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3/25/96
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1995
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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
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Commission File Number: 0-16937
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SUMMIT TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-897945
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21 Hickory Drive, Waltham, MA 02154
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (617) 890-1234
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which Registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock and Common Share Purchase Rights
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(Title of class)
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Indicate by check mark 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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the average closing bid and asked prices for the registrant's voting
stock on February 28, 1996, the aggregate market value of such voting stock held
by non-affiliates of the registrant was approximately $843,276 million on said
date. The number of shares of the registrant's Common Stock, $.01 par value,
outstanding on February 28, 1996 was 29,239,609.
DOCUMENTS INCORPORATED IN TEXT BY REFERENCE
Certain portions of the Company's Annual Report to security holders for the
fiscal year ended December 31, 1995 furnished to the Commission pursuant to Rule
14a-3(b) (the "1995 Annual Report") are incorporated by reference into Parts II
and IV of this Report, certain portions of the Company's Proxy Statement for the
Special Meeting of Stockholders in Lieu of 1996 Annual Meeting (the "Proxy
Statement") are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Summit is a worldwide leader in the development, manufacture and sale of
ophthalmic laser systems designed to correct common refractive vision disorders
such as nearsightedness, farsightedness and astigmatism with a procedure called
laser vision correction ("LVC"). On October 20, 1995, the Company's Excimer
System became the first excimer laser system in the world to be approved by the
FDA for commercial sale in the United States to treat nearsightedness. The
Approval Letter covers the use of the Company's Excimer System to treat
nearsightedness between 1.5 and 7.0 diopters with a six millimeter ablation
zone. Use of the Company's Excimer System to treat astigmatism and
farsightedness has not yet been approved by the FDA.
According to the two year follow-up data accumulated by the Company during
its Phase III LVC clinical trials, all of the individuals undergoing LVC for
treatment of nearsightedness experienced an improvement in visual acuity without
corrective eyewear. Prior to LVC, 95% of the eyes were 20/200 or worse. Of the
eyes treated, approximately 91% improved to 20/40 or better, the legal
requirement to obtain a driver's license in most states without corrective
eyewear, while the remaining 9% experienced improved vision without corrective
eyewear, but still required corrective eyewear to achieve 20/40 vision or
better.
LVC is an outpatient surgical procedure performed with the Excimer System to
treat nearsightedness, farsightedness and astigmatism, wherein submicron layers
of tissue are ablated (removed) from the surface of the cornea in a
computer-assisted, predetermined pattern to reshape the cornea. The average
procedure consists of approximately 150 laser pulses, each of which lasts
several billionths of a second. Cumulative exposure to the laser light is less
than one second. The entire procedure, including patient preparation and
post-operative dressing, generally lasts no more than thirty minutes.
The Company's strategy is to become a vertically-integrated vision correction
business by (i) manufacturing and selling laser systems and related products to
correct vision disorders; (ii) operating Vision Correction Centers; and (iii)
participating in per procedure royalty revenues from its ownership in Pillar
Point Partners.
Summit Technology, Inc. was incorporated in Massachusetts on November 27, 1985
and commenced operations on January 1, 1986. The Company's executive offices
are located at 21 Hickory Drive, Waltham, Massachusetts 02154, and its
telephone number is (617) 890-1234.
MARKET
It is estimated that in excess of 140 million people in the United States use
eyeglasses or contact lenses to correct common vision disorders, with over 60
million of these individuals suffering from nearsightedness. U.S. consumers
spent an estimated $13.8 billion in eyeglass and contact lens purchases in 1995.
The Company believes that LVC performed with its Excimer System will make it
possible for many of these people to eliminate or reduce their reliance on
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corrective eyewear. The Company believes that over 30 million people in the U.S.
use contact lenses and that many of these individuals would be particularly
receptive to LVC as they have already chosen to use an alternative to eyeglasses
for vision correction. Furthermore, in 1995 approximately 350,000 RK procedures
(a manual surgical procedure in which an ophthalmologist uses a scalpel to make
a series of incisions in the cornea) were performed in the U.S. The Company
believes that LVC is an attractive alternative to RK since LVC is a less
invasive procedure.
The principal purchasers of the Company's products have been
ophthalmologists, universities, clinics and hospitals. There are approximately
13,000 ophthalmologists in the U.S. The Company believes that U.S.
ophthalmologists are receptive to LVC as a treatment for nearsightedness. The
Company is also aware that several businesses have been formed to participate in
the LVC market in the U.S., some of which have purchased the Company's Excimer
Systems.
As of March 22, 1996, the Company has sold over 175 Excimer Systems for
use in the U.S. Due to the recent installation of a large number of Systems,
competition, consolidation of physician practices, and other market factors,
the Company is unable to predict whether and to what extent Excimer System
sales will grow in 1996.
Following FDA approval of LVC for treating nearsightedness in October, 1995,
the Company has begun a significant marketing effort in the U.S. to educate the
public about the safety and efficacy of LVC. The Company believes that through
such marketing efforts, it can promote consumer acceptance of, and create demand
for, LVC in the U.S.
PRODUCTS AND PROCEDURES
The Company's products are used by ophthalmologists to treat the following:
Refractive Vision Disorders. Images enter the human eye through the cornea.
In a properly functioning eye, the cornea bends (refracts) incoming images,
causing the images to focus on the retina of the eye. A refractive vision
disorder is the inability of the cornea to refract properly incoming images
resulting in blurred vision. Nearsightedness (myopia), farsightedness
(hyperopia) and astigmatism are the three most common refractive vision
disorders. In a nearsighted eye, images are focused in front of the retina. In a
farsighted eye, images are focused behind the retina. In an astigmatic eye,
images are not focused at any one point. These disorders are commonly treated
with corrective eyewear. The Company's products are used to change the shape of
the cornea in a controlled manner so that these images are properly focused on
the retina thereby eliminating or reducing the need for corrective eyewear.
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Corneal Pathologies and Glaucoma. Corneal pathologies, which include certain
diseases, injuries and conditions of the cornea, can result in impaired vision,
discomfort or blindness. Such pathologies include corneal opacities, irregular
corneal surfaces and abnormal tissue growths on the cornea. Another pathological
condition of the eye is glaucoma, a disease characterized by a sustained
elevation of intraocular pressure which, if untreated, may result in blindness.
PRODUCTS
<TABLE>
The following table presents in summary form the Company's laser systems, the
principal procedures for which they currently can be used, and the status of the
FDA approval process.
<CAPTION>
SUMMARY OF COMPANY PRODUCTS AND FDA STATUS
TREATMENT
LASER SYSTEMS PROCEDURE APPLICATION FDA STATUS
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<S> <C> <C> <C>
Excimer System LVC (or PRK) Low to FDA approval received
without Erodible moderate October 20, 1995
Mask nearsightedness
LVC with Erodible Nearsightedness, Ongoing clinical trials
Mask astigmatism
and
farsightedness
Phototherapeutic Corneal FDA approval received March
Keratectomy ("PTK") pathologies 10, 1995
Laser Assisted in situ Extreme Ongoing clinical trials
Keratomileusis nearsightedness
("LASIK")
Holmium System Laser Sclerostomy Glaucoma FDA clearance received June
("LS") 1992
Laser Thermal Farsightedness Ongoing clinical trials
Keratoplasty and
("LTK") astigmatism
</TABLE>
Excimer System. The Company's principal product is its Excimer System, which
is incorporated in a fully integrated ophthalmic surgical laser workstation for
use by ophthalmologists to perform procedures to treat refractive and other
ophthalmic disorders. The Company has sold more than 400 Excimer Systems in over
50 countries, including most of Europe. Prior to March 10, 1995 when the FDA
approved commercial sale of the Excimer System for performing PTK, sales of the
Excimer System in the U.S. were restricted to a limited number of clinical trial
sites. On October 20, 1995, the Company received FDA approval to sell
commercially the Excimer System in the U.S. to treat nearsightedness with LVC.
In addition to the U.S., the Company is seeking to obtain regulatory approval
for the sale of its Excimer Systems in other countries, including Japan and
Taiwan.
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The Excimer System delivers pulses of ultraviolet laser light to an eye
to ablate (remove) submicron layers of tissue from the surface of the cornea.
The Excimer System as currently approved in the U.S. is configured to perform
procedures with a mechanical iris (a device that shapes laser light) and may be
upgraded to treat astigmatism and farsightedness with the Erodible Mask, if and
when approved, or with the Erodible Mask. All procedures using the Excimer
System are performed on an outpatient basis with topical anesthesia.
Most of the laser light generated by the Excimer System is absorbed by the
ablated (removed) corneal tissue during a procedure. As a result, the laser
light does not penetrate interior portions of the eye and does not create
substantial amounts of heat in the surrounding tissue. These attributes make the
Excimer System well suited to corneal surgery.
The Company continues to refine its Excimer System to improve
ergonomics and versatility. In foreign markets the Company has recently
introduced a new version of the Excimer System designed to use the Erodible
Mask for treatment of astigmatism and farsightedness. The Company intends to
continue clinical trials of this new version in the U.S.
Erodible Mask. The Excimer System currently is configured to treat
nearsightedness without the Erodible Mask, and if upgraded to treat
farsightedness, astigmatism and combinations of these disorders only with the
Erodible Mask. To use the Erodible Mask, an ophthalmologist determines the
correction, selects the appropriate Erodible Mask and places it in the laser
beam path of the Excimer System. As the Erodible Mask is ablated by the laser,
its shape is replicated on the cornea. The Company has produced a limited
quantity of Erodible Masks for clinical trials within the U.S. and produces
Erodible Masks for commercial sale outside of the U.S. Based on limited use to
date, the company believes that the Excimer System will provide acceptable
treatment for astigmatism and farsightedness.
Holmium System. The Holmium System delivers high intensity pulses of infrared
light to an eye by means of a fiber optic cable and a single-use, hand-held
probe that directly contacts the eye at the exact spots chosen by the
ophthalmologist. All procedures using the Holmium System are performed on an
outpatient basis with topical anesthesia.
PROCEDURES
Laser Vision Correction ("LVC"). LVC (also known as Photorefractive
Keratectomy, or "PRK") is an outpatient surgical procedure performed with the
Excimer System to treat nearsightedness, farsightedness and astigmatism,
wherein submicron layers of tissue are ablated (removed) from the surface of
the cornea in a predetermined pattern to reshape the cornea. The goal of LVC is
to eliminate or to reduce a person's reliance on corrective eyewear. The
Company estimates that ophthalmologists around the world have used the
Company's Excimer Systems to perform over 250,000 procedures to treat
nearsightedness.
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When performing LVC with the Excimer System, the ophthalmologist determines
the exact correction required (which is measured by the same examination used to
prescribe eyeglasses or contact lenses) and programs the correction into the
Excimer System's computer. If an Erodible Mask is used, the Erodible Mask itself
contains the correction. The ophthalmologist removes the thin surface layer of
the cornea (the epithelium) and positions the patient for the laser procedure.
The Excimer System emits laser pulses, each of which lasts several billionths of
a second, to ablate submicron layers of tissue from the surface of the cornea in
a predetermined pattern to reshape the front surface of the cornea. The average
procedure consists of approximately 150 laser pulses and lasts approximately 15
to 40 seconds. Cumulative exposure to the laser light is less than one second.
The entire procedure, including patient preparation and post-operative dressing,
generally lasts no more than thirty minutes.
Following the procedure, the ophthalmologist may prescribe topical
pharmaceuticals to promote corneal healing and to alleviate discomfort.
Individuals undergoing LVC generally experience discomfort for approximately 24
hours, and blurred vision for approximately 48 to 72 hours, after the procedure.
Although most patients experience improvement in uncorrected vision within a few
days of the procedure, it generally takes from two to six months for the
correction to stabilize and for the full benefit of the procedure to be
realized. An individual typically has one eye treated in a session, with the
second eye treated three to six months thereafter.
Phototherapeutic Keratectomy ("PTK"). PTK is an outpatient surgical procedure
performed with the Excimer System to treat corneal pathologies. In this
procedure, submicron layers of tissue are ablated from the surface of the cornea
in order to remove diseased, scarred or sight-inhibiting tissue. The goal of PTK
is not necessarily to cure the corneal pathology, but rather to alleviate the
symptoms associated with the pathology. In March 1995 the FDA approved the
Company's Excimer System to perform PTK, and as a result the Company became the
first ophthalmic laser manufacturer to receive FDA approval to sell ophthalmic
excimer laser systems in the U.S. The Company estimates that its Excimer Systems
have been used worldwide to perform over 8,000 PTK procedures.
Other Procedures. Other procedures performed with the Excimer System and the
Holmium System include Laser In Sito Keratomileusis ("LASIK") (a procedure
performed with the Excimer System to treat extreme nearsightedness), Laser
Thermal Keratoplasty ("LTK") (a procedure performed with the Holmium System to
treat farsightedness and astigmatism by shrinkage of corneal tissue) and Laser
Sclerostomy ("LS") (a surgical procedure performed with the Holmium System to
treat the symptoms of glaucoma by making an opening in the front chamber of the
eye). The Company estimates that ophthalmologists around the world have used its
products to perform over 5,000 LASIK procedures and over 1,100 LTK procedures.
The Company is currently engaged in FDA clinical trials to expand indications
to include LASIK and LTK.
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SAFETY AND EFFICACY
According to the two year follow-up data accumulated by the Company during
its LVC clinical trials, all of the individuals undergoing LVC in Phase III
clinical trials experienced an improvement in visual acuity without corrective
eyewear. Prior to LVC, 95% of the eyes were 20/200 or worse. Of the eyes
treated, approximately 91% improved to 20/40 or better, the legal requirement to
obtain a driver's license in most states without corrective eyewear, while the
remaining 9% experienced improved vision without corrective eyewear, but still
required corrective eyewear to achieve 20/40 vision or better.
The first LVC procedure for the treatment of nearsightedness using the
Excimer System was performed in 1989 and the first PTK procedure for the
treatment of a corneal pathology using the Excimer System was performed in 1988.
A large majority of such procedures have been performed only in the past four
years. Concerns with respect to the safety and efficacy of the Excimer System to
perform procedures include predictability and stability of results and potential
complications, such as modest decreases in best corrected vision and side
effects from LVC, PTK, LASIK and LTK.
VISION CORRECTION CENTERS
During 1996, the Company intends to open between 20 and 30 Vision Correction
Centers in selected geographic markets in the U.S. including California,
Florida, Ohio, Minnesota, Illinois and the Washington, D.C. area. As of March
22, 1996, the Company has entered into 12 leases for centers. These Vision
Correction Centers will provide LVC directly to consumers. Each Vision
Correction Center will be staffed by optometrists, ophthalmologists and
administrative personnel. The Company will provide each Vision Correction Center
with an Excimer System and related equipment. Each Vision Correction Center will
treat consumers who come directly to the Vision Correction Center and under
certain circumstances will make its facilities available for use by local area
ophthalmologists.
The Company believes that, as a direct provider of LVC, its Vision Correction
Centers will benefit from any increase in the market demand for LVC. The Company
has commenced implementation of a comprehensive consumer marketing program to
explain and promote LVC generally, using television, radio and print media and
teleservices. Based on market studies conducted by the Company, the Company
believes that such a marketing program will have a significant impact on the
consumer demand for LVC. In addition, the Company has commenced implementation
of a direct-marketing program to consumers who are interested in LVC to a
Vision Correction Center.
In selected geographic markets, the Company has affiliated Vision Correction
Centers with a prominent hospital or university (an "Institution") whereby each
Institution utilizes an Excimer System for performing LVC within the
Institution's facilities and the Company provides a variety of business
consulting, management and marketing services to each Institution. As of March
1, 1996, the Company had affiliations with Jules Stein Eye Institute at the UCLA
Medical Center in Los Angeles, Stanford University Medical Center in Palo Alto,
California, Rush Presbyterian -
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St. Luke's Medical Center in Chicago, New England Eye Center at the Tufts
University School of Medicine in Boston, George Washington University Medical
Center in Washington D.C., and the Cleveland Clinic Foundation Eye Institute in
Cleveland, Ohio. LVC customers within the geographic region of an Institution
are directed for treatment either to the Institution or to one of the Vision
Correction Centers based on the convenience of location to the customer. In
certain areas, the advertising and marketing materials used by the Company
include the name of the Institution. The Company believes that it will benefit
from such affiliations because of the reputation of such Institutions. In turn,
the Company believes that the Institutions will benefit from the services
provided by the Company and the access to a customer base generated from the
Company's marketing activities. The Company also believes that unaffiliated
users of Excimer Systems will benefit from the Company's marketing activities.
The Company intends to direct patients to such users in areas where there are no
Vision Correction Centers. The Company may from time to time open additional
Vision Correction Centers in response to market demand.
The Company has organized advisory boards of prominent optometrists and
ophthalmologists with experience in LVC to establish medical and operational
standards for the Vision Correction Centers. The Company further is developing
proprietary systems to track medical data relating to all procedures performed
at the Vision Correction Centers. The Company believes that these features,
together with the identification of the Company as a leading manufacturer of
excimer laser systems, will enhance consumer and ophthalmologist perceptions of
the Vision Correction Centers.
The Company believes that its experience in operating three LVC centers
in the U.K. (which incurred losses) has helped it refine the center concept
for the U.S. market and has chosen to discontinue U.K. operations to focus on
the U.S. market. These centers have incurred operating losses since inception,
and the Company is in the process of discontinuing their operations.
The Company began segment reporting for its LVC centers in the year
ended December 31, 1992 and has reported approximately $3.5 million of capital
expenditures and approximately $9.0 million of operating losses as of December
31, 1995 in connection with these development activities and related marketing
activities. The Company anticipates that this segment will continue to incur
substantial ongoing marketing, operating and development expenses, and there
can be no assurance that it will be profitable.
The Company's Vision Correction Center business is owned by Refractive
Centers International, Inc. ("RCII"), a subsidiary of the Company. The
authorized capital of RCII is 10,000,000 shares of common stock, of which
5,000,000 have been issued to the Company and 800,000 have been reserved for
issuance under RCII's employee stock option plan. As of December 31, 1995,
options to purchase 711,250 shares of RCII common stock have been granted at an
exercise price of $.50 per share, of which 450,000 were granted to David F.
Muller, the Company's President and Chief Executive Officer. The options have a
term of ten years, and as of December 31, 1995, 213,250 were exercisable. The
Company intends to further capitalize RCII with additional equity contributions
and through inter-company loans with market rates and terms. Inter-company
transactions between the Company and RCII are valued on an arms-length basis
and are subject to approval by Summit's Board of Directors.
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MARKETING
The Company has commenced implementation of a multi-tiered professional and
consumer marketing strategy for sale of its Excimer System in the U.S. for LVC
to treat nearsightedness.
Consumer Market Acceptance. The Company believes that its future success is
dependent on broad consumer market acceptance of LVC as an alternative to
eyeglasses, contact lenses, RK and other corrective treatments. The Company's
efforts to promote LVC directly to the consumer, known as "category
development," are being conducted through a comprehensive marketing program,
utilizing proven methods of television, radio and print advertising, public
relations and teleservices, that is based on historically successful programs
for consumer marketing of other medical products and procedures. The Company
uses advertising, telemarketing and public relations firms in the medical and
consumer marketing areas to work with it in category development. The Company
anticipates benefiting from consumer demand through sales of its Excimer
Systems, receipt of its percentage share of the per-procedure royalties paid to
Pillar Point Partners, and treatment of customers in its Vision Correction
Centers.
Vision Correction Centers. In addition to the Company's efforts in category
development, the Company utilizes direct consumer advertising, consumer public
relations and teleservices methods to promote its Vision Correction Centers and
the Institutions as preferred locations for LVC. The Company focuses this
advertising in geographic areas in which Institutions and Vision Correction
Centers are located. Interested customers are offered a toll-free telephone
number to pursue LVC as a potential treatment at a Vision Correction Center. In
certain cases, this advertising highlights the affiliation between Vision
Correction Centers and affiliated Institutions. If a Vision Correction Center is
not geographically convenient to a customer, the customer is directed to the
most geographically convenient owner of an Excimer System in their area.
Excimer Systems. The Company sells its Excimer Systems and related products
worldwide (subject to regulatory restrictions) through directly employed sales
people, independent sales representatives and distributors. The Company sells
its products on open credit to select distributors and end users, but in many
instances requires a letter of credit or a commitment from a third party lessor
to secure payment.
The Company sponsors a series of educational programs that are designed to
introduce the Company's products and procedures, in which several thousand
ophthalmologists from approximately 50 countries have participated. The Company
has established the Summit International Laser User Group, which is an
organization bringing together approximately 500 top researchers, academicians
and clinicians from around the world, including the U.S., to exchange
information about the development and application of the Company's products.
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PATENTS
GENERAL
There are a number of U.S. patents covering methods and apparatus for
performing corneal surgery with excimer lasers, including a large number owned
by the Company and VISX. All U.S. patents now or hereafter granted to the
Company or VISX which could preclude either company from making, using or
selling in the U.S. its excimer laser corneal surgery systems as designed on
June 3, 1992, have been or are required to be exclusively licensed or offered
for exclusive license to Pillar Point Partners, a partnership jointly formed by
the Company and VISX in 1992 primarily to settle their U.S. patent disputes
(the "Partnership" or "Pillar Point Partners"). This does not include the
so-called Crozaphon/Azema patent which the Company has commenced an
infringement action against VISX. There also are many foreign patents covering
apparatus for performing excimer laser corneal surgery, including patents or
patent rights held by the Company, VISX and others. If the foreign patents held
by VISX or others were considered valid and interpreted broadly in an
adversarial proceeding, they could be deemed to cover one or more aspects of
certain of the Company's excimer-based products manufactured or sold abroad.
The Company believes that the protection afforded by certain of its patents
and the patents licensed to the Company and VISX by Pillar Point Partners is
material to its future revenues and earnings. The Company currently holds over
50 U.S. and foreign patents and has several patent applications pending in the
U.S. and elsewhere.
PILLAR POINT PARTNERS
On June 3, 1992, the Company, through a subsidiary, entered into a Formation
Agreement ("Formation Agreement") with a subsidiary of VISX to settle disputes
regarding their U.S. patents covering methods and apparatus for performing
ultraviolet laser corneal surgery (the "Subject Matter"). Pursuant to the
Formation Agreement, the Company and VISX (the "Partners") each contributed to
Pillar Point Partners (also referred to as the "Partnership") the exclusive
right to make, use and sell apparatus and perform (including the right to
license others to perform) procedures covered by any of their U.S. patents
relating to the Subject Matter (the "Pillar Point Patents"). The Partnership
arrangement does not cover foreign patents. The Partnership's policy is to
license Pillar Point Patents to manufacturers and sellers of ophthalmic excimer
laser systems in the U.S., including Summit and VISX, in return for per
procedure royalties and royalties on equipment sales.
Simultaneously with the formation of the Partnership, the Company and VISX
entered into separate license agreements with the Partnership, for the life of
the Pillar Point Patents, whereby each is entitled to the benefit of the Pillar
Point Patents. The Partnership's patent rights will begin to expire in May 2004
(seventeen years from the issuance date of the first patent), subject to the
possible extension of the term of certain patents covering products regulated by
the FDA. The duration of such patent term extensions if available to, and sought
by, the patent owners, will be determined by the U.S. Patent Office, after
calculation of the regulatory review period and taking into account the
remaining duration of the patent after FDA approval is obtained.
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In general, each of Summit and VISX are required to pay to the Partnership
equipment royalties ranging from 3% to 6%. No sales royalties were due on sales
of systems until the Excimer System was approved by the FDA for LVC to treat
nearsightedness, or on sales to affiliates of the Company or VISX unless the
number of systems sold to such affiliates exceeds 50% of all systems
manufactured by such manufacturer in the U.S. in a given year. In addition, each
licensee is required to pay the Partnership a per procedure royalty each time a
laser system sold or leased by it in the U.S. is used to perform a procedure
covered by the Pillar Point Patents, including procedures performed at Vision
Correction Centers. The per procedure royalties have been set by the Partnership
at $250 LVC and $0 for PTK. Each licensee has complete discretion whether and to
what extent it will require per procedure royalty payments from customers;
however each licensee is required to make the royalty payments to the
Partnership regardless of collection from customers.
Partnership profits and losses are allocated between the Partners by
revenue category and cash is distributed periodically. Profits from royalties
received from third parties as a result of the sale of their equipment are
allocated 50% to Summit and 50% to VISX. Profits from royalties on equipment
sales paid to the Partnership by Summit and VISX are allocated entirely to
VISX. The first $30 of profits realized from each per procedure royalty from
LVC procedures using an adjustable iris is allocated to VISX and the remaining
profits are allocated 50% to Summit and 50% to VISX. Partnership profits
realized from the receipt of each per procedure royalty from LVC procedures
performed with an Erodible Mask are allocated so that VISX receives the first
$30, Summit receives the next $30, with the balance allocated 50% to each
thereafter. Partnership profits realized from receipt of each PTK per procedure
royalty are allocated 51% to VISX and 49% to Summit, but the Partnership has
decided not to charge any per procedure fees for PTK. The agreements further
provide that the Partners waive any rights to bring an action to partition the
Partnership property and that neither Partner may voluntarily cause a
dissolution of the Partnership.
Pillar Point Partners' ability to enforce its rights under one of its patents
against LaserSight, Inc. has been challenged in a declaratory judgment
counterclaim to a patent infringement suit brought by the Partnership in March
1995, against LaserSight in the Federal District Court in Delaware, which
counterclaim asserts, among other things, that the alleged pooling of patents by
Pillar Point Partners constitutes patent misuse. Furthermore, on October 13,
1995 the Company received notice that the FTC initiated an investigation to
determine whether Pillar Point Partners, VISX, the Company or any of their
predecessors, alone or in conjunction with others, is engaging or has engaged in
any unfair methods of competition in violation of the Federal Trade Commission
Act, relating to certain arrangements concerning patents on devices and
procedures, and/or practices relating to the sale or distribution of certain
ophthalmic surgical devices. The FTC issued a subpoena requiring the Company to
produce certain materials and information relating to the subject matter of the
investigation. Pillar Point Partners was structured in compliance with the
Federal Trade Commission Act and other applicable U.S. antitrust laws. The
Company believes that both the formation of Pillar Point Partners in 1992 and
its operation to date are consistent with such laws. There can be no assurance,
however, that the FTC's investigation will ultimately lead the FTC to agree with
the Company. The Company is
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accordingly unable to predict whether or not, or when, any proceeding may be
brought by the FTC following such investigation, or the scope of relief, if any,
that may ultimately be ordered in the event that any such proceeding were
determined adversely to the Company and/or Pillar Point Partners. Any successful
challenge to the structure and operation of Pillar Point Partners could have a
material adverse effect on the Company's business, financial condition and
result of operations.
CROZAFON/AZEMA PATENT
In 1993, the Company purchased certain U.S. and foreign patents for an
aggregate purchase price, including acquisition costs, of $5.1 million in cash
and 50,000 shares of Common Stock. One of these patents is the Crozafon/Azema
Patent, which the Company believes to be the only basic laser vision correction
patent in the U.S. that is not held by Pillar Point Partners. As required by the
terms of the governing agreements, the Company offered Pillar Point Partners the
opportunity to acquire exclusive rights under the Crozafon/Azema Patent, but
Pillar Point Partners declined. On August 29, 1995, the Company filed suit in
the U.S. District Court for the District of Delaware against VISX for
infringement of the Crozafon/Azema Patent. The Company is seeking damages for
past infringement for all excimer lasers manufactured by VISX in the U.S. for
use outside the U.S. In addition, the Company is seeking to enjoin VISX from
manufacturing and selling excimer lasers for any purpose other than U.S.
clinical trials. On October 10, 1995, VISX filed an answer to the Company's
complaint. There can be no assurance that the Company will prevail in this
proceeding. The trial is currently scheduled to begin in July, 1997.
On August 3, 1995, a German court determined that the Schwind Keratom
ophthalmic excimer laser system distributed by Coherent, and the Chiron
Technolas Keracor 116 ophthalmic excimer laser system distributed by Chiron
Technolas, infringe the German counterpart of the Crozafon/Azema Patent. The
court has entered cease and desist orders against Schwind and Chiron Technolas
and has ordered them to pay damages to the Company for past infringements. Both
the Schwind and Chiron Technolas excimer laser systems are manufactured in
Germany. On September 5, 1995, the Company posted the requisite bond in Germany
to enforce the injunction issued against Chiron Technolas by the German court,
as a result of which Chiron Technolas is now prohibited from manufacturing,
selling or using its Keracor 116 ophthalmic excimer laser systems in Germany,
where its production facility is located. Chiron Technolas and Schwind have
appealed the judgment and Chiron Technolas has also filed a nullity action with
the German Patent Office. Although the Company believes it will prevail in this
nullity action, there can be no assurance that the German counterpart of the
Crozafon/Azema Patent will survive the proceeding. If the nullity action is
decided against the Company, its infringement verdicts in Germany will be
overturned and it will be liable for damages (which may or may not exceed the
amount of the bond).
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CANADA
On September 5, 1995, VISX sued the Company and eight Canadian
ophthalmologists who use or have used the Company's Excimer System, in the
Federal Court of Canada, Trial Division, asserting that the Excimer System
infringed certain Canadian patents held by VISX. In such suit, VISX seeks, among
other things, damages for past infringement and a permanent injunction
preventing the Company and the other defendants from manufacturing, marketing,
selling using and inducing others to use the Excimer System in Canada. The
Company believes that it has valid defenses to VISX's suit and intends to defend
such action vigorously; however, there can be no assurance that the Company will
be successful. The Company does not believe that the Canadian market is material
to its business.
OTHER
In 1992, the Company entered into a licensing agreement with IBM pursuant to
which IBM granted the Company a non-exclusive license to its patent covering
excimer laser ablation of tissue and the Company agreed to pay to IBM a royalty
of 2% of the net selling price of its Excimer Systems sold or leased in the U.S.
and certain other countries. The Company has also entered into a license
agreement with Patlex Corporation which holds certain patents on lasers. Under
this agreement, the Company has agreed to pay a royalty on certain laser
components of its products.
Issuance of one of the Company's European patents covering apparatus for
performing LVC is undergoing review in opposition through proceedings in the
European Patent Office. Another patent held by the Company is being challenged
in an invalidity action before the German Patent Office. While the Company
believes that it will prevail in such proceedings, there can be no assurance
that the Company's patents will survive such proceedings.
RESEARCH AND PRODUCT DEVELOPMENT
The Company intends to remain a leader in the development, manufacture and
sale of state-of-the-art laser technologies for the treatment of ophthalmic
disorders. In keeping with this goal, the Company expended $5.7 million, $6.2
million and $5.6 million for research, engineering and product development,
including regulatory and clinical affairs, during fiscal 1993, 1994 and 1995,
respectively. The Company expects to continue spending significant amounts on
these areas for the foreseeable future. The Research, Development and
Engineering Department, which also deals with regulatory and clinical affairs,
was comprised as of March 1, 1996 of 61 full-time employees, of whom seven have
Ph.D.'s and nine have Masters degrees.
INSTALLATION, SERVICE AND TRAINING
The Company installs and maintains its Excimer Systems through a combination
of directly employed technicians and Company-trained employees of its
distributors. Installation, training and the first year of maintenance are
generally included in the purchase price of the Excimer System, except for sales
to certain distributors who are required to install Excimer Systems and
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provide maintenance to their customers for one year. Thereafter, the Company
offers annual equipment maintenance contracts to customers who have purchased
Excimer Systems directly from the Company. Upon installation of an Excimer
System, a clinical specialist from the Company travels to the site to train the
ophthalmologist in the clinical use and operation of the Excimer System. The
Company maintains a 24-hour telephone service for emergency maintenance calls.
INSURANCE AND PRODUCT LIABILITY
The testing and use of human health care products entails an inherent risk of
physical injury to patients and physicians, and exposes the manufacturer to
potential product liability and other damage claims. In addition, the Company's
products include high voltage power supplies. Although the Company has not had
any product liability actions filed against it to date, there can be no
assurance that any damages which may be assessed against the Company would not
exceed its insurance coverage. The costs of defending a product liability or
similar action, and/or the assessment of damages in excess of insurance
coverage, could have a material adverse effect on the Company. The Company
maintains product liability insurance with coverage of $5.0 million per
occurrence and an annual aggregate maximum of $5.0 million.
The Company requires that ophthalmologists who perform laser procedures at
Vision Correction Centers maintain their own malpractice insurance coverage. The
Company has obtained umbrella coverage with respect to any malpractice claims
relating to procedures performed at Vision Correction Centers and similar
coverage with respect to center administrative staff.
EMPLOYEES
As of March 1, 1996, the Company employed 290 persons full-time in the U.S.,
Ireland and other European countries, of whom approximately 60 were in
manufacturing, 56 in research, engineering, product development and regulatory
and clinical affairs, 63 in customer service, 95 in selling, marketing and
administration and 16 in the vision correction center segment. Of such
employees, 224 are located in the U.S., 61 in Ireland and 5 in other parts of
the world. None of the Company's employees is represented by a union. The
Company believes that its relations with its employees are good. The Company
plans to increase the number of employees employed in the Vision Correction
Center segment.
COMPETITION
The Company is subject to competition in two principal areas: (i) the
consumer market for vision correction; and (ii) the professional market for
ophthalmic excimer laser equipment.
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Consumer Market. In the foreseeable future, the Company believes that
eyeglass and contact lens use will continue to be the most popular alternative
to LVC. Advantages of corrective eyewear include the comparatively low immediate
cost (although the Company believes that eyeglass and contact lens wearers may
spend well in excess of the cost of LVC over their lifetimes) and the avoidance
of surgery. It is likely that eyeglass and contact lens manufacturers, some of
whom have greater financial resources than the Company, will continue to
develop, enhance and market their products to make them as attractive as
possible to people with refractive vision disorders. Other manual surgical,
laser surgical and non-surgical techniques to treat vision disorders, such as
RK, are currently in use and under development, which may prove to be more
attractive to consumers than LVC.
The Company is aware of a number of businesses that have been formed to
provide LVC directly to consumers in the U.S., and others may be formed now that
FDA approval of the Excimer System for LVC to treat nearsightedness has been
obtained, some of which may have greater financial resources than the Company.
The Company believes that some of these businesses are pursuing a strategy of
marketing LVC directly to consumers through optical chains. Such businesses, as
well as hospitals, clinics and private ophthalmologists who own excimer laser
equipment, may compete with the Company's Vision Correction Centers in the
geographic areas in which Vision Correction Centers are located. The Company
believes that the potential demand for LVC is sufficiently large that most
markets will support more than one business that offers LVC, and that the
marketing efforts of each may increase overall demand for LVC.
Ophthalmic Excimer Laser Equipment. The Company's Excimer System was the
first excimer laser approved by FDA for commercial sale in the U.S. to treat
nearsightedness with LVC. On October 2, 1995, VISX announced that it had
received FDA approval to commercially market its excimer laser system for PTK
and on March 27, 1996, VISX announced that its PMA application for its excimer
laser system for LVC to treat nearsightedness was approved by FDA. Receipt by
VISX of FDA approval to market its system in the U.S. for refractive procedures
may have a negative impact on the Company's laser sales. The Company believes
that there are significant requirements for entry into the manufacturing field,
including patents and the long lead time required to obtain FDA approvals. Other
companies, however, are engaged in the manufacture of ophthalmic excimer laser
equipment both in the U.S. and abroad, and additional competitors may enter the
equipment manufacturing business or acquire existing companies. Competitors may
have greater financial resources than the Company, may be able to offer their
products at a lower cost or may develop procedures that involve a lower
per-procedure cost. Competition from new entrants may be particularly prevalent
in those countries where significant regulatory approvals are not required.
Methods of competition include efficacy, price maintenance costs, service
capabilities and treatment modalities. The Company believes that its Excimer
System is a strong competitor in all these areas.
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The Company is aware that certain U.S. physicians are performing
refractive procedures in the U.S. with used Summit excimer systems purchased
from overseas third parties at prices below those charged by Summit for new
U.S. systems. These "grey market" systems do not conform to the specifications
required by the FDA and have been classified by the FDA as "adulterated" in an
FDA Import Alert dated February 23, 1996. The alert authorizes detention of
such systems without inspection at customs. The Company is also aware that
certain U.S. ophthalmologists are performing refractive procedures in the U.S.
with so-called "homemade" excimer lasers that have not been the subject of any
FDA-approved clinical testing. The Company believes that these lasers, which
generally sell for less than the Company's Excimer Laser System, are also
adulterated within the meaning of the FDA Act. The confusion created by, and
the pricing of, the "grey market" laser systems and "homemade" laser systems is
having an adverse effect on the Company's U.S. system sales. The Company
believes that FDA and certain state agencies are investigating the parties
involved in the grey market and homemade laser activities, and is hopeful that
regulatory action to curb these activities may be forthcoming, although there
can be no assurance of such regulatory action. The Company is also pursuing
litigation against certain of the parties involved in certain of these
activities, including an importer, a service provider and certain
ophthalmologists, and is considering additional action to curb this activity.
GOVERNMENT REGULATION
BACKGROUND
The Company's Excimer Systems and related disposables (including the Erodible
Mask) are regulated as medical devices by the FDA under the FDC Act. As such,
these devices require premarket clearance or premarket approval (also referred
to as a PMA) by the FDA prior to commercialization in the U.S. Pursuant to the
FDC Act, the FDA regulates the manufacture, distribution and production of
medical devices in the U.S. Noncompliance with applicable requirements can
result, among other things, in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial or
withdrawal of premarket clearance or approval of devices, recommendations by the
FDA that the Company not be allowed to enter into government contracts and
criminal prosecution. The FDA also has authority to request repair, replacement
or refund of the cost of any device manufactured or distributed by the Company.
In the U.S., medical devices are classified into one of three classes (i.e.,
Class I, II, or III) on the basis of the controls deemed necessary by the FDA to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling, premarket notification and adherence to GMPs)
and Class II devices are subject to general and special controls (e.g.,
performance standards, postmarket surveillance, patient registries and FDA
guidelines). Generally, Class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices).
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Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or approval of a PMA. A 510(k) clearance will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device, or to a
Class III medical device for which the FDA has not called for PMAs. The FDA has
recently been requiring a more rigorous demonstration of substantial equivalence
than in the past. It generally takes from four to 12 months from submission to
obtain 510(k) premarket clearance, but it may take longer. The FDA may determine
that a proposed device is not substantially equivalent to a legally marketed
device, or that additional information is needed before a substantial
equivalence determination can be made. A "not substantially equivalent"
determination, or a request for additional data, could delay the market
introduction of new products that fall into this category and could have a
material adverse effect on the Company's business, financial condition and
results of operations. For any of the Company's devices that are cleared through
the 510(k) process, modifications or enhancements that could significantly
affect the safety or effectiveness of the device or that constitute a major
change to the intended use of the device will require a new 510(k) submission.
There can be no assurance that the Company will obtain 510(k) premarket
clearance within the above time frames, it at all, for any of the devices for
which it may file a 510(k).
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive data,
including preclinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. If human clinical trials of a device are required,
and the device presents a "significant risk," the sponsor of the trial (usually
the manufacturer or the distributor of the device) will have to file an
Investigational Device Exemption ("IDE") application prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. Sponsors of clinical trials are permitted to sell those devices distributed
in the course of the study provided such compensation does not exceed recovery
of the costs of manufacture, research, development and handling. An IDE
supplement must be submitted and approved by the FDA before a sponsor or
investigator may make a change to the investigational plan that may affect its
scientific soundness or the rights, safety or welfare of subjects.
The PMA application must contain the results of clinical trials, the results
of all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, and a detailed description of the
methods, facilities and controls used to manufacture the device. In addition,
the submission must include the proposed labeling, advertising literature and
training materials (if required). Upon receipt of a PMA application, the FDA
makes a threshold determination as to whether the application is sufficiently
complete to permit a substantive review. If the FDA determines that the PMA
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for filing. The FDA review of a PMA generally takes
one to two years from the date the PMA is accepted for filing
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but may take significantly longer. The review time is often significantly
extended by the FDA asking for more information, including additional clinical
trials or clarification of information already provided in the submission. A
number of devices for which FDA approval has been sought by other companies have
never been approved for marketing.
The PMA process is lengthy and uncertain and requires substantial commitments
of the Company's financial resources and management's time and effort.
Significant unforeseen delays in the approval process could occur as a result of
the FDA's failure to schedule advisory review panels, changes in established
review guidelines, regulations or administrative interpretations, or
determinations by the FDA that the clinical data collected are insufficient to
support the safety and efficacy of one or more of the devices for their intended
uses or that the data warrants the continuation of clinical studies. Toward the
end of the PMA review process, the FDA generally will conduct an inspection of
the manufacturer's facilities to ensure that the facilities are in compliance
with applicable GMP requirements. If the FDA's evaluation of both the PMA
application and the manufacturing facilities are favorable, the FDA will either
issue an approval letter or an Approvable Letter, which usually contains a
number of conditions which must be met in order to obtain final approval of the
PMA. When and if the conditions have been fulfilled to the satisfaction of the
FDA, the agency will issue a PMA approval letter, authorizing commercial
distribution of the device for certain indications. If the FDA's evaluation of
the PMA application or manufacturer's facilities are not favorable, the FDA will
deny approval of the PMA application or issue a "not approvable letter".
Furthermore, the FDA may approve a device for some procedures but not others or
for certain classes of patients and not others. Modifications to a device that
is the subject of an approved PMA, its labeling or manufacturing process may
require approval by the FDA of PMA supplements or new PMAs. The Company has made
certain minor manufacturing changes to the Excimer System since the device was
approved by the FDA for PTK. Although the Company believes such changes are
minimal and do not require the filing of a PMA supplement or prior approval by
the FDA, there can be no assurance that the FDA would not require the Company to
file a PMA supplement, which would result in additional costs and delays in
marketing the modified device. Supplements to a PMA often require the submission
of the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA. Delays in
obtaining, or failure to obtain, requisite regulatory approvals or clearances in
the U.S. and other countries would prevent the marketing of the Excimer System
and other devices and impair the Company's ability to generate funds from
operations, which in turn would have a material adverse effect on the Company's
business, financial condition, and results of operations.
EXCIMER SYSTEM
The Company believes that the Excimer System requires a PMA or PMA
supplement for each of the surgical procedures which it is intended to perform,
including PTK, LVC and LASIK. The FDA has approved the Company's PMA
applications to commercially market the Excimer System for PTK and LVC in the
U.S. The Company has obtained approval from the FDA to conduct clinical
investigations of the Excimer System for use of LVC and LASIK to treat extreme
nearsightedness pursuant to an approved IDE. The FDA may grant premarket
approval with respect to a particular procedure performed with
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the Excimer System only when it is satisfied that the use of the device for that
particular procedure is safe and effective. In granting premarket approval, the
FDA may restrict the types of patients who may be treated, thereby limiting the
market acceptance of the Excimer System. The FDA may grant approval of the
Excimer System for use with certain procedures but not others. Until premarket
approval is obtained, the Company may conduct limited clinical trials of the
device in the U.S. pursuant to an IDE. Currently, the Company has permission to
conduct excimer laser clinical trials in the U.S. at 20 sites, 19 of which
currently are active. Not all procedures are being performed at each site.
On September 15, 1995, the Company received an Approvable Letter from
the FDA for the Company's PMA for use of the Excimer System in the U.S. to
treat nearsightedness using LVC. The Approvable Letter specifies a six
millimeter ablation zone for myopic corrections between 1.5 and 7.0 diopters.
The Approvable Letter contained the final conditions and product labeling
requirements that the Company must satisfy prior to the FDA's approval of the
PMA. The Approvable Letter also required the initiation of post-approval
studies. The data generated by these studies, however, will be reviewed by the
FDA in determining whether future restrictions on device labeling or use are
warranted.
The Company received from the FDA an Approval Letter dated October 20, 1995
for the Company's PMA for use of the Excimer System in the U.S. to treat
nearsightedness using LVC. The Approval Letter authorizes the Company to
commercially distribute the device for its approved indications in the U.S. The
Approval Letter also places certain restrictions on the use, labeling, promotion
and advertising of the device and requires the Company to notify purchasers and
users of these restrictions. The restrictions concern, generally, the use of the
device only by trained practitioners, the information that must be provided to
prospective patients, and the inclusion of specified indications, risks and
benefits in all promotion and advertising for use of the Excimer System using
LVC.
On March 10, 1995, the FDA approved the Company's PMA application for the
Excimer System for performing PTK. Pursuant to such approval, the Company may
commercially market the Excimer System in the U.S. for performing PTK.
Other Procedures. The Company has obtained FDA approval to conduct
several additional studies involving subsets of patients under the Company's
IDES for LVC. Under a separate IDE from the Phase III LVC study, the Company
has obtained approval to conduct three therapeutic refractive studies on three
different subsets of patients using the LVC procedure. The FDA has not
published guidelines for clinical trials of the Excimer System for performing
other procedures and the Company is working with the FDA to design appropriate
trials for such procedures on a case by case basis. Because the FDA has not
published guidelines with respect to clinical trials for LASIK, it is not known
whether or to what extent the FDA may require further clinical trials of such
procedures. There can be no assurance that the device will be shown to be safe
and effective, or that it will be approved or cleared by the FDA or foreign
bodies, for the intended uses for which it is being investigated.
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ERODIBLE MASK
The Company also is engaged in ongoing clinical trials of the Erodible
Mask. There can be no assurance that the device will be shown to be safe and
effective, or that it will be approved or cleared by FDA or foreign bodies, for
the intended uses for which it is being investigated.
HOLMIUM SYSTEM
The Holmium System was developed by the Company for use by ophthalmologists
to treat hyperopia and astigmatism with LTK and to treat glaucoma with LS. In
June 1992, the Company was granted 510(k) premarket clearance for the Holmium
System and a related disposable hand-held probe for performing LS. In June 1993,
the Company was granted premarket clearance for a second hand-held tip for
performing LS. If the Company makes any modifications to its cleared Holmium
System or probes that constitute a major change to the intended use of the
device or that could significantly affect the safety or effectiveness of the
device, the Company would be required to file a new 510(k), or potentially a
PMA, for the modification. The Company believes that PMA approval is necessary
to market the Holmium System for performing LTK. The Company has received
approval from the FDA to conduct several IDE studies of the Holmium System using
LTK to treat approximately 400 eyes for hyperopia and astigmatism. Such trials
are ongoing. There can be no assurance that the device will be shown to be safe
and effective, or that it will be approved or cleared by the FDA or foreign
bodies, for the intended uses for which it is being investigated.
VISION CORRECTION CENTERS
The Company is developing a network of centers for the delivery of LVC
directly to the public, some of which are Vision Correction Centers and some of
which are located at Institutions (collectively, "Centers"). Centers located at
Institutions are owned by the respective Institutions, such as hospitals and
universities (with the Company providing equipment and/or management services),
while Vision Correction Centers may be owned either by the Company or by one or
more healthcare professionals.
Numerous state laws and regulations presently affect the manner in which the
Company may establish or operate Centers, which vary significantly from state to
state. In some instances these laws and regulations are ambiguous, and sometimes
state regulators fail to provide adequate guidelines. The Company believes that
it has adopted a strategy that will enable it to establish its network of
Centers in compliance with all applicable regulatory requirements. However,
federal and state regulatory attention may continue to be directed to the
practice of medicine, and any changes in state or federal law or regulations, or
in governmental agency and judicial interpretations of such laws and
regulations, could cause one of the Company's strategies that is now in
compliance with applicable laws to cease so to comply. Additionally, while U.S.
federal laws and regulations do not now clearly affect Centers, there can be no
assurance that the federal
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regulatory scheme will not in the future place impediments upon the Company's
proposed network of Centers.
Current state regulatory requirements and restrictions that relate to
corporate entities such as the Company that are involved in the ownership and
operation of healthcare facilities include prohibitions against: the corporate
practice of medicine except by an entity owned by healthcare professionals
and/or wherein the professionals exercise control over medical judgments;
patient referrals by healthcare professionals (including ophthalmologists and
optometrists) to a facility owned or compensated by such referring professional
(either generally, or sometimes by defining such payments as "kick backs"); and
"fee splitting" between healthcare professionals and corporate entities. Other
state laws specifically regulate the nature and compensation provisions of
employment or management relationships that healthcare professionals may have
with a corporate-owned facility, affect the form of business entity to be
utilized, limit payments either to the entity or to healthcare professionals to
the "fair market value" of their contributions, or affect the manner of
marketing the service performed at the healthcare facility. Additional
regulations in some states also now affect, or in the future may affect, the
establishment of Centers, including requirements for certificates of need and/or
other licensing to open a Center, and registration of medical laser equipment.
The Company believes that it has developed strategies for use in most states
to operate the Centers in compliance with applicable law. The business terms and
organizational structure of the Centers will vary significantly from state to
state, however, in order to accommodate the local regulatory framework. There
can be no assurance that the Company will be able to establish its Centers in
all of the jurisdictions its business strategy dictates, to continue such
Centers in the event of future regulatory changes, or profitably to operate any
or all of its Centers.
OTHER REGULATORY REQUIREMENTS
Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDA Act also requires the Company to
manufacture its products in registered establishments and in accordance with GMP
regulations and to list its devices with the FDA. The Company's facilities in
the U.S. and Ireland are subject to periodic inspections by the FDA. These
regulations impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities. The FDA
has proposed changes to the GMP regulations which will likely increase the cost
of compliance with GMP requirements. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. Current FDA enforcement policy prohibits the marketing of approved
medical devices for unapproved uses. Changes in existing regulatory requirements
or adoption of new requirements could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will not be required to incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have a material adverse effect upon the Company's business, financial
condition and results of operations.
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All lasers manufactured by the Company are subject to the Radiation Control
for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users pursuant to a performance standard, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product under the performance
standard.
There can be no assurance that future changes in review guidelines,
regulations or administrative interpretations by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
In addition to the foregoing, the manufacture, sale and use of the Company's
products are subject to numerous federal, state, local and foreign government
laws and regulations relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to conduct business.
Furthermore, the introduction of the Company's products in foreign countries
may require obtaining foreign regulatory clearances. The Company currently sells
its Excimer Systems outside the U.S. in approximately 50 countries, including
most of Europe. Sales of the Company's laser systems are limited in several
countries in addition to the U.S., including Japan and Taiwan. There can be no
assurances that the Company will be able to obtain regulatory clearances for its
products in the U.S. or foreign markets.
BACKLOG
The Company's firm backlog as of March 15, 1996 was approximately $1.3
million, compared to a backlog of approximately $1.8 million as of March 15,
1995. The Company anticipates shipping all of its product backlog in the
current fiscal year.
CAUTIONARY STATEMENTS AND FACTORS AFFECTING FUTURE OPERATING RISKS
This report, the Company's press releases, oral presentations, and other
filings with the SEC, may contain information about the Company's future
business prospects including, without limitation, statements about the size of
the potential markets for laser vision correction and the Company's excimer
laser systems, the potential for significant royalty revenues, and the success
of the Company's vision correction center business. Some of these statements may
be considered "forward-looking". The following cautionary statements identify
important factors that may cause actual results to differ materially from those
reflected in, or implied by, any such forward looking statements.
1. The Company believes that its profitability and growth depend upon broad
acceptance of LVC in the U.S. There can be no assurance that LVC will be
accepted by either the ophthalmic community or the general population as an
alternative to existing methods of treating refractive vision disorders. The
acceptance of LVC may be affected adversely by its cost (estimated to be
between $1,250 and $2,000 per eye), concerns relating to its safety and
efficacy, the lack of third party reimbursement for LVC, general resistance to
surgery, the effectiveness of alternative methods of correcting refractive
vision disorders, the lack of long-term follow-up data, the
-21-
<PAGE> 24
possibility of unknown side effects and the cost of the Excimer System.
Promotional efforts by suppliers of products or procedures which are
alternatives to LVC, including eyeglasses and contact lenses, some of whom may
have greater resources than the Company, may also affect adversely the market
acceptance of LVC. Even if broad acceptance of LVC does occur, laser system
sales may be negatively impacted by competition, patent disputes, changing
technologies and delays in regulatory approvals. Participation in per-procedure
royalties may be negatively impacted by challenges to Pillar Point Partners,
the Company's patents and/or the FTC's investigation regarding Pillar Point
Partners, VISX and the Company. The Company's failure to achieve broad market
acceptance of LVC is likely to have a material adverse effect on the Company's
business, financial condition and results of operations.
2. The Company has experienced losses in each year of operation since inception
in 1986, except for a modest profit in 1991. For the year ended December 31,
1995, the Company incurred a net loss of $3.5 million, bringing its
accumulated deficit to $33.5 million as of December 31, 1995. To implement
its commercialization strategy, the Company has begun to make significant
expenditures including, marketing, opening and operating Vision Correction
Centers. There can be no assurances that the Company will ever achieve long-term
profitability and growth.
3. The Company's three LVC centers operating in the U.K. have incurred operating
losses since their inception in 1992 and are being discontinued. During the
first half of 1996 the Company intends to open between 20 to 30 Vision
Correction Centers in the U.S., and anticipates incurring significant ongoing
expenses including marketing, public relations, leasing costs, personnel hiring
and training costs. The success of the Vision Correction Centers will depend on
the market acceptance of LVC. The Company has limited experience in the
operation of such centers and the marketing of LVC directly to consumers.
4. There are a number of U.S. and foreign patents covering methods and apparatus
for performing corneal surgery with excimer lasers and holmium lasers that are
not owned by the Company. If patents held by others were considered valid and
interpreted broadly in an adversarial proceeding, they could be deemed to cover
one or more aspects of the Excimer Systems or the Company's holmium laser
systems or their use to perform one or more procedures. While the Company either
owns or has obtained from Pillar Point Partners (a partnership formed by the
Company and VISX to hold certain U.S. patents) a license to what it believes are
the important U.S. LVC patents, there can be no assurance that the Company will
not be subject to one or more claims for infringement.
In the event one of the Company's products is adjudged to infringe a patent
in a particular market with the likely consequence of a damage award, the
Company and its customers may be enjoined from making, using and selling such
products in such market or be required to obtain a royalty-bearing license, if
available on acceptable terms. Alternatively, in the event a license is not
offered, the Company might be required to redesign those aspects of the products
held to infringe so as to avoid infringement. Any redesign efforts undertaken by
the Company might be expensive and could necessitate FDA review. Furthermore,
they could delay the re-introduction of the Company's products into certain
markets, or may be so significant as to be impractical. If
-22-
<PAGE> 25
redesign efforts were impractical, the Company could be prevented from
manufacturing and selling the infringing products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Failure to maintain the protection afforded by certain of the Company's
patents and the patents licensed to the Company and VISX by Pillar Point
Partners would have a material adverse effect on the Company's future revenues
and earnings. Further, there can be no assurance that the Company's patents (or
those licensed from Pillar Point Partners) will ultimately be found to be valid,
or that the Company's patent rights (or those licensed from Pillar Point
Partners) will deter others from developing substantially equivalent or
competitive products. Even if an unlicensed competitor's products infringe upon
the Company's patents or those of Pillar Point Partners, it may be costly to
enforce such rights. An infringement action may require the diversion of funds
from the Company's operations and may require management to expend effort that
might otherwise be devoted to the Company's operations. Furthermore, there can
be no assurance that the Company or Pillar Point Partners will be successful in
enforcing its patent rights. Any failure by the Company or Pillar Point Partners
to prevail in patent infringement actions against others, or any success by
another company in enforcing a patent infringement claim against the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations.
5. There can be no assurance that the agreements between the Company and VISX
relating to Pillar Point Partners will preclude patent disputes with VISX with
respect to technology not included in Pillar Point Partners in the U.S. or with
respect to any technology outside the U.S., or that the Company's activities
will not infringe patents held by other parties. Under the agreements
establishing Pillar Point Partners, the Company must pay Pillar Point Partners a
royalty fee each time its Excimer System is used to perform LVC in the U.S.,
regardless of whether the Company performs the procedure. The Company intends to
maintain contractual arrangements permitting it to collect such royalty fees
from purchasers of its Excimer Systems, but, there can be no assurance that it
will be able to collect such fees. On October 13, 1995, the Company received
notice that the Federal Trade Commission ("FTC") initiated an investigation to
determine whether Pillar Point Partners, VISX, the Company or any of their
predecessors, alone or in conjunction with others, is engaging or has engaged in
any unfair methods of competition in violation of the Federal Trade Commission
Act, relating to certain arrangements concerning patents on devices and
procedures, and/or practices relating to the sale or distribution of certain
ophthalmic surgical devices. The FTC issued a subpoena requiring the Company to
produce certain materials and information relating to the subject matter of the
investigation. In forming Pillar Point Partners, the Company has taken measures
to structure the partnership in a manner consistent with U.S. antitrust laws.
The compliance of Pillar Point Partners with these laws will depend upon the
activities of the partners, a determination of what constitutes the relevant
market for purposes of such laws, the number and relative strength of
competitors in such markets and numerous other factors, many of which are
presently unknown or are beyond the control of Pillar Point Partners. There can
be no assurance that the FTC's investigation will ultimately lead the FTC to
agree that Pillar Point Partners complies with U.S. antitrust laws. The Company
is accordingly unable to predict whether or not, or when, any proceeding may be
brought by the FTC following such investigation, or the scope of relief, if any,
that may
-23-
<PAGE> 26
ultimately be ordered in the event that any such proceeding were determined
adversely to the Company and/or Pillar Point Partners.
6. The vision correction industry is subject to intense competition. LVC
competes with eyeglasses, contact lenses and RK, as well as with other
technologies and surgical techniques currently under development, such as
corneal implants and surgery using different types of lasers. Certain of the
Company's competitors may have greater financial resources than the Company,
which may enable them to market their products or procedures to the consumer and
to the ophthalmic community in a more effective manner. The success of any
competing alternatives to LVC would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is aware of a number of businesses that have been formed to
provide U.S. consumers with treatment for nearsightedness using LVC, and others
may be formed. These providers of LVC will compete with the Vision Correction
Centers and may have greater financial resources than the Company and/or may be
or become more experienced in profitably performing LVC. The Company's Vision
Correction Centers also may compete with hospitals, clinics and private
ophthalmologists to the extent such providers perform LVC within the same
geographic areas as a Vision Correction Center. The success of these providers
of LVC using the Company's or similar products in capturing the market for LVC
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Excimer System currently competes with other manufacturers' excimer
laser systems sold in the U.S. and abroad. On October 2, 1995 VISX announced
that it had received FDA approval to commercially market its excimer laser
system for Phototherapeutic Keratectomy and on March 27, 1996 VISX announced
that its PMA application for its excimer laser system for LVC to treat
nearsightedness was approved by the FDA. This may have a negative effect on
the Company's system sales. Additionally, competitors, both in the U.S. and
abroad, may enter the equipment manufacturing business or acquire existing
companies. Competing manufacturers of excimer laser systems may have greater
financial resources than the Company, may be able to offer their products at a
lower cost or may develop procedures that involve a lower per procedure cost.
Competition from new entrants may be particularly prevalent in those countries
where significant regulatory approvals are not required.
The Company is aware that certain U.S. physicians are performing refractive
procedures in the U.S. with used Summit excimer systems purchased from overseas
third parties at prices below those charged by Summit for new U.S. systems.
These "grey market" systems do not conform to the specifications required by the
FDA and have been classified by the FDA as "adulterated" in an FDA Import Alert
dated February 23, 1996. The alert authorizes detention of such systems without
inspection at customs. The Company is also aware that certain U.S.
ophthalmologists are performing refractive procedures in the U.S. with so-called
"home-made" excimer lasers that have not been the subject of any FDA-approved
clinical testing. The Company believes that these lasers, which generally sell
for less than the Company's Excimer
-24-
<PAGE> 27
Laser System, are also adulterated within the meaning of the FDA Act. The
confusion created by the "grey market" laser systems and "homemade"
laser systems is adversely affecting the Company's U.S. system sales. The
Company believes that FDA and certain state agencies are investigating the
parties involved in the grey market and homemade laser activities, and is
hopeful that regulatory action to curb these activities may be forthcoming,
although there can be no assurance of such regulatory action. The Company is
also pursuing litigation against certain of the parties involved in certain of
these activities, including an importer, a service provider and certain
ophthalmologists, and is considering additional action to curb this activity.
7. Concerns with respect to the safety and efficacy of the Company's Excimer
System to perform LVC include predictability and stability of results. Potential
complications and side effects include: post-operative discomfort; corneal haze
during healing (an increase in the light scattering properties of the cornea);
glare/halos (undesirable visual sensations produced by bright lights); decreases
in contrast sensitivity; temporary increases in intraocular pressure in reaction
to post-procedure medication; modest fluctuations in refractive capabilities
during healing; modest decreases in best corrected vision (i.e., with corrective
eyewear); unintended over- or under-corrections; regression of effect; disorders
of corneal healing; corneal scars; corneal ulcers and induced astigmatism. There
can be no assurance that long-term follow-up data will not reveal additional
complications that may have a material adverse effect on acceptance of LVC which
in turn would have a material adverse effect on the Company's business,
financial condition and results of operations.
8. The Company currently purchases certain components used in the manufacture of
the Excimer Systems from only one of the available suppliers. If any of these
suppliers were to cease providing components to the Company, the Company would
be required to locate and contract with a substitute supplier, and there can be
no assurances that such substitute supplier could be located in a timely manner,
or could provide required components on commercially reasonable terms. A failure
to increase production volumes in a cost-effective or timely manner, or any
interruption in the manufacturing of Excimer Systems, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
9. The testing and use of human health care products entail an inherent risk of
physical injury to patients and physicians, and exposes the manufacturer to
potential product liability and other damage claims. In addition, the Company's
products include high voltage power supplies. While the Company maintains
product liability insurance with coverage of $5.0 million per occurrence and an
annual aggregate maximum of $5.0 million, there can be no assurance that any
product liability claim assessed against the Company would not exceed its
insurance coverage. There can be no assurance that adequate product liability
insurance will continue to be available, either at existing or increased levels
of coverage, on commercially reasonable terms, if at all, and that the Company's
existing insurance will be adequate to cover any future claims that may be made.
Also, while the Company is exploring the availability of umbrella liability and
errors and omissions coverage for its Vision Correction Centers, there can be no
assurance that such coverage will be available in amounts sufficient to protect
the Company from malpractice, negligence or other claims, or that it will be
available at an acceptable cost. Even if a claim against the Company is covered
by insurance, the costs of defending a product liability,
-25-
<PAGE> 28
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Summit Technology, Inc.:
Under date of February 6, 1996, we reported on the balance sheets of Summit
Technology, Inc. as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995, as contained in the 1995 annual
report to stockholders. These financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1995.
In connection with our audits of the aforementioned financial statements, we
also audited financial statement Schedule II. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 6, 1996
<PAGE> 29
Schedule II
-----------
<TABLE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1995, 1994, and 1993
(in thousands)
<CAPTION>
Balance at Balance
Beginning Amounts at End of
DECEMBER 31, 1995 of Period Additions Written Off Period
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $1,049 $(75) $ - $ 974
Balance at Balance
Beginning Amounts at End of
DECEMBER 31, 1994 of Period Additions Written Off Period
---------- --------- ----------- ---------
Allowance for Doubtful Accounts $ 760 $357 $ 68 $1,049
Balance at Balance
Beginning Amounts at End of
DECEMBER 31, 1993 of Period Additions Written Off Period
---------- --------- ----------- ---------
Allowance for Doubtful Accounts $ 750 $985 $975 $ 760
</TABLE>
<PAGE> 30
<TABLE>
Exhibit Index
-------------
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
13 The Company's Annual Report to Security Holders
for the fiscal year ended December 31, 1995
24 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (For EDGAR Filing
Purposes Only)
</TABLE>
<PAGE> 31
Exhibit 13
----------
<PAGE> 32
malpractice, negligence or other action, and/or the assessment of damages in
excess of insurance coverage, could have a material adverse effect on the
Company's business, financial condition and results of operation.
ITEM 2. PROPERTIES
MANUFACTURING AND FACILITIES
The Company presently leases 50,000 square feet of manufacturing and office
space in Waltham, Massachusetts, under a ten-year lease expiring in August 2000
and 5,300 square feet of office space in Boston, Massachusetts under a five-year
lease expiring in March 2000. The Company also leases a 25,000 square foot
manufacturing facility in Cork, Ireland, under a lease expiring in 2026. To
date, the Company's manufacturing activities have consisted primarily of the
production of limited quantities of its products. The Company believes that it
has the capacity to manufacture a sufficient number of Excimer Systems to
satisfy demand. The Company also has the manufacturing space to produce Excimer
Systems in much greater volumes; however, any significant increase in
manufacturing capacity will require the hiring and training of qualified
manufacturing personnel.
ITEM 3. LEGAL PROCEEDINGS
U.S. Patent Litigation against VISX
On August 29, 1995, the Company filed suit in the U.S. District Court for the
District of Delaware against VISX for infringement of a certain U.S. patent with
a priority date of 1995, which was purchased by the Company in 1993 ("the Azema
Patent"). The Company is seeking damages for past infringement for all excimer
lasers manufactured by VISX in the U.S. for use outside the U.S. In addition,
the Company is seeking to enjoin VISX from manufacturing and selling excimer
lasers for any purpose other than U.S. clinical trials. On October 10, 1995,
VISX filed an answer to the Company's complaint. There can be no assurance that
the Company will prevail in this proceeding.
German Patent Litigation
On August 3, 1995, a German court determined that the Schwind Keratom
ophthalmic excimer laser system distributed by Coherent, and the Chiron
Technolas Keracor 116 ophthalmic excimer laser system distributed by Chiron
Technolas, infringe the German counterpart of the Azema Patent. The court has
entered cease and desist orders against Schwind and Chiron Technolas and has
ordered them to pay damages to the Company for past infringements. Both the
Schwind and Chiron Technolas excimer laser systems are manufactured in Germany.
On September 5, 1995, the Company posted the requisite bond in Germany to
enforce the injunction issued against Chiron Technolas by the German court, as a
result of which Chiron Technolas is now prohibited from manufacturing, selling
or using its Keracor 116 ophthalmic excimer laser systems in Germany, where its
production facility is located. Chiron Technolas and Schwind have appealed the
judgment and Chiron Technolas has also filed a nullity action with the German
Patent Office. Although the Company believes it will prevail in this nullity
action, there can be no assurance that the German Azema patent will survive the
proceeding. If the nullity action or
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<PAGE> 33
Chiron's appeal is decided against the Company, its infringement verdict in
Germany will be overturned and it will be liable for damages which may or may
not exceed the amount of the bond. This bond is included in current assets as
restricted cash of $1.5 million at December 31, 1995.
Canadian Patent Litigation
On September 5, 1995, VISX sued the Company and eight Canadian
ophthalmologists who use or have used the Company's Excimer System, in the
Federal Court of Canada, Trial Division, asserting that the Excimer System
infringed certain Canadian patents held by VISX. In such suit, VISX seeks, among
other things, damages for past infringement and a permanent injunction
preventing the Company and the other defendants from manufacturing, marketing,
selling, using and inducing others to use the Excimer System in Canada. The
Company believes that it has valid defenses to VISX's suit and intends to defend
such action vigorously; however, there can be no assurance that the Company will
be successful. The Company does not believe that the Canadian market is material
to its business. There can be no assurance that additional patent infringement
claims in the United States or in other countries will not be asserted against
the Company, or, if asserted, that the Company will be successful in defending
against such claims.
FTC Investigation
On October 13, 1995, the Company received notice that the Federal Trade
Commission ("FTC") initiated an investigation to determine whether Pillar Point
Partners, VISX, and the Company or any of their predecessors, alone or in
conjunction with others, is engaging or has engaged in any unfair methods of
competition in violation of the Federal Trade Commission Act, relating to
certain arrangements concerning patents of devices and procedures, and/or
practices relating to the sale or distribution of certain ophthalmic surgical
devices. The FTC issued a subpoena requiring the Company to produce certain
materials and information relating to the subject matter of the investigation.
In forming Pillar Point Partners, the Company has taken measures to structure
the partnership in a manner consistent with U.S. antitrust laws. The compliance
of Pillar Point Partners with these laws will depend upon the activities of the
partners, a determination of what constitutes the relevant market for purposes
of such laws, the number and relative strength of competitors in such markets
and numerous other factors, many of which are presently unknown or are beyond
the control of Pillar Point Partners. There can be no assurance that the FTC's
investigation will ultimately lead the FTC to agree that Pillar Point Partners
complies with the U.S. antitrust laws. The Company is accordingly unable to
predict whether or not, or when, any proceeding may be brought by the FTC
following such investigation, or the scope of relief, if any, that may
ultimately be ordered in the event that any such proceeding were determined
adversely to the Company and/or Pillar Point Partners.
LaserSight Litigation
In March 1995, Pillar Point Partners sued LaserSight, Inc. for patent
infringement in the Federal District Court for Delaware. Although the suit is
based on a patent licensed to Pillar Point Partners by VISX, the Company will
share in the expenses of this litigation. In addition, the defendant,
LaserSight, Inc. has entered a declaratory judgment counterclaim challenging
Pillar Point Partners' ability to enforce its rights under one of its patents,
which counterclaim
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<PAGE> 34
asserts, among other things, that the alleged pooling of patents by Pillar Point
Partners constitutes patent misuse. Any successful challenge to the structure
and operation of Pillar Point Partners or to its patents could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information required by Item 5 is hereby incorporated by reference
to page 36 of the 1995 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is hereby incorporated by reference
to page 1 of the 1995 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 7 is hereby incorporated by reference
to pages 18 and 19 of the 1995 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and subsidiaries as
of December 31, 1995 and 1994 and the related consolidated statements of
operations, stockholders' equity and cash flow for each of the years in the
three-year period ended December 31, 1995, together with the related notes and
report of KPMG Peat Marwick LLP, independent auditors, are hereby incorporated
by reference to pages 20 through 35 of the 1995 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-28-
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the
Company is set forth under the "Election of Directors," "Directors and Executive
Officers," "Information Concerning the Board of Directors and Its Committees"
and "Compliance with Section 16(a) of the Exchange Act of 1934" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth under
"Executive Compensation" in the Proxy Statement and is incorporated herein by
reference, except that the Report of the Compensation Committee and the
Performance Graph are not incorporated herein for any purpose.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is set forth under "Ownership of Securities" in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
set forth under "Other Transactions and Relationships" in the Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
1. Financial Statements
-29-
<PAGE> 36
<TABLE>
The documents listed below are included in Part II of this Report by
incorporation by reference to the 1995 Annual Report.
<CAPTION>
Page Number of
Document 1995 Annual Report
- -------- ------------------
<S> <C>
Independent Auditors' Report 35
Consolidated Balance Sheets 20
December 31, 1995 and 1994
Consolidated Statements of 21
Operations-Years Ended December
31, 1995, 1994 and 1993
Consolidated Statement of Cash 24
Flows-Years Ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' 22-23
Equity-Years Ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements 25-35
</TABLE>
2. Financial Statement Schedules
Included at the end of this Report are the following:
Independent Auditors' report regarding Schedules
Schedule II - Valuation and qualifying accounts
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information
is presented in the financial statements or notes thereto.
3. Exhibits
The following Exhibits are either filed herewith or were filed as
exhibits to such other document filed with the Commission as is indicated:
-30-
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Articles of Organization, as amended, incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992, as amended (the "1992
10-K")
3.2 Articles of Amendment to Articles of Organization dated
September 7, 1994, incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994
By-Laws, as amended, incorporated by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1989
4 Rights Agreement, incorporated by reference to Exhibit 1 to
the Company's Report on Form 8-A filed with the Commission
on April 2, 1990
10.1 IBM License Agreement, incorporated by reference to Exhibit
10(b) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991 (the "1991 10-K")
10.2 Muller Employment Contract, incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 filed with the Commission on June 7, 1993 (the "1993
S-1")
10.3 Waltham Lease, incorporated by reference to Exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1990
10.4 Irish facility agreement, incorporated by reference to
Exhibit 10(g) to the 1991 10-K
10.5 The Industrial Development Authority grant agreements,
incorporated by reference to Exhibit 10(h) to the 1991 10-K
10.6 Formation Agreement, Summit Transfer Agreement, Summit
Contribution Agreement, Partnership Agreement and
License-Back to Summit, each dated June 3, 1992 relating to
the formation of Pillar Point Partners, Incorporated by
reference to Exhibit 10(a) to the Company's Current Report
on Form 8-K filed with the Commission on June 5, 1992
10.7 Patlex License, incorporated by reference to Exhibit 10.9 to
the 1993 S-1
</TABLE>
-31-
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C>
10.8* 1992 Stock Option Plan For Outside Directors, as amended,
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995*
10.9* Executive Stock Option Agreement Between the Company and
David F. Muller, incorporation by reference to Exhibit 10.9
to the 1992 10-K*
13 The Company's Annual Report to Security Holders for the
fiscal year ended December 31, 1995 filed herewith
22 Subsidiaries, incorporated by reference to Exhibit 22 to the
1992 10-K
23 Consent of KPMG Peat Marwick LLP, attached hereto
27 Financial Data Schedule (For EDGAR Filing Purposes Only)
(b) Reports on Form 8-K. During the quarter ended December 31,
1995, the Company filed two (2) reports on Form 8-K; one
dated October 13, 1995 regarding the FTC investigation; and
one dated October 10, 1995 regarding third quarter results.
<FN>
* Management Compensation Plan
</TABLE>
-32-
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUMMIT TECHNOLOGY, INC.
Date: March 29, 1996 By: /s/ DAVID F. MULLER
----------------------------- ----------------------------
David F. Muller, President,
Chief Executive Officer and
Chairman of the Board
<TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ DAVID F. MULLER President, Chief Executive March 29, 1996
- ----------------------- Officer and Chairman of
David F. Muller the Board
/s/ RAJIV P. BHATT Executive Vice President March 29, 1996
- ----------------------- and Chief Financial Officer
Rajiv P. Bhatt
/s/ JEFFREY A. BERNFELD Director March 29, 1996
- -----------------------
Jeffrey A. Bernfeld
/s/ RICHARD F. MILLER Director March 29, 1996
- -----------------------
Richard F. Miller
/s/ JOHN A. NORRIS Director March 29, 1996
- -----------------------
John A. Norris
/s/ RICHARD M. TRASKOS Director March 29, 1996
- -----------------------
Richard M. Traskos
</TABLE>
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<PAGE> 1
- --------------------------------------------------------------------------------
S U M M I T 1 9 9 5
- --------------------------------------------------------------------------------
<PAGE> 2
Summit Technology is a worldwide leader in the development, manufacture and sale
of ophthalmic laser systems designed to correct common vision disorders such as
nearsightedness, farsightedness and astigmatism. On October 20, 1995, the
Company's excimer laser system became the first excimer laser system in the
world to be APPROVED BY THE FDA for commercial sale in the United States for
laser correction of nearsightedness. Laser correction of nearsightedness is an
outpatient procedure performed with the excimer laser requiring approximately
15 seconds of laser time. All participants in Summit's U.S. clinical trials,
which were conducted in support of obtaining FDA approval, experienced an
improvement in visual acuity without corrective eyewear. It is estimated that
in excess of 140 million people in the United States use eyeglasses or contact
lenses to correct common vision disorders, with over 60 million of these
individuals suffering from nearsightedness. The Company's strategy is to become
a vertically-integrated vision correction business by (i) manufacturing and
selling laser systems and related products to correct vision disorders; (ii)
operating vision correction centers; and (iii) participating in per procedure
royalty revenues.
<PAGE> 3
Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Year ended December 31 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of operations data
Net revenue $45,134 $ 24,210 $26,801 $31,130 $22,018
Net income (loss) $(3,512) $(15,381) $(9,154) $ (383) $ 980
Net income (loss) per share of
common stock (1) $ (.14) $ (.62) $ (.39) $ (.02) $ .04
Weighted average number of
common shares outstanding (1) 25,965 24,666 23,379 22,299 22,400
<FN>
(1) All per share data and weighted average share amounts have been restated
to reflect the 3-for-2 stock dividend with a payment date of December 1,
1995
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance sheet data
Working capital $106,172 $ 23,351 $26,618 $24,537 $25,615
Total assets $157,135 $ 51,167 $50,548 $38,772 $35,494
Long term obligations,
excluding current portion $ 1,002 $ 1,177 $ 164 $ 729 $ 390
Stockholders' equity $136,875 $ 37,883 $40,384 $29,854 $29,714
</TABLE>
1
<PAGE> 4
To Our Shareholders:
FDA Approved! After more than ten years of determination and hard work we can
finally deliver that unqualified message. The power of the message is further
enhanced by the fact that we were the first company approved for excimer
laser vision correction in the United States. There should be no confusion as to
the meaning of this opportunity to set the U.S. standard of excellence and to
continue the market leadership that we first established in the overseas
markets. The clinical results we presented to the FDA Advisory Panel in
obtaining FDA approval are, to the best of our knowledge, better in virtually
every category than all other laser vision correction results presented to the
Panel. These facts speak for themselves. As we go to press with this report,
there are over 150 Summit Apex Lasers in use in the U.S. providing laser vision
correction. In addition, several thousand ophthalmologists have received the
didactic portion of the FDA-required training program and several hundred of
these have completed the clinical hands-on portion, certifying them to treat
patients.
Approval of our laser system for the treatment of nearsightedness is just
the beginning. We are actively engaged in worldwide clinical trials of our Apex
Plus system for the treatment of astigmatism and farsightedness and we are
achieving excellent results. In fact, we believe that we have the most
successful system for the predictable and stable treatment of astigmatism and
farsightedness, and look forward to bringing this product to the U.S. market as
an upgrade to our ever-increasing installed base. Since both astigmatism and
farsightedness treatments require our single-use emphasis[REGISTERED TRADEMARK]
erodible mask technology, the U.S. approval would open up a new recurring
revenue stream. We have been advised in writing by the FDA that it will require
the same type of Advisory Panel review of astigmatism and farsightedness
treatments as it required for our initial nearsightedness approval. This
requirement applies to our competitors as well.
Our patent portfolio continues to play an important role in our strategic
business plans. In 1995, the Federal Trade Commission initiated an inquiry into
Pillar Point Partners, a partnership which has exclusively licensed many of our
U.S. patents. We are confident that the partnership complies with applicable
laws, but it may take a considerable amount of time for the FTC to reach its own
conclusions. Nonetheless, it should be stressed that our ability to collect
royalties on the use of our equipment is based on our patents themselves. We
have licensed all U.S. purchasers of our Apex systems, who in turn purchase
single-treatment magnetic control cards for $250. We believe that this has set
the stage for a very meaningful and sustainable revenue stream.
In 1993, we made a major acquisition of an international patent portfolio
which we believed to cover some of the fundamental concepts incorporated into
state-of-the-art excimer laser vision correction systems. Our belief was
confirmed when, in August of 1995, the German patent court ruled that our two
German based competitors, Chiron/Technolas and Schwind, infringed our patents.
Both companies were ordered to cease and desist from manufacturing and selling
their product.
2
<PAGE> 5
Additionally, we have sued our U.S. competitor, Visx, for patent infringement of
the U.S. counterpart of the European patent. The trial date is set for February,
1997 in the U.S. District Court of Delaware. I would like to emphasize that this
dispute between Summit and Visx does not affect the Pillar Point Partnership but
we believe that a victory will result in substantial benefit to Summit.
I would like to address the confusion surrounding the media-hyped procedure
known as laser assisted in-situ keratomileusis, or LASIK for short. It is
important to understand that from a financial perspective, Summit is essentially
neutral as to the success of this procedure. That is to say, the procedure
requires the use of our equipment and should result in the same royalties being
paid as with laser vision correction. LASIK is a procedure that has had very
limited testing and no long-term studies. Unlike laser vision correction, which
requires minimal surgical instruction, LASIK is a technically demanding surgical
procedure during which the top one-third of the cornea is sliced off to expose
the inner surface of the cornea. While it is true that there have been
satisfactory results using this technique, it is also true that complications
have included the need for patients to undergo corneal transplants. To our
knowledge, there have not been any laser-induced corneal transplants resulting
from the hundreds of thousands of laser vision correction procedures which have
been performed worldwide. So while the LASIK procedure may ultimately be
approved and used for appropriately selected patients, the clinical trials still
need to be conducted and the risk/reward ratio determined.
In 1995, the Summit Vision[TRADEMARK] Center plan coalesced as we began to
get ready for the U.S. launch of our own treatment centers. We spent a
considerable amount of time and money to determine the exact size and
demographics of our target audience in order to prepare the most cost-efficient
consumer marketing program. We formed alliances with some of the most renowned
universities in the U.S. to act as Centers of Excellence. The purpose of these
centers is to enhance our professional image and to provide the consumer with
additional confidence in the potential for laser vision correction. The centers
will, in some cases, conduct advanced clinical trials for new applications of
our system, offer additional refractive surgical procedures, and provide
staffing for our own Summit Vision[TRADEMARK] Centers. To further enhance our
Summit Vision[TRADEMARK] Center offerings, we set up a third-party patient
financing facility to allow our customers to pay for their procedure on a
monthly basis over an extended period.
We are in the process of discontinuing our center operations in the United
Kingdom and consider that our off-shore beta site testing was successful. During
our time operating these clinics, we learned many of the do's and don'ts which
could have only been learned through experience. I feel that this will form the
cornerstone of what I expect to become a very successful part of Summit's
future.
On the corporate side, we had several significant accomplishments. In the
same week that we received FDA approval, we raised $100 million in an equity
offering. This has resulted in additional positive coverage by Wall Street
analysts and increased ownership of Summit stock by institutional investors. On
December 1, 1995, we issued a 3-for-2 stock dividend for our shareholders. This
dividend was intended, among other things, to enhance the ability of our
shareholders to increase their
3
<PAGE> 6
ownership of Summit in a meaningful fashion. To further enhance our capital
flexibility, Summit has obtained a $20 million line of credit for working
capital needs, and a $20 million term loan to finance the development of
our U.S. centers. This has substantially enhanced our balance sheet and allows
us to keep substantial cash reserves on hand. The financial market seems to have
responded well to these events and we believe our goals have been met.
So, what next? While FDA approval has been our Holy Grail, it comes as no
surprise to any of us that the victory in the race to approval has only brought
us to a new starting line. We now expect to be critically and rightfully judged
on our ability to turn once-in-a-lifetime medical innovation into a resounding
business and financial success. We won the race to approval through
determination, intelligence, dedication, and old-fashioned hard work. The spirit
that runs through the Company will be the catalyst for us to continue our
efforts of the last decade to accomplish the goals that our shareholders have
set for us. Over the years, our shareholders, clinical investigators, and
employees have shared in the faith and belief of many promises made, and we have
delivered. I believe the future will be a reflection of our successful past and
your patience as a shareholder will be justly rewarded.
Very truly yours,
/s/ David F. Muller
- ----------------------------------------
David F. Muller, Ph.D.
President and Chairman of the Board
4
<PAGE> 7
- --------------------------------------------------------------------------------
"The spirit that runs through the Company will be the catalyst for us to
continue our efforts of the last decade to accomplish the goals that our
shareholders have set for us."
David F. Muller, Ph.D.
President and
Chairman of the Board
- --------------------------------------------------------------------------------
<PAGE> 8
- --------------------------------------------------------------------------------
In excess of 140 million people in the United States use eyeglasses or contact
lenses to correct common vision disorders, with over 60 million of these
individuals suffering from nearsightedness. In 1995, approximately $13.8 billion
were spent on eyeglasses and contact lenses by U.S. consumers. In addition, an
estimated 250,000-300,000 radial keratotomy procedures were performed in the
U.S. in 1995. The results of a survey conducted in 1995 among a nationally
representative cross sample of U.S. households indicated that 25% of nearsighted
people between the ages of 21 - 49 years of age would be interested in having
their nearsightedness corrected with excimer laser vision correction. This
projects to approximately 13 million people.
- --------------------------------------------------------------------------------
<PAGE> 9
In excess of 140 million people in the United States use eyeglasses or contact
lenses to correct common vision disorders, with over 60 million of these
individuals suffering from nearsightedness. In 1995, approximately $13.8
billion were spent on eyeglasses and contact lenses by U.S. consumers. In
addition, an estimated 350,000 radial keratotomy procedures were performed in
the U.S. in 1995. The results of a survey conducted in 1995 among a nationally
representative cross sample of U.S. households indicated that 25% of
nearsighted people between the ages of 21-49 years of age would be interested
in having their nearsightedness corrected with excimer laser vision correction.
This projects to approximately 13 million people.
<PAGE> 10
- --------------------------------------------------------------------------------
The principal purchasers of Summit's products are ophthalmologists,
universities, clinics and hospitals, as well as enterprises formed to deliver
laser correction of nearsightedness to consumers. The Company believes that the
demand for its excimer laser systems will be driven by the public demand for
laser correction of nearsightedness. Accordingly, Summit has implemented a
multi-tiered professional and consumer marketing strategy. The Company's efforts
to promote laser correction of nearsightedness directly to the consumer are
being conducted through a comprehensive marketing program utilizing television,
radio and print advertising. This campaign is intended to benefit all Summit
laser owners and the Company's vision correction centers.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"Summit is proud to offer the only excimer laser system approved in the U.S.
to treat nearsightedness. We are committed to creating programs which will
reduce the barrier to capital equipment acquisitions and to help our customers
promote the profitable use of their equipment."
John Frantzis,
Vice President, Sales
- --------------------------------------------------------------------------------
<PAGE> 11
- --------------------------------------------------------------------------------
"Early response to our direct response consumer advertising efforts confirms
that consumers have a tremendous amount of interest in laser correction of
nearsightedness. Our commitment to the highest level of quality patient care and
our investment in state-of-the-art telemarketing and database management systems
give us a competitive advantage in this exciting new vision correction market."
David Applegate,
Vice President, Marketing - Summit Vision[TRADEMARK] Centers
- --------------------------------------------------------------------------------
<PAGE> 12
- --------------------------------------------------------------------------------
"Summit's priority is to meet or exceed customer expectations in all facets of
our business. FDA approval has challenged our customer support organization to
grow rapidly to meet the needs of the U.S. market while maintaining strong
support for our international customers. Summit will continue to meet this
challenge in 1996."
Ray Krauss,
Executive Vice President,
Chief of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Summit's success is clearly demonstrated by the growing size of its customer
base. Since its inception, the Company has sold over 400 laser systems in over
50 countries. Since receiving FDA approval, the Company has increased its
production capabilities and substantially increased its field service
operations. The Company manufactures its products at its headquarters in
Waltham, Massachusetts, and its manufacturing facility in Cork, Ireland.
- --------------------------------------------------------------------------------
<PAGE> 13
- --------------------------------------------------------------------------------
"Our ISO 9002 approved facility in Cork reflects Summit's commitment to quality.
However, quality is a journey which never ends. We are continuously developing
our people, our manufacturing processes and our quality systems to ensure that
we meet the challenges and demands of the marketplace with the highest quality
products."
Andy Jones,
Managing Director, Operations - Summit Ireland.
- --------------------------------------------------------------------------------
<PAGE> 14
- --------------------------------------------------------------------------------
Summit intends to maintain its leadership position in the development,
manufacture and sale of state-of-the-art laser technologies for the treatment of
common vision disorders. The Company expects to continue to devote a significant
amount of its resources in the areas of research, engineering and product
development, including regulatory and clinical affairs. Outside the U.S., Summit
has introduced its newest product, the Apex Plus excimer laser system. In
addition to treating nearsightedness, this system is providing physicians with
outstanding results in treating astigmatism and farsightedness.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"1995 represented the culmination of Company-wide efforts to obtain U.S.
approval for our excimer laser technology, reinforcing Summit's leadership in
the refractive care field. As the first company to receive both therapeutic and
laser vision correction approval, Summit is at the forefront of ophthalmology
and is committed to continue offering revolutionary breakthroughs in the years
to come."
Kimberley Doney,
Executive Vice President, Regulatory, Clinical & Quality Affairs
- --------------------------------------------------------------------------------
<PAGE> 15
- --------------------------------------------------------------------------------
"In addition to being the leader in treating nearsightedness, we have completed
our astigmatism and farsightedness product development. The Apex Plus laser
system uses our patented erodible mask technology which we believe provides the
surgeon with the most advanced, state-of-the-art technology to treat common
vision disorders."
Howard Apple, Ph.D.
Vice President, R&D
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"Research continues to be the engine that drives Summit. The Company prides
itself on having a scientific team that continually monitors new and existing
technologies so that we can continue to make procedural refinements/enhancements
and remain a world leader in ophthalmic laser surgery."
Peter Klopotek, Ph.D.
Vice President, Science & Technology
- --------------------------------------------------------------------------------
<PAGE> 16
- --------------------------------------------------------------------------------
Summit is proud of its affiliations with prominent teaching hospitals located
throughout the United States. The vast majority of the Summit Vision[TRADEMARK]
Centers are being developed using a hub and spoke concept. The hub in each
geographic region is a prestigious national teaching hospital serving as a
Center of Excellence for teaching and training purposes. The spokes in each
region will be Summit Vision[TRADEMARK] Centers where laser correction of
nearsightedness is performed, offering local physicians access to the
facilities to treat their own patients. The following Centers of Excellence
are currently operating and treating patients: Jules Stein Eye Institute at the
UCLA Medical Center, Los Angeles; Stanford University Medical Center, Palo
Alto, California; Rush Presbyterian - St. Lukes Medical Center, Chicago; New
England Eye Center at the Tufts University School of Medicine, Boston; George
Washington University Medical Center, Washington, D.C.; and Cleveland Clinic
Foundation Eye Institute, Cleveland, Ohio.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"Our Centers of Excellence strategy represents a significant milestone in the
integration of laser vision correction into the vision correction market. We
are confident that the imperatives of physician education, high quality patient
care and access to the technology for community providers will be met, resulting
in the adoption of laser vision correction as an accepted method of vision
correction."
Ron Herskowitz, O.D.
Executive Vice President,
Professional Business Development
- --------------------------------------------------------------------------------
<PAGE> 17
- --------------------------------------------------------------------------------
"Bringing laser vision correction to patients in a consistent, predictable and
professional manner has required the development of innovative approaches to
clinical data management and medical education."
Maureen O'Connell,
Vice President,
Compliance & Quality Assurance - Summit Vision[TRADEMARK] Centers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"Predictability, stability, success... laser vision correction qualities
that we want our staff and facilities to convey to consumers."
Bruce Garcia,
Vice President,
Operations - Summit Vision[TRADEMARK] Centers
- --------------------------------------------------------------------------------
<PAGE> 18
- --------------------------------------------------------------------------------
Summit's objective is to maximize shareholder value by being the leader in every
aspect of its business. Summit is uniquely positioned to generate its revenue
from multiple sources including laser system sales, per procedure royalties, and
operating vision correction centers. In addition, Summit offers an array of
value-added services such as flexible equipment leasing and service programs for
laser customers, consumer finance programs, marketing programs including
education, research and telemarketing, and outcomes analysis and database
management programs.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"Summit's financial performance improved substantially throughout 1995 as we
increased revenues 86% from 1994 and succeeded in controlling operating
expenses, which increased only 8% over last year. Our successful $100 million
equity offering in 1995 substantially strengthened our balance sheet and
established the capital required to maximize growth and expansion
opportunities."
Rajiv Bhatt,
Executive Vice President,
Treasurer and Chief Financial Officer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"We have had considerable success in designing and implementing novel solutions
to the complex and ever-changing legal challenges that arise as we build new
businesses in a new industry. These are the building blocks for future success."
Peter Litman,
Executive Vice President and General Counsel
- --------------------------------------------------------------------------------
<PAGE> 19
<TABLE>
Financial Section
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25
Independent Auditor's Report 35
Market for the Registrant's Common Stock and Related Securityholder Matters 36
</TABLE>
17
<PAGE> 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
The Company is a worldwide leader in the development, manufacture and sale of
ophthalmic laser systems designed to correct common refractive vision disorders
such as nearsightedness, farsightedness and astigmatism. On October 20, 1995,
the Company's excimer laser system (Excimer System) became the first excimer
laser system in the world to be approved by the Food and Drug Administration for
commercial sale in the United States for laser correction of nearsightedness.
The Company's strategy is to become a vertically integrated vision
correction business by (i) manufacturing and selling laser systems and related
products to correct vision disorders; (ii) participating in per procedure
royalties from its ownership in Pillar Point Partners; and (iii) operating
vision correction centers. The Company believes that this strategy will position
it to participate in revenues derived from the sale of Excimer Systems and
revenues generated from laser correction of nearsightedness. There can be no
assurance, however, that the Company will be successful in achieving these
goals.
Results of Operations
1995 as compared with 1994
Revenues
Revenues for the year ended December 31, 1995 increased 86.4% to $45.1 million
from $24.2 million for the year ended December 31, 1994. The increases were
primarily attributable to higher sales of laser systems in the U.S. and product
upgrade revenue.
Due to uncertainty regarding acceptance of laser correction of
nearsightedness by the ophthalmic community and the general population,
uncertainty regarding the success of the Company's U.S. vision correction
centers, the long sales cycle for laser systems and continued competition,
quarterly revenues are likely to remain unpredictable. In addition, if U.S. FDA
approval of Visx's excimer laser system for laser correction of nearsightedness
occurs in 1996, the resulting increased competition may have a negative impact
on laser system sales.
Cost of revenues
Cost of revenues as a percentage of revenues for the year ended December 31,
1995 decreased to 62.4% from 80.0% for the year ended December 31, 1994. This
improvement was primarily attributable to the absorption of fixed overheads over
higher sales volumes.
Operating Expenses
Operating expenses for the year ended December 31, 1995 increased 8.1% to $22.0
million from $20.3 million for the year ended December 31, 1994. The increase is
primarily related to legal and start up costs related to the Company's U.S.
vision correction centers. Operating expenses as a percentage of revenues for
the year ended December 31, 1995 decreased to 48.7% from 84.0% for the year
ended December 31, 1994.
In the next twelve months the Company intends to open 20 to 30 Vision
Correction Centers in the U.S. and anticipates incurring significant ongoing
expenses including marketing, public relations, leasing, personnel hiring
and training costs. Advertising and telemarketing commitments as of December 31,
1995 are approximately $1.7 million. The Company is in the process of
discontinuing its vision correction centers in the U.K. as it concentrates on
the opening of its U.S. vision correction centers.
Net Loss
Net loss for the year ended December 31, 1995 was $3.5 million. Net loss for the
year ended December 31, 1994 was $15.4 million. The net loss related to the
vision correction centers segment was $5.3 million for the year ended December
31, 1995 and $3.2 million for the year ended December 31, 1994. There can be no
assurance that the Company will achieve profitability in 1996.
Income Taxes
Due to the uncertainties noted above, the Company has continued to provide a
100% valuation allowance against its net deferred tax asset of approximately
$15.1 million.
18
<PAGE> 21
1994 as compared with 1993
Revenues
Revenues for the year ended December 31, 1994 decreased 9.7% to $24.2 million
from $26.8 million for the year ended December 31, 1993. The decrease was
primarily attributable to lower international sales. The decrease was offset in
part by increases in U.S. sales of Holmium Systems, service revenues and
revenues from the Company's outpatient clinics. The decrease in international
sales was due to increased competition. The Company's upgrade program continued
to impact the Company's average selling price as early versions of its laser
workstations were exchanged, on a limited basis, for new laser workstations at a
reduced price.
Regulatory delays in the U.S. continue to negatively impact the Company's
revenues in 1994. In addition, increased competition in internal markets, a long
sales cycle and the absence of a significant backlog may make quarterly revenues
unpredictable.
Cost of revenues
Cost of revenues for the year ended December 31, 1994 as a percentage of
revenues increased to 80.0% from 61.5% for the year ended December 31, 1993. The
increase was primarily attributable to unabsorbed overheads due to a decline in
production volumes, increases in costs incurred for product upgrades and
revisions, and to a substantially lesser extent costs related to the development
of the erodible mask.
Operating expenses
Operating expenses for the year ended December 31, 1994 increased 4.2% to $20.3
million from $19.5 million for the year ended December 31, 1993. The increases
were primarily attributable to expenses related to regulatory affairs and
research and development.
Liquidity and Capital Resources
The Company's liquidity requirements have been met through external financing.
As of December 31, 1995, the Company's cash, cash equivalent balances and
short-term investments increased $78.7 million to $95.9 million from $17.2
million as of December 31, 1994. The Company's net loss decreased to $3.5
million for the year ended December 31, 1995 from $15.4 million for the year
ended December 31, 1994. The Company's inventories and accounts receivable
increased $3.3 million and $5.9 million, respectively. Cash used from operations
increased to $5.1 million for the year ended December 31, 1995 from $4.7 million
for the year ended December 31, 1994.
Cash used by investing activities of $31.4 million resulted primarily from
an increase of $26.6 million in short and long term investments and additions to
property and equipment of $4.1 million.
Cash provided by financing activities of $102.1 million resulted from net
proceeds from the sale of common stock of $99.9 million, and proceeds from the
exercise of stock options of $2.6 million offset in part by net repayments of
capital lease obligations of $0.5 million.
In March of 1996, the Company obtained a $20.0 million unsecured revolving
credit facility. The facility expires in March 1999 and allows the Company to
borrow at LIBOR plus 75 basis points or Prime Rate. Also in March 1996, the
Company's wholly-owned subsidiary, Refractive Centers International Inc.,
obtained a $20.0 million unsecured term loan. The term loan is payable over 16
equal quarterly installments at LIBOR plus 125 basis points or Prime Rate. The
term loan is guaranteed by the Company. The Company intends to use this facility
to fund working capital requirements and purchase equipment related to the
opening of its U.S. vision correction centers.
In October, the Company received net proceeds of $99.9 million from the
sale of 3,795,000 shares of common stock. The Company intends to continue to
expand its business through development and marketing of the Company's Vision
Correction Centers, development of consumer acceptance of and demand for laser
correction of nearsightedness, the expansion of manufacturing capabilities and
further research and development. Management believes current cash resources and
internally generated funds will be adequate to satisfy the Company's cash
requirements, including current anticipated expenditures, for at least
twenty-four months.
19
<PAGE> 22
<TABLE>
Consolidated Balance Sheets
<CAPTION>
December 31,
(In thousands, except share and per share amounts) 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 74,285 $ 8,656
Short-term investments 21,607 8,495
Receivables, net of allowance of $974 in 1995 and $1,049 in 1994 15,520 9,535
Inventories (note 3) 10,265 7,028
Prepaid expenses and other current assets 3,372 1,079
Notes receivable from officers (note 4) 381 665
-------- --------
Total current assets 125,430 35,458
-------- --------
Property and equipment, net (note 5) 8,431 6,398
-------- --------
Other assets:
Long-term investments 13,531 -
Patents, net (note 6) 6,795 6,925
Other assets, net 1,413 2,386
Restricted cash (note 10) 1,535 -
-------- --------
Total Assets $157,135 $ 51,167
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,781 $ 2,749
Accrued expenses (note 7) 9,637 5,860
Current maturities of capital lease obligations (note 8) 429 516
Deferred revenue 3,411 2,982
-------- --------
Total current liabilities 19,258 12,107
Capital lease obligations, less current maturities (note 8) 1,002 1,177
-------- --------
Total liabilities 20,260 13,284
-------- --------
Commitments and contingencies (notes 8 and 10)
Stockholders' equity (note 9):
Preferred stock, $.01 par value. Authorized 5,000,000 shares. - -
Common stock, $.01 par value. Authorized 60,000,000 shares;
issued 29,226,327 shares in 1995 and 25,185,973 shares in 1994 292 252
Additional paid-in capital 170,229 67,676
Accumulated deficit (33,514) (30,002)
-------- --------
137,007 37,926
Treasury stock, at cost, 5,284 shares in 1995 and 1,749
shares in 1994 (132) (43)
-------- --------
Total stockholders' equity 136,875 37,883
-------- --------
Total Liabilities and Stockholders' Equity $157,135 $ 51,167
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
<TABLE>
Consolidated Statements of Operations
<CAPTION>
Years Ended December 31,
(In thousands, except per share amounts) 1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $45,134 $ 24,210 $26,801
Cost of revenues 28,181 19,363 16,480
------- -------- -------
Gross profit 16,953 4,847 10,321
Operating expenses 21,981 20,331 19,503
------- -------- -------
Operating loss (5,028) (15,484) (9,182)
------- -------- -------
Other income 1,516 103 28
------- -------- -------
Net loss $(3,512) $(15,381) $(9,154)
======= ======== =======
Net loss per share $ (.14) $ (.62) $ (.39)
======= ======== =======
Weighted average number of
common shares outstanding 25,965 24,666 23,379
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
<TABLE>
Consolidated Statement's of Stockholders' Equity
<CAPTION>
Years Ended December 31, 1995, 1994 and 1993
Notes
Preferred stock Common Stock Additional receivable for Total
----------------- ---------------- paid-in Accumulated Treasury common stock stockholders'
In thousands Shares Par value Shares Par value capital deficit stock purchase equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 - $ - 22,907 $230 $ 35,659 $ (5,467) $(564) $(3) $ 29,855
Sale of common stock, net of
issuance costs - - 1,725 17 19,011 - - - 19,028
Retirement of treasury stock - - (347) (3) (561) - 563 - (1)
Repayment of note receivable - - - -- - - - 3 3
Other shares issued - - 15 -- 202 - 1 - 203
Exercise of stock options - - 156 1 453 - (5) - 449
Net loss - - - -- - (9,154) - - (9,154)
----- ----- ------ ---- -------- -------- ----- --- --------
Balance at December 31, 1993 - $ - 24,456 $245 $ 54,764 $(14,621) $ (5) $ - $ 40,383
===== ===== ====== ==== ======== ======== ===== === ========
Sale of common stock, net of
issuance costs - - 525 6 11,112 - - - 11,118
Retirement of treasury stock - - (13) - (305) - 305 - -
Other shares issued - - 75 - 1,082 - - - 1,082
Exercise of stock options - - 143 1 1,023 - (343) - 681
Net loss - - - - - (15,381) - - (15,381)
----- ----- ------ ---- -------- -------- ----- --- --------
Balance at December 31, 1994 - $ - 25,186 $252 $ 67,676 $(30,002) $ (43) $ - $ 37,883
===== ===== ====== ==== ======== ======== ===== === ========
Sale of common stock, net of
issuance costs - - 3,795 38 99,819 - - - 99,857
Other shares issued - - 2 - 18 - - - 18
Exercise of stock options - - 243 2 2,716 - (89) - 2,629
Net loss - - - - - (3,512) - - (3,512)
----- ----- ------ ---- -------- -------- ----- --- --------
Balance at December 31, 1995 - $ - 29,226 $292 $170,229 $(33,514) $(132) $ - $136,875
===== ===== ====== ==== ======== ======== ===== === ========
</TABLE>
See accompanying notes to consolidated financial statements.
This statement retroactively reflects the issuance of a dividend of one share of
the Company's common stock for every two shares of outstanding common stock to
shareholders paid on December 1, 1995.
22 23
<PAGE> 25
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31,
In thousands 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,512) $(15,381) $ (9,154)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 2,493 2,253 1,710
Provision (recovery) for losses on
accounts receivable (75) 357 985
Changes in operating assets and liabilities:
Accounts receivable, net (5,910) 3,688 521
Inventories (3,341) 2,166 (3,824)
Prepaid expenses and other current assets (2,292) (125) 167
Accounts payable 3,032 1,439 5
Accrued expenses 4,064 1,100 1,271
Deferred revenue 429 (176) 669
-------- -------- --------
Net cash used by operating activities (5,112) (4,679) (7,650)
-------- -------- --------
Cash Flows from Investing Activities:
Increase in short-term investments (13,112) (374) (2,244)
Purchase of long-term investments (13,531) - -
Additions to property and equipment (4,099) (1,180) (3,063)
Purchase of patents (245) (317) (5,470)
Change in other assets 876 177 (994)
Repayment (issuance) of notes receivable from officers 284 (100) 381
Increase in restricted cash (1,535) - -
Proceeds from sale of property - - 162
-------- -------- --------
Net cash used by investing activities (31,362) (1,794) (11,228)
-------- -------- --------
Cash Flows from Financing Activities:
Repayments of long-term debt and capital lease
obligations (537) (617) (616)
Proceeds from long-term debt and capital lease
obligations 136 1,279 -
Proceeds from sale of common stock 99,857 11,118 19,029
Proceeds from exercise of stock options 2,629 476 420
Proceeds from shares sold under Employee
Stock Purchase Plan 18 54 130
-------- -------- --------
Net cash provided by financing activities 102,103 12,310 18,963
-------- -------- --------
Increase in cash and cash equivalents 65,629 5,837 85
Cash and cash equivalents at beginning of year 8,656 2,819 2,734
-------- -------- --------
Cash and cash equivalents at end of year $ 74,285 $ 8,656 $ 2,819
======== ======== ========
Supplemental disclosures:
Interest paid $ 309 $ 185 $ 93
======== ======== ========
Income taxes paid $ 5 $ 5 $ 15
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
Notes to Consolidated Financial Statements
In thousands, except share and per share amounts
December 31, 1995, 1994, and 1993
1. Nature of Business
Summit Technology, Inc. (the "Company") develops, manufactures and sells
ophthalmic refractive laser systems and related products to correct vision
disorders. The Company participates in per procedure royalties payable to Pillar
Point Partners, a partnership, formed by the Company and VISX to hold certain
U.S. patents covering excimer laser systems and procedures. Through its
wholly-owned subsidiary, RCII, the Company owns and operates vision correction
centers. The Company is in the process of discontinuing its vision correction
centers in the U.K. as it concentrates on the opening of a signifigant number of
U.S. vision correction centers ("Summit VisionTM Centers") in 1996. The vast
majority of the Summit VisionTM Centers are being developed in affiliation with
prestigious national teaching hospitals.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of material intercompany
accounts and transactions.
Revenue Recognition
The Company recognizes revenue on product sales when the products are
shipped and the customer takes ownership. The Company recognizes revenue on
physician education programs when the services are performed. The Company
records any advance payments for products or services as deferred revenue. The
Company accrues the cost of warranty and product upgrade obligations when the
product is shipped. The Company recognizes service contract revenue ratably over
the length of the contract. The Company recognizes vision correction of
nearsightedness treatment revenue at Summit Vision Centers when the procedure is
performed. The Company recognizes per procedure royalty revenue and its payment
obligation to Pillar Point Partners upon shipment of Omnicards to its customers.
Omnicards are required to perform laser vision correction procedures.
Cash Equivalents
Cash equivalents consist of certificates of deposit and highly liquid investment
grade corporate bonds with a maturity of three months or less.
Short and Long-term Investments
The Company's investments consist of short-term investments with original
maturities between three and twelve months and long-term investments with
original maturities greater than twelve months. The Company has the intent and
the ability to hold these investments to maturity. Investments are carried at
cost plus accrued interest, which approximates market. These investments consist
of U.S. Government Securities and investment grade corporate bonds.
Financial Instruments
The carrying amount of cash and cash equivalents, accounts payable and accrued
expenses approximates fair value because of the maturity of these items. The
carrying amount of long-term capital lease obligations approximates fair value.
25
<PAGE> 27
Concentration of Credit Risk
The Company's trade receivables can potentially subject it to credit risk. The
Company limits its credit risk of U.S. receivables by obtaining advance deposits
and commitments from customers and third-party leasing companies. The Company
limits its credit risk of international receivables by using distributors with
proven credit history or by requiring irrevocable letters of credit. In
addition, all sales are made in U.S. dollars.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Property and equipment under capital
leases is stated at the lower of the present value of future minimum lease
payments or fair market value at the beginning of the lease term. Depreciation
on property and equipment is calculated using the straight-line method over the
estimated useful lives of the assets ranging from five to ten years.
Amortization on property and equipment held under capital leases and leasehold
improvements is calculated using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
Research and Development Expenses
Expenditures for research, development and engineering of products and
manufacturing processes are expensed as incurred. These expenses were
approximately $5,579, $6,186 and $5,682 for the years ended December 31, 1995,
1994 and 1993, respectively.
Patents and Organization Costs
Patents consist of patents and patent application costs. Patents are amortized
over the patent's economic life using the straight-line method. Other assets
include deposits, organization costs, and long-term trade receivables.
Organization costs are amortized over five years using the straight-line method.
Income Taxes
Deferred tax assets and liabilities have been established for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns. These deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using
currently enacted tax rates that are expected to be in effect during the years
in which the differences are anticipated to reverse. Deferred tax provision
(benefit) represents the change in the deferred tax asset balance. Tax credits
are treated as reductions of income taxes in the year in which the credits
become available for income tax purposes.
Impairment of Long-lived Assets
The Company continually evaluates the recoverability of long-lived assets by
assessing whether the amortization of the asset balance can be recovered through
expected future results. Future operations of the Company may be impacted by the
various legal proceedings related to the patents associated with the Company's
product discussed in note 10. As of December 31, 1995 and 1994, the Company had
not experienced any impairment of its long-lived assets.
Foreign Currency Translation
Assets, liabilities and expenses related to foreign operations are remeasured in
U.S. dollars at the appropriate exchange rates. Gains and losses resulting from
remeasurement are included in other income and expense.
Advertising Expenses
The Company expenses the production costs of advertising when the advertising
takes place. At December 31, 1995, $1.8 million of advertising and telemarketing
26
<PAGE> 28
3. Inventories
<TABLE>
Inventories consist of the following:
<CAPTION>
December 31,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and subassemblies $ 5,802 $ 4,370
Work in process 2,231 1,815
Finished goods 2,232 843
------- -------
$10,265 $ 7,028
======= =======
</TABLE>
4. Notes Receivable From Officers
Notes receivable from officers at December 31, 1995 consists of a demand note
receivable including accrued interest with an interest rate of 7.25%. Notes
receivable from officers at December 31, 1994 consists of demand notes
receivable with interest rates ranging from 7.0% to 8.0%.
5. Property and Equipment
<TABLE>
Property and equipment consists of the following:
<CAPTION>
December 31,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 1,669 $ 1,406
Manufacturing and test equipment 6,703 5,689
Furniture, fixtures and office equipment 4,575 3,347
Laser and medical equipment 2,106 1,633
Software development 837 -
------- -------
$15,890 $12,075
Less Accumulated Depreciation (7,459) (5,677)
------- -------
Net Property and Equipment $ 8,431 $ 6,398
======= =======
</TABLE>
6. Patents
<TABLE>
Patents consist of the following:
<CAPTION>
December 31,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Patents $7,381 $7,136
Patent Amortization (586) (211)
------ ------
Net Patents $6,795 $6,925
------ ------
</TABLE>
7. Accrued Expenses
<TABLE>
Accrued expenses consist of the following:
<CAPTION>
December 31,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Accrued commissions $ 191 $ 888
Accrued payroll and vacation 903 851
Accrued warranty costs 2,623 873
Accrued product upgrade costs 1,058 1,155
Accrued sales tax 1,031 237
Other accrued expenses 3,831 1,856
------ ------
$9,637 $5,860
------ ------
</TABLE>
27
<PAGE> 29
8. Financing and Leasing Arrangements
Leases
Capital lease obligations consist of amounts due under equipment lease
agreements. At December 31, 1995, the cost and accumulated depreciation of the
related equipment was $2,245 and $ 1,011, respectively.
The Company leases office, manufacturing and vision correction center
facilities in the U.S. under operating leases expiring in 2001. The Company
leases office space for its vision correction centers in the U.K. under
operating leases expiring in 2000. The Company leases an office and
manufacturing facility in Ireland under an operating lease expiring in 2026.
Rent expense was approximately $796, $675 and $576, for the years ended December
31, 1995, 1994, and 1993, respectively.
<TABLE>
At December 31, 1995, future minimum payments for capital leases and
minimum rental payments under noncancellable operating leases were as follows:
<CAPTION>
Capital Leases Operating Leases
- -------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31:
1996 581 1,245
1997 510 1,242
1998 383 1,222
1999 270 925
2000 12 667
Thereafter - 3,387
------ ------
Minimum future lease payments 1,756 $8,688
======
Less amounts representing interest 325
Present value of minimum future lease payments 1,431
Less current maturities 429
------
Capital leases, less current maturities $1,002
======
</TABLE>
Financing Arrangements
In March 1995, the Company received a renewal of its working capital line of
credit agreement. The agreement expires in March of 1996. The line of credit
agreement allows the Company to borrow up to $8.0 million against eligible
accounts receivable at LIBOR plus 150 basis points or Prime Rate per annum. At
December 31, 1995 the Company had no borrowings under this facility.
In March of 1996, the Company obtained a $20.0 million unsecured revolving
credit facility. The facility expires in March 1999 and allows the Company to
borrow at LIBOR plus 75 basis points or Prime Rate. Also in March 1996, the
Company's wholly-owned subsidiary, RCII, obtained a $20.0 million unsecured
term loan. The term loan is payable over 16 equal quarterly installments at
LIBOR plus 125 basis points or Prime Rate. The term loan is guaranteed by the
Company.
9. Stockholders' Equity
Common and Preferred Stock
As of December 31, 1995, the Company has authorized 5,000,000 shares of
preferred stock of $.01 par value and 60,000,000 shares of common stock at $.01
par value. The terms and conditions of the preferred stock, including any
preferences and dividends, will not be established until such time, if ever, as
such shares are in fact issued by the Company.
During the year ended December 31, 1995, the Company received net proceeds
of $99.9 million from the sale of 3, 795,000 shares of Common Stock.
On November 14, 1995, the Company announced the issuance of a dividend of
one share of the Company's common stock for every two shares of outstanding
common stock which has been retroactively reflected in the financial statements.
The record date was November 24, 1995 and the payment date was December 1, 1995.
28
<PAGE> 30
Stock Options
<TABLE>
In March 1987, the Company adopted a Stock Option Plan (the "Plan"). The Plan
permits the Company to grant both incentive and nonincentive stock options.
The stock options are generally exercisable one year after grant in equal
installments over three to ten years. The Company has reserved 2,824,923 shares
of Common Stock for issuance under this Plan.
<CAPTION>
Options available Options outstanding Option price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, December 31, 1992 197,641 1,033,717 $ 1.17-19.83
Options granted (185,494) 185,494 0.67-16.83
Options exercised - (156,749) 1.17-16.17
Options canceled 161,180 (161,180) 6.75-19.83
-------- --------- -----------
Balances, December 31, 1993 173,327 901,282 0.67-19.83
-------- --------- -----------
Options granted (179,423) 179,423 0.67-22.83
Options exercised - (142,307) 1.63-19.83
Options canceled 73,281 (73,281) 4.15-22.83
-------- --------- -----------
Balances, December 31, 1994 67,185 865,117 0.67-22.83
-------- --------- -----------
Increase in shares reserved 375,000
Options granted (98,661) 98,661 19.17-33.75
Options exercised - (242,314) 0.67-22.83
Options canceled 46,763 (46,763) 13.33-29.33
-------- --------- -----------
Balances, December 31, 1995 390,287 674,701 $4.33-33.75
======== ========= ===========
</TABLE>
At December 31, 1995, 385,738 shares were exercisable under the Plan at exercise
prices ranging from $4.33 to $22.83.
In February 1989, the Company granted an officer options to purchase
225,000 shares of Common Stock at $1.00 per share. The options are restricted,
nonincentive, and were granted outside of the Company's Plan. At December 31,
1995, all 225,000 shares were exercisable.
In May 1992, the Company adopted a Stock Option Plan for Outside Directors
(the Directors Plan) and reserved 75,000 shares of Common Stock for issuance
under the Directors' Plan. At December 31, 1995, 30,000 options were outstanding
at option prices ranging from $10.50 to $14.87 and 24,000 options were
exercisable at prices ranging from $10.50 to $14.87.
Refractive Centers International, Inc. Stock Option Plan
In August 1993, the Company adopted a Stock Option Plan to grant options to
purchase shares of its wholly-owned subsidiary, Refractive Centers
International, Inc. ("the RCII Plan") and reserved 2,500,000 shares of
Refractive Centers International, Inc. for issuance under the RCII Plan. In
September of 1995, the Company decreased the number of shares reserved from
2,500,000 to 800,000. At December 31, 1995, 711,250 options were outstanding at
an option price of $0.50 and 213,250 were exercisable.
Employee Stock Purchase Plan
In May 1991, the Company adopted an Employee Stock Purchase Plan ("the Purchase
Plan"). The Purchase Plan is available to all eligible full-time employees,
excluding those owning 5% or more of the Companys Common Stock. Pursuant to
the Purchase Plan, employees can purchase the Companys Common Stock, at 85% of
fair market value, in an amount up to 5% of the employees wages during the
semi-annual plan purchase period. At December 31, 1995, 375,000 shares of Common
Stock were reserved under the Purchase Plan and 19,605 shares were issued.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" which permits either the recording of the estimated value of stock
based compensation over the applicable vesting period or disclosing the
unrecorded cost and the related effect on earnings per share in the Notes to the
Consolidated Financial Statements. At this time, the Company does not intend to
adopt the new standard, however, compliance with the new disclosure requirements
will be made for the year ended December 31, 1996.
29
<PAGE> 31
Shareholder Rights Plan
In March 1990, the Board of Directors adopted a Shareholder Rights Plan ("Rights
Plan") pursuant to which each stockholder of the Company holds one currently
non-exercisable right ("Right") for each share of Common Stock beneficially
held. The Rights become exercisable upon the occurrence of a "Distribution
Date," whereupon the holder is entitled to purchase from the Company one-quarter
of a share of Common Stock at the exercise price of $8.33, subject to
adjustment. Generally, a Distribution Date occurs if (a) a person or group
becomes a beneficial owner of 15% or more of the Company's outstanding shares
of Common Stock without the prior approval of the Board ("Acquiring Plan"), or
(b) ten business days lapse following the commencement of, or announcement of an
intention to make, a tender or exchange offer for the Common Stock not approved
by the Board, which, if consummated, would result in a person or group becoming
a beneficial owner of 15% or more of the CompanyAEs outstanding shares of Common
Stock.
If a person or group becomes an Acquiring Person, a "Flip-In Event" thereby
occurs concurrently with the Distribution Date, with the effect that each Right
(other than those owned by such Acquiring Person) will entitle its holder to
obtain Common Stock having a market value of eight times the Right's exercise
price for a purchase price equal to four times the exercise price of the Rights,
in effect allowing a Rights holder to purchase a fixed amount of the Company's
Common Stock at a discount of 50% off the market price. If a person or group
becomes an Acquiring Person (hence triggering a Flip-In Event), and thereafter
the Company is involved in a merger or other business combination with the
Acquiring Person where the Company is not the surviving entity and the holders
of the Company's Common Stock are not the holders of all of the surviving
entitys Common Stock, or the sale of 50% or more of the Company's assets and
earning power to the Acquiring Person occurs a "Flip-Over Event", each Right
(other than those owned by the Acquiring Person) will then entitle the holder to
obtain eight times the Right's exercise price for a purchase price equal to four
times the exercise price of the Rights.
10. Commitments and Contingencies
Commitments
During 1991, the Irish Development Authority ("IDA") agreed to reimburse the
Company up to approximately $740 for rent, training and fixed asset acquisition
costs incurred in conjunction with the opening of its manufacturing facility in
Cork, Ireland. The Company may be required to repay the grants if the facility
is closed within eight years of the final grant drawdown. As of December 31,
1995, the Company has received approximately $595 from the IDA under these
agreements.
In February 1992, the Company entered into a licensing agreement with IBM
pursuant to which IBM granted the Company a license to its patent covering
excimer laser ablation of tissue and the Company agreed to pay IBM a royalty of
2% of the net selling price of its Excimer Systems sold or leased in the U.S.
and certain other countries. The Company also licenses certain laser patents
from Patlex Corporation and has agreed to pay royalties, not to exceed $100 per
year, with respect to laser sales.
Contingencies
There are a number of U.S. and foreign patents covering methods and apparatus
for performing corneal surgery with excimer lasers and holmium lasers that are
not owned by the Company. If patents held by others were considered valid and
interpreted broadly in an adversarial proceeding, they could be deemed to cover
one or more aspects of the excimer laser systems ("Excimer System") or the
Company's holmium laser systems ("Holmium System") or their use to perform one
or more procedures. While the Company either owns or has obtained from Pillar
Point Partners (a partnership formed by the Company and VISX to hold certain
U.S. patents) a license to what it believes are the important U.S. patents on
laser vision correction to treat nearsightedness, also known as photorefractive
keratectomy, or PRK patents, there can be no assurance that the Company will not
be subject to one or more claims for infringement.
In the event one of the Company's products is adjudged to infringe a patent
in a particular market with the likely consequence of a damage award, the
Company and its customers may be enjoined from making, using and selling such
products in such market or be required to obtain a royalty-bearing license, if
available on acceptable terms. Alternatively, in the event a license is not
offered, the Company might be required to redesign those aspects of the products
held to infringe so as to avoid infringement. Any redesign efforts undertaken by
the Company might be expensive and could necessitate FDA review. Furthermore,
they could delay the re-introduction of the Company's products into certain
markets, or may be so significant as to be impractical. If redesign efforts were
impractical, the Company could be prevented from manufacturing and selling the
infringing products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
30
<PAGE> 32
Failure to maintain the protection afforded by certain of the Companys
patents and the patents licensed to the Company and VISX by Pillar Point
Partners would have a material adverse effect on the Company's future revenues
and earnings. Further, there can be no assurance that the Company's patents (or
those licensed from Pillar Point Partners) will ultimately be found to be valid,
or that the Companys patent rights (or those licensed from Pillar Point
Partners) will deter others from developing substantially equivalent or
competitive products. Even if an unlicensed competitor's products infringe upon
the Company's patents or those of Pillar Point Partners, it may be costly to
enforce such rights. An infringement action may require the diversion of funds
from the Company's operations and may require management to expend effort that
might otherwise be devoted to the Company's operations. Furthermore, there can
be no assurance that the Company or Pillar Point Partners will be successful in
enforcing its patent rights. Any failure by the Company or Pillar Point Partners
to prevail in patent infringement actions against others, or any success by
another company in enforcing a patent infringement claim against the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations.
U.S. Patent Litigation against VISX
On August 29, 1995, the Company filed suit in the U.S. District Court for the
District of Delaware against VISX for infringement of a certain U.S. patent with
a priority date of 1995, which was purchased by the Company in 1993 ("the Azema
Patent"). The Company is seeking damages for past infringement for all excimer
lasers manufactured by VISX in the U.S. for use outside the U.S. In addition,
the Company is seeking to enjoin VISX from manufacturing and selling excimer
lasers for any purpose other than U.S. clinical trials. On October 10, 1995,
VISX filed an answer to the Company's complaint. There can be no assurance that
the Company will prevail in this proceeding.
German Patent Litigation
On August 3, 1995, a German court determined that the Schwind Keratom ophthalmic
excimer laser system distributed by Coherent, and the Chiron Technolas Keracor
116 ophthalmic excimer laser system distributed by Chiron Technolas, infringe
the German counterpart of the Azema Patent. The court has entered cease and
desist orders against Schwind and Chiron Technolas and has ordered them to pay
damages to the Company for past infringements. Both the Schwind and Chiron
Technolas excimer laser systems are manufactured in Germany. On September 5,
1995, the Company posted the requisite bond in Germany to enforce the injunction
issued against Chiron Technolas by the German court, as a result of which Chiron
Technolas is now prohibited from manufacturing, selling or using its Keracor 116
ophthalmic excimer laser systems in Germany, where its production facility is
located. Chiron Technolas and Schwind have appealed the judgment and Chiron
Technolas has also filed a nullity action with the German Patent Office.
Although the Company believes it will prevail in this nullity action, there can
be no assurance that the German Azema patent will survive the proceeding. If the
nullity action or Chiron's appeal is decided against the Company, its
infringement verdict in Germany will be overturned and it will be liable for
damages which may or may not exceed the amount of the bond. This bond is
recorded as restricted cash of $1.5 million at December 31, 1995.
Canadian Patent Litigation
On September 5, 1995, VISX sued the Company and eight Canadian ophthalmologists
who use or have used the Company's Excimer System, the Federal Court of Canada,
Trial Division, asserting that the Excimer System infringed certain Canadian
patents held by VISX. In such suit, VISX seeks, among other things, damages for
past infringement and a permanent injunction preventing the Company and the
other defendants from manufacturing, marketing, selling, using and inducing
others to use the Excimer System in Canada. The Company believes that it has
valid defenses to VISX's suit and intends to defend such action vigorously;
however, there can be no assurance that the Company will be successful. The
Company does not believe that the Canadian market is material to its business.
There can be no assurance that additional patent infringement claims in the
United States or in other countries will not be asserted against the Company,
or, if asserted, that the Company will be successful in defending against such
claims.
Pillar Point Partners
There can be no assurance that the agreements between the Company and VISX
relating to Pillar Point Partners will preclude patent disputes with VISX with
respect to technology not included in Pillar Point Partners in the U.S. or with
respect to any technology outside the U.S., or that the Company's activities
will not infringe patents held by other parties. Under the agreements
establishing Pillar Point Partners, the
31
<PAGE> 33
Company must pay Pillar Point Partners a royalty fee each time its Excimer
System is used to perform laser vision correction in the U.S., regardless of
whether the Company performs the procedure. The Company intends to maintain
contractual arrangements permitting it to collect such royalty fees from
purchasers of its Excimer Systems, but, there can be no assurance that it will
be able to collect such fees.
FTC Investigation
On October 13, 1995, the Company received notice that the Federal Trade
Commission ("FTC") initiated an investigation to determine whether Pillar Point
Partners, VISX, and the Company or any of their predecessors, alone or in
conjunction with others, is engaging or has engaged in any unfair methods of
competition in violation of the Federal Trade Commission Act, relating to
certain arrangements concerning patents of devices and procedures, and/or
practices relating to the sale or distribution of certain ophthalmic surgical
devices. The FTC issued a subpoena requiring the Company to produce certain
materials and information relating to the subject matter of the investigation.
In forming Pillar Point Partners, the Company has taken measures to structure
the partnership in a manner consistent with U.S. antitrust laws. The compliance
of Pillar Point Partners with these laws will depend upon the activities of the
partners, a determination of what constitutes the relevant market for purposes
of such laws, the number and relative strength of competitors in such markets
and numerous other factors, many of which are presently unknown or are beyond
the control of Pillar Point Partners. There can be no assurance that the FTC's
investigation will ultimately lead the FTC to agree that Pillar Point Partners
complies with the U.S. antitrust laws. The Company is accordingly unable to
predict whether or not, or when, any proceeding may be brought by the FTC
following such investigation, or the scope of relief, if any, that may
ultimately be ordered in the event that any such proceeding were determined
adversely to the Company and/or Pillar Point Partners.
LaserSight Litigation
In March 1995, Pillar Point Partners sued LaserSight, Inc. for patent
infringement in the Federal District Court for Delaware. Although the suit is
based on a patent licensed to Pillar Point Partners by VISX, the Company will
share in the expenses of this litigation. In addition, the defendant,
LaserSight, Inc. has entered a declaratory judgment counterclaim challenging
Pillar Point Partners' ability to enforce its rights under one of its patents,
which counterclaim asserts, among other things, that the alleged pooling of
patents by Pillar Point Partners constitutes patent misuse. Any successful
challenge to the structure and operation of Pillar Point Partners or to its
patents could have a material adverse effect on the Company's business,
financial condition and results of operations.
11. Income Taxes
<TABLE>
The appropriate tax effect of each type of temporary difference and carryforward
that gives rise to significant portions of the deferred tax assets and
liabilities are as follows:
<CAPTION>
December 31,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Net operating loss $ 12,214 $ 11,682
Research and development credit 761 685
Inventory adjustments 856 591
Warranty/other reserves 1,623 786
Other temporary differences 426 199
-------- --------
Subtotal $ 15,880 $ 13,943
Valuation allowance (15,057) (13,759)
-------- --------
$ 823 $ 184
Deferred tax liability:
Patent costs 689 76
Other temporary differences 134 108
-------- --------
$ 823 $ 184
Net deferred tax asset $ 0 $ 0
======== ========
</TABLE>
32
<PAGE> 34
Due to the uncertainty of future taxable income being generated, the
Company has recorded a valuation allowance against its deferred tax assets. The
valuation allowance for deferred tax assets as of December 31, 1993, was $8,638.
The net change in the total valuation allowance for the years ended December 31,
1995 and December 31, 1994 was $1,298 and $5,121, respectively.
At December 31, 1995, the Company had an operating loss carryforward of
approximately $32,142 available to offset future federal taxable income. The net
operating loss amount includes approximately $5,839 of employee stock option
compensation deductions which will be credited to additional paid-in capital
when realized. In addition, the Company has research and experimentation tax
credit carryforwards of approximately $761. The operating loss and tax credit
carryforwards expire in varying amounts through 2010. Pursuant to Section 382 of
the Internal Revenue Code, if there is a change in stock ownership of the
Company exceeding 50% during a three-year period, the utilization of the
Company's net operating loss may be limited. As of December 31, 1995,
utilization of the Company's net operating loss carryforward is not limited by
Section 382.
There are no unremitted earnings in the Company's subsidiaries.
12. Segment Information
During 1992, the Company classified its operations into two business segments:
medical equipment and vision correction centers. During the fourth quarter of
1995, the Company recorded an estimated $400 charge related to the closing of
its U.K. centers.
<TABLE>
Segment Information
<CAPTION>
Medical Vision
Year Ended December 31, 1995 Equipment Correction Centers Consolidated
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 44,310 $ 824 $ 45,134
Loss from operations (624) (4,404) (5,028)
Depreciation and amortization 2,078 415 2,493
Identifiable assets 151,525 5,610 157,135
Capital expenditures 2,412 1,687 4,099
Year Ended December 31, 1994
- -------------------------------------------------------------------------------
Sales $ 23,371 $ 839 $ 24,210
Loss from operations (13,205) (2,279) (15,484)
Depreciation and amortization 1,828 425 2,253
Identifiable assets 49,085 2,082 51,167
Capital expenditures 1,139 41 1,180
Year Ended December 31, 1993
- -------------------------------------------------------------------------------
Sales $ 26,740 $ 61 $ 26,801
Loss from operations (7,502) (1,680) (9,182)
Depreciation and amortization 1,447 221 1,668
Identifiable assets 48,494 2,054 50,548
Capital expenditures 1,332 1,731 3,063
</TABLE>
33
<PAGE> 35
<TABLE>
Geographic Area
The following table summarizes financial information by geographic area:
<CAPTION>
Year Ended December 31, 1995: United States Europe Eliminations Consolidated
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers $ 38,421 $ 6,713 $ - $ 45,134
Intercompany transfers 3,745 11,931 (15,676) -
-------- -------- -------- --------
Total $ 42,166 $ 18,644 $(15,676) $ 45,134
======== ======== ======== ========
Loss from operations $ (3,391) $ (1,255) $ (382) $ (5,028)
======== ======== ======== ========
Identifiable assets $172,365 $ 10,093 $(25,323) $157,135
======== ======== ======== ========
Year Ended December 31, 1994:
Total revenues:
Unaffiliated customers $ 19,475 $ 4,735 $ - $ 24,210
Intercompany transfers 2,426 2,364 (4,790) -
-------- -------- -------- --------
Total $ 21,901 $ 7,099 $ (4,790) $ 24,210
======== ======== ======== ========
Loss from operations $ (9,092) $ (6,493) $ 101 $(15,484)
======== ======== ======== ========
Identifiable assets $ 57,750 $ 9,109 $(15,692) $ 51,167
======== ======== ======== ========
Year Ended December 31, 1993:
- ----------------------------------------------------------------------------------
Total revenues:
Unaffiliated customers $ 13,965 $ 12,836 $ - $ 26,801
Intercompany transfers 6,925 2,870 (9,795) -
-------- -------- -------- --------
Total $ 20,890 $ 15,706 $ (9,795) $ 26,801
======== ======== ======== ========
Loss from operations $ (8,175) $ (1,007) $ - $ (9,182)
======== ======== ======== ========
Identifiable assets $ 51,659 $ 15,930 $(17,040) $ 50,548)
======== ======== ======== ========
</TABLE>
Intercompany transfers represent shipments of parts and subassemblies between
the Company and its European subsidiary. These shipments are made at transfer
prices which approximate prices charged to unaffiliated customers and have been
eliminated from consolidated net revenues.
Significant Customers
For the year ended December 31, 1993, a customer accounted for 11% of total net
revenues. There were no significant customers for the years ended December 31,
1995 and December 31, 1994.
Export Sales
<TABLE>
Export sales from the Company's U.S. operation to unaffiliated customers by
geographic area were as follows:
<CAPTION>
1993
- --------------------------------------------------------------------------------
<S> <C>
Pacific Rim & Far East 20%
Europe & Mideast 8%
North and Latin America 9%
</TABLE>
The above percentages do not include sales to unaffiliated customers made from
the Company's European subsidiary. Export sales in 1995 and 1994 were
immaterial.
34
<PAGE> 36
13. Retirement Plan
In 1991, the Company established a Retirement Plan ("the Plan") for all domestic
employees under Section 401(k) of the Internal Revenue Code. Employees may
contribute from 2% to 18% of their salary subject to contribution limits defined
by the Internal Revenue Code. The Company may, at its discretion, match in cash
or its common stock 50% of an employee's contribution up to 4% of the
employee's salary. For the year ended December 31, 1995, $76 of common stock
was subscribed. For the years ended December 31, 1994 and 1993, the Company
issued common stock valued at $62 and $76, respectively representing its
matching contribution to the Plan.
14. Pillar Point Partnership
Pursuant to a partnership and licensing arrangement with VISX, the Company and
VISX are obligated to pay royalties on U.S. equipment sales and procedures
performed with such equipment in the U.S. to Pillar Point Partners. Pillar Point
Partners is jointly owned by the Company and VISX. The Company records the net
royalty liability owed to Pillar Point Partners as Cost of Revenues.
Administrative expenses paid to Pillar Point Partners are classified as
operating expenses as incurred.
15. Supplemental Cash Flow Information
For the years ended December 31, 1995, 1994, and 1993, the Company recorded the
following non cash transactions:
1995
- --------------------------------------------------------------------------------
None.
1994
- --------------------------------------------------------------------------------
Shares issued for patent rights of $966. Retirement of treasury stock of $305.
Notes receivable for common stock purchase of $205. Shares issued under
Retirement Plan of $62.
1993
- --------------------------------------------------------------------------------
Retirement of treasury stock of $563.
Shares issued under Retirement Plan of $76.
Independent Auditors' Report
The Board of Directors and Stockholders
Summit Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Summit
Technology, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Technology, Inc. and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 6, 1996
35
<PAGE> 37
Market for the Registrant's Common Stock and Related Security Holder Matters
<TABLE>
The Companys common stock $.01 par value ("Common Stock") is traded on the Nasdaq
National Market System, under the symbol "BEAM". The following chart sets forth
the high and low closing price for the Common Stock during the indicated
periods. This chart retroactively reflects the issuance of a dividend of one
share of the Company's common stock for every two shares of outstanding common
stock with a payment date of December 1, 1995.
<CAPTION>
Period High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
January 1 - March 31, 1995 21 21/64 19
April 1 - June 30, 1995 25 11/64 20 43/64
July 1 - September 30, 1995 33 53/64 28 53/64
October 1 - December 31, 1995 33 3/4 29 43/64
January 1 - March 31, 1994 23 53/64 18
April 1 - June 30, 1994 18 16 1/2
July 1 - September 30, 1994 22 53/64 19 11/64
October 1 - December 31, 1994 20 21/64 18 53/64
</TABLE>
The foregoing quotations represent prices between dealers and do not include
retail mark up, mark down, or commission and may not necessarily represent
actual transactions. The actual closing price for the Common Stock on March 5,
1996 was 30 1/4. On March 5, 1996, the Common Stock was held of record by 3,902
persons and entities, including significant amounts of stock held in "street
name".
Dividend Policy
The Company has paid no cash dividends on its Common Stock since incorporation,
and does not intend to pay cash dividends to holders of its Common Stock in the
foreseeable future. It is the present policy of the Company to retain earnings,
if any, to finance expansion and growth. Payments of dividends will rest within
the discretion of the Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.
Cautionary Statements Under "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
This Report contains information about the Companys future business prospects
including, without limitation, statements about the size of the potential
markets for laser vision correction and the Company's excimer laser systems,
the potential for significant royalty revenues, and the success of the
Company's vision correction center business. Some of these statements may be
considered "forward-looking". The following cautionary statements identify
important factors that may cause actual results to differ materially from those
reflected in, or implied by, any such forward-looking statements. The Company's
profitability and growth depend upon broad acceptance of laser vision correction
in the U.S. and there can be no assurance that laser vision correction will be
accepted by either the ophthalmic community or the general population as an
alternative to existing methods of treating refractive vision disorders.
Acceptance of laser vision correction may be affected adversely by its cost,
concerns relating to its safety and efficacy, the lack of third party
reimbursement, general resistance to surgery, the effectiveness of alternative
methods of correcting refractive vision disorders, the lack of long-term
follow-up data, the possibility of unknown side effects and the cost of the
Excimer System. Laser system sales may be negatively impacted by competition,
patent disputes, changing technologies and delays in regulatory approvals.
Participation in per-procedure royalties may be negatively impacted by
challenges to Pillar Point Partners, the Company's patents and/or the FTC's
investigation regarding Pillar Point Partners, VISX and the Company. The
Company's financial position and results of operations are likely to be
negatively impacted if the Company is unsuccessful in any of these areas.
For additional information about the risks associated with the Companys
business, please review the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, a copy of which is available from the Company without
charge.
36
<PAGE> 38
Board of Directors
David F. Muller, Ph.D.
President and Chairman of the Board
Summit Technology, Inc.
Jeffrey A. Bernfeld, J.D.
Vice President and General Counsel
American Science and Engineering,
a manufacturer of x-ray based detection equipment
Richard F. Miller
Investment Executive
First Albany Corporation,
a financial services firm
John A. Norris, J.D.
John A. Norris, Esq., P.C.,
a law and public affairs consulting firm
Richard M. Traskos
Vice President
Arthur A. Watson & Co., Inc.,
a business insurance brokerage and consulting firm
Executive Officers
David F. Muller, Ph.D.
President and Chairman of the Board
Howard P. Apple, Ph.D.
Vice President, Research and Development
Rajiv P. Bhatt
Executive Vice President, Treasurer and
Chief Financial Officer
Kimberley A. Doney
Executive Vice President, Regulatory, Clinical
and Quality Affairs
John B. Frantzis
Vice President, Sales
Ron Herskowitz, O.D.
Executive Vice President, Professional Business
Development
Peter J. Klopotek, Ph.D.
Vice President, Science and Technology
Ray H. Krauss
Executive Vice President, Chief of Operations
Peter E. Litman
Executive Vice President and General Counsel
Shareholder Services
Shareholders of Summit Technology, Inc. who desire information about the Company
are invited to contact Paula Elliott, Manager of Investor Relations, Summit
Technology, Inc., 21 Hickory Drive, Waltham, MA 02154, by letter or telephone at
617-672-0518. A mailing list is maintained to enable shareholders whose stock is
held in street name, and other interested individuals, to receive quarterly and
annual reports as quickly as possible. If you would like your name added to the
list, please notify this office.
Annual Meeting
The annual meeting
of shareholders will be held on Wednesday, May 29, 1996, at 9:00 a.m. at:
Omni Parker House Hote
l60 School Street
Boston, Massachusetts
Form 10-K Report
A copy of the Annual Report on Form 10-K and other financial reports filed with
the Securities and Exchange Commission are available without charge by writing
or calling:
Investor Relations
Summit Technology, Inc.
21 Hickory Drive
Waltham, MA, 02154
Phone: 617-672-0518
Transfer Agent
The transfer agent is responsible for shareholder records and issuance of stock
certificates. Shareholder requests concerning these matters are most efficiently
answered by corresponding directly with American Stock Transfer at the following
address:
American Stock Transfer and Trust Co.
40 Wall Street
New York, NY 10005
212-936-5100
<PAGE> 39
Summit Technology, Inc.
21 Hickory Drive
Waltham, Massachusetts 02154
<PAGE> 1
Consent of Independent Accountants
----------------------------------
The Board of Directors
Summit Technology, Inc.
We consent to incorporation by reference in the registration statement (No.
33-25169), (No. 33-41451), (No. 33-49162), and (No. 33-79158) on Form S-8, S-8,
S-8 and S-3, respectively, of Summit Technology, Inc. of our report dated
February 6, 1996, relating to the consolidated balance sheets of Summit
Technology, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows and related schedules for each of the years in the three-year period
ended December 31, 1995, which reports appear in the December 31, 1995 annual
report on Form 10-K of Summit Technology, Inc.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1995 Form 10K and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JAN-01-1995
<CASH> 74,285
<SECURITIES> 21,607
<RECEIVABLES> 16,494<F1>
<ALLOWANCES> 974
<INVENTORY> 10,265
<CURRENT-ASSETS> 125,430
<PP&E> 15,890
<DEPRECIATION> 7,459
<TOTAL-ASSETS> 157,135
<CURRENT-LIABILITIES> 19,258
<BONDS> 1,002
0
0
<COMMON> 292
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 157,135
<SALES> 0
<TOTAL-REVENUES> 45,134
<CGS> 0
<TOTAL-COSTS> 28,181
<OTHER-EXPENSES> 21,981<F2>
<LOSS-PROVISION> (75)
<INTEREST-EXPENSE> 478<F3>
<INCOME-PRETAX> (3,512)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,512)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,512)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
<FN>
<F1> Does not include allowance for doubtful accounts
<F2> Total operating expenses including S, G & A
<F3> Net interest income
</FN>
</TABLE>
