<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended: June 30, 1996
-------------
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 04-2897945
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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)
617-890-1234
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report.)
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.
[ X ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
On June 30, 1996, 30,962,751 shares of common stock, par value $0.01 per share
were outstanding.
<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1996 1995
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,705 $ 74,632
Short-term investments 35,943 21,607
Accounts receivable, net 9,502 16,312
Inventories, net 20,034 15,703
Prepaid expenses and other current assets 3,739 3,271
Due from related party 1,180 238
Note receivable from officer 318 381
-------- --------
Total current assets 109,421 132,144
-------- --------
Long-term investments 25,456 13,531
Property and equipment, net 16,015 9,300
Patents, net 6,597 6,795
Other assets, net 1,743 1,479
Restricted cash 1,480 1,535
-------- --------
Total assets $160,712 $164,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,223 $ 7,771
Accrued expenses 12,099 10,018
Current maturities of long-term debt 5,160 3,429
Deferred revenue 1,722 3,425
Due to related party 1,327 583
-------- --------
Total current liabilities 24,531 25,226
Long-term debt, less current maturities 12,947 1,247
Deferred Taxes 70 70
Stockholders' equity:
Common stock, $.01 par value. Authorized 60,000,000
shares; Issued 30,968,876 shares in 1996
and 30,934,827 in 1995 310 309
Additional paid-in capital 170,878 170,393
Accumulated deficit (47,864) (32,329)
-------- --------
123,324 138,373
Treasury stock, at cost, 6,125 shares in 1996 and
5,284 shares in 1995 (160) (132)
-------- --------
Total stockholders' equity 123,164 138,241
-------- --------
Total liabilities and stockholders' equity $160,712 $164,784
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 3
PART I: FINANCIAL INFORMATION
<TABLE>
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
<CAPTION>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES THREE MONTHS SIX MONTHS
CONSOLIDATED STATEMENTS OF OPERATIONS ENDED JUNE 30, ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 17,958 $22,763 $ 43,402 $42,627
Cost of revenues 15,561 15,587 33,392 28,824
-------- ------- -------- -------
Gross profit 2,397 7,176 10,010 13,803
Operating expenses 15,625 9,161 27,861 17,558
Operating loss (13,228) (1,985) (17,851) (3,755)
-------- ------- -------- -------
Other Income 1,126 49 2,314 309
Loss before provision
for income taxes (12,102) (1,936) (15,537) (3,446)
Provision (benefit)
for income taxes (119) 318 (2) 602
-------- ------- -------- -------
Net loss $(11,983) $(2,254) $(15,535) $(4,048)
======== ======= ======== =======
Net loss per share $ (.39) $ (.08) $ (.50) $ (.15)
======== ======= ======== =======
Weighted average number of common
shares and common share
equivalents outstanding 30,962 26,938 30,953 26,923
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
PART I: FINANCIAL INFORMATION
<TABLE>
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES SIX MONTHS
CONSOLIDATED STATEMENTS OF CASH FLOWS ENDED JUNE 30,
(IN THOUSANDS; UNAUDITED) 1996 1995
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<S> <C> <C>
Cash flows used by operating activities:
Net loss $(15,535) $(4,048)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 1,775 1,865
Bad debt recovery (153) (75)
Changes in operating assets and liabilities:
Accounts receivable, net 6,877 (394)
Inventories (4,331) (3,796)
Prepaid expenses and other current assets (569) (830)
Accounts payable (3,548) 688
Accrued expenses 3,453 (403)
Deferred revenue (1,703) 1,045
Related party, net (198) -
-------- -------
Net cash used by operating activities (13,932) (5,948)
-------- -------
Cash flows from investing activities:
Decrease (increase) in short-term investments (14,336) 2,276
Decrease (increase) in long-term investments (11,925) -
Additions to property and equipment, net (9,348) (1,633)
Other (275) (395)
-------- -------
Net cash provided (used) by investing activities (35,884) 248
-------- -------
Cash flows from financing activities:
Net proceeds (repayments) of long-term debt 13,432 1,853
Proceeds from exercise of stock options 457 373
-------- -------
Net cash provided by financing activities 13,889 2,226
-------- -------
Decrease in cash and cash equivalents (35,927) (3,474)
Cash and cash equivalents at beginning of period 74,632 8,698
-------- -------
Cash and cash equivalents at end of period $ 38,705 $ 5,224
========= =======
Supplemental cash flow information:
Interest paid $ 771 $ 261
========= =======
Income taxes paid $ 10 $ 436
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(1) Nature of Business
------------------
Summit Technology, Inc. (the "Company") develops, manufactures and markets
ophthalmic laser systems designed to correct common vision disorders such
as nearsightedness, farsightedness and astigmatism. The Company also
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, Refractive Centers International, Inc. ("RCII"), the Company
owns and operates vision correction centers. The Company has recently
discontinued its vision correction centers in the U.K. and is concentrating
on operating several U.S. vision correction centers ("Summit
Vision[Registered Trademark] Centers") in 1996, many of which are
affiliated with prestigious national teaching hospitals. In addition,
through its wholly owned subsidiary, Lens Express, Inc., the Company sells
contact lenses and related products.
(2) Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Company, these
consolidated financial statements contain all adjustments (consisting of
only normal, recurring adjustments) necessary to present fairly the
consolidated financial position of Summit Technology, Inc. and subsidiaries
at June 30, 1996 and the results of operations for the three and six month
periods ended June 30, 1996 and 1995 and cash flows for the six month
periods ended June 30, 1996 and 1995.
The accompanying consolidated financial statements and related notes should
be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. The results of operations for the three
and six month periods ended June 30, 1996 are not necessarily indicative of
the results to be expected for the full year.
Loss Per Share
--------------
Loss per share is computed based on the weighted average number of common
shares outstanding.
<TABLE>
(3) Inventories (in thousands)
--------------------------
Inventories consist of the following:
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials and
subassemblies (net) $ 6,545 $ 5,802
Work in process 1,360 2,231
Finished goods 12,129 7,670
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$20,034 $15,703
======= =======
</TABLE>
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<PAGE> 6
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(4) Restatement and Reclassifications
---------------------------------
The 1995 consolidated financial statements reflect retroactive restatement
of a dividend of one share of the Company's common stock for every two
shares of outstanding common stock paid on December 1, 1995. Certain
reclassifications were made to the 1995 consolidated financial statements
to conform to the 1996 presentation.
(5) Business Combination
--------------------
In May 1996, the Company acquired Lens Express, Inc. of Deerfield Beach,
Florida for 1.71 million shares of Summit stock. Lens Express operates as a
wholly owned subsidiary of Summit Technology. The acquisition has been
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements for all periods presented have been restated to
include the accounts of Lens Express, Inc.
The following information for the three months ended March 31, 1996 was
reported as pro-forma information on the Company's Form 8K-A filed on
July 31, 1996 (in thousands):
SUMMIT LENS
TECHNOLOGY, INC. EXPRESS, INC. COMBINED
---------------- ------------- --------
Net Revenues $12,683 $12,761 $25,444
Net Loss $ 3,309 $ 243 $ 3,552
(6) 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, 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.
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
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<PAGE> 7
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 1985, 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. If either 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 non-current assets as
restricted cash of $1.5 million at June 30, 1996.
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 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
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<PAGE> 8
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Burlingame Litigation
In June 1996, a Texas ophthalmologist, Robert G. Burlingame sued Pillar
Point, VISX, the Company and certain affiliates of VISX and the Company in
the Federal District Court for the Northern District of California alleging
that the defendants have violated and are violating federal and state
antitrust laws. The plaintiff seeks damages of an unspecified amount,
treble damages, attorneys' fees and a permanent injunction against future
violations.
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.
Seriani Litigation
On October 26, 1992, Joseph Seriani brought suit against Lens Express, Inc.
("Lens") and certain of its former shareholders in the Florida Circuit
Court. The suit alleges violations of the Florida Civil Remedies for
Criminal Practices Act - the Florida civil RICO statute - based on events
which allegedly occurred in the mid-1980's. Seriani's claims against Lens
have been dismissed several times for failure to state a viable claim, but
in each instance with leave to amend and refile. On May 15, 1996, the date
of the Company's acquisition of Lens, Seriani and his wife Rhonda Seriani
filed, but have yet to serve on the Company, an amended complaint which
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<PAGE> 9
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
includes the Company as an additional defendant. The amended Seriani
complaint alleges, among other things, that the Company is liable for the
alleged actions of the other defendants by virtue of its acquisition of
Lens. The amended Seriani complaint seeks damages of an unspecified amount,
treble damages and attorneys' fees. Lens' current motion to dismiss the
suit is presently pending. The Company believes the Serianis' suit against
the Company and Lens is without merit and intends to contest it vigorously.
Shareholder Litigation
On August 2, 1996, a complaint was filed by G. Richard Pearl in the United
States District Court for the District of Massachusetts which purports to
be a class action. The complaint names as defendants the Company and
certain of its officers. On August 12, 1996, two additional complaints,
both purporting to be class actions and asserting similar allegations
against the same defendants, were filed in the same court by three
additional named plaintiffs. The complaints purport to allege securities
fraud claims under Sections 10(b), 20(a) and 20(b) of the Securities
Exchange Act of 1934. The complaints assert that the Company and the
individual defendants made misrepresentations and omissions to the public
which caused the Company's stock price to be artificially inflated. The
plaintiffs seek unspecified damages, interest, costs and expenses. On
August 9, 1996, a complaint, also purporting to be a class action, was
filed in the United States District Court for the District of Massachusetts
by James J. Locke, together with three other named plaintiffs. The
complaint names as defendants the Company and David F. Muller, its Chief
Executive Officer. The allegations and relief sought in the complaint are
similar to those contained in the Pearl complaint.
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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. Use of the Company's Excimer System to treat
astigmatism and farsightedness has not been approved by the FDA.
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 royalty from its ownership in Pillar Point Partners; (iii)
operating vision correction centers; and (iv) selling contact lenses and
related products. 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. In light of recent performance, the Company is assessing its
strategy and operations.
-9-
<PAGE> 10
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
1996 as compared with 1995
- --------------------------
Revenues
Revenues for the three months ended June 30, 1996 decreased 21% to $18.0
million from $22.8 million for the three months ended June 30, 1995. The
decrease was primarily attributable to lower sales of laser systems and
lower product upgrade revenue. This decrease was offset in part by an
increase in per procedure royalties. During the three months ended June 30,
1996, the Company also introduced several per procedure leasing programs,
revenue from which will be recognized over the term of the leases. Revenues
for the six months ended June 30, 1996 increased 2% to $43.4 million from
$42.6 million for the six months ended June 30, 1995. This increase was
primarily attributable to an increase in per procedure royalties which was
offset in part by lower sales of laser systems. During the quarter, the
Company had 14 Vision Correction Centers (of which 10 were open at the
begining of the quarter) in operation which had revenues of $.6 million.
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, a decrease in U.S. demand
for the Company's laser systems and continued competition, quarterly
revenues are likely to remain unpredictable. In addition, U.S. FDA approval
of VISX's excimer laser system for laser correction of nearsightedness in
March 1996 has resulted in increased competition that has negatively
impacted laser system sales.
Cost of revenues
Cost of revenues as a percentage of revenues for the three months ended
June 30, 1996 increased to 87% from 68% for the three months ended June 30,
1995. Cost of revenues as a percentage of revenues for the six months ended
June 30, 1996 increased to 77% from 68% for the six months ended June 30,
1995. The increase in cost of revenues as a percentage of revenues was
attributable to unabsorbed fixed overheads due to lower sales of laser
systems, lower average selling price of laser systems, and costs incurred
in connection with the Company's U.S. vision correction centers. These
increases were partially offset by lower cost of revenues associated with
the per procedure royalties.
Operating Expenses
Operating expenses for the three months ended June 30, 1996 increased 71%
to $15.6 million from $9.2 million for the three months ended June 30,
1995. Operating expenses for the six months ended June 30, 1996 increased
59% to $27.9 million from $17.6 million for the six months ended June 30,
1995. The increases are primarily related to costs incurred in connection
with the Company's U.S. vision correction centers, one-time costs incurred
in category development consumer advertising and in the acquisition of Lens
Express, Inc., and on going legal expenses.
The Company has to date opened 19 Vision Correction Centers in the U.S. and
anticipates incurring significant ongoing expenses including marketing,
leasing and personnel costs. As a result the Company anticipates a loss for
the year in the Vision Correction Centers. The Company has discontinued its
vision correction centers in the U.K. and is concentrating on the U.S.
vision correction centers.
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<PAGE> 11
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Net Income (Loss)
Net loss for the three months ended June 30, 1996 was $12.0 million. Net
loss for the three months ended June 30, 1995 was $2.3 million. Net loss
for the six months ended June 30, 1996 was $15.5 million. Net loss for the
six months ended June 30, 1995 was $4.0 million. The increases in net loss
were primarily due to lower revenues and higher operating expenses. There
can be no assurance that the Company will achieve profitability in the
second half of 1996. The Company announced the consolidation of laser
manufacturing operations into its Cork, Ireland facility and recorded a
one-time restructuring charge of $500,000 in the three months ended June
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's liquidity requirements have been met through external
financing. As of June 30, 1996, the Company's cash, cash equivalent
balances and short-term investments decreased $21.5 million to $74.6
million from $96.2 million as of December 31, 1995. The net loss of $15.5
million for the six month period ended June 30, 1996 was offset by
depreciation and amortization of $1.8 million, a decrease in accounts
receivable of $6.9 million, and an increase in accrued expenses of $3.5
million. Reductions of working capital resulted from the increase in
inventories of $4.3 million. In addition, accounts payable and deferred
revenue decreased $3.5 million, and $1.7 million, respectively.
Cash used by investing activities of $35.9 million resulted primarily from
an increase of $26.3 million in short and long-term investments, additions
to property and equipment of $9.3 million and an increase in other assets
of $0.3 million.
Cash provided by financing activities of $13.9 million resulted from net
proceeds of long-term debt obligations of $13.4 million and proceeds from
the exercise of stock options 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. There have been no
borrowings under this facility. Also in March 1996, 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. 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. At June 30,
1996, $17.5 million of borrowings were outstanding under this facility.
PART II: OTHER INFORMATION
Item 1. 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 1985, 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.
-11-
<PAGE> 12
PART II: OTHER INFORMATION
ITEM 2: LEGAL PROCEEDINGS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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. If either 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 non-current assets as
restricted cash of $1.5 million at June 30, 1996.
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.
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.
-12-
<PAGE> 13
PART II: OTHER INFORMATION
ITEM 2: LEGAL PROCEEDINGS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Burlingame Litigation
In June 1996, a Texas ophthalmologist, Robert G. Burlingame, sued Pillar
Point, VISX, the Company and certain affiliates of VISX and the Company in
the Federal District Court for the Northern District of California alleging
that the defendants have violated and are violating federal and state
antitrust laws. The plaintiff seeks damages of an unspecified amount,
treble damages, attorneys' fees and a permanent injunction against future
violations.
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.
Seriani Litigation
On October 26, 1992, Joseph Seriani brought suit against Lens Express, Inc.
("Lens") and certain of its former shareholders in the Florida Circuit
Court. The suit alleges violations of the Florida Civil Remedies for
Criminal Practices Act - the Florida civil RICO statute - based on events
which allegedly occurred in the mid-1980's. Seriani's claims against Lens
have been dismissed several times for failure to state a viable claim, but
in each instance with leave to amend and refile. On May 15, 1996, the date
of the Company's acquisition of Lens, Seriani and his wife Rhonda Seriani
filed, but have yet to serve on the Company, an amended complaint which
includes the Company as an additional defendant. The amended Seriani
complaint alleges, among other things, that the Company is liable for the
alleged actions of the other defendants by virtue of its acquisition of
Lens. The amended Seriani complaint seeks damages of an unspecified amount,
treble damages and attorneys' fees. Lens' current motion to dismiss the
suit is presently pending. The Company believes the Serianis' suit against
the Company and Lens is without merit and intends to contest it vigorously.
Shareholder Litigation
On August 2, 1996, a complaint was filed by G. Richard Pearl in the United
States District Court for the District of Massachusetts which purports to
be a class action. The complaint names as defendants the Company and
certain of its officers. On August 12, 1996, two additional complaints,
both purporting to be class actions and asserting similar allegations
against the same defendants, were filed in the same court by three
additional named plaintiffs. The complaints purport to allege securities
fraud claims under Sections 10(b), 20(a) and 20(b) of the Securities
Exchange Act of 1934. The complaints assert that the Company and the
individual defendants made misrepresentations and omissions to the public
which caused the Company's stock price to be artificially inflated. The
plaintiffs seek unspecified damages, interest, costs and expenses. On
August 9, 1996, a complaint, also purporting to be a class action, was
filed in the United States District Court for the District of
Massachusetts by James J. Locke, together with three other named
plaintiffs. The complaint names as defendants the Company and David F.
Muller, its Chief Executive Officer. The allegations and relief sought in
the complaint are similar to those contained in the Pearl complaint.
-13-
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The following matter was submitted to a vote of the shareholders at the
Company's annual meeting held on May 29, 1996:
<TABLE>
Proposal 1. David F. Muller and John A. Norris were reelected to the Board
of Directors for three year terms.
The following table summarizes the election results:
<CAPTION>
For Withheld Not Voting
Proposal 1
<S> <C> <C> <C>
David F. Muller 25,819,167 262,427 3,172,095
John A. Norris 25,821,505 260,089 3,172,095
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
2.1 Agreement and Plan of Merger, dated April 19, 1996 (as amended,
the Filed "Merger Agreement"), among Summit Technology, Inc. (the
"Registrant"), Summit Acquisition Corporation, a wholly-owned
subsidiary of the Registrant, Lens Express, Inc., Mordechai
Golan, Creslin Limited, Menderes Akdag and Huseyin Kizanlikli,
including a list of exhibits to the Merger Agreement. The
Registrant will furnish supplementally a copy of any omitted
Exhibit to the Merger Agreement to the Securities and Exchange
Commission upon request.*
2.3 Consent of Coopers & Lybrand*
11 Statement Re: Computation of per share earnings
*Previously filed with Form 8-K
b. Reports on Form 8-K
-------------------
On May 24, 1996, the Company filed a Form 8-K related to its
acquisition of Lens Express, Inc. for 1,708,500 shares of the
Company's common stock. On July 31, 1996, the Company filed an
amendment to this 8-K.
-14-
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 4: OTHER INFORMATION
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
- ----------------------------------------
Item 5. Other Information
-----------------
On May 15, 1996, the Company acquired Lens Express, a leading mail
order distributor of replacement contact lenses and related products
to retail consumers in the United States. Lens divides its business
into three primary areas: retail, wholesale and group sales. Retail
sales consist of new orders of contact lenses, reorders of contact
lenses, program sales, sales of eye care solutions, lens case sales,
sunglass sales, membership sales and shipping and handling fees.
Wholesale sales are made to pharmacies and similar retail outlets and
consist of sales of contact lenses, sales of eye care solutions and
shipping and handling fees. In addition, in the wake of increasing
employee health care costs, Lens has begun to market certain of its
eye care programs to large employer groups as a cost effective
alternative to more traditional vision indemnity programs. Retail and
group sales consisted of over 97% of total sales in 1995. Expenses
associated with the acquisition of Lens contributed to a loss for the
second quarter of 1996.
The Company announced the consolidation of its laser manufacturing
operations into its Cork, Ireland facility and the elimination of
approximately 55 jobs, roughly 9% of the company' consolidated
worldwide workforce. The Company announced that it would be taking a
one-time restructuring charge of $500,000 in the second quarter of
1996.
The Company is aware that the federal government is conducting an
investigation into the facts and circumstances surrounding the
delivery to David Muller, the Company's CEO and Chairman, of a package
that apparently included confidential FDA documents. The Company is
cooperating with such investigation. There can be no assurance that
this investigation will result in any conclusive findings or that
further government action will not adversely affect the Company.
Cautionary Statement under "Safe Harbor" Provisions of the Securities
---------------------------------------------------------------------
Litigation Reform Act of 1995
-----------------------------
Statements made in this news release may contain information about the
Company's future business prospects. Some of these statements may be
considered "forward looking". These statements are subject to risks
and uncertainties that could cause actual results to differ materially
from those set forth in or implied by such forward-looking statements.
For further information regarding cautionary statements and factors
affecting future operating results, please refer to Summit's annual
report on Form 10-K.
-15-
<PAGE> 16
SIGNATURES
----------
Pursuant to the requirements 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: August 14, 1996 By: /s/ David F. Muller
--------------- -------------------
David F. Muller, Ph.D.
Chief Executive Officer and Chairman of the Board
Date: August 14, 1996 By: /s/ Rajiv Bhatt
--------------- -------------------
Rajiv Bhatt
Executive Vice President and Chief Financial Officer
-16-
<PAGE> 1
Exhibit 11
SUMMIT TECHNOLOGY, INC.
<TABLE>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(11,983) $(2,254) $15,535) $(4,048)
Primary loss per share:
Weighted average common shares
outstanding 30,962 26,938 30,953 26,923
-------- ------- ------- -------
Loss per share $ (.39) $ (.08) $ (.50) $ (.15)
======== ======= ======= =======
Fully diluted loss per share:
Weighted average common shares
outstanding 30,962 26,938 30,953 26,923
-------- ------- ------- -------
Loss per share $ (.39) $ (.08) $ (.50) $ (.15)
======== ======= ======= =======
</TABLE>
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 38,705
<SECURITIES> 35,943
<RECEIVABLES> 10,209
<ALLOWANCES> 707
<INVENTORY> 20,034
<CURRENT-ASSETS> 109,421
<PP&E> 24,806
<DEPRECIATION> 8,791
<TOTAL-ASSETS> 160,712
<CURRENT-LIABILITIES> 24,531
<BONDS> 12,947
<COMMON> 310
0
0
<OTHER-SE> 122,854
<TOTAL-LIABILITY-AND-EQUITY> 160,712
<SALES> 0
<TOTAL-REVENUES> 43,402
<CGS> 0
<TOTAL-COSTS> 33,392
<OTHER-EXPENSES> 27,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 646
<INCOME-PRETAX> (15,537)
<INCOME-TAX> (2)
<INCOME-CONTINUING> (15,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,535)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
