UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Year Ended December 31, 1996 Commission File Number: 0-16937
SUMMIT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-897945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21 Hickory Drive, Waltham, Massachusetts 02154
(Address of principal executive officer) (Zip Code)
(617) 890-1234
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock and Common Share Purchase Rights
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Based on the closing price for the registrant's voting stock on February 28,
1997, the aggregate market value of such voting stock held by non-affiliates of
the registrant was approximately $276 million on said date. The number of shares
of the registrant's Common Stock, $.01 par value, outstanding on February 28,
1997 was 31,027,282.
DOCUMENTS INCORPORATED IN TEXT BY REFERENCE
Certain portions of the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Report.
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PART I
Item 1. BUSINESS
GENERAL
The Company's operations presently consist of (i) manufacturing,
selling and servicing laser systems and related products to correct vision
disorders; (ii) participating in per procedure royalties from its ownership in
Pillar Point Partners ("Pillar Point Partners"), a partnership jointly formed by
the Company and VISX, Incorporated ("VISX") in 1992; and (iii) selling contact
lenses and related products by mail order through its wholly-owned subsidiary
Lens Express, Inc. ("Lens"), which the Company acquired on May 15, 1996. The
Company also operates nineteen vision correction centers ("Vision Correction
Centers") which offer Laser Vision Correction services directly to consumers. On
January 30, 1997, the Company publicly announced its plan to discontinue its
Vision Correction Centers business. The Company anticipates that the business
will be disposed of by July, 1997. The Company's Vision Correction Centers have
been accounted for as a discontinued operation. The Company is continuing to
evaluate its operations and strategies, which may result in the acquisition by
the Company of one or more additional businesses, or additional dispositions of
all or part of one or more of the Company's businesses.
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.
LASER VISION CORRECTION BUSINESS
Overview
The Company develops, manufactures, sells and services ophthalmic laser
systems and related products designed to correct common refractive vision
disorders such as nearsightedness (myopia), farsightedness (hyperopia) and
astigmatism with a procedure known as Laser Vision Correction. The Company also
participates in per procedure royalties through its ownership interest in Pillar
Point Partners. On October 20, 1995, the Company's excimer system ("Excimer
System") became the first excimer laser system to be approved by the U.S. Food
and Drug Administration ("FDA") for commercial sale in the United States to
treat nearsightedness. The approval covers the use of the Excimer System to
treat nearsightedness between 1.5 and 7.0 diopters with a six millimeter
ablation zone. On February 7, 1997, an advanced model of the Company's Excimer
System, referred to as Apex Plus, was approved by the FDA for the same
indications. The FDA has not approved the Excimer System to treat astigmatism
and farsightedness.
Market
It is estimated that over 140 million people in the U.S. use eyeglasses
or contact lenses to correct common vision disorders and over 60 million of
these individuals suffer from nearsightedness. U.S. consumers spent an estimated
$14.6 billion in eyeglass and contact lens purchases in 1996. The Company
believes that Laser Vision Correction performed with its Excimer System will
make it possible for many of these people to eliminate or reduce their reliance
on 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 Laser Vision Correction as they have already chosen to use an
alternative to eyeglasses for vision correction. In 1996, approximately 70,000
Laser Vision Correction procedures were performed in the U.S. with licensed
Company and VISX systems.
The principal purchasers of the Company's laser systems have been
ophthalmologists, universities, clinics, hospitals and businesses which have
been created specifically to participate in the Laser Vision Correction market
in the U.S. The Company believes that U.S. ophthalmologists, who number
approximately 13,000, are receptive to Laser Vision Correction as a treatment
for nearsightedness.
As of March 15, 1997, the Company had sold or leased over 230 Excimer
Systems for use in the U.S.
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Products Uses
Ophthalmologists use the Company's laser systems 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.
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
Excimer System. The Company's principal laser product is its Excimer
System. The FDA has approved the Excimer System for sale in the U.S. to treat
mild to moderate nearsightedness with Laser Vision Correction. In addition to
the U.S., the Company is seeking to obtain regulatory approval for the sale of
its Excimer Systems in Japan. 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. Most of the laser light that the Excimer System generates
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. All procedures
using the Excimer System are performed on an outpatient basis with topical
anesthesia. These attributes make the Excimer System well suited to corneal
surgery.
The Excimer System currently is configured to treat nearsightedness
using a mechanical iris device that shapes light. The Company is now conducting
clinical trials for approval of the Excimer System to treat farsightedness,
astigmatism and combinations of these disorders using the emphasis(R) laser disk
("Laser Disk"), a single-use polymer disk that the Company has developed. To use
the Laser Disk, an ophthalmologist determines the correction, selects the
appropriate Laser Disk and places it in the laser beam path of the Excimer
System. As the laser ablates the Laser Disk, its shape is replicated on the
cornea. The Company's Apex Excimer System, which was approved by the FDA in
October, 1995 for treatment of mild to moderate nearsightedness using a
mechanical iris, requires a hardware upgrade to permit treatment of astigmatism
and hyperopia using the Company's Laser Disk. The Company's Apex Plus Excimer
System, which the FDA approved on February 7, 1997 for treatment of mild to
moderate nearsightedness with a mechanical iris (the same indications for which
the Apex model is approved), is capable, without hardware modification, of
treating astigmatism and farsightedness using the Laser Disk, although it has
not been approved by the FDA for these indications. The Company is presently
offering the Apex Plus in the U.S. for treatment of mild to moderate
nearsightedness using a mechanical iris. The Company is also offering to upgrade
existing Apex systems to the Apex Plus configuration and intends to charge
customers for this upgrade at prices approximating its cost. The Company is
presently offering the Apex Plus Excimer System for use with the Laser Disk to
treat astigmatism and hyperopia in foreign markets.
Holmium System. The Company's holmium laser system ("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. The Company
has discontinued production and sale of the Holmium System.
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Procedures
Laser Vision Correction. Laser Vision Correction, also known as
Photorefractive Keratectomy ("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 Laser Vision Correction is to eliminate or to reduce a person's reliance on
corrective eyewear.
When performing Laser Vision Correction 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 a Laser Disk is
used, the Laser Disk 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 Laser Vision Correction 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 which the Excimer and Holmium
Systems are capable of performing include Laser In Situ Keratomileusis ("LASIK")
(a procedure performed with the Excimer System to treat nearsightedness,
astigmatism and hyperopia), 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's Excimer System is not
approved for LASIK or LTK procedures in the U.S. The Company discontinued its
LTK trials in 1996.
Safety and Efficacy
According to the two year follow-up data that the Company accumulated
during its Laser Vision Correction clinical trials for nearsightedness, all of
the individuals undergoing Laser Vision Correction in Phase III clinical trials
experienced an improvement in visual acuity without corrective eyewear. Prior to
Laser Vision Correction, 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 Laser Vision Correction procedure for the treatment of
nearsightedness using the Excimer System was performed in 1989 and the first PTK
procedure for the treatment of corneal pathology using the Excimer System was
performed in 1988. Concerns about the safety and efficacy of the Excimer System
include predictability and stability of results, potential complications, and
unwanted side effects. See, "Cautionary Statements and Risk Factors Affecting
Future Operating Results - Safety and Efficacy Concerns."
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Sales and Marketing
The Company sells its Excimer Systems and related products worldwide
(subject to regulatory restrictions) through a direct sales force, 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.
In 1996, the Company began promoting Laser Vision Correction directly
to consumers through television, radio and print advertising, public relations
and teleservices using broad, media-based "category development" marketing
techniques. The results did not justify the high cost. The Company discontinued
these category development efforts in favor of more focused marketing utilizing
the resources of its Lens Express subsidiary. These efforts, which are intended
to assist owners of the Company's Excimer System in attracting patients, include
direct mail and lead generation programs targeted at contact lens wearers.
Patents and Pillar Point Partners
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. 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 has instituted and is the subject of infringement actions with respect
to foreign patents. See "Legal Proceedings -- German Patent Litigation and --
Canadian Patent Litigation."
The Company believes that its patents and the patents licensed to the
Company and VISX by Pillar Point Partners are crucial to its ability to realize
revenues and earnings through the collection of per procedure royalties.
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"). 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 that date were, or
are required to be, exclusively licensed or offered for exclusive license to
Pillar Point Partners. 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, nor does
it include the so-called Crozaphon/Azema patent which the Company purchased in
1993 (the "Azema Patent") and with respect to which the Company has commenced an
infringement action against VISX. See "Legal Proceedings -- U.S. Patent
Litigation Against VISX". The Partnership's policy is to license Pillar Point
Patents to manufacturers and sellers of ophthalmic excimer laser systems in the
U.S., including the Company 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.
In general, each of the Company and VISX is required to pay to the
Partnership royalties ranging from 3% to 6% of equipment sales. No sales
royalties are due on sales of systems before the Excimer System was approved by
the FDA for Laser Vision Correction 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
Partnership has set the per procedure royalties at $250 for Laser Vision
Correction and $0 for PTK. Each licensee has complete discretion whether and to
what extent
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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 the Company and 50% to VISX. Profits from royalties paid to the
Partnership on equipment sales by the Company and VISX are allocated entirely to
VISX. The first $30 of profits realized from each per procedure royalty from
Laser Vision Correction procedures using an adjustable iris is allocated to VISX
and the remaining profits are allocated 50% to the Company and 50% to VISX.
Partnership profits realized from the receipt of each per procedure royalty from
Laser Vision Correction procedures performed with a Laser Disk are allocated so
that VISX receives the first $30, the Company 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
the Company, 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.
The Company, VISX and Pillar Point Partners are involved in several
disputes with respect to royalties, patent infringement and related antitrust
issues and are also the subject of a Federal Trade Commission ("FTC")
investigation. See "Legal Proceedings -- VISX Royalty Action, -- Pillar Point
Partners Patent Litigation, -- Antitrust Litigation and -- FTC Investigation".
Other. In 1992, 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.
Research and Product Development
The Company expended $6.2 million, $5.6 million and $5.9 million for
research, engineering and product development, including regulatory and clinical
affairs, during 1994, 1995 and 1996, respectively. The Research, Development and
Engineering Department, which also deals with regulatory and clinical affairs,
was comprised as of March 19, 1997 of 40 full-time employees, of whom four have
Ph.D.'s and two 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 provide
maintenance to their customers for one year. Thereafter, the Company offers
annual equipment maintenance contracts to owners of Excimer Systems. Upon
installation of an Excimer System, a clinical specialist from the Company may
travel 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.
Competition
Consumer Market. In the foreseeable future, the Company believes that
eyeglass and contact lens use will continue to be the most popular alternative
to Laser Vision Correction. 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 Laser Vision
Correction 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 or under development,
which may prove to be more attractive to consumers than Laser Vision Correction.
Ophthalmic Excimer Laser Equipment. To date, the Company's principal
competition in the U.S. market for ophthalmic excimer laser equipment has been
VISX and, to a lesser extent, "gray market" and "homemade" lasers.
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Although the Company's Excimer System was the first excimer laser approved by
the FDA for commercial sale in the U.S. to treat nearsightedness with Laser
Vision Correction, VISX received FDA approval for its excimer laser system for
Laser Vision Correction to treat nearsightedness in March of 1996 and in
February of 1997 announced that it had received an approvable letter from the
FDA for use of its excimer system to treat astigmatism. Receipt by VISX of FDA
approval to market its system in the U.S. for the treatment of nearsightedness,
as well as its announced receipt of an approvable letter to market its system in
the U.S. for treatment of astigmatism, have had a negative impact on the
Company's laser sales. See "Cautionary Statements and Risk Factors Affecting
Future Operating Results -- Competition in the Vision Correction Industry".
Although the Company believes that there are significant requirements
for entry into the manufacturing field, including patents and, in the U.S., the
long lead time required to obtain FDA approvals, additional competitors have
entered the equipment manufacturing business. 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.
The Company is aware that certain U.S. physicians are performing
refractive procedures in the U.S. with used "gray market" Excimer Systems
purchased from overseas third parties at prices below those charged by the
Company for new U.S. systems. In addition, certain U.S. ophthalmologists are
performing refractive procedures in the U.S. with so-called "homemade" excimer
lasers that have not been approved by the FDA for commercial use in the U.S. The
gray market laser systems and homemade laser systems are adversely affecting the
Company's U.S. system sales and its ability to collect per procedure royalties.
See "Cautionary Statements and Risk Factors Affecting Future Operating Results
- -- Competition in the Vision Correction Industry," and "Legal Proceedings --
Pillar Point Partners Patent Litigation."
Government Regulation
Background. The Company's Excimer Systems and related disposables
(including the Laser Disk) are regulated as medical devices by the FDA under the
Federal Food, Drug and Cosmetic Act (the "FDC Act"). As such, these devices
require a premarket clearance or premarket approval (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 the FDA deems necessary
to reasonably ensure their safety and effectiveness. Class I devices are subject
to general controls (e.g., labeling, premarket notification and adherence to
Good Marketing Practices ("GMP") 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 a PMA 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).
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 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
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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, if
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 application
generally takes one to two years from the date such application is accepted for
filing 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 authorizing commercial distribution of the device for
certain indications (an "Approval Letter") or an approvable letter which usually
contains a number of conditions which must be met in order to obtain final
approval (an "Approvable Letter"). When and if the conditions of an Approvable
Letter have been fulfilled to the satisfaction of the FDA, the agency will issue
an Approval Letter. 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 a 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 a PMA supplement for each of the surgical procedures which it is intended
to perform. The FDA may grant a PMA with respect to a particular procedure
performed with the Excimer System only when it is satisfied that the use of the
device for that
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particular procedure is safe and effective. In granting a PMA, 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.
The Company received from the FDA an Approval Letter dated October 20,
1995 for the Company's use of the Excimer System in the U.S. to treat between
1.5D and 7.0D of myopia using Laser Vision Correction. 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 Laser Vision Correction
The FDC Act authorizes any interested person to petition for
administrative review of the FDA's decision to approve a PMA application. After
reviewing the petition, the agency decides whether to grant or deny the petition
and publishes a notice of its decision in the Federal Register. If the FDA
grants the petition, the notice will state the issue to be reviewed, the form of
the review to be used, the persons who may participate in the review, the time
and place where the review will occur, and other details. Challenges to an FDA
approval of a PMA application since enactment of the Medical Device Amendments
of 1976 on May 28, 1976 have been rare and, to the Company's knowledge, no PMA
application has ever been revoked by the agency based on such a challenge. The
Company is aware that at least two persons have filed a petition with the FDA
alling for reconsideration of the FDA's approval of the Company's PMA for its
Excimer System as described above. If the FDA were to grant such a petition, the
Company could continue to market the device during the agency's deliberations.
If, however, the FDA, after a hearing, were to revoke its approval of the
Company's PMA application, the Company would be required to cease marketing the
device. Such an FDA action would have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company has obtained FDA approval to conduct several additional
studies involving subsets of patients under the Company's IDEs for Laser Vision
Correction. The Company received FDA approval to initiate Phase III toric
astigmatism trials on April 12, 1996 and on November 25, 1996 received FDA
approval to initiate hyperopia trials. These U.S. clinical trials are under way.
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. In June 1992, the Company was granted 510(k) premarket
clearance for its 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. The Company has discontinued production
of the Holmium System and the related hand-held tips, as well as its IDE studies
of the Holmium System using LTK to treat hyperopia and astigmatism.
Other Regulatory Requirements. Any products that the Company
manufactures or distributes pursuant to a premarket clearance notification or a
PMA are or will be subject to pervasive and continuing regulation by the FDA.
The FDC Act also requires the Company to manufacture its products in registered
establishments and in accordance with its GMP regulations and to list its
devices with the FDA. The Company's facilities in the U.S. and Ireland are
subject to periodic GMP 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. Noncompliance with applicable requirements can result in, among
other things, 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, recommendation by the FDA that the
Company may not be allowed to enter into government contracts and criminal
prosecution. The FDA also has the authority to request the repair, replacement
or refund of the cost of any device manufactured or distributed by the Company.
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
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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. Sales of the
Company's laser systems are limited in several countries in addition to the
U.S., including Japan and Mexico. 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.
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LENS EXPRESS
Overview
On May 15, 1996, the Company acquired Lens, a leading mail order
distributor of contact lenses and related products in the United States. Lens'
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. Lens' 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. Lens
also markets certain of its eye care programs to large employers as a cost
effective alternative to more traditional vision indemnity programs. Retail and
group sales consisted of over 97% of total sales in 1996. See "Cautionary
Statements and Risk Factors Affecting Future Operating Results - Risks
Associated With Lens."
The process of purchasing contact lenses through Lens Express consists
of a few simple steps. A customer first places a call to the Lens 800 telephone
number to order contact lenses. The Lens operators then explain that the
company's services are available to the customer after Lens first receives a
valid prescription. For customers without a valid prescription, Lens will supply
the names of ophthalmologists or optometrists located in a customer's immediate
location from its nationwide network of over 2,500 doctors who will provide an
examination and prescription. Lens cannot distribute contact lenses to a patient
without a verified prescription. Many states permit Lens to obtain telephone
verification from the patient's contact lens prescriber; other states have
stricter requirements, including at least one state which requires that Lens
obtain a written copy of the patient's prescription before lenses may be
shipped. Some practitioners resist verifying prescriptions to Lens because they
regard Lens as their competitor in the sale of lenses to their customers.
Approximately 30% of Lens' orders are shipped on the day the order is received.
Of the balance, approximately 20% cannot be shipped on the day the order is
received because the product is not in stock, and approximately 35% cannot be
shipped on the day the order is received because Lens has not yet been able to
verify the customer's prescription.
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Several manufacturers of contact lenses have historically refused to
sell lenses to mail order distributors including Lens, and accordingly, Lens
obtains most of its contact lens inventory from others. The price Lens pays for
its inventory is therefore higher in some cases than those paid by
practitioners, chains and others who are able to buy directly from the
manufacturers. Although Lens has been able to obtain most contact lens brands at
competitive prices in sufficient quantities on a regular basis, there are some
lens models that are difficult and/or expensive for Lens to obtain. This has
resulted in Lens being unable to fill some customer orders at all or filling
them at little or no profit and has negatively impacted Lens' growth and
profitability. Lens believes that the manufacturers' "refusal to deal" with Lens
is being challenged on antitrust grounds by the Florida State Attorney General
and others.
Most orders are shipped via two day air and paid for with a valid
credit card or C.O.D. and Lens has little collection or bad debt expenses.
Most of Lens' retail customers join the Lens Express Discount Club for
a fee of $25 for three years or $40 for five years. Membership in this club
entitles a member to receive discounts on contact lenses and other products and
services.
Competition
The contact lens and solutions business is extremely competitive, and
Lens competes actively for customers. Ophthalmologists/optometrists are Lens'
primary competition, representing approximately 65% of all U.S. contact lens
sales. Some of these practitioners are reluctant to provide Lens with
prescription information for their patients, which can make it difficult for
Lens to obtain the timely prescription verification it requires in order to ship
contact lenses. National Optical Chains represent an estimated 30% of the U.S.
contact lens market. Some pharmacies have recently begun to sell contact lenses
directly to consumers. Several of the mass merchandisers, such as Wal-Mart,
Sam's, and Costco, have entered the optical market offering lower prices than
typically offered by chains and professionals. There are approximately 15 mail
order contact lens companies in the United States, exclusive of Lens. Lens
Express is believed to be the largest mail order contact lens supplier in the
United States. A number of companies offer vision care programs and indemnity
plans which compete with the Lens Express Vision Care Program. Competition for
eye care solutions is extremely intense and price sensitive with generic or
private label solutions providing a cost advantage over traditional
higher-priced branded products.
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Marketing and Advertising
Lens' sales are highly dependent upon the amount and effectiveness of
its marketing and advertising. Lens utilizes primarily print, radio, television,
interactive mediums, inserts and referrals. These efforts have helped produce a
database of over several million people who have expressed an interest in
purchasing contact lenses and have requested a brochure from Lens. The use of a
well-known celebrity spokesperson, in combination with the company's reputation
for quality, reliability and service, have contributed to Lens' growth and
expanding name recognition. Lens has determined that the use of television
represents the greatest opportunity for customer awareness and, therefore, sales
of Lens products and services. In addition to television, Lens advertises
extensively in print. Lens also uses promotions with major credit cards to
market its services and products. Periodically, Lens places coupons offering
replacement contact lenses at special discounts in credit card monthly
statements.
Government Regulation
While some states impose little or no specific regulation of mail order
dispensing of replacement contact lenses, other states have stricter
requirements. Burdensome regulatory requirements imposed by certain states, such
as prohibiting dispensing of replacement lenses prior to receipt of a written
prescription, make it more difficult and expensive for Lens to sell replacement
lenses in such states. There can be no assurance that other states will not
enact or impose laws or regulations that prohibit mail order dispensing of
replacement contact lenses or otherwise impair Lens' ability to sell lenses and
operate profitably.
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VISION CORRECTION CENTERS
Overview
On January 30, 1997, the Company publicly announced its plan to
discontinue its Vision Correction Center business. The Company anticipates that
the business will be disposed of by July, 1997. The Company's Vision Correction
Center business has been accounted for as a discontinued operation. There are
currently 19 Vision Correction Centers located in the U.S. including California,
Florida, Ohio, Minnesota, Illinois and the Baltimore/Washington, D.C. area.
These Vision Correction Centers provide Laser Vision Correction directly to
patients. Each Vision Correction Center is staffed by optometrists,
ophthalmologists and administrative personnel. Each Vision Correction Center is
equipped with an Excimer System and related equipment. Each Vision Correction
Center treats consumers who come directly to the Vision Correction Center and
under certain circumstances makes its facilities available for use by local area
ophthalmologists.
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 Laser Vision
Correction within the Institution's facilities, and the Company provides a
variety of business consulting, management and marketing services to each
Institution. As of March 15, 1997, the Company had affiliations with UCLA-Jules
Stein Eye Institute in Los Angeles, Stanford University Medical Center in Palo
Alto, California, Rush-Presbyterian - St. Luke's Medical Center in Chicago,
George Washington University Medical Center in Washington, D.C., and the
Cleveland Clinic Foundation in Cleveland, Ohio. Laser Vision Correction patients
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 patient. In certain areas, the Company's
advertising and marketing materials include the name of the Institution.
In addition to the Company's 1996 efforts in "Category Development,"
presently discontinued (see "Laser System Business - Sales and Marketing"), the
Company uses direct response marketing vehicles to promote its Vision Correction
Centers. The Company focuses this advertising in geographic areas in which
Institutions and Vision Correction Centers are located. 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.
In addition to competition in the consumer market from alternatives to
Laser Vision Correction (see "Laser System Business -- Competition -- Consumer
Market"), the Company's Vision Correction Centers also face competition from
other providers of Laser Vision Correction. The Company is aware of a number of
businesses that may have been formed to provide Laser Vision Correction directly
to consumers in the U.S., and others may be formed now that FDA approval of the
Excimer System for Laser Vision Correction to treat nearsightedness has been
obtained. The Company believes that some of these businesses are pursuing a
strategy of marketing Laser Vision Correction 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 reported losses for the discontinued Vision Correction
Center business of approximately $23.4 million for the year ended December 31,
1996. The Vision Correction Center business is treated as a discontinued
operation for accounting purposes.
Government Regulation
Numerous state laws and regulations presently affect the operation of
the Vision Correction Centers. The Company has developed strategies for most
states to operate the Vision Correction Centers in compliance with applicable
law. The business terms and organizational structure of the Vision Correction
Centers will vary significantly from state to state, however, in order to
accommodate the local regulatory framework. There can be no assurance that the
Vision Correction Centers will be able to profitably compete in the event of
future regulatory changes.
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EMPLOYEES
As of March 19, 1997, the Company and its subsidiaries employed 519
persons full-time in the U.S., Ireland and other countries. Of this number (i)
199 were employed in the Company's laser systems business (of whom approximately
52 were in manufacturing, 40 in research, engineering, product development and
regulatory and clinical affairs, 49 in customer service and 58 in selling,
marketing and administration), (ii) 52 were employed in the Vision Correction
Center business, and (iii) 268 were employed by Lens. Of such employees, 460 are
located in the U.S., 47 in Ireland and 12 in other parts of the world. None of
such employees is represented by a union. The Company and its subsidiaries
believe that relations with employees are good.
BACKLOG
As of March 19, 1997, the Company had no significant backlog.
CAUTIONARY STATEMENTS AND RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
This report contains 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 Systems,
the potential for royalty revenues, and the success of Lens. These statements
are considered "forward-looking" within the meaning of the Private Securities
Litigation Reform Act. These statements are based on the Company's current plans
and expectations and involve risks and uncertainties that could cause actual
future activities and results of operations to be materially different from
those set forth in the forward-looking statements. 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 expressly undertakes no duty to update any
forward-looking statement.
Absence of Profitability; Possible Future Losses. 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, 1996, the Company
incurred a net loss of $36.9 million, bringing its accumulated deficit to $69.2
million as of December 31, 1996. A decrease in U.S. demand for the Company's
laser systems, continued competition, expenses related to the acquisition of
Lens, start-up and operating losses experienced by the Vision Correction
Centers, legal expenses and operating losses experienced in the Company's
equipment business all contributed to a significant loss for 1996. The Company
believes revenues are likely to remain unpredictable, and there can be no
assurances as to if, or when, the Company will achieve profitability.
Competition in the Vision Correction Industry. The vision correction
industry is subject to intense competition. Laser Vision Correction 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 competitive
alternatives to Laser Vision Correction would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's Excimer System currently competes with other
manufacturers' excimer laser systems sold in the U.S. and abroad. To date, the
Company's principal competition in the U.S. market for ophthalmic excimer laser
equipment has been VISX and, to a lesser extent, "gray market" and "homemade"
lasers. VISX received FDA approval for its excimer system for Laser Vision
Correction to treat nearsightedness in March of 1996 and in February of 1997
announced that it had received an approvable letter from the FDA for use of its
excimer system to treat astigmatism. Although the Company intends to submit a
PMA supplement to the FDA requesting approval of its Excimer System to treat
astigmatism, the Company's Excimer System is not presently approved to treat
astigmatism in the U.S., and there can be no assurance that it will ever be
approved to do so. Neither the Company's Excimer System nor VISX's excimer
system have been approved by the FDA for treating high myopia or hyperopia (and
there can be no assurance that either will ever be approved for such.) The
Company's Apex Excimer System, currently approved in the United States for
treatment of 1.5D to 7.0D of myopia, requires one hardware modification to
permit treatment of astigmatism and hyperopia using the Company's Laser Disk.
VISX has indicated that its excimer system as currently approved in the U.S.
does not require a hardware modification to permit treatment of astigmatism,
although the Company believes that the VISX system will require a hardware
modification for treating hyperopia. The Company's Apex Plus Excimer System,
which was approved by the FDA on February 7, 1997 for treatment of 1.5D to 7.0D
of myopia using a mechanical iris (the
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same treatment indications approved for the Apex model), does not require a
hardware modification to treat astigmatism and hyperopia using the Laser Disk.
The version of the Apex Plus Excimer System currently sold by the Company
internationally permits treatment of moderate and high myopia, astigmatism and
hyperopia. The Company believes the perceptions that VISX's system will receive
FDA approval to treat astigmatism prior to the Company, and that VISX's system
does not require a hardware modification to do so, have adversely affected the
Company's systems sales in the U.S. Additionally, competitors, both in the U.S.
and abroad, have entered the equipment manufacturing business. 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 Excimer Systems purchased from
overseas third parties at prices below those charged by the Company for new U.S.
systems. The Company believes that most of these "gray market" systems do not
conform to the specifications required by the FDA and have been classified by
the FDA as "adulterated" in FDA Import Alerts dated February 23, 1996 and July
8, 1996. The alerts authorize 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 approved by the FDA for commercial use in the United
States. The Company believes that these lasers, which generally sell for less
than the Company's Excimer Systems, are also adulterated within the meaning of
the FDC Act. These gray market laser systems and homemade laser systems are
adversely affecting the Company's U.S. system sales. The Company believes that
the FDA is investigating the parties involved in gray market and homemade laser
activities. In an open letter to manufacturers and users of lasers for
refractive surgery dated October 10, 1996, the FDA announced an enforcement
grace period to permit owners of so-called "homemade" excimer lasers to apply
for IDEs for their systems and to permit owners of reimported excimer lasers
either to apply to FDA for certification that their systems are materially
identical to FDA approved models or to apply for IDEs. The Company believes the
FDA, in furtherance of this policy, has certified at least two gray market
systems and has granted at least two IDEs. The users of the gray market laser
systems and homemade laser systems are not licensed under patents held by Pillar
Point Partners and have not been paying licensing fees. Accordingly, Pillar
Point Partners is pursuing patent infringement litigation against certain of
such users. In addition, the Company is pursuing litigation against certain
other parties involved in gray market activities, including an importer, a
service provider and certain ophthalmologists. See "Legal Proceedings -- Pillar
Point Partners Patent Litigation". There can be no assurance that these lawsuits
will be successful in curbing the use of gray market and homemade lasers in the
U.S., or that these systems will not proliferate.
Uncertain Market Acceptance of Laser Vision Correction. The Company
believes that broad acceptance of Laser Vision Correction in the U.S. is
critical to its long-term success. There can be no assurance that Laser Vision
Correction will be broadly accepted by either the ophthalmic community or the
general population as an alternative to existing methods of treating refractive
vision disorders. The acceptance of Laser Vision Correction 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 Laser Vision Correction, 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 excimer laser systems. Promotional efforts by suppliers of
products or procedures which are alternatives to Laser Vision Correction,
including eyeglasses and contact lenses, some of whom may have greater resources
than the Company, may also affect adversely the market acceptance of Laser
Vision Correction. The Company believes a significant number of ophthalmologists
and other potential laser system customers are continuing to evaluate the demand
for Laser Vision Correction in the U.S. marketplace. Many of these potential
customers have elected to defer acquisition of systems or have formed groups to
share or acquire a single system. This contributed to weak laser system sales in
fiscal 1996 and there can be no assurance it will not continue. Failure to
achieve broad market acceptance of Laser Vision Correction is likely to have a
material adverse effect on the Company's business, financial condition and
results of operations. Even if broad acceptance of Laser Vision Correction 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 and/or the patents licensed to Pillar Point
Partners, challenges to the Company's patents and/or the investigation by the
FTC regarding Pillar Point Partners, VISX and the Company.
Patent Concerns. 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
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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 Company's
Excimer Systems or Holmium Systems or their use to perform one or more
procedures. While the Company either owns or has obtained from Pillar Point
Partners a license to most of the important U.S. Laser Vision Correction
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 review by the FDA.
Furthermore, they could delay the reintroduction of the Company's laser systems
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 infringing such patents or developing
substantially equivalent or competitive products. Even if an unlicensed party's
products or procedures 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, or invalidating patents owned or
licensed by the Company, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks of 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 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. The Company, VISX and Pillar Point Partners are involved in several
disputes with respect to royalties, patent infringement and antitrust issues and
are also the subject of an investigation by the FTC. If any of these matters is
resolved adversely to the Company it could have a material adverse effect on the
Company's business, financial condition and results of operations.
Safety and Efficacy Concerns. Concerns with respect to the safety and
efficacy of the Company's Excimer System to perform Laser Vision Correction
include predictability and stability of results. Potential complications and
side effects include: post-operative discomfort (which can include pain,
itching, tearing and dryness of the eye); 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 (which can lead to night vision difficulties); temporary increase in
intraocular pressure and/or pupil enlargement in reaction to post-procedure
medication; modest fluctuations in refractive capabilities during healing;
modest decreases in best corrected vision (i.e., vision with corrective
eyewear); unintended over- or under- corrections; disorders of corneal healing
(including so-called "central islands"); corneal scars; corneal ulcers; induced
regular or irregular astigmatism (which may cause blurred or double vision
and/or shadow images); drooping of the eyelid; and iris inflammation. 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 Laser
Vision Correction which in turn would have a material adverse effect on the
Company's business, financial condition and results of operations.
17
<PAGE>
Possible Failure to Obtain Regulatory Approvals for Products. The
Company's Excimer Systems and related disposables are regulated as medical
devices by the FDA under the FDC Act. As such, these devices require a premarket
clearance or a PMA by the FDA prior to commercialization in the U.S. The PMA
process (and underlying clinical studies) is lengthy and uncertain and requires
substantial commitments of the Company's financial resources and management's
time and effort. Delays in obtaining or failure to obtain required 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. There can be no assurance that the Company will be able to obtain
PMAs or premarket clearances in the U.S. or certain foreign countries for
intended uses of its Excimer Systems, or any of its other devices for which the
Company seeks approvals or clearances.
Any products that the Company manufactures or distributes pursuant to a
premarket clearance notification or a PMA are or will be subject to pervasive
and continuing regulation by the FDA. The Company believes its relations with
the FDA are good. However, there can be no assurance that the departures from
the Company during 1996 of David F. Muller and Kimberley A. Doney, who were
responsible for the Company's relations with the FDA, will not adversely affect
the Company's ability to accomplish its regulatory goals. See "Cautionary
Statements and Risk Factors Affecting Future Operating Results -- Other
Matters". Changes in the existing regulatory environment, 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 or results of operations.
Vendor Concerns. The Company currently purchases certain components
used in the production, operation and maintenance of Excimer Systems and related
products from a limited number of suppliers. If such suppliers were to cease
providing components to the Company, the Company would be required to locate and
contract with substitute suppliers, and there can be no assurances that such
substitute suppliers could be located in a timely manner, or could provide
required components on commercially reasonable terms. Any interruption in the
Company's ability to manufacture and service Excimer Systems on a timely basis
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Liability Claims and Uninsured Risks; Limited Insurance. 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. While the Company maintains
product liability insurance with coverage of $5.0 million per occurrence and an
annual aggregate maximum of $5.0 million, as well as liability coverage of $10
million per occurrence for its Vision Correction Centers, with an aggregate
annual maximum of $10 million, and $2 million of liability coverage for Lens,
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. Even if a claim against the Company is covered
by insurance, the costs of defending a product liability, 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 operations.
Risks Associated with Lens. The operations of Lens could be adversely
affected by certain risks beyond its control, including: (i) lack of consistent
sources of supply, (ii) inability to obtain prescriptions required by state law
before lenses may be shipped; (iii) inability to obtain suitable advertising
spots in selected media at cost-effective prices; (iv) state regulations, and
(v) competition from other contact lens providers. Because some contact lens
manufacturers have refused to sell contact lenses directly to Lens, Lens must
obtain product through indirect channels. There can be no assurance that Lens
will continue to be able to obtain product through indirect channels at the
times, at the price and in the quantities it requires. If Lens is unable to
obtain product from indirect
18
<PAGE>
suppliers, or is forced to do so on unfavorable terms, Lens' sales and/or
profitability could be adversely affected. Lens' operations are subject to
numerous state laws and regulations concerning the dispensing of replacement
contact lenses. While some states impose little regulation of mail order
dispensing of contact lenses, other states have stricter requirements.
Burdensome regulatory requirements imposed by certain states, such as
prohibiting dispensing of replacement lenses prior to receipt of a written
prescription, make it more difficult and expensive for Lens to sell replacement
contact lenses in such states. There can be no assurance that other states will
not enact or impose laws or regulations that prohibit mail order dispensing of
replacement contact lenses or otherwise impair Lens' ability to sell lenses and
operate profitably. In addition, the contact lens dispensing industry is subject
to intense competition. There can be no assurance that Lens Express will not
lose market share to other contact lens providers electing to pursue a marketing
strategy which, like that of Lens, emphasizes convenience and price, or to
discount chains, wholesale clubs and other competitors.
Volatility of Stock Price. The market price of the Company's Common
Stock historically has been volatile. Factors such as announcements of
technological innovations or new products by the Company or its competitors,
changes in domestic or foreign governmental regulations or regulatory approval
processes, developments or disputes relating to patent or proprietary rights and
public concern as to the safety and efficacy of the procedures for which the
Excimer System is used, has and may continue to have a significant impact on the
market price of the Common Stock. Moreover, the possibility exists that the
stock market (and in particular the securities of technology companies such as
the Company) could experience extreme price and volume fluctuations unrelated to
operating performance.
Shareholder Securities Law Class Action Litigation. Since August 2,
1996, sixteen shareholder actions have been commenced against the Company and,
in some instances, against certain of its officers in the United States District
Court for the District of Massachusetts. There can be no assurance that the
Company will not be served with additional complaints of a similar nature in the
future, that the Company will ultimately prevail in the pending or any further
actions, or that the actions, individually or in the aggregate, will not have a
material adverse effect on the Company.
Other Matters. On September 5, 1996, David F. Muller, the Company's
Chairman and Chief Executive Officer, was terminated from all positions with the
Company and its subsidiaries. D. Verne Sharma, the Company's President, was
elected interim Chief Executive Officer. Kimberley A. Doney, the Company's
Executive Vice President for Quality, Regulatory and Clinical Affairs, resigned
from the Company effective September 30, 1996. Andrew J. Jones, the Company's
Vice President of Manufacturing, resigned from the Company effective October 4,
1996. The Company depends to a significant extent on certain key management,
technical and other personnel, and the departure of one or more of such key
individuals could have a material adverse effect on the Company. The foregoing
departures and other events during the second half of 1996 have had an
unsettling effect on the Company's remaining workforce. There can be no
assurance that these developments will not result in further employee attrition
or that, if such attrition were to occur, it would not have a material adverse
effect on the Company.
The Company believes that the federal government has conducted, or may
be conducting, one or more investigations into the facts and circumstances
surrounding the delivery in November, 1995 to David F. Muller, the Company's
former CEO and Chairman, of a package that apparently included confidential FDA
documents. The Company has cooperated and intends to cooperate with any such
investigation to the extent its cooperation is or has been requested by any
appropriate government agency. There can be no assurance that any such
investigation will result in any conclusive findings, that any conclusive
findings will not entail a determination of culpability on the part of the
Company, or that further government action will not have a material adverse
effect on the Company, including, for example, a material adverse effect on the
Company's relationship with the FDA.
In November, 1996, certain former shareholders of Lens (the "Lens
Shareholders") made demand on the Company for rescission of the Company's
acquisition of Lens, asserting that, prior to the acquisition, they had been
misled "regarding the product, markets, operations and financial prospects" of
the Company. Subsequently, the Lens Shareholders withdrew their rescission
demand and entered into settlement discussions with the Company. These
discussions are continuing. However, there can be no assurance that the Lens
Shareholders will not renew their rescission demand or that the matter will be
resolved without resort to litigation. The Company believes the Lens
Shareholders' claims to be without merit.
19
<PAGE>
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.
Lens presently leases a 38,000 square foot office/warehouse facility in
the Fort Lauderdale, Florida area, under a seven-year lease expiring in August,
1999.
In addition, RCII has entered into a total of nineteen (19) leases for
Vision Correction Center facilities in California, Florida, Illinois, Maryland,
Minnesota, Ohio and Virginia, with expiration dates ranging from 1999 to 2004.
These facilities vary in size from approximately 2,500 square feet to
approximately 3,500 square feet.
Item 3. LEGAL PROCEEDINGS
U.S. Patent Litigation against VISX
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 Azema Patent. As
required by the terms of the governing agreements, the Company offered Pillar
Point Partners the opportunity to acquire exclusive rights under the 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 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 and on March 3, 1997, VISX moved for Summary Judgment. The Court has
scheduled a trial, if necessary, for July 21, 1997. 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 appealed the
judgment. On October 17, 1996, Schwind agreed to dismiss its appeal and pay the
Company 1.23 million German marks (approximately $800,000) in satisfaction of
the Company's judgment. The Chiron Technolas appeal was recently decided in
favor of the Company. Chiron Technolas may appeal further to the German Supreme
Court. If the Chiron Technolas appeal is decided against the Company, the
infringement verdict in Germany will be overturned and the Company 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,
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, in the
Federal Court of Canada, Trial Division, asserting that the Excimer
20
<PAGE>
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 U.S. 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 Patent Litigation
In March 1995, Pillar Point Partners sued LaserSight, Inc. for patent
infringement in the Federal District Court for Delaware. In addition, the
defendant, LaserSight, Inc., 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. On March 26, 1997, the parties
announced that they had entered into a settlement agreement pursuant to which
the litigation will be dismissed without prejudice. In the settlement agreement,
Pillar Point, VISX and Summit have granted LaserSight a release from liability
for patent infringement claims arising before the effective date of the
agreement, and LaserSight has agreed to make a nominal payment and to notify
Pillar Point before it begins manufacturing or selling in the United States.
Pillar Point Partners has also commenced patent infringement litigation
against certain ophthalmologists believed to be using homemade laser systems not
licensed under patents held by Pillar Point Partners, as well as two alleged
manufacturers of such laser systems and an individual believed to be inducing
infringement of such patents. These actions are presently pending as Pillar
Point Partners, et al. v. David Dulaney, et al. (U.S. District Court, District
of Arizona, Civil Action No. 96-2051PHXPGR); Pillar Point Partners, et al. v.
Jon G. Dishler, et al. (U.S. District Court, District of Colorado, Civil Action
No. 96-N-2351); Pillar Point Partners, et al. v. Jui-Teng Lin, et al. (U.S.
District Court, Middle District of Florida, Civil Action No. 97-54-CV-ORL-22);
and Pillar Point Partners, et al. v. William D. Appler (U.S. District Court,
District of Columbia, Civil Action No. 1:96CV02082). The defendants in the
Barnet and Dishler actions have asserted counterclaims seeking declarations that
the patents in suit are invalid and unenforceable. Those defendants have also
raised antitrust counterclaims. In addition, the Company is pursuing litigation
against certain other parties engaged in similar activities, including an
importer, a service provider and certain other ophthalmologists, some of whom
have asserted antitrust and other counterclaims against the Company.
In October, 1996, Autonomous Technologies Corporation ("Autonomous")
sued Pillar Point Partners, the Company and VISX (and certain affiliates of the
Company and VISX) in the Federal District Court for Delaware. In this action,
Autonomous seeks, inter alia, a declaratory judgment that it does not infringe a
certain United States Patent held by Pillar Point Partners, or, alternatively, a
judgment ordering that all U.S. patents held by Pillar Point Partners, together
with their foreign counterparts, be deemed unenforceable and/or be licensed to
Autonomous.
VISX Royalty Action
On August 28, 1996, an affiliate of VISX, purporting to act on behalf
of Pillar Point Partners, commenced a lawsuit against the Company in the United
States District Court for the District of Massachusetts. The suit alleges that
the Company owes equipment royalties to Pillar Point Partners of not less than
$4.5 million together with interest, costs and attorneys' fees. The Company
denies these allegations and intends to contest them vigorously. However, there
can be no assurance that the lawsuit will be resolved in the Company's favor or
that an adverse judgment or settlement would not have a material adverse affect
on the results of operations of the Company in the period in which it occurs.
FTC Investigation
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 has issued subpoenas to the Company
and others (including one officer of the Company and David F. Muller, the
Company's former Chairman and Chief Executive Officer) for testimony and 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 may 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 conclude 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
21
<PAGE>
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.
Antitrust 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. On
September 5, 1996, a Nevada ophthalmologist, John R. Shepherd, through his
professional corporation, commenced a similar lawsuit against the same parties,
in the same court, alleging substantially similar claims and seeking
substantially similar relief. Pillar Point Partners has stated that it believes
the California lawsuits are without merit and is contesting the suits
vigorously.
Seriani Litigation
On October 26, 1992, Joseph Seriani brought suit against Lens and
certain of its former shareholders in the Florida Circuit Court. The suit
alleged violations of the Florida Civil Remedies for Criminal Practices Act -
the Florida civil RICO statute - based on events which allegedly occurred in the
mid-1980s. Seriani's claims against Lens were 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 an amended complaint which included the
Company as an additional defendant. On November 25, 1996, the Serianis
voluntarily dismissed their action against the Company and on March 7, 1997
voluntarily dismissed their action against the remaining defendants, in each
case without prejudice. The Company believes that the Serianis' suit against the
Company and Lens was without merit.
Vernon Litigation.
On or about March 23, 1994, a former Lens employee filed a charge of
discrimination against Lens with the Equal Employment Opportunity Commission,
alleging sexual discrimination and harassment by certain co-employees, and
retaliation against her by Lens when she was terminated after making the claim.
After an investigation, the EEOC's Legal Department concluded that no probable
cause existed. On or about February 1, 1996, the former employee sued Lens and
two Lens managers in the United States District Court for the Southern District
of Florida, alleging sexual harassment and other state and federal charges and
seeking unspecified compensatory and punitive damages. All defendants have
denied the allegations. Subsequently, other present or former employees have
made similar allegations, and one has indicated that she intends to file suit.
While Lens believes the claims to be without merit, there can be no assurance
that it will prevail in this litigation. Lens cannot predict the range of
possible compensatory damages, if any, or whether punitive damages may be
assessed.
Shareholder Actions.
Between August, 1996 and October, 1996, fourteen shareholder actions
were commenced against the Company and certain of its officers in the United
States District Court for the District of Massachusetts. The actions were
consolidated, by order of the Court entered December 2, 1996, as In re Summit
Technology Securities Litigation, Civil Action No. 96-11589-JCT (the "Exchange
Act Action"). Plaintiffs filed a First Amended and Consolidated Class Action
Complaint (the "Complaint") on January 10, 1997.
In the Complaint, plaintiffs claim to have been purchasers of the
Company's Common Stock at various times between May, 1995 and June, 1996. They
claim violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 arising out of public statements made by the Company or its officers.
Plaintiffs allege that the statements made material misrepresentations of fact,
or failed to disclose material information necessary to make statements made not
misleading, concerning a variety of matters -- including, for example, alleged
sale of laser systems in contravention of FDA regulations, alleged patent
royalty payments owed by the Company, alleged defects in the manner by which the
Company obtained FDA approval for the Company's Excimer System, alleged adverse
side effects of use of the Company's laser systems, alleged size of the market
for Laser Vision Correction systems and procedures in the U.S., alleged
competitive position of the Company's Excimer System compared with excimer
systems under development or sold by competitors, and an alleged "write-off"
arising from the acquisition of Lens Express, Inc. Among the statements which
plaintiffs claim to have been misleading or to have unlawfully omitted material
information are statements contained in a number of the Company's filings with
the SEC pursuant to the reporting and other requirements of the Securities
Exchange Act of 1934 or the Securities Act of 1933. Such filings include:
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995
The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995
The Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995
The Company's Registration Statement on Form S-3 and Prospectus dated
October 23, 1995
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995
22
<PAGE>
In addition, plaintiffs claim violations of Section 20A of the
Securities Exchange Act of 1934 by certain officers of the Company due to
alleged sales of Common Stock of the Company while in the possession of material
non-public information.
Plaintiffs seek certification of the Exchange Act Action as a class
action, purportedly on behalf of all purchasers of the Company's Common Stock,
other than defendants and certain affiliated persons and entities, between March
31, 1995 and July 3, 1996. Plaintiffs seek unspecified damages, interest, costs
and expenses.
On October 1, 1996, an additional action was commenced in the United
Sates District Court for the District of Massachusetts against the Company, its
directors, certain of its officers and the four underwriters of the Company's
October, 1995 Common Stock offering. The action was coordinated with In re
Summit Technology Securities Litigation, Civil Action No. 96-11589, by order of
the Court dated December 2, 1996 and is presently pending as In re Summit
Technology Securities Litigation (the Burke Action), Civil Action No. 96-11589
(the "Burke Action"). Plaintiff filed an Amended Complaint (the "Amended
Complaint") on January 10, 1997.
In the Amended Complaint, plaintiff claims to have purchased shares of
the Company's Common Stock pursuant to the Company's Registration Statement on
Form S-3 dated October 23, 1995, and declared effective by the Securities and
Exchange Commission on or about October 24, 1995 (the "October Registration
Statement"). He claims violations of Sections 11, 12(2) and 15 of the Securities
Act of 1933 arising out of alleged material misstatements of fact in the October
Registration Statement or failures to disclose material information necessary to
make statements made in the October Registration Statement not misleading. He
claims misrepresentations or omissions concerning a variety of matters --
including, for example, alleged adverse side effects of use of the Company's
laser products, alleged sale by the Company of its products in contravention of
FDA regulations and alleged royalty payments owed by the Company. The Amended
Complaint seeks unspecified damages, interest, costs and expenses. The plaintiff
seeks certification of the Burke Action as a class action, purportedly on behalf
of all purchasers of the Company's Common Stock pursuant to the October
Registration Statement, other than defendants and certain affiliated persons and
entities.
On February 27, 1997, the Company moved to dismiss the Exchange Act
Action and the Burke Action for failure to state a claim on which relief could
be granted. The Court has scheduled a hearing on the motions for May 5, 1997.
The Company believes that the allegations in the Exchange Act Action
and the Burke Action are without merit, and it intends to defend the actions
vigorously. There can be no assurance that the Company will not be served with
additional complaints of a similar nature in the future, that the Company will
ultimately prevail in the pending or any possible additional actions, or that
the actions, individually or in the aggregate, will not have a material adverse
effect on the Company.
On December 20, 1996, a shareholder of the Company filed in the United
States District Court for the District of Massachusetts a derivative action,
purportedly on behalf of the Company, against the Company as nominal defendant,
its directors and certain of its present or former officers. This action is
presently pending as West v. Muller, et al, Civil Action No. 96-12576-JLT (the
"Derivative Action"). The complaint in the Derivative Action alleges that the
defendant directors and officers caused the Company to make public statements,
in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and of Sections 11 and 12 of the Securities Act of 1933, which contained
material misrepresentations of fact or which failed to disclose material
information necessary to make the statements made not misleading. It alleges
that this conduct has rendered the Company liable to the plaintiffs in, and has
exposed the Company to the expense and inconvenience of defending, the Exchange
Act Action and the Burke Action and has harmed the Company's reputation, thereby
limiting its access to capital markets. The complaint further alleges that the
defendant directors and officers improperly traded in the Company's Common Stock
based upon material non-public information. The complaint seeks recovery from
the defendant directors and officers, in an unspecified amount, for the damages
allegedly caused by their alleged misconduct. The Company has not been served
with the complaint.
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 1996.
23
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's 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.
<TABLE>
<CAPTION>
Period High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
January 1 - March 31, 1996 34 7/8 23 5/8
April 1 - June 30, 1996 23 5/8 14
July 1 - September 30, 1996 14 1/2 5 1/4
October 1 - December 31, 1996 8 3/4 4 1/2
January 1 - March 31, 1995 23 1/4 18 43/64
April 1 - June 30, 1995 25 11/64 20 21/64
July 1 - September 30, 1995 34 21/64 25 21/64
October 1 - December 31, 1995 36 1/4 25 1/4
</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 14, 1997 was $8.19. On March 14, 1997, the Common Stock was held of record
by 3,144 persons and entities, including significant amounts of stock held in
"street name".
24
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except for share amounts)
Year ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of operations data
Net revenue 80,477 95,898 71,468 68,549 56,669
Net income (loss) from continuing
operations (13,491) 1,575 (14,433) (6,487) 21
Net income (loss) per share of
common stock from continuing
operations (1) (.44) .06 (.55) (.26) 0
Weighted average number of
common shares outstanding (1) 30,956 27,674 26,375 25,087 24,008
(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.
Balance sheet data
Working capital 73,085 108,374 23,560 28,830 25,337
Total assets 133,660 161,661 54,288 55,230 42,044
Long term obligations,
excluding current portion 11,472 537 503 400 896
Stockholders' equity 101,947 138,239 38,692 42,611 42,044
</TABLE>
All prior years' Selected Financial Data has been restated to reflect the
acquisition of Lens Express which has been accounted for as a pooling of
interests and the divestiture of the Company's vision center business which has
been reported as a discontinued operation.
25
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company manufactures and sells laser systems and related products to correct
vision disorders, participates in per procedure royalties from its ownership in
Pillar Point Partners and sells contact lenses and related products. The Company
also operates several centers that provide vision correction services to the
public. On January 30, 1997 the Company publicly announced its plan to
discontinue its vision center business. The Company anticipates that the
business will be disposed of by July, 1997. Accordingly, the results of
operations for this business have been classified as discontinued operations for
all periods presented in the consolidated financial statements. The Company is
continuing to evaluate its operations and strategies, which may result in the
acquisition by the Company of one or more additional businesses or the total or
partial disposition of one or more of the Company's businesses.
RESULTS OF OPERATIONS
1996 as compared with 1995
Revenues
Revenues for 1996 decreased 16.1% to $80.5 million from $95.9 million in 1995.
This decrease was primarily attributable to lower sales of laser systems and a
decrease in the average selling price of laser systems. This decrease in system
sales was offset in part by an increase in royalties. During 1996 the Company
also introduced several per procedure leasing programs, revenue from which will
be recognized over the lease term.
Due to slower than anticipated acceptance of laser vision correction in the U.S.
by the ophthalmic community and the general population, the long sales cycle for
laser systems, a decrease in demand for the Company's laser systems and
continued competition, system sales are likely to remain weak and the Company
may continue to experience a decrease in unit sales and the average selling
price of its laser systems in 1997.
Patent royalty revenues from Pillar Point Partners increased significantly in
1996 from 1995. Royalty revenue growth should continue in 1997 although there
are many risks and contingencies that could adversely affect this trend. Some of
these are: (a) consumer and professional acceptance of laser vision correction
fails to grow; (b) licensees fail to honor their royalty payment obligations;
(c) the Company's rights to collect such payments and to participate in the
profits of Pillar Point Partners are adversely affected. The Company, Visx and
Pillar Point Partners are involved in several lawsuits with respect to
royalties, patent infringement and related antitrust matters. If any of these
matters is resolved adversely to the Company it may have an adverse effect on
the Company's royalty revenues.
Cost of revenues
Cost of revenues as a percentage of revenues increased to 77.6% from 64.0%. The
increase in cost of revenues as a percentage of revenues was attributable to
unabsorbed fixed overheads due to lower sales of laser systems and the lower
average selling price of laser systems. These increases were partially offset by
lower cost of revenues as a percentage of revenues associated with per procedure
royalties.
If and when the FDA approves the Company's Excimer System to treat astigmatism,
most existing U.S. customers will require a software and hardware upgrade to
their existing Excimer Systems to treat astigmatism. The Company intends to
charge its customers for this upgrade with prices approximating its cost of the
upgrade.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1996 decreased 3.8% to $24.8
million from $25.8 million for 1995. This decrease was primarily a result of the
Company's effort to reduce controllable costs. This decrease was offset in part
by one-time costs incurred in the acquisition of Lens Express, Inc.
Research and Development Expenses
Research and Development expenses for 1996 increased 5.6% to $5.9 million from
$5.6 million for 1995. This increase was primarily related to increased spending
on the Company's regulatory efforts.
26
<PAGE>
Legal Expenses
Legal expenses for 1996 increased 161.8% to $6.0 million from $2.3 million for
1995. This increase is primarily related to patent litigation initiated by the
Company and/or Pillar Point Partners to defend its intellectual property, in
defense of Pillar Point Partners and in defense of shareholder litigation. The
Company expects to incur substantial legal expenses in 1997.
Net Income (Loss)
Net loss from continuing operations for 1996 was $13.5 million as compared to a
net income from continuing operations of $1.6 million for 1995. The net loss for
1996 was primarily due to lower revenues and higher legal expenses. On July 11,
1996 the Company announced a restructuring of its laser equipment business to
focus on key priorities and to reduce operating expenses and its operating loss.
There can be no assurance that the Company will achieve profitability in 1997.
Net loss from discontinued operations for 1996 increased to $23.4 million from
$4.5 million for 1995.
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
$19.7 million.
1995 as compared with 1994
Revenues
Revenues for 1995 increased 34.2% to $95.9 million from $71.5 million for 1994.
The increases were primarily attributable to higher sales of laser systems in
the U.S. and product upgrade revenue.
Cost of revenues
Cost of revenues as a percentage of revenues for 1995 decreased to 64.0% from
68.4% for 1994. This improvement was primarily attributable to the absorption of
fixed overheads over higher sales volumes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1995 decreased 12.3% to $25.8
million from $29.4 million for 1994. This decrease was primarily a result of the
Company's effort to reduce controllable costs.
Research and Development Expenses
Research and Development expenses for 1995 decreased 9.8% to $5.6 million from
$6.2 million for 1994. This decrease was primarily related to lower spending on
research and development projects and was offset in part by increased spending
on the Company's regulatory efforts.
Legal Expenses
Legal expenses for 1995 increased 77.4% to $2.3 million from $1.3 million for
1994. This increase is primarily related to litigation initiated by the Company
and/or Pillar Point Partners to defend its intellectual property and in defense
of Pillar Point Partners.
Net Loss
Net income from continuing operations for 1995 was $1.6 million as compared to a
net loss from continuing operations of $14.4 million for 1994. Net loss from
discontinued operations for 1995 increased to $4.5 million from $2.4 million for
1994.
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
$14.4 million at December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external debt and
equity financing. As of December 31, 1996, the Company's cash, cash equivalent
balances and short-term investments decreased $32.5 million to $63.4 million
from $95.9 million as of December 31, 1995. Cash used by operations of $28.0
million resulted primarily from the net operating loss of $36.9 million and a
decrease in accounts payable and accrued expenses of $5.9 million. These
decreases to cash,
27
<PAGE>
cash equivalents and short term investments were offset in part by a reduction
in accounts receivable of $7.7 million, depreciation and amortization of $3.6
million, and non-cash charges and working capital changes for discontinued
operations of $4.9 million.
Cash used by investing activities of $14.9 million resulted primarily from cash
invested in discontinued operations of $16.4 million and additions to property
and equipment of $5.6 million. This cash used by investing activities was offset
in part by a decrease in long and short term investments of $7.0 million.
Cash provided by financing activities of $12.6 million resulted from net
proceeds of long-term debt obligations of $13.0 million and proceeds from the
exercise of stock options of $.5 million. This cash provided by financing
activities was offset in part by cash used for financing activities of
discontinued operations of $1.0 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. At December 31, 1996, the
Company had no borrowings under this facility. Also in March 1996, the Company's
wholly-owned subsidiary, RCII, obtained a $20.0 million unsecured term loan. The
term loan is guaranteed by the Company. At December 31, 1996 $16.3 million of
borrowings were outstanding under this facility. All interest expense for the
year ended December 31, 1996 related to this obligation is included in the net
loss of discontinued operations. This obligation is included in the Company's
consolidated balance sheet as of December 31, 1996.
28
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ........................................................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 .......................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995
and 1994 ......................................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 .......................... F-6
Notes to Consolidated Financial Statements .......................................................................... F-7
</TABLE>
<PAGE>
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 27, 1997
F-2
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 44,013 $ 74,303
Short-term investments (note 16) 19,393 21,607
Receivables, net of allowance of $897 in 1996 and $974
in 1995 8,553 16,146
Inventories (note 4) 15,848 15,703
Prepaid expenses and other current assets 2,121 1,276
Due from related party (note 14) 1,726 238
Restricted cash (note 11) 1,502 1,535
Notes receivable from officers (note 5) 101 381
--------- ---------
Total current assets 93,257 131,189
--------- ---------
Property and equipment, net (note 6) 9,381 6,706
Long-term investments (note 16) 8,718 13,531
Patents, net (note 7) 6,747 6,795
Other assets, net 529 950
Net assets held for discontinued operations (note 3) 15,028 2,490
--------- ---------
TOTAL ASSETS $ 133,660 $ 161,661
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,771 $ 6,374
Accrued expenses (note 8) 5,974 9,287
Current maturities of long term debt (note 9) 5,246 3,148
Deferred revenue 3,634 3,423
Due to related party (note 14) 1,547 583
--------- ---------
Total current liabilities 20,172 22,815
Long term debt, less current maturities (note 9) 11,472 537
Deferred taxes 69 70
--------- ---------
Total liabilities 31,713 23,422
--------- ---------
Commitments and contingencies (notes 9 and 11)
Stockholders' equity (note 10):
Preferred stock, $.01 par value. Authorized 5,000,000 shares - -
Common stock, $.01 par value. Authorized 60,000,000 shares;
issued 31,024,709 shares in 1996 and 30,934,827 shares
in 1995 311 309
Additional paid-in capital 170,983 170,392
Accumulated deficit (69,187) (32,330)
--------- ---------
102,107 138,371
Treasury stock, at cost, 6,125 shares in 1996 and 5,284
shares in 1995 (160) (132)
--------- ---------
Total stockholders' equity 101,947 138,239
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 133,660 $ 161,661
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Net revenues $ 80,477 $ 95,898 $ 71,468
Cost of revenues 62,438 61,358 48,890
-------- -------- --------
Gross profit 18,039 34,540 22,578
Operating Expenses:
Selling, general and
administrative expenses 24,802 25,781 29,407
Research and development expenses 5,892 5,579 6,186
Legal expenses 6,009 2,295 1,294
-------- -------- --------
Total operating expenses 36,703 33,655 36,887
Operating (loss) income from
continuing operations (18,664) 885 (14,309)
-------- -------- --------
Other income 5,217 1,467 163
-------- -------- --------
Net (loss) income from
continuing operations before
provision for income taxes (13,447) 2,352 (14,146)
Provision for income taxes 44 777 287
-------- -------- --------
Net (loss) income from
continuing operations $(13,491) $ 1,575 $(14,433)
Discontinued Operations:
Loss from discontinued operations (18,766) (4,542) (2,366)
Loss on disposal of discontinued
operations ( 4,600) - -
-------- -------- --------
Loss from discontinued
operations (23,366) (4,542) (2,366)
-------- -------- --------
Net loss (36,857) (2,967) (16,799)
======== ======== ========
(Loss) income per share from
continuing operations (.44) .06 (.55)
Loss per share from discontinued
operations (.75) (.17) (.09)
-------- -------- --------
Net loss per share $ (1.19) $ (.11) $ (.64)
======== ======== ========
Weighted average number of
common shares outstanding 30,956 27,674 26,375
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Preferred stock Common Stock Additional Total
----------------- ------------------- paid-in Accumulated Treasury shareholder's
Shares Par value Shares Par value capital deficit stock equity
------ --------- ------ --------- ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 - $ -- 26,165 $262 $ 54,927 $(12,564) $ (5) $ 42,620
Sale of common stock, net of issuance costs - -- 526 6 11,112 -- -- 11,118
Retirement of treasury stock - -- (14) -- (305) -- 305 --
Other shares issued - -- 75 -- 1,082 -- -- 1,082
Exercise of stock options - -- 143 1 1,023 -- (343) 681
Net loss - -- -- -- -- (16,799) -- (16,799)
- ------- -------- ---- --------- -------- ----- ---------
Balance at December 31, 1994 - $ -- 26,895 $269 $ 67,839 $(29,363) $ (43) $ 38,702
= ======= ======== ==== ========= ======== ===== =========
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 - -- -- -- -- (2,967) -- (2,967)
- ------- -------- ---- --------- -------- ----- ---------
Balance at December 31, 1995 - $ -- 30,935 $309 $ 170,392 $(32,330) $(132) $ 138,239
= ======= ======== ==== ========= ======== ===== =========
Exercise of stock options - -- 85 1 507 -- (28) 480
Others shares issued - -- 5 1 84 -- -- 85
Net loss - -- -- -- -- (36,857) -- (36,857)
- ------- -------- ---- --------- -------- ----- ---------
Balance at December 31, 1996 - $ -- $ 31,025 $311 $ 170,983 $(69,187) $(160) $ 101,947
= ======= ======== ==== ========= ======== ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(36,857) $ (2,967) $(16,799)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 3,605 2,437 2,113
Provision (recovery) for losses on accounts receivable (78) (75) 357
Changes in operating assets and liabilities:
Accounts receivable, net 7,671 (5,991) 3,706
Inventories (145) (6,119) 3,281
Prepaid expenses and other current assets (844) (240) (126)
Accounts payable (2,603) 1,667 1,700
Accrued expenses (3,314) 2,772 1,751
Related party, net (524) 345 -
Discontinued operations - noncash charges
and working capital changes 4,858 117 (3)
Deferred revenue 209 279 (27)
-------- --------- --------
Net cash used by operating activities (28,022) (7,775) (4,047)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments 2,214 (13,112) (374)
Decrease (increase) in long-term investments 4,813 (13,531) -
Additions to property and equipment (5,642) (2,591) (1,673)
Purchase of patents and application costs (553) (245) (317)
Change in other assets 767 1,372 145
(Issuance) repayment of notes receivable from officers (101) 284 (100)
Change in restricted cash 33 (1,535) -
Net cash invested in discontinued operations (16,403) (2,188) 12
-------- --------- --------
Net cash used by investing activities (14,872) (31,546) (2,307)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of long-term debt 13,033 2,792 (386)
Proceeds from sale of common stock - 99,857 11,118
Proceeds from exercise of stock options 480 2,629 476
Proceeds from shares sold under Employee
Stock Purchase Plan 85 18 54
Net cash (used) provided by discontinued operations (994) (259) 823
-------- --------- --------
Net cash provided by financing
activities 12,604 105,037 12,085
-------- --------- --------
(Decrease) increase in cash and cash
equivalents (30,290) 65,716 5,731
Cash and cash equivalents at beginning of year 74,303 8,587 2,856
-------- --------- --------
Cash and cash equivalents at end of year $ 44,013 $ 74,303 $ 8,587
======== ========= ========
Supplemental disclosures
Interest paid $ 272 $ 427 $ 135
======== ========= ========
Income taxes paid $ 57 $ 863 $ 269
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Years ended December 31, 1996, 1995, and 1994
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, Inc. ("VISX") to hold certain U.S. patents
covering excimer laser systems and procedures. Through its wholly-owned
subsidiary, Lens Express, Inc., the Company sells contact lenses and related
products.
The Company has sold its vision correction centers in the U.K. and is divesting
its U.S. Vision Center Business, owned and operated by the Company's
wholly-owned subsidiary, Refractive Centers International, Inc. ("RCII"). RCII
was previously recorded as a business segment and has been reported as a
discontinued operation.
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 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 revenue under laser equipment operating leases
per the terms of the contract. The Company recognizes revenue on the sale of
contact lenses and related products upon shipment. 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 with the Company's equipment. The Company
recognizes revenue resulting from its share of Visx per procedure fees upon
distribution from Pillar Point Partners (see note 14).
Cash Equivalents
Cash equivalents consist of certificates of deposit and highly liquid debt
instruments with original maturities of three months or less.
Short and Long-term Investments
Short-term investments consist of investments that will mature within twelve
months of the balance sheet date. Long-term investments consist of investments
that will mature greater than twelve months from the balance sheet date. The
Company considers its investments as available-for-sale and carries the
investments at market, which approximates cost plus accrued interest. Unrealized
holding gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific identification
basis. These investments consist of U.S. Government Securities, mortgage-backed
securities and investment grade corporate bonds.
Financial Instruments
F-7
<PAGE>
The carrying amount of cash and cash equivalents, accounts payable and accrued
expenses approximates fair value because of the short-term maturity of these
items. The fair market value of long term debt approximates the carrying value
due to the floating interest rate.
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.
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.
Patents and Organization costs
Patents consist of patents and patent application costs. Patents are amortized
over the patents 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.
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 Expense
The Company expenses the production costs of advertising when the advertising
takes place. For the years ended December 31, 1996, 1995 and 1994 the Company
expensed $6,346, $4,126 and $5,300, respectively.
Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (OAPBO) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income (loss) and pro forma earnings (loss) per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an
F-8
<PAGE>
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
CompanyOs financial position, results of operations, or liquidity. 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
11.
Net Income (loss) Per Share
Net Income (loss) per common share is based on the weighted average number of
common shares outstanding during each year. After giving effect to stock options
considered to be dilutive Common Stock equivalents, fully diluted income per
share is not materially different from primary income per share.
Reclassifications and Restatement
Certain reclassifications were made to the 1995 and 1994 Consolidated Financial
Statements to conform to the 1996 presentation. The prior years Consolidated
Financial Statements have been restated to reflect the accounts of Lens Express,
Inc., which the Company acquired in May of 1996 and has accounted for as a
pooling of interests. The Company is divesting its Vision Center Business owned
and operated by RCII. Accordingly, the results of operations for this business
have been classified as discontinued operations for all periods presented in the
consolidated statements of operations.
3. Discontinued Operations
On January 30, 1997, the Company publicly announced its plan to discontinue its
Vision Center Business owned and operated by RCII. The Company anticipates that
the business will be disposed of by July, 1997. Accordingly, the results of
operations for this business have been classified as discontinued operations for
all periods presented in the consolidated financial statements. The net assets
held for discontinued operations of 15.0 million includes $10.0 million of short
term investments allocated to RCII, $8.1 million of net property and equipment
and a $4.6 million provision for operating losses during the phase-out period.
The net loss of the discontinued operations for the years ended December 31,
1996, 1995 and 1994 was $23,366, $4,542 and $2,366, respectively.
4. Inventories
Inventories consist of the following:
December 31,
-----------------------
1996 1995
---- ----
Raw materials and subassemblies $ 2,243 $ 5,802
Work in process 728 2,231
Finished goods 12,877 7,670
--------- --------
$ 15,848 $ 15,703
========= ========
5. Notes Receivable From Officers
Notes receivable from officers at December 31, 1996 consist of a demand note
receivable including accrued interest with an interest rate of 9%. Notes
receivable from officers at December 31, 1995 consist of a demand note
receivable including accrued interest with an interest rate of 7.25%.
6. Property and Equipment
Property and equipment consist of the following:
December 31,
----------------------
1996 1995
---- ----
Leasehold improvements $ 1,625 $ 1,402
Manufacturing and test equipment 8,552 6,703
Furniture, fixtures and office equipment 6,455 5,398
Laser equipment held for leases 3,494 981
---------- --------
$ 20,126 $ 14,484
Less Accumulated Depreciation (10,745) (7,778)
---------- -------
F-9
<PAGE>
Net Property and Equipment $ 9,381 $ 6,706
========== =======
Laser equipment held for leases is held under operating leases with customers.
Accumulated depreciation on such leased equipment as of December 31, 1996 and
1995 was $1.0 million and $.2 million, respectively. At December 31, 1996 $2.3
million of future minimum lease payments were due to the Company pursuant to its
operating lease agreements.
7. Patents
Patents consist of the following:
December 31,
--------------------------
1996 1995
---- ----
Patents $ 7,934 $ 7,381
Less Accumulated Amortization (1,187) (586)
--------- ---------
Net Patents $ 6,747 $ 6,795
========= =========
F-10
<PAGE>
8. Accrued Expenses
Accrued expenses consist of the following:
December 31,
--------------------------
1996 1995
---- ----
Accrued payroll and vacation $ 1,115 $ 1,192
Accrued warranty costs 932 2,623
Other accrued expenses 3,927 5,472
--------- ----------
$ 5,974 $ 9,287
========= ==========
9. Financing and Leasing Arrangements
Leases
Capital lease obligations consist of amounts due under equipment lease
agreements. At December 31, 1996, the cost and accumulated depreciation of the
related equipment was $1,299 and $523, respectively. The Company leases its
office and manufacturing facilities in the U.S. 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 $898,
$655 and $697, for the years ended December 31, 1996, 1995, and 1994,
respectively.
Financing Arrangements
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. At December 31, 1996, the
Company had no borrowings under this facility. Also in March 1996, the Company's
wholly-owned subsidiary, RCII, obtained a $20.0 million unsecured term loan. The
term loan is guaranteed by the Company. At December 31, 1996 $16.3 million of
borrowings were outstanding under this facility. The interest rate at December
31, 1996 was 8.25%. Interest expense related to this obligation is included in
the net loss of discontinued operations. This obligation is included
in the Company's consolidated balance sheet as of December 31, 1996.
At December 31, 1996, future payments of long term debt and capital leases and
minimum rental payments under noncancellable operating leases of continuing
operations were as follows:
<TABLE>
<CAPTION>
Long Term Debt Capital Leases Operating Leases
-------------- -------------- ----------------
<S> <C> <C> <C>
Year ending December 31:
1997 5,000 284 828
1998 5,000 150 837
1999 5,000 81 792
2000 1,250 12 512
2001 - - 206
Thereafter - - 5,058
---------- ------ -------
Minimum future debt payments 16,250 527 $ 8,233
=======
Less amounts representing interest - 59
---------- ------
Present value of minimum future debt
payments 16,250 468
Less current maturities of long term debt 5,000 246
---------- ------
Long term debt, less current maturities $ 11,250 $ 222
========== ======
</TABLE>
10. Stockholders' Equity
Common and Preferred Stock
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.
F-11
<PAGE>
Stock Option Plans
In March 1987, the Company adopted a Stock Option Plan (the "1987 Plan"). The
Plan permits the Company to grant both incentive and nonincentive stock options
to employees. In October of 1996, the Company's Board of Directors approved a
10% increase (282,492) in shares reserved for the 1987 Plan. At December 31,
1996, there were 3,107,415 shares of common stock reserved by the Board of
Directors for issuance under the 1987 Plan. Options generally vest within 3
years of grant date. Options granted under the 1987 Plan must be exercised not
later than 10 years from the date of grant.
The Company also has a Stock Option Plan for Outside Directors (the "Directors
Plan"). At December 31, 1996, there were 75,000 shares of common stock reserved
for issuance under the Directors Plan. Options vest one year from grant date.
Options granted under the Directors' Plan must be exercised not later than 10
years from the date of grant.
Options on 482,324 shares, 409,326 shares, and 488,776 shares were exercisable
under the plans at December 31, 1996, 1995, and 1994, with a weighted average
exercise price of $7.82, $11.52, and $8.79, respectively.
The following table summarizes activity under the Plans for each of the three
years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
Shares Weighted average
In thousands Price per share price per share
------------ --------------- ----------------
<S> <C> <C> <C>
Options outstanding, December 31, 1993 888,763 $ 10.37
Options granted at market price 189,555 $16.17 - 22.83 17.91
Options granted below market price 8,625 .67 - 10.50 7.51
Options lapsed or canceled (141,397) 16.11
Options exercised (50,841) 1.63 - 19.83 7.15
------
Options outstanding, December 31, 1994 894,705 12.13
Options granted at market price 68,102 19.17 - 33.75 23.31
Options granted below market price 36,938 20.00 20.00
Options lapsed or canceled (48,356) 18.17
Options exercised (248,314) .67 - 22.83 9.48
--------
Options outstanding, December 31, 1995 703,075 14.14
Options granted at market price 832,161 5.375 - 31.13 6.23
Options lapsed or canceled (329,012) 17.76
Options exercised (184,308) $4.33 - $22.83 7.58
--------
Options outstanding, December 31, 1996 1,021,916 $7.72
========= =====
</TABLE>
There were 210,256, 435,287, and 112,185 shares available for grants under the
Plans at December 31, 1996, 1995 and 1994, respectively. The weighted average
fair value of options granted during 1996 and 1995 was $3.43 and $12.33 per
option, respectively.
F-12
<PAGE>
The following table summarizes significant ranges of outstanding and exercisable
options under the Stock Option Plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Ranges of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.33 to $5.38 786,192 9.0 $ 5.35 356,013 $ 5.32
$5.50 to $14.50 123,080 7.0 12.80 87,732 13.37
$14.87 to $29.33 112,644 7.8 18.68 38,579 18.25
</TABLE>
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1996 1995
---- ----
Expected life 4 years 4 years
Interest rate 6.18% 6.38%
Volatility 65.3% 51.5%
Dividend yield 0% 0%
Stock based compensation costs would have increased pretax loss by $1.5 million
and $.7 million in 1996 and 1995 ($.05 and $.03 per share, respectively) if the
fair values of the options granted in that year had been recognized as
compensation expense on a straight-line basis over the vesting period of the
grant. The pro forma effect on net income for 1996 and 1995 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
Other Options Issued
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,
1996, all 225,000 shares were exercisable, and were exercised subsequent to year
end.
RCII 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 1995, the Company decreased the number of shares reserved from
2,500,000 to 800,000. During 1996, 83,500 and 606,250 shares were granted and
canceled, respectively. At December 31, 1996, 238,500 options were outstanding
at an option price of $.50 and 61,000 were exercisable. Options granted under
the plan must be exercised not later than 10 years from the date of grant. The
proforma disclosures for 1996 and 1995 related to the adoption of SFAS No. 123
are not material.
Employee Stock Purchase Plan
In May 1991, the Company adopted an Employee Stock Purchase Plan (the OPurchase
PlanO). The Purchase Plan is available to all eligible full-time employees,
excluding those owning 5% or more of the Company's Common Stock. Pursuant to the
Purchase Plan, employees can purchase the Company's Common Stock, at 85% of fair
market value, in an amount up to 5% of the employee's wages during the
semi-annual plan purchase period. Under the Plan, the Company sold 1,051 shares,
2,250 shares, and 8,210 shares in 1996, 1995, and 1994, respectively. The
Company has adopted the provisions of SFAS No. 123 for the Purchase Plan,
however, the proforma effect on net income for 1996 and 1995 of the 15% discount
is not material.
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
F-13
<PAGE>
entitled to purchase from the Company one-quarter of a share of Common Stock at
the exercise price of $12.50, 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 CompanyOs 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
entity's 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.
11. 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,
1996, the Company has received approximately $574 from the IDA under these
agreements.
On September 5, 1996 David F. Muller, the Company's Chairman and Chief Executive
Officer, was terminated from all positions with the Company and its
subsidiaries. On March 5, 1997 the Company and Dr. Muller entered into a
settlement agreement intended to resolve any and all disputes relating to Dr.
Muller's termination. Pursuant to the agreement, Dr. Muller will receive
remuneration for certain services.
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
U.S. Patent Litigation against VISX
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 Azema Patent. As
required by the terms of the governing agreements, the Company offered Pillar
Point Partners the opportunity to acquire exclusive rights under the 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 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 and on March 3, 1997, VISX moved for Summary Judgment. The Court has
scheduled a trial, if necessary, for July 21, 1997. There can be no assurance
that the Company will prevail in this proceeding.
F-14
<PAGE>
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 appealed the
judgment. On October 17, 1996, Schwind agreed to dismiss its appeal and pay the
Company 1.23 million German marks (approximately $800,000) in satisfaction of
the Company's judgment. The Chiron Technolas appeal was recently decided in
favor of the Company. Chiron Technolas may appeal further to the German Supreme
Court. If the Chiron Technolas appeal is decided against the Company, the
infringement verdict in Germany will be overturned and the Company 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,
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, 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.
Pillar Point Partners Patent Litigation
In March 1995, Pillar Point Partners sued LaserSight, Inc. for patent
infringement in the Federal District Court for Delaware. 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. On March 26, 1997, the parties
announced that they had entered into a settlement agreement pursuant to which
the litigation will be dismissed without prejudice. In the settlement agreement,
Pillar Point, VISX and Summit have granted LaserSight a release from liability
for patent infringement claims arising before the effective date of the
agreement, and LaserSight has agreed to make a nominal payment and to notify
Pillar Point before it begins manufacturing or selling in the United States.
Pillar Point Partners has also commenced patent infringement litigation
against certain ophthalmologists believed to be using homemade laser systems not
licensed under patents held by Pillar Point Partners, as well as two alleged
manufacturers of such laser systems and an individual believed to be inducing
infringement of such patents. These actions are presently pending as Pillar
Point Partners, et al. v. David Dulaney, et al. (U.S. District Court, District
of Arizona, Civil Action No. 96-2051PHXPGR); Pillar Point Partners, et al. v.
Jon G. Dishler, et al. (U.S. District Court, District of Colorado, Civil Action
No. 96-N-2351); Pillar Point Partners, et al. v. Jui-Teng Lin, et al. (U.S.
District Court, Middle District of Florida, Civil Action No. 97-54-CV-ORL-22);
and Pillar Point Partners, et al. v. William D. Appler (U.S. District Court,
District of Columbia, Civil Action No. 1:96CV02082). The defendants in the
Barnet and Dishler actions have asserted counterclaims seeking declarations that
the patents in suit are invalid and unenforceable. Those defendants have also
raised antitrust counterclaims. In addition, the Company is pursuing litigation
against certain other parties engaged in similar activities, including an
importer, a service provider and certain other ophthalmologists, some of whom
have asserted antitrust and other counterclaims against the Company.
In October, 1996, Autonomous Technologies Corporation ("Autonomous")
sued Pillar Point Partners, the Company and VISX (and certain affiliates of the
Company and VISX) in the Federal District Court for Delaware. In this action,
Autonomous seeks, inter alia, a declaratory judgment that it does not infringe a
certain United States Patent held by Pillar Point Partners, or, alternatively, a
judgment ordering that all U.S. patents held by Pillar Point Partners, together
with their foreign counterparts, be deemed unenforceable and/or be licensed to
Autonomous.
VISX Royalty Action
On August 28, 1996, an affiliate of VISX, purporting to act on behalf
of Pillar Point Partners, commenced a lawsuit against the Company in the United
States District Court for the District of Massachusetts. The suit alleges
F-15
<PAGE>
that the Company owes equipment royalties to Pillar Point Partners of not less
than $4.5 million together with interest, costs and attorneys' fees. The Company
denies these allegations and intends to contest them vigorously. However, there
can be no assurance that the lawsuit will be resolved in the Company's favor or
that an adverse judgment or settlement would not have a material adverse affect
on the results of operations of the Company in the period in which it occurs.
FTC Investigation
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 has issued subpoenas to the Company
and others (including one officer of the Company and David F. Muller, the
Company's former Chairman and Chief Executive Officer) for testimony and 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 may 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 conclude 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
ultimately be ordered in the event that any such proceeding were determined
adversely to the Company and/or Pillar Point Partners.
Antitrust 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. On
September 5, 1996, a Nevada ophthalmologist, John R. Shepherd, through his
professional corporation, commenced a similar lawsuit against the same parties,
in the same court, alleging substantially similar claims and seeking
substantially similar relief. Pillar Point Partners has stated that it believes
the California lawsuits are without merit and is contesting the suits
vigorously.
Seriani Litigation
On October 26, 1992, Joseph Seriani brought suit against Lens and
certain of its former shareholders in the Florida Circuit Court. The suit
alleged violations of the Florida Civil Remedies for Criminal Practices Act -
the Florida civil RICO statute - based on events which allegedly occurred in the
mid-1980s. Seriani's claims against Lens were 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 an amended complaint which included the
Company as an additional defendant. On November 25, 1996, the Serianis
voluntarily dismissed their action against the Company and on March 7, 1997
voluntarily dismissed their action against the remaining defendants, in each
case without prejudice. The Company believes that the Serianis' suit against the
Company and Lens was without merit.
Vernon Litigation.
On or about March 23, 1994, a former Lens employee filed a charge of
discrimination against Lens with the Equal Employment Opportunity Commission,
alleging sexual discrimination and harassment by certain co-employees, and
retaliation against her by Lens when she was terminated after making the claim.
After an investigation, the EEOC's Legal Department concluded that no probable
cause existed. On or about February 1, 1996, the former employee sued Lens and
two Lens managers in the United States District Court for the Southern District
of Florida, alleging sexual harassment and other state and federal charges and
seeking unspecified compensatory and punitive damages. All defendants have
denied the allegations. Subsequently, other present or former employees have
made similar allegations, and one has indicated that she intends to file suit.
While Lens believes the claims to be without merit, there can be no assurance
that it will prevail in this litigation. Lens cannot predict the range of
possible compensatory damages, if any, or whether punitive damages may be
assessed.
Shareholder Actions.
Between August, 1996 and October, 1996, fourteen shareholder actions
were commenced against the Company and certain of its officers in the United
States District Court for the District of Massachusetts. The actions were
consolidated, by order of the Court entered December 2, 1996, as In re Summit
Technology Securities Litigation, Civil Action No. 96-11589-JCT (the "Exchange
Act Action"). Plaintiffs filed a First Amended and Consolidated Class Action
Complaint (the "Complaint") on January 10, 1997.
In the Complaint, plaintiffs claim to have been purchasers of the
Company's Common Stock at various times between May, 1995 and June, 1996. They
claim violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 arising out of public statements made by the Company or its officers.
Plaintiffs allege that
F-16
<PAGE>
the statements made material misrepresentations of fact, or failed to disclose
material information necessary to make statements made not misleading,
concerning a variety of matters -- including, for example, alleged sale of laser
systems in contravention of FDA regulations, alleged patent royalty payments
owed by the Company, alleged defects in the manner by which the Company obtained
FDA approval for the Company's Excimer System, alleged adverse side effects of
use of the Company's laser systems, alleged size of the market for LVC systems
and procedures in the United States, alleged competitive position of the
Company's Excimer System compared with excimer systems under development or sold
by competitors, and an alleged "write-off" arising from the acquisition of Lens
Express, Inc. Among the statements which plaintiffs claim to have been
misleading or to have unlawfully omitted material information are statements
contained in a number of the Company's filings with the SEC pursuant to the
reporting and other requirements of the Securities Exchange Act of 1934 or the
Securities Act of 1933. Such filings include:
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995
The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995
The Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1995
The Company's Registration Statement on Form S-3 and Prospectus dated
October 23, 1995
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995
In addition, plaintiffs claim violations of Section 20A of the
Securities Exchange Act of 1934 by certain officers of the Company due to
alleged sales of Common Stock of the Company while in the possession of material
non-public information.
Plaintiffs seek certification of the Exchange Act Action as a class
action, purportedly on behalf of all purchasers of the Company's Common Stock,
other than defendants and certain affiliated persons and entities, between March
31, 1995 and July 3, 1996. Plaintiffs seek unspecified damages, interest, costs
and expenses.
On October 1, 1996, an additional action was commenced in the United
Sates District Court for the District of Massachusetts against the Company, its
directors, certain of its officers and the four underwriters of the Company's
October, 1995 Common Stock offering. The action was coordinated with In re
Summit Technology Securities Litigation, Civil Action No. 96-11589, by order of
the Court dated December 2, 1996 and is presently pending as In re Summit
Technology Securities Litigation (the Burke Action), Civil Action No. 96-11589
(the "Burke Action"). Plaintiff filed an Amended Complaint (the "Amended
Complaint") on January 10, 1997.
In the Amended Complaint, plaintiff claims to have purchased shares of
the Company's Common Stock pursuant to the Company's Registration Statement on
Form S-3 dated October 23, 1995, and declared effective by the Securities and
Exchange Commission on or about October 24, 1995 (the "October Registration
Statement"). He claims violations of Sections 11, 12(2) and 15 of the Securities
Act of 1933 arising out of alleged material misstatements of fact in the October
Registration Statement or failures to disclose material information necessary to
make statements made in the October Registration Statement not misleading. He
claims misrepresentations or omissions concerning a variety of matters --
including, for example, alleged adverse side effects of use of the Company's
laser products, alleged sale by the Company of its products in contravention of
FDA regulations and alleged royalty payments owed by the Company. The Amended
Complaint seeks unspecified damages, interest, costs and expenses. The plaintiff
seeks certification of the Burke Action as a class action, purportedly on behalf
of all purchasers of the Company's Common Stock pursuant to the October
Registration Statement, other than defendants and certain affiliated persons and
entities.
On February 27, 1997, the Company moved to dismiss the Exchange Act
Action and the Burke Action for failure to state a claim on which relief could
be granted. The Court has scheduled a hearing on the motions for May 5, 1997.
The Company believes that the allegations in the Exchange Act Action
and the Burke Action are without merit, and it intends to defend the actions
vigorously. There can be no assurance that the Company will not be
F-17
<PAGE>
served with additional complaints of a similar nature in the future, that the
Company will ultimately prevail in the pending or any possible additional
actions, or that the actions, individually or in the aggregate, will not have a
material adverse effect on the Company.
On December 20, 1996, a shareholder of the Company filed in the United
States District Court for the District of Massachusetts a derivative action,
purportedly on behalf of the Company, against the Company as nominal defendant,
its directors and certain of its present or former officers. This action is
presently pending as West v. Muller, et al, Civil Action No. 96-12576-JLT (the
"Derivative Action"). The complaint in the Derivative Action alleges that the
defendant directors and officers caused the Company to make public statements,
in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and of Sections 11 and 12 of the Securities Act of 1933, which contained
material misrepresentations of fact or which failed to disclose material
information necessary to make the statements made not misleading. It alleges
that this conduct has rendered the Company liable to the plaintiffs in, and has
exposed the Company to the expense and inconvenience of defending, the Exchange
Act Action and the Burke Action and has harmed the Company's reputation, thereby
limiting its access to capital markets. The complaint further alleges that the
defendant directors and officers improperly traded in the Company's Common Stock
based upon material non-public information. The complaint seeks recovery from
the defendant directors and officers, in an unspecified amount, for the damages
allegedly caused by their alleged misconduct. The Company has not been served
with the complaint.
Lens Express
In November, 1996, certain former shareholders of Lens (the "Lens
Shareholders") made demand on the Company for rescission of the Company's
acquisition of Lens, asserting that, prior to the acquisition, they had been
misled "regarding the product, markets, operations and financial prospects" of
the Company. Subsequently, the Lens Shareholders withdrew their rescission
demand and entered into settlement discussions with the Company. These
discussions are continuing. However, there can be no assurance that the Lens
Shareholders will not renew their rescission demand or that the matter will be
resolved without resort to litigation. The Company believes the Lens
Shareholders' claims to be without merit.
12. Income Taxes
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:
December 31,
--------------------
1996 1995
-------- --------
Deferred tax asset:
Net operating loss $ 18,595 $ 11,547
Research and development credit 721 761
Inventory adjustments 349 856
Warranty/ other reserves 509 1,623
Other temporary differences 250 426
-------- --------
Subtotal $ 20,424 $ 15,213
Valuation allowance (19,695) (14,413)
-------- --------
$ 752 $ 800
Deferred tax liability:
Patent costs 534 689
Other temporary differences 195 111
-------- --------
$ 729 $ 800
-------- --------
Net Deferred Tax Asset $ 0 $ 0
======== ========
F-18
<PAGE>
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, 1994, was $13,092. The net
change in the total valuation allowance for the years ended December 31, 1996
and December 31, 1995 was $5,282 and $1,321, respectively.
The provision for income taxes differs from the amount computed by applying the
federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected benefit at federal
income tax rate $ (4,706) $ 823 $ (4,951)
Foreign, state, and other
taxes, net of federal benefit 46 126 64
Change in valuation allowance
for deferred tax assets
allocated to income tax expense 4,704 (172) 5,174
-------- ------ --------
Provision for income tax $ 44 $ 777 $ 287
======== ====== ========
</TABLE>
At December 31, 1996, the Company had an operating loss carryforward of
approximately $46,487 available to offset future federal taxable income from
continuing operations. The net operating loss amount includes approximately
$6,141 of employee stock option compensation deductions which will be credited
to additional paid-in capital when realized. The Company is currently divesting
RCII and has reported RCII as a discontinued operation. The operating loss
carryforward attributed to RCII of $15,203 will remain with the divested entity.
As a result, the Company will not be able to utilize that portion of the
operating loss carryforward to offset future federal taxable income from
continuing operations. This amount has been removed from the deferred tax asset
and operating loss carryforward as stated above.
In addition, the Company has research and experimentation tax credit
carryforwards of approximately $721. The operating loss and tax credit
carryforwards expire in varying amounts through 2011. 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, 1996,
utilization of the Company's net operating loss carryforward is not limited by
Section 382.
There are no unremitted earnings in the Company's foreign subsidiaries.
The Internal Revenue Service is currently in the process of an Income Tax
Examination of Lens Express for the years ended June 30, 1994 and June 30, 1995.
The Company has no other income tax examinations pending.
13. Retirement Plans
The Company sponsors defined contribution retirement plans ("the plans").
Employees may contribute various percentages 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 the employeeOs contributions.
For the years ended December 31, 1996, 1995 and 1994, the Company contributed
cash and common stock valued at $127, $91 and $62, 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. The Company
records revenue on distributions from Pillar Point Partners resulting from the
Company's share of Visx royalties. Administrative expenses paid to Pillar Point
Partners are classified as operating expenses as incurred. For the year ended
December 31, 1996 and 1995, Summit royalty revenues were $7.1 million and $.2
million, respectively.
F-19
<PAGE>
15. Supplemental Cash Flow Information
For the years ended December 31, 1996, 1995, and 1994, the Company recorded the
following non cash transactions:
1996
None
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.
16. Investment Securities
Short and long term investment securities consists of the following at December
31, 1996 and 1995:
Fair Value
At December 31, 1996
U.S. Government $ 14,512
Mortgage-backed $ 5,759
Corporate Bonds $ 7,840
------------
$ 28,111
============
At December 31, 1995
U.S. Government $ 12,160
Mortgage-backed $ 2,002
Corporate Bonds $ 20,976
------------
$ 35,138
============
The Company's amortized cost approximates fair value of the investment
securities and as a result the Company has no unrealized holding gains or
losses.
As of December 31, 1996, the Company had $26,611 of debt securities due within
five years of the balance sheet date and had $1.5 million of debt securities due
after five years of the balance sheet date. As of December 31, 1995, all of the
Company's debt securities of $35,138 were due within five years of the balance
sheet date.
Gross realized gains included in other income in 1996 and 1995 were $104 and
$11, respectively, and gross realized losses included in other income in 1996
was $70 and were immaterial in 1995.
17. 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.
Net sales, net income (loss) from continuing operations, and net income (loss)
of the separate companies for the restated periods were:
Year ended December 31, 1995
F-20
<PAGE>
<TABLE>
<CAPTION>
SUMMIT LENS DISCONTINUED
TECHNOLOGY, INC. EXPRESS, INC. OPERATIONS COMBINED
---------------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net Revenues $44,311 $51,587 $ - $95,898
Net Income from continuing operations 1,030 545 - 1,575
Net income (loss) $1,030 $ 545 $ (4,542) $(2,967)
Year ended December 31, 1994
</TABLE>
<TABLE>
<CAPTION>
SUMMIT LENS DISCONTINUED
TECHNOLOGY, INC. EXPRESS, INC. OPERATIONS COMBINED
---------------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Net Revenues $23,370 $ 48,098 $ - $71,468
Net Loss from continuing operations (13,015) (1,418) - (14,433)
Net loss $(13,015) $ (1,418) $ (2,366) $(16,799)
</TABLE>
The following adjustments were made to the previously reported December 31, 1993
stockholders' equity accounts:
<TABLE>
<CAPTION>
Common Stock
------------ Additional paid Accumulated Total Shareholders'
Shares Par Value in capital Deficit equity adjustment
------ --------- ---------- ------- -----------------
<S> <C> <C> <C> <C>
1,709 $ 17 $ 163 $ 2,057 $ 2,237
</TABLE>
F-21
<PAGE>
Independent Auditor's Report
----------------------------
The Board of Directors and Stockholders
Summit Technology, Inc.:
Under date of February 27, 1997, we reported on the consolidated balance sheets
of Summit Technology, Inc. as of December 31, 1996 and 1995, 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, 1996, as contained
in the 1996 annual report to stockholders. In connection with our audits of the
aforementioned consolidated 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 consolidated 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 27, 1997
Schedule II
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1994, 1995 and 1996 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, 1994 Balance at Beginning Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $760 $357 $68 $1,049
December 31, 1995 Balance at Beginning Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
Allowance for Doubtful Accounts $1,049 ($75) $- $974
December 31,1996 Balance at Beginning Amounts Balance at End
of Period Additions Written Off of Period
Allowance for Doubtful Accounts $974 $186 $263 $897
</TABLE>
F-22
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
29
<PAGE>
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
The documents listed below are included in Item 8 of Part II of this Report.
Independent Auditors' Report
Consolidated Balance Sheets
December 31, 1996 and 1995
Consolidated Statements of
Operations-Years Ended December 31,
1996, 1995 and 1994
Consolidated Statement of Cash
Flows-Years Ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders'
Equity-Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Included in Item 8 of Part II 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.
30
<PAGE>
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:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated April 19, 1996 among the Company,
Summit Acquisition Corporation, Lens Express, Inc., Mordechai Golan, Creslin
Limited, Menderes Akdag and Huseyin Kizanlikli, incorporated by reference to the
Company's Form 8-K dated May 15, 1996.
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
3.3 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
31
<PAGE>
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,
incorporated by reference to Exhibit 10.9 to the 1992 10-K
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)
Reports on Form 8-K.
During the quarter ended December 31, 1996, the
Company filed one report on Form 8-K dated October 8, 1996.
</TABLE>
* Management Compensation Plan
32
<PAGE>
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 28, 1997 By: /s/ D. Verne Sharma
-------------------------- ----------------------------------
D. Verne Sharma, President
and Acting Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ D. Verne Sharma President and Acting March 28, 1997
- ---------------------------------------- Chief Executive Officer
D. Verne Sharma
/s/ Rajiv P. Bhatt Executive Vice President March 28, 1997
- --------------------------------------- and Chief Financial Officer
Rajiv P. Bhatt
/s/ Jeffrey A. Bernfeld
- --------------------------------------- Director March 28, 1997
Jeffrey A. Bernfeld
/s/ Richard F. Miller
- --------------------------------------- Director March 28, 1997
Richard F. Miller
/s/ John A. Norris
- --------------------------------------- Director March 28, 1997
John A. Norris
/s/ Richard M. Traskos
- --------------------------------------- Director and March 28, 1997
Richard M. Traskos Chairman of the Board
</TABLE>
33
<PAGE>
Exhibit Index
-------------
Exhibit Description
- ------- -----------
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule (For EDGAR Filing
Purposes Only)
Consent of Independent Accountants
----------------------------------
The Board of Directors
Summit Technology, Inc.
We consent to incorporation by reference in the registration statements (No.
33-25169), (No. 33-41451), (No. 33-49162), (No. 33-79158) and (No. 333-03765) on
Forms S-8, S-8, S-8, S-3 and S-3, respectively, of Summit Technology, Inc. of
our report dated February 27, 1997, relating to the consolidated balance sheets
of Summit Technology, Inc. and subsidiaries as of December 31, 1996 and 1995,
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, 1996, which reports appear in the December 31, 1996 annual
report on Form 10-K of Summit Technology, Inc.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 44,013
<SECURITIES> 19,393
<RECEIVABLES> 9,450
<ALLOWANCES> 897
<INVENTORY> 15,848
<CURRENT-ASSETS> 93,257
<PP&E> 20,126
<DEPRECIATION> (10,745)
<TOTAL-ASSETS> 133,600
<CURRENT-LIABILITIES> 20,172
<BONDS> 11,472
0
0
<COMMON> 311
<OTHER-SE> 101,636
<TOTAL-LIABILITY-AND-EQUITY> 133,660
<SALES> 80,477
<TOTAL-REVENUES> 0
<CGS> 62,438
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 36,703
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> (13,447)
<INCOME-TAX> 44
<INCOME-CONTINUING> (13,491)
<DISCONTINUED> (23,366)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,857)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
