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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended: SEPTEMBER 30, 1997
Commission File Number: 0-16937
SUMMIT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2897945
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21 HICKORY DRIVE WALTHAM, MA 02154
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(Address of principal executive offices) (Zip Code)
617-890-1234
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
On September 30, 1997, 31,262,474 shares of common stock, par value $.01 per
share were outstanding.
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<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
(Unaudited)
--------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,374 $ 44,013
Short-term investments 33,939 19,393
Short-term investments held for distribution 17,550 -
Accounts receivable, net 9,648 8,553
Inventories, net 16,032 15,848
Prepaid expenses and other current assets 1,169 2,121
Due from related party 580 1,726
Restricted cash 1,262 1,502
Notes receivable from officers 594 101
-------- --------
Total current assets 108,148 93,257
Long-term investments 17,422 8,718
Property and equipment, net 8,463 9,381
Patents, net 4,885 6,747
Other assets, net 497 529
Net assets held for discontinued operations - 15,028
-------- --------
Total assets $139,415 $133,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,533 $ 3,771
Accrued expenses 9,183 5,974
Current maturities of long-term debt 5,077 5,246
Deferred revenue 2,872 3,634
Due to related party 1,049 1,547
Dividend payable 17,550 -
-------- --------
Total current liabilities 38,264
20,172
Long-term debt, less current maturities 7,702 11,472
Deferred taxes 69 69
Stockholders' equity:
Common stock, $.01 par value. Authorized 60,000,000
shares; Issued 31,262,474 shares in 1997
and 31,024,709 in 1996 313 311
Additional paid-in capital 153,847 170,983
Accumulated deficit (60,620) (69,187)
-------- --------
93,540 102,107
Treasury stock, at cost, 6,125 shares
in 1997 and 1996 (160) (160)
-------- --------
Total stockholders' equity 93,380 101,947
-------- --------
Total liabilities and stockholders' equity $139,415 $133,660
======== ========
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</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
(CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net revenues $22,897 $20,052 $67,239 $ 62,599
Cost of revenues 14,473 13,564 42,686 44,737
------- ------- ------- --------
Gross profit 8,424 6,488 24,553 17,862
Operating expenses:
Selling, general and administrative 5,698 4,548 14,367 18,865
Research and development expenses 1,447 1,252 4,683 4,525
Legal expenses 1,883 1,297 6,132 3,617
------- ------- ------- --------
Total operating expenses 9,028 7,097 25,182 27,007
Operating loss from
continuing operations (604) (609) (629) (9,145)
Other income 649 1,193 1,954 4,035
------- ------- ------- --------
Income (loss) from continuing operations
before provision for income taxes 45 584 1,325 (5,110)
Provision (benefit) for income taxes 21 - 129 (2)
------- ------- ------- --------
Net income (loss) from
continuing operations 24 584 1,196 (5,108)
Loss from discontinued operations (3,340) (4,524) (3,340) (14,367)
Gain on sale of
discontinued operations 10,711 - 10,711 -
------- ------- ------- --------
Net income (loss) $ 7,395 $(3,940) $ 8,567 $(19,475)
======= ======= ======= ========
Net income (loss) per share
from continuing operations $ - $ .02 $ .04 $ (.17)
Net loss per share
from discontinued operations (.10) (.15) (.10) (.46)
Gain on sale of
discontinued operations .34 - .34 -
------- ------- ------- --------
Net income (loss) per share $ .24 $ (.13) $ .28 $ (.63)
======= ======= ======= ========
Weighted average number of
common shares outstanding 31,256 30,963 31,146 30,950
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
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<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net income (loss) $ 8,567 $(19,475)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Gain on sale of discontinued operations (10,711) --
Depreciation and amortization 2,742 1,935
Changes in operating assets and liabilities:
Accounts receivable, net (1,095) 7,626
Inventories, net (184) (4,562)
Prepaid expenses and other current assets 952 (2,044)
Accounts payable (1,238) (1,894)
Accrued expenses 3,069 (2,129)
Deferred revenue (762) (1,450)
Related party, net 648 1,001
Operating activities of discontinued operations (14,653) (650)
-------- --------
Net cash used by operating activities (12,665) (21,642)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (14,546) (5,470)
Decrease (increase) in long-term investments 4,191 (1,056)
Additions to property and equipment, net (1,405) (4,560)
Decrease in restricted cash 240 30
Net issuance (repayment) of notes
receivable from officers (493) 59
Other 1,475 12
Investing activities of discontinued operations 9,948 (6,006)
-------- --------
Net cash used by investing activities (590) (16,991)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of long-term debt (3,939) 13,102
Proceeds from exercise of stock options 416 469
Financing activities of discontinued operations 139 (993)
-------- --------
Net cash provided (used) by financing activities (3,384) 12,578
Decrease in cash and cash equivalents (16,639) (26,055)
Cash and cash equivalents at beginning of period 44,013 74,304
-------- --------
Cash and cash equivalents at end of period $ 27,374 $ 48,249
======== ========
Supplemental cash flow information:
Interest paid $ 839 $ 894
Income taxes paid $ 94 $ 49
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</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Summit Technology, Inc. and subsidiaries (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.
On August 18, 1997, the Company sold its wholly-owned subsidiary Refractive
Centers International, Inc. (RCII) to LCA-Vision Inc. (LCA) for 16,164,361
shares of LCA common stock. Prior to the sale, RCII owned and operated the
Company's Vision Center business. RCII was previously recorded as a business
segment and has been reported as a discontinued operation (see Note 4).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of the Company, these consolidated
financial statements contain all adjustments (consisting of only normal,
recurring adjustments) necessary to present fairly the consolidated financial
position of the Company at September 30, 1997 and the results of operations for
the three and nine month periods ended September 30, 1997 and 1996 and cash
flows for the nine month periods ending September 30, 1997 and 1996.
The accompanying consolidated financial statements and related notes should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1996. The results of operations for the three and nine month
periods ended September 30, 1997 are not necessarily indicative of the results
to be expected for the full year.
Net Income (loss) Per Share
Net income (loss) per common share is based on the weighted average number of
common shares outstanding during each period after giving effect to stock
options considered to be dilutive common stock equivalents.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards No. 128 Earnings Per Share
("Statement 128"). Statement 128 replaces the presentation of primary earnings
per share ("EPS") and fully diluted EPS with basic EPS and diluted EPS,
respectively. Statement 128 is effective for both interim and annual periods
ending after December 15, 1997 and once implemented will require restatement of
all prior EPS data to conform with Statement 128. Such restatement will not be
material.
5
<PAGE> 6
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVENTORIES (IN THOUSANDS)
Inventories consist of the following:
------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------------------------------------------------------
Raw materials and subassemblies (net) $ 1,426 $ 2,243
Work in process 1,416 728
Finished goods 13,190 12,877
------- -------
$16,032 $15,848
------- -------
------------------------------------------------------------------
(4) DISCONTINUED OPERATION
In January 1997, the Company announced its plan to discontinue its Vision Center
Business owned and operated by Refractive Centers International, Inc. (RCII), a
wholly owned subsidiary of the Company. Accordingly, the results of operations
for this business were classified as discontinued operations as of December 31,
1996. On August 18, 1997, the Company sold RCII to LCA-Vision Inc. (LCA) for
16,164,361 newly issued shares of LCA common stock. The Company intends to
distribute 9,000,000 shares of LCA common stock to its shareholders as soon as
practical after the registration of such shares by LCA. The remaining shares,
which represent approximately 20 percent of LCA's outstanding shares, are held
by the Company and may not be sold prior to May 17, 1998. Accordingly, the
9,000,000 shares of LCA common stock have been classified as a short-term
investment held for distribution valued at $ 17.6 million and the remaining
shares have been classified as a long-term investment valued at $12.9 million as
of September 30, 1997.
The sale of the discontinued operation resulted in a net gain of $ 10.7 million,
which includes a gain on the sale of net assets held for discontinued operation
and accruals for other estimated costs to be incurred in connection with the
sale of RCII and distribution of LCA common stock.
6
<PAGE> 7
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CONTINGENCIES
PILLAR POINT PARTNERS PATENT LITIGATION
Pillar Point Partners has 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 one alleged
manufacturer 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
Dulaney and Dishler actions have asserted counterclaims seeking declarations
that the patents in suit are invalid and unenforceable. Those defendants have
also raised antitrust and Lanham Act counterclaims. In addition, the Company is
pursuing litigation against certain other parties engaged in similar activities,
including, 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.
In July, 1997, John Taboada filed a complaint in the United States District
Court for the Western District of Texas against Stephen L. Trokel, Visx, Visx
Partner, Inc., Summit Partner, Inc., and Pillar Point Partners. In the first two
counts of the complaint, Taboada seeks a declaration that he is either the sole
inventor or a joint inventor of U.S. Patent No. 5,108,388 (the " `388 Patent")
which names Dr. Trokel as the inventor. The `388 Patent has been assigned to
VISX and is licensed to Pillar Point Partners. Taboada also seeks to recover
royalties paid to one or more of the defendants for licenses granted under `388
Patent, charges defendants with infringement of the `388 Patent, and seeks
monetary damages and injunctive relief.
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 included in current assets as restricted cash of $1.5 million at December
31, 1996.
7
<PAGE> 8
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
FEDERAL TRADE COMMISSION 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. The FTC investigating staff has informed the Company that it has
reason to believe that a violation of the Federal Trade Commission Act may have
occurred and that it is prepared to recommend that the Commission issue an
administrative complaint under the Act. The staff has also invited the Company
to engage in negotiation regarding these matters. There can be no assurance
that, if any such staff recommendation were made, the Commission would
ultimately authorize the filing of a complaint. 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' patent arrangements with the Federal Trade Commission Act 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 an administrative action, if one were commenced by the FTC,
will conclude that Pillar Point Partners' patent arrangements comply with U.S.
antitrust laws. The Company is unable to predict with certainty whether or not,
or when, any proceeding may be brought by the FTC, 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. The Company
intends to vigorously contest any action challenging the lawfulness of Pillar
Point Partners' patent arrangements.
8
<PAGE> 9
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 these California
lawsuits are without merit and is contesting the suits vigorously.
On November 5, 1997, Antoine Garabet, M.D., Inc. and Abraham Shammas, M.D.,
d/b/a The Laser Eye Center, 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 seeking a declaratory judgment that the patents
held by Pillar Point are invalid and unenforceable on account of alleged
antitrust violations and alleging fraud in connection with the Company's sales
and marketing activities. The plaintiffs seek compensatory damages of at least
$48,585.69, punitive damages of an unspecified amount, injunctions against
enforcement of the Pillar Point patents and against alleged continuing
violations of the antitrust laws, attorneys' fees and costs. The Complaint has
not been served on the Company.
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. On
March 24, 1997, the Seriani's commenced a new lawsuit against Lens and others in
the United States District Court for the Southern District of Illinois, alleging
substantially similar claims. The Company believes that the Serianis' suits
against the Company and Lens are and were without merit.
LENS EXPRESS EMPLOYEE LITIGATION
On or about February 1997, a former employee allegedly filed an administrative
complaint with the Florida Commission on Human Relations against Lens and a
former employee of Lens, alleging sexual discrimination and harassment by the
former employee, retaliatory demotion, and constructive discharge. On or about
May 1997, a current employee filed an administrative complaint with the same
Florida agency, also alleging sexual discrimination and harassment by the same
former employee. The Florida Commission referred both complaints to the U.S.
Equal Employment Opportunity Commission for investigation. No investigations
were completed before each complainant, represented by the same counsel, sued
Lens Express and the former employee in Florida Circuit Court on or about
September 1997. Each complaint alleges sexual discrimination and harassment
under the Florida Civil Rights Act and various other state common law claims;
the former employee also alleges retaliatory demotion under the Florida Civil
Rights Act. Each plaintiff seeks a court order prohibiting such alleged
discrimination as well as unspecified compensatory and punitive damages. Lens
has moved to dismiss each complaint as a matter of law; the other defendant (the
former employee) has yet to answer or otherwise respond to either complaint.
While Lens believes the claims to be without merit, there can be no assurance
that it will prevail in either litigation. Lens cannot predict the range of
possible compensatory damages, if any, or whether punitive damages may be
assessed.
9
<PAGE> 10
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHAREHOLDER ACTIONS
Between August, 1996 and February, 1997 various shareholder actions were
commenced against the Company and certain of its officers in the United States
District Court for the District of Massachusetts (the "District of
Massachusetts") claiming, among other things, violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 arising out of public statements
made by defendants. 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 "Securities Litigation"). Plaintiffs seek certification of
the action as a class action 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. They seek unspecified damages,
interest, costs and expenses.
On October 1, 1996 an additional action was commenced in 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
claiming violations of Sections 11, 12(2) and 15 of the Securities Act of 1933
arising out of alleged material misstatements of fact in the Registration
Statement issued in connection with the offering. The action was coordinated
with the Securities Litigation by order of the Court dated December 2, 1996. It
also seeks unspecified damages, interest, costs and expenses.
On December 20, 1996, a shareholder of the Company filed in 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 was consolidated with the Securities Litigation by
order of the Court entered July 22, 1997. The complaint alleges that the conduct
of the individual defendants has exposed the Company to the expense and
inconvenience of defending the Securities Litigation and has harmed the
Company's reputation, thereby limiting its access to capital markets. It also
alleges that the individual defendants improperly traded in the Company's Common
Stock based upon material non-public information.
The Company believes that the allegations in all of the complaints in the
actions described herein 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.
10
<PAGE> 11
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (CONTINUED)
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LENS EXPRESS ACTION
Certain former shareholders of Lens (the "Lens Shareholders") commenced an
action against the Company in the United States District Court for the Southern
District of Florida captioned GOLAN ET AL. V. SUMMIT TECHNOLOGY, et al., Case
No. 97-6589-Ferguson, alleging causes of action under Section 12 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the common law. The Complaint alleges that material
misrepresentations and non-disclosures by the Company caused the Lens
Shareholders to enter into a Merger Agreement with the Company, pursuant to
which the Company acquired all of the outstanding shares of common stock of Lens
Express and that the Company breached the Merger Agreement by failing to
disclose alleged material adverse financial information about the Company and by
failing to take actions which the Lens Shareholders allege was necessary to make
the shares of Summit stock they received in the merger tradeable in the stock
market. Plaintiffs ask that the Merger Agreement be rescinded, that Lens Express
be restored to them and that they be awarded unspecified compensatory and
punitive damages, interest, costs and expenses. By order of the Judicial Panel
on Multidistrict Litigation, dated October 9, 1997, the action was transferred
to the District of Massachusetts and consolidated for pretrial purposes with the
Securities Litigation.
The Company believes that the allegations in the Complaint are without merit,
and it intends to defend the action vigorously. There can be no assurance that
the Company will ultimately prevail in the action, or that the action will not
have a material adverse effect on the Company.
VISX DECLARATORY JUDGEMENT ACTION
On November 12, 1997, VISX commenced a lawsuit against the Company, Pillar Point
Partners and an affiliate of the Company in the Santa Clara California Superior
Court. The lawsuit seeks a declaratory judgement to the effect that royalties
are not payable by VISX to Pillar Point for LASIK procedures performed on VISX
systems prior to VISX's receipt of premarket approval for LASIK. The Company is
presently evaluating VISX's claims.
11
<PAGE> 12
PART I: FINANCIAL INFORMATION
ITEM 2: 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. On August
18, 1997, the Company sold its wholly-owned subsidiary Refractive Centers
International, Inc., (RCII) to LCA-Vision Inc. (LCA) for 16,164,361 shares of
LCA common stock. Prior to the sale, RCII owned and operated the Company's
Vision Center business. The results of operations for this business have been
classified as a discontinued operation 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
1997 AS COMPARED WITH 1996
REVENUES
Revenues for the three months ended September 30, 1997 increased 14% to $22.9
million from $20.1 million for the three months ended September 30, 1996,
primarily as a result of increased royalty revenues. Revenues for the nine
months ended September 30, 1997 increased 7% to $67.2 million from $62.6 million
for the nine months ended September 30, 1996. During the first nine months of
1997, increased royalty revenues more than offset the decrease in sales of laser
systems and product upgrades. Sales of contact lenses and related products
decreased for the three and nine month periods ended September 30, 1997 as
compared to the three and nine month periods ended September 30, 1996,
respectively, reflecting the negative impact of the nationwide U.P.S. strike
during the third quarter.
On February 18, 1997, the Company announced that it received FDA approval to
commercially market and sell its SVS APEX PLUS excimer laser system ("Apex
Plus") to treat nearsightedness. Prior to Apex Plus approval, the Company had
FDA approval to treat nearsightedness only using its Apex excimer laser system
("Apex"). The Apex Plus has been used outside the U.S. to treat nearsightedness,
farsightedness and astigmatism but is not approved in the U.S. to treat
farsightedness and astigmatism. During the three and nine month periods ended
1997, the Company upgraded several Apex systems to Apex Plus systems at prices
approximating the cost of the upgrade. The Company expects this upgrade program
to continue through at least the remainder of 1997.
12
<PAGE> 13
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company is aware that certain U.S. ophthalmologists are performing
refractive procedures with so-called homemade excimer lasers or with gray market
Company excimer systems acquired from overseas. These homemade and gray market
systems have not received FDA approval and have been declared illegal by the
FDA. These systems have not been determined to be safe or effective by the FDA,
and are apparently unregulated. Users have not been limited either to the amount
of refractive correction they can perform, or to the scope of advertising they
can use to encourage consumers to have the procedure. As a consequence, doctors
in the United States who purchase an approved system may be put at a commercial
disadvantage. Moreover, users of unapproved systems are not licensed under the
Pillar Point Patents, and have not been paying procedure royalties. Pillar Point
continues to spend significant amounts of money in litigation with certain users
of this equipment. The proliferation of these unapproved devices may negatively
impact the Company's business, financial position and results of operations
through loss of sales to unapproved lasers, loss of patent royalty revenues from
Pillar Point Partners, and the potential damage to the industry, at this early
stage, posed by these unapproved devices.
Due to the competitive environment and the proliferation of unapproved,
unlicensed laser systems in the U.S., system sales are likely to remain weak and
the Company may experience a decrease in unit sales and the average selling
price of its laser systems for the remainder of 1997 as compared to 1996.
Similarly, procedure volumes on Summit systems in the U.S. are likely to
remain less than volumes on competitor's systems at least until Summit's
systems are approved by FDA for the treatment of astigmatism.
Patent royalty revenues from Pillar Point Partners increased significantly in
the three and nine month period ended September 30, 1997 from the three and nine
month periods ended September 30, 1996, respectively. There are many risks and
contingencies that could adversely affect the Company's royalty revenue. 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 continued proliferation of unapproved, unlicensed laser systems in the
U.S.; and (d) 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 and are the subject
of an FTC investigation. If any of these matters are resolved unfavorably to the
Company it would likely have an adverse effect on the Company's royalty
revenues. VISX royalty payments to Pillar Point for the month of September, 1997
were 60% below the prior month's payments by VISX, due to a new contract
interpretation by VISX to the effect that royalties are not payable by VISX to
Pillar Point for LASIK procedures performed on VISX systems prior to VISX's
receipt of premarket approval for LASIK. On November 12, 1997, VISX commenced a
lawsuit against the Company, Pillar Point and an affiliate of the Company
seeking a declaratory judgement that its contract interpretation is correct. The
Company is presently evaluating VISX's claims.
COST OF REVENUES
Cost of revenues as a percentage of revenues decreased to 63% for the three
months ended September 30, 1997 from 68% for the three months ended September
30, 1996. Cost of revenues as a percentage of revenues decreased to 63% for the
nine months ended September 30, 1997 from 71% for the nine months ended
September 30, 1996. These decreases were primarily a result of lower cost of
revenues associated with royalty revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 1997 increased 25% to $5.7 million from $4.5 million for the three
months ended September 30, 1996. In the third quarter of 1996, the Company
recorded a one-time reduction of $0.8 million in operating expenses resulting
from the settlement of a German patent litigation. Selling, general and
administrative expenses for the nine months ended September 30, 1997 decreased
24% to $14.4 million from $18.9 million for the nine months ended September 30,
1996. This decrease was primarily a result of lower sales and marketing
expenses. In addition, the Company recorded a one-time reduction in operating
expenses of $1.7 million in the second quarter of 1997 resulting from the
settlement of patent litigation.
13
<PAGE> 14
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended September 30, 1997
increased 15% to $1.4 million from $1.3 million for the three months ended
September 30, 1996. Research and development expenses for the nine months ended
September 30, 1997 increased 3% to $4.7 million from $4.5 million for the nine
months ended September 30, 1996. These increases were primarily related to more
spending on the Company's regulatory efforts.
LEGAL EXPENSES
Legal expenses for the three months ended September 30, 1997 increased 45% to
$1.8 million from $1.3 million for the three months ended September 30, 1996.
Legal expenses for the nine months ended September 30, 1997 increased 70% to
$6.1 million from $3.6 million for the nine months ended September 30, 1996.
This increase is primarily related to the patent litigation initiated by the
Company and/or Pillar Point Partners to defend its intellectual property, to the
defense of antitrust and similar claims asserted against Pillar Point Partners
and in defense of shareholder litigation initiated against the Company in 1996.
The Company expects to continue to incur substantial legal expenses for at least
the remainder of 1997.
DISCONTINUED OPERATIONS
In January 1997, the Company announced its plan to discontinue its Vision Center
Business owned and operated by Refractive Centers International, Inc., (RCII) a
wholly owned subsidiary of the Company. Accordingly, the results of operations
for this business were classified as discontinued operations as of December 31,
1996. On August 18, 1997, the Company sold RCII to LCA-Vision Inc. (LCA) in
exchange for 16,164,361 newly issued shares of LCA common stock. The Company
intends to distribute 9,000,000 shares of LCA common stock to its shareholders
as soon as practical after the closing and registration of such shares by LCA.
The remaining shares, which will represent approximately 20 percent of LCA's
outstanding shares, will be held by the Company and may not sold prior to May
17, 1998. Accordingly, the 9,000,000 shares of LCA common stock have been
classified as a short-term investment valued at $ 17.6 million and the remaining
shares have been classified as a long-term investment valued at $12.9 million as
of September 30, 1997.
NET INCOME (LOSS)
Net income from continuing operations for the three months ended September 30,
1997 was $ 24 thousand as compared to $584 thousand for the three months ended
September 30, 1996. Net income from continuing operations for the nine months
ended September 30, 1997 was $1.2 million as compared to a net loss from
continuing operations of $5.1 million for the nine months ended September 30,
1996.
Net loss from discontinued operations for both the three and nine month periods
ended September 30, 1997 was $3.3 million. The results for the nine month period
ended September 30, 1997 also include a $4.6 million provision for operating
losses recorded as of December 31, 1996. Net loss from discontinued operations
for the three and nine month periods ended September 30, 1996 was $4.5 million
and $14.4 million, respectively.
The sale of the discontinued operation resulted in a net gain of $ 10.7 million,
which includes a gain on the sale of net assets held for discontinued operation
and accruals for other estimated costs to be incurred in connection with the
sale of RCII and distribution of LCA common stock.
Net income for the three months ended September 30, 1997 was $7.4 million as
compared to a net loss of $3.9 million for the three months ended September 30,
1996. Net income for the nine months ended September 30, 1997 was $ 8.6 million
as compared to a net loss of $19.5 million for the nine months ended September
30, 1996.
14
<PAGE> 15
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
Due to the uncertainties noted above, the Company has continued to provide a
100% valuation allowance against its net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external debt and
equity financing. As of September 30, 1997, the Company's cash, cash equivalent
balances and short-term investments decreased $2.1 million to $61.3 million from
$63.4 million as of December 31, 1996. Net cash used by operating activities of
$12.7 million resulted primarily from net cash used by discontinued operations
of $14.7 million. Excluding the gain on sale of discontinued operations, net
income before depreciation and amortization for the nine months ended September
30, 1997 was $0.6 million.
Net cash used by investing activities of $.6 million resulted primarily from a
net increase in short and long term investments of $10.4 million, additions to
property and equipment of $1.4 million, a decrease in patents due to settlement
of litigation of $1.3 million and investing activities of discontinued
operations of $9.9 million.
Net cash used by financing activities of $3.4 million resulted from net
repayments of long-term debt obligations of $3.9 million. This cash used by
financing activities was offset in part by proceeds from the exercise of stock
options of $.4 million and financing activities of discontinued operations of
$.1 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 September 30, 1997, the
Company had no borrowings under this facility. Also in March 1996, the Company's
then wholly-owned subsidiary, RCII, obtained a $20.0 million unsecured term
loan, which was guaranteed by the Company. In July, 1997, the Company and RCII
entered into a Loan Modification Agreement with their lenders pursuant to which,
inter alia, RCII was released from liability and the Company became the
principal obligor under the term loan. At September 30, 1997 $12.5 million of
borrowings were outstanding under this facility. This obligation is included in
the Company's consolidated balance sheet as of September 30, 1997.
15
<PAGE> 16
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
See note (5) to Financial Statements, above, and Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1997.
On November 12, 1997, VISX commenced a lawsuit against the Company, Pillar Point
Partners and an affiliate of the Company in the Santa Clara California Superior
Court. The lawsuit seeks a declaratory judgement to the effect that royalties
are not payable by VISX to Pillar Point for LASIK procedures performed on VISX
systems prior to VISX's receipt of premarket approval for LASIK. The Company is
presently evaluating VISX's claims.
16
<PAGE> 17
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
11 Statement Re: Computation of per share earnings
27 Financial Data Schedule (For EDGAR Filing
Purposes Only)
b.) Reports of Form 8-K
On August 28, 1997, the Company filed a Form 8-K
related to the sale of Refractive Centers
International, Inc., a wholly owned subsidiary of the
Company, to LCA-Vision Inc. On October 27, 1997, the
Company filed an Amended 8-K related to this sale.
17
<PAGE> 18
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 system, the
potential for royalty revenues and the success of the Company's Lens Express
subsidiary. Some of these statements may be considered "forward looking". The
following cautionary statements identify important factors that may cause actual
results to differ materially from those reflected in, or implied by, any such
forward looking statements.
The Company's profitability and growth depend upon broad acceptance of laser
vision correction in the U.S., and there can be no assurance that laser vision
correction will be broadly accepted as an alternative to existing methods of
treating refractive vision disorders or that, if broad acceptance occurs, the
Company will benefit. Acceptance of laser vision correction may be affected
adversely by its cost, concerns relating to its safety and efficacy, the lack of
third party reimbursement, general resistance to surgery, the effectiveness of
alternative methods of correcting refractive vision disorders, the lack of
long-term follow-up data, the possibility of unknown side effects, and the cost
of the Excimer System. Laser system sales may be negatively impacted by
competition, the proliferation of unapproved devices, patent disputes, changing
technologies and delays in regulatory approvals. Participation in per-procedure
Royalties may also be negatively impacted by challenges to Pillar Point
Partners, the Company's patents and/or the FTC's investigation regarding Pillar
Point Partners, VISX and the Company. Sales of contact lenses and related
products by the Company's Lens Express subsidiary may be adversely affected by
lack of consistent sources of supply, inability to obtain suitable advertising,
burdensome laws and regulations and competition. The Company's financial
position and results of operations are likely to be negatively impacted if the
Company is unsuccessful in any of these areas.
For additional information and risks associated with the
Company's business, please review the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, a copy of which is available from the
Company without charge.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT TECHNOLOGY, INC.
Date: November 13, 1997 By: /s/ Robert J. Palmisano
----------------- --------------------------------------
Robert J. Palmisano
Chief Executive Officer
Date: November 13, 1997 By: /s/ Robert J. Kelly
----------------- --------------------------------------
Robert J. Kelly
Executive Vice President and Chief
Financial Officer
19
<PAGE> 1
Exhibit 11
SUMMIT TECHNOLOGY, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) from continuing operations $ 24 $ 584 $ 1,196 $ (5,108)
Loss from discontinued operations (3,340) (4,524) (3,340) (14,367)
Gain on sale of discontinued operations 10,711 - 10,711 -
-------- -------- -------- --------
Net income (loss) $ (7,395) $ (3,940) 8,567 $(19,475)
-------- -------- -------- --------
PRIMARY INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding 31,256 30,963 31,146 30,950
Weighted average stock options outstanding 169 - 168 -
-------- -------- -------- --------
Total weighted average common shares outstanding 31,425 30,963 31,314 30,950
-------- -------- -------- --------
Net income (loss) per share from continuing operations $ - $ .02 $ .04 $ (.17)
Loss per share from discontinued operations (.10) (.15) (.10) (.46)
Gain on sale of discontinued operations .34 - .34 -
-------- -------- -------- --------
Net income per share $ .24 $ (.13) $ .28 $ (.63)
-------- -------- -------- --------
FULLY DILUTED INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding 31,256 30,962 31,146 30,950
Weighted average stock options outstanding 242 53 220 195
-------- -------- -------- --------
Total weighted average common shares outstanding 31,498 31,015 31,366 31,145
-------- -------- -------- --------
Net income (loss) per share from continuing operations $ - $ .02 $ .04 $ (.17)
Loss per share from discontinued operations (.10) (.15) (.10) (.46)
Gain on sale of discontinued operation .34 - .34 -
-------- -------- -------- --------
Net loss per share $ .24 $ (.13) $ .28 $ (.63)
-------- -------- -------- --------
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 27,374
<SECURITIES> 51,489
<RECEIVABLES> 10,144
<ALLOWANCES> 496
<INVENTORY> 16,032
<CURRENT-ASSETS> 108,148
<PP&E> 21,531
<DEPRECIATION> 13,068
<TOTAL-ASSETS> 139,415
<CURRENT-LIABILITIES> 38,264
<BONDS> 7,702
0
0
<COMMON> 313
<OTHER-SE> 93,067
<TOTAL-LIABILITY-AND-EQUITY> 139,415
<SALES> 67,239
<TOTAL-REVENUES> 67,239
<CGS> 42,686
<TOTAL-COSTS> 67,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 933
<INCOME-PRETAX> 1,325
<INCOME-TAX> 129
<INCOME-CONTINUING> 1,196
<DISCONTINUED> (3,340)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,567
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
