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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, 1997 Commission File Number: 0-16937
SUMMIT TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-897945
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21 HICKORY DRIVE, WALTHAM, MASSACHUSETTS 02154
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(Address of principal executive officer) (Zip Code)
(781) 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
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(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. [ ]
Based on the closing price for the registrant's voting stock on February 28,
1998, the aggregate market value of such voting stock held by non-affiliates of
the registrant was approximately $168.8 million on said date. The number of
shares of the registrant's Common Stock, $.01 par value, outstanding on February
28, 1998 was 31,044,627.
DOCUMENTS INCORPORATED IN TEXT BY REFERENCE
Certain portions of the Company's Proxy Statement for the 1998 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 operations of Summit Technology, Inc. and subsidiaries (the
"Company") presently consist of (i) manufacturing, selling and servicing laser
systems and related products to correct vision disorders; (ii) collecting per
procedure royalties from users of its systems and 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. 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, which was
accounted for as a discontinued operation in 1996.
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 (781) 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
collects per procedure royalties from users of its systems and participates in
per procedure royalties through its ownership interest in Pillar Point Partners.
On October 20, 1995, the Company's 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. That approval
covered use of the Company's Apex excimer system ("Apex") 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,
known as the Apex Plus ("Apex Plus"), was approved by the FDA for the same
indications. On March 11, 1998, the FDA approved the Apex Plus for the treatment
of nearsightedness with concomitant astigmatism using the Company's emphasis(R)
laser disc ("Laser Disc"), a single use polymer disc that the Company has
developed. The Apex Plus is currently in U.S. clinical trials for the treatment
of hyperopia (farsightedness). On January 30, 1998, the Company submitted to the
FDA its application for approval of the Apex and Apex Plus excimer systems
(sometimes collectively referred to as the "Excimer System") to treat up
to 22 diopters of myopia (high myopia). However, the FDA has not yet approved
the Excimer System for hyperopia or high myopia.
Market
It is estimated that over 140 million people in the U.S. use eyeglasses
or contact lenses to correct common vision disorders. Based on presently
existing treatment modalities (some of which have not yet received FDA
approval) and demographic considerations such as age and median income, the
Company estimates its current potential U.S. market for Laser Vision Correction
to be approximately 30 million people. The Company believes that Laser Vision
Correction performed with the Excimer System will make it possible for many of
these people to eliminate or reduce their reliance on corrective eyewear. In
1997, approximately 200,000 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 refractive vision disorders.
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Products Uses
Ophthalmologists use the Company's Excimer System to treat refractive
vision disorders and corneal pathologies.
Refractive Vision Disorders. Light enters the human eye through the
cornea. In a properly functioning eye, the cornea bends (refracts) incoming
light, causing the light to focus on the retina of the eye. A refractive vision
disorder is the inability of the cornea to refract properly incoming light
resulting in blurred vision. Nearsightedness (myopia), farsightedness
(hyperopia) and astigmatism are the three most common refractive vision
disorders. In a nearsighted eye, light is focused in front of the retina. In a
farsighted eye, light is focused behind the retina. In an astigmatic eye, light
is 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 light is properly focused on the retina
thereby eliminating or reducing the need for corrective eyewear.
Corneal Pathologies. 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.
Products
Excimer System. The Company's principal laser systems presently in use
are the Apex and Apex Plus Excimer Systems. The FDA has approved both for sale
in the U.S. to treat mild to moderate nearsightedness and has approved the Apex
Plus for treatment of mild to moderate nearsightedness with concomitant mild to
moderate astigmatism. On January 30, 1998, the Company filed its application for
premarket approval ("PMA") seeking approval for both the Apex and the Apex Plus
to treat high myopia. The Company anticipates filing a PMA application for
approval of the Apex Plus to treat hyperopia (farsightedness) later in 1998. In
addition to the U.S., the Company is seeking regulatory approval for the sale of
its Excimer Systems in Japan. The Company's Excimer Systems deliver pulses of
ultraviolet laser light to an eye to ablate (remove) submicron layers of tissue
from the cornea. Most of the laser light that is generated 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 Excimer System
procedures are performed on an outpatient basis with topical anesthesia. These
attributes make the Company's Excimer Systems well suited to corneal surgery.
The Company's Apex and Apex Plus Systems are configured to treat
nearsightedness using a mechanical iris device that shapes light. The Apex Plus
is also configured to treat farsightedness, astigmatism and both nearsightedness
or farsightedness with concomitant astigmatism using the Company's
emphasis(R)Laser Disc. To use the Laser Disc, an ophthalmologist determines the
correction, selects the appropriate Laser Disc and places it in the laser beam
path. As the laser ablates the Laser Disc, its shape is replicated on the
cornea. The Company's Apex System requires a hardware upgrade, to Apex Plus, to
permit treatment of astigmatism and farsightedness using the Laser Disc. The
Apex Plus, which the FDA approved in February 1997 for treatment of mild to
moderate nearsightedness with a mechanical iris (the same indications for which
the Apex model is approved), and which the FDA approved in March of 1998 for
treatment of mild to moderate nearsightedness between 1.0 and 5.9 diopters with
concomitant mild to moderate astigmatism between 1.0 and 3.9 diopters with a
combined spherical equivalent of up to 5.9 diopters, is capable, without
significant hardware modification, of treating nearsightedness without the Laser
Disc, and of treating astigmatism, farsightedness (and combinations of
nearsightedness, farsightedness and astigmatism) using the Laser Disc. Because
the Apex Plus is not yet approved by the FDA for treatment of farsightedness and
high myopia, the Company is presently offering the Apex Plus in the U.S. for
treatment of mild to moderate nearsightedness using a mechanical iris and for
treatment of mild to moderate nearsightedness with concomitant mild to moderate
astigmatism using the Laser Disc. Since FDA approval of the Apex Plus platform
in early 1997, the Company has been offering its U.S. customers upgrades from
Apex to Apex Plus at prices approximating the Company's cost. The international
version of the Apex Plus is configured to treat a full range of refractive
disorders, including astigmatism, farsightedness, high myopia and combinations
of these disorders.
Laser Disc. The emphasis(R) Laser Disc, a proprietary single use
polymer disc developed and manufactured by the Company, can be used with the
Apex Plus to treat a wide range of refractive disorders. The Disc is designed to
create very smooth and precise corneal ablations, without reliance on
complicated optomechanics, resulting in improved healing and enhanced refractive
outcomes. This technology permits the ophthalmologist to select a Disc that is
matched to the patient's refractive error, in much the same way that an
appropriate contact lens might be selected. Using special tweezers, the doctor
places the coin-size Disc into a cassette which is snapped into the
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downtube of the laser, directly in the path of the beam. As the laser ablates
the Disc, the shape of the Disc is precisely replicated on the cornea. The
Company presently produces Discs for correcting astigmatism, myopic astigmatism,
hyperopia and hyperopic astigmatism. To date the FDA has approved the Disc in
the United States for treatment of mild to moderate myopic astigmatism only. The
Company is working to develop additional applications for the Laser Disc,
including development of patient-specific, customized Discs for treatment of
difficult or unusual cases.
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 Disc is
used, the Laser Disc itself contains the correction. The ophthalmologist
prepares the cornea and positions the patient for the laser procedure. In some
instances, the ophthalmologist prepares the cornea by surgically creating a
corneal flap and using the laser to ablate tissue from the corneal surface
exposed under the flap. This form of PRK is commonly referred to as LASIK (an
acronym for Laser In Situ Keratomileusis). The Excimer System emits laser
pulses, each of which lasts several billionths of a second, to ablate submicron
layers of tissue from the cornea in a predetermined pattern to reshape the
cornea and improve refraction of incoming light to the eye. The average
procedure consists of approximately 150 laser pulses and lasts approximately 15
to 60 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.
Post-procedure responses vary depending upon the individual patient and the
manner in which the ophthalmologist prepares the cornea and performs the
procedure. Individuals undergoing Laser Vision Correction often experience
discomfort for approximately 24 hours, and blurred vision for approximately 48
to 72 hours, after the procedure. Although many patients experience improvement
in uncorrected vision within a few hours or days of the procedure, it can take
up to two to six months for the correction to stabilize and for the full benefit
of the procedure to be realized.
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.
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. According to six
month clinical data that the Company developed, of the eyes treated during the
Company's clinical trials for mild to moderate nearsightedness with concomitant
mild to moderate astigmatism, 84% were corrected to 20/40 or better, and 48%
were corrected to 20/20 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.
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.
On June 18, 1997, the Company and VISX, Inc. settled all outstanding patent
infringement disputes between them, including infringement litigation in
Delaware related to the Company's Azema patent and in Canada related to VISX's
L'Esperance patents. Under the settlement, VISX and the Company have released
each other and their customers from claims of past infringement, covenanted not
to bring future patent infringement claims anywhere in the world and
cross-licensed each other's foreign patents in the field of laser ablation of
corneal tissue.
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. 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 by a licensee to perform a procedure covered by the
Pillar Point Patents. 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 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 Disc are allocated
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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
lawsuits with respect to Pillar Point Partners relating to royalties, patent
infringement by others and antitrust issues. On March 24, 1998, the
Federal trade Commission ("FTC") commenced an administrative enforcement
proceeding against the Company and VISX alleging antitrust violations in
connection with the Partnership's patent arrangements. The FTC also
alleged that certain of the patents licensed by VISX to the Partnership
were fraudulently obtained by VISX. The FTC has not, however, challenged the
validity of any of the Company's patents. The FTC is seeking, inter alia, an
order dissolving Pillar Point Partners and requiring that VISX cease charging
royalties on the patents alleged by the FTC to have been fraudulently obtained.
On November 12, 1997, VISX informed the Company that in September of 1997, it
had begun withholding royalty payments to the Partnership for LASIK procedures
performed on VISX systems in the U.S., based upon an interpretation of its
license agreement with the Partnership. On the same day, VISX commenced a
lawsuit against the Company and the Partnership seeking a declaration that its
contract interpretation was correct. The Company disagrees with the VISX
interpretation and has asserted counterclaims on behalf of itself and the
Partnership, seeking to enforce the VISX license agreement. On February 17,
1998, VISX commenced a lawsuit against the Company seeking a dissolution of the
Partnership, and the Company has asserted counterclaims alleging breach of the
Partnership's prohibition against voluntary dissolution. See "Legal Proceedings
- -- VISX Dissolution Action -- VISX Royalty Action, -- VISX LASIK Action --
Pillar Point Partners Patent Litigation, -- Antitrust Litigation and -- FTC
Proceedings." See also, "Cautionary Statements and Risk Factors Affecting Future
Operating Results - Risks of Pillar Point Partners."
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. Although the Company has been
notified that IBM's rights under its license agreement with Summit have been
transferred, the Company does not believe the transfer will materially affect
the Company's rights or obligations under the license. 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, $5.9 million and $5.6 million for
research, engineering and product development, including regulatory and clinical
affairs, during 1997, 1996 and 1995, respectively. The Research and Development
and Regulatory/Clinical Departments, as of February 28, 1998, were comprised of
48 full-time employees.
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 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
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for ophthalmic excimer laser equipment has been VISX and, to a lesser extent,
"gray market" and "homemade" lasers. Although the Company's Apex 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. In April of 1997 VISX received FDA
approval for use of its excimer system to treat astigmatism and in January of
1998 VISX received FDA approval for treatment of high myopia. The Company
believes that VISX's receipt of regulatory approval for astigmatism in April
1997 had a negative impact on the Company's laser sales in 1997 and resulted in
some users electing to exchange their Excimer Systems for VISX systems. 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 and are nearing FDA approval. The
Company believes that one or more additional manufacturers are likely to obtain
FDA approval to market ophthalmic excimer laser equipment in the U.S. in 1998.
On February 13, 1998, one such manufacturer, Autonomous Technologies Corp.
("ATC"), announced that the FDA's Ophthalmic Devices Advisory Panel had
unanimously voted to recommend FDA approval of ATC's excimer laser system for
the correction of nearsightedness and astigmatism. The FDA typically adopts the
Panel's recommendations, although it is not obligated to do so. Competitors may
have greater financial resources than the Company, may be able to offer their
products at a lower cost or may develop products that involve a lower
per-procedure cost or are perceived to be more technologically advanced. Methods
of competition include efficacy, price, maintenance costs, service capabilities
and treatment modalities. The Company believes that its Excimer Systems are
strong competitors 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.
Although the Company believes FDA enforcement activity in 1997 has had a
positive impact on this problem, the gray market laser systems and homemade
laser systems have adversely affected the Company's U.S. system sales and its
ability to collect per procedure royalties and may continue to do so. The
Company is investigating reports that some U.S. Excimer Systems may have been
tampered with to defeat the card reading system used to facilitate the
collection of 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 Disc) 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.
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. 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
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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.
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. 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. The Company believes that its Excimer
Systems require a PMA or a PMA supplement for each of the surgical procedures
which they are intended to perform. The FDA may grant a PMA with respect to a
particular procedure only when it is satisfied that the use of the device for
that 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
potential of the device.
The Company received an Approval Letter from the FDA dated October 20,
1995 for the Company's use of the Apex Excimer System in the U.S. to treat
between 1.5D and 7.0D of myopia using Laser Vision Correction. On February 7,
1997, the FDA approved the Apex Plus for the same indications and on March 11,
1998, the FDA approved the Apex Plus for the treatment of mild to moderate
nearsightedness between 1.0 and 5.9 diopters with concomitant mild to moderate
astigmatism between 1.0 and 3.9 diopters with a combined spherical equivalent of
up to 5.9 diopters, using the Laser Disc.
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
calling for reconsideration of the FDA's approval of the Company's PMA for its
Excimer System as described above, although one such petition was subsequently
withdrawn. 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 Investigational Device
Exemptions for Laser Vision Correction. On November 25, 1996 the Company
received FDA approval to initiate hyperopia trials with the Apex Plus. These
U.S. clinical trials have been under way since February, 1997, and the
Company expects to submit a PMA supplement to the FDA for this indication in
1998. On January 30, 1998, the Company submitted a PMA supplement seeking
approval of the Apex and Apex Plus for treatment of high myopia. There can be no
assurance that the devices will be approved or cleared by FDA for these
procedures.
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 Quality System Regulations(QSR) and to
list its devices with the FDA. The Company's facilities in the U.S. and Ireland
are subject to periodic QSR 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 QSR regulations which will likely increase the cost of compliance with
QSR 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
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to comply with labeling and certification requirements. Various warning labels
must be affixed to the laser, depending on the class of the product under the
performance standard.
There can be no assurance that future changes in review guidelines,
regulations or administrative interpretations by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
In addition to the foregoing, the manufacture, sale and use of the Company's
products are subject to numerous federal, state, local and foreign government
laws and regulations relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to conduct business.
Furthermore, the introduction of the Company's products in foreign
countries may require obtaining foreign regulatory clearances. Presently, the
Company is seeking regulatory approval for the Excimer System in Japan. There
can be no assurance that the Company will be able to obtain regulatory
clearances for its products in Japan or other foreign markets.
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, vitamin 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 1997. 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 2,700 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.
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
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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.
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.
EMPLOYEES
As of February 28, 1998, the Company and its subsidiaries employed 529
persons full-time in the U.S., Ireland and other countries. Of this number (i)
224 were employed in the Company's laser systems business (of whom approximately
46 were in manufacturing, 48 in research, engineering, product development and
regulatory and clinical affairs, 53 in customer service and 77 in selling,
marketing and administration, and (ii) 305 were employed by Lens. Of such
employees, 455 are located in the U.S.,60 in Ireland and 14 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, 1998, 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-
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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
modest profits in 1991 and 1997. For the year ended December 31, 1997, the
Company's net income was $8.9 million, bringing its accumulated deficit to
$60.3 million as of December 31, 1997. The Company believes revenues are likely
to remain unpredictable, and there can be no assurances that the Company will
continue to achieve profitability in the future.
Competition in the Vision Correction Industry Generally. 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.
Competition in the Laser Vision Correction Industry. 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, astigmatism in April of 1997 and high
myopia in January of 1998. Although the Company submitted a PMA supplement to
the FDA for the treatment of high myopia in January of 1998, the Company's
Excimer System is not presently approved to treat high myopia 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 hyperopia, and there can be no assurance that either company will
ever obtain FDA approval for this indication. In the event one of the Company or
VISX were to obtain FDA approval for hyperopia significantly in advance of the
other, a competitive advantage would arise. The Company's Apex Excimer System,
currently approved in the United States for treatment of 1.5D to 7.0D of myopia,
requires a hardware upgrade from Apex to Apex Plus to permit treatment of
astigmatism and hyperopia using the Company's Laser Disc. The Company believes
the VISX system requires a hardware upgrade to treat hyperopia. The Company's
Apex Plus Excimer System does not require any significant hardware upgrade to
treat astigmatism and hyperopia using the Laser Disc. The version of the Apex
Plus currently sold by the Company internationally permits treatment of moderate
and high myopia, astigmatism, hyperopia and combinations of these disorders. The
Company believes that approval of the VISX system for treatment of astigmatism
prior to approval of the Company's Apex Plus System for treatment of astigmatism
placed the Company at a competitive disadvantage in 1997 which adversely
affected equipment sales and prompted some users to exchange their Excimer
Systems for VISX systems. Approval of the VISX system to treat high myopia in
January of 1998 may also give rise to a competitive advantage. 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 products 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. In the
U.S., the Company believes that one or more additional manufacturers are likely
to obtain regulatory approval to market ophthalmic excimer laser equipment in
1998. On February 13, 1998, one such manufacturer, Autonomous Technologies Corp.
("ATC"), announced that the FDA's Ophthalmic Devices Advisory Panel had
unanimously voted to recommend FDA approval of ATC's excimer laser system for
the correction of nearsightedness and astigmatism. The FDA typically adopts the
Panel's recommendations, although it is not obligated to do so. Although the
Company believes that its Excimer Systems and unique Laser Disc technology leave
it competitively well-positioned, there can be no assurance that the Company
will compete successfully in the Laser Vision Correction Industry.
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
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the U.S. Although the Company believes FDA enforcement activity in 1997 has had
some positive impact on this problem, the gray market laser systems and homemade
laser systems have adversely affected the Company's U.S. system sales and its
ability to collect per procedure royalties and may continue to do so. The
Company is investigating reports that some U.S. Excimer Systems may have been
tampered with to defeat the card reading system used to facilitate the
collection of per procedure royalties. 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. 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.
Risks of Pillar Point Partners. The Company, VISX and others are involved
in several lawsuits regarding Pillar Point Partners with respect to royalties,
patent enforcement and antitrust issues. On March 24, 1998, the Federal Trade
Commission ("FTC") commenced an administrative enforcement proceeding against
the Company and VISX alleging antitrust violations in connection with Pillar
Point Partners' patent arrangements. The FTC also alleged that certain of the
patents licensed by VISX to Pillar Point Partners were fraudulently obtained by
VISX. The FTC has not, however, challenged the validity of any of the Company's
patents. The FTC is seeking, inter alia, an order dissolving Pillar Point
Partners and requiring that VISX cease charging royalties on the patents alleged
by the FTC to have been fraudulently obtained. On November 12, 1997, VISX
informed the Company that beginning in September of 1997, it had been
withholding royalty payments to the Partnership for LASIK procedures performed
on VISX systems in the U.S., based upon an interpretation of its license
agreement with the Partnership. On the same day, VISX commenced a lawsuit
against the Company and the Partnership seeking a declaration that its contract
interpretation was correct. The Company disagrees with the VISX interpretation
and has asserted counterclaims on behalf of itself and the Partnership, seeking
to enforce the VISX license agreement. On February 17, 1998, VISX brought an
action against the Company in a California court seeking an order dissolving the
Partnership due to alleged deadlocks between the Partners. See "Legal
Proceedings -- VISX Dissolution Action -- VISX LASIK Action -- VISX Royalty
Action -- FTC Proceedings -- Antitrust Litigation -- Pillar Point Partners
Patent Litigation." 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. If Pillar Point Partners is
dissolved, the Company's per procedure revenues could become dependent on the
number of procedures performed solely on Company Excimer Systems. There can be
no assurance that this would not have a material adverse effect on the Company's
per procedure royalty revenue. Under the agreements establishing Pillar Point
Partners, the Company must pay Pillar Point Partners a royalty fee each time its
Excimer System is used by a Company licensee to perform Laser Vision Correction
in the U.S. The Company maintains contractual arrangements permitting it to
collect such royalty fees, but there can be no assurance that it will be able to
collect such fees.
Laser Disc Concerns. The Company's Apex Plus System is designed to
treat astigmatism and other refractive disorders using the Laser Disc. The
Company believes the Laser Disc is an optimal method for treating certain
refractive disorders and that the Company's proprietary Laser Disc technology
presently affords the Company a unique competitive position in the ophthalmic
excimer laser equipment industry. There can be no assurance, however, that the
Company's Laser Disc technology will achieve broad acceptance among
ophthalmologists or that, if broad acceptance is achieved, the Company will be
successful in profitably manufacturing and distributing Laser Discs in
sufficient quantities.
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.
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
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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 1997 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, 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, disputes with VISX, proliferation of gray market and homemade excimer
systems, challenges to the Company's patents and/or the FTC proceedings
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 that are not owned by the Company. If patents held by others were
considered valid and interpreted broadly in an adversarial proceeding, they
could be deemed to cover one or more aspects of the Company's Excimer Systems or
their use to perform one or more procedures. While the Company believes it
either owns or has obtained from Pillar Point Partners or VISX licenses to most
of the important U.S. and worldwide Laser Vision Correction patents, there can
be no assurance that present or future challenges to some of these patents will
not be successful or 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 by VISX and 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 or VISX)
will ultimately be found to be valid, or that the Company's patent rights (or
those licensed from Pillar Point Partners or VISX) will deter others from
infringing such patents or developing substantially equivalent or competitive
products. On March 24, 1998, the Federal Trade Commission ("FTC") commenced an
administrative enforcement proceeding against the Company and VISX alleging
antitrust violations in connection with Pillar Point Partners' patent
arrangements. The FTC also alleged that certain of the patents licensed by VISX
to Pillar Point Partners were fraudulently obtained by VISX. The FTC has not,
however, challenged the validity of any of the Company's patents. The FTC is
seeking, inter alia, an order dissolving Pillar Point Partners and requiring
that VISX cease charging royalties on the patents alleged by the FTC to have
been fraudulently obtained. In July 1997, John Taboada commenced a lawsuit
against VISX and others in which he asserts, inter alia, that he is the sole
inventor of a certain VISX patent. This action was later amended to include the
Company as an additional defendant. A negative finding as to any of the VISX
patents in suit could have a material adverse affect on the Company. See "Legal
Proceedings -- FTC Proceedings -- Pillar Point Partners Patent and Antitrust
Litigation." 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.
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.
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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., and each
time approval is sought for expanded treatment modalities or significant design
or manufacturing modifications. 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. 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 and utilize corrosive gases. While
the Company maintains product liability insurance with coverage of $5.0 million
per occurrence and an annual aggregate maximum of $5.0 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, prices and quantities it requires. If Lens is unable to obtain product
from indirect 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, and place Lens at a competitive disadvantage
versus competing mail order sellers that are able to avoid or ignore such laws
and regulations. 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
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<PAGE> 15
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.
FDA Incident. 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.
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. The Company also leases a 25,000 square foot manufacturing facility
in Cork, Ireland, under a lease expiring in 2026. Approximately 5,300 square
feet of office space in Boston, Massachusetts, which had previously been the
principal office space for the Company's vision center business, has been
subleased for the duration of its term. 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.
ITEM 3. LEGAL PROCEEDINGS
Pillar Point Partners Antitrust And Patent Litigation. Pillar Point
Partners, the Company, VISX and certain affiliates of the Company and VISX are
presently involved in a series of patent and antitrust lawsuits which have been
administratively consolidated for pretrial purposes in the United States
District Court for the District of Arizona by the Federal Judicial Panel on
Multidistrict Litigation ("MDL Panel"). These cases are presently pending as IN
RE: PILLAR POINT PARTNERS ANTITRUST AND PATENT LITIGATION (CIVIL ACTION NO. MDL
1202) and are described below.
Patent Litigation. Pillar Point Partners commenced patent infringement
litigation against certain ophthalmologists believed to have used or be using
homemade laser systems not licensed under patents held by Pillar Point Partners,
as well as one alleged manufacturer of such laser systems. These actions were
originally pending as PILLAR POINT PARTNERS, ET AL. V. DAVID DULANEY, ET AL.
(U.S. DISTRICT COURT, DISTRICT OF ARIZONA, CIVIL ACTION NO. 96-2051PHXPGR) and
PILLAR POINT PARTNERS, ET AL. V. JON G. DISHLER, ET AL. (U.S. DISTRICT COURT,
DISTRICT OF COLORADO, CIVIL ACTION NO. 96-N-2351). 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 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
December, 1997, Taboada amended his complaint to include the Company as an
additional defendant. 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
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<PAGE> 16
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 the `388 Patent, charges defendants with infringement of the `388 Patent,
alleges Lanham Act claims, and seeks monetary damages and injunctive relief.
Taboada is opposing the MDL Panel's transfer of his case to the District of
Arizona.
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. Plaintiff's counsel in the Shepherd case has indicated that he
intends to seek certification of the case as a class action.
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 certain of 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.
Unconsolidated Cases. Two patent infringement cases commenced by Pillar
Point, one against an illegal manufacturer of homemade laser systems not
licensed under the Pillar Point patents and one against an individual believed
to be inducing infringement of such patents, have not been consolidated by the
MDL Panel. These cases are presently pending as 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 APPLER case has been settled.
On March 26, 1998, Janice Camp, an individual who claims to have
received laser vision correction surgery, commenced a lawsuit, purporting to be
a class action, against the Company and VISX in the United States District Court
for the District of Massachusetts. The complaint alleges that the defendants
jointly conspired to monopolize, and did monopolize, the nationwide market for
the licensing of laser vision correction technology, in violation of various
antitrust laws, consumer protection statutes, and the Racketeer Influenced and
Corrupt Organizations Act. The complaint seeks, inter alia, treble damages,
costs of suit and various forms of equitable relief. This case is presently
pending as Camp v. Summit Technology, Inc. and VISX, Inc., United States
District Court, District of Massachusetts, Case No. 98CV10544DPW. The Company is
presently studying the complaint, which was served on the Company on March 27,
1998.
In October, 1996, Autonomous Technologies Corporation ("ATC") sued
Pillar Point Partners, the Company and VISX (and certain affiliates of the
Company and VISX) in the Federal District Court for the District of 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.
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. On November 24, 1997,
Chiron Technolas agreed to dismiss its appeal and pay the Company $1,375,000 in
satisfaction of the Company's judgment.
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 is
contesting 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 effect on the results of operations
of the Company in the period in which it occurs.
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<PAGE> 17
FTC Proceedings. On March 24, 1998, the Federal Trade Commission
("FTC") commenced an administrative enforcement proceeding against the Company
and VISX alleging antitrust violations in connection with Pillar Point
Partners' patent arrangements. The FTC also alleged that certain of the
patents licensed by VISX to Pillar Point were fraudulently obtained by VISX.
The FTC has not, however, challenged the validity of any of the Company's
patents. The FTC is seeking, inter alia, an order, dissolving Pillar Point
Partners, requiring the Company and VISX to allow their users to withdraw from
their license agreements with the Company and VISX and requiring that VISX
cease charging royalties on the patents alleged by the FTC to have been
fraudulently obtained. The FTC does not seek monetary damages. This action is
presently pending before the FTC as In the Matter of Summit Technology, Inc., a
Corporation, and VISX, Inc., a corporation, Docket No. 9286. The Company
believes that the FTC's antitrust allegations are without merit and intends to
contest them. However, there can be no assurance that this action will be
resolved in the Company's favor or that an adverse judgment or settlement would
not have a material adverse affect 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 Serianis 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 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 answered each complaint, denying the
allegations. 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.
Lens Express Woodstock Litigation. On or about April, 1997, three
current and two former employees sued Lens, ten employees and four former
employees, alleging racial discrimination under 42 USC ss. 1981. The plaintiffs
seek an unspecified amount of compensatory damages, punitive damages, lost wages
and a court order declaring the alleged conduct unlawful. Lens and the current
employees have denied the allegations; the former employees apparently have
never been served with the complaint. After the Court sua sponte dismissed the
complaint for improper pleading and Lens moved to dismiss the second amended
complaint, plaintiffs filed a third amended complaint, which alleges the same
causes of action. This case is presently pending as Woodstock, et al. v. Lens
Express, Inc., et al., In the United States District Court for the Southern
District of Florida, Case No. 97-6529-Civ-Hurley. Lens intends to move to
dismiss the third amended complaint as well. While Lens believes the claims to
be without merit, there can be no assurance that it will prevail. Lens cannot
predict the range of possible compensatory damages, if any, or whether punitive
damages may be assessed.
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
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<PAGE> 18
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.
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 MDL Panel 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 LASIK Action. On November 12, 1997, VISX commenced a lawsuit
against the Company and Pillar Point Partners in the Santa Clara, California
Superior Court seeking a declaratory judgment that VISX was not obligated to pay
royalties to Pillar Point for LASIK procedures performed using VISX equipment.
VISX claims no royalties are due for these procedures because VISX has not
received pre-market approval from the FDA to market its devices for LASIK. The
Company disagrees with VISX's position and has brought a countersuit on behalf
of itself and Pillar Point Partners to recover the royalties which it alleges
VISX is wrongfully withholding. The Company believes that if it prevails in its
counterclaim, applicable provisions of the Pillar Point agreements mandate that
all royalties recovered from VISX will be allocated 100% to the Company rather
than divided between VISX and the Company. In response to the Company's
counterclaim, VISX has asserted a
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further claim that the Company's sales activities dating to 1992 constituted
unfair and deceptive trade practices. The Company believes VISX's countersuit is
wholly without merit and will contest it vigorously.
VISX Dissolution Action. On February 17, 1998, an affiliate of VISX
commenced an action in the Santa Clara California Superior Court against an
affiliate of the Company seeking an order dissolving Pillar Point Partners and
appointment of a receiver to wind up its affairs. The Company and its affiliate
have counterclaimed, alleging that the VISX action violates the prohibition
against voluntary dissolution set forth in the Pillar Point agreements. The VISX
complaint and the Company's answer and counterclaim have been filed under seal.
The Company believes that if it prevails on its counterclaims, applicable
provisions of the Pillar Point agreements will entitle it to obtain sole rights
to all of Pillar Point's patents and other assets.
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 1997.
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.
High Low
- ---------------------------------------------------------
1997
First quarter $ 8.88 $ 6.13
Second quarter 7.69 5.50
Third quarter 7.63 6.19
Fourth quarter 10.00 4.38
1996
First quarter $34.88 $23.63
Second quarter 23.63 14.00
Third quarter 14.50 5.25
Fourth quarter 8.75 4.50
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 closing price of the Common Stock on
February 28, 1998 was $5.44. On February 28, 1998, the Common Stock was held
of record by 2,866 persons and entities, including significant amounts of stock
held in "street name".
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except for per share amounts)
YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net revenues $ 88,791 $ 80,477 $ 95,898 $ 71,468 $ 68,549
Income (loss) from continuing
operations 1,503 (13,491) 1,575 (14,433) (6,487)
Income (loss) per share
from continuing operations (1) $ .05 $ (.44) $ .06 $ (.55) $ (.26)
Weighted average number of
common shares outstanding (1) 31,182 30,956 27,674 26,375 25,087
</TABLE>
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<PAGE> 20
(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. All
per share amounts are the same for both basic and diluted earnings (loss) per
share.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 67,895 $ 73,085 $108,374 $23,560 $28,830
Total assets 115,103 133,660 161,661 54,288 55,230
Long-term debt,
less current maturities 6,330 11,472 537 503 400
Stockholders' equity 88,987 101,947 138,239 38,692 42,611
</TABLE>
Selected Financial Data for 1995-1993 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.
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<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The operations of Summit Technology, Inc. and subsidiaries (the
"Company") presently consist of (i) manufacturing, selling and servicing laser
systems and related products to correct vision disorders; (ii) collecting per
procedure royalties from users of its systems and 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. 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, which was
accounted for as a discontinued operation in 1996.
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.
RESULTS OF OPERATIONS
1997 AS COMPARED WITH 1996
Revenues: Revenues in 1997 increased 10% to $88.8 million from $80.5
million in 1996, primarily as a result of increased revenues from royalties,
service and other revenues. Royalties, service and other revenues increased 65%
from $21.0 million in 1996 to $34.6 million in 1997. In 1997, sales of laser
systems decreased to $7.6 million from $11.5 million in 1996, a 34% decrease.
Sales of contact lenses and related products decreased slightly to $46.6 million
in 1997 from $48.0 million in 1996.
Cost Of Revenues: Cost of revenues as a percentage of revenues decreased to 63%
in 1997 from 78% in 1996. This decrease was primarily attributable to lower
costs of revenues associated with royalty revenues and leasing programs.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for 1997 decreased 10% to $23.2 million from $25.6
million for 1996. This decrease reflects lower spending in both sales and
marketing as well as general and administrative costs. Selling, general and
administrative expenses as a percentage of revenues were 26% and 32% in 1997 and
1996, respectively.
Research and Development Expenses: Research and development expenses for 1997
increased 5% to $6.2 million from $5.9 million for 1996. This increase was
primarily related to increased spending on the Company's regulatory efforts.
Legal Expenses: Legal expenses were $4.3 million in 1997 and $5.2 million in
1996. In 1997, the Company recorded a $4.7 million reduction in legal expenses
resulting from the settlement of patent litigations and recovery of certain
legal costs due from the Company's insurance carrier. Legal expense in 1996 were
offset by a $.8 million settlement of a patent litigation. Legal expenses in
1997 and 1996 were 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.
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<PAGE> 22
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. On December 29, 1997, the Company distributed
9,000,000 shares of LCA common stock to its shareholders in the form of a
dividend. A dividend of one share of common stock of LCA was issued for every
3.5 (approximate) shares of the Company's common stock outstanding. The
remaining shares, which represent approximately 19.5 percent of LCA's
outstanding shares, will be held by the Company and may not sold prior to May
17, 1998. Accordingly, these shares have been classified as a long-term
investment.
Net Income (Loss): Income from continuing operations for 1997 was $1.5 million,
or $.05 per share, as compared to a loss from continuing operations of $13.5
million, or $.44 per share, for 1996. The increase in income from continuing
operations is primarily attributable to increased revenues and lower operating
expenses. In 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. Losses
from discontinued operations for 1997 were $3.3 million, or $.11 per share, as
compared to $23.4 million, or $.75 per share for 1996. Net income for 1997 was
$8.9 million, or $.28 per share, as compared to a net loss of $36.9 million, or
$1.19 per share for 1996. All per share amounts are the same for both basic and
diluted earnings (loss) per share.
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 $20.6
million as of December 31, 1997.
1996 AS COMPARED WITH 1995
Revenues: Revenues in 1996 decreased 16% 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. Sales of laser
systems were $11.5 million in 1996 compared to $37.8 million in 1995. This
decrease in system sales was offset in part by an increase in royalties, service
and other revenues. Royalties, service and other revenues increased to $21.0
million in 1996 from $6.5 million in 1995. During 1996 the Company introduced
several per procedure leasing programs, revenue from which will be recognized
over the lease term.
Cost of revenues: Cost of revenues as a percentage of revenues increased to 78%
in 1996 from 64% in 1995. The increase in cost of revenues as a percentage of
revenues was attributable to unabsorbed fixed overheads due to lower sales of
laser systems 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.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for 1996 decreased 1% to $25.6 million from $25.8
million for 1995. Lower spending in selling, general and administrative costs
was offset in part by one-time costs incurred in the acquisition of Lens
Express, Inc.
22
<PAGE> 23
Research and Development Expenses: Research and Development expenses for 1996
increased 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.
Legal Expenses: Legal expenses for 1996 increased to $5.2 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.
Net Income (Loss): The loss from continuing operations for 1996 was $13.5
million, or $.44 per share, as compared to income from continuing operations of
$1.6 million, or $.06 per share for 1995. The loss for 1996 was primarily due to
lower revenues and higher legal expenses. The loss from discontinued operations
for 1996 increased to $23.4 million, or $.75 per share from $4.5 million, or
$.17 per share, for 1995. The net loss for 1996 was $36.9 million, or $1.19 per
share and $3.0 million, or $.11 per share for 1995. All per share amounts are
the same for both basic and diluted earnings (loss) per share.
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 as of December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external
debt and equity financing. As of December 31, 1997, the Company's cash and cash
equivalent balances and short and long-term investments increased to $74.1
million from $72.1 million as of December 31, 1996. Shares of LCA common stock
valued at $8.1 million were included in long-term investments as of December 31,
1997. Working capital decreased to $67.9 million as of December 31, 1997 from
$73.1 million as of December 31, 1996. In 1997, net cash used by operating
activities of $10.8 million resulted primarily from net cash used by
discontinued operations of $14.7 million. In 1996, net cash used by operating
activities of $28.0 million resulted primarily from the net loss of $36.9
million. Excluding the gain on sale of discontinued operations, net income
before depreciation and amortization was $1.5 million in 1997 compared to a net
loss before depreciation and amortization of $33.3 million for 1996.
In 1997, net cash provided by investing activities of $5.1 million
resulted primarily from investing activities of discontinued operations of $9.9
million offset by a net increase in short and long-term investments of $4.2
million and capital expenditures of $1.8 million. In 1996, net cash used by
investing activities of $14.9 million resulted primarily from investing
activities of discontinued operations of $16.4 million and capital expenditures
of $5.6 million offset by a decrease in short and long-term investments of $7.0
million.
In 1997, net cash used by financing activities of $4.6 million were
primarily attributable to net repayments of long-term debt of $5.2 million. In
1996, net cash provided by financing activities of $12.6 million were primarily
attributable to net proceeds from the issuance long-term debt of $13.0 million.
In March 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, 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 December 31, 1997, $11.3 million of
borrowings were outstanding under this loan. This obligation is included in the
Company's consolidated balance sheet as of December 31, 1997.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income and SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full-set of general purpose
financial statements. SFAS No. 131 establishes standards for the way that
public business enterprises report selected information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
statements. Both statements, which are effective for the Company in its year
ending December 31, 1998, are not expected to have a material impact on the
Company's financial position or results of operations.
Year 2000
The Year 2000 issue is the result of computer programs that are not
able to differentiate between the year 1900 and the year 2000 because they were
written using two digits instead of four digits to define the applicable year.
A review of the Company's computer systems has been performed to identify the
systems and software that could be affected by this issue. The Company
currently believes that with the conversion to new software and modifications
to existing systems, the Year 2000 problem will not pose a significant
operational problem to the Company. However, there can be no assurance that the
Company will not experience unexpected costs and delays in achieving Year 2000
compliance for its computer systems, which could result in a material adverse
effect on the operations and financial postion of the Company.
23
<PAGE> 24
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 Sheet as of December 31, 1997 and 1996......... F-3
Consolidated Statement of Operations for the Years Ended
December 31, 1997, 1996 and 1995 .................................. F-4
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995 .............. F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 .................................. F-6
Notes to Consolidated Financial Statements ......................... F-7
</TABLE>
<PAGE> 25
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 6, 1998, except as to Note 10, which is as
of March 27, 1998
F-2
<PAGE> 26
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,720 $ 44,013
Short-term investments (Note 15) 26,770 19,393
Receivables, net of allowances of $758 in
1997 and $897 in 1996 8,896 8,553
Inventories (Note 4) 14,494 15,848
Prepaid expenses and other current assets 2,533 2,222
Due from related party (Note 13) 4 1,726
Restricted cash 1,264 1,502
-------- --------
Total current assets 87,681 93,257
Long-term investments (Note 15) 13,583 8,718
Property and equipment, net (Note 5) 8,593 9,381
Patents, net (Note 6) 4,769 6,747
Other assets 477 529
Net assets held for discontinued operations (Note 3) - 15,028
-------- --------
TOTAL ASSETS $115,103 $133,660
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,482 $ 3,771
Accrued expenses (Note 7) 7,197 5,974
Current maturities of long-term debt (Note 8) 5,142 5,246
Deferred revenue 2,937 3,634
Due to related party (Note 13) 28 1,547
-------- --------
Total current liabilities 19,786 20,172
Long-term debt, less current maturities (Note 8) 6,330 11,472
Deferred taxes - 69
-------- --------
Total liabilities 26,116 31,713
-------- --------
Stockholders' equity (Note 9):
Preferred stock, $.01 par value.
Authorized 5,000,000 shares - -
Common stock, $.01 par value. Authorized
60,000,000 shares; Issued 31,299,803 shares
in 1997 and 31,024,709 in 1996 313 311
Additional paid-in capital 153,982 170,983
Accumulated deficit (60,313) (69,187)
-------- --------
93,982 102,107
Net unrealized loss on investment (Note 15) (4,835) -
Treasury stock, at cost, 6,125 shares in 1997
and 1996 (160) (160)
-------- --------
Total stockholders' equity 88,987 101,947
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $115,103 $133,660
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 27
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Net revenues:
Systems $ 7,589 $ 11,484 $ 37,834
Royalties, service and other 34,627 21,030 6,477
Contact lens and related products 46,575 47,963 51,587
----------- ---------- ----------
Total net revenues 88,791 80,477 95,898
Cost of revenues 55,902 62,438 61,358
----------- ---------- -----------
Gross profit 32,889 18,039 34,540
----------- ---------- -----------
Operating expenses:
Selling, general and administrative expenses 23,194 25,636 25,781
Research and development expenses 6,213 5,892 5,579
Legal expenses 4,255 5,175 2,295
----------- ---------- -----------
Total operating expenses 33,662 36,703 33,655
----------- ---------- -----------
Operating income (loss) from continuing operations (773) (18,664) 885
Other income 2,413 5,217 1,467
----------- ----------- -----------
Income (loss) from continuing operations
before provision for income taxes 1,640 (13,447) 2,352
Provision for income taxes 137 44 777
----------- ----------- -----------
Income (loss) from continuing operations 1,503 (13,491) 1,575
Gain on sale of discontinued operations 10,711 - -
Loss from discontinued operations (3,340) (23,366) (4,542)
----------- ----------- -----------
Net income (loss) $ 8,874 $ (36,857) $ (2,967)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Basic and diluted earnings (loss) per share
- -------------------------------------------
<S> <C> <C> <C>
Income (loss) per share from continuing operations $ 0.05 $ (0.44) $ 0.06
Gain per share on sale of discontinued operations 0.34 - -
Loss per share from discontinued operations (0.11) (0.75) (0.17)
----------- ---------- -----------
Net income (loss) per share $ 0.28 $ (1.19) $ 0.11)
=========== ========== ===========
Weighted average number of common shares outstanding 31,182 30,956 27,674
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 28
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL NET UNREALIZED
------------------ ------------------ PAID-IN ACCUMULATED LOSS ON
SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT INVESTMENT
------ --------- ------ --------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 - $ - 26,895 $269 $ 67,839 $(29,363) $ -
Sale of common stock,
net of issuance costs - - 3,795 38 99,819 -
Exercise of stock options - - 243 2 2,716 -
Other shares issued - - 2 - 18 -
Net loss - - - - - (2,967)
---- ----- ------ ---- -------- -------- -------
Balance at
December 31, 1995 - - 30,935 309 170,392 (32,330) -
Exercise of stock options - - 85 1 507 -
Other shares issued 5 1 84 -
Net loss - - - - - (36,857)
---- ----- ------ ---- -------- -------- -------
Balance at
December 31, 1996 - - 31,025 311 170,983 (69,187) -
Exercise of stock options - - 40 - 214 -
Other shares issued - - 235 2 335 -
Dividend - - - - (17,550) -
Net unrealized loss
on investment - - - - - - (4,835)
Net income - - - - - 8,874
---- ----- ------ ---- -------- -------- -------
Balance at
December 31, 1997 - $ - 31,300 $313 $153,982 $(60,313) $(4,835)
==== ===== ====== ==== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK TOTAL
-------------------- SHAREHOLDERS'
SHARES AT COST EQUITY
-------------------- -------------
<S> <C> <C> <C>
Balance at
December 31, 1994 2 $ (43) $ 38,702
Sale of common stock,
net of issuance costs - - 99,857
Exercise of stock options 3 (89) 2,629
Other shares issued - - 18
Net loss - - (2,967)
---- ----- --------
Balance at
December 31, 1995 5 (132) 138,239
Exercise of stock options 1 (28) 480
Other shares issued - - 85
Net loss - - (36,857)
---- ----- --------
Balance at
December 31, 1996 6 (160) 101,947
Exercise of stock options - - 214
Other shares issued - - 337
Dividend - - (17,550)
Net unrealized loss
on investment (4,835)
Net income - - 8,874
---- ----- --------
Balance at
December 31, 1997 6 $(160) $ 88,987
==== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 29
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,874 $ (36,857) $ (2,967)
Gain on sale of discontinued operations (10,711) - -
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 3,301 3,605 2,437
Recovery for losses on accounts receivables (139) (78) (75)
Changes in operating assets and liabilities:
Receivables (204) 7,671 (5,991)
Inventories 1,354 (145) (6,119)
Prepaid expenses and other current assets 79 (844) (240)
Accounts payable 711 (2,603) 1,667
Accrued expenses 1,083 (3,314) 2,772
Deferred revenue (697) 209 279
Related party, net 203 (524) 345
Operating activities of discontinued operations (14,653) 4,858 117
--------- --------- ---------
Net cash used by operating activities (10,799) (28,022) (7,775)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments (7,377) 2,214 (13,112)
(Increase) decrease in long-term investments 3,195 4,813 (13,531)
Additions to property and equipment (1,834) (5,642) (2,591)
Purchase of patents and application costs - (553) (245)
(Increase) decrease in restricted cash 238 33 (1,535)
Other 892 666 1,656
Investing activities of discontinued operations 9,948 (16,403) (2,188)
--------- --------- ---------
Net cash provided (used) by investing activities 5,062 (14,872) (31,546)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of long-term debt (5,246) 13,033 2,792
Proceeds from sale of common stock - - 99,857
Proceeds from exercise of stock options 214 480 2,629
Proceeds from other shares issued 337 85 18
Financing activities of discontinued operations 139 (994) (259)
--------- --------- ---------
Net cash provided (used) by financing activities (4,556) 12,604 105,037
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (10,293) (30,290) 65,716
Cash and cash equivalents at beginning of period 44,013 74,303 8,587
--------- --------- ---------
Cash and cash equivalents at end of period $ 33,720 $ 44,013 $ 74,303
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,108 $ 272 $ 427
Income taxes paid $ 106 $ 57 $ 863
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 30
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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 collects per procedure royalties from users of its systems and
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 primarily sells contact lenses and
related products.
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 in the U.S. The
Company recognizes revenue resulting from its share of VISX per procedure fees
upon allocation from Pillar Point Partners (see Note 13).
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 primarily
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 primarily consist of U.S.
Government Securities, mortgage-backed securities, equity securities and
investment grade corporate bonds.
Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
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.
F-7
<PAGE> 31
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 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 three 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 patent's economic life using the straight-line method. Other
assets include deposits, organization costs, and long-term 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 basis 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, 1997, 1996 and 1995
the Company expensed $3,683, $6,346 and $4,126, 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 ("APB")
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.
F-8
<PAGE> 32
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 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 Company's
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 10.
Net Income (loss) Per Share
The Company adopted the provisions of SFAS No. 128, Earnings per Share,
effective for fiscal 1997. This Statement requires the presentation of basic
earnings per share and diluted earnings per share. Basic earnings (loss) per
share are computed by dividing net income (loss) by the weighted-average number
of common shares outstanding during the year. The number of shares used to
compute basic earnings (loss) per share were (in thousands) 31,182 in 1997,
30,956 in 1996 and 27,674 in 1995. Diluted earnings (loss) per share includes
the effect of all dilutive potential common shares that were outstanding during
the year. Diluted earnings (loss) per share are computed by dividing net income
(loss) by the weighted-average number of common shares and dilutive securities.
The number of shares used to compute diluted earnings (loss) per share were (in
thousands) 31,373 in 1997 and 28,097 in 1995. Diluted loss per share was not
reported in 1996 because the results produce an antidilutive result. Prior year
earnings per share amounts have been restated to conform to the provisions of
this Statement. All per share amounts for 1997 and 1995 are the same for
both basic and diluted earnings (loss) per share.
Reclassifications and Restatement
Certain prior year information has been reclassified to conform with
current year presentation of data.
3. 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 at
December 31, 1996. At December 31, 1996, the net assets held for discontinued
operations of 15.0 million included $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.
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 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. On December 29, 1997, the Company distributed
9,000,000 shares of LCA common stock to its shareholders in the form of a
dividend. A dividend of one share of common stock of LCA was issued for every
3.5 (approximate) shares of the Company's common stock outstanding. The
remaining shares, which represent approximately 19.5 percent of LCA's
outstanding shares, will be held by the Company and may not sold prior to May
17, 1998. Accordingly, the remaining shares have been classified as a long-term
investment. The operating loss from discontinued operations for the year ended
December 31, 1997, 1996 and 1995 was $3.3 million, $23.4 million, $4.5 million,
respectively.
F-9
<PAGE> 33
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Raw materials and subassemblies $ 3,195 $ 2,243
Work in process 2,147 728
Finished goods 9,152 12,877
-------- -------
Total $14,494 $15,848
======== =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Leasehold improvements $ 1,611 $ 1,625
Manufacturing and test equipment 8,360 8,552
Furniture, fixtures and office
equipment 6,896 6,455
Laser equipment held for leases 5,093 3,494
------- -------
21,960 20,126
Less accumulated depreciation 13,367 10,745
------- -------
Net property and equipment $ 8,593 $ 9,381
======= =======
</TABLE>
Laser equipment held for leases is held under operating leases with customers.
Accumulated depreciation on such leased equipment as of December 31, 1997 and
1996 was $2.0 million and $1.0 million, respectively. At December 31, 1997, $2.4
million of future minimum lease payments were due to the Company pursuant to its
operating lease agreements.
6. PATENTS
Patents consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Patents $ 6,617 $ 7,934
Less accumulated amortization 1,848 1,187
------- -------
Net patents $ 4,769 $ 6,747
======= =======
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Accrued payroll and vacation $ 1,427 $ 1,115
Accrued warranty costs 342 932
Other accrued expenses 3,575 3,927
Accrued costs related to sale
of discontinued operations 1,853 -
------- ------
Total $ 7,197 $5,974
======= ======
</TABLE>
F-10
<PAGE> 34
8. FINANCING AND LEASING ARRANGEMENTS
Leases
Capital lease obligations consist of amounts due under equipment lease
agreements. At December 31, 1997, the cost and accumulated depreciation of the
related equipment was $1,299 and $689, 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 $751,
$898 and $655 for the years ended December 31, 1997, 1996, and 1995,
respectively.
Financing Arrangements
In March 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, 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 December 31, 1997, $11.3 million of
borrowings were outstanding under this loan and the interest rate was 8.5%.
At December 31, 1997, 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:
1998 $ 5,000 $ 160 $ 864
1999 5,000 74 675
2000 1,250 12 410
2001 - - 136
2002 - - 136
Thereafter - - 3,316
------- ------- -------
Minimum future debt payments 11,250 246 $ 5,537
Less amounts representing interest - 24 =======
------- -------
Present value of minimum future debt
payments 11,250 222
Less current maturities of long term debt 5,000 142
------- -------
Long term debt, less current maturities $ 6,250 $ 80
======= =======
</TABLE>
9. STOCKHOLDERS' EQUITY
Common and Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock at $.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.
Stock Option Plans
In March 1987, the Company adopted a Stock Option Plan (the "1987
Plan") which permitted the Company to grant both incentive and nonincentive
stock options to employees. The 1987 Plan expired by its terms in March 1997 and
the Company adopted the 1997 Stock Option Plan (the "1997 Plan"). A total of
3,107,415 shares of Common Stock were authorized by the Board of Directors for
issuance under the 1987 Plan and a total of 1,500,000 shares have been
authorized for issuance under the 1997 Plan. The 1997 Plan permits the Company
to grant stock options (incentive and nonincentive) and stock appreciation
rights to employees, members of the Board of Directors, consultants and
advisors. Options generally vest within 3 years of grant date and must be
exercised not later than 10 years from the date of grant.
F-11
<PAGE> 35
The Company also has a Stock Option Plan for Outside Directors (the
"Directors' Plan") under which a total of 75,000 shares of common stock have
been authorized for issuance. Options granted under the Directors' Plan vest one
year from grant date and must be exercised not later than 10 years from the date
of grant.
The following table summarizes activity under all Plans for each of the
three years in the period ended December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
--------- --------------- ----------------
<S> <C> <C> <C>
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) 13.33 - 29.33 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) 5.38 - 33.75 17.76
Options exercised (184,308) 4.33 - 22.83 7.58
---------
Options outstanding, December 31, 1996 1,021,916 7.72
Options granted at market price 697,684 4.53 - 9.13 6.81
Options lapsed or canceled (195,355) 5.38 - 29.33 9.25
Options exercised (39,822) 5.38 - 5.50 5.39
--------- ---------
Options outstanding, December 31, 1997 1,484,423 $ 7.16
========= =========
</TABLE>
Options on 622,879 shares, 482,324 shares and 409,326 shares were
exercisable under the Plans at December 31, 1997, 1996 and 1995, with a weighted
exercise price per share of $7.92, $7.82 and $11.52, respectively. In addition,
options on 225,000 shares, which were granted in 1989 under a separate executive
stock option agreement, were exercised in 1997. The number of shares of Common
Stock reserved for granting of future options under all Plans was 829,635,
210,256 and 435,287 shares at December 31, 1997, 1996 and 1995, respectively.
The weighted average fair value of options granted during 1997, 1996 and 1995
was $3.94, $3.43 and $12.33 per option, respectively.
The following table summarizes significant ranges of outstanding and
exercisable options under the Plans at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGES OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$4.33 to $5.38 606,728 8.2 $ 5.32 424,389 $ 5.33
5.50 to 6.50 421,456 9.4 5.78 55,766 5.62
6.75 to 25.31 456,239 8.5 10.86 142,724 16.53
</TABLE>
F-12
<PAGE> 36
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected life 4 years 4 years 4 years
Interest rate 6.19% 6.18% 6.38%
Volatility 70.5% 65.3% 51.5%
Dividend yield 0% 0% 0%
</TABLE>
If the Company had recorded compensation costs for its stock option
plans and its stock purchase plan under the provisions of SFAS 123, the pretax
loss would have increased by $1.2 million, $1.5 million and $.7 million in 1997,
1996 and 1995, respectively, ($.04, $.05 and $.03 per share, respectively). The
fair values of the options granted are recognized as compensation expense on a
straight-line basis over the vesting period of the grant. The pro forma effect
on net income for 1997, 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.
Employee Stock Purchase Plan
In May 1991, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan is available to all eligible full-time
employees, excluding those owning 5% or more of the 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 907 shares, 1,051 shares, and 2,250 shares in 1997, 1996 and 1995,
respectively.
Shareholder Rights Plan
In March 1990, the Board of Directors adopted a Shareholder Rights Plan
("Rights Plan") pursuant to which each stockholder of the Company holds one
currently non-exercisable right ("Right") for each share of Common Stock
beneficially held. The Rights become exercisable upon the occurrence of a
"Distribution Date," whereupon the holder is entitled to purchase from the
Company one-quarter of a share of Common Stock at the exercise price of $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
Person"), 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 Company's 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.
F-13
<PAGE> 37
10. COMMITMENTS AND CONTINGENCIES
Commitments
During 1991, the Irish Development Authority ("IDA") agreed to
reimburse the Company up to approximately $740 for rent, training and fixed
asset acquisition costs incurred in conjunction with the opening of its
manufacturing facility in Cork, Ireland. The Company may be required to repay
the grants if the facility is closed within eight years of the final grant
drawdown. As of December 31, 1997, the Company has received approximately $574
from the IDA under these agreements.
In February 1992, the Company entered into a licensing agreement with IBM
pursuant to which IBM granted the Company a license to its patent covering
excimer laser ablation of tissue and the Company agreed to pay IBM a royalty of
2% of the net selling price of its Excimer Systems sold or leased in the U.S.
and certain other countries. The Company also licenses certain laser patents
from Patlex Corporation and has agreed to pay royalties, not to exceed $100 per
year, with respect to laser sales.
Contingencies
Pillar Point Partners Antitrust And Patent Litigation. Pillar Point
Partners, the Company, VISX and certain affiliates of the Company and VISX are
presently involved in a series of patent and antitrust lawsuits which have been
administratively consolidated for pretrial purposes in the United States
District Court for the District of Arizona by the Federal Judicial Panel on
Multidistrict Litigation ("MDL Panel"). These cases are presently pending as IN
RE: PILLAR POINT PARTNERS ANTITRUST AND PATENT LITIGATION (CIVIL ACTION NO. MDL
1202) and are described below.
Patent Litigation. Pillar Point Partners commenced patent infringement
litigation against certain ophthalmologists believed to have used or be using
homemade laser systems not licensed under patents held by Pillar Point Partners,
as well as one alleged manufacturer of such laser systems. These actions were
originally pending as PILLAR POINT PARTNERS, ET AL. V. DAVID DULANEY, ET AL.
(U.S. DISTRICT COURT, DISTRICT OF ARIZONA, CIVIL ACTION NO. 96-2051PHXPGR) and
PILLAR POINT PARTNERS, ET AL. V. JON G. DISHLER, ET AL. (U.S. DISTRICT COURT,
DISTRICT OF COLORADO, CIVIL ACTION NO. 96-N-2351). 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 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
December, 1997, Taboada amended his complaint to include the Company as an
additional defendant. 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, alleges Lanham
Act claims, and seeks monetary damages and injunctive relief. Taboada is
opposing the MDL Panel's transfer of his case to the District of Arizona.
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. Plaintiff's counsel in the Shephard case has indicated that he
intends to seek certification of the case as a class action.
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 certain of 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.
Unconsolidated Cases. Two patent infringement cases commenced by Pillar
Point, one against an illegal manufacturer of homemade laser systems not
licensed under the Pillar Point patents and one against an individual believed
to be inducing infringement of such patents, have not been consolidated by the
MDL Panel. These cases are presently as 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 APPLER case has been settled.
On March 26, 1998, Janice Camp, an individual who claims to have
received laser vision correction surgery, commenced a lawsuit, purporting to be
a class action, against the Company and VISX in the United States District Court
for the District of Massachusetts. The complaint alleges that the defendants
jointly conspired to monopolize, and did monopolize, the nationwide market for
the licensing of laser vision correction technology, in violation of various
antitrust laws, consumer protection statutes, and the Racketeer Influenced and
Corrupt Organizations Act. The complaint seeks, inter alia, treble damages,
costs of suit and various forms of equitable relief. This case is presently
pending as Camp v. Summit Technology, Inc. and VISX, Inc., United States
District Court, District of Massachusetts, Case No. 98CV10544DPW. The Company is
presently studying the complaint, which was served on the Company on March 27,
1998.
In October, 1996, Autonomous Technologies Corporation ("ATC") sued
Pillar Point Partners, the Company and VISX (and certain affiliates of the
Company and VISX) in the Federal District Court for the District of 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 is
contesting 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 effect on the results of operations
of the Company in the period in which it occurs.
FTC Proceedings. On March 24, 1998, the Federal Trade Commission
("FTC") commenced an administrative enforcement proceeding against the Company
and VISX alleging antitrust violations in connection with Pillar Point Partners'
patent arrangements. The FTC also alleged that certain of the patents licensed
by VISX to Pillar Point were fraudulently obtained by VISX. The FTC has not,
however, challenged the validity of any of the Company's patents. The FTC is
seeking, inter alia, an order, dissolving Pillar Point Partners, requiring the
Company and VISX to allow their users to withdraw from their license agreements
with the Company and VISX and requiring that VISX cease charging royalties on
the patents alleged by the FTC to have been fraudulently obtained. The FTC does
not seek monetary damages. This action is presently pending before the FTC as
In the Matter of Summit Technology, Inc., a Corporation, and VISX, Inc., a
corporation, Docket No. 9286. The Company believes that the FTC's antitrust
allegations are without merit and intends to contest them. However, there can
be no assurance that this action will be resolved in the Company's favor or that
an adverse judgment or settlement would not have a material adverse affect 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 Serianis 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 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 answered each complaint, denying the
allegations. 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.
Lens Express Woodstock Litigation. On or about April, 1997, three
current and two former employees sued Lens, ten employees and four former
employees, alleging racial discrimination under 42 USC ss. 1981. The plaintiffs
seek an unspecified amount of compensatory damages, punitive damages, lost wages
and a court order declaring the alleged conduct unlawful. Lens and the other
employees have denied the allegations; the former employees apparently have
never been served with the complaint. After the Court sua sponte dismissed the
complaint for improper pleading and Lens moved to dismiss the second amended
complaint, plaintiffs filed a third amended complaint, which alleges the same
causes of action. This case is presently pending as Woodstock, et al. v. Lens
Express, Inc., et al., In the United States District Court for the Southern
District of Florida, Case No. 97-6529-Civ-Hurley. Lens intends to move to
dismiss the third amended complaint as well. While Lens believes the claims to
be without merit, there can be no assurance that it will prevail. Lens cannot
predict the range of possible compensatory damages, if any, or whether punitive
damages may be assessed.
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.
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 MDL Panel 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 LASIK Action. On November 12, 1997, VISX commenced a lawsuit
against the Company and Pillar Point Partners in the Santa Clara, California
Superior Court seeking a declaratory judgment that VISX was not obligated to pay
royalties to Pillar Point for LASIK procedures performed using VISX equipment.
VISX claims no royalties are due for these procedures because VISX has not
received pre-market approval from the FDA to market its devices for LASIK. The
Company disagrees with VISX's position and has brought a countersuit on behalf
of itself and Pillar Point Partners to recover the royalties which it alleges
VISX is wrongfully withholding. The Company believes that if it prevails in its
counterclaim, applicable provisions of the Pillar Point agreements mandate that
all royalties recovered from VISX will be allocated 100% to the Company rather
than divided between VISX and the Company. In response to the Company's
counterclaim, VISX has asserted a further claim that the Company's sales
activities dating to 1992 constituted unfair and deceptive trade practices. The
Company believes VISX's countersuit is wholly without merit and will contest it
vigorously.
VISX Dissolution Action. On February 17, 1998, an affiliate of VISX
commenced an action in the Santa Clara California Superior Court against an
affiliate of the Company seeking an order dissolving Pillar Point Partners and
appointment of a receiver to wind up its affairs. The Company and its affiliate
have counterclaimed, alleging that the VISX action violates the prohibition
against voluntary dissolution set forth in the Pillar Point agreements. The VISX
complaint and the Company's answer and counterclaim have been filed under seal.
The Company believes that if it prevails on its counterclaims, applicable
provisions of the Pillar Point agreements will entitle it to obtain sole rights
to all of Pillar Point's patents and other assets and to continue the business
of Pillar Point without VISX.
11. 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,
--------------------------
1997 1996
--------------------------
Deferred tax asset:
Net operating loss and other carryforwards $ 19,926 $ 18,595
Research and development credit 684 721
Inventory adjustments 145 349
Warranty/other reserves 526 509
Other temporary differences 252 250
-------- --------
Subtotal 21,533 20,424
Valuation allowance (20,564) (19,695)
-------- --------
969 729
-------- --------
Deferred tax liability:
Patent costs 441 534
Other temporary differences 528 195
-------- --------
969 729
-------- --------
Net deferred tax asset $ 0 $ 0
======== ========
Due to the uncertainty of future taxable income being generated, the Company has
recorded a valuation allowance against it deferred tax assets. The valuation
allowance for deferred tax assets as of December 31, 1995, was $14,413. The net
change in the total valuation allowance for the years ended December 31, 1997
and 1996 was $869 and $5,282, respectively.
F-14
<PAGE> 38
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>
December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Expected expense (benefit) at federal $ 574 $(4,706) $ 823
income tax rate
Foreign, state, and other taxes, net of
federal benefit 53 46 126
Change in valuation allowance for
deferred tax assets allocated to
income tax expense (490) 4,704 (172)
------- ------- -----
Provision for income tax $ 137 $ 44 $ 777
======= ======= =====
</TABLE>
At December 31, 1997, the Company had an operating loss carryforward of
approximately $49,293 available to offset future federal taxable income from
continuing operations. The net operating loss amount includes approximately
$6,164 of employee stock option compensation deductions which will be credited
to additional paid-in capital when realized. The Company divested RCII in 1997
(see Note 3) and has reported RCII as a discontinued operation. The operating
loss carryforward attributed to RCII of $18,929 remains 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
continued 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 credit carryforwards
of approximately $684. The operating loss and tax credit carryforwards expire in
varying amounts through 2012. 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, 1997, 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.
12. 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 employee's contributions.
For the years ended December 31, 1997, 1996 and 1995, the Company contributed
cash and common stock valued at $63, $127 and $91, respectively representing its
matching contribution to the Plan.
13. 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 upon allocation 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. (Also see Note 10)
F-15
<PAGE> 39
14. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997, other non-cash transactions
include proceeds of 16.2 million shares of LCA common stock valued at $30.4
million from the sale of discontinued operations and dividend distribution of
9.0 million shares of LCA common stock valued at $17.6 million. (see Note 3)
15. INVESTMENT SECURITIES
Short and long term investment securities consists of the following at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
FAIR VALUE
----------
<S> <C>
At December 31, 1997
U.S. Government securities $ 983
Mortgage-backed securities 2,248
Corporate bonds 29,062
---------
Total debt securities 32,293
Equity security 8,060
---------
$ 40,353
=========
At December 31, 1996
U.S. Government securities $ 14,512
Mortgage-backed securities 5,759
Corporate bonds 7,840
---------
Total debt securities $ 28,111
=========
</TABLE>
At December 31, 1997, the cost of the equity security was $12,895 and
the related unrealized loss of $4,835 was included as a separate component of
stockholders' equity. The amortized cost of debt securities at December 31, 1997
and 1996 approximates fair value and as a result the Company has no unrealized
holding gains or losses related to these securities.
As of December 31, 1997, the Company had $31,543 of debt securities due
within five years of the balance sheet date and had $750 of debt securities due
after five years of the balance sheet date. 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.
Gross realized gains included in other income in 1997 and 1996 were
$185 and $104, respectively, and gross realized losses included in other income
in 1997 was $46 and 1996 was $70.
F-16
<PAGE> 40
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Summit Technology, Inc.:
Under date of March 6, 1998, except as to Note 10, which is as of March 27,
1998, we reported on the consolidated balance sheets of Summit Technology, Inc.
as of December 31, 1997 and 1996, 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, 1997, as contained in the 1997 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
March 6, 1998, except as to Note 10,
which is as of March 27, 1998
F-17
<PAGE> 41
SCHEDULE II
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1995, 1996 and 1997 (unaudited)
(in thousands)
<TABLE>
<S> <C> <C> <C> <C>
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 Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
--------- ---------- ----------- ---------
Allowance for Doubtful Accounts $974 $186 $263 $897
DECEMBER 31,1997 Balance at Beginning Amounts Balance at End
of Period Additions Written Off of Period
--------- ---------- ----------- ---------
Allowance for Doubtful Accounts $897 $245 $384 $758
</TABLE>
F-18
<PAGE> 42
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.
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 Sheet as of December 31, 1997 and 1996
Consolidated Statement of Operations for the Years Ended December 31, 1997,
1996 and 1995
24
<PAGE> 43
Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
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 Schedule
Schedule II - Valuation and qualifying accounts
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is presented in the
financial statements or notes thereto.
3. EXHIBITS
The following Exhibits are either filed herewith or were filed as
exhibits to such other document filed with the Commission as is indicated:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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 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
25
<PAGE> 44
10.3 Irish facility agreement, incorporated by reference to Exhibit
10(g) to the 1991 10-K
10.4 The Industrial Development Authority grant agreements,
incorporated by reference to Exhibit 10(h) to the 1991 10-K
10.5 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
10.6 Patlex License, incorporated by reference to Exhibit 10.9 to
the 1993 S-1
10.7 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*
10.8 Executive Stock Option Agreement Between the Company and David
F. Muller, incorporated by reference to Exhibit 10.9 to the
1992 10-K
11 Statement Re: Computation of Per Share Earnings
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
None
*Management Compensation Plan
26
<PAGE> 45
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 27, 1998 By: /s/ Robert J. Palmisano
-------------- -----------------------
Robert J. Palmisano
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.
Signature Title Date
/s/ Robert J. Palmisano Director and
- ----------------------- Chief Executive Officer March 27, 1998
Robert J. Palmisano --------
Executive Vice President,
/s/ Robert J. Kelly Chief Financial Officer and
- ----------------------- Treasurer March 27, 1998
Robert J. Kelly --------
/s/ Jeffrey A. Bernfeld
- ----------------------- Director March 27, 1998
Jeffrey A. Bernfeld
/s/ Richard F. Miller
- -----------------------
Richard F. Miller Director March 27, 1998
--------
/s/ John A. Norris
- ----------------------- Director March 27, 1998
John A. Norris --------
/s/ Richard M. Traskos Director and
- ----------------------- Chairman of the Board March 27, 1998
Richard M. Traskos --------
27
<PAGE> 1
Exhibit 11
SUMMIT TECHNOLOGY, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $ 1,503 $(13,491) $ 1,575
Loss from discontinued operations (3,340) (23,366) (4,542)
Gain on sale of discontinued operations 10,711 -- --
------- -------- --------
Net income (loss) 8,874 (36,857) (2,967)
------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE:
Weighted average common shares outstanding 31,182 30,956 27,674
------- -------- --------
Income (loss) per share from continuing operations $ .05 $ (.44) $ .06
Loss per share from discontinued operations (.11) (.75) (.17)
Gain on sale of discontinued operations .34 -- --
------- -------- --------
Net income (loss) per share $ .28 $ (1.19) $ (.11)
------- -------- --------
DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average common shares outstanding 31,182 30,956 27,674
Weighted average stock options outstanding 191 210 423
------- -------- --------
Total weighted average common shares outstanding 31,373 31,166 28,097
------- -------- --------
Income (loss) per share from continuing operations $ .05 $ (.43) $ .06
Loss per share from discontinued operations (.11) (.75) (.17)
Gain on sale of discontinued operations .34 -- --
------- -------- --------
Net income (loss) per share $ .28 $ (1.18)(A) $ (.11)
------- -------- --------
</TABLE>
(A) This computation is submitted as an exhibit to the Company's Form 10-K in
accordance with Regulation S-K Item 601(b) (11), although presenting the
computation is not in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share, because the computation produces an
antidilutive result.
<PAGE> 1
Exhibit 23
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), (No. 333-03765),
(No. 333-26142) and (No. 333-41583) on Forms S-8, S-8, S-8, S-3, S-3, S-8, and
S-8, respectively, of Summit Technology, Inc. of our report dated March 6, 1998,
except as to Note 10, which is as of March 27, 1998 relating to the consolidated
balance sheets of Summit Technology, Inc. and subsidiaries as of December 31,
1997 and 1996, 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, 1997, which reports appear in the
December 31, 1997 annual report on Form 10-K of Summit Technology, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 6, 1998, except as to Note 10,
which is as of March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 33,720
<SECURITIES> 26,770
<RECEIVABLES> 9,654
<ALLOWANCES> 758
<INVENTORY> 14,494
<CURRENT-ASSETS> 87,681
<PP&E> 21,960
<DEPRECIATION> 13,367
<TOTAL-ASSETS> 115,103
<CURRENT-LIABILITIES> 19,786
<BONDS> 6,330
0
0
<COMMON> 313
<OTHER-SE> 88,674
<TOTAL-LIABILITY-AND-EQUITY> 115,103
<SALES> 88,791
<TOTAL-REVENUES> 88,791
<CGS> 55,902
<TOTAL-COSTS> 89,564
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 245
<INTEREST-EXPENSE> 1,195
<INCOME-PRETAX> 1,640
<INCOME-TAX> 137
<INCOME-CONTINUING> 1,503
<DISCONTINUED> (3,340)
<EXTRAORDINARY> 10,711
<CHANGES> 0
<NET-INCOME> 8,874
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
