<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: SEPTEMBER 30, 1999
------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-16937
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SUMMIT TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2897945
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21 Hickory Drive, Waltham, Massachusetts 02451
- - ---------------------------------------- ----------
(Address of principal executive offices) (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
---------------------------------------------
(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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
On October 29, 1999, 46,745,745 shares of common stock, par value $0.01 per
share were outstanding.
<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 73,820 $ 31,314
Short-term investments 10,654 33,295
Receivables, net of allowances 17,602 12,764
Inventories 22,836 17,403
Other current assets 3,009 5,965
-------- --------
Total current assets 127,921 100,741
Long-term investments 35,074 25,253
Property and equipment, net 16,512 8,802
Patents and other intangibles, net 9,827 7,497
Purchased technologies, net 27,319 --
Goodwill, net 54,412 --
Deferred tax assets 11,695 --
Other assets 3,902 2,632
-------- --------
TOTAL ASSETS $286,662 $144,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,551 $ 4,132
Accrued expenses 8,032 5,081
Current maturities of long-term debt 1,449 6,431
Deferred revenue 6,760 6,144
Deferred tax liabilities 1,005 --
-------- --------
Total current liabilities 25,797 21,788
Deferred revenue - noncurrent 4,285 3,653
Deferred tax liabilities - noncurrent 17,450 --
Long-term debt, less current maturities 156 150
-------- --------
Total liabilities 47,688 25,591
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value.
Authorized 5,000,000 shares; none
issued -- --
Common stock, $.01 par value. Authorized
100,000,000 shares; issued 46,890,422
shares in 1999 and 31,322,880 shares
in 1998; outstanding 46,725,707
shares in 1999 and 31,153,765
in 1998 469 314
Additional paid-in capital 270,791 149,482
Accumulated deficit (42,373) (20,219)
Accumulated other comprehensive income (loss) 10,895 (9,411)
Treasury stock, at cost, 164,715 shares
in 1999 and 169,115 shares in 1998 (808) (832)
-------- --------
Total stockholders' equity 238,974 119,334
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $286,662 $144,925
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
(AS RESTATED, (AS RESTATED,
NOTE 8) NOTE 8)
======= ======= ======== =======
Revenues:
<S> <C> <C> <C> <C>
Systems $ 4,879 $ 2,824 $ 12,608 $11,507
License fees, service and other 11,233 8,411 32,718 22,705
Contact lens and related products 11,998 11,906 35,869 35,069
------- ------- -------- -------
Total revenues 28,110 23,141 81,195 69,281
------- ------- -------- -------
Cost of revenues:
Systems 4,043 2,644 10,938 9,611
License fees, service and other 4,934 3,114 11,719 9,116
Contact lens and related products 7,090 7,236 21,504 21,730
Inventory write-down -- -- 2,800 --
------- ------- -------- -------
Total cost of revenues 16,067 12,994 46,961 40,457
------- ------- -------- -------
Gross profit 12,043 10,147 34,234 28,824
------- ------- -------- -------
Operating expenses:
Selling, general and administrative 11,326 7,781 30,463 22,198
Research, development and regulatory 3,698 1,806 9,628 5,405
Acquired in-process research and development -- -- 19,800 --
------- ------- -------- -------
Total operating expenses 15,024 9,587 59,891 27,603
------- ------- -------- -------
Operating income (loss) (2,981) 560 (25,657) 1,221
Litigation settlement, net of related expenses -- -- -- 34,386
Interest income 745 1,299 2,457 3,165
Interest expense (61) (182) (257) (630)
Other income (expense) 2,280 (90) 2,048 (50)
------- ------- -------- -------
Income (loss) before provision for income taxes (17) 1,587 (21,409) 38,092
Provision for income taxes 588 32 745 4,952
------- ------- -------- -------
Income (loss) before cumulative effect of
accounting principle change (605) 1,555 (22,154) 33,140
Cumulative effect of accounting principle
change, net of tax -- -- -- (10,103)
------- ------- -------- -------
Net income (loss) $ (605) $ 1,555 $(22,154) $23,037
======= ======= ======== =======
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of
accounting principle change $ (0.01) $ 0.05 $ (0.58) $ 1.06
Cumulative effect of accounting principle
change, net of tax -- -- -- (0.32)
------- ------- -------- -------
Net income (loss) per share $ (0.01) $ 0.05 $ (0.58) $ 0.74
------- ------- -------- -------
Weighted average number of common shares:
Basic 44,700 31,243 38,360 31,273
Effect of dilutive securities outstanding -- 54 -- 32
------- ------- -------- -------
Diluted 44,700 31,297 38,360 31,305
======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
(AS RESTATED, (AS RESTATED,
NOTE 8) NOTE 8)
======== ======== ======== =======
<S> <C> <C> <C> <C>
Net income (loss) $ (605) $ 1,555 $(22,154) $23,037
Net unrealized gain (loss) on investment, net of tax (18,438) (10,210) 20,306 2,761
Reclassification adjustment, net of tax (1,522) -- (1,522) --
-------- -------- -------- -------
Comprehensive income (loss) $(20,565) $ (8,655) $ (3,370) $25,798
======== ======== ======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
1999 1998
(AS RESTATED,
NOTE 8)
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(22,154) $23,037
Cumulative effect of accounting principle change -- 10,103
Acquired in-process research and development 19,800 --
Inventory write-down 2,800 --
Other non-cash items 24 --
Change in deferred taxes 407 --
Gain on sale of investment (2,430) --
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization 6,304 2,640
Provision for losses on accounts receivables 13 246
Changes in operating assets and liabilities:
Receivables (4,775) (4,921)
Inventories (3,642) 373
Prepaid expenses and other assets (710) (2,054)
Accounts payable 4,230 727
Accrued expenses (2,853) 2,170
Deferred revenue 906 (2,767)
-------- -------
Net cash provided (used) by operating activities (2,080) 29,554
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,235) (41,733)
Purchases of long-term investments (1,797) (20,296)
Maturities of short-term investments 7,802 27,539
Maturities of long-term investments 5,669 6,276
Sales of short-term investments 18,074 4,210
Sales of long-term investments 11,616 2,345
Additions to property and equipment (7,387) (2,534)
Purchase of patents and other intangibles (375) --
Decrease in restricted cash -- 1,264
Note receivable and other (449) --
Proceeds from sale of investment 3,780 --
Cost of acquisition, net of cash acquired (46,344) --
-------- -------
Net cash used by investing activities (12,646) (22,929)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (5,000) (5,000)
Payments of capital lease obligations (169) (155)
Proceeds from exercise of stock options 2,003 37
Proceeds from other shares issued -- 73
Purchases of treasury stock -- (1,855)
Proceeds from issuance of common stock 60,398 --
-------- -------
Net cash provided (used) by financing activities 57,232 (6,900)
-------- -------
Increase (decrease) in cash and cash equivalents 42,506 (275)
Cash and cash equivalents, beginning of year 31,314 33,720
-------- -------
Cash and cash equivalents, end of period $ 73,820 $33,445
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 248 $ 735
Income taxes paid $ 126 $ 1,965
See accompanying notes to unaudited condensed consolidated financial statements.
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SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. NATURE OF BUSINESS
The operations of Summit Technology, Inc. and subsidiaries (the "Company")
presently consist of two operating segments: (i) laser vision correction which
includes manufacturing, selling and servicing laser systems and related products
to correct vision disorders and collecting per procedure license fees from users
of its systems and (ii) contact lenses and related products which are sold via
mail order through its wholly-owned subsidiary, Lens Express, Inc. ("Lens").
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, these unaudited condensed consolidated financial statements contain all
adjustments (consisting of only normal, recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations,
comprehensive income (loss) and cash flows of the Company for the interim
periods.
The accompanying consolidated financial statements and related notes should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year.
Earnings Per Share: Basic earnings per share amounts are based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share amounts include the effect of all potential common shares, if
dilutive, that were outstanding during the period.
Reclassifications: Certain prior period information has been reclassified to
conform to current period presentation of data.
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1999 1998
- - -------------------------------------------------------------------
Raw materials and subassemblies $ 8,611 $ 5,599
Work in process 5,142 1,244
Finished goods 9,083 10,560
- - -------------------------------------------------------------------
Total $22,836 $17,403
===================================================================
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4. ACQUISITION
On April 29, 1999, the Company completed its acquisition of Orlando, FL-based
Autonomous Technologies Corporation ("Autonomous") for 11,190,306 shares of the
Company's common stock and $46,826 in cash. Autonomous is engaged in the design
and development of next-generation excimer laser instruments for laser
refractive surgery. Autonomous' LADARVision System combines laser radar eye
tracking with narrow beam shaping technology.
The acquisition of Autonomous has been accounted for under the purchase method
of accounting. The issuance of 11,190,306 shares of Summit common stock was
valued at $4.2917 per share, which represents the price at which the total share
and cash consideration paid by the Company became substantially fixed. The
purchase price has been allocated to the assets acquired by the Company and to
the liabilities assumed by the Company based on their estimated fair values.
An independent third-party appraisal company has conducted a valuation of the
intangible assets that the Company acquired. These intangibles include purchased
technologies, in-process research and development and other intangible assets.
Purchased technologies primarily consist of Autonomous' LADARVision technology.
The fair value of the in-process research and development of $19,800 which
relates to Autonomous' CustomCornea research project has been recorded as an
expense in the second quarter of 1999.
The valuation of these intangibles was determined using the income method.
Revenue projections were completed through year 2012 and were separately
identified as follows: (i) revenue derived from products relying on current
technology, (ii) revenue derived from products relying on a new in-process
research and development program -- CustomCornea, and (iii) revenue from future
technologies not yet developed. Revenue generated from the CustomCornea product
has similar margin and expense levels as those generated from the LADARVision
product. The projected cash flows were discounted using a 27.5% rate. The fair
value of in-process research and development was determined separately from all
other acquired assets using the percentage of completion method. The percentage
of completion ratio was calculated by dividing total expected expenditures on
CustomCornea through the acquisition closing date by the total estimated
expenditures to achieve technological feasibility. Management is responsible for
the estimate of the value of the in-process research and development.
Amortization is being recognized on a straight-line basis over the following
number of years:
Goodwill -- 25 years
Purchased technologies -- 15 years
Other intangible asset -- 5 years
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<PAGE> 8
The total purchase price and allocation of the purchase price is as follows:
TOTAL PURCHASE PRICE
Summit common stock (11,190,306 shares @ $4.2917 per share) $ 48,025
Cash paid to Autonomous equity holders 46,826
Acquisition-related fees and expenses 3,537
Fair value of Autonomous options and warrants exchanged for
equivalent Summit stock options and warrants at the
closing of the merger 11,037
--------------------------------------------------------------------
Total purchase price $109,425
====================================================================
ALLOCATION OF PURCHASE PRICE
Net worth of Autonomous $ 2,991
Deferred tax assets, net of valuation allowance 12,520
Deferred tax liabilities (12,520)
In-process research and development 19,800
Purchased technologies 28,100
Other intangible asset 3,200
Goodwill 55,334
--------------------------------------------------------------------
Total $109,425
====================================================================
The results of Autonomous' operations have been included in the Company's
consolidated statement of operations from the effective date of acquisition,
which was April 29, 1999. The following unaudited pro forma information combines
the results of operations of Summit and Autonomous as if the acquisition had
occurred on January 1, 1998 and excludes one-time charges of $19.8 million for
acquired in-process research and development and $2.8 million to write-down
inventory to its net realizable value as a result of the acquisition. The pro
forma information does not purport to represent what the consolidated financial
results of operations actually would have been if the acquisition in fact had
occurred on January 1, 1998 or to project the consolidated results of operations
of any future period.
Nine months ended
September 30,
1999 1998
------------------------------------------------------------------
Total revenues $81,361 $69,416
Net income(loss) $(7,259) $ 9,985
Basic earning (loss) per share $ (0.17) $ 0.24
Diluted earning (loss) per share $ (0.17) $ 0.23
==================================================================
5. CONTINGENCIES
The Company is a party to various litigation matters as described below. The
Company has denied, or will deny, the substantive allegations in each of these
actions, and intends to defend them vigorously. The Company may be served with
additional complaints of a similar nature in the future. The Company may not
prevail in the pending or any possible additional actions, and the resolutions
of the actions, individually or in the aggregate, may have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. The Company has not made any provision for any loss that may result upon
resolution of these matters in the accompanying unaudited consolidated financial
statements.
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<PAGE> 9
ANTITRUST LITIGATION
The Company, VISX, and certain of their affiliates (including Pillar Point
Partners, a partnership between affiliates of the Company and VISX) are involved
in a number of antitrust lawsuits which, among other things, allege price-fixing
in connection with per-procedure patent royalties charged by the Company and
VISX. These suits are pending in both federal and state court, on behalf of both
direct purchasers from the Company and VISX and patients/consumers, and include
both purported class actions and individual actions. Most of the federal
lawsuits have been transferred for pretrial purposes to the U.S. District Court
for the District of Arizona by the Judicial Panel on Multidistrict Litigation as
In re: Pillar Point Partners Antitrust and Patent Litigation.
FEDERAL ANTITRUST LITIGATION
Cases Consolidated for Pre-Trial Proceedings
- - --------------------------------------------
In April 1998, The Eye Professionals, P.A. commenced an action in the U.S.
District Court for the District of New Jersey against the Company and VISX. The
case purported to be a class action on behalf of all individuals or entities
that have paid a per-procedure fee directly to either defendant for use of a
Summit or VISX laser to perform laser vision correction surgery at any time
after November 1, 1995. The complaint alleged, inter alia, price-fixing in
violation of Section 1 of the Sherman Act. The action sought treble damages,
costs of suit, attorneys' fees, and various forms of declaratory and injunctive
relief. Similar actions were also filed in May 1998 by Metropolitan Eye Center
and Outpatient Surgical Facility, Inc. in the U.S. District Court for the
Northern District of California against the Company, VISX, Summit Partner and
VISX Partner and by New England Laser Vision, Inc. in the U.S. District Court
for the District of New Jersey against the Company and VISX. In August 1998,
David R. Shapiro, M.D., filed another similar purported class action against the
Company and VISX in the U.S. District Court for the District of Arizona.
Plaintiffs in these cases have agreed to consolidation of the four purported
class actions and filed a single consolidated amended complaint in the U.S.
District Court for the District of Arizona. It purports to be a class action on
behalf of all persons and entities (excluding governmental entities, defendants,
subsidiaries and affiliates of defendants) in the United States who paid a
per-procedure royalty to any defendant or any alleged co-conspirator or any
subsidiary or affiliate thereof, at any time after September 1995. The
Consolidated Amended Class Action Complaint seeks, among other things,
unspecified treble damages on behalf of plaintiffs and the alleged class, along
with attorneys' fees, costs, and injunctive and declaratory relief.
In September 1998, Laser Eye Center of Texas, L.L.P. and Warren D. Cross, M.D.,
filed a purported class action against the Company, Summit Partner, VISX, VISX
Partner and Pillar Point Partners in the U.S. District Court for the Southern
District of Texas. The suit purports to be a class action on behalf of all
persons and entities who have paid money to defendants, or any of their
subsidiaries, on a per-procedure basis for the ability to use defendants' laser
equipment or technology to perform laser vision correction surgery. Plaintiffs
allege, among other things, price-fixing and monopolization in violation of
Sections 1 and 2 of the Sherman Act. They seek, among other things, treble
damages on behalf of the alleged class, costs of suit, including attorneys'
fees, and declaratory and injunctive relief. This case was transferred to the
District of Arizona for consolidated pre-trial proceedings.
In February 1999, Carolina Eye Associates, P.A. and Carolina-South Eye
Associates filed suit against VISX and the Company in the U.S. District Court
for the District of New Jersey. This action, like the consolidated federal
actions described above, purports to be a class action on behalf of all persons
and entities (excluding governmental entities, defendants, subsidiaries and
affiliates of defendants) in the United States who paid a per-procedure royalty
to any defendant or any alleged co-conspirator or any subsidiary or affiliate
thereof, at any time after September 1995. The complaint alleges, among other
things, price-fixing in violation of Section 1 of the Sherman Act and seeks,
among other things, compensatory damages of at least $100,000 plus $8,300 per
month from the filing of the complaint until the date of judgment, trebling of
those damages, attorneys' fees,
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<PAGE> 10
costs, and declaratory and injunctive relief. This case was transferred to the
District of Arizona for consolidated pre-trial proceedings.
In June 1996, a Texas ophthalmologist, Robert G. Burlingame, sued the Company,
Summit Partner, VISX, VISX Partner and Pillar Point Partners in U.S. District
Court for the Northern District of California alleging price-fixing in violation
of Section 1 of the Sherman Act and state antitrust laws and fraud and deceit in
connection with certain of the Company's sales and marketing activities. The
plaintiff seeks, among other things, compensatory damages of at least $30 plus
$2 to $3 per month until the date of judgment, trebling of those damages,
compensatory and punitive damages on the fraud claim against the Company of at
least $500 plus $2 to $3 per month until the date of judgment, attorneys' fees,
costs and declaratory and injunctive relief. This case was transferred to the
District of Arizona for consolidated pre-trial proceedings.
In September 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 antitrust claims and seeking
substantially similar relief, including damages before trebling of at least $125
plus $13 per month until the date of judgment. Plaintiff's counsel in the
Shepherd case has indicated that he intends to seek certification of the case as
a class action. This case was transferred to the District of Arizona for
consolidated pre-trial proceedings.
In November 1997, Antoine L. Garabet, M.D., Inc. and Abraham V. Shammas, M.D.,
Inc., d/b/a The Laser Eye Center, sued the Company, Summit Partner, VISX, VISX
Partner and Pillar Point Partners in the U.S. 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 fraudulent inducement and deceit in connection with
certain of the Company's sales and marketing activities. The plaintiffs sought,
among other things, compensatory damages on the fraud claim against the Company
of at least $49 plus prejudgment interest, disgorgement of revenues and profits,
a constructive trust on defendants' revenues and profits, punitive damages of an
unspecified amount, injunctions against enforcement of the Pillar Point patents
and against alleged continuing violations of the antitrust laws, declaratory
relief, attorneys' fees and costs. This case was transferred to the District of
Arizona for consolidated pre-trial proceedings. The court has granted a motion
to dismiss. The Company had earlier filed a counterclaim for patent infringement
against the plaintiffs and Antoine L. Garabet, M.D. and Abraham V. Shammas,
M.D., individually. The counterclaim alleges that counterclaim-defendants have
infringed certain of the Company's patents by using excimer laser systems
manufactured by the Company without having a license to do so, and seeks treble
damages and injunctive relief. The parties have stipulated to consolidate this
counterclaim with the Robert T. Lin litigation discussed below under "PATENT
LITIGATION."
In May 1999, Freedom Vision Laser Center, L.P. filed suit in the United States
District Court for the Central District of California against the Company,
Autonomous, Summit Partner, VISX, VISX Partner and Pillar Point Partners. The
complaint alleges, among other things, price-fixing, monopolization, attempted
monopolization, and conspiracy to monopolize, in violation of Sections 1 and 2
of the Sherman Act, as well as violations of the California Business and
Professions Code. Plaintiff seeks, among other things, damages that are alleged
to be more than $1,000 before trebling, disgorgement of alleged illegal and
ill-gotten gains, declaratory and injunctive relief, and attorneys' fees and
costs. This case has been transferred to the District of Arizona for
consolidated pre-trial proceedings.
Cases Not Consolidated for Pre-Trial Proceedings
- - ------------------------------------------------
In April 1999, Antoine L. Garabet, M.D., Inc. and Abraham V. Shammas, M.D.,
Inc., d/b/a The Laser Eye Center, filed suit in the U.S. District Court for the
Central District of California against the Company and Autonomous. The suit
alleges, among other things, that the Company's acquisition of Autonomous may
substantially lessen competition or tend to create a monopoly in violation of
Section 7 of the Clayton Act, Section 1 of the Sherman Act, and the California
Business and Professions Code. The complaint seeks, among other
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<PAGE> 11
things, unspecified compensatory damages, trebling of those damages, declaratory
and injunctive relief, divestiture in the event that the acquisition of
Autonomous is consummated, restitutionary relief, including disgorgement of
alleged unlawful profits and the imposition of a constructive trust over alleged
ill-gotten gains, and attorneys' fees and costs. Plaintiffs also threatened to
seek a temporary restraining order, preliminary injunction, and other
unspecified preliminary injunctive relief directed at the acquisition. The
Company has filed a counterclaim for copyright infringement and unfair
competition against the plaintiffs and Antoine L. Garabet, M.D. and Abraham V.
Shammas, M.D., individually.
Counterclaims
The Company is the subject of additional Federal antitrust litigation as a
result of counterclaims to patent litigation initiated by Pillar Point Partners.
A discussion of those counterclaims is presented below under "Patent
Litigation."
STATE ANTITRUST LITIGATION
Beginning in March 1998, a number of actions brought by individuals under the
Cartwright Act and the California Business and Professions Code were commenced
against the Company, Summit Partner, VISX and VISX Partner in Superior Court of
Santa Clara County. In May 1998, these actions were consolidated as In re
PRK/LASIK Consumer Litigation. In June 1998, plaintiffs B.J. Snyder, Donna
McMahan, Paula Mobsby, Helen Thomas, Carmen Ocariz, Martin Hermans, Ken
Bartlett, Jackie Kirk, Grace Geniusz, Jocelyn Joseph, Andrew Stoddard, and
Cynthia Brubecker filed an Amended Consolidated Master Complaint for Damages
("Amended Complaint") in this matter against the Company, Summit Partner, VISX,
and VISX Partner. The Amended Complaint purports to be filed on behalf of all
natural persons in the United States who underwent excimer laser surgery with a
laser manufactured by the Company or VISX during the period beginning October
1995, and paid a per-procedure fee indirectly to a defendant, excluding
defendants, any unnamed co-conspirators of defendants, defendants' predecessors,
successors, parents, subsidiaries, affiliates, officers and directors,
governmental entities, and any and all judges and justices assigned to hear any
aspect of the litigation. The Amended Complaint seeks unspecified compensatory
damages, restitution and/or disgorgement of alleged ill-gotten gains,
prejudgment and postjudgment interest, costs of suit, and attorneys' fees, as
well as various forms of declaratory and injunctive relief, including an order
permitting any person or entity with which the Company or VISX or both have
entered into any agreement since June 3, 1992, for the purchase, license, or use
of any of the Pillar Point Patents to withdraw from such agreement without
penalty or obligation. James Ballard filed a similar suit against the Company,
Summit Partner, VISX, VISX Partner, Pillar Point Partners, and other individual
defendants in Superior Court of San Diego County. This suit has been transferred
to Santa Clara County and consolidated as part of In re PRK/LASIK Consumer
Litigation. The parties have stipulated to the conditional certification of a
class of natural persons in California, Alabama, Arizona, the District of
Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico,
New York, North Carolina, North Dakota, South Dakota, Tennessee, West Virginia,
and Wisconsin who have undergone ophthalmic refractive surgery with an excimer
laser manufactured by the Company or VISX.
In April 1998, Penny S. Marks, an individual who allegedly has had laser vision
correction surgery performed, commenced an action in Florida state court against
the Company and VISX. The case purports to be a class action on behalf of all
persons who have had a PRK procedure in the State of Florida from October 20,
1995 up to and including the date the class certification hearing begins. The
complaint alleges various violations of the Florida Deceptive and Unfair Trade
Practices Act, the Florida Antitrust Act and Section 5 of the Federal Trade
Commission Act. The complaint seeks unspecified compensatory damages, costs and
attorneys' fees, as well as declaratory and injunctive relief. Plaintiff has
filed a motion seeking class certification.
In June 1998, Barbara Worcester, an individual who allegedly has had laser
vision correction surgery performed, filed an action in Wisconsin state court
against the Company, Summit Partner, VISX, VISX Partner and Pillar Point
Partners. The case purports to be a class action on behalf of all Wisconsin
purchasers of refractive laser surgery
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<PAGE> 12
procedures. The complaint alleges violations of the antitrust laws of the State
of Wisconsin. The complaint seeks unspecified damages, trebling of those
damages, attorneys' fees and costs, and declaratory and injunctive relief.
Defendants removed this action to federal court, and it has been transferred to
the District of Arizona. Plaintiff has filed a motion seeking class
certification.
In January 1999, Karen Frankson, Virginia Harmes, and Beth Luetschwager, three
individuals who allegedly have had laser vision correction surgery performed,
filed a similar purported class action in Wisconsin state court. Defendants
removed this action to federal district court in Wisconsin, and it has been
transferred to the District of Arizona. Plaintiffs' counsel has indicated that
plaintiffs may attempt to dismiss this case, without prejudice.
In May 1999, Linda Brisson, an individual who allegedly has had laser vision
correction surgery performed, commenced an action in Minnesota state court
against the Company, Summit Partner, VISX, VISX Partner and Pillar Point
Partners. The case purports to be a class action on behalf of all Minnesota
purchasers of refractive laser surgery procedures. The complaint alleges, among
other things, price-fixing in violation of Minnesota antitrust law. The
complaint seeks, among other things, compensatory damages alleged to be at least
in the millions of dollars, trebling of those damages, attorneys' fees and
costs, and injunctive and other relief.
SHAREHOLDER LITIGATION
Between August 1996 and February 1997 various shareholder actions were commenced
against the Company and certain of its officers in the U.S. 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 and violations
of Section 20A of the Securities Exchange Act of 1934, arising out of alleged
insider trading by certain defendants. The actions were consolidated, by order
of the Court entered December 2, 1996, as In re Summit Technology Securities
Litigation. Plaintiffs seek certification of the action as a class action on
behalf of all purchasers of Summit 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, attorneys'
fees and extraordinary and/or injunctive relief.
In October 1996, an additional class action was commenced in the U.S. District
Court for the District of Massachusetts against the Company, its directors,
certain of the Company's 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 compensatory damages,
interest, costs and expenses, attorneys' fees and extraordinary and/or
injunctive relief.
In December 1996, one of the Company's shareholders filed in the U.S. District
Court for the District of Massachusetts a derivative action, purportedly on
behalf of the Company, against the Company as nominal defendant, directors of
the Company and certain present or former officers of the Company. 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 breach of fiduciary
duty, gross negligence and insider trading against individual defendants. It
seeks damages, interest, costs and expenses and attorneys' fees.
PATENT LITIGATION
Pillar Point Partners, Summit Partner and VISX Partner commenced patent
infringement litigation against an ophthalmologist believed to have used or be
using homemade laser systems not licensed under patents held by Pillar Point
Partners and one alleged manufacturer of such laser systems. These actions were
originally pending as Pillar Point
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Partners, et al. v. Jon G. Dishler, et al. (U.S. District Court, District of
Colorado) and Pillar Point Partners, et al. v. Jui-Teng Lin, et al. (U.S.
District Court, Middle District of Florida). Each action was transferred to the
District of Arizona. The defendants in the Dishler action have asserted
counterclaims against Summit Partner, VISX Partner, and Pillar Point Partners
seeking declarations that the patents in suit are invalid and unenforceable.
They have also raised antitrust counterclaims alleging price-fixing, tying,
monopolization, concerted refusal to deal, conspiracy to monopolize, and
attempted monopolization. Defendants seek unspecified actual damages, trebling
of those damages, attorneys' fees, costs and injunctive relief.
In December 1998, the Company filed a patent infringement lawsuit in the U.S.
District Court for the District of Massachusetts against Nidek, whose laser
system recently received FDA approval. The suit alleges that Nidek's excimer
laser system infringes certain of the Company's U.S. patents and seeks damages
and injunctive relief. On January 29, 1999, a district court in Tokyo, Japan
ruled against the Company in a patent infringement lawsuit which the Company
initiated against Nidek in 1996. The Japanese lawsuit involved the Japanese
counterpart of one of the two U.S. patents which the Company has alleged Nidek
infringes in the U.S. lawsuit. The Company has appealed the Tokyo district court
decision.
In June 1999, the Company commenced a patent infringement lawsuit against George
I. Bekov in the U.S. District Court for the District of Massachusetts. The suit
alleges that Bekov has induced infringement of certain of the Company's patents,
including by disabling card readers and maintaining systems which are not
licensed by the Company, and seeks damages and injunctive relief.
In June 1999, the Company commenced a patent infringement lawsuit against Robert
T. Lin, Ferzaad Moosa, and Randa M.R. Garrana in the U.S. District Court for the
Central District of California. The suit alleges that the defendant physicians
have infringed certain of the Company's patents by using excimer laser systems
manufactured by the Company without having a license to do so, and seeks damages
and injunctive relief. This case has been transferred to the District of
Arizona.
In October 1999, the Company commenced a patent infringement lawsuit against
Icon Laser Centers (U.S.), Inc. in the U.S. District Court for the District of
Delaware. The suit alleges that the defendant has infringed and/or contributed
to and/or induced infringement of certain of the Company's patents by using the
Nidek EC-5000 Excimer Laser System without having a license to do so, and seeks
damages and injunctive relief.
OTHER LITIGATION
In October 1992, Joseph Seriani brought suit against Lens Express 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 Express 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
Express, 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 Express and others in the U.S. District Court for the
Southern District of Illinois, alleging substantially similar claims. On October
7, 1999, the Court issued an Order to Show Cause why the case should not be
dismissed for lack of prosecution.
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6. Business Segments
The Company is internally organized and operates in two operating segments:
laser vision correction and contact lens and related products. The Company's
laser vision correction business consists of manufacturing, selling and
servicing laser systems and related products to correct vision disorders and
collecting per procedure license fees from users of its systems. The Company's
mail order contact lens business operates under its wholly owned subsidiary,
Lens. Lens is primarily a retailer and wholesaler of contact lenses and related
products.
The category "Other" includes the Company's investments, deferred taxes,
interest income, interest expense, and other non-operating income (expense).
<TABLE>
<CAPTION>
Laser vision Contact lens and
correction related products Other Total
---------- ---------------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Nine months ended September 30, 1999 $ 45,326 $35,869 $ -- $ 81,195
Nine months ended September 30, 1998 (as restated) 34,212 35,069 -- 69,281
Three months ended September 30, 1999 $ 16,112 $11,998 $ -- $ 28,110
Three months ended September 30, 1998 (as restated) 11,235 11,906 -- 23,141
Income (loss) from continuing operations before
provision for income taxes:
Nine months ended September 30, 1999 $(29,610) $ 3,953 $ 4,248 $(21,409)
Nine months ended September 30, 1998 (as restated) 30,981 4,626 2,485 38,092
Three months ended September 30, 1999 $ (4,631) $ 1,650 $ 2,964 $ (17)
Three months ended September 30, 1998 (as restated) (1,169) 1,729 1,027 1,587
Total assets:
September 30, 1999 $153,556 $ 11,069 $122,037 $286,662
December 31, 1998 47,744 10,048 87,133 144,925
</TABLE>
7. Supplemental Cash Flow Information
For the nine months ended September 30, 1999, the Company recorded non-cash
transactions related to the Autonomous acquisition (see Note 4). For the nine
months ended September 30, 1998, non-cash transactions included $321 for capital
lease obligations incurred, and $1,183 for stock distributed to former Lens
owners as an adjustment of the exchange ratio in the Lens acquisition and
related distribution of $168 of LCA Vision Inc.
common stock to former Lens owners.
8. Restatement
During the fourth quarter of 1998, the Company changed its method of accounting
for membership fee revenues, which were previously recognized when received.
Under the new accounting method, the Company recognizes membership fee revenues
ratably over the term of the membership, which are one to five years. Adoption
of the new method resulted in a one-time charge of $10,103, or $.32 per basic
and diluted share, representing the cumulative effect of adopting the new
accounting principle as of January 1, 1998. The Company has restated the first
three quarters of 1998 in accordance with SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements".
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PART I: FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The operations of Summit Technology, Inc. and subsidiaries (the "Company")
presently consist of two operating segments: (i) laser vision correction which
includes manufacturing, selling and servicing laser systems and related products
to correct vision disorders and collecting per procedure license fees from users
of its systems and (ii) contact lenses and related products which are sold via
mail order through its wholly-owned subsidiary, Lens Express, Inc. ("Lens").
On April 29, 1999, the Company completed its acquisition of Autonomous
Technologies Corporation ("Autonomous") for approximately 11.2 million shares of
Summit common stock and $46.8 million in cash. An independent third party
appraisal company has conducted a valuation of the intangible assets that were
acquired. Goodwill of $55.3 million will be amortized over 25 years, purchased
technologies of $28.1 million will be amortized over 15 years and other
intangible asset of $3.2 million will be amortized over five years. In addition,
the Company recorded a one-time charge of $19.8 million in the second quarter of
1999 for acquired in-process research and development. As a result of the
acquisition, the Company recorded a one-time charge of $2.8 million in the
second quarter of 1999 to write-down Summit's inventory to its net realizable
value due to a reduction in future requirements of work-in-process inventory and
spare parts inventory. Results of operations discussed in this section include
the effects of operations of Autonomous from the effective date of the
acquisition and do not include any historical results of Autonomous.
Information about U.S. procedure volume is based on the Company's sale of
OmniCards to U.S. customers and procedures performed on the LADARVision excimer
laser system. OmniCards are credit card-sized, data encrypted plastic cards that
must be inserted into the Apex Plus excimer laser system (recently relaunched as
the Infinity Lasik System) to enable customers to perform a procedure. OmniCards
may be encoded with a single procedure or with several procedures, and they are
priced based on the number of procedures they permit. As part of the Partnership
Vision Plan arrangements with customers, the Company may bundle the OmniCard
price with other products and services. In addition, the Company may offer
volume discounts to its high-use customers that cause them to purchase an
inventory of procedures in advance. As a result, the Company's procedure volume
data do not necessarily reflect the actual number of procedures performed during
a particular period. Procedures are tracked on the LADARVision system by
internal software that enables billing information to be processed via modem,
and are thus likely to offer a more direct correlation to actual procedure
volume in any given period.
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.
THIRD QUARTER RESULTS OF OPERATIONS
Revenues: Revenues for the three months ended September 30, 1999 increased 21%
to $28.1 million from $23.1 million for the three months ended September 30,
1998. Revenues from the Company's laser vision correction business increased 43%
to $16.1 million in the third quarter of 1999 from $11.2 million in the third
quarter of 1998. In the third quarter of 1999, the number of procedures in the
U.S. performed on the Company's laser systems, as measured by OmniCard sales,
increased 79% over the third quarter of 1998 and 10% over the second quarter of
1999. Third quarter procedure volume was favorably impacted by a promotion,
intended to address customer impatience with the Company's pending hyperopia
application, offering a limited number of single OmniCard/emphasis disc
combinations at $250 each, a $25 discount off the list price of the emphasis
disk. Revenues from system sales, which include new placements as well as
upgrades of laser systems, increased 73% in the third quarter of 1999 compared
to the third quarter of 1998. System sales in the third quarter of 1999 also
include revenues from the Company's microkeratome product line, which was
acquired in the fourth quarter of 1998.
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<PAGE> 16
In the third quarter of 1999, revenues from contact lens and related products
increased 1% to $12.0 million from $11.9 million in the same period a year ago.
Cost of Revenues: Cost of revenues as a percentage of revenues increased to 57%
in the third quarter of 1999 from 56% in the third quarter of 1998. This
increase was primarily attributable to unabsorbed manufacturing cost offset by
the favorable impact from lower cost of revenues associated with license fee
revenues.
Operating Expenses: Selling, general and administrative expenses as a percentage
of revenues were 40% in the third quarter of 1999 and 34% in the third quarter
of 1998. Selling, general and administrative expenses in the third quarter of
1999 were $11.3 million compared to $7.8 million in the third quarter of 1998, a
46% increase. The 1999 third quarter expenses include the affects of the
Autonomous acquisition, including the impact of Autonomous' operations and
amortization of goodwill and other intangible asset. In addition, the Company
incurred higher sales and marketing costs associated with its contact lens
business and increased legal costs.
Research, development and regulatory expenses in the third quarter of 1999
increased to $3.7 million from $1.8 million in the same period a year ago,
primarily due to research and development costs associated with the Company's
LADARVision system. In the third quarter of 1999, the Company also incurred
increased spending on its regulatory efforts to obtain additional Food and Drug
Administration ("FDA") approvals for the use of the Apex Plus and LADARVision to
treat a wider range of common refractive vision disorders. In October 1999, the
FDA approved the Company's Apex Plus for two new indications - treatment of
hyperopia with PRK and treatment of myopia and high myopia with or without
astigmatism using LASIK. In November 1999, the FDA accepted the filing of the
Pre-market Approval Application Supplement for the LADARVision system to treat
myopia and hyperopia with or without astigmatism using LASIK.
Other Income (Expense): Interest income in the third quarter of 1999 decreased
to $.7 million in the third quarter of 1999 from $1.3 million in the third
quarter of 1998, primarily due to lower average balances of cash and cash
equivalent balances and interest-bearing investments. Interest expense decreased
to $61 thousand in the third quarter of 1999 from $182 thousand in the third
quarter of 1998 as a result of lower borrowings. Other income in the third
quarter of 1999 includes a gain of $1.5 million, or $0.03 per basic and diluted
share, net of taxes and related expenses, from the sale of 500,000 shares of LCA
Vision Inc. common stock. As of September 30, 1999, the Company owned 6.6
million shares of LCA Vision Inc. common stock. For purposes of calculating the
tax on the gain on the sale, the Company assumed a statutory tax rate of 37%.
Net Income (Loss): The net loss for the third quarter of 1999 was $.6 million,
or $0.01 per basic and diluted share, compared to net income of $1.6 million, or
$0.05 per basic and diluted share, for the third quarter of 1998.
Income Taxes: The provision for income taxes for the third quarter of 1999 was
$.6 million for losses before taxes of $17 thousand. The income tax provision
for the third quarter of 1999 was primarily attributable to the gain on the sale
of LCA Vision Inc. common stock. The effective tax rate of 2% for the third
quarter of 1998 reflects the usage of net operating loss carryforwards.
FIRST NINE MONTHS RESULTS OF OPERATIONS
Revenues: Revenues for the nine months ended September 30, 1999 increased 17% to
$81.2 million from $69.3 million for the nine months ended September 30, 1998.
Revenues from the Company's laser vision correction business were $45.3 million
in the first nine months of 1999 compared to $34.2 million in the first nine
months of 1998, a 32% increase. Revenues for the first nine months of 1999
reflect increases in license fee revenues, disc revenues and system revenues.
System sales in the first nine months of 1999 also include revenues from the
Company's microkeratome product line, which was acquired in the fourth quarter
of 1998. In the first nine months of 1999, revenues from contact lens and
related products increased 2% to $35.9 million from $35.1 million in the same
period a year ago.
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<PAGE> 17
Cost of Revenues: Excluding the $2.8 million inventory write-down, as previously
discussed in the section "General", cost of revenues as a percentage of revenues
decreased to 54% in the first nine months of 1999 from 58% in the first nine
months of 1998. This decrease was primarily attributable to the favorable impact
from lower cost of revenues associated with license fee revenues partially
offset by unabsorbed manufacturing costs. Including the inventory write-down,
cost of revenues as a percentage of revenues was 58% in the first nine months of
1999.
Operating Expenses: Selling, general and administrative expenses as a percentage
of revenues were 38% in the first nine months of 1999 and 32% in the first nine
months of 1998. Selling, general and administrative expenses in the first nine
months of 1999 were $30.5 million compared to $22.2 million in the first nine
months of 1998, a 37% increase. These expenses for the first nine months of 1999
reflect the effects of the Autonomous acquisition, increased sales and marketing
costs to grow laser vision correction procedure volume and to grow the Company's
contact lens business and increased legal costs. The effects of the Autonomous
acquisition include five months of Autonomous' operations and amortization of
goodwill and other intangible asset.
Research, development and regulatory expenses in the first nine months of 1999
increased to $9.6 million from $5.4 million in the same period a year ago,
primarily due to research and development costs associated with the Company's
LADARVision system. In the first nine months of 1999, the Company also incurred
increased spending on its regulatory efforts to obtain additional FDA approvals
for the use of the Apex Plus and LADARVision to treat a wider range of common
refractive vision disorders. In July 1999, the FDA granted the Company an
Investigational Device Exemption to initiate studies for customized ablations
using its CustomCornea wavefront measurement device and its LADARVision system.
In October 1999, the FDA approved the Company's Apex Plus for two new
indications - treatment of hyperopia using PRK and treatment of myopia and high
myopia with or without astigmatism using LASIK. In November 1999, the FDA
accepted the filing of the Pre-market Approval Application Supplement for the
LADARVision system to treat myopia and hyperopia with or without astigmatism
using LASIK.
Other Income (Expense): Interest income in the first nine months of 1999
decreased to $2.5 million in the first nine months of 1999 from $3.2 million in
the first nine months of 1998, primarily due to lower average balances of cash
and cash equivalent balances and interest-bearing investments. Interest expense
decreased to $.3 million in the first nine months of 1999 from $.6 million in
the first nine months of 1998 as a result of lower borrowings.
Net Income (Loss): The loss before the cumulative effect of accounting change
was $22.2 million, or $0.58 per basic and diluted share, in the first nine
months of 1999. In the first nine months of 1998, income before the cumulative
effect of accounting change was $33.1 million, or $1.06 per basic and diluted
share. The net loss in the first nine months of 1999 was $22.2 million, or $0.58
per basic and diluted share, compared to net income of $23.0 million, or $0.74
per basic and diluted share in the first nine months of 1998. The 1999 first
nine months results include one-time charges of $19.8 million for acquired
in-process research and development and $2.8 million to write-down inventory
related to the Autonomous acquisition. In the first nine months of 1998, the
Company received a $29.9 million litigation settlement, net of taxes and related
expenses. The 1998 first nine months results also include a one-time non-cash
charge of $10.1 million, or $0.32 per basic and diluted share, representing the
cumulative effect of adopting a new accounting principle as of January 1, 1998.
Under the new accounting method, the Company recognizes membership fee revenues
ratably over the term of the membership, which are one to five years. Customers
of Lens pay membership fees, which entitle members to purchase contact lens, and
related products at member prices. The Company believes that this method is
preferable because it spreads revenue over the period that benefits are provided
to members.
Income Taxes: The provision for income taxes for the first nine months of 1999
was $.7 million for losses before taxes of $21.4 million. The income tax
provision for the first nine months of 1999 was primarily attributable to the
gain on the sale of LCA Vision Inc. common stock. The effective tax rate of 13%
for the first nine months of 1998 reflects the usage of net operating loss
carryforwards.
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<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external debt and
equity financing. As of September 30, 1999, the Company's cash and cash
equivalent balances and short and long-term investments increased to $119.5
million from $89.9 million as of December 31, 1998. Shares of LCA Vision Inc.
common stock included in long-term investments as of September 30, 1999 and
December 31, 1998 were valued at $35.1 million and $9.8 million, respectively.
Working capital increased to $102.1 million as of September 30, 1999 from $79.0
million as of December 31, 1998. In the first nine months of 1999, net cash used
by operating activities was $2.1 million compared to net cash provided by
operating activities of $30.0 million in the first nine months of 1998. In the
first nine months of 1998, the Company received a $35.0 million litigation
settlement. Excluding the cumulative effect of accounting principle change,
acquired in-process research and development, inventory write-down and gain on
sale of investment, net income before depreciation and amortization was $4.3
million in the first nine months of 1999 and $35.8 million in the first nine
months of 1998.
In the first nine months of 1999, net cash used by investing activities of $12.6
million resulted primarily from the net cash cost of the Autonomous acquisition
of $46.3 million, capital expenditures of $7.4 million offset by a net decrease
in short and long-term investments of $38.1 million and proceeds of $3.8 from
the sale of investment. In the first nine months of 1998, net cash used by
investing activities of $22.9 million resulted primarily from a net increase in
short and long-term investments of $21.7 million and capital expenditures of
$2.5 million offset by a decrease in restricted cash of $1.3 million.
In the first nine months of 1999, net cash provided by financing activities of
$57.2 million was primarily attributable to net proceeds of $60.4 million from
the issuance of 4,025,000 shares of the Company's common stock and proceeds of
$2.0 million from option exercises partially offset by repayments of long-term
debt of $5.0 million. The Company intends to use the net proceeds from the
offering to fund the commercial introduction of the LADARVision system in the
U.S. market and for working capital and other general corporate purposes. In
addition, the Company may use a portion of the net proceeds to acquire
complementary businesses, products, services or technologies; however, the
Company currently has no commitments or agreements about any such transaction.
In the first nine months of 1998, net cash used by financing activities of $6.9
million were attributable to repayments of long-term debt of $5.0 million and
purchases of 380,500 shares of treasury stock for $1.9 million.
In 1996, the Company entered into a loan agreement consisting of a $20.0 million
unsecured revolving credit facility ("facility") and a $20.0 million unsecured
term loan ("term loan"). The $20.0 million facility expired in March 1999 and
there were no borrowings under the facility. The term loan requires quarterly
principal payments of $1.3 million and monthly interest payments calculated at
prime rate. The interest rate of the term loan at September 30, 1999 was 8.25%.
The outstanding balance of the term loan of $1.3 million as of September 30,
1999 is included in current maturities of long-term debt. The Company is
currently discussing with its existing and other institutions a new line of
credit of approximately $20 million to $25 million.
The Autonomous acquisition placed, and the launch of the LADARVision system will
continue to place, a significant strain on the Company's liquidity. The Company
believes that its existing corporate resources are adequate for at least the
next twelve months to meet working capital needs and to fund corporate
requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to the risks
associated with fluctuations in the market value of its available-for-sale
investment securities, changes in foreign currency exchange rates and changes in
interest rates. The Company's market risk sensitive instruments are entered into
for other than trading purposes.
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The Company's available-for-sale investment securities consist of debt
securities, primarily corporate bonds and mortgage-backed securities, and 6.6
million shares of LCA Vision Inc. common stock. The fair value of these
investment securities at September 30, 1999 was $45.7 million, which included
$10.6 million of debt securities and $35.1 million of LCA Vision Inc. common
stock with a corresponding accumulated unrealized gain of $17.2 million.
Substantially all of the unrealized gain relates to the LCA Vision Inc. common
stock, which is subject to much more market risk than the Company's debt
securities and which has been more volatile than most market indices. A 10
percent change in the quoted market price of one share of LCA Vision Inc. common
stock as of September 30, 1999 would have a pre-tax impact of approximately $3.5
million on the fair value of the Company's investment in LCA Vision Inc. common
stock. This impact would be recognized net of tax in the Company's statement of
comprehensive income. At September 30, 1999, the Company's debt securities
consist of highly rated debt instruments. The Company's investment goal
surrounding debt securities is to meet liquidity needs and to preserve the
principal.
The functional currency of the Company's foreign operations is the U.S. dollar.
The Company enters into forward exchange contracts to reduce exposure to
exchange rate risk associated with transactions in the ordinary course of
business, primarily payments to vendors and employees in foreign currency. The
forward exchange contracts establish a specific exchange rate at which the
Company will sell U.S. dollars at a future date and have maturities not
exceeding twelve months. Exchange gains or losses on forward exchange contracts
are recognized in other income (expense) when the contracts are settled.
Outstanding forward exchange contracts at September 30, 1999, which had a
notional value of $1.5 million, hedged firm commitments to third parties. A 10%
change in the currency exchange rates associated with these outstanding
contracts would have a $69 thousand pre-tax impact on the Company's operating
results.
The Company has a variable rate term loan with an unpaid principal balance of
$1.3 million at September 30, 1999. The term loan requires quarterly principal
payments of $1.3 million and monthly interest payments calculated at prime rate.
A one-percentage point change in the prime rate would impact interest expense
for the last quarter of 1999 by approximately $3 thousand.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which
establishes standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. It requires that changes in the derivative's fair value be recognized
currently in the earnings unless specific hedge accounting criteria are met. A
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133 is currently effective for
fiscal years beginning after June 15, 2000. the Company will adopt SFAS 133 in
the first quarter of fiscal 2001. The Company is currently evaluating this
statement, but does not expect the adoption of SFAS 133 to have a material
effect on the Company's consolidated financial position or results of
operations.
YEAR 2000 READINESS DISCLOSURE
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.
Internal Operation: A review of the Company's internal computer systems and
software packages has been performed to identify the systems and software that
could be affected by this issue. Discovery of these systems and software was
conducted through surveys and research of third party suppliers and
manufacturers. The Company has performed independent testing through the use of
testing applications and scripting to simulate and test for Year 2000 related
issues. Those hardware devices, which include, but are not limited to, desktops,
laptops, file servers, LAN and WAN hardware, PBX and voicemail,
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<PAGE> 20
found not to be compliant have been or will be either replaced or upgraded to
meet compliance. The Company currently believes that by either upgrading its
software packages to currently available versions or replacing them, the Year
2000 problem will not pose a significant operational problem to the Company.
These software packages include, but not limited to, financials, manufacturing,
payroll, customer service, email and local area network operating system. A
survey of vendors providing electronic information will be conducted and
addressed. Installation of and testing of Year 2000 compliant hardware and
software are currently expected to be completed by 2000. The costs related to
software upgrades to ensure Year 2000 compliance will not be material and have
been incurred in the normal course of operations.
Products: Summit currently offers two products which have the ability to process
and store date/time data the Apex excimer laser and the Apex Plus excimer laser.
These lasers meet Year 2000 compliance requirements although their capability to
record date/time does not impact clinical output. The Company has not surveyed
third parties to inquire into their Year 2000 compliance status. There can be no
assurance that the Company will not experience unexpected costs and delays in
achieving Year 2000 compliance, which could result in a material adverse effect
on the Company's results of operations, financial position or cash flow.
Year 2000 Risks: Efforts are continually being made to ensure proper operation
of the Company's systems during the transition from 1999 to 2000 and beyond. As
well, internal testing, and Year 2000 testing tools will be used to test the
readiness of software applications for the Year 2000. In the event of unforeseen
or unanticipated issues related to the Year 2000, these issues may have material
adverse effect on the Company's results of operations, financial position, or
cash flow.
Year 2000 Contingency Plans: The Company is currently creating a formal
contingency plan for Year 2000 problems. The Company intends to take appropriate
actions to mitigate the effects of third parties' failure to remediate their
Year 2000 issues and for unexpected failures in its own systems. The Company
expects to make arrangements for some alternate suppliers and will continue to
identify potential alternate suppliers. If it becomes necessary for the Company
to take these corrective actions, it is uncertain whether this would result in
significant interruptions in service or delays in business operations or whether
it would have a material adverse effect on the Company's results of operations,
financial position or cash flow.
Autonomous Year 2000 Compliance. Prior to the Company's acquisition of
Autonomous, Autonomous installed a Year 2000 compliant upgrade to its accounting
and manufacturing requirements planning software. In addition, all versions of
the system application software in the LADARVision system have been designed to
be Year 2000 compliant. Autonomous has received written statements from all key
vendors that they are Year 2000 compliant. The Company does not believe there
are any other Year 2000 compliance risks or potential costs related to
Autonomous' business.
EURO CONVERSION
On January 1, 1999, eleven of fifteen member countries of the European Union
adopted the conversion of their national currencies to the European Union's
common currency (Euro). A permanent fixed conversion rate between the existing
national currencies of these countries and the Euro was established on that
date. The Euro may be used in business transactions; however, national
currencies will still remain legal tender through June 30, 2002. The Company
does not believe that adoption of the Euro will have a material adverse effect
on the Company's results of operations, financial position or cash flow.
CAUTIONARY STATEMENTS AND RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Cautionary Statement under "Safe harbor" Provisions of the Private Securities
Litigation Reform Act of 1995: Statements made in this filing contain
information about the Company's future business prospects. These statements may
be considered "forward looking". These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by such forward looking statements. Among these risks
and uncertainties are: competition from other manufacturers
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<PAGE> 21
and vision correction technologies, delays in obtaining regulatory approvals,
challenges to patents owned and licensed by the Company affecting per procedure
revenues, adverse litigation results, difficulties in commercializing the
LADARVision system and dependence on sole source suppliers. For additional
information and risks associated with the Company's business prospects and
future operating results, please refer to the Company's public filings with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is included in Item 2 of Part I of this Report, entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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<PAGE> 22
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
See Note 5 to Notes to Condensed Consolidated Financial Statements
above (Part I, Item 1 of this filing), for description of pending
material litigation
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits:
27 Financial Data Schedule (For EDGAR Filing Purposes Only)
b.) Reports of Form 8-K:
(i) On July 20, 1999, the Company filed a report on Form 8-K
which included an Amendment to the Company's Article of
Organization, material contracts and consolidated
financial statements of Autonomous Technologies
Corporation.
(ii) On July 30, 1999, the Company filed a report on Form 8-K
relating to press releases issued by the Company on July
26, 1999, July 27, 1999 and July 28, 1999.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT TECHNOLOGY, INC.
Date: November 15, 1999 By: /s/ Robert J. Palmisano
------------------------------
Robert J. Palmisano
Chief Executive Officer
Date: November 15, 1999 By: /s/ Robert J. Kelly
------------------------------
Robert J. Kelly
Executive Vice President,
Chief Financial Officer and
Treasurer
-23-
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