<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: JUNE 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 July 30, 1999, 42,584,414 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)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,845 $31,314
Short-term investments 15,548 33,295
Receivables, net of allowances 16,421 12,764
Inventories 20,581 17,403
Other current assets 3,341 5,965
----------------------------------------
Total current assets 67,736 100,741
Long-term investments 66,139 25,253
Property and equipment, net 13,634 8,802
Patents and other intangibles, net 10,321 7,497
Purchased technologies, net 27,788 --
Goodwill, net 54,966 --
Other assets 3,773 2,632
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $244,357 $144,925
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,226 $ 4,132
Accrued expenses 8,580 5,081
Current maturities of long-term debt 2,720 6,431
Deferred revenue 6,212 6,144
----------------------------------------
Total current liabilities 25,738 21,788
Deferred revenue - noncurrent 4,033 3,653
Deferred tax liabilities 17,630 --
Long-term debt, less current maturities 202 150
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 47,603 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 42,719,730 shares in 1999 and 31,322,880 shares in 1998;
outstanding 42,555,015 shares in 1999 and 31,153,765 in 1998 427 314
Additional paid-in capital 209,570 149,482
Accumulated deficit (41,768) (20,219)
Accumulated other comprehensive income (loss) 29,333 (9,411)
Treasury stock, at cost, 164,715 shares
in 1999 and 169,115 shares in 1998 (808) (832)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 196,754 119,334
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $244,357 $144,925
===================================================================================================================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 3
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
(AS RESTATED, (AS RESTATED,
NOTE 8) NOTE 8)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Systems $ 4,394 $ 5,395 $ 7,729 $ 8,683
License fees, service and other 11,300 7,459 21,485 14,294
Contact lens and related products 11,707 11,246 23,871 23,163
-----------------------------------------------------------------------
Total revenues 27,401 24,100 53,085 46,140
-----------------------------------------------------------------------
Cost of revenues:
Systems 3,595 4,102 6,895 6,967
License fees, service and other 4,068 3,208 6,785 6,002
Contact lens and related products 7,053 6,845 14,414 14,494
Inventory write-down 2,800 -- 2,800 --
-----------------------------------------------------------------------
Total cost of revenues 17,516 14,155 30,894 27,463
-----------------------------------------------------------------------
Gross profit 9,885 9,945 22,191 18,677
-----------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 10,512 7,242 19,137 14,417
Research, development and regulatory 3,844 1,761 5,930 3,599
Acquired in-process research and development 19,800 -- 19,800 --
-----------------------------------------------------------------------
Total operating expenses 34,156 9,003 44,867 18,016
-----------------------------------------------------------------------
Operating income (loss) (24,271) 942 (22,676) 661
Litigation settlement, net of related expenses -- 34,386 -- 34,386
Interest income 626 938 1,712 1,866
Interest expense (82) (208) (196) (448)
Other income (expense) (116) 46 (232) 40
-----------------------------------------------------------------------
Income (loss) before provision for income taxes (23,843) 36,104 (21,392) 36,505
Provision for income taxes 92 4,896 157 4,920
-----------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting principle change (23,935) 31,208 (21,549) 31,585
Cumulative effect of accounting principle
change, net of tax -- -- -- (10,103)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(23,935) $ 31,208 $(21,549) $ 21,482
===========================================================================================================================
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of
accounting principle change $ (0.61) $ 1.00 $ (0.61) $ 1.01
Cumulative effect of accounting principle
change, net of tax -- -- -- (0.32)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ (0.61) $ 1.00 $ (0.61) $ 0.69
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares:
Basic 39,362 31,277 35,219 31,288
Effect of dilutive options outstanding -- 50 -- 31
-----------------------------------------------------------------------
Diluted 39,362 31,327 35,219 31,319
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 4
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
(AS RESTATED, (AS RESTATED,
NOTE 8) NOTE 8)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $(23,935) $ 31,208 $(21,549) $ 21,482
Net unrealized gain on investment, net of tax 20,100 8,269 38,744 12,971
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (3,835) $ 39,477 $ 17,195 $ 34,453
===============================================================================================================================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 5
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1999 1998
(AS RESTATED,
NOTE 8)
----------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(21,549) $ 21,482
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 --
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,366 1,743
Provision for losses on accounts receivables 13 162
Changes in operating assets and liabilities:
Receivables (3,594) (4,807)
Inventories (1,387) 619
Prepaid expenses and other assets (1,063) (745)
Accounts payable 3,905 138
Accrued expenses (2,305) 4,765
Deferred revenue 106 (1,614)
-------- --------
Net cash provided by operating activities 116 31,846
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (754) (19,237)
Purchases of long-term investments (1,797) (9,295)
Maturities of short-term investments 3,781 20,197
Maturities of long-term investments 5,669 5,066
Sales of short-term investments 14,720 983
Sales of long-term investments 11,616 --
Additions to property and equipment (3,088) (1,846)
Purchase of patents and other intangibles (375) --
Decrease in restricted cash -- 1,264
Note receivable and other (299) --
Cost of acquisition, net (46,344) --
-------- --------
Net cash provided by investing activities (16,871) (2,868)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (3,750) (3,750)
Payments of capital lease obligations (102) (96)
Proceeds from exercise of stock options 1,138 34
Proceeds from other shares issued -- 68
Purchases of treasury stock -- (1,360)
-------- --------
Net cash used by financing activities (2,714) (5,104)
-------- --------
Increase (decrease) in cash and cash equivalents (19,469) 23,874
Cash and cash equivalents, beginning of year 31,314 33,720
-------- --------
Cash and cash equivalents, end of year $ 11,845 $ 57,594
======== ========
Supplemental cash flow information:
- -----------------------------------
Interest paid $ 187 $ 548
Income taxes paid $ 49 $ 70
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 6
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 six months ended June
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:
June 30, December 31,
1999 1998
-------------------------------------------------------------------
Raw materials and subassemblies $ 6,744 $ 5,599
Work in process 3,535 1,244
Finished goods 10,302 10,560
-------------------------------------------------------------------
Total $20,581 $17,403
===================================================================
-6-
<PAGE> 7
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 is conducting 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
-7-
<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
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
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 $19,800 for
acquired in-process research and development and $2,800 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.
Six months ended
June 30,
1999 1998
-------------------------------------------------------------------
Total revenues $ 53,251 $ 46,245
Net income(loss) $ (8,310) $ 14,184
Basic and diluted earning (loss) per share $ (0.20) $ 0.33
===================================================================
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.
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-
-8-
<PAGE> 9
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, costs, and declaratory and injunctive relief.
This case was transferred to the District of Arizona for consolidated pre-trial
proceedings.
In March 1998, Janice Camp of Atlanta, Georgia commenced an action in the U.S.
District Court for the District of Massachusetts against the Company and VISX.
As amended in
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<PAGE> 10
April 1998, the complaint added as a named plaintiff Jon Singer of Congers, New
York. The case purported to be a class action on behalf of all similarly
situated individuals who have undergone laser vision correction surgery
utilizing equipment or technology purchased or leased from Pillar Point Partners
and who paid a price for that surgery that was artificially inflated due to the
alleged anti-competitive and illegal licensing agreement entered into between
the Company and VISX. The complaint alleged monopolization, conspiracy to
monopolize, conspiracy to restrain trade, violation of the Clayton Act,
violation of the RICO Act and violations of state consumer protection statutes.
The action sought, inter alia, treble damages, punitive or exemplary damages,
costs of suit, attorneys' fees, and various forms of equitable relief, including
disgorgement of ill-gotten gains and restitution. The case was transferred to
the District of Arizona for consolidated pre-trial proceedings. The court
recently granted defendants' motion to dismiss.
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 seek,
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 recently granted a
motion to dismiss filed by Pillar Point Partners, VISX and VISX Partner. The
Company has withdrawn its motion to dismiss and 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.
-10-
<PAGE> 11
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 conditionally 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 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, 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
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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 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.
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. Defendants removed this action to
federal district court in Minnesota. Plaintiffs filed a motion to remand to
state court, which was recently granted. The Judicial Panel on Multidistrict
Litigation has conditionally transferred the case to the District of Arizona.
Plaintiffs have filed a motion to vacate that conditional transfer order.
Also in May 1999, John Castino, an individual who allegedly has had laser vision
correction surgery performed, commenced an action in Minnesota state court
against the Company and VISX. The case purports to be a class action under
various state antitrust laws on behalf of a purported class of all residents of
Alabama, the District of Columbia, Hawaii, Kansas, Maine, Michigan, Minnesota,
Mississippi, New Mexico, North Carolina, North Dakota, South Dakota, Tennessee,
and Wisconsin who have paid for laser vision correction surgery (including PRK
and LASIK). The complaint seeks, among other things, unspecified actual and
multiple damages, attorneys' fees and costs, and injunctive and other relief.
Defendants have removed this action to federal district court in Minnesota. The
Judicial Panel on Multidistrict Litigation has conditionally transferred the
case to the District of Arizona, and plaintiff has filed a notice of opposition
to the conditional transfer order. On July 2, 1999, plaintiff filed a motion for
voluntary dismissal of this action without prejudice. The Court recently granted
this motion.
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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 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.
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<PAGE> 14
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 conditionally transferred to the
District of Arizona.
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.
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 lens and related
products.
The category "Other" includes the Company's investments, interest income,
interest expense, and other non-operating income (expense).
<TABLE>
<CAPTION>
Laser vision Contact lens and
correction related products Other Total
------------- ---------------- ------- ---------
<S> <C> <C> <C> <C>
Revenues:
Six months ended June 30, 1999 $ 29,214 $ 23,871 $ - $ 53,085
Six months ended June 30, 1998 (as restated) 22,977 23,163 - 46,140
Three months ended June 30, 1999 $ 15,694 $ 11,707 $ - $ 27,401
Three months ended June 30, 1998 (as restated) 12,854 11,246 - 24,100
Income (loss) from continuing operations before
provision for income taxes:
Six months ended June 30, 1999 $ (25,464) $ 2,788 $ 1,284 $ (21,392)
Six months ended June 30, 1998 (as restated) 32,150 2,897 1,458 36,505
Three months ended June 30, 1999 $ (26,142) $ 1,871 $ 428 $ (23,843)
Three months ended June 30, 1998 (as restated) 33,733 1,595 776 36,104
Total assets:
June 30, 1999 $ 142,466 $ 15,887 $ 86,004 $ 244,357
December 31, 1998 47,744 10,048 87,133 144,925
</TABLE>
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7. SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended June 30, 1999, the Company incurred non-cash
transactions related to the Autonomous acquisition (see Note 4). For the six
months ended June 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 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 is 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 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 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 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.
SECOND QUARTER RESULTS OF OPERATIONS
Revenues: Revenues for the three months ended June 30, 1999 increased 14% to
$27.4 million from $24.1 million for the three months ended June 30, 1998.
Revenues from the Company's laser vision correction business were $15.7 million
in the second quarter of 1999 compared to $12.9 million in the second quarter of
1998, a 22% increase. In the second quarter of 1999, a substantial increase in
license fee revenues was partially offset by a decrease in system revenues. In
the second quarter of 1999, the number of procedures in the U.S. performed on
the Company's laser systems increased 100% over the second quarter of 1998 and
14% over the first quarter of 1999. Revenues from system sales, which include
new placements as well as upgrades of laser systems, decreased 19% in the second
quarter of 1999 compared to the second quarter of 1998. System sales in
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<PAGE> 17
the second quarter of 1999 also include revenues from the Company's
microkeratome product line, which was acquired in the fourth quarter of 1998. In
the second quarter of 1999, revenues from contact lens and related products
increased 4% to $11.7 million from $11.2 million in the same period a year ago.
Cost of Revenues: Excluding the $2.8 million inventory write-down, as previously
discussed, cost of revenues as a percentage of revenues decreased to 54% in the
second quarter of 1999 from 59% in the second quarter of 1998. This decrease was
primarily attributable to the favorable impact from lower cost of revenues
associated with license fee revenues. Including the inventory write-down, cost
of revenues as a percentage of revenues was 64% in the second quarter of 1999.
Operating Expenses: Selling, general and administrative expenses as a percentage
of revenues were 38% in the second quarter of 1999 and 30% in the second quarter
of 1998. Selling, general and administrative expenses in the second quarter of
1999 were $10.5 million compared to $7.2 million in the second quarter of 1998,
a 45% increase. Nearly half of the increase in these expenses is attributable to
the Autonomous acquisition, including two months 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 second quarter of 1999
increased to $3.8 million from $1.8 million in the same period a year ago,
primarily due to expenses related to Autonomous. In the second quarter of 1999,
the Company also incurred increased spending on its regulatory efforts to obtain
additional FDA approvals for the use of the Apex Plus to treat a wider range of
common refractive vision disorders. In July 1999, the Food and Drug
Administration ("FDA") Ophthalmic Advisory Panel recommended approval of the
Company's Pre-Market Approval application for treatment of high myopia and high
astigmatism with LASIK using the Summit Apex Plus Excimer Laser Workstation. The
FDA also granted the Company an Investigational Device Exemption to initiate
studies for customized ablations using its patented CustomCornea measurement
device and its LADARVision system.
Other Income (Expense): Interest income in the second quarter of 1999 decreased
to $.6 million in the second quarter of 1999 from $.9 million in the second
quarter of 1998, primarily due to lower average balances of cash and cash
equivalent balances and short and long-term investments. Interest expense
decreased to $.1 million in the second quarter of 1999 from $.2 million in the
second quarter of 1998 as a result of lower borrowings.
Net Income (Loss): Excluding one-time charges of $19.8 million for acquired
in-process research and development and $2.8 million to write-down inventory,
the net loss for the second quarter of 1999 was $1.3 million, or $0.03 per basic
and diluted share. The net loss for the second quarter of 1999, including
one-time charges was $23.9 million, or $.61 per basic and diluted share,
compared to net income of $31.2 million, or $1.00 per basic and diluted share,
for the second quarter of 1998. In the second quarter of 1998, the Company
received a $29.9 million litigation settlement, net of taxes and related
expenses.
Income Taxes: The effective tax rate for the second quarter of 1999 was 0%
compared to 14% for the second quarter of 1998. The income tax provision for the
second quarter of 1999 was determined using an estimated annual effective tax
rate for the full year. The income tax provision for the second quarter of 1998
reflects the usage of net operating loss carryforwards.
FIRST HALF RESULTS OF OPERATIONS
Revenues: Revenues for the six months ended June 30, 1999 increased 15% to $53.1
million from $46.1 million for the six months ended June 30, 1998. Revenues from
the Company's laser vision correction business were $29.2 million in the first
half of 1999 compared to $23.0 million in the first half of 1998, a 27%
increase. In the first half of 1999, a substantial increase in license fee
revenues and disc revenues was partially offset by a
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<PAGE> 18
decrease in system revenues. Revenues from system sales, which include new
placements as well as upgrades of laser systems, decreased 11% in the first half
of 1999 compared to the first half of 1998. System sales in the first half of
1999 also include revenues from the Company's microkeratome product line, which
was acquired in the fourth quarter of 1998. In the first half of 1999, revenues
from contact lens and related products increased 3% to $23.9 million from $23.2
million in the same period a year ago.
Cost of Revenues: Excluding the $2.8 million inventory write-down, as previously
discussed, cost of revenues as a percentage of revenues decreased to 53% in the
first half of 1999 from 60% in the first half of 1998. This decrease was
primarily attributable to the favorable impact from lower cost of revenues
associated with license fee revenues. Including the inventory write-down, cost
of revenues as a percentage of revenues was 58% in the first half of 1999.
Operating Expenses: Selling, general and administrative expenses as a percentage
of revenues were 36% in the first half of 1999 and 31% in the first half of
1998. Selling, general and administrative expenses in the first half of 1999
were $19.1 million compared to $14.4 million in the first half of 1998, a 33%
increase. The first half 1999 expenses 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 two months of
Autonomous' operations and amortization of goodwill and other intangible asset.
Research, development and regulatory expenses in the first half of 1999
increased to $3.8 million from $1.8 million in the same period a year ago,
primarily due to two months of Autonomous' expenses. In the first half of 1999,
the Company also incurred increased spending on its regulatory efforts to obtain
additional FDA approvals for the use of the Apex Plus to treat a wider range of
common refractive vision disorders. In July 1999, the Food and Drug
Administration ("FDA") Ophthalmic Advisory Panel recommended approval of the
Company's Pre-Market Approval application for treatment of high myopia and high
astigmatism with LASIK using the Summit Apex Plus Excimer Laser Workstation. The
FDA also granted the Company an Investigational Device Exemption to initiate
studies for customized ablations using its patented CustomCornea measurement
device and its LADARVision system.
Other Income (Expense): Interest income in the first half of 1999 decreased to
$1.7 million in the first half of 1999 from $1.9 million in the first half of
1998, primarily due to lower average balances of cash and cash equivalent
balances and short and long-term investments. Interest expense decreased to $.2
million in the first half of 1999 from $.4 million in the first half of 1998 as
a result of lower borrowings.
Net Income (Loss): The loss before the cumulative effect of accounting change
was $21.5 million, or $0.61 per basic and diluted share, in the first half of
1999. In the first half of 1998, income before the cumulative effect of
accounting change was $31.6 million, or $1.01 per basic and diluted share. The
net loss in the first half of 1999 was $21.5 million, or $0.61 per basic and
diluted share, compared to net income of $21.5 million, or $0.69 per basic and
diluted share in the first half of 1998. The 1999 first half results include
one-time charges of $19.8 million for acquired in-process research and
development and $2.8 million to write-down inventory. In the first half of 1998,
the Company received a $29.9 million litigation settlement, net of taxes and
related expenses. The 1998 first half 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 is 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 effective tax rate for the first half of 1999 was 1% compared
to 13% for the first half of 1998. The income tax provision for the first half
of 1999 was
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determined using an estimated annual effective tax rate for the full year. The
income tax provision for the first half of 1998 reflects the usage of net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external debt and
equity financing. As of June 30, 1999, the Company's cash and cash equivalent
balances and short and long-term investments increased to $93.5 million from
$89.9 million as of December 31, 1998. Shares of LCA common stock included in
long-term investments as of June 30, 1999 and December 31, 1998 were valued at
$66.1 million and $9.8 million, respectively. Working capital decreased to $42.0
million as of June 30, 1999 from $79.0 million as of December 31, 1998. In the
first half of 1999, net cash provided by operating activities was $.1 million
compared to $31.8 million in the first half of 1998. In the first half 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 and inventory write-down, net income before depreciation and
amortization and was $4.4 million in the first half of 1999 and $33.3 million in
the first half of 1998.
In the first half of 1999, net cash used by investing activities of $16.9
million resulted primarily from the net cash cost of the Autonomous acquisition
of $46.3 million, capital expenditures of $3.1 million offset by a net decrease
in short and long-term investments of $33.2 million. In the first half of 1998,
net cash used by investing activities of $2.9 million resulted primarily from a
net increase in short and long-term investments of $2.3 million and capital
expenditures of $1.8 million offset by a decrease in restricted cash of $1.3
million.
In the first half of 1999, net cash used by financing activities of $2.7 million
was primarily attributable to repayments of long-term debt of $3.8 million
partially offset by $1.1 million from the proceeds of option exercises. In the
first half of 1998, net cash used by financing activities of $5.1 million were
attributable to net repayments of long-term debt of $3.8 million and purchases
of 250,000 shares of treasury stock for $1.4 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 acquisition of Autonomous placed the Company in technical
default of a loan agreement covenant. This default permits the lenders to
accelerate payment of the remaining balance of the term loan. The interest rate
of the term loan at June 30, 1999 was 7.75%. The outstanding balance of the term
loan of $2.5 million as of June 30, 1999 has been 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.
On August 12, 1999, the Company announced the public offering of 3.5 million
shares of its common stock priced at $16.00 per share. The net proceeds will be
approximately $52.7 million. In connection with this offering the Company
granted the underwriters an over-allotment option to purchase up to 525,000
additional shares of the Company's common stock for $8.0 million. On August 13,
1999, the underwriters exercised this option in full. The Company intends to use
the net proceeds from this 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,
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products, services or technologies; however, the Company currently has no
commitments or agreements about any such transaction.
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.
The Company's available-for-sale investment securities consist of debt
securities, primarily corporate bonds and mortgage-backed securities, and 7.2
million shares of LCA common stock. The fair value of these investment
securities at June 30, 1999 was $81.6 million, which included $15.5 million of
debt securities and $66.1 million of LCA common stock with a corresponding
accumulated unrealized gain of $46.9 million. Substantially all of the
unrealized gain relates to the LCA 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 common stock would have a pre-tax impact of approximately $1
million on the fair value of the Company's investment in LCA common stock. This
impact would be recognized in the Company's statement of comprehensive income.
At June 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. In the
first half of 1999, the Company recorded a loss of $16,000 for outstanding
forward exchange contract at June 30, 1999 that did not hedge firm commitments
to third parties. Outstanding forward exchange contracts at June 30, 1999 had a
notional value of $1.5 million. A 10% change in the currency exchange rates
associated with these outstanding contracts would have a $15,000 impact on the
Company's operating results.
The Company has a variable rate term loan with an unpaid principal balance of
$2.5 million at June 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 second half of 1999 by approximately $9,000.
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.
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<PAGE> 21
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 is done
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, 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: The Company 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. Before the acquisition, Autonomous received written
statements from two of its four key vendors that they were Year 2000 compliant.
The Company anticipates that it will receive written statements from the other
two key vendors in the near future. There is a potential risk if two vendors are
not Year 2000 compliant and cannot meet delivery requirements for parts or
components until they correct their Year 2000 problem. The Company does not
believe there are any other Year 2000 compliance risks or potential costs
related to Autonomous' business. The Company has not completed a contingency
plan for dealing with costs that might occur if any of the four key vendors is
unable to deliver its parts or
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<PAGE> 22
sub-systems to the Company on a timely basis. The Company currently plans to
complete such analysis and contingency planning by year end.
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 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."
-22-
<PAGE> 23
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
a) 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The following matters were submitted to a vote of the shareholders
at the Company's special meeting held on April 29, 1999. The
following are the voting results:
PROPOSAL 1: The shareholders approved the issuance of up to
11,650,400 shares of Summit common stock in connection with the
acquisition of Autonomous Technologies Corporation with 14,850,356
votes in favor, 691,028 votes against, 193,314 abstentions and
13,175,481 broker non-votes.
PROPOSAL 2: The shareholders approved the amendment to the
Company's Article of Organization to increase the authorized
common stock from 60 million shares to 100 million shares with
27,406,840 votes in favor, 1,284,583 votes against and 218,756
abstentions.
PROPOSAL 3: The shareholders approved the amendment to the
Company's 1997 Stock Option Plan to increase the number of shares
of common stock available to be issued under the Plan by 1,500,000
shares with 24,081,663 votes in favor, 4,451,279 votes against and
377,237 abstentions.
b) The following matters were submitted to a vote of the shareholders
at the Company's annual meeting held on June 15, 1999:
PROPOSAL 1: The shareholders re-elected John A. Norris and Robert
J. Palmisano to the Board of Directors, each for a three-year term
with the following votes:
FOR WITHHOLD AUTHORITY
---------- ------------------
John A. Norris 26,030,229 1,486,498
Robert J. Palmisano 27,321,668 195,059
PROPOSAL 2: The shareholders approved the 1999 Outside Directors'
Compensation Plan with 26,242,000 votes in favor, 1,041,003 votes
against and 233,724 abstentions.
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 May 4, 1999 and April 28, 1999, the Company filed reports
on Form 8-K relating to a lawsuit threatened, and
subsequently commenced, by Antoine Garabet M.D. Inc. and
others which challenged the Company's acquisition of
Autonomous Technologies Corporation on antitrust grounds.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT TECHNOLOGY, INC.
Date: August 13, 1999 By: /s/ Robert J. Palmisano
------------------------------
Robert J. Palmisano
Chief Executive Officer
Date: August 13, 1999 By: /s/ Robert J. Kelly
------------------------------
Robert J. Kelly
Executive Vice President,
Chief Financial Officer and
Treasurer
-24-
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