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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 8-K
Current Report
Pursuant to
Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): March 23, 1999
__________
SUMMIT TECHNOLOGY, INC.
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(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 0-16937 04-2897945
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(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) I.D. Number)
__________
21 Hickory Drive, Waltham, Massachusetts 02451
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(Address of Principal Executive Offices) (Zip Code)
(781) 890-1234
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Registrant's Telephone Number including area code
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Item 5. Other Events.
This Current Report on Form 8-K is being filed voluntarily by Summit
Technology, Inc. (the "Registrant") in order to permit the Registrant's
consolidated financial statements as of December 31, 1998 and 1997 and for each
of the years in the three-year period ended December 31, 1998, and the related
management's discussion and analysis of financial condition and results of
operations, to be incorporated by reference in the Registrant's Form S-4
registration statement.
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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").
Prior to June 1998, the Company participated in per procedure license fees from
its ownership interest in Pillar Point Partners ("PPP"), a partnership formed by
the Company and VISX, Inc. ("VISX") to hold certain U.S. patents covering
excimer laser systems and procedures. The Company recorded as license fees,
service and other revenues its equity (approximately 44%) in the net income of
PPP. On June 4, 1998, the Company and VISX entered into a settlement agreement
that dissolved PPP and granted to each other worldwide, royalty-free cross-
licenses to all of their respective U.S. and foreign patents in the field of
laser ablation of corneal tissue, including all patents that were included or
includable in PPP. The impact of dissolution of PPP on the Company's future
results is not readily determinable primarily because the Company cannot
estimate the amount of license fees that it would have received from users of
VISX's systems through PPP. Under the terms of the settlement, the Company
received a payment from VISX of $35.0 million and recorded a gain of $34.4
million, net of expenses associated with the settlement. Subsequent to the
dissolution of PPP, the Company effectively retains 100% of all per procedure
license fees performed on its systems because it no longer owes license fees to
PPP for these procedures.
On October 1, 1998, the Company entered into a definitive merger agreement with
Orlando, FL-based Autonomous Technologies Corporation ("Autonomous") to acquire
all of Autonomous' outstanding shares in exchange for 11.7 million shares of
Summit common stock and an equal value of cash, not to exceed $50.0 million. The
actual value of the transaction will not be determinable until closing and is
dependent upon numerous factors including, but not limited to, the market price
of the Company's common stock prior to closing and any outstanding loan balance
due from Autonomous. As part of the agreement, the Company has provided
Autonomous an $8.0 million revolving line of credit under which Autonomous may
borrow $1.5 million in any calendar month. One half of the amount outstanding
under the revolver on the closing date of the transaction will reduce the cash
consideration paid by the Company. This acquisition is subject to the approval
of the stockholders of the Company and Autonomous and is expected to close in
April 1999.
In October 1998, the Company acquired all rights to the Krumeich-Barraquer
Microkeratome, a high-precision surgical cutting device utilizing disposable,
single-use blades. This device is used by ophthalmologists in corneal surgery.
The Company immediately began marketing the product in international markets and
in December 1998, received 510K clearance from the Food and Drug Administration
("FDA") to begin marketing the product in the United States.
In August 1997, the Company sold its wholly-owned subsidiary Refractive Centers
International, Inc. ("RCII") to LCA-Vision Inc. ("LCA") for 16,164,361 shares of
LCA common stock. Prior to the sale, RCII owned and operated the Company's
vision center business, which was accounted for as a discontinued operation in
1996.
The Company is continuing to evaluate its operations and strategies, which may
result in the acquisition by the Company of one or more additional businesses,
or additional dispositions of all or part of one or more of the Company's
businesses.
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RESULTS OF OPERATIONS
1998 as compared with 1997
Revenues: Revenues in 1998 increased 15% to $91.6 million from $79.7 million in
1997. Revenues from the Company's laser vision correction business increased 36%
to $44.9 million in 1998 compared to $33.1 million in 1997. Revenues from system
sales, which include new placements as well as upgrades of laser systems,
increased by 86% in 1998 compared to 1997. System sales in 1998 also include
revenues from the Company's microkeratome product line, which was acquired in
the fourth quarter of 1998. The volume of laser vision correction procedures
performed on the Company's laser systems in the U.S. increased 25% in 1998
compared to 1997. Revenues from the Company's laser vision correction business
during 1998 were also favorably impacted by the FDA approval in March 1998 of
the Apex Plus to treat astigmatism utilizing the Company's emphasis(TM) disc. In
1998 and 1997, revenues from contact lens and related products were $46.8
million and $46.6 million, respectively. As discussed below in "Accounting
Principle Change", the Company changed its method of accounting for Lens'
membership fee revenues which resulted in a $2.6 million increase in 1998
contact lens and related products revenues.
Cost of Revenues: Cost of revenues as a percentage of revenues decreased to 57%
in 1998 from 63% in 1997. This decrease was primarily attributable to the
favorable impact from increased manufacturing levels and lower cost of revenues
associated with contact lens and related products and license fee revenues.
Cost of system revenues as a percentage of its revenue decreased to 80% in 1998
compared to 112% in 1997. In 1997, cost of system revenues exceeded system
revenues primarily due to unabsorbed manufacturing costs. In 1998, cost of
contact lens and related products revenues as a percentage of its revenues was
62% compared to 68% in 1997. This cost of revenue percentage in 1997 would have
been 66% assuming the accounting principle change had been in effect in 1997.
Operating Expenses: Selling, general and administrative expenses in 1998 were
$30.2 million compared to $24.1 million in the prior year, a 25% increase.
Selling, general and administrative expenses as a percentage of revenues were
33% and 30% in 1998 and 1997, respectively. The Company has incurred significant
expenditures in sales and marketing in order to grow laser vision correction
procedure volume, that included hiring additional personnel, increased
promotions and development of product marketing materials for users of the
Company's lasers. In 1998, increases in general and administrative expenses were
primarily attributable to higher payroll and benefit costs associated with new
management hires which occurred in the latter part of 1997. In 1997, the Company
received a net payment of $4.5 million from VISX resulting from the settlement
of patent litigation. This settlement resulted in a reduction of legal costs of
$.6 million in 1998 and $2.6 million in the second quarter of 1997. The Company
also recorded a $1.4 million reduction in legal expenses in 1997 resulting from
the settlement of a patent litigation.
Research, development and regulatory expenses in 1998 increased to $7.2 million
from $6.2 million a year ago, primarily as a result of increased spending on the
Company's research and development efforts in developing enhancements to the
Apex Plus and increased regulatory efforts to obtain additional FDA approvals
for the use of the Apex Plus to treat hyperopia as well as a wider range of
myopia.
Other Income (Expense): In 1998, the Company received a $35.0 million payment
from VISX pursuant to a settlement agreement, under which Summit and VISX agreed
to dissolve Pillar Point Partners and settle all pending litigation between the
two companies. The litigation settlement, net of related expenses was $34.4
million. Interest income in 1998 increased slightly to $4.4 million in 1998
from $4.0 million in 1997, primarily due to higher average balances of cash and
cash equivalent balances and short and long-term investments. Interest expense
decreased to $.8 million in 1998 from $1.2 million as a result of lower
borrowings. In the fourth quarter of 1998, other income included a $2.0 million
gain from the sale of assets and in 1997 other income included a $.7 million
loss on investment in connection with the distribution of LCA common stock as
discussed below.
Discontinued Operations: In January 1997, the Company announced its plan to
discontinue its Vision Center business owned and operated by RCII, a wholly-
owned subsidiary of the Company. Accordingly, the results of operations for this
business were classified as discontinued operations at December 31, 1996.
On August 18, 1997, the Company sold RCII to LCA in exchange for 16,164,361
newly issued shares of LCA common stock. The sale of the discontinued operations
resulted in a net gain of $23.9 million, which included a gain on the sale of
net assets held for discontinued operations and accruals for other estimated
costs to be incurred in connection with
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the sale of RCII and distribution of LCA common stock. On December 29, 1997, the
Company distributed 9,000,000 shares of LCA common stock to its shareholders in
the form of a dividend. Due to the distribution, the Company recorded a loss on
investment of $.7 million, representing the difference between the fair market
value of LCA common stock on the dividend declaration date of $23.6 million and
its cost basis of $24.3 million.
In the fourth quarter of 1998, the Company reversed an accrual related to the
sale of discontinued operations which resulted in an additional gain on the sale
of discontinued operations of $.9 million.
Accounting Principle Change: Customers of Lens pay membership fees which
entitle members to purchase contact lens and related products at member prices.
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. The Company
believes that this method is preferable because it spreads revenue over the
period that benefits are provided to members. In accordance with the provisions
of Accounting Principles Board Opinion No. 20 "Accounting Changes", the Company
recorded a one-time non-cash charge of $10.1 million, or $.32 per basic and
diluted share, representing the cumulative effect of adopting the new accounting
principle as of January 1, 1998.
Net Income: Income from continuing operations was $36.7 million, or $1.17 per
basic and diluted share, in 1998 compared to $.8 million, or $.03 per basic and
diluted share in 1997. Excluding the $35.0 million litigation settlement and
related expenses of $.6 million and related taxes of $4.5 million and the $1.9
million gain, net of tax, on the sale of assets, income from continuing
operations in 1998 was $4.9 million, or $.16 per basic and diluted share
compared to $2.1 million, or $.07 per basic and diluted share, in 1997 assuming
that the accounting principle change had been in effect in 1997.
Net income for 1998 was $27.6 million, or $.88 per basic and diluted share,
compared to net income of $21.4 million for 1997, or $.68 per basic and diluted
share. On a pro forma basis, assuming the accounting principle change had been
in effect in 1997, net income for 1997 would have been $22.7 million, or $.72
per basic and diluted share.
Income Taxes: The effective tax rate for 1998 was 12% compared to 14% for 1997.
The Company has continued to provide a 100% valuation allowance against its net
deferred tax asset of $11.3 million as of December 31, 1998. In 1998, the
valuation allowance decreased $13.8 million primarily due to usage of net
operating loss carryforwards.
1997 as compared with 1996
Revenues: Revenues in 1997 increased 8% to $79.7 million from $73.9 million in
1996, primarily as a result of increased revenues from license fees, service and
other revenues. License fees, service and other revenues increased 76% from
$14.5 million in 1996 to $25.5 million in 1997. License fees, including the
Company's equity in the income of PPP, more than doubled due to the substantial
growth of laser vision correction procedures performed in the U.S. In 1997,
sales of laser systems decreased to $7.6 million from $11.5 million in 1996, a
34% decrease. Contact lenses and related products revenues decreased slightly to
$46.6 million in 1997 from $48.0 million in 1996.
Cost of Revenues: Cost of revenues as a percentage of revenues decreased to 63%
in 1997 from 76% in 1996. This decrease was primarily attributable to lower
costs of revenues associated with license fee revenues and leasing programs.
Cost of system revenues as of percentage of system revenues decreased to 112% in
1997 from 120% in 1996. In 1997 and 1996, cost of system revenues exceeded
system revenues primarily due to unabsorbed manufacturing costs.
Operating Expenses: Selling, general and administrative expenses for 1997
decreased 20% to $24.1 million from $30.3 million for 1996. This decrease
reflects lower spending in both sales and marketing as well as general and
administrative costs. Selling, general and administrative expenses as a
percentage of revenues were 30% and 41% in 1997 and 1996, respectively. Sales
and marketing expenses decreased in 1997 compared to 1996 due to lower payroll
and benefit costs and lower marketing costs associated with the Company's
contact lens and related products business. In 1997, the Company recorded a $4.0
million reduction in legal expenses resulting from settlements of patent
litigations. Legal expense in 1996 were offset by a $.8 million settlement of a
patent litigation.
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Research, development and regulatory expenses for 1997 increased 5% to $6.2
million from $5.9 million for 1996. This increase was primarily related to
increased spending on the Company's regulatory efforts to obtain FDA approval
for use of the Apex Plus laser to treat astigmatism and hyperopia as well as a
wider range of myopia.
Discontinued Operations: As previously discussed in "1998 as compared with
1997", the Company recognized a gain of $23.9 million, or $.76 per basic and
diluted share, on the sale of discontinued operations in 1997. Losses from
discontinued operations were $3.3 million, or $.11 per basic and diluted share
in 1997 and $23.4 million, or $.75 per basic and diluted share, in 1996.
Net Income (Loss): Income from continuing operations for 1997 was $.8 million,
or $.03 per basic and diluted share, as compared to a loss from continuing
operations of $13.5 million, or $.43 per basic and diluted share, for 1996. The
increase in income from continuing operations is primarily attributable to
increased revenues and lower operating expenses. Net income for 1997 was $21.4
million, or $.68 per basic and diluted share, as compared to a net loss of $36.9
million, or $1.18 per basic and diluted share for 1996.
Income Taxes: The effective tax rate for 1997 was 14% compared to 0% for 1996.
The Company has continued to provide a 100% valuation allowance against its net
deferred tax asset of $25.1 million as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external debt and
equity financing. As of December 31, 1998, the Company's cash and cash
equivalent balances and short and long-term investments increased to $89.9
million from $74.1 million as of December 31, 1997. Shares of LCA common stock
included in long-term investments as of December 31, 1998 and 1997 were valued
at $9.8 million and $8.1 million, respectively. Working capital increased to
$79.0 million as of December 31, 1998 from $67.4 million as of December 31,
1997. In 1998, net cash provided by operating activities of $30.0 million
resulted primarily from income from continuing operations of $37.7 million which
includes the receipt of a $35.0 million litigation settlement. In 1997, net cash
used by operating activities of $10.8 million resulted primarily from net cash
used by discontinued operations of $14.7 million. Excluding the gain on sale of
discontinued operations, cumulative effect of accounting principle change and
loss on investment, net income before depreciation and amortization was $40.5
million in 1998 compared to $.8 million in 1997.
In 1998, net cash used by investing activities of $25.4 million resulted
primarily from a net increase in short and long-term investments of $16.5
million, purchase of patents, intangibles and property and equipment of $6.4
million and a loan to Autonomous and deferred acquisition costs of $3.8 million.
In 1997, net cash provided by investing activities of $5.1 million resulted
primarily from investing activities of discontinued operations of $9.9 million
offset by a net increase in short and long-term investments of $4.2 million and
capital expenditures of $1.8 million.
Net cash used by financing activities of $7.0 million in 1998 and $4.6 million
in 1997 included $5.0 million repayments of long-term debt. In 1998, the
Company also repurchased 380,500 shares of its common 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
allowed the Company to borrow at LIBOR plus 75 to 125 basis points, based upon
the financial results of the Company or the prime rate. As of December 31, 1998
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.
In the fourth quarter of 1998, the Company's loan to 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 outstanding balance of the term loan of $6.3 million as of December 31, 1998
has been included in current maturities of long-term debt. The interest rate of
the term loan at December 31, 1998 was 7.75%.
The Company believes that consummation of the Autonomous acquisition will place
the Company in technical default of certain covenants included in the loan
agreement and place a significant strain on the Company's liquidity. The cash
consideration to be paid to Autonomous stockholders of up to $50.0 million
represents approximately 68% of the Company's cash and cash equivalent balances
and short and long-term investments excluding the value of LCA common stock and
net of the term loan at December 31, 1998. The Company is currently negotiating
with its existing and other institutions for a new line of credit of
approximately $20 million to $25 million. The Company is currently evaluating
its options regarding debt and borrowing capacity. 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.
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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 December 31, 1998 was $58.5 million, which included $48.8 million
of debt securities and $9.8 million of LCA common stock with a corresponding
accumulated unrealized loss of $9.4 million. Substantially all of the unrealized
loss 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 an 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 December 31,
1998, 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
1998, the Company recorded a loss of $32,000, representing the estimated
fair value, for outstanding forward exchange contracts at December 31, 1998
which had a notional value of $3 million. A 10% change in the currency exchange
rates associated with these contracts would have $.3 million impact on the
Company's annual operating results.
The Company has a variable rate term loan with an unpaid principal balance of
$6.3 million at December 31, 1998. 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 in
1999 by approximately $32,000. The Company also has an unsecured credit line
which would be subject to market risk associated with changing interest rates.
The credit line expired in March 1999 and there were no borrowings against the
credit line at December 31, 1998.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. Under SFAS No. 133, companies will be required to recognize
derivative instruments on the balance sheet at their fair value and report
corresponding gains or losses either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. The Company has not completed its assessment of the consolidated
financial statement impact of adopting the new standard.
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 manufactures.
The Company will also be performing 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,
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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 is currently expected to be completed within the
next six months. The costs related to software upgrades are not anticipated to
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 has not created 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.
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 is
currently conducting an internal analysis to determine the impact of the Euro
conversion on its business and financial condition and does not believe that the
impact will be material.
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CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Independent Auditors' Reports....................................................... F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997........................ F-4
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1997 and 1996....................................................................... F-5
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 1998, 1997 and 1996.................................................... F-6
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1998, 1997 and 1996................................................................. F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996....................................................................... F-8
Notes to Consolidated Financial Statements.......................................... F-9
</TABLE>
F-1
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Independent Auditors' Report
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The Board of Directors and Stockholders
Summit Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Summit
Technology, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
the related consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule for the year ended December 31, 1998
listed in the Exhibit Index. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1998 and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule for the year
ended December 31, 1998, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for membership fee revenues in 1998.
Deloitte & Touche LLP
Boston, Massachusetts
March 17, 1999
F-2
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Summit Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Summit
Technology, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Summit Technology,
Inc. and subsidiaries at December 31, 1997, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 6, 1998, except as to Note 10, which is as
of March 27, 1998, and except for the restatement
referred to in Note 18, as to which the date is
March 9, 1999
F-3
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SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,314 $ 33,720
Short-term investments 33,295 26,770
Receivables, net of allowances of 12,764 8,896
$1,399 in 1998 and $758 in 1997
Inventories 17,403 14,494
Other current assets 5,965 2,046
Restricted cash - 1,264
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Total current assets 100,741 87,190
Long-term investments 25,253 13,583
Property and equipment, net 8,802 8,593
Patents and other intangibles, net 7,497 4,769
Other assets 2,632 968
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Total assets $144,925 $115,103
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,132 $ 4,482
Accrued expenses 5,081 7,225
Current maturities of long-term debt 6,431 5,142
Deferred revenue 6,144 2,937
-------- --------
Total current liabilities 21,788 19,786
Deferred revenue - noncurrent 3,653 -
Long-term debt, less current maturities 150 6,330
-------- --------
Total liabilities 25,591 26,116
-------- --------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 60,000,000 shares; issued 31,322,880
shares in 1998 and 31,299,803 shares in 1997;
outstanding 31,153,765 shares in 1998 and 31,293,678 shares in 1997 314 313
Additional paid-in capital 149,482 147,907
Accumulated deficit (20,219) (47,789)
Accumulated other comprehensive loss (9,411) (11,284)
Treasury stock, at cost, 169,115 shares in 1998 and 6,125 shares (832) (160)
in 1997 -------- --------
Total stockholders' equity 119,334 88,987
-------- --------
Total liabilities and stockholders' equity $144,925 $115,103
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ----------------- -----------------
Revenues:
<S> <C> <C> <C>
Systems $ 14,105 $ 7,589 $ 11,484
License fees, service and other 30,782 25,486 14,465
Contact lens and related products 46,754 46,575 47,963
-------- ------- --------
Total revenues 91,641 79,650 73,912
-------- ------- --------
Cost of revenues:
Systems 11,333 8,490 13,776
License fees, service and other 12,187 9,788 9,366
Contact lens and related products 28,800 31,721 33,173
-------- ------- --------
Total cost of revenues 52,320 49,999 56,315
-------- ------- --------
Gross profit 39,321 29,651 17,597
-------- ------- --------
Operating expenses:
Selling, general and administrative expenses 30,217 24,131 30,340
Research, development and regulatory 7,223 6,213 5,892
-------- ------- --------
Total operating expenses 37,440 30,344 36,232
-------- ------- --------
Operating income (loss) from continuing operations 1,881 (693) (18,635)
Litigation settlement, net of related expenses 34,386 - -
Interest income 4,351 4,019 5,500
Interest expense (780) (1,195) (166)
Other income (expense) 1,913 (1,166) (146)
-------- ------- --------
Income (loss) from continuing operations
before provision for income taxes 41,751 965 (13,447)
Provision for income taxes 5,021 137 44
-------- ------- --------
Income (loss) from continuing operations 36,730 828 (13,491)
Gain on sale of discontinued operations, net of tax 943 23,910 -
Loss from discontinued operations - (3,340) (23,366)
-------- ------- --------
Income (loss) before cumulative
effect of accounting principle change 37,673 21,398 (36,857)
Cumulative effect of accounting principle change, net of tax (10,103) - -
-------- ------- --------
Net income (loss) $ 27,570 $21,398 $(36,857)
======== ======= ========
Income (loss) from continuing operations $ 1.17 $ 0.03 $ (0.43)
Gain on sale of discontinued operations, net of tax 0.03 0.76 -
Loss from discontinued operations - (0.11) (0.75)
------- ------- -------
Income (loss) before cumulative
effect of accounting principle change 1.20 0.68 (1.18)
Cumulative effect of accounting principle change, net of tax (0.32) - -
------- ------- -------
Net income (loss) $ 0.88 $ 0.68 $ (1.18)
======= ======= =======
Weighted-average number of common shares:
- -----------------------------------------
Basic 31,244 31,400 31,174
Effect of dilutive stock options outstanding 48 191 -
------- ------- -------
Diluted 31,292 31,591 31,174
======= ======= =======
Pro forma amounts assuming accounting principle
change had been applied retroactively:
- -----------------------------------------------------
Net income (loss) $37,673 $22,682 $(37,772)
Net income (loss) per share basic and diluted $ 1.20 $ 0.72 $ (1.21)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ----------------- -----------------
<S> <C> <C> <C>
Net income (loss) $27,570 $ 21,398 $(36,857)
Net unrealized gain (loss) on investments, net of tax 1,873 (11,284) -
------- -------- --------
Comprehensive income (loss) $29,443 $ 10,114 $(36,857)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
--------------------------- Paid-in Accumulated Comprehensive
Shares Par Value Capital Deficit Income (Loss)
------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 30,935 $309 $170,392 $(32,330) $ -
Exercise of stock options 184 2 1,396 - -
Other shares issued 9 1 94 - -
Shares cancelled (103) (1) (899) - -
Net loss - - - (36,857)
------ ---- -------- -------- ----------
Balance at December 31, 1996 31,025 311 170,983 (69,187) -
Exercise of stock options 40 - 214 - -
Other shares issued 235 2 335 - -
Dividend - - (23,625) - -
Net unrealized loss on investment - - - - (11,284)
Net income - - - 21,398
------ ---- -------- -------- ----------
Balance at December 31, 1997 31,300 313 147,907 (47,789) (11,284)
Exercise of stock options 7 - 37 - -
Other shares issued 16 1 72 - -
Net unrealized gain on investment - - - - 1,873
Purchases of treasury stock - - - - -
Effect of adjustment to Lens
acquisition exchange ratio - - (1,351) - -
Tax benefit related to stock options - - 2,817 - -
Net income - - - 27,570 -
------ ---- -------- -------- ----------
Balance at December 31, 1998 31,323 $314 $149,482 $(20,219) $ (9,411)
====== ==== ======== ======== ==========
<CAPTION>
Treasury Stock Total
------------------------ Stockholders'
Shares At Cost Equity
--------- -------- --------------
<S> <C> <C> <C>
Balance at January 1, 1996 (5) $ (132) $138,239
Exercise of stock options (1) (28) 1,370
Other shares issued - - 95
Shares cancelled - - (900)
Net loss - - (36,857)
---- ------ --------
Balance at December 31, 1996 (6) (160) 101,947
Exercise of stock options - - 214
Other shares issued - - 337
Dividend - - (23,625)
Net unrealized loss on investment (11,284)
Net income - - 21,398
---- ------ --------
Balance at December 31, 1997 (6) (160) 88,987
Exercise of stock options
Other shares issued - - 37
Net unrealized gain on investment - - 73
1,873
Purchases of treasury stock (381) (1,855) (1,855)
Effect of adjustment to Lens
acquisition exchange ratio 218 1,183 (168)
Tax benefit related to stock options - - 2,817
Net income - - 27,570
----- ------ --------
Balance at December 31, 1998 (169) $ (832) $119,334
===== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
------- ------- --------
Cash flows from operating activities:
Net income (loss) $27,570 $21,398 $(36,857)
Cumulative effect of accounting principle change 10,103 - -
Gain on sale of discontinued operations (943) (23,910) -
Loss on investment - 675 -
Gain on sale of assets (1,981) - -
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 3,743 3,301 3,605
Provision for losses on accounts receivables 838 245 186
Changes in operating assets and liabilities:
Receivables (4,706) (588) 7,407
Inventories (2,909) 1,354 (145)
Other current assets 221 282 (1,368)
Accounts payable (350) 711 (2,603)
Accrued expenses 1,644 1,083 (3,314)
Deferred revenue (3,243) (697) 209
Operating activities of discontinued operations - (14,653) 4,858
-------- -------- ---------
Net cash provided (used) by operating activities 29,987 (10,799) (28,022)
-------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments (53,063) (46,196) (109,185)
Purchases of long-term investments (24,670) (9,686) (9,718)
Maturities of short-term investments 39,630 26,557 37,050
Maturities of long-term investments 6,590 7,715 12,021
Sales of short-term investments 6,908 12,262 74,349
Sales of long-term investments 8,115 5,166 2,510
Additions to property and equipment (3,022) (1,834) (5,593)
Proceeds from sale of assets 1,990 - -
Purchase of patents and other intangibles (3,346) - (553)
Decrease in restricted cash 1,264 238 33
Loan to Autonomous and deferred acquisition costs (3,832) - -
Note receivable and other (2,000) 892 666
Investing activities of discontinued operations - 9,948 (16,403)
-------- -------- ---------
Net cash provided (used) by investing activities (25,436) 5,062 (14,823)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - - 20,000
Repayments of long-term debt (5,000) (5,000) (3,750)
Repayments under line of credit - - (3,000)
Payments of capital lease obligations (212) (246) (266)
Proceeds from exercise of stock options 37 214 480
Proceeds from other shares issued 73 337 85
Purchases of treasury stock (1,855) - -
Financing activities of discontinued operations - 139 (994)
-------- -------- ---------
Net cash provided (used) by financing activities (6,957) (4,556) 12,555
-------- -------- ---------
Decrease in cash and cash equivalents (2,406) (10,293) (30,290)
Cash and cash equivalents, beginning of year 33,720 44,013 74,303
------- -------- -------
Cash and cash equivalents, end of year $31,314 $ 33,720 $ 44,013
======= ======== ========
Supplemental cash flow information:
- ----------------------------------
Interest paid $ 820 $ 1,108 $ 272
Income taxes paid $ 2,186 $ 106 $ 57
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Years ended December 31, 1998, 1997, and 1996
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").
On October 1, 1998, the Company entered into a definitive merger agreement with
Orlando, FL-based Autonomous Technologies Corporation ("Autonomous") to acquire
all of Autonomous' outstanding shares in exchange for 11.7 million shares of
Summit common stock and an equal value of cash, not to exceed $50,000. The
actual value of the transaction will not be determinable until closing and is
dependent upon numerous factors including, but not limited to, the market price
of Company's common stock prior to closing and any outstanding loan balance due
from Autonomous. As part of the agreement, the Company has provided Autonomous a
$8,000 revolving line of credit under which Autonomous may borrow $1,500 in any
calendar month. One half of the amount outstanding under the revolver on the
closing date of the transaction will reduce the cash consideration paid by the
Company. As of December 31, 1998, other current assets include $3,832 of costs
related to this acquisition, of which $3,000 represents borrowings by Autonomous
under the revolver and $832 represents deferred costs incurred in connection
with this acquisition. This acquisition is subject to the approval of the
stockholders of the Company and Autonomous and is expected to close in April
1999.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of intercompany
accounts and transactions.
Revenue Recognition
The Company recognizes revenue on product sales when the products are
shipped and the customer takes ownership and assumes risk of loss. The cost of
any product upgrade obligation is accrued when the product is shipped.
Additionally, the Company provides installation, training and a one-year
warranty on its laser system. The costs to provide these services are incidental
to the sale and are accrued when the sale is recognized. Advance payments
received by the Company for products or services are recorded as deferred
revenue. Service contract revenue is recognized ratably over the term of the
contract. The Company recognizes revenue under laser equipment operating leases
based upon the terms of the contract. Non-refundable per procedure license fees
are recognized upon shipment of Omnicards which are required to perform laser
vision correction procedures with the Company's equipment in the U.S. The
Company accounted for its interest in Pillar Point Partners ("PPP") using the
equity method of accounting and recorded its equity in the net income of PPP as
"license fees, service and other revenues" (see Note 4).
Accounting Principle Change
Customers of Lens pay membership fees which entitle members to
purchase contact lens and related products at member prices. 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. The Company believes
that this method is preferable because it spreads revenue over the period that
benefits are provided to members. In accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 20, "Accounting Changes," the
Company recorded 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. Adoption of the new standard resulted in a
$2,583 increase in 1998 contact lens and related products revenues.
F-9
<PAGE>
Cash Equivalents
Cash equivalents consist of certificates of deposit and highly liquid
debt instruments with original maturities of three months or less.
Short and Long-term Investments
Short-term investments consist of investments that will mature within
twelve months of the balance sheet date. Long-term investments consist
primarily of investments that will mature greater than twelve months from the
balance sheet date. The Company considers its investments as available-for-sale
and carries the investments at market value. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities are
included in other comprehensive income. Realized gains and losses from the sale
of available-for-sale securities are determined on a specific identification
basis. These investments primarily consist of U.S. government securities,
mortgage-backed securities, equity securities and investment grade corporate
bonds.
Inventories
Inventories are stated at the lower of cost or market value, cost
being determined using the first-in, first-out method.
Property and Equipment
Property and equipment is stated at cost. Property and equipment
under capital leases is stated at the lower of the present value of future
minimum lease payments or fair market value at the beginning of the lease term.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets. Amortization of property
and equipment held under capital leases and leasehold improvements is calculated
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
Useful lives for property and equipment is as follows:
Leasehold improvements 5-10 years
Manufacturing and test equipment 3-10 years
Furniture, fixtures and office equipment 3-10 years
Laser equipment held for lease 3 years
Patents and Other Intangibles
Patents consist of purchased patents and patent application costs. Patents
are amortized using the straight-line method over the patent's economic life
ranging from nine to twenty years. Other intangibles include purchased
licenses and customer databases. Purchased licenses are amortized over, five
years using the straight-line method and customer databases are amortized on an
accelerated method over six years based upon expected customer turnover. The
carrying values of patents and other intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable.
Restricted Cash
As of December 31, 1997, restricted cash of $1,264 represented a bond
posted by the Company to enforce an injunction issued by a German court. The
related litigation has been resolved in the Company's favor.
Income Taxes
Deferred tax assets and liabilities have been established for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns. These deferred tax assets
and liabilities are determined based on the difference between the financial
statement carrying amounts and tax basis of assets and liabilities using
currently enacted tax rates that are expected to be in effect during the years
in which the differences are anticipated to reverse.
Foreign Currency Translation
The functional currency of the Company's foreign operations is the U.S.
dollar. Assets, liabilities and expenses related to foreign operations are
remeasured in U.S. dollars at the appropriate exchange rates. Gains and losses
resulting from remeasurement are included in other income (expense).
Advertising Expense
The Company expenses advertising costs when the advertising takes place.
For the years ended December 31, 1998, 1997 and 1996, the Company's advertising
expense was $2,741, $3,683 and $6,346, respectively.
F-10
<PAGE>
Foreign Currency Management
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
1998, the Company recorded a loss of $32, representing the estimated fair value,
for outstanding forward exchange contracts at December 31, 1998 which had a
notional value of $3,000. There were no forward exchange contracts outstanding
at December 31, 1997.
Fair Value
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value because of the short-term maturity of
these items. The fair market value of long-term debt approximates the carrying
value due to the floating interest rate.
Concentration of Credit Risk
The Company's financial instruments subject to credit risk are primarily
cash and cash equivalents, short-and long-term investments, trade receivables
and forward contracts. The Company places its investments and enters into
forward exchange contracts with major financial institutions. Investments
primarily consist of highly rated debt instruments to meet liquidity needs and
to preserve the principal. The Company limits its credit risk of U.S.
receivables by obtaining commitments from a third-party leasing company. The
Company limits its credit risk of international receivables by using
distributors with proven credit history or by requiring irrevocable letters of
credit.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Earnings Per Share
Basic earnings per share amounts are based on the weighted-average number of
common shares outstanding during the year. Diluted earnings per share amounts
include the effect of all potential common shares, if dilutive, that were
outstanding during the year.
Reclassifications
Certain prior year information has been reclassified to conform with
present year presentation of data. See Note 4.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. Under SFAS No. 133, companies will be required to recognize
derivative instruments on the balance sheet at their fair value and report
corresponding gains or losses either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. The Company has not completed its assessment of the consolidated
financial statement impact of adopting the new standard.
3. Discontinued Operations
In January 1997, the Company announced its plan to discontinue its Vision
Center business owned and operated by Refractive Centers International, Inc.
("RCII"), a wholly-owned subsidiary of the Company. Accordingly, the results of
operations for this business were classified as discontinued operations at
December 31, 1996.
On August 18, 1997, the Company sold RCII to LCA-Vision Inc. ("LCA") in
exchange for 16,164,361 newly issued shares of LCA common stock. The sale of the
discontinued operations resulted in a net gain of $23,910, which included a gain
on the sale of net assets held for discontinued operations and accruals for
other estimated costs to be incurred in connection with the sale of RCII and
distribution of LCA common stock. On December 29, 1997, the Company distributed
9,000,000 shares of LCA common stock to its shareholders in the form of a
dividend. Due to the distribution, the Company recorded a loss on investment of
$675, representing the difference between the fair market value of LCA common
stock on the dividend declaration date of $23,625 and its cost basis of $24,300.
The remaining shares are held by the Company and have been classified as a long-
term investment available for sale. As of December 31, 1998 and 1997, the
Company owned 17.3% and 19.5%, respectively, of LCA's outstanding common stock.
In the fourth quarter of 1998, the Company reversed an accrual related to the
sale of discontinued operations, which resulted in an additional gain on the
sale of discontinued operations of $943.
F-11
<PAGE>
4. Pillar Point Partners
Prior to June 1998, the Company participated in per procedure license fees
from its ownership interest in PPP, a partnership formed by the Company and
VISX, Inc. ("VISX") to hold certain U.S. patents covering excimer laser systems
and procedures. On June 4, 1998, the Company and VISX entered into a settlement
agreement that dissolved PPP and granted to each other worldwide, royalty-free
cross-licenses to all of their respective U.S. and foreign patents in the field
of laser ablation of corneal tissue, including all patents that were included or
includable in PPP. Under the terms of the settlement, the Company received a
payment from VISX of $35,000 and recorded a gain of $34,386, net of expenses
associated with the settlement. Subsequent to the dissolution of PPP, the
Company retains 100% of all per procedure license fees performed on its systems.
The Company records as license fees, service and other revenues its equity
(approximately 44%) in the net income of PPP, which was $922, $10,682, and
$6,674 for the years ended December 31, 1998, 1997 and 1996, respectively.
5. Inventories
Inventories consist of the following:
<TABLE>
December 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Raw materials and subassemblies $ 5,599 $ 3,195
Work in process 1,244 2,147
Finished goods 10,560 9,152
------- -------
Total $17,403 $14,494
======= =======
</TABLE>
6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
December 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Leasehold improvements $ 1,828 $ 1,611
Manufacturing and test equipment 8,771 8,360
Furniture, fixtures and office equipment 8,585 6,896
Laser equipment held for leases 4,450 5,093
-------- --------
23,634 21,960
Less accumulated depreciation (14,832) (13,367)
-------- --------
Net property and equipment $ 8,802 $ 8,593
======== ========
</TABLE>
F-12
<PAGE>
Laser equipment held for leases is held under operating leases with customers.
Rental revenue from these leases was $2,649, $2,319 and $332 in 1998, 1997 and
1996, respectively. Accumulated depreciation on leased equipment as of December
31, 1998 and 1997 was $1,827 and $1,966, respectively. At December 31, 1998,
$2,427 of future minimum lease payments were due to the Company over the next
four years pursuant to the operating lease agreements.
7. Patents and Other Intangibles
Patents and other intangibles consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Patents $ 6,610 $ 6,617
Licenses and customer databases 3,346 -
Less accumulated amortization (2,459) (1,848)
------- -------
$ 7,497 $ 4,769
======= =======
</TABLE>
8. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
------ ------
<S> <C> <C>
Accrued compensation and benefits $1,322 $1,427
Accrued warranty costs 646 342
Other accrued expenses 2,997 3,603
Accrued costs related to sale
of discontinued operations 116 1,853
------ ------
Total $5,081 $7,225
====== ======
</TABLE>
9. Leasing and Financing Arrangements
Leases
Capital lease obligations consist of amounts due under equipment lease
agreements. At December 31, 1998, the cost and accumulated depreciation of the
related equipment was $745 and $431, respectively. The Company leases its
facilities in the U.S. under operating leases expiring in 2000 and 2002. The
Company leases an office and manufacturing facility in Ireland under an
operating lease expiring in 2026. Rent expense was approximately $732, $751 and
$898 for the years ended December 31, 1998, 1997, and 1996, respectively.
Financing Arrangements
In 1996, the Company entered into a loan agreement consisting of a $20,000
unsecured revolving credit facility ("facility") and a $20,000 unsecured term
loan ("term loan"). The loan agreement contains the following financial
covenants: debt service coverage ratio, interest coverage ratio, leverage ratio,
minimum net worth and quick ratio. The loan agreement also includes restrictions
on the Company's ability to incur additional indebtedness, to create liens, to
make certain guarantees, loans, advances and investments and to merge or
consolidate with other entities and to dispose of material assets. The $20,000
facility expired in March 1999 and allowed the Company to borrow at LIBOR plus
75 to 125 basis points, based upon the financial results of the Company or the
prime rate. As of December 31, 1998 there were no borrowings under the facility.
The term loan requires quarterly principal payments of $1,250 and monthly
interest payments calculated at prime rate.
In the fourth quarter of 1998, the Company's loan to 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.
Accordingly, the outstanding balance of the term loan of $6,250 as of December
31, 1998 has been included in current maturities of long-term debt. The interest
rate of the term loan at December 31, 1998 was 7.75%.
The Company believes that consummation of the Autonomous acquisition will place
the Company in technical default of certain covenants included in the loan
agreement and place a significant strain on the Company's liquidity. The cash
consideration to be paid to Autonomous stockholders of up to $50.0 million
represents approximately 68% of the Company's cash and cash equivalent balances
and short and long-term investments excluding the value of LCA common stock and
net of the term loan at December 31, 1998. The Company is currently negotiating
with its existing and other institutions for a new line of credit of
approximately $20 million to $25 million. The Company is currently evaluating
its options regarding debt and borrowing capacity. 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.
F-13
<PAGE>
At December 31, 1998, future payments of the term loan and capital leases
and minimum rental payments under noncancellable operating leases were as
follows:
<TABLE>
<CAPTION>
Total
Long-term
Term Loan Capital Leases Debt Operating Leases
--------- -------------- ------- ----------------
<S> <C> <C> <C> <C>
Year ending December 31:
1999 $6,250 $193 $6,443 $ 861
2000 - 129 129 740
2001 - 34 34 419
2002 - - - 328
2003 - - - 140
Thereafter - - - 3,285
------ ---- ------ ------
Minimum future payments 6,250 356 6,606 $5,773
======
Less amounts representing interest - 25 25
------ ---- ------
Long-term debt 6,250 331 6,581
Less current maturities of long-term debt 6,250 181 6,431
------ ---- ------
Long-term debt, less current maturities $ - $150 $150
====== ==== ======
</TABLE>
10. Stockholders' Equity
Common and Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock at $.01
par value and 60,000,000 shares of common stock at $.01 par value. The terms
and conditions of the preferred stock, including any preferences and dividends,
will not be established until such time, if ever, as such shares are issued by
the Company.
Stock Option Plans
In March 1987, the Company adopted a Stock Option Plan (the "1987
Plan") which permitted the Company to grant both incentive and non-incentive
stock options to employees. The 1987 Plan expired by its terms in March 1997 and
the Company adopted the 1997 Stock Option Plan (the "1997 Plan"). A total of
3,107,415 shares and 1,500,000 shares of common stock were authorized by the
Board of Directors (the "Board") for issuance under the 1987 Plan and the 1997
Plan, respectively. The 1997 Plan permits the Company to grant stock options
(incentive and non-incentive) and stock appreciation rights to employees,
members of the Board, consultants and advisors. Options generally vest within 3
years of grant date and must be exercised not later than 10 years from the date
of grant.
The Company also has a Stock Option Plan for Outside Directors (the
"Directors' Plan") under which a total of 75,000 shares of common stock have
been authorized for issuance. Options granted under the Directors' Plan vest one
year from grant date and must be exercised not later than 10 years from the date
of grant.
F-14
<PAGE>
The following table summarizes activity under the 1987 Plan, 1997 Plan
and the Directors' Plan (collectively, the "Plans") for each of the three years
in the period ended December 31, 1998:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Price Per Share
---------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1996 703,075 $14.14
Options granted 832,161 6.23
Options lapsed or canceled (329,012) 17.76
Options exercised (184,308) 7.58
---------
Options outstanding, December 31, 1996 1,021,916 7.72
Options granted 697,684 6.81
Options lapsed or canceled (195,355) 9.25
Options exercised (39,822) 5.39
---------
Options outstanding, December 31, 1997 1,484,423 7.16
Options granted 627,918 3.95
Options lapsed or canceled (296,700) 8.88
Options exercised (6,850) 5.38
---------
Options outstanding, December 31, 1998 1,808,791 $ 5.77
========= ======
</TABLE>
Options to purchase 780,524 shares, 622,879 shares and 482,324 shares were
exercisable under the plans at December 31, 1998, 1997 and 1996, with a
weighted-average exercise price per share of $6.88, $7.92 and $7.82,
respectively. In 1997, options to purchase 225,000 shares, which were granted in
1989 under a separate executive stock option agreement, were exercised. In 1998
and 1996, options to purchase 100,000 shares and 130,342 shares, respectively,
were repriced through cancellation and reissuance. The number of shares of
common stock reserved for granting of future options under the Plans was 321,225
shares, 829,635 shares and 210,256 shares at December 31, 1998, 1997 and 1996,
respectively. The weighted-average fair value of options granted during 1998,
1997 and 1996 was $2.66, $3.94 and $3.43 per option, respectively.
The following table summarizes certain information relating to outstanding and
exercisable options under the Plans at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Ranges of Number Remaining Exercise Number Exercise
Exercise Prices of Shares Contractual Life Price of Shares Price
- -------------------------- ------------------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$3.50 to $5.38 1,073,892 8.4 $ 4.51 458,907 $ 5.26
5.50 to 7.75 622,925 8.5 6.11 217,143 6.09
10.50 to 14.87 72,200 4.8 13.88 72,200 13.88
17.33 to 25.31 39,774 6.2 19.41 32,274 19.66
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Expected life 4 years 4 years 4 years
Interest rate 5.02% 6.19% 6.18%
Volatility 77.6% 70.5% 65.3%
Dividend yield 0% 0% 0%
</TABLE>
F-15
<PAGE>
If the Company had recorded compensation expense for the Plans and the
Employee Stock Purchase Plan under the provisions of SFAS No. 123, net income
(loss) would have decreased (increased) by $1.4 million, $1.2 million and $(1.5)
million in 1998, 1997 and 1996, respectively and ($.05, $.04 and $(.05) per
basic and diluted share, respectively). The fair values of the options granted
are assumed to have been recognized as compensation expense on a straight-line
basis over the vesting period of the grant.
Employee Stock Purchase Plan
In May 1991, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan is available to all eligible full-time
employees, excluding those owning 5% or more of the Company's common stock.
Pursuant to the Purchase Plan, employees can purchase the Company's common
stock, at 85% of fair market value, in an amount up to 5% of the employee's
wages during the semi-annual plan purchase period. Under the Purchase Plan, the
Company sold 2,291 shares, 907 shares and 1,051 shares in 1998, 1997 and 1996,
respectively.
Shareholder Rights Plan
In March 1990, the Board adopted a Shareholder Rights Plan ("Rights Plan")
pursuant to which each stockholder of the Company holds one currently non-
exercisable right ("Right") for each share of common stock beneficially held.
The Rights become exercisable upon the occurrence of a "Distribution Date,"
whereupon the holder is entitled to purchase from the Company one-quarter of a
share of Generally, a Distribution Date occurs if (a) a person or group becomes
a beneficial owner of 15% or more of the Company's outstanding shares of Common
Stock without the prior approval of the Board ("Acquiring Person"), or (b) ten
business days lapse following the commencement of, or announcement of an
intention to make, a tender or exchange offer for the common stock not approved
by the Board, which, if consummated, would result in a person or group becoming
a beneficial owner of 15% or more of the Company's outstanding shares of Common
Stock.
If a person or group becomes an Acquiring Person, a "Flip-In Event" thereby
occurs concurrently with the Distribution Date, with the effect that each Right
(other than those owned by such Acquiring Person) will entitle its holder to
obtain common stock having a market value of eight times the Right's exercise
price for a purchase price equal to four times the exercise price of the Rights,
in effect allowing a Rights holder to purchase a fixed amount of the Company's
common stock at a discount of 50% off the market price. If a person or group
becomes an Acquiring Person (hence triggering a Flip-In Event), and thereafter
the Company is involved in a merger or other business combination with the
Acquiring Person where the Company is not the surviving entity and the holders
of the Company's common stock are not the holders of all of the surviving
entity's common stock, or the sale of 50% or more of the Company's assets and
earning power to the Acquiring Person occurs (a "Flip-Over Event"), each Right
(other than those owned by the Acquiring Person) will then entitle the holder to
obtain eight times the Right's exercise price for a purchase price equal to four
times the exercise price of the Rights.
11. Commitments and Contingencies
Commitments
During 1991, the Irish Development Authority ("IDA") agreed to reimburse
the Company up to approximately $740 for rent, training and fixed asset
acquisition costs incurred in conjunction with the opening of its manufacturing
facility in Cork, Ireland. The Company may be required to repay the grants if
the facility is closed within eight years of the final grant drawdown. As of
December 31, 1998, the Company has received approximately $662 from the IDA
under these agreements.
In February 1992, the Company entered into a licensing agreement which
granted the Company use of a patent covering excimer laser ablation of tissue
under which the Company pays a royalty of 2% of the net selling price of its
Excimer Systems sold or leased in the U.S. and certain other countries. The
Company also licenses certain laser patents under which it pays royalties. The
Company also pays royalties based upon the net selling price of its
microkeratomes. Royalty expense related to laser system and microkeratome sales
were $153, $37 and $448 in 1998, 1997 and 1996, respectively.
Contingencies
The Company is a party to various litigation matters as described below. The
Company believes that the allegations in all of the complaints against it in the
actions described herein are without merit, and it intends to defend the actions
vigorously. There can be no assurance that the Company will not be served with
additional complaints of a similar nature in the future, that the Company will
ultimately prevail in the pending or any possible additional actions, or that
the actions, individually or in the aggregate, will not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. No provision for any loss that may result upon resolution of these
matters has been made in the accompanying consolidated financial statements.
F-16
<PAGE>
Pillar Point Partners Antitrust And Patent Litigation. Pillar Point Partners,
- ------------------------------------------------------
the Company, VISX and certain affiliates of the Company and VISX are presently
involved in a series of patent and antitrust lawsuits which have been
administratively consolidated for pretrial purposes in the United States
District Court for the District of Arizona by the Federal Judicial Panel on
Multidistrict Litigation ("MDL Panel"). These cases are presently pending as IN
RE: PILLAR POINT PARTNERS ANTITRUST AND PATENT LITIGATION (CIVIL ACTION NO. MDL
1202) and are described below.
Patent Litigation. Pillar Point Partners commenced patent infringement
- ------------------
litigation against certain ophthalmologists believed to have used or be using
homemade laser systems not licensed under patents held by Pillar Point Partners,
as well as one alleged manufacturer of such laser systems. These actions were
originally pending as PILLAR POINT PARTNERS, et al. v. DAVID DULANEY, et al.
(U.S. DISTRICT COURT, DISTRICT OF ARIZONA, CIVIL ACTION NO. 96-2051PHXPGR),
PILLAR POINT PARTNERS, et al. v. JON G. DISHLER, et al. (U.S. DISTRICT COURT,
DISTRICT OF COLORADO, CIVIL ACTION NO. 96-N-2351), and PILLAR POINT PARTNERS, et
al. v. JUI-TENG LIN, et al. (U.S. DISTRICT COURT, MIDDLE DISTRICT OF FLORIDA,
CIVIL ACTION NO. 97-54-CV-ORL-22). The defendants in the Dulaney and Dishler
actions have asserted counterclaims seeking declarations that the patents in
suit are invalid and unenforceable. Those defendants have also raised antitrust
and Lanham Act counterclaims. A settlement has been reached in the Dulaney
action, and a stipulation of dismissal has been lodged with the court.
Federal Antitrust Litigation. In June, 1996, a Texas ophthalmologist, Robert G.
- -----------------------------
Burlingame, sued Pillar Point, VISX, the Company and certain affiliates of VISX
and the Company in the Federal District Court for the Northern District of
California alleging that the defendants have violated and are violating federal
and state antitrust laws and alleging fraud in connection with certain of the
Company's sales and marketing activities. The plaintiff seeks, things, antitrust
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, attorney's fees, and a permanent injunction against future violations.
On September 5, 1996, a Nevada ophthalmologist, John R. Shepherd, through his
professional corporation, commenced a similar lawsuit against the same parties,
in the same court, alleging substantially similar antitrust claims and seeking
substantially similar relief, including damages before trebling of at least $125
plus $12 per month until the date of judgment. The Company has denied the
substantive allegations in these actions. Plaintiff's counsel in the Shepherd
case has indicated that he intends to seek certification of the case as a class
action.
On November 5, 1997, Antoine Garabet, M.D., Inc. and Abraham Shammas, M.D.,
Inc., d/b/a Laser Eye Center, sued Pillar Point, VISX, the Company and certain
affiliates of VISX and the Company in the Federal District Court for the
Northern District of California seeking a declaratory judgment that the patents
held by Pillar Point are invalid and unenforceable on account of alleged
antitrust violations and alleging fraud in connection with certain of the
Company's sales and marketing activities. The plaintiffs seek compensatory
damages on the fraud claim against the Company of at least $49, disgorgement of
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, attorneys' fees and costs. The Company has
withdrawn its motion to dismiss and has filed a counterclaim for patent
infringement against the plaintiffs and Antoine Garabet and Abraham Shammas,
individually. On March 12, 1999, the Company was served with a complaint filed
against it and Antoine Garabet, M.D., by Kathy Tedesco. In her complaint, Ms.
Tedesco alleges that she was negligently treated for farsightedness by Dr.
Garabet on a Company laser and asserts strict liability claims against the
Company as manufacturer. The complaint seeks unspecified compensatory and
punitive damages. The Company has never provided Dr. Garabet with equipment,
software or service, nor are Company systems presently approved for treatment of
farsightedness in the U.S. The Tedesco matter has been turned over to the
Company's insurer. It is presently pending in the Superior Court of Los Angeles
County, California, as Case No. B0203838.
In May, 1998, The Eye Professionals, P.A. of Millville, New Jersey commenced an
action in the Federal District Court for the District of New Jersey against the
Company and VISX. The case purports 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. The complaint alleges, inter alia, price-fixing in violation of Section
1 of the Sherman Act. The action seeks, inter alia, 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, Inc., and VISX
Partner, Inc., 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 United States District Court for the District of
Arizona. Plaintiffs in each of these cases have agreed to consolidation of the
four purported class actions and filed and served a single consolidated amended
complaint. 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 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, Inc., VISX,
VISX, Partner, Inc., 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, violations 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 has now been transferred to the District of Arizona.
F-17
<PAGE>
In late March, 1998, Janice Camp of Atlanta, Georgia commenced an action in
Federal District Court for the District of Massachusetts against the Company and
VISX. As amended in April, 1998, the complaint adds as a named plaintiff Jon
Singer of Congers, New York. The case has been transferred to Federal District
Court for the District of Arizona for consolidated pretrial proceedings. The
case purports to be a class action on behalf of all similarly situated
individuals who have undergone laser vision correction surgery. The complaint
alleges, inter alia, price-fixing, monopolization, conspiracy to monopolize,
violations of the Clayton Act, violations of the RICO Act, and violations of
state consumer protection statutes. The action seeks, 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. In response to defendants' motion to dismiss, plaintiffs have
abandoned their federal antitrust claims. A Magistrate Judge has recommended
that defendants' motion to dismiss the RICO and state law claims be granted.
Consolidated California State Litigation. Beginning in late March, 1998, a
- ------------------------------------------
number of actions brought by individuals under the Cartwright Act and California
unfair competition laws were commenced against the Company, VISX, and related
defendants 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, Inc., VISX, and VISX Partner, Inc. The Amended
Complaint purports to be filed on behalf of a nationwide class of persons who
have undergone excimer laser surgery with a laser manufactured by the Company or
VISX. The Amended Complaint seeks, inter alia, 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. The Company and Summit Partner, Inc. have filed an answer denying
generally the allegations of the Amended Complaint in this litigation. James
Ballard filed a similar suit against the Company, Summit Partner, Inc., VISX,
VISX Partner, Inc., 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.
Other Antitrust and Patent Cases. In April, 1998, Penny 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 individuals similarly situated in the State of
Florida. The complaint alleges various violations of the Florida Deceptive Trade
and Unfair Practices Act. The complaint seeks unspecified damages, costs,
expenses, 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, Inc., VISX, VISX Partner, Inc., 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 Chapter 133 of the Wisconsin Statutes. The complaint seeks
unspecified treble 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. 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 have removed this action to Federal
District Court in Wisconsin and are seeking to have it transferred to Federal
District Court in Arizona.
In addition, the Company has recently become aware of a suit filed against VISX
and the Company in the U.S. District Court for the District of New Jersey on
February 4, 1999, by Carolina Eye Associates, P.A. and Carolina-South Eye
Associates. 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 plus $8 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.
On December 28, 1998, Summit filed a patent infringement lawsuit in the United
States 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 Summit's U.S. patents and seeks
damages and injunctive relief. On January 29, 1999, a district court in Tokyo,
Japan ruled against Summit in a patent infringement lawsuit which Summit
initiated against Nidek in 1996. The Japanese lawsuit involved the Japanese
counterpart of one of the two U.S. patents which Summit has alleged Nidek
infringes in the U.S. lawsuit. Summit intends to appeal the Tokyo district
court decision.
In July, 1997, John Taboada filed a complaint in the United States District
Court for the Western District of Texas against Stephen L. Trokel, VISX, VISX
Partner, Inc., Summit Partner, Inc., and Pillar Point Partners. In December,
1997, Taboada amended his complaint to include the
F-18
<PAGE>
Company as an additional defendant. Taboada seeks a declaration that he is
either the sole inventor or a joint inventor of U.S. Patent No. 5,108,388 (the "
`388 Patent") which names Dr. Trokel as the inventor. The `388 Patent has been
assigned to VISX and is licensed to Pillar Point Partners. Taboada also seeks to
recover royalties paid to one or more of the defendants for licenses granted
under `388 Patent, charges defendants with infringement of the `388 Patent,
alleges Lanham Act claims, and seeks monetary damages and injunctive relief. On
February 23, 1999, the court granted summary judgement in favor of the Company,
Summit Partner, Inc. and Pillar Point Partners.
Seriani Litigation. On October 26, 1992, Joseph Seriani brought suit against
- -------------------
Lens and certain of its former shareholders in the Florida Circuit Court. The
suit alleged violations of the Florida Civil Remedies for Criminal Practices Act
- - - - the Florida civil RICO statute -- based on events which allegedly occurred
in the mid-1980s. Seriani's claims against Lens were dismissed several times for
failure to state a viable claim, but in each instance with leave to amend and
refile. On May 15, 1996, the date of the Company's acquisition of Lens, Seriani
and his wife Rhonda Seriani filed an amended complaint which included the
Company as an additional defendant. On November 25, 1996, the Serianis
voluntarily dismissed their action against the Company and on March 7, 1997
voluntarily dismissed their action against the remaining defendants, in each
case without prejudice. On March 24, 1997, the Serianis commenced a new lawsuit
against Lens and others in the United States District Court for the Southern
District of Illinois, alleging substantially similar claims. The Company
believes that the Serianis' suits against the Company and Lens are and were
without merit.
Lens Express Employee Litigation. On or about February, 1997, a former employee
- ---------------------------------
allegedly filed an administrative complaint with the Florida Commission on Human
Relations against Lens and a former employee of Lens, alleging sexual
discrimination and harassment by the former employee, retaliatory demotion, and
constructive discharge. On or about May, 1997, a current employee filed an
administrative complaint with the same Florida agency, also alleging sexual
discrimination and harassment by the same former employee. The Florida
Commission referred both complaints to the U.S. Equal Employment Opportunity
Commission for investigation. No administrative investigations were completed
before each complainant, represented by the same counsel, sued Lens and the
former employee in Florida state court on or about September, 1997. Each
complaint alleges sexual discrimination and harassment under the Florida Civil
Rights Act and various other state common law claims; the former employee also
alleges retaliatory demotion under the Florida Civil Rights Act. Each plaintiff
seeks a court order prohibiting such alleged discrimination as well as
unspecified compensatory and punitive damages. Lens answered each complaint,
denying the allegations. On or about June 15, 1998, Lens settled all claims of
the current employee for a nominal amount and without admitting any wrongdoing
or liability. On or about October 30, 1998, another current employee filed an
administrative complaint with the same Florida agency against Lens, alleging
sexual discrimination by the same former employee and retaliation. Soon
thereafter, this current employee filed a complaint in Florida state court
against Lens and the former employee alleging battery, intentional infliction of
emotional distress, invasion of privacy, negligent infliction of emotional
distress, and false imprisonment against both Lens and the former employee, and
negligent retention and supervision and negligent investigation against Lens.
While Lens believes the claims in both remaining cases to be without merit,
there can be no assurance that it will prevail in either litigation. Lens cannot
predict the range of possible compensatory damages, if any, or whether punitive
damages may be assessed.
Lens Express Woodstock Litigation. On or about April, 1997, three then current
- ----------------------------------
and two former employees sued Lens, ten employees and four former employees of
Lens, alleging racial discrimination under 42 USC ss. 1981. The plaintiffs
sought an unspecified amount of compensatory damages, punitive damages, lost
wages and a court order declaring the alleged conduct unlawful. Lens and the
other employees denied the allegations; the former employees apparently were
never served with the complaint. After the Court dismissed most claims in
plaintiffs' third amended complaint, plaintiffs filed a fourth amended complaint
in which they dropped claims against most of the individual defendants. Lens
moved to dismiss the fourth amended complaint, and plaintiffs requested leave to
file yet another amendment, which was granted. This case was pending as
WOODSTOCK, et al. v. LENS EXPRESS, INC., et al., in the United States District
Court for the Southern District of Florida, Case No. 97-6529-Civ-Hurley. Lens
made offers of judgement for .75 to each plaintiff; one plaintiff accepted the
offer. Thereafter, two former employees settled for nominal amounts and the two
remaining current employees resigned and also settled for nominal amounts.
Lester Swartz Litigation. On or about June 23, 1998, a former Lens customer
- -------------------------
service representative filed a pro se complaint in federal court asserting
eleven counts against Lens, the Company and numerous individual officers and
employees of both corporations. The claims asserted are conspiracy, violation of
Florida's Whistleblower Act, civil theft, fraud and deceit, breach of contract,
breach of duty, gross negligence, negligent representations, negligent
supervision, negligent infliction of emotional distress, and intentional
infliction of emotional distress. Mr. Swartz alleges he suffered an "emotional
explosion" as a result of the customer complaints he received in his position as
a customer service representative at Lens. Mr. Swartz claims that Lens' sales
department engaged in unlawful activities that, in turn, resulted in the
customer complaints that caused this event. Mr. Swartz claims Lens promised him
an indefinite leave of absence from work until he recovered and was fired when
he did not return to work after two months. The complaint seeks unspecified
compensatory damages for financial and emotional injury. Lens Express and the
Company moved to dismiss the complaint on October 27, 1998 and served Mr. Swartz
with a copy of a motion seeking sanctions for filing a frivolous lawsuit. By
Orders dated January 29, 1999, a United States Magistrate Judge recommended
dismissal of the entire complaint and denial of the motion for sanctions. Mr.
Schwartz filed objections to the Magistrate Judge's recommendation of dismissal
of the entire complaint. On March 3, 1999, the court issued an Order adopting
the Magistrate Judge's recommendation and dismissed the case without prejudice.
The Company believes the allegations of the complaint were without merit and
that meritorious defenses to liability and damages, if any, exist as a matter of
fact and law.
F-19
<PAGE>
Shareholder Actions. Between August, 1996 and February, 1997 various shareholder
- --------------------
actions were commenced against the Company and certain of its officers in the
United States District Court for the District of Massachusetts (the "District of
Massachusetts") claiming, among other things, violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 arising out of public statements
made by defendants. The actions were consolidated, by order of the Court entered
December 2, 1996, as IN RE SUMMIT TECHNOLOGY SECURITIES LITIGATION, Civil Action
No. 96-11589-JCT (the "Securities Litigation"). Plaintiffs seek certification of
the action as a class action on behalf of all purchasers of the Company's common
stock, other than defendants and certain affiliated persons and entities,
between March 31, 1995 and July 3, 1996. They seek unspecified damages,
interest, costs and expenses.
On October 1, 1996 an additional action was commenced in the District of
Massachusetts against the Company, its directors, certain of its officers and
the four underwriters of the Company's October, 1995 Common Stock offering
claiming violations of Sections 11, 12(2) and 15 of the Securities Act of 1933
arising out of alleged material misstatements of fact in the Registration
Statement issued in connection with the offering. The action was coordinated
with the Securities Litigation by order of the Court dated December 2, 1996. It
also seeks unspecified damages, interest, costs and expenses.
On December 20, 1996, a shareholder of the Company filed in the District of
Massachusetts a derivative action, purportedly on behalf of the Company, against
the Company as nominal defendant, its directors and certain of its present or
former officers. This action was consolidated with the Securities Litigation by
order of the Court entered July 22, 1997. The complaint alleges that the conduct
of the individual defendants has exposed the Company to the expense and
inconvenience of defending the Securities Litigation and has harmed the
Company's reputation, thereby limiting its access to capital markets. It also
alleges that the individual defendants improperly traded in the Company's Common
Stock based upon material non-public information.
12. Income Taxes
The domestic and foreign components of income (loss) from continuing operations
before provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997 1996
-------- ------- ----------
<S> <C> <C> <C>
Domestic $39,245 $1,475 $ (8,521)
Foreign 2,506 (510) (4,926)
------- ------ ---------
$41,751 $ 965 $(13,447)
======= ====== =========
</TABLE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 789 $ (60) $ -
State 1,314 195 44
Foreign 105 2 -
-------- ------- -------
2,208 137 44
-------- ------- -------
Deferred:
Federal 14,293 (4,873) (4,854)
State (470) (510) 216
Tax benefit of stock
options 2,817 - -
-------- ------- -------
16,640 (5,383) (4,638)
-------- ------- -------
Change in valuation allowance (13,827) 5,383 4,638
-------- ------- -------
Total $ 5,021 $ 137 $ 44
======== ======= =======
</TABLE>
F-20
<PAGE>
The appropriate tax effect of each type of temporary difference and carryforward
that gives rise to the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- --------
<S> <C> <C>
Deferred tax asset:
Net operating loss $ 1,552 $ 19,926
Deferred revenue 3,155 -
Unrealized loss on marketable securities 3,764 4,514
Research and development credit 684 684
Alternative minimum tax credit 789 -
Inventory reserves 1,205 145
Other temporary differences 1,023 778
--------- --------
Subtotal 12,172 26,047
Less valuation allowance (11,251) (25,078)
--------- --------
921 969
Deferred tax liability:
Patent costs 427 441
Depreciation 494 528
--------- --------
921 969
--------- --------
Net deferred tax asset $ - $ -
========= ========
</TABLE>
Due to the uncertainty of the Company generating future taxable income, the
Company has recorded a valuation allowance against its deferred tax assets which
more than likely will not be realized. The decrease in the valuation allowance
in 1998 of $13,827 was due primarily to utilization of net operating loss
carryforwards. The increase in the valuation allowance in 1997 of $5,383 was
due primarily to an increase in deferred tax assets.
The provision for income taxes differs from the amount computed by applying the
federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
--------- ------ ---------
<S> <C> <C> <C>
Expected expense (benefit) at federal income tax rate $ 14,613 $ 338 $(4,706)
Foreign, state, and other taxes, net of federal benefit 920 53 46
Change in valuation allowance for deferred
tax assets allocated to income tax expense (11,010) (490) 4,638
Other 498 236 66
-------- ----- -------
Provision for income tax $ 5,021 $ 137 $ 44
======== ===== =======
</TABLE>
At December 31, 1998, the Company had an operating loss carryforward of $4,434
and tax credit carryforwards of $1,473 available to offset future federal
taxable income. Net operating loss and tax credit benefits related to stock
options of $3,025 will be credited to additional paid-in capital when realized.
The entire operating loss carryforward expires in 2012. Research and
experimentation credit carryforwards of approximately $684 expire in the years
2001 through 2008 and the alternative minimum tax credit of $789 does not
expire.
There are no unremitted earnings in the Company's foreign subsidiaries.
13. Retirement Plans
F-21
<PAGE>
The Company sponsors defined contribution retirement plans (the "retirement
plans"). Employees may contribute various percentages of their salary subject
to contribution limits defined by the Internal Revenue Code. The Company may,
at its discretion, match in cash or common stock the employee's contributions.
For the years ended December 31, 1998, 1997 and 1996, the Company contributed
cash and/or common stock valued at $172, $63 and $127, respectively,
representing its matching contribution to the retirement plans.
14. Supplemental Cash Flow Information
For the year ended December 31, 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. For the year ended December 31, 1997, other non-cash transactions
include proceeds of 16.2 million shares of LCA common stock valued at $43,644
from the sale of discontinued operations and dividend distribution of
9.0 million shares of LCA common stock valued at $23,625 on declaration date.
For the year ended December 31, 1996, non-cash transactions included $49 for
capital lease obligations incurred.
15. Investment Securities
The fair value of short and long term investment securities at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Corporate bonds $42,528 $28,050
Mortgage-backed securities 3,954 2,248
Other debt securities 1,412 1,012
U.S. Government securities 889 983
------- -------
Total debt securities 48,783 32,293
LCA common stock 9,765 8,060
------- -------
$58,548 $40,353
======= =======
</TABLE>
At December 31, 1998 and 1997, the cost of the equity security was $19,176 and
$19,344, respectively and the related unrealized loss of $9,411 and $11,284,
respectively, was included in accumulated other comprehensive loss. The cost of
debt securities approximates fair value at December 31, 1998 and 1997.
Gross realized gains included in other income in 1998, 1997 and 1996 were $22,
$185 and $104, respectively, and gross realized losses included in other income
in 1998, 1997 and 1996 were $1, $721 and $70, respectively.
Contractual maturities of debt securities at fair value at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Due within one year $33,295 $26,770
Due after one year within five years 14,838 4,773
Due after ten years 650 750
------- -------
Total debt securities $48,783 $32,293
======= =======
</TABLE>
F-22
<PAGE>
16. Business Segments
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related information", effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial statements.
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>
1998
Revenues $44,887 $46,754 $ - $ 91,641
Income (loss) from continuing operations before
provision for income taxes 29,950 6,317 5,484 41,751
Total assets 47,744 10,048 87,133 144,925
1997
Revenues 33,075 46,575 - 79,650
Income (loss) from continuing operations before
provision for income taxes (2,708) 2,015 1,658 965
Total assets 37,024 8,975 69,104 115,103
1996
Revenues 25,949 47,963 - 73,912
Income (loss) from continuing operations before
provision for income taxes (18,873) 238 5,188 (13,447)
Total assets 46,632 8,071 78,957 133,660
</TABLE>
For the following geographic area data, revenues are attributed to
geographic regions based on the location of the customer and property and
equipment (net) are attributed to its physical location.
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------------ -------------------
<S> <C> <C> <C>
Revenues
United States $81,909 $70,931 $66,122
Other foreign countries 9,732 8,719 7,790
------- ------- -------
Total revenues $91,641 $79,650 $73,912
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Property and equipment (net)
United States $ 7,768 $ 7,618
Ireland 1,034 975
------- -------
Total property and equipment (net) $ 8,802 $ 8,593
======= =======
</TABLE>
F-23
<PAGE>
17. Selected Quarterly Financial Data (Unaudited)
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" as follows:
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------------------------------------
First Second Third Fourth
--------------------------- ---------------------- ---------------------- ---------
As As As
As Previously As Previously As Previously
1998 Restated Reported Restated Reported Restated Reported
---------- ------------ --------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 22,040 $21,840 $24,100 $23,396 $23,141 $22,284 $22,360
Gross profit 8,732 8,532 9,945 9,241 10,147 9,290 10,497
Income from continuing operations 377 177 31,208 30,504 1,555 698 3,590
Gain on sale of discontinued operations - - - - - - 943
Income before cumulative effect of
accounting principle change 377 177 31,208 30,504 1,555 698 4,533
Cumulative effect of accounting
principle change (10,103) - - - - - -
Net income (loss) (9,726) 177 31,208 30,504 1,555 698 4,533
Basic and diluted earnings per share (unless otherwise indicated):
- ------------------------------------------------------------------
Income from continuing operations $ 0.01 $ 0.01 $ 1.00 $ 0.98(1) $ 0.05 $ 0.02 $ 0.12
Gain on sale of discontinued operations - - - - - - 0.03
Income before cumulative effect of
accounting principle change 0.01 0.01 1.00 0.98(1) 0.05 0.02 0.15
Cumulative effect of accounting
principle change (0.32) - - - - - -
Net income (loss) (0.31) 0.01 1.00 0.98(1) 0.05 0.02 0.15
(1) Diluted - $0.97
</TABLE>
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------
First Second Third Fourth
----------- --------- --------- ---------
1997
<S> <C> <C> <C> <C>
Revenues $ 18,353 $ 21,106 $ 20,322 $ 19,869
Gross profit 6,372 8,663 7,520 7,096
Income (loss) from continuing operations (1,400) 2,572 24 (368)
Gain on sale of discontinued operations - - 23,910 -
Loss from discontinued operations - - (3,340) -
Net income (loss) (1,400) 2,572 20,594 (368)
Basic and diluted earnings per share:
- -------------------------------------
Income (loss) from continuing operations $ (0.04) $ 0.08 $ - $ (0.01)
Gain on sale of discontinued operations - - 0.76 -
Loss from discontinued operations - - (0.11) -
Net income (loss) (0.04) 0.08 0.65 (0.01)
</TABLE>
F-24
<PAGE>
18. Restatement
In response to a review by the Staff of the Securities and Exchange
Commission, the Company has restated its consolidated financial statements as of
December 31, 1997 and for the year then ended, for transactions related to the
sale of the Company's discontinued operations (see Note 3) and has filed such
restated financial statements in an Annual Report on Form 10K/A for the year
ended December 31, 1997. With guidance from the Staff, the 16,164,361 newly
issued shares of LCA common stock, representing the proceeds from the sale, were
valued at a 10% discount from the market price of 9,000,000 shares of LCA common
stock which resulted in a gain on the sale of discontinued operations of $23,910
in the third quarter of 1997, compared to a gain of $10,771 that the Company had
previously recognized. In connection with the distribution of LCA common stock,
the Company recorded a one-time non-cash loss on investment of $675 in the
fourth quarter of 1997, representing the difference between the fair market
value of LCA common stock on the dividend declaration date of $23,625 and its
cost basis of $24,300. Previously, the distribution of LCA common stock was
recorded at cost.
F-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Summit Technology, Inc.:
Under date of March 6, 1998, except as to Note 10, which is as of March 27, 1998
and except for the restatement referred to in Note 18, as to which the date is
March 9, 1999, we reported on the consolidated balance sheets of Summit
Technology, Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1997, as contained in the 1997
annual report to stockholders. In connection with our audits of the
aforementioned consolidated financial statements, we also audited financial
statement Schedule II. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits .
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 6, 1998, except as to Note 10,
which is as of March 27, 1998 and
except for the restatement referred
to in Note 18, as to which the
date is March 9, 1999
F-26
<PAGE>
Schedule II
-----------
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1996, 1997 and 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996 Balance at Beginning Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $974 $186 $263 $897
December 31, 1997 Balance at Beginning Amounts Balance at End
of Period Additions Written Off of Period
--------- ------------ ----------- ---------
Allowance for Doubtful Accounts $897 $245 $384 $758
December 31, 1998 Balance at Beginning Amounts Balance at End
of Period Additions Written Off of Period
--------- ------------ ----------- ---------
Allowance for Doubtful Accounts $758 $838 $197 $1,399
</TABLE>
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned hereunto duly authorized.
SUMMIT TECHNOLOGY, INC.
By: /s/ Robert J. Kelly
____________________________________
Name: Robert J. Kelly
Title: Chief Financial Officer
Date: March 23, 1999
F-28
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Index Page
- ----------- -------------------- ----
Exhibit 18.1 Letter Regarding Change in Accounting
Principle
Exhibit 23.1 Independent Auditors' Consent of
Deloitte & Touche LLP
Exhibit 23.2 Consent of KPMG Peat Marwick LLP
Exhibit 27.1 Financial Data Schedules
F-29
<PAGE>
Exhibit 18.1
March 17, 1999
Summit Technology, Inc.
21 Hickory Drive
Waltham, MA 02451
Dear Sirs/Madams:
We have audited the consolidated financial statements of Summit Technology, Inc.
as of and for the year ended December 31, 1998, included in your Current Report
on Form 8-K to the Securities and Exchange Commission and have issued our report
thereon dated March 17, 1999. Note 2 to such consolidated financial statements
contains a description of your adoption during the year ended December 31, 1998
of a change in your revenue recognition policy with respect to membership fees.
In our judgment, such change is to an alternative accounting principle that is
preferable under the circumstances.
Yours truly,
DELOITTE & TOUCHE LLP
Boston, Massachusetts
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-25169, 33-41451, 33-49162, 333-26142 and 333-41583 on Form S-8, and Nos.
33-79158 and 333-03765 on Form S-3 of Summit Technology, Inc. (the "Company") of
our report dated March 17, 1999 (which expresses an unqualified opinion and
includes an explanatory paragraph relating to a change in accounting principle
described in Note 2 to the consolidated financial statements), appearing in this
Current Report on Form 8-K of the Company dated March 23, 1999.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 23, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
The Board of Directors
Summit Technology, Inc.:
We consent to incorporation by reference in the registration statements
(No.33-25169), (No.33-41451), (No.33-49162), (No. 33-79158), (No. 333-03765),
(No. 333-26142) and (No. 333-41583) on Forms S-8, S-8, S-8, S-3, S-3, S-8, and
S-8, respectively, of Summit Technology, Inc. of our report dated March 6, 1998,
except as to Note 10, which is as of March 27, 1998 and except for the
restatement referred to in Note 18, as to which the date is March 9, 1999
relating to the consolidated balance sheet of Summit Technology, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows and related schedules for each
of the years in the two-year period ended December 31, 1997, which report
appears in this current report on Form 8-K of Summit Technology, Inc. dated
March 23, 1999.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,314
<SECURITIES> 33,295
<RECEIVABLES> 14,163
<ALLOWANCES> 1,399
<INVENTORY> 17,403
<CURRENT-ASSETS> 100,741
<PP&E> 23,634
<DEPRECIATION> 14,832
<TOTAL-ASSETS> 144,925
<CURRENT-LIABILITIES> 21,788
<BONDS> 150
0
0
<COMMON> 314
<OTHER-SE> 119,020
<TOTAL-LIABILITY-AND-EQUITY> 119,334
<SALES> 91,641
<TOTAL-REVENUES> 91,641
<CGS> 52,320
<TOTAL-COSTS> 89,760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 838
<INTEREST-EXPENSE> 780
<INCOME-PRETAX> 41,751
<INCOME-TAX> 5,021
<INCOME-CONTINUING> 36,730
<DISCONTINUED> 943
<EXTRAORDINARY> 0
<CHANGES> (10,103)
<NET-INCOME> 27,570
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
