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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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REGISTRATION STATEMENT
ON
FORM S-3
UNDER
THE SECURITIES ACT OF 1933
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SUMMIT TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2897945
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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21 HICKORY DRIVE
WALTHAM, MASSACHUSETTS 02451
(781) 890-1234
(ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JAMES A. LIGHTMAN, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND CLERK
SUMMIT TECHNOLOGY, INC.
21 HICKORY DRIVE
WALTHAM, MASSACHUSETTS 02451
(781) 890-1234
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
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KEITH F. HIGGINS, ESQ. MARK L. JOHNSON, ESQ.
ROPES & GRAY EARL W. MELLOTT, II, ESQ.
ONE INTERNATIONAL PLACE FOLEY, HOAG & ELIOT LLP
BOSTON, MASSACHUSETTS 02110 ONE POST OFFICE SQUARE
(617) 951-7000 BOSTON, MASSACHUSETTS 02109
(617) 832-1000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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Common Stock, $0.01 par value..... 4,600,000 shares(1) $19.00(2) $87,400,000 $24,298
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(1) Includes 600,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee under
Rule 457(c) under the Securities Act of 1933 based upon the average of the
high and low prices as reported on the Nasdaq National Market System on July
13, 1999.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED JULY 19, 1999
PROSPECTUS
4,000,000 SHARES
[SUMMIT TECHNOLOGY LOGO]
SUMMIT TECHNOLOGY, INC.
COMMON STOCK
Summit Technology is offering 4,000,000 shares of common stock. Our
common stock is quoted on the Nasdaq National Market under the symbol "BEAM." On
July 16, 1999, the last reported sale price for the common stock on the Nasdaq
National Market was $19.94 per share. See "Price Range of Common Stock."
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PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discounts......................................
Proceeds to Summit, before expenses.........................
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We have granted the underwriters an option for a period of 30 days to
purchase up to 600,000 additional shares of common stock. The underwriters
expect to deliver the shares against payment on , 1999.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
, 1999.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements and Industry Data................ 10
Use of Proceeds............................................. 11
Price Range of Common Stock................................. 11
Dividend Policy............................................. 11
Capitalization.............................................. 12
Selected Consolidated Financial Data........................ 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Business.................................................... 22
Management.................................................. 43
Principal Stockholders...................................... 50
Underwriting................................................ 51
Validity of Common Stock.................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 53
Information Incorporated by Reference....................... 54
Index to Financial Statements............................... F-1
</TABLE>
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Apex Plus(TM), CustomCornea(TM), emphasis(R) Disc, LADARVision(R), OmniCard(R)
and SKB Microkeratome(TM) are our trademarks and registered trademarks. Other
trademarks used in this prospectus are the property of their respective holders.
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that you should consider before investing in
our common stock. You should read carefully this entire prospectus, including
"Risk Factors," the financial statements and the documents to which we have
referred you before making an investment decision. Unless we state otherwise,
the information we present in this prospectus assumes no exercise of the
underwriters' over-allotment option.
OUR BUSINESS
We are a leading worldwide manufacturer and supplier of excimer laser
systems and related products used to perform procedures that correct common
refractive vision disorders such as nearsightedness, farsightedness and
astigmatism. Our excimer laser systems use ultraviolet laser light to ablate, or
remove, submicron layers of corneal tissue from the eye in a procedure known as
laser vision correction. During a laser vision correction procedure, the system
precisely sculpts the cornea into a predetermined shape, enabling the retina to
focus properly the light from incoming images. The goal of these procedures is
to reduce or eliminate a patient's reliance on corrective eyewear. We also sell
contact lenses and other vision products by mail order through our Lens Express
subsidiary.
Laser vision correction is a fast growing segment of the U.S. refractive
vision correction market. Industry wide, laser vision correction procedures have
more than doubled each year since 1996, the first full year after FDA approval.
An estimated 980,000 laser vision correction procedures will be performed on
U.S. consumers in 1999, up from an estimated 480,000 in 1998. Based on existing
treatment modalities and demographic considerations such as age, income and type
of correction needed, an estimated 37 million Americans are excellent candidates
for laser vision correction. Approximately 800,000 procedures have been
performed since FDA approval in 1995, with each eye treated considered to be a
separate procedure.
We derive revenues from the sale of our products, related disposables and
maintenance services and from technology licensing fees. We charge a
per-procedure technology licensing fee each time a laser vision correction
procedure is performed using one of our U.S. excimer laser systems. These per-
procedure license fees are our fastest growing and most profitable revenue
source and are a key element of our business. Our procedure volume in the United
States during the first quarter of 1999 increased 31% over the procedure volume
in the fourth quarter of 1998 and 81% over the first quarter of 1998, based on
our sales of data encrypted, prepaid cards that allow procedures to be performed
on our Apex Plus systems.
With our recent acquisition of Autonomous Technologies Corporation, we
now offer our customers a choice of excimer laser systems:
- the Apex Plus, with a proven track record of excellent clinical results
and an installed base of approximately 332 systems worldwide; and
- the LADARVision system, our next generation technology now being
introduced into the U.S. market, which combines a small beam scanning
laser with sophisticated high speed eye tracking, and the potential for
customized ablations using our CustomCornea technology, for which the
FDA has recently granted us clearance to begin clinical trials.
We also manufacture and sell the SKB microkeratome, a surgical device
used in ophthalmic procedures. Our SKB microkeratome uses disposable, single-use
blades that we also sell to our customers.
Our objective is to increase our installed base of excimer laser systems,
grow the procedure volume of those systems and become the preeminent provider of
refractive vision correction products to ophthalmologists, clinics and
hospitals. Key elements of our strategy to achieve this objective are:
- expanding the range of refractive procedures that our systems are
FDA-approved to perform;
- leveraging our Autonomous acquisition to make us the undisputed
technology leader in the field; and
- providing our users with the highest level of customer service in the
industry.
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Our principal executive offices are located at 21 Hickory Drive, Waltham,
Massachusetts 02451 and our telephone number is (781) 890-1234.
THE OFFERING
Common stock offered by Summit.............. 4,000,000 shares
Common stock to be outstanding after the
offering.................................... 46,555,015 shares
Use of proceeds............................. To fund the commercial
introduction of the LADARVision
system in the U.S. market, for
working capital and for other
general corporate purposes.
Nasdaq National Market symbol............... BEAM
The number of shares of our common stock that will be outstanding after
the offering is based on the number outstanding at June 30, 1999 and does not
include 2,776,200 shares subject to options and warrants outstanding on that
date at a weighted average exercise price of $6.02 per share.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize our statement of operations and balance
sheet data. The pro forma statement of operations data assume we acquired
Autonomous on January 1, 1998. The pro forma balance sheet data assume the
acquisition occurred on March 31, 1999. The pro forma as adjusted balance sheet
data reflect our sale of 4,000,000 shares of common stock at an assumed public
offering price of $19.94 per share after deducting estimated underwriting
discounts and estimated expenses. You should read these tables along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and our unaudited pro forma
combined financial data that are included elsewhere in this prospectus.
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THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
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PRO FORMA PRO FORMA
1999 1999 1998 1998 1998 1997 1996
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STATEMENT OF OPERATIONS DATA:
Revenues...................................... $25,813 $25,684 $ 22,040 $ 91,863 $ 91,641 $79,650 $ 73,912
Income (loss) from continuing operations(1)... (3,438) 2,386 377 16,561 36,730 828 (13,491)
Cumulative effect of accounting principle
change(2)................................... -- -- (10,103) (10,103) (10,103) -- --
Net income (loss)(3).......................... (3,438) 2,386 (9,726) 7,401 27,570 21,398 (36,857)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations...... $ (.08) $ .08 $ .01 $ .39 $ 1.17 $ .03 $ (.43)
Cumulative effect of accounting principle
change...................................... -- -- (.32) (.24) (.32) -- --
Net income (loss)............................. (.08) .08 (.31) .17 .88 .68 (1.18)
Weighted average number of common shares --
basic....................................... 42,355 31,165 31,082 42,434 31,244 31,400 31,174
Weighted average number of common shares --
diluted..................................... 42,355 31,458 31,082 42,942 31,292 31,591 31,174
PRO FORMA AMOUNTS ASSUMING ACCOUNTING
PRINCIPLE CHANGE HAD BEEN APPLIED
RETROACTIVELY:
Net income (loss)............................. $(3,438) $ 2,386 $ 377 $ 17,504 $ 37,673 $22,682 $(37,772)
Net income (loss) per share -- basic and
diluted..................................... $ (.08) $ .08 $ .01 $ .41 $ 1.20 $ .72 $ (1.21)
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MARCH 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Working capital............................................. $ 85,648 $ 35,262 $110,251
Total assets................................................ 164,820 202,993 277,982
Long-term debt, less current maturities..................... 111 245 245
Stockholders' equity........................................ 140,440 176,902 251,891
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(1) In the second quarter of 1998, we received a litigation settlement of $29.9
million, net of related taxes and expenses.
(2) In the fourth quarter of 1998, we changed our method of accounting for Lens
Express membership fee revenues which were previously recognized when
received. Under the new accounting method, we recognize membership fee
revenues ratably over the term of the membership, which is up to five years.
(3) Net income (loss) includes a gain of $943,000 in 1998, a net gain of $20.6
million in 1997, and a loss of $23.4 million in 1996 related to our
discontinued laser center business.
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RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. If any of the following risks actually
occur, our business, financial condition or operating results could be
materially harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
WE MAY HAVE DIFFICULTY INTEGRATING THE AUTONOMOUS OPERATIONS AND REALIZING
BENEFITS FROM THE ACQUISITION
Our acquisition of Autonomous requires us to merge the operations of two
companies that previously operated independently. We may not be able to
integrate the Autonomous operations without encountering difficulties or
experiencing the loss of key employees, potential customers or suppliers, and
the benefits expected from the integration may not be realized. If our customers
view the acquisition as a negative development, we may lose revenues and market
share. In addition, we may not realize anticipated synergies from the
acquisition. For example, before the acquisition, Autonomous had only limited
experience manufacturing the LADARVision system and had no experience producing
the system in significant quantities. If we are unsuccessful in developing the
capabilities to manufacture the LADARVision system in sufficient quantities, or
if the effort requires greater time or resources than we have anticipated, we
may not realize the benefits from the acquisition.
OUR COMMERCIAL LAUNCH OF THE LADARVISION SYSTEM MAY NOT BE SUCCESSFUL
We are currently implementing the commercial launch of the LADARVision
system, which we intend to offer as a premium-priced system. We intend to offer
the system on a per-procedure, leased basis, where we retain ownership of the
equipment. Because we have limited experience marketing the LADARVision product,
and because this business model will be a new one for us, we cannot be certain
that it will meet with market acceptance. If the market does not accept the
LADARVision system, it will have an adverse effect on our business.
ANY COMPETITOR WITH BROADER APPROVALS MAY HAVE A COMPETITIVE ADVANTAGE OVER US
In the United States, a manufacturer of laser vision correction systems
gains a competitive advantage by having its systems approved by the FDA for a
wider range of treatments. Currently, the VISX laser vision correction system is
approved for a wider range of treatments than are our systems. The Nidek laser
vision correction system is approved for a higher degree of nearsightedness than
our systems. The Apex Plus is presently approved for low to moderate
nearsightedness alone and with low to moderate astigmatism. The LADARVision
system is presently approved for low to high degrees of nearsightedness alone
and with moderate astigmatism. If the FDA does not approve in a timely manner
our pending applications for farsightedness and for higher degrees of
nearsightedness and astigmatism, our ability to compete effectively in the
United States may be compromised.
NEW COMPETITORS MAY ERODE OUR U.S. MARKET SHARE
The number of manufacturers offering laser vision correction systems is
growing. Nidek obtained FDA approval of its EC-5000 excimer laser system in
December 1998. We expect that other manufacturers, including Bausch & Lomb and
LaserSight, will receive approvals within the next twelve months, giving them
the right to market their systems commercially in the United States. Some of
these competitors are larger than we are and have greater resources to devote to
selling and marketing their systems. If ophthalmologists perceive new
competitors' systems to be technologically or economically superior to ours, we
could lose customers and market share to these competitors.
CHALLENGES TO OWNED OR LICENSED INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
BUSINESS
Failure to maintain the protection afforded by our owned and licensed
patents would materially reduce our revenues. These patents might ultimately be
found to be invalid, or others might elect to
4
<PAGE> 8
infringe these patents or develop substantially equivalent or competitive
products. On March 24, 1998, the FTC commenced an action challenging and seeking
to invalidate certain of the patents that VISX has licensed to us. We have
settled our part of this litigation. In June 1999, an FTC administrative law
judge issued a decision in favor of VISX and the FTC has appealed this decision.
In March 1999, a U.S. physician wrote us claiming to be a co-inventor of two of
our patents, both of which are the subject of infringement actions that we have
brought against Nidek and other alleged infringers. Alleged infringers have
responded or may respond by challenging the validity and enforceability of these
patents. Successful challenges to the validity and enforceability of any of our
patents or the patents licensed from VISX could significantly impair our ability
to collect per-procedure license fees. Even if an unlicensed party's products or
procedures infringe upon our patents, it is costly to enforce these rights.
Infringement actions require the diversion of funds from our operations and
require management to expend funds and effort that might otherwise be devoted to
our operations. Furthermore, we may not be successful in enforcing our patent
rights. Any failure by us to prevail in patent infringement actions against
others, or any success by others in invalidating, asserting ownership in, or
being found not to infringe patents owned or licensed by us, could impair our
ability to collect per-procedure fees and thus materially reduce our revenues.
There are a number of U.S. and foreign patents covering methods and
apparatus for performing corneal surgery that we neither own nor have the right
to use. If we were found to infringe a patent in a particular market, we may be
enjoined from making and selling, and our customers may be enjoined from using,
that product in the market or we may be required to obtain a fee-bearing
license, if available on acceptable terms. Alternatively, we might be required
to redesign the infringing aspects of these products. Any redesign efforts that
we undertake could be expensive and might require FDA review. Furthermore, the
redesign efforts could delay the reintroduction of these products into certain
markets, or may be so significant as to be impractical. If redesign efforts were
impractical, we could be prevented from manufacturing and selling the infringing
products, which would significantly harm our business.
WE ARE INVOLVED IN LITIGATION THAT HAS CONSUMED OUR TIME AND RESOURCES AND COULD
SUBJECT US TO SIGNIFICANT LIABILITIES
Since August 1996, stockholders have commenced multiple separate legal
actions against us and some of our directors and officers. In addition, there
are multiple state and federal antitrust lawsuits pending against us and VISX
relating to the Pillar Point Partners arrangement that existed between the two
companies from 1992 to 1998. All these lawsuits seek substantial monetary
damages for alleged violations of securities or antitrust laws. Defending
against these lawsuits has consumed, and will continue to consume, considerable
resources, including management time and attention, which has been diverted from
operating our business. If the plaintiffs are successful, their recoveries could
have a significant negative effect on our cash position. Litigation is
inherently uncertain and an adverse resolution of these actions may have a
material adverse effect on our financial position and operating results in the
period in which they are resolved.
OUR RELIANCE ON SOLE SOURCE SUPPLIERS FOR CRITICAL COMPONENTS COULD JEOPARDIZE
OUR OPERATIONS
We purchase the optical module for the LADARVision system and other
components of our products from sole source suppliers. Until recently, we
purchased the laser component for the LADARVision system from a sole source
supplier, but we are transitioning its production to our facility in Cork,
Ireland. If these sole source suppliers were to cease providing these
components, or if we experience problems in the transition to Cork without
sufficient backup, we would be required to locate and contract with substitute
suppliers, which we may not be able to do in a timely manner. Any interruption
in our ability to manufacture and service excimer laser systems or
microkeratomes on a timely basis would reduce our revenues, could increase our
costs and might jeopardize our customer relationships.
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THE AUTONOMOUS ACQUISITION WILL IMPEDE OUR EFFORTS TO ACHIEVE CONSISTENT
PROFITABILITY
The Autonomous acquisition is likely to delay our efforts to achieve
consistent profitability until at least the year 2000. Expenses related to
research and development of our CustomCornea and LADARVision technology, the
expansion of our manufacturing and marketing activities for the LADARVision
system, as well as the amortization of goodwill and other capitalized items
created by the Autonomous acquisition will reduce our operating income or
increase our operating loss until at least the year 2000. See "Unaudited Pro
Forma Combined Financial Data."
THE MARKET ACCEPTANCE OF TWO LASER VISION CORRECTION SYSTEMS IS UNPREDICTABLE
We cannot predict how existing and potential customers for laser vision
correction will respond to our offering of two different laser vision correction
systems. Sales of the Apex Plus could decline as customers defer purchases until
the LADARVision system becomes fully available. For some time after the
LADARVision system becomes fully available, we may be unable to expand our
manufacturing quickly enough to offset any loss of sales of the Apex Plus. In
addition, we could lose existing Apex Plus customers who perceive that our
acquisition of the LADARVision system will result in less support for our
installed base of Apex Plus systems.
COMPETITORS MAY NOT CHARGE THEIR CUSTOMERS PER-PROCEDURE FEES WHICH, IN TURN,
COULD AFFECT OUR ABILITY TO CHARGE LICENSE FEES
We license a number of patents to our U.S. customers on a per-procedure
basis. We derive a substantial portion of our revenues from the per-procedure
fees we charge to license these patents. If competitors do not charge
per-procedure fees to users of their systems, we could be forced to reduce or
eliminate the fees we charge, which could significantly reduce our revenues.
Nidek, one of our competitors, has publicly stated that it does not intend to
charge per-procedure fees to users of its systems.
NEW PRODUCTS AND TECHNOLOGIES COULD DECREASE DEMAND FOR OUR PRODUCTS OR MAKE
THEM OBSOLETE
In addition to competing with eyewear, excimer laser vision correction
systems compete with newer technologies such as intraocular lenses, corneal
rings and surgical techniques using different types of lasers. KeraVision has
recently received FDA approval for its corneal ring and has begun to market this
product commercially in the United States. A holmium laser for the treatment of
farsightedness manufactured by Sunrise Technologies is scheduled for
consideration by the FDA's Ophthalmic Advisory Panel on July 22, 1999. To the
extent that any of these or other new technologies are perceived to be
clinically superior or more economical than excimer laser vision correction,
they could decrease demand for our excimer laser systems or render these
products obsolete. If one or more competing technologies achieve broader market
acceptance or render the Apex Plus or the LADARVision system obsolete, we may
lose customers and revenues.
OUR FAILURE TO TIMELY OBTAIN REGULATORY APPROVALS FOR PRODUCTS AND TO COMPLY
WITH FDA REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our excimer laser systems and related products are regulated medical
devices under the Food, Drug and Cosmetics Act. New product introductions,
expanded treatment types and levels for approved products, and significant
design or manufacturing modifications require a premarket clearance by the FDA
prior to commercialization in the United States. The FDA approval process, which
is lengthy and uncertain, requires underlying clinical studies and substantial
commitments of financial and management resources. Failure to obtain regulatory
approvals and clearances in the United States and other countries, or
significant delays in obtaining these approvals and clearances, could prevent us
from marketing our products for either approved or expanded treatments, which
could significantly reduce our future revenues.
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Our manufacturing processes are subject to extensive FDA regulation. On
July 14, 1999, we received an FDA Warning Letter noting alleged deficiencies in
our Device Master Record contents for SKB microkeratome blades observed during a
recent periodic FDA inspection of our Irish manufacturing facility. The Warning
Letter notes deficiencies in the blade sterilization protocol specifications,
provided by our German manufacturer, and requires a response within fifteen days
from the date of the letter. We are currently investigating the matter and
intend to submit a timely response. Failure to promptly resolve this matter to
the satisfaction of the FDA could result in further administrative sanctions,
could prevent us from selling blades until the matter is resolved, and could
harm our sales of SKB microkeratomes, all of which could significantly reduce
our future revenues.
WE MAY NEED ADDITIONAL FINANCING WHICH COULD BE DIFFICULT TO OBTAIN
We used a significant amount of our cash resources to complete the
Autonomous acquisition. We expect that Autonomous could require as much as $20
million before reaching a cash flow break-even status, although this amount
could fluctuate up or down depending on a variety of factors. This use of cash
has put a significant strain on our liquidity and could preclude us from having
cash available to fund operations, make other acquisitions, or for other
purposes. We may need to obtain external financing in the future. Our ability to
obtain additional financing will depend on a number of factors, including market
conditions, our operating performance and investor interest, particularly in
medical device companies.
These factors may make the timing, amount, terms and conditions of any
financing unattractive. They may also result in our adding additional
indebtedness or accepting stockholder dilution. If we are unable to raise the
capital necessary to fund our growth, our business would be adversely affected.
USE OF UNAPPROVED SYSTEMS COULD REDUCE OUR REVENUES
We are aware that some U.S. physicians are performing refractive
procedures with laser vision correction systems that have not been approved by
the FDA, including earlier versions of our systems originally sold in
international markets as well as so-called "homemade" or "black box" systems.
Pursuing these potential infringers could be costly and might not result in any
significant recoveries. Continued use or additional sales of these systems will
reduce our system sales and per-procedure revenues. In addition, any adverse
clinical consequences resulting from the use of these systems could adversely
affect consumer acceptance of laser vision correction generally.
ILLEGAL TAMPERING WITH SYSTEM CONFIGURATIONS COULD REDUCE OUR REVENUES
Some U.S. users of the Apex excimer laser systems have tampered with the
software and hardware configuration of their systems to defeat the card reading
system that facilitates the collection of per-procedure license fees. Continued
loss of per-procedure fees will reduce our revenues.
CHANGES IN THE U.S. ECONOMY AND CONSUMER SPENDING COULD ADVERSELY AFFECT THE
VOLUME OF U.S. PROCEDURES
Laser vision correction is an elective procedure that involves greater
immediate expense than eyeglasses or contact lenses. The procedure is not
typically covered by insurance. A significant adverse change in the U.S. economy
may cause consumers to re-assess their spending choices and reduce the demand
for laser vision correction. Any such shift would have an adverse effect on the
volume of laser vision correction procedures performed and on our collection of
per-procedure licensing fees.
OUR LENS EXPRESS OPERATIONS ARE SUBJECT TO ADDITIONAL RISKS THAT COULD REDUCE
OUR PROFITABILITY
Our Lens Express operations are subject to risks beyond our control,
including:
- lack of consistent sources of supply;
- inability to obtain suitable advertising spots in selected media at
cost-effective prices;
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<PAGE> 11
- state regulations; and
- competition from other contact lens providers.
Because some contact lens manufacturers do not sell contact lenses
directly to Lens Express, Lens Express must obtain product through indirect
channels. Lens Express may not be able cost effectively to obtain sufficient
quantities of product through indirect channels at the times it requires. If
unable to obtain product from indirect suppliers, or if forced to do so on
unfavorable terms, Lens Express' revenues and profitability would be adversely
affected. Lens Express' operations are subject to numerous state laws and
regulations that govern the dispensing of replacement contact lenses. Some
states have strict requirements that prohibit dispensing replacement lenses
without receipt of a written prescription, which makes it more difficult and
expensive for Lens Express to sell replacement contact lenses in those states.
In addition, these regulations place Lens Express at a competitive disadvantage
versus competing mail order sellers that are able to avoid or ignore these laws
and regulations. Our principal competitor has stated publicly that it does not
comply with these regulations. Other states may enact or impose laws or
regulations that prohibit mail order dispensing of replacement contact lenses or
otherwise impair Lens Express' ability to sell lenses and operate profitability.
In addition, the contact lens dispensing industry is subject to intense
competition. Lens Express may lose market share to other contact lens providers
electing to pursue a marketing strategy which, like that of Lens Express,
emphasizes convenience and price, or to discount chains, wholesale clubs and
other competitors.
INADEQUACY OR UNAVAILABILITY OF INSURANCE MAY EXPOSE US TO SIGNIFICANT LIABILITY
The testing and use of our products entail an inherent risk of physical
injury to patients and physicians and expose us to potential product liability
and other damage claims. In addition, our products have high voltage power
supplies and use corrosive gases. Although we maintain product liability
insurance, a product liability claim assessed against us could exceed our
insurance coverage. Adequate product liability insurance may not continue to be
available, either at existing or increased levels of coverage, on commercially
reasonable terms. Even if a claim is covered by insurance, the costs of
defending a product liability, malpractice, negligence or other action, and the
assessment of damages in excess of insurance coverage, could entail significant
expense and damage our reputation.
THE MARKET PRICE OF OUR STOCK HISTORICALLY HAS BEEN VOLATILE
The volatility of our common stock imposes a greater risk of capital
losses on stockholders when compared to less volatile stocks. The market price
of our common stock may be significantly affected by factors such as:
- the announcement or introduction of technological innovations or new
products by us or our competitors;
- quarter-to-quarter variations in our operating results and changes in
earnings estimates by analysts;
- market conditions in the technology, healthcare and other growth
sectors;
- changes in U.S. or foreign governmental regulations or regulatory
approval processes;
- developments or disputes relating to patent or proprietary rights; and
- public concern about the safety and efficacy of the procedures for
which the excimer laser system is used.
Moreover, the possibility exists that the stock market, and in particular
the securities of technology companies such as us, could experience extreme
price and volume fluctuations unrelated to operating performance. These
fluctuations may have a material adverse effect on the market price of our
common stock.
8
<PAGE> 12
CONCERNS ABOUT THE SAFETY AND EFFICACY OF OUR PRODUCTS COULD LIMIT OUR FUTURE
REVENUES
Physicians and consumers may have a number of concerns about the safety
and efficacy of laser vision correction procedures, including the predictability
and stability of results. Potential complications and side effects include:
- post-operative discomfort, including pain, itching, tearing and dryness
of the eye;
- corneal haze, which is an increase in the cornea's light scattering
properties, during healing;
- glare and halos produced by bright lights;
- decreases in contrast sensitivity that can cause night vision
difficulties;
- temporary increases in intraocular pressure or pupil enlargement in
reaction to post-procedure medication;
- fluctuations in refractive capabilities during healing;
- decreases in vision with corrective eyewear;
- unintended over- or under-corrections;
- disorders of corneal healing;
- corneal scars and corneal ulcers;
- induced regular or irregular astigmatism that can cause blurred or
double vision or shadow images;
- drooping of the eyelid; and
- inflammation of the iris.
In addition, we have had limited commercial experience with our SKB
microkeratome, which, if misused or defective, could cause significant injury
when cutting a patient's cornea. Long-term follow-up data may reveal additional
complications associated with our products. The responses of potential
candidates, physicians and others to information about complications could
materially affect market acceptance for laser vision correction, which in turn
would materially harm our business.
9
<PAGE> 13
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and
"continue" or similar words. You should read statements that contain these words
carefully. They discuss our future expectations, contain projections of our
future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We assume no obligation to update forward-looking statements or
update the reasons actual results could differ materially from those anticipated
in forward-looking statements. The factors discussed in the sections captioned
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" identify important factors that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements.
In addition, the data concerning the laser vision correction industry
that we cite throughout this prospectus are based upon information published in
Refractive Market Perspectives, an independent publication that follows the
refractive vision correction market, and on information from a presentation made
in April 1999 by Mr. David R. Harmon of MarketScope, the publisher of Refractive
Market Perspectives, before the American Society of Cataract and Refractive
Surgery. We believe that this information is the most reliable data currently
available about our industry. However, we have not independently verified any of
the data and we cannot assure their accuracy or completeness.
10
<PAGE> 14
USE OF PROCEEDS
We will receive an estimated $75.0 million in net proceeds from our sale
of 4,000,000 shares of common stock, assuming a public offering price of $19.94
per share and after deducting estimated underwriting discounts and estimated
expenses. If the underwriters exercise their over-allotment option in full, we
will receive an estimated $11.3 million in additional net proceeds.
We intend to use the net proceeds from this offering to fund the
commercial introduction of the LADARVision system in the U.S. market and for
working capital and other general corporate purposes. In addition, we may use a
portion of the net proceeds to acquire complementary businesses, products,
services or technologies; however, we currently have no commitments or
agreements about any such transaction. Pending these uses, we intend to invest
the net proceeds in short-term interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market under the symbol
"BEAM." The following table sets forth the high and low sale prices per share of
our common stock, as reported on the Nasdaq National Market, during the periods
indicated.
<TABLE>
<CAPTION>
FY 1997 HIGH LOW
- ------- ------ ------
<S> <C> <C>
First Quarter............................................... $ 8.88 $ 5.63
Second Quarter.............................................. 7.75 5.38
Third Quarter............................................... 7.75 6.13
Fourth Quarter.............................................. 10.13 4.13
FY 1998
First Quarter............................................... $ 7.25 $ 4.56
Second Quarter.............................................. 7.50 4.50
Third Quarter............................................... 6.88 3.06
Fourth Quarter.............................................. 6.13 3.00
FY 1999
First Quarter............................................... $11.56 $ 4.31
Second Quarter.............................................. 23.44 10.44
Period from July 1, 1999 to July 16, 1999................... 21.50 17.56
</TABLE>
The number of shares of our common stock outstanding as of June 30, 1999
was 42,555,015. As of June 30, 1999, there were approximately 2,560 record
holders of common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future. Our loan
agreement prohibits the payment of dividends. Any future determination
concerning the payment of dividends will be at the discretion of the board of
directors.
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<PAGE> 15
CAPITALIZATION
The following table sets forth our capitalization at March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the acquisition of Autonomous as if it
had occurred on that date; and
- on a pro forma basis as adjusted to give effect to our receipt of the
estimated net proceeds from the sale of 4,000,000 shares of common
stock at an assumed public offering price of $19.94 per share.
You should read the information below together with our consolidated
financial statements and unaudited pro forma combined financial data included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current maturities..................... $ 111 $ 245 $ 245
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000
shares; none issued..................................... -- -- --
Common stock, $0.01 par value; authorized 60,000,000
shares; issued 31,352,641 shares (actual); issued
42,542,947 shares (pro forma); issued 46,542,947 shares
(as adjusted)........................................... 314 426 466
Additional paid-in capital................................ 149,534 208,484 283,433
Accumulated deficit....................................... (17,833) (40,433) (40,433)
Accumulated other comprehensive income.................... 9,233 9,233 9,233
Treasury stock, at cost, 164,715 shares................... (808) (808) (808)
-------- -------- --------
Total stockholders' equity.......................... 140,440 176,902 251,891
-------- -------- --------
Total capitalization........................................ $140,551 $177,147 $252,136
======== ======== ========
</TABLE>
12
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of
the end of, each of the years in the five-year period ended December 31, 1998
are derived from our audited consolidated financial statements. The information
presented below for the three months ended March 31, 1999 and 1998 and as of
March 31, 1999 is derived from our unaudited condensed consolidated financial
statements, which include all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary for the fair
presentation of our results of operations and financial condition. These interim
results are not necessarily indicative of the results that we may achieve for
any other period. You should read these selected consolidated financial data
along with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and our unaudited
pro forma combined financial data that are included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 25,684 $ 22,040 $ 91,641 $ 79,650 $ 73,912 $ 95,258 $ 71,410
Income (loss) from continuing
operations(1).......................... 2,386 377 36,730 828 (13,491) 1,575 (14,433)
Cumulative effect of accounting principle
change(2).............................. -- (10,103) (10,103) -- -- -- --
Net income (loss)(3)..................... 2,386 $ (9,726) 27,570 21,398 (36,857) (2,967) (16,799)
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE:
Income (loss) from continuing
operations........................... $ .08 $ .01 $ 1.17 $ .03 $ (.43) $ .06 $ (.54)
Cumulative effect of accounting
principle change..................... -- (.32) (.32) -- -- -- --
Net income (loss)...................... .08 (.31) .88 .68 (1.18) (.11) (.63)
Weighted average number of common
shares -- basic........................ 31,165 31,082 31,244 31,400 31,174 27,892 26,593
Weighted average number of common
shares -- diluted...................... 31,458 31,082 31,292 31,591 31,174 27,892 26,593
PRO FORMA AMOUNTS ASSUMING ACCOUNTING
PRINCIPLE CHANGE HAD BEEN APPLIED
RETROACTIVELY:
Net income (loss)........................ $ 2,386 $ 377 $ 37,673 $ 22,682 $(37,772) $ (6,073) $(19,966)
Net income (loss) per share -- basic and
diluted................................ $ .08 $ .01 $ 1.20 $ .72 $ (1.21) $ (.22) $ (.75)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- -------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 85,648 $ 78,953 $ 67,404 $ 73,085 $108,374 $23,560
Total assets........................................... 164,820 144,925 115,103 133,660 161,661 54,288
Long-term debt, less current maturities................ 111 150 6,330 11,472 537 503
Stockholders' equity................................... 140,440 119,334 88,987 101,947 138,239 38,692
</TABLE>
- -------------------------
(1) In the second quarter of 1998, we received a litigation settlement of $29.9
million, net of related taxes and expenses.
(2) In the fourth quarter of 1998, we changed our method of accounting for Lens
Express membership fee revenues, which were previously recognized when
received. Under the new accounting method, we recognize membership fee
revenues ratably over the term of the membership, which is up to five years.
(3) Net income (loss) includes a gain of $943,000 in 1998, a net gain of $20.6
million in 1997, a loss of $23.4 million in 1996, a loss of $4.5 million in
1995 and a loss of $2.4 million in 1994 related to our discontinued laser
center business.
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<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We currently operate in two principal segments:
- laser vision correction, which includes manufacturing, selling and
servicing excimer laser systems and related products to correct vision
disorders and collecting per-procedure licensing fees from users of our
excimer laser systems; and
- contact lenses and related products, which we sell via mail order
through our wholly-owned Lens Express subsidiary.
On April 29, 1999, we completed our acquisition of Autonomous for
approximately 11.2 million shares of our common stock and $46.8 million in cash.
An independent third party appraisal company is conducting a valuation of the
intangible assets that we acquired. Based upon a preliminary valuation report,
we have estimated goodwill and other intangible assets to be $54.7 million,
which we will amortize over five to 25 years, and purchased technologies to be
$28.1 million, which we will amortize over 15 years. In addition, we will record
an expense of $19.8 million in the second quarter of 1999 in connection with
in-process research and development that we acquired in the Autonomous
acquisition. Results of operations discussed in this section do not include any
historical results of Autonomous.
We are currently commencing the commercial introduction of the
LADARVision system. Our plans call for us to provide this system, which includes
patent licenses, to our users on a per-procedure basis. This choice of business
model will affect the way that we recognize revenues and record the costs of
revenues related to the LADARVision system. A per-procedure model will result in
our recognizing equipment revenue over the time period the system is in use
rather than immediately upon placement of the device. We anticipate that this
business model will have an unfavorable impact on our overall gross margins
until we have placed approximately 50 revenue-producing systems. Our commercial
introduction of the LADARVision system, therefore, might cause our future
results not to be comparable to our historical results of operations. This
business model will also allow us to recognize per-procedure revenues from
international installations of the LADARVision system. Under an agreement with
CIBA Vision, we pay a commission of 6% on all LADARVision system revenues,
including patient procedure fees, net of patent license fees, until we have paid
an aggregate of $10 million. Commissions paid to CIBA Vision under this
agreement have not been material.
Information about U.S. procedure volume in this section and elsewhere in
the prospectus is based on our sale of OmniCards to our U.S. customers.
OmniCards are credit card-sized, data encrypted plastic cards that must be
inserted into the Apex Plus to enable customers to perform a procedure. Our
customers must purchase OmniCards from us. OmniCards may be encoded with a
single procedure or with several procedures, and they are priced based on the
number of procedures they permit. As part of our Partnership Vision Plan
arrangements with customers, we may bundle the OmniCard price with other
products and services. In addition, we may offer volume discounts to our
high-use customers that cause them to purchase an inventory of procedures in
advance. As a result, our procedure volume data do not necessarily reflect the
actual number of procedures performed during a particular period. Procedures are
tracked on the LADARVision system by internal software that enables billing
information to be processed via modem, and are thus likely to offer a more
direct correlation to actual procedure volume in any given period.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 AS COMPARED WITH FIRST QUARTER 1998
Revenues. Revenues for the first quarter of 1999 increased 17% to $25.7
million from $22.0 million for the first quarter of 1998. Revenues from our
laser vision correction business were $13.5 million in the first quarter of 1999
compared to $10.1 million in the first quarter of 1998, a 34% increase.
14
<PAGE> 18
This increase was primarily related to a substantial increase in license fee
revenues. In the first quarter of 1999, the number of procedures in the United
States performed on our excimer laser systems increased 31% over the fourth
quarter of 1998 and 81% over the first quarter of 1998. Revenues from system
sales, which include new placements as well as upgrades of laser systems,
increased 1% in the first quarter of 1999 compared to the first quarter of 1998.
System sales in the first quarter of 1999 also include revenues from our SKB
microkeratome product line, which was acquired in the fourth quarter of 1998. In
the first quarter of 1999, revenues from contact lens and related products
increased 2% to $12.2 million from $11.9 million in the same period a year ago.
Cost of Revenues. Cost of revenues as a percentage of revenues decreased
to 52% in the first quarter of 1999 from 60% in the first quarter of 1998. This
decrease was primarily attributable to the favorable impact from lower cost of
revenues associated with license fee revenues and contact lens and related
products. Cost of system revenues as a percentage of systems revenues was 99% in
the first quarter of 1999 and 87% in the first quarter of 1998. In the first
quarter of 1999, cost of system revenues was negatively affected by unabsorbed
manufacturing costs.
Operating Expenses. Selling, general and administrative expenses in the
first quarter of 1999 were $8.6 million compared to $7.2 million in the first
quarter of 1998, a 20% increase. Selling, general and administrative expenses as
a percentage of revenues were 34% in the first quarter of 1999 and 33% in the
first quarter of 1998. We have continued to incur significant expenditures in
sales and marketing in order to grow laser vision correction procedure volume,
which included increased promotions and development of product marketing
materials for users of our lasers.
Research, development and regulatory expenses in the first quarter of
1999 increased to $2.1 million from $1.8 million in the same period a year ago,
primarily as a result of increased spending on Summit's regulatory efforts to
obtain additional FDA approvals for the use of the Apex Plus to treat a wider
range of common refractive vision disorders.
Other Income (Expense). Interest income increased slightly to $1.1
million in the first quarter of 1999 from $928,000 in the first quarter of 1998,
primarily due to higher average balances of cash and cash equivalent balances
and short and long-term investments. Interest expense decreased to $114,000 in
the first quarter of 1999 from $240,000 in the first quarter of 1998 as a result
of lower borrowings.
Net Income. Income before the cumulative effect of accounting change was
$2.4 million, or $.08 per basic and diluted share, in the first quarter of 1999
compared to $377,000, or $.01 per basic and diluted share, in the first quarter
of 1998. Net income in the first quarter of 1999 was $2.4 million, or $.08 per
basic and diluted share, compared to a net loss of $9.7 million, or $.31 per
basic and diluted share in the first quarter of 1998. The 1998 first quarter
results include a one-time non-cash charge of $10.1 million, or $.32 per basic
and diluted share, representing the cumulative effect of adopting a new
accounting principle as of January 1, 1998. Under the new accounting method, we
recognize membership fee revenues ratably over the term of the membership, which
is one to five years. Customers of Lens Express may choose to pay membership
fees, which entitle members to purchase contact lens and related products at
member prices. We believe that this method is preferable because it spreads
revenues over the period that benefits are provided to members.
Income Taxes. The effective tax rate for the first quarter of 1999 was
3% compared to 6% for the first quarter of 1998. The income tax provision for
the first quarter of 1999 was determined using an estimated annual effective tax
rate for the full year, which will include the operating results of Autonomous.
The income tax provision for the first quarter of 1998 reflects the usage of net
operating loss carryforwards.
1998 AS COMPARED WITH 1997
Revenues. Revenues in 1998 increased 15% to $91.6 million from $79.7
million in 1997. Revenues from our 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
15
<PAGE> 19
laser systems, increased by 86% in 1998 compared to 1997. System sales in 1998
also include revenues from Summit's SKB microkeratome product line, which was
acquired in the fourth quarter of 1998. The volume of laser vision correction
procedures performed on our excimer laser systems in the United States increased
25% in 1998 compared to 1997. Revenues from our laser vision correction business
during 1998 were also favorably affected by the FDA approval in March 1998 of
the Apex Plus to treat astigmatism utilizing our emphasis Disc. Revenues from
contact lens and related products were $46.8 million in 1998 and $46.6 million
in 1997. As discussed in "Accounting Principle Change," we changed our method of
accounting for Lens Express' membership fee revenues, which resulted in a $2.6
million increase contact lens and related products revenues in 1998.
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% in 1998 and 30% in 1997. We have incurred significant expenditures in sales
and marketing in order to grow laser vision correction procedure volume,
including expenditures for hiring additional personnel, increased promotions and
development of product marketing materials for users of Summit's excimer laser
systems. 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, we 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 $575,000
in 1998 and $2.6 million in the second quarter of 1997. We 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 in the prior year, primarily as a result of increased
spending on our 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 farsightedness as well as a
wider range of nearsightedness.
Other Income (Expense). In 1998, we received a $35.0 million payment
from VISX pursuant to a settlement agreement, under which we 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 $780,000 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 $675,000 loss on
investment in connection with the distribution of LCA common stock as discussed
below.
Discontinued Operations. In January 1997, we announced our plan to
discontinue our Vision Center business owned and operated by RCII, a
wholly-owned subsidiary of Summit. Accordingly, the results of operations for
this business were classified as discontinued operations at December 31, 1996.
On August 18, 1997, we sold RCII to LCA-Vision, a publicly-traded
company, in exchange for 16,164,361 shares of its 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 the sale of RCII and
distribution of
16
<PAGE> 20
LCA common stock. On December 29, 1997, we distributed 9,000,000 shares of LCA
common stock to our shareholders in the form of a dividend. Due to the
distribution, we recorded a loss on investment of $675,000, 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, we reversed an accrual related to the sale
of discontinued operations, which resulted in gain of $943,000.
Accounting Principle Change. Customers of Lens Express may choose to pay
membership fees, which entitle members to purchase contact lens and related
products at member prices. During the fourth quarter of 1998, we changed our
method of accounting for membership fee revenues, which were previously
recognized when received. Under the new accounting method, we recognize
membership fee revenues ratably over the term of the membership, which is one to
five years. We believe that this method is preferable because it spreads
revenues over the period that benefits are provided to members. In accordance
with the provisions of Accounting Principles Board Opinion No. 20 "Accounting
Changes," we 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 $828,000, or $.03 per
basic and diluted share, in 1997. Excluding the $35.0 million litigation
settlement and related expenses of $614,000 and related taxes of $4.5 million
and excluding 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. We continued to provide a 100% valuation allowance against our 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
our equity in the income of Pillar Point Partners, increased 199% due to the
substantial growth of laser vision correction procedures performed in the United
States. 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% in 1997 and 41% in 1996. Sales and marketing
expenses decreased in 1997 compared to 1996 due to lower payroll and benefit
costs and lower marketing costs associated with our contact lens and related
products business. In 1997, we recorded a $4.0 million reduction in legal
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<PAGE> 21
expenses resulting from settlements of patent litigations. Legal expenses in
1996 were offset by a $834,000 settlement of a patent litigation.
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 our regulatory efforts to obtain FDA approval for use of
the Apex Plus to treat astigmatism and farsightedness as well as a wider range
of nearsightedness.
Discontinued Operations. As previously discussed in "1998 as compared
with 1997", we 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
$828,000, 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. We continued to provide a 100% valuation allowance against our net
deferred tax asset of $25.1 million as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements have been met through external debt and equity
financing. As of March 31, 1999, our cash and cash equivalent balances and short
and long-term investments increased to $110.6 million from $89.9 million as of
December 31, 1998. Shares of LCA common stock included in long-term investments
as of March 31, 1999 and December 31, 1998 were valued at $28.4 million and $9.8
million, respectively. Working capital increased to $85.6 million as of March
31, 1999 from $79.0 million as of December 31, 1998. In the first quarter of
1999, net cash provided by operating activities was $4.7 million compared to net
cash used by operating activities of $2.7 million in the first quarter of 1998.
Net income before depreciation and amortization and cumulative effect of
accounting principle change was $3.5 million in the first quarter of 1999 and
$1.2 million in the first quarter of 1998.
In the first quarter of 1999, net cash provided by investing activities
of $5.3 million resulted primarily from a net decrease in short and long-term
investments of $6.7 million offset by capital expenditures of $583,000, deferred
acquisition costs of $352,000, purchase of intangibles of $303,000 and issuance
of a note for $149,000. In the first quarter of 1998, net cash used by investing
activities of $9.8 million resulted primarily from an increase in short and
long-term investments of $10.1 million and capital expenditures of $943,000
offset by a decrease in restricted cash of $1.3 million.
In the first quarter of 1999, net cash used by financing activities of
$1.2 million was primarily attributable to repayments of long-term debt of $1.3
million. In the first quarter of 1998, net cash used by financing activities of
$3.9 million included repayments of long-term debt of $2.5 million and
repurchases of 250,000 shares of our common stock for $1.4 million.
In 1996, we entered into a loan agreement consisting of a $20.0 million
unsecured revolving credit facility and a $20.0 million unsecured term loan. The
$20.0 million credit facility expired in March 1999 and there were no borrowings
under the credit facility. The term loan requires quarterly principal payments
of $1.3 million and monthly interest payments calculated at prime rate. Our
acquisition of Autonomous placed us 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 on the term loan of
$5.0 million as of March 31, 1999 has been included in current maturities of
long-term debt. The interest rate of the term loan at June 30, 1999 was 7.75%.
At July 1, 1999, the
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outstanding principal amount was $2.5 million. We are also discussing with our
existing and other institutions a new line of credit of approximately $20
million to $25 million.
The Autonomous acquisition placed, and the launch of the LADARVision
system will continue to place, a significant strain on our liquidity. One of the
purposes of this offering is to provide us the liquidity and capital resources
to implement our strategy. We believe that our existing corporate resources will
be sufficient to meet our working capital needs and to fund corporate
requirements for at least the next 12 months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of doing business, we are exposed to the risks
associated with fluctuations in the market value of our available-for-sale
investment securities, changes in foreign currency exchange rates and changes in
interest rates. Our market risk sensitive instruments are entered into for other
than trading purposes.
Our available-for-sale investment securities consist of debt securities,
primarily corporate bonds and mortgage-backed securities, and, as of March 31,
1999, 7.2 million shares of LCA common stock. The fair value of these investment
securities at March 31, 1999 was $70.5 million, which included $42.1 million of
debt securities and $28.4 million of LCA common stock with a corresponding
accumulated unrealized gain of $9.2 million. Substantially all of the unrealized
gain relates to the LCA common stock, which is subject to much more market risk
than our debt securities and which has been more volatile than most market
indices. A 10% 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 our
investment in LCA common stock. This impact would be recognized in our statement
of comprehensive income. At March 31, 1999, our debt securities consist of
highly rated debt instruments. Our investment goal surrounding debt securities
is to meet liquidity needs and to preserve the principal.
The functional currency of our foreign operations is the U.S. dollar. We
enter 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 we will sell U.S. dollars
at a future date and have maturities not exceeding twelve months. Exchange gains
or losses on forward exchange contracts are recognized in other income (expense)
when the contracts are settled. In the first quarter of 1999, we recorded a loss
of $45,000 for outstanding forward exchange contracts at March 31, 1999 that did
not hedge firm commitments to third parties. Outstanding forward exchange
contracts at March 31, 1999 had a notional value of $2.3 million. A 10% change
in the currency exchange rates associated with these contracts would have a
$230,000 impact on our operating results.
We have a variable rate term loan with an unpaid principal balance of
$2.5 million at July 1, 1999. The term loan requires quarterly principal
payments of $1.3 million and monthly interest payments calculated at prime rate.
A one-percentage point change in the prime rate would impact interest expense in
1999 by approximately $19,000.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which establishes standards for derivative instruments and hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It requires that changes in the derivative's fair value be
recognized currently in the earnings unless specific hedge accounting criteria
are met. A company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 is
currently effective for fiscal years beginning after June 15, 1999. In May 1999,
the FASB issued an exposure draft that would delay the effective date of SFAS
133 to fiscal years beginning after June 15, 2000. If the effective date is
deferred, Summit will adopt SFAS 133 in the first quarter of fiscal 2001. We are
currently evaluating this statement, but do not
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expect the adoption of SFAS 133 to have a material effect on our consolidated
financial position or results of operations.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs that are not able
to differentiate between the year 1900 and the year 2000 because they were
written using two digits instead of four digits to define the applicable year.
Internal Operation. A review of our internal computer systems and
software packages has been performed to identify the systems and software that
could be affected by this issue. Discovery of these systems and software is done
through surveys and research of third party suppliers and manufacturers. We have
performed independent testing through the use of testing applications and
scripting to simulate and test for Year 2000 related issues. Those hardware
devices, which include, but are not limited to, desktops, laptops, file servers,
network hardware, PBX and voicemail, found not to be compliant have been or will
be either replaced or upgraded to meet compliance. We currently believe that by
either upgrading our software packages to currently available versions or
replacing them, the Year 2000 problem will not pose a significant operational
problem to us. These software packages include, but are not limited to,
financial, manufacturing, payroll, customer service, email and local area
network operating systems. A survey of vendors providing electronic information
will be conducted and addressed. Installation and testing of Year 2000 compliant
hardware and software are currently expected to be completed by 2000. The costs
related to software upgrades to ensure Year 2000 compliance will not be material
and have been incurred in the normal course of operations.
Products. We currently have two products which have the ability to
process and store date/time data: our earlier generation Apex system and the
Apex Plus. These lasers meet Year 2000 compliance requirements although their
capability to record date/time does not impact clinical output. We have not
surveyed third parties to inquire into their Year 2000 compliance status. There
can be no assurance that we will not experience unexpected costs and delays in
achieving Year 2000 compliance, which could result in a material adverse effect
on our results of operations, financial position or cash flow.
Year 2000 Risks. Efforts are continually being made to ensure proper
operation of our 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 a
material adverse effect on our results of operations, financial position, or
cash flow.
Year 2000 Contingency Plans. We are currently creating a formal
contingency plan for Year 2000 problems. We intend to take appropriate actions
to mitigate the effects of third parties' failure to remediate their Year 2000
issues and for unexpected failures in our own systems. We expect to make
arrangements for some alternate suppliers and will continue to identify
potential alternate suppliers. If it becomes necessary for us 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 our results of operations, financial position
or cash flow.
Autonomous Year 2000 Compliance. Prior to our acquisition of Autonomous,
Autonomous installed a Year 2000 compliant upgrade to its accounting and
manufacturing requirements planning software. In addition, all versions of the
system application software in the LADARVision system have been designed to be
Year 2000 compliant. Before the acquisition, Autonomous received written
statements from two of its four key vendors that they were Year 2000 compliant.
We anticipate that we will receive written statements from the other two key
vendors in the near future. There is a potential risk if two vendors are not
Year 2000 compliant and cannot meet delivery requirements for parts or
components until they correct their Year 2000 problem. We do not believe there
are any other Year 2000 compliance risks or potential costs related to
Autonomous' business. We have not completed a contingency plan for dealing with
costs that might occur if any of the four key vendors is unable to
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deliver its parts or sub-systems to us on a timely basis. We currently plan to
complete such analysis and contingency planning by year end.
EURO CONVERSION
On January 1, 1999, eleven of fifteen member countries of the European
Union adopted the conversion of their national currencies to the European
Union's common currency, the 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. We do not
believe that adoption of the Euro will have a material adverse effect on our
results of operations, financial position or cash flow.
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BUSINESS
We are a leading worldwide manufacturer and supplier of excimer laser
systems and related products used to perform procedures that correct common
refractive vision disorders such as nearsightedness, farsightedness and
astigmatism. We also sell contact lenses and other vision products by mail order
through our Lens Express subsidiary.
INDUSTRY OVERVIEW
LASER VISION CORRECTION
Laser vision correction is a surgical procedure for correcting disorders
such as nearsightedness, farsightedness and astigmatism using an excimer laser.
This procedure uses ultraviolet laser energy to remove tissue from the surface
of, and thus sculpt, the cornea into a predetermined shape. Because the excimer
laser is a cold laser, it is possible to ablate, or remove, precise amounts of
corneal tissue without causing thermal damage to surrounding tissue. The goal of
laser vision correction is to eliminate or reduce a person's reliance on
corrective eyewear.
Today, there are two principal methods for performing laser vision
correction with excimer laser systems: photorefractive keratectomy, or PRK, and
a form of PRK known as laser in-situ keratomileusis, or LASIK. In a PRK
procedure, tissue is removed from the outermost surface of the cornea, just
beneath the epithelium. In a LASIK procedure, the ophthalmologist uses a device
called a microkeratome to surgically create a thin, hinged flap of corneal
tissue. The flap is folded back, the laser energy is directed to the corneal
surface exposed beneath the flap, and the flap is folded back into place. The
LASIK procedure generally involves less post-operative discomfort and faster
visual results than PRK, often resulting in a high degree of immediate patient
satisfaction.
In both PRK and LASIK procedures, an ophthalmologist determines the exact
correction required to be made to the cornea, typically using the same
examination used to prescribe eyeglasses and contact lenses. Required
corrections are then programmed into the excimer laser system's computer.
During a procedure, the excimer laser system emits laser pulses, each of
which lasts several billionths of a second, to remove submicron layers of
corneal tissue. The average procedure lasts approximately 15 to 60 seconds.
Cumulative exposure to the laser light is less than one second. The entire
procedure, including patient preparation and post-operative dressing, generally
lasts no more than thirty minutes.
Following the procedure, an ophthalmologist may prescribe topical
pharmaceuticals to promote corneal healing and to alleviate discomfort.
Post-procedure responses vary depending upon the individual patient and the type
of procedure performed. Individuals undergoing laser vision correction may
experience discomfort for approximately 24 hours, and blurred vision for
approximately 48 to 72 hours, after the procedure. Although many patients
experience improvement in vision without the use of eyeglasses or contact lenses
within a few hours or days of the procedure, it can take up to two to six months
for the correction to stabilize and for the full benefit of the procedure to be
realized.
REFRACTIVE VISION CORRECTION MARKET
The market for products and services to correct common refractive vision
disorders such as nearsightedness, farsightedness and astigmatism is large and
growing. Market Scope estimates that 50% of the U.S. population, or
approximately 140 million Americans, presently use eyeglasses or contact lenses.
In 1998, U.S. optical retail sales totaled $15.8 billion, a substantial
portion of which consisted of sales of eyeglasses, contact lenses and other
vision correction products. Eyeglasses and contact lenses are large, mature
segments of this market.
Laser vision correction is a small, but fast growing segment of the
vision correction market. Since 1996, according to Market Scope, total industry
procedure volume in the United States has more than doubled each year,
increasing from 105,000 procedures in 1996, to 215,000 procedures in 1997, to
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480,000 procedures in 1998. Market Scope predicts that over 980,000 procedures
will be performed in the United States in 1999. Based on presently existing
treatment modalities, some of which are not yet FDA-approved, and on demographic
considerations such as age, income and type of correction needed, Market Scope
estimates that there are approximately 37 million people in the United States
who would make excellent candidates for laser vision correction.
Laser vision correction's rapid growth in the United States is also
reflected in the expansion of excimer laser installations, in the rise in
average annual procedure volume per laser and in the increasing number of
ophthalmologists now practicing refractive surgery. Market Scope predicts a U.S.
installed base of 627 systems by the end of 1999, up from 476 systems at year
end 1998, and 365 systems at year end 1997. Average procedures per laser per
year are predicted to increase to 1,416 in 1999, up from 1,102 in 1998 and 542
in 1997.
Similarly, out of a total of approximately 14,000 practicing
ophthalmologists in the United States, Market Scope estimates that the number
identifying themselves as refractive surgeons will exceed 3,000 by the end of
1999, up from just over 2,000 in 1998 and 1,000 in 1997. We believe U.S.
ophthalmologists are receptive to laser vision correction because of the
potential for excellent clinical results and high patient satisfaction, and
because laser vision correction is an attractive source of revenue that does not
usually involve Medicare and managed care reimbursement complexities. For this
reason, we believe that many U.S. ophthalmologists are transitioning their
practices from Medicare reimbursed cataract surgery to laser vision correction.
We believe the accelerating popularity of laser vision correction in the
United States has been driven, in part, by the increased patient satisfaction
associated with the LASIK procedure. No manufacturer of excimer laser systems
has obtained FDA approval of its device to perform LASIK procedures. Despite
this, U.S. ophthalmologists are not prohibited from performing LASIK procedures
using equipment that has been approved for PRK and, during a LASIK procedure,
the equipment functions essentially as if it were performing a PRK procedure. We
believe the vast majority of laser vision correction procedures now being
performed in the United States are LASIK procedures.
Other alternatives for correcting refractive vision disorders include
radial keratotomy, which involves reshaping the cornea with a series of scalpel
cuts, and surgically implantable rings, which were recently approved by the FDA.
A holmium laser system has been developed for farsightedness. This system would
involve reshaping the cornea using thermal energy, in contrast to our cold
excimer laser system. This system has been scheduled for FDA Ophthalmic Advisory
Panel review on July 22, 1999.
DEVELOPMENT OF THE LASER VISION CORRECTION INDUSTRY
In October 1995, we were the first manufacturer to receive FDA approval
to market an excimer laser system for PRK. Our initial approval was for the
correction of low to moderate nearsightedness. VISX, our principal competitor,
received PRK approval for low to moderate nearsightedness in March 1996. FDA
approvals have been a critical aspect of U.S. industry development, as expanded
treatment approvals also expand the pool of laser vision correction candidates
to whom the procedure can be marketed.
FDA approvals have also been a key competitive element in the industry. A
manufacturer with broader FDA approval ranges can address a wider patient
population. In the U.S. market, VISX obtained approval to expand its labeling to
include astigmatism in April 1997, approximately one year before we obtained
astigmatism approval for the Apex Plus. VISX obtained approval to treat higher
degrees of nearsightedness in January 1998 and to treat farsightedness in
November 1998. Our applications for approval to treat higher degrees of
nearsightedness and farsightedness are presently pending before the FDA. We
believe that VISX's lead in obtaining these labeling expansions has helped it
achieve early dominance in the laser vision correction industry, with an
estimated 75-80% share of total U.S. procedure volume in 1998.
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Although FDA approval requirements create a significant barrier to entry
into the U.S. laser vision correction field, laser manufacturers in addition to
Summit and VISX have obtained or are expected to obtain FDA approval to market
their systems in the United States. In December 1998, Nidek obtained FDA
approval of its system to treat low to high nearsightedness without astigmatism.
Two other manufacturers, Bausch & Lomb and LaserSight, are expected to receive
FDA approval of their excimer laser systems in the next twelve months. The table
below summarizes the product features and approved treatment ranges with PRK for
all excimer laser systems currently approved by the FDA. No treatment ranges
with LASIK have been approved to date for any manufacturer. The labeling for
each device contains a more detailed description of the ranges summarized below.
<TABLE>
<CAPTION>
SUMMIT VISX NIDEK
---------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Model Name............................. LADARVision Apex Plus Star S(2) EC-5000
Weight(lbs.)........................... 799 1,399 1,597 1,430
Beam Size.............................. Narrow Wide Wide Wide
Beam Shaping........................... Programmable Iris & Iris, slit Iris & slit
shot pattern ablatable mask & beam
shaping
Eye Tracking........................... Active None None None
FDA Approval Status (diopters):
Nearsightedness...................... to -10 to -7 to -12 to -13
Nearsightedness with astigmatism..... to -4(1) to -3.9(2) to -4 No Approval
Farsightedness....................... No Approval No Approval to +6 No Approval
Farsightedness with astigmatism...... No Approval No Approval No Approval No Approval
</TABLE>
- ---------------
(1) With combined spherical equivalent of up to -10 diopters.
(2) With combined spherical equivalent of up to -5.9 diopters.
The development of the laser vision correction industry has also been
technology and patent driven. In addition to regulatory hurdles, we believe new
entrants will need to obtain licenses to key patents owned by us and by VISX. In
1992, we and VISX entered into a patent pooling partnership -- Pillar Point
Partners -- intended to resolve our patent disputes, enable each company to
develop and commercialize its products free of infringement and offer
comprehensive licenses to other FDA-approved manufacturers. Pillar Point
Partners was dissolved in 1998 by mutual agreement. As part of that dissolution,
we exchanged royalty-free patent cross-licenses with VISX. Thus, any new
entrants who want to obtain licenses to these patents must now negotiate
separately with us and with VISX to obtain licenses to our respective patents.
The growth of the industry has been driven by FDA approvals, patent
holdings and technology advances. The laser vision correction market today
addresses only a small portion of the population with refractive vision
disorders. Current excimer laser systems have just begun to penetrate the large
market of individuals with refractive vision disorders. We believe that
manufacturers with a wide range of FDA approvals who are able to successfully
commercialize new technologies will accelerate penetration of the laser vision
correction market and allow the capture of a greater portion of this market.
OUR SOLUTION
We provide excimer laser systems, microkeratomes and related products to
ophthalmologists, clinics and hospitals participating in the fast-growing laser
vision correction field. We also provide disposable items used with these
devices, as well as equipment maintenance and repair services. Because
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we either own or license what we believe to be the key U.S. patents needed to
practice laser vision correction, we are able to provide our U.S. customers with
comprehensive licenses to the patents needed to operate our excimer laser
systems. We believe that as consumer acceptance of laser vision correction
continues to grow, so too will ophthalmologists' desire for more precise and
sophisticated laser systems.
We are the only manufacturer to offer a choice of two FDA-approved
excimer laser systems:
- the Apex Plus, our proven system using our proprietary emphasis Disc
technology; and
- the LADARVision system, our next generation technology, whose small
beam scanning and sophisticated eye tracking offers the potential for
customizing procedures to address the subtle variations that make every
eye unique.
As of March 31, 1999, we have a U.S. installed base of approximately 180
Apex Plus systems and 12 earlier generation Apex systems. Worldwide, we have an
installed base of approximately 332 systems. In 1998, we placed 117 Apex Plus
systems, of which 65 were upgrades of existing sites from Apex to the Apex Plus
configuration and 52 were new Apex Plus installations. In the first quarter of
1999, we placed 16 Apex Plus systems, of which 4 were upgrades and 12 were new
installations.
Since receiving astigmatism approval for the Apex Plus in March of 1998,
we have seen a steady increase in procedure volume on our U.S. equipment, which
we measure by the sale of OmniCards. In the fourth quarter of 1998, by which
time most of our U.S. installed base had been upgraded and enabled to perform
astigmatism procedures, our procedure volume was 64% greater than in the fourth
quarter of 1997, before astigmatism approval. Procedure volume during the first
quarter of this year exceeded 1998 first quarter volume by 81%. On a sequential
basis, procedure volume grew 31% from the fourth quarter of 1998 to the first
quarter of 1999.
Our application for farsightedness approval on the Apex Plus is presently
pending before the FDA, and we expect to gain approval in the third quarter of
this year. Our application for approval of the Apex Plus to treat higher degrees
of nearsightedness and astigmatism with LASIK will be presented to the FDA
Ophthalmic Advisory Panel on July 23, 1999. A positive recommendation from the
Panel could result in final approval by the end of the third quarter.
We are presently in clinical trials with both the Apex Plus and the
LADARVision system for treatment of farsightedness and astigmatism with LASIK
and with the LADARVision system for treatment of higher degrees of
nearsightedness and astigmatism with LASIK. We anticipate submitting premarket
approval applications for these indications by year end or sooner. We have
recently received FDA approval to begin clinical trials of our CustomCornea
technology with the LADARVision system for both nearsightedness and
farsightedness, alone and with astigmatism, using both PRK and LASIK.
Presently, we are the only manufacturer to offer both an FDA-approved
laser and an FDA-cleared microkeratome. Since we acquired our SKB microkeratome
in October 1998, we have placed a total of 29 units worldwide through March 31,
1999, of which 8 have been U.S. installations. We placed 14 SKB microkeratomes
in the fourth quarter of 1998 and 15 SKB microkeratomes in the first quarter of
this year.
STRATEGY
Our objective is to increase our installed base of excimer laser systems,
grow the procedure volume of those systems and become the preeminent provider of
refractive vision correction products to ophthalmologists, clinics and
hospitals. Key elements of our strategy to achieve this objective are:
ESTABLISH LABELING LEADERSHIP
We believe that broad labeling approvals will enhance the competitiveness
of our systems and result in increased placements and increased procedure
volume. Our excimer laser systems are designed to treat wide ranges of
refractive disorders. Although our systems are presently FDA-approved for low to
high nearsightedness alone or with low to moderate astigmatism, we are in
clinical trials or have
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applications pending before the FDA to treat farsightedness and higher degrees
of nearsightedness, alone or with astigmatism. We have and will continue to
devote substantial resources to expand our labeling with the objective of
obtaining the broadest FDA-approved treatment ranges in the industry.
ESTABLISH TECHNOLOGY LEADERSHIP
As laser vision correction procedures continue to grow, we believe there
will be a growing demand for increasingly outstanding results that can best be
achieved through customized procedures. These procedures will require a system
that can be programmed to recognize and treat the subtle variations in optical
properties that exist from eye to eye. Our acquisition of Autonomous provides us
with the LADARVision system and CustomCornea technology, which we believe
represent the most sophisticated technology developed in the industry to date.
An important element of our strategy is to become the undisputed technology
leader in the industry by capitalizing on improved outcomes and pursuing the
additional refractive disorders this technology may be able to address.
EMPHASIZE CUSTOMER FOCUS
Our customers are medical professionals and administrators with many
demands on their time and resources. We seek to provide prompt, effective and
courteous service, and also to serve as a resource to whom our customers can
turn for education and assistance by offering clinical education, marketing and
other programs to help them to be successful in their practices. To do this, we
are inculcating the notion of customer focus throughout our organization and
expanding our educational offerings. We regularly survey our customers to
measure our progress in this area and learn new ways to improve our products and
services to better meet and exceed their expectations.
PRODUCTS
We currently offer the following two laser vision correction systems and
related products:
APEX PLUS
The FDA has approved the Apex Plus for sale in the United States to treat
low to moderate nearsightedness, alone and with low to moderate astigmatism,
using PRK. We have filed applications with the FDA seeking approval to treat
farsightedness using PRK and higher degrees of nearsightedness and astigmatism
with LASIK. The Apex Plus is the successor to our earlier generation Apex
system, which we no longer manufacture. Since FDA approval of the Apex Plus in
early 1997, we have offered our U.S. customers upgrades from Apex to the Apex
Plus at reduced prices. In addition, we sell the Apex Plus in selected
international markets.
The Apex Plus is configured to treat nearsightedness using a mechanical
iris device that shapes light. It is also configured to treat farsightedness,
astigmatism and both nearsightedness or farsightedness with astigmatism using
our emphasis Disc. We presently offer the Apex Plus in the United States for
treatment of low to moderate nearsightedness using a mechanical iris and for
treatment of low to moderate nearsightedness with low to moderate astigmatism
using our emphasis Disc. Our emphasis Disc is a proprietary single-use polymer
disc that is used with the Apex Plus to treat a wide range of refractive
disorders. The disc is designed to create very smooth and precise corneal
ablations, without reliance on complicated optomechanics, resulting in improved
healing and enhanced refractive outcomes. This technology permits the
ophthalmologist to select a disc that is matched to the patient's refractive
error, in much the same way that an appropriate contact lens might be selected.
During a procedure, the shape of the disc is precisely replicated on the cornea.
We presently produce discs for correcting astigmatism, nearsightedness with
astigmatism, farsightedness and farsightedness with astigmatism. As part of the
Apex Plus approvals described above, the FDA has approved the disc in the United
States for treatment of low to moderate nearsightedness with astigmatism only.
The disc is included in our clinical submissions for expanded Apex Plus
indications. We are working to develop additional applications for our emphasis
Disc, including development of patient-specific, customized discs for treatment
of difficult
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or unusual cases. The international version of the Apex Plus is configured to
treat a full range of refractive disorders, including astigmatism,
farsightedness, high degrees of nearsightedness and combinations of these
disorders.
Our U.S. list price for the Apex Plus is $395,000. Actual prices charged
to customers may vary, depending on a number of factors including whether the
system is new or refurbished, whether it is outfitted with any optional upgrades
and whether its purchase is bundled with other products and services. The list
price for our emphasis Disc is $75.00 in the United States and international
markets. The list price of an emphasis Disc when purchased in the United States
together with an OmniCard is $275.00. Actual prices charged to customers for the
emphasis Disc may vary, depending upon a number of factors, including volume
discounts and promotions and participation in one of our innovative bundled
pricing programs which combine emphasis Discs with other products and services.
We sell OmniCards to facilitate the collection of per-procedure license
fees due in connection with use of the Apex Plus in the United States. OmniCards
are credit card-sized, data encrypted plastic cards that must be inserted into
the Apex Plus to enable customers to perform a procedure. These OmniCards must
be purchased from us. OmniCards may be encoded with a single procedure or with
several procedures, and are priced based on the number of procedures they
permit. The card cannot be reused once the permitted number of procedures have
been performed. The list price of OmniCards is $250.00 per procedure, but actual
pricing may vary based on factors including volume discounts and promotions,
participation in one of our innovative bundled pricing programs which combine
OmniCards with other products and services, and whether the customer is or was
one of our clinical investigators.
LADARVISION SYSTEM
The FDA has approved the LADARVision system for low to high levels of
nearsightedness alone or with low to moderate astigmatism. The LADARVision
system combines high-speed, laser radar eye tracking with narrow beam corneal
shaping. The LADARVision system is designed to address a need for sophisticated
eye tracking to compensate for eye movement during surgery, including saccadic
eye movements. Saccadic eye movements are very rapid, involuntary and random in
amplitude and direction and are not suppressed or reduced by medication used
during laser vision correction procedures. These eye movements degrade
predictability and visual quality from the procedure. The LADAR eye tracker
measures and adjusts more than 4,000 times per second. We believe that the
LADARVision system provides higher accuracy ablation by virtually eliminating
shaping error caused by eye movement. Additionally, the narrow beam excimer
provides a smooth ablation, and the LADARVision system's shaping algorithms
offer high speed ablations to minimize surgical duration while retaining high
pointing accuracy to achieve predictable shaping.
We believe the LADARVision system will yield more stable, predictable
results with less post-operative regression, thereby improving visual quality
and clinical outcomes for low to moderate levels of nearsightedness compared to
first generation excimer laser vision correction systems. We also believe
extensions of the LADARVision platform may yield even greater improvements in
patient results for vision disorders that require more complex corneal reshaping
such as farsightedness, higher degrees of nearsightedness and astigmatism and
combinations of these disorders.
Our proprietary software in the LADARVision system is a user-friendly,
32-bit Windows-based, graphical user interface incorporating high resolution,
real-time imaging of both the tracked and untracked eye images. The software is
designed with full patient database features and unique eye tracker information
available to identify and count surgical procedures.
Our current strategy is to lease these systems to customers and charge
them on a per-procedure basis including service, maintenance and technology
licensing fees. Per-procedure pricing varies based upon a number of factors,
including the customer's procedure volume.
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The following table summarizes the regulatory status of the Apex Plus and
the LADARVision system. The numbers presented below are expressed in diopters.
The labeling for each device contains a more detailed description of the ranges
summarized below.
<TABLE>
<CAPTION>
LADARVISION APEX PLUS
--------------------------------------- ------------------------------------------
<S> <C> <C>
LOW TO MODERATE Approved (to -10) Approved (to -7)
NEARSIGHTEDNESS
-- with astigmatism Approved (to -4)(1) Approved (to -3.9)(2)
HIGHER DEGREES OF Approved (to -10) Pending before FDA (with LASIK)(to -14)
NEARSIGHTEDNESS In clinical trials (with LASIK)(to -15)
-- with astigmatism Approved (to -4) Pending before FDA (with LASIK) (to -5)
In clinical trials (with LASIK)(to -6)
LOW TO MODERATE In clinical trials (with LASIK)(to +6) Pending before FDA (to +4)
FARSIGHTEDNESS In clinical trials (with LASIK)(to +6)
-- with astigmatism In clinical trials (with LASIK)(to -6) In clinical trials with LASIK)(to -3)
CUSTOMCORNEA Approved for clinical trials (with PRK N/A
and LASIK) for nearsightedness or
farsightedness, alone or with
astigmatism
</TABLE>
- ---------------
(1) With combined spherical equivalent of up to -10 diopters.
(2) With combined spherical equivalent of up to -5.9 diopters.
SKB MICROKERATOME
Our recently acquired SKB microkeratome is a medical device designed
exclusively for use in ophthalmic surgery. It is used to create a flap on the
anterior corneal surface and can be used to dissect a thin layer of corneal
tissue that remains attached to the rest of the cornea via a small hinge of
tissue. The operator of the SKB microkeratome can control and change the size of
the hinge, the blade traverse distance, the advancement speed of the steel
blade, and the oscillation speed of the blade by means of front panel settings.
Our SKB microkeratome utilizes disposable, single-use blades. In December 1998,
we received FDA clearance to market our SKB microkeratome in the United States
for keratoplasty, corneal harvesting and microlamellar keratoplasty. Previously,
we had only marketed the SKB microkeratome internationally. We have not received
FDA clearance to market our SKB microkeratome for LASIK. The list price of our
SKB microkeratome is $58,000. The list price of the disposable microkeratome
blade is $62.00 per blade. Actual prices charged to customers may vary.
SALES AND MARKETING
Our sales and marketing efforts are focused on innovative and flexible
programs tailored to the particular needs of our customers -- ophthalmologists,
clinics and hospitals. We sell our excimer laser systems, microkeratomes and
related products in more than 50 countries through a direct sales force,
independent sales representatives and distributors. We sell our products on open
credit to select distributors and end users. In many instances we require a
letter of credit or a commitment from a third party lessor to secure payment.
Working alone or in conjunction with independent leasing companies, we offer our
U.S. customers a variety of innovative programs that bundle the price of all or
a combination of equipment, per-procedure license fees, emphasis Discs and
service into a single periodic payment. Our current strategy is to place the
LADARVision systems at customer sites strictly on a bundled, per-procedure fee
basis and retain ownership of the system. At June 30, 1999, we had 23 people
employed in sales and marketing. The efforts of our sales force are augmented by
our senior executives, who participate in our Executive Champion program. Under
this program, nine of our senior executives take responsibility for our top 50
customer accounts to make sure that these accounts are receiving the utmost in
customer attention.
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Our sales force includes five refractive marketing representatives who
assist customers in developing programs and materials to help grow their laser
vision correction practices. We have developed marketing materials that
ophthalmologists can use to inform their patients about the benefits of laser
vision correction. We also offer an innovative patient financing program,
underwritten by an independent financing company which we have made available
only to our own customers. We use our web site for marketing purposes and have
established a "Find a Doctor" section where consumers can locate a doctor to
whom they can be referred for a laser vision correction procedure with one of
our excimer laser systems. We believe that practice marketing is most effective
when it emphasizes the surgeon, rather than the equipment. Our marketing
programs are structured to help our individual users market their practices to
prospective laser vision correction candidates.
SYSTEM INSTALLATION, TRAINING AND SERVICE
We train our employees and distributors on how to properly install and
maintain our excimer laser systems. We believe that educating our customers and
informing them about system developments is an important way to ensure customer
satisfaction and desirable clinical results. After installation, one of our
clinical specialists will typically travel to a customer site to train the
ophthalmologist how to safely operate our excimer laser system and successfully
perform laser surgery. We have also developed an extensive set of written
materials to inform ophthalmologists about how our excimer laser system works.
We generally include installation, training and the first year of maintenance in
the purchase price of our excimer laser system. After the initial year of
maintenance, we offer annual equipment maintenance contracts, at list prices
ranging from $45,000 to $70,000 depending on the level of service selected.
Prices may vary depending on various factors, including whether the price of
service is bundled with other products or services. LADARVision system
installation, training and service is typically included in the bundled
per-procedure fee. We also maintain a 24-hour telephone call service for
emergency maintenance calls.
RESEARCH AND DEVELOPMENT
We continually invest in research and product development to improve our
technology and enhance our current systems. We have 87 full-time employees
committed exclusively to research, engineering, product development and
regulatory and clinical affairs. We spent $7.2 million in 1998, $6.2 million in
1997, and $5.9 million in 1996 for research, engineering and product
development, including regulatory and clinical affairs. These figures do not
include amounts that Autonomous spent on these activities, which totaled $6.4
million in 1998, $6.0 million in 1997 and $5.2 million in 1996.
Our current research and development projects include:
Additional indications. Clinical trials are underway for FDA approval
for the Apex Plus and the LADARVision system for farsightedness using LASIK
and farsightedness with astigmatism using LASIK. Clinical trials are
underway with the LADARVision system for high degrees of nearsightedness and
astigmatism with LASIK.
CustomCornea. We are developing CustomCornea, a patent pending
technology designed to further extend the precision and flexibility of the
LADARVision system by incorporating an advanced eye measurement technology.
The advanced eye measurement technology will allow CustomCornea to determine
the more subtle errors of the human visual system. With this information,
the LADARVision system can address what we believe will be a growing demand
for custom ablations specifically tailored for individual patients, offering
the promise of outstanding results that consistently exceed 20/20.
CustomCornea is also intended to offer correction of the degrading effects
of complex corneal topographical anomalies, including irregular astigmatism.
A successful clinical trial of the measurement aspects of the CustomCornea
technology was conducted during late 1997 on approximately 100 eyes with a
prototype device. In June 1999, the FDA granted us clearance to commence
clinical trials of the CustomCornea technology with the LADARVision system
to correct a full range of refractive disorders using both PRK and LASIK. We
believe that
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CustomCornea corrections offer the promise of increased contrast
sensitivity, improved night vision and uncorrected visual acuity beyond that
offered by current technology.
Engineering improvements. We continue to spend significant amounts on
engineering to improve both the Apex Plus and the LADARVision system in
order to enhance their performance in clinic operation and to improve
manufacturability and serviceability. Operational performance improvements
include not only enhancements in electrical/electronic and optical
performance, but also implementation of physician requested features to
further enhance ease of use. We are working on an upgrade to the Apex Plus
with a new microscope for better visualization, on-site energy calibration
to ensure better energy distribution, remote diagnostics and an
easier-to-use graphical interface.
COMPETITION
The vision correction industry is subject to intense competition.
Our excimer laser systems compete with other manufacturers' excimer laser
systems sold in the United States and abroad. To date, our principal competitor
in the United States has been VISX. At present, the laser vision correction
system manufactured by VISX is FDA-approved to perform a wider range of
treatments than our systems, including farsightedness and higher degrees of
nearsightedness and astigmatism. These approvals have given VISX a competitive
advantage, and we believe that in 1998 approximately 75-80% of U.S. laser vision
correction procedures were performed on VISX systems. Our excimer laser systems
are not presently approved to treat farsightedness or more than ten diopters of
nearsightedness in the United States. Our applications to the FDA for approval
of procedures to correct farsightedness and high degrees of nearsightedness are
presently pending. We do not know whether or when they will be approved. In
addition, we believe that Bausch & Lomb and LaserSight are likely to obtain
regulatory approval to market ophthalmic excimer laser equipment in the next
twelve months.
Competing manufacturers of excimer laser systems may have greater
financial resources than us, may be able to offer their products at a lower cost
or may develop products that involve a lower per-procedure cost. In 1998, Nidek
received approval from the FDA to market its system in the United States for up
to 13.0 diopters of nearsightedness but has not been approved to treat
farsightedness or astigmatism. Nidek has stated that it does not intend to
charge its customers per-procedure license fees. Nidek has not obtained patent
licenses from us or VISX and is presently the subject of patent infringement
suits brought by both companies.
On April 12, 1999, KeraVision announced it had received FDA approval to
market its Intacs surgically implantable corneal ring for correction of up to
3.0 diopters of nearsightedness. We cannot predict whether, or the extent to
which, corneal rings will garner significant market share in the vision
correction market but believe the manufacturer's claims that the procedure is
reversible may be attractive to some candidates. However, we believe that the
ring's market penetration will be limited by its present approval for treatment
of low degrees of nearsightedness only.
Sunrise Technologies has announced that its application for FDA approval
of its holmium laser for treatment of .75 to 2.5 diopters of farsightedness will
be considered by the Ophthalmic Advisory Panel on July 22, 1999. We believe this
system is designed only for treatment of farsightedness and involves reshaping
the cornea using thermal energy, in contrast to our cold excimer laser system.
We cannot predict the degree to which this system will achieve market acceptance
if it is commercially approved. The Sunrise Technologies system's relatively
small size and claimed ease of use may be attractive to many ophthalmologists.
PATENTS
There are a number of U.S. and foreign patents or patent rights covering
methods and apparatus for performing laser ablation of corneal tissue. We and
VISX own a large number of these patents. We
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believe that the patents we own and the patents we license are valuable to our
business and represent a key competitive advantage in our industry.
Pillar Point Partners. Between 1992 and 1998, we were a partner with
VISX in a partnership called Pillar Point Partners. The partnership was formed
in 1992 as a result of a dispute between us and VISX over U.S. patents covering
methods and apparatus for performing ultraviolet laser corneal surgery. In
forming the partnership, all U.S. patents that we then owned or were later
granted to us or VISX which could have precluded either company from making,
using or selling in the United States our excimer laser systems as designed on
that date were required to be exclusively licensed or offered for exclusive
license to Pillar Point Partners. Under the formation agreement, we and VISX
each contributed the exclusive right to make, use and sell apparatus and perform
(including the right to license others to perform) procedures covered by any of
our U.S. patents relating to ultraviolet laser corneal surgery. The partnership
arrangement did not cover foreign patents. The partnership's policy was to
license its patents to manufacturers and sellers of excimer laser systems in the
United States, including us and VISX, in return for per-procedure royalties and
royalties on equipment sales.
Along with VISX and Pillar Point Partners, we became involved in several
lawsuits with respect to Pillar Point Partners relating to royalties, patent
infringement by others and antitrust issues. On March 24, 1998, the Federal
Trade Commission commenced an administrative enforcement proceeding against us
and VISX alleging antitrust violations in connection with the partnership's
patent arrangements. The FTC also alleged that some of the patents licensed by
VISX to the partnership were fraudulently obtained by VISX. The FTC has not
challenged the validity of any of our patents. The FTC sought an order
dissolving Pillar Point Partners and requiring that VISX cease charging
royalties on the patents alleged by the FTC to have been fraudulently obtained.
In June 1999, an FTC administrative law judge issued a decision in favor of VISX
and the FTC has appealed this decision. In 1997, VISX commenced a lawsuit
against us and the partnership seeking a declaration that it did not have to pay
royalties to the partnership for LASIK procedures performed on VISX systems in
the United States. On February 17, 1998, VISX commenced another lawsuit against
us seeking a dissolution of the partnership. On June 4, 1998, we settled all
outstanding disputes and litigation with VISX. Under the settlement, Pillar
Point Partners was dissolved. In addition, we and VISX granted to each other
worldwide, royalty-free cross-licenses to all of our U.S. and foreign patents in
the field of laser ablation of corneal tissue. These cross-licenses permit each
of us to license each other's patents to users of our equipment. Both of us have
retained all rights to license our own patents to other manufacturers. As part
of the settlement, VISX paid us $35 million.
Autonomous patents. Our Autonomous subsidiary has filed a total of
thirteen patent applications in the United States. Five of the thirteen U.S.
patent filings have resulted in patents being issued. The earliest of these
patents will expire in 2012, and the latest will expire in 2018. Autonomous has
also filed numerous patent applications in foreign jurisdictions.
The patents and applications generally relate to the following areas:
- CustomCornea;
- a cartridge excimer laser device for high serviceability;
- fast response eye tracking;
- fast and accurate optical narrow beam delivery system with tracking;
- ablation with shot pattern, with minimal sensitivity to ablation
debris;
- the algorithm for shaping with arbitrary combinations of plus and minus
sphere and cylinder; and
- measuring vision defects of a human eye.
Other. In 1992, IBM granted us a non-exclusive license to its patent
covering excimer laser ablation of tissue. The terms of the license permit us to
sublicense our subsidiaries. We agreed to pay to
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IBM a royalty of 2%, net of related expenses, on all excimer laser systems we
sell or lease in the United States and other countries that are covered by this
license. LaserSight has notified us that it has acquired IBM's rights under this
license agreement. We do not believe the transfer will materially affect our
rights or obligations under the license. In 1996, IBM granted Autonomous a
non-exclusive license to the same patent, providing for a royalty of 5%
applicable to both sales and usage fees, net of related expenses. We do not
believe that this license has been transferred by IBM. We have also entered into
a license agreement with Patlex Corporation under which we pay a royalty on
various laser components of our products.
MANUFACTURING
Summit's manufacturing operations consist of assembly, inspection and
testing of parts and system components to assure performance and quality.
Assembly of the Apex Plus takes place at our facility in Cork, Ireland. We have
also begun production of certain LADARVision system components at that facility.
Most parts and system components are manufactured and supplied by outside
vendors. We conduct a series of final integration and acceptance tests prior to
shipping a completed system.
The laser component in the LADARVision system has been custom designed
and, until recently, was sourced solely from a single U.S. specialty
manufacturer. We have also begun manufacturing this component at our Cork,
Ireland facility and intend to manufacture this component exclusively after
expiration of our supply contract with the present manufacturer.
In addition to the excimer laser, the most significant component of the
LADARVision system is the optical module. We have outsourced the manufacture of
the LADARVision optical module to a sole source supplier. If this supplier is
unable to meet our demand, our ability to build LADARVision systems would be
adversely affected.
We manufacture our emphasis Discs at both our Waltham and Cork
facilities. Our SKB microkeratome is presently manufactured both in our Cork
facility and in Germany by a contract manufacturer that also supplies our single
use microkeratome disposable blades. We presently intend to continue dual
sourcing of this product.
GOVERNMENT REGULATION
Medical device regulation. The FDA regulates the manufacture,
distribution and production of medical devices in the United States. Our
products are regulated as medical devices by the FDA under the Federal Food,
Drug and Cosmetic Act. In order to sell such products in the United States, we
must obtain a premarket clearance or premarket approval by the FDA.
Noncompliance with applicable requirements can result in any one or more of the
following:
- fines;
- injunctions;
- civil penalties;
- recall or seizure of products;
- total or partial suspension of production;
- denial or withdrawal of premarket clearance or approval of devices;
- recommendations by the FDA that we not be allowed to enter into
government contracts; and
- criminal prosecution.
The FDA also has authority to request repair, replacement or refund of
the cost of any device manufactured or distributed by a company.
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Medical devices are classified by the FDA as Class I, Class II or Class
III based upon the extent of regulatory review necessary to reasonably ensure
their safety and effectiveness. Class III devices are subject to the most
stringent regulatory review and cannot be marketed for commercial sale in the
United States until the FDA grants a premarket approval, or PMA, for the device.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA requires PMAs. The process of obtaining approval of
a PMA application is lengthy, expensive and uncertain. It requires the
submission of extensive clinical data and supporting information to the FDA.
Human clinical studies may be conducted only under an FDA-approved
investigational device exemption and must be conducted in accordance with FDA
regulations. In addition to the results of clinical trials, the PMA application
includes other information relevant to the safety and efficacy of the device, a
description of the facilities and controls used in the manufacturing of the
device, and proposed labeling. After the FDA accepts a PMA application for
filing and reviews the application, a public meeting may be held before an FDA
advisory panel comprised of experts in the field.
After the PMA is reviewed and discussed, the panel issues a favorable, or
approvable, or unfavorable, or not approvable, recommendation to the FDA and may
recommend conditions. Although the FDA is not bound by the panel's
recommendations, it historically has given them significant weight. Products
manufactured and distributed pursuant to a PMA will be subject to extensive,
ongoing regulation by the FDA. The FDA review of a PMA application generally
takes one to two years from the date such application is accepted for filing but
may take significantly longer. The review time is often significantly extended
by the FDA asking for more information, including additional clinical trials or
clarification of information already provided in the submission. A number of
devices for which FDA approval has been sought by other companies have never
been approved for marketing.
Modifications to a device subject to a PMA may require approval by the
FDA of PMA supplements or new PMAs. We believe that our excimer laser systems
require a PMA or a PMA supplement for each of the surgical procedures which they
are intended to perform. The FDA may grant a PMA with respect to a particular
procedure only when it is satisfied that the use of the device for that
particular procedure is safe and effective. In granting a PMA, the FDA may
restrict the types of patients who may be treated.
FDA regulations authorize any interested person to petition for
administrative review of the FDA's decision to approve a PMA application.
Challenges to an FDA approval have been rare. We do not believe any PMA
application has ever been revoked by the agency based on such a challenge. We
are aware that at least two persons have filed a petition with the FDA calling
for reconsideration of the FDA's approval of our PMA for the Apex Plus. One of
these petitions was subsequently withdrawn, and we are unaware of any action
having been taken by the FDA on the other. If the FDA were to grant such a
petition, we could continue to market the device during the agency's
deliberations. If after a hearing, however, the FDA were to revoke its approval
of our PMA application, we would be required to cease marketing the device.
Devices deemed to pose relatively less risk are placed in either Class I
or II, which requires the manufacturer to submit a premarket notification
requesting 510(k) clearance, unless an exemption applies. The premarket
notification must demonstrate that the proposed device is "substantially
equivalent" in intended use and in safety and effectiveness to a legally
marketed "predicate device" that is either in Class I or II, or is a
"preamendment" Class III device (i.e., one that was in commercial distribution
before May 28, 1976) for which the FDA has not yet decided to require PMA
approval. Our SKB microkeratome received premarket clearance through the 510(k)
process in December 1998.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance, but
the FDA can review any such decision. If the FDA disagrees with a manufacturer's
decision not to seek a new 510(k) clearance, the agency may retroactively
require the manufacturer to submit a
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premarket notification requiring 510(k) clearance. The FDA also can require the
manufacturer to cease marketing and/or recall the modified device until 510(k)
clearance is obtained.
We have obtained FDA approval to conduct several additional studies
involving subsets of patients under our Investigational Device Exemptions for
laser vision correction. In addition to the continuation, for patient monitoring
purposes, of studies for which PMA supplements have already been submitted to
the FDA (farsightedness and high degrees of nearsightedness with astigmatism),
we are currently conducting clinical trials with the Apex Plus for treatment of
farsightedness with astigmatism using LASIK and with the LADARVision system for
treatment of farsightedness and high degrees of nearsightedness, alone and with
astigmatism, using LASIK. In June 1999, the FDA authorized us to begin clinical
trials of our CustomCornea technology with the LADARVision system. Our
CustomCornea investigational device exemption permits us to treat both
farsighted and nearsighted patients, alone or with astigmatism, using both PRK
and LASIK. We are also conducting clinical research at international sites in
the area of customized ablations using the emphasis Disc and in large zone
extended astigmatism treatment using LASIK.
Other regulatory requirements. Our products are subject to pervasive and
continuing regulation by the FDA. We are required under FDA guidelines to
manufacture our products in registered establishments and in accordance with its
Quality System Regulations and to list our devices with the FDA. These
regulations impose certain procedural and documentation requirements upon us
with respect to manufacturing and quality assurance activities. Our facilities
are also subject to periodic Quality System Regulations inspections by the FDA.
Labeling and promotional activities are subject to scrutiny by the FDA and by
the FTC. Current FDA enforcement policy prohibits the marketing of approved
medical devices for unapproved uses.
On July 14, 1999, we received an FDA Warning Letter noting alleged
deficiencies in our Device Master Record contents for SKB microkeratome blades
observed during a recent periodic FDA inspection of our Irish manufacturing
facility. The Warning Letter notes deficiencies in the blade sterilization
protocol specifications, provided by our German manufacturer, and requires a
response within fifteen days from the date of the letter. We are currently
investigating the matter and intend to submit a timely response. Failure to
promptly resolve this matter to the satisfaction of the FDA could result in
further administrative sanctions, could prevent us from selling blades until the
matter is resolved, and could harm our sales of SKB microkeratomes, all of which
could significantly reduce our future revenues.
Our lasers are also subject to the Radiation Control for Health and
Safety Act administered by the Center for Devices and Radiological Health of the
FDA. The law requires laser manufacturers to file new product and annual reports
and to maintain quality control, product testing and sales records. In addition,
laser manufacturers must incorporate specified design and operating features in
lasers sold to end users and comply with labeling and certification
requirements. Various warning labels must be affixed to the laser depending on
the class of the product under the performance standard.
The manufacture, sale and use of our products is also subject to numerous
federal, state, local and foreign government laws and regulations relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances.
International regulatory requirements. We may need foreign regulatory
clearances to introduce our products in foreign countries.
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LENS EXPRESS
In 1996, we acquired Lens Express, a leading mail order distributor of
contact lenses and related products in the United States. Lens Express' retail
sales consist of:
- new orders of contact lenses
- reorders of contact lenses
- eye care solutions sales
- lens case sales
- - sunglass sales
- - membership sales
- - vitamin sales
- - shipping and handling fees
Lens Express wholesales contact lenses and eye care solutions to
pharmacies and similar retail outlets. Lens Express also markets some eye care
programs to large employers as a cost effective alternative to more traditional
vision indemnity programs.
To purchase contact lenses through Lens Express, a customer simply places
a toll-free call to the Lens Express telephone number to place an order. For
customers without a valid prescription, Lens Express will supply the names of
ophthalmologists or optometrists located in a customer's immediate location from
its nationwide network of over 2,700 doctors who will provide an examination and
prescription. Lens Express cannot distribute contact lenses to a patient without
a verified prescription. Many states permit Lens Express to obtain telephone
verification from the patient's contact lens prescriber; other states have
stricter requirements, including at least one state which requires that Lens
Express obtain a written copy of the patient's prescription before lenses may be
shipped. Some practitioners resist verifying prescriptions to Lens Express
because they regard Lens Express as their competitor in the sale of lenses to
their customers. Approximately 79% of Lens Express' orders are shipped within
one business day of when the order is received. The balance cannot be shipped
within one business day either because the product is not in stock or because
Lens Express has not yet been able to verify the customer's prescription.
We take orders on-line through Lens Express' world wide web site,
www.LensExpress.com. Lens Express' objective is to increase our Internet sales
significantly and become the leading Internet provider of contact lenses,
sunglasses and related products. Our strategy includes:
- reconstruction of our website with state-of-the-art, real time order
processing and other unique features and tools; and
- development of affiliations with other top Internet advertisers and
portals.
Several manufacturers of contact lenses have historically refused to sell
lenses to mail order distributors including Lens Express. Because of this, Lens
Express obtains most of its contact lens inventory from others. The price Lens
Express pays for its inventory is therefore higher in some cases than those paid
by practitioners, chains and others who are able to buy directly from the
manufacturers. Although Lens Express has been able to obtain most contact lens
brands at competitive prices in sufficient quantities on a regular basis, there
are some lens brands that are difficult and/or expensive for Lens Express to
obtain. This has resulted in Lens Express from time to time being unable to fill
some customer orders or filling them at little or no profit and has negatively
affected Lens Express' growth and profitability.
Most orders are shipped via priority mail and paid for with a credit
card. Lens Express has little collection or bad debt expenses.
Most of Lens Express' retail customers join the Lens Express Premium
Vision Program for a fee of $29 for three years or $40 for five years.
Membership in this program entitles a member to purchase contact lenses and
other products and services at member prices. We have recently added a feature
to this program under which we promise not to increase member prices during the
term of membership. We have also added a feature under which each member is
entitled to rebates on future purchases based on past purchasing volume.
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Marketing and advertising. Lens Express' sales are highly dependent upon
the amount and effectiveness of its marketing and advertising. Lens Express
utilizes primarily television, print, radio, Internet, inserts and referrals.
These efforts have helped produce a database of over several million people who
have expressed an interest in purchasing contact lenses and have requested a
brochure from Lens Express. The use of a well-known celebrity spokesperson, in
combination with our reputation for quality, reliability and service, have
contributed to Lens Express' growth and expanding name recognition. Lens Express
has determined that the use of television represents the greatest opportunity
for customer awareness and, therefore, sales of Lens Express products and
services. Lens Express also uses promotions with major credit cards to market
its services and products. Periodically, Lens Express places coupons offering
replacement contact lenses at special discounts in credit card monthly
statements.
Government regulation. Although some states impose little or no specific
regulation of mail order dispensing of replacement contact lenses, other states
have stricter requirements. Burdensome regulatory requirements imposed by
certain states, such as prohibiting dispensing of replacement lenses prior to
receipt of a written prescription, make it more difficult and expensive for Lens
Express to sell replacement lenses in such states. There can be no assurance
that other states will not enact or impose laws or regulations that prohibit
mail order dispensing of replacement contact lenses or otherwise impair Lens
Express' ability to sell lenses and operate profitably.
Competition. The contact lens and solutions business is extremely
competitive. Lens Express' primary competition are
ophthalmologists/optometrists. Sales by ophthalmologists/optometrists represent
approximately 62% of all U.S. contact lens sales. Some of these practitioners
are reluctant to provide Lens Express with prescription information for their
patients, which can make it difficult for Lens Express to obtain the timely
prescription verification it requires in order to ship contact lenses. National
optical chains represent an estimated 25% of the U.S. contact lens market. Some
pharmacies have recently begun to sell contact lenses directly to consumers.
Several of the mass merchandisers, such as Wal-Mart, Sam's, and Costco, have
entered the optical market offering lower prices than typically offered by
chains and professionals. There are approximately 15 mail order contact lens
companies in the United States, exclusive of Lens Express. Lens Express believes
its principal mail order competitor to be 1-800-CONTACTS. Lens Express believes
that 1-800-CONTACTS has stated that its practice is to fill orders even if it is
unable to obtain a valid prescription as required by applicable state laws and
regulations. We believe this practice, combined with extensive advertising, has
enabled it to make significant inroads into Lens Express' market share. A number
of companies offer vision care programs and indemnity plans which compete with
the Lens Express Premium Vision Program. Competition for eye care solutions is
extremely intense and price sensitive with generic or private label solutions
providing a cost advantage over traditional higher-priced branded products.
EMPLOYEES
As of June 30, 1999, we had 532 full-time employees in the United States,
Ireland and other countries. Of these, 352 were employed in our excimer laser
systems business and 180 were employed by Lens Express. Of the laser systems
employees, 241 were employed at Summit and 111 were employed at our Autonomous
subsidiary. The following is a breakdown of the employees in our excimer laser
systems business by functional area:
- 83 in manufacturing;
- 87 in research, engineering, product development and regulatory and
clinical affairs;
- 65 in customer service;
- 23 in sales and marketing; and
- 94 in administration.
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Of the total number of our employees, 452 are located in the United
States, 71 in Ireland and 9 in other parts of the world. None of our employees
is represented by a union or subject to a collective bargaining agreement. We
believe that our relations with our employees are good.
FACILITIES
We presently lease approximately 50,000 square feet of manufacturing and
office space in Waltham, Massachusetts, under a ten-year lease expiring in
August 2000. We are currently negotiating an extension of this lease with our
landlord. We also lease an approximately 25,000-square-foot manufacturing
facility in Cork, Ireland, under a lease expiring in 2026. We believe that we
have the capacity to manufacture a sufficient number of our products to satisfy
demand. We also have the manufacturing space to produce products in greater
volumes. Any significant increase in manufacturing capacity will require the
hiring and training of qualified manufacturing personnel.
Our Autonomous subsidiary leases approximately 30,300 square feet of
office/manufacturing/ warehouse space in Orlando, Florida. The primary office
and manufacturing facility consists of approximately 25,250 square feet and is
covered by a lease that expires in 2007. The separate ancillary warehouse lease
consists of approximately 5,050 square feet and is covered by a lease that
expires in 2000, with renewal opportunities.
Our Lens Express subsidiary leases approximately 38,000-square-feet of
office/warehouse space in the Fort Lauderdale, Florida area under a lease
expiring in August 2002.
LEGAL PROCEEDINGS
We are a party to various litigation matters as described below. We have
denied, or will deny, the substantive allegations in each of these actions, and
we intend to defend them vigorously. We may be served with additional complaints
of a similar nature in the future. We may not prevail in the pending or any
possible additional actions, and the resolutions of the actions, individually or
in the aggregate, may have a material adverse effect on our financial position,
results of operations, or cash flows. We have not made any provision for any
loss that may result upon resolution of these matters in the consolidated
financial statements included in this prospectus.
ANTITRUST LITIGATION
Summit, VISX, and certain of their affiliates (including Pillar Point
Partners, a partnership between affiliates of Summit and VISX) are involved in a
number of antitrust lawsuits which, among other things, allege price-fixing in
connection with per-procedure patent royalties charged by Summit and VISX. These
suits are pending in both federal and state court, on behalf of both direct
purchasers from Summit and VISX and patients/consumers, and include both
purported class actions and individual actions. Most of the federal lawsuits
have been transferred for pretrial purposes to the U.S. District Court for the
District of Arizona by the Judicial Panel on Multidistrict Litigation as In re:
Pillar Point Partners Antitrust and Patent Litigation.
FEDERAL ANTITRUST LITIGATION
Cases Consolidated for Pre-Trial Proceedings
In April 1998, The Eye Professionals, P.A. commenced an action in the
U.S. District Court for the District of New Jersey against us and VISX. The case
purported to be a class action on behalf of all individuals or entities that
have paid a per-procedure fee directly to either defendant for use of a Summit
or VISX laser to perform laser vision correction surgery at any time after
November 1, 1995. The complaint alleged, inter alia, price-fixing in violation
of Section 1 of the Sherman Act. The action sought treble damages, costs of
suit, attorneys' fees, and various forms of declaratory and injunctive relief.
Similar actions were also filed in May 1998 by Metropolitan Eye Center and
Outpatient Surgical Facility, Inc. in the U.S. District Court for the Northern
District of California against us, VISX, Summit Partner
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and VISX Partner and by New England Laser Vision, Inc. in the U.S. District
Court for the District of New Jersey against us and VISX. In August 1998, David
R. Shapiro, M.D., filed another similar purported class action against us and
VISX in the U.S. District Court for the District of Arizona. Plaintiffs in these
cases have agreed to consolidation of the four purported class actions and filed
a single consolidated amended complaint in the U.S. District Court for the
District of Arizona. It purports to be a class action on behalf of all persons
and entities (excluding governmental entities, defendants, subsidiaries and
affiliates of defendants) in the United States who paid a per-procedure royalty
to any defendant or any alleged co-conspirator or any subsidiary or affiliate
thereof, at any time after September 1995. The Consolidated Amended Class Action
Complaint seeks, among other things, unspecified treble damages on behalf of
plaintiffs and the alleged class, along with attorneys' fees, costs, and
injunctive and declaratory relief.
In September 1998, Laser Eye Center of Texas, L.L.P. and Warren D. Cross,
M.D., filed a purported class action against us, Summit Partner, VISX, VISX
Partner and Pillar Point Partners in the U.S. District Court for the Southern
District of Texas. The suit purports to be a class action on behalf of all
persons and entities who have paid money to defendants, or any of their
subsidiaries, on a per-procedure basis for the ability to use defendants' laser
equipment or technology to perform laser vision correction surgery. Plaintiffs
allege, among other things, price-fixing and monopolization in violation of
Sections 1 and 2 of the Sherman Act. They seek, among other things, treble
damages on behalf of the alleged class, costs of suit, including attorneys'
fees, and declaratory and injunctive relief. This case was transferred to the
District of Arizona for consolidated pre-trial proceedings.
In February 1999, Carolina Eye Associates, P.A. and Carolina-South Eye
Associates filed suit against VISX and us in the U.S. District Court for the
District of New Jersey. This action, like the consolidated federal actions
described above, purports to be a class action on behalf of all persons and
entities (excluding governmental entities, defendants, subsidiaries and
affiliates of defendants) in the United States who paid a per-procedure royalty
to any defendant or any alleged co-conspirator or any subsidiary or affiliate
thereof, at any time after September 1995. The complaint alleges, among other
things, price-fixing in violation of Section 1 of the Sherman Act and seeks,
among other things, compensatory damages of at least $100 million plus $8.3
million per month from the filing of the complaint until the date of judgment,
trebling of those damages, attorneys' fees, costs, and declaratory and
injunctive relief. This case was transferred to the District of Arizona for
consolidated pre-trial proceedings.
In March 1998, Janice Camp of Atlanta, Georgia commenced an action in the
U.S. District Court for the District of Massachusetts against us and VISX. As
amended in April 1998, the complaint added as a named plaintiff Jon Singer of
Congers, New York. The case purported to be a class action on behalf of all
similarly situated individuals who have undergone laser vision correction
surgery utilizing equipment or technology purchased or leased from Pillar Point
Partners and who paid a price for that surgery that was artificially inflated
due to the alleged anti-competitive and illegal licensing agreement entered into
between Summit and VISX. The complaint alleged monopolization, conspiracy to
monopolize, conspiracy to restrain trade, violation of the Clayton Act,
violation of the RICO Act and violations of state consumer protection statutes.
The action sought, inter alia, treble damages, punitive or exemplary damages,
costs of suit, attorneys' fees, and various forms of equitable relief, including
disgorgement of ill-gotten gains and restitution. The case was transferred to
the District of Arizona for consolidated pre-trial proceedings. The court
recently granted defendants' motion to dismiss.
In June 1996, a Texas ophthalmologist, Robert G. Burlingame, sued us,
Summit Partner, VISX, VISX Partner and Pillar Point Partners in U.S. District
Court for the Northern District of California alleging price-fixing in violation
of Section 1 of the Sherman Act and state antitrust laws and fraud and deceit in
connection with certain of our sales and marketing activities. The plaintiff
seeks, among other things, compensatory damages of at least $30,000 plus $2,500
to $3,000 per month until the date of judgment, trebling of those damages,
compensatory and punitive damages on the fraud claim against us of at least
$500,000 plus $2,500 to $3,000 per month until the date of judgment, attorneys'
fees, costs and
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declaratory and injunctive relief. This case was transfered to the District of
Arizona for consolidated pre-trial proceedings.
In September 1996, a Nevada ophthalmologist, John R. Shepherd, through
his professional corporation, commenced a similar lawsuit against the same
parties, in the same court, alleging substantially similar antitrust claims and
seeking substantially similar relief, including damages before trebling of at
least $125,000 plus $12,500 per month until the date of judgment. Plaintiff's
counsel in the Shepherd case has indicated that he intends to seek certification
of the case as a class action. This case was transferred to the District of
Arizona for consolidated pre-trial proceedings.
In November 1997, Antoine L. Garabet, M.D., Inc. and Abraham V. Shammas,
M.D., Inc., d/b/a The Laser Eye Center, sued us, Summit Partner, VISX, VISX
Partner and Pillar Point Partners in the U.S. District Court for the Northern
District of California seeking a declaratory judgment that the patents held by
Pillar Point are invalid and unenforceable on account of alleged antitrust
violations and alleging fraudulent inducement and deceit in connection with
certain of our sales and marketing activities. The plaintiffs seek, among other
things, compensatory damages on the fraud claim against us of at least
$48,585.69 plus prejudgment interest, disgorgement of revenues and profits, a
constructive trust on defendants' revenues and profits, punitive damages of an
unspecified amount, injunctions against enforcement of the Pillar Point patents
and against alleged continuing violations of the antitrust laws, declaratory
relief, attorneys' fees and costs. This case was transferred to the District of
Arizona for consolidated pre-trial proceedings. The court recently granted a
motion to dismiss filed by Pillar Point Partners, VISX and VISX Partner. We have
withdrawn our motion to dismiss and filed a counterclaim for patent infringement
against the plaintiffs and Antoine L. Garabet, M.D. and Abraham V. Shammas,
M.D., individually. The counterclaim alleges that counterclaim-defendants have
infringed certain of our patents by using excimer laser systems manufactured by
us without having a license to do so, and seeks treble damages and injunctive
relief.
In May 1999, Freedom Vision Laser Center, L.P. filed suit in the United
States District Court for the Central District of California against us,
Autonomous, Summit Partner VISX, VISX Partner and Pillar Point Partners. The
complaint alleges, among other things, price-fixing, monopolization, attempted
monopolization, and conspiracy to monopolize, in violation of Sections 1 and 2
of the Sherman Act, as well as violations of the California Business and
Professions Code. Plaintiff seeks, among other things, damages that are alleged
to be more than $1 million before trebling, disgorgement of alleged illegal and
ill-gotten gains, declaratory and injunctive relief, and attorneys' fees and
costs. This case was conditionally transferred to the District of Arizona for
consolidated pre-trial proceedings.
Cases Not Consolidated for Pre-Trial Proceedings
In April 1999, Antoine L. Garabet, M.D., Inc. and Abraham V. Shammas,
M.D., Inc., d/b/a The Laser Eye Center, filed suit in the U.S. District Court
for the Central District of California against us and Autonomous. The suit
alleges, among other things, that our acquisition of Autonomous may
substantially lessen competition or tend to create a monopoly in violation of
Section 7 of the Clayton Act, Section 1 of the Sherman Act, and the California
Business and Professions Code. The complaint seeks, among other things,
unspecified compensatory damages, trebling of those damages, declaratory and
injunctive relief, divestiture in the event that the acquisition of Autonomous
is consummated, restitutionary relief, including disgorgement of alleged
unlawful profits and the imposition of a constructive trust over alleged
ill-gotten gains, and attorneys' fees and costs. Plaintiffs also threatened to
seek a temporary restraining order, preliminary injunction, and other
unspecified preliminary injunctive relief directed at the acquisition. We have
filed a counterclaim for copyright infringement and unfair competition against
the plaintiffs and Antoine L. Garabet, M.D. and Abraham V. Shammas, M.D.,
individually.
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Counterclaims
We are the subject of additional Federal antitrust litigation as a result
of counterclaims to patent litigation initiated by Pillar Point Partners. A
discussion of those counterclaims is presented below under "-- Patent
Litigation."
STATE ANTITRUST LITIGATION
Beginning in March 1998, a number of actions brought by individuals under
the Cartwright Act and the California Business and Professions Code were
commenced against us, Summit Partner, VISX and VISX Partner in Superior Court of
Santa Clara County. In May 1998, these actions were consolidated as In re
PRK/LASIK Consumer Litigation. In June 1998, plaintiffs B.J. Snyder, Donna
McMahan, Paula Mobsby, Helen Thomas, Carmen Ocariz, Martin Hermans, Ken
Bartlett, Jackie Kirk, Grace Geniusz, Jocelyn Joseph, Andrew Stoddard, and
Cynthia Brubecker filed an Amended Consolidated Master Complaint for Damages
("Amended Complaint") in this matter against us, Summit Partner, VISX, and VISX
Partner. The Amended Complaint purports to be filed on behalf of all natural
persons in the United States who underwent excimer laser surgery with a laser
manufactured by us or VISX during the period beginning October 1995, and paid a
per-procedure fee indirectly to a defendant, excluding defendants, any unnamed
co-conspirators of defendants, defendants' predecessors, successors, officers
and directors, governmental entities, and any and all judges and justices
assigned to hear any aspect of the litigation. The Amended Complaint seeks
unspecified compensatory damages, restitution and/or disgorgement of alleged
ill-gotten gains, prejudgment and postjudgment interest, costs of suit, and
attorneys' fees, as well as various forms of declaratory and injunctive relief,
including an order permitting any person or entity with which we or VISX or both
have entered into any agreement since June 3, 1992, for the purchase, license,
or use of any of the Pillar Point Patents to withdraw from such agreement
without penalty or obligation. James Ballard filed a similar suit against us,
Summit Partner, VISX, VISX Partner, Pillar Point Partners, and other individual
defendants in Superior Court of San Diego County. This suit has been transferred
to Santa Clara County and consolidated as part of In re PRK/LASIK Consumer
Litigation. The parties have stipulated to the conditional certification of a
class of natural persons in California, Alabama, Arizona, the District of
Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico,
New York, North Carolina, North Dakota, South Dakota, Tennessee, West Virginia,
and Wisconsin who have undergone ophthalmic refractive surgery with an excimer
laser manufactured by us or VISX.
In April 1998, Penny S. Marks, an individual who allegedly has had laser
vision correction surgery performed, commenced an action in Florida state court
against us and VISX. The case purports to be a class action on behalf of all
persons who have had a PRK procedure in the State of Florida from October 20,
1995 up to and including the date the class certification hearing begins. The
complaint alleges various violations of the Florida Deceptive and Unfair Trade
Practices Act, the Florida Antitrust Act and Section 5 of the Federal Trade
Commission Act. The complaint seeks unspecified compensatory damages, costs and
attorneys' fees, as well as declaratory and injunctive relief. Plaintiff has
filed a motion seeking class certification.
In June 1998, Barbara Worcester, an individual who allegedly has had
laser vision correction surgery performed, filed an action in Wisconsin state
court against us, Summit Partner, VISX, VISX Partner and Pillar Point Partners.
The case purports to be a class action on behalf of all Wisconsin purchasers of
refractive laser surgery procedures. The complaint alleges violations of the
antitrust laws of the State of Wisconsin. The complaint seeks unspecified
damages, trebling of those damages, attorneys' fees and costs, and declaratory
and injunctive relief. Defendants removed this action to federal court, and it
has been transferred to the District of Arizona. Plaintiff has filed a motion
seeking class certification.
In January 1999, Karen Frankson, Virginia Harmes, and Beth Luetschwager,
three individuals who allegedly have had laser vision correction surgery
performed, filed a similar purported class action
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in Wisconsin state court. Defendants removed this action to federal district
court in Wisconsin, and it has been transferred to the District of Arizona.
In May 1999, Linda Brisson, an individual who allegedly has had laser
vision correction surgery performed, commenced an action in Minnesota state
court against us, Summit Partner, VISX, VISX Partner and Pillar Point Partners.
The case purports to be a class action on behalf of all Minnesota purchasers of
refractive laser surgery procedures. The complaint alleges, among other things,
price-fixing in violation of Minnesota antitrust law. The complaint seeks, among
other things, compensatory damages alleged to be at least in the millions of
dollars, trebling of those damages, attorneys' fees and costs, and injunctive
and other relief. Defendants have removed this action to federal district court
in Minnesota. Plaintiffs have filed a motion to remand to state court. The
Judicial Panel on Multidistrict Litigation has conditionally transferred the
case to the District of Arizona. Plaintiffs have filed a motion to vacate that
conditional transfer order.
Also in May 1999, John Castino, an individual who allegedly has had laser
vision correction surgery performed, commenced an action in Minnesota state
court against us and VISX. The case purports to be a class action under various
state antitrust laws on behalf of a purported class of all residents of Alabama,
the District of Columbia, Hawaii, Kansas, Maine, Michigan, Minnesota,
Mississippi, New Mexico, North Carolina, North Dakota, South Dakota, Tennessee,
and Wisconsin who have paid for laser vision correction surgery (including PRK
and LASIK). The complaint seeks, among other things, unspecified actual and
multiple damages, attorneys' fees and costs, and injunctive and other relief.
Defendants have removed this action to federal district court in Minnesota. The
Judicial Panel on Multidistrict Litigation has conditionally transferred the
case to the District of Arizona, and plaintiff has filed a motion opposing this
conditional transfer order. On July 2, 1999, plaintiff filed a motion for
voluntary dismissal of this action without prejudice.
SHAREHOLDER LITIGATION
Between August 1996 and February 1997 various shareholder actions were
commenced against us and certain of our officers in the U.S. District Court for
the District of Massachusetts (the "District of Massachusetts") claiming, among
other things, violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 arising out of public statements made by defendants and violations
of Section 20A of the Securities Exchange Act of 1934, arising out of alleged
insider trading by certain defendants. The actions were consolidated, by order
of the Court entered December 2, 1996, as In re Summit Technology Securities
Litigation. Plaintiffs seek certification of the action as a class action on
behalf of all purchasers of our common stock, other than defendants and certain
affiliated persons and entities, between March 31, 1995 and July 3, 1996. They
seek unspecified damages, interest, costs and expenses, attorneys' fees and
extraordinary and/or injunctive relief.
In October 1996, an additional class action was commenced in the U.S.
District Court for the District of Massachusetts against us, our directors,
certain of our officers and the four underwriters of our October 1995 common
stock offering claiming violations of Sections 11, 12(2) and 15 of the
Securities Act of 1933 arising out of alleged material misstatements of fact in
the Registration Statement issued in connection with the offering. The action
was coordinated with the securities litigation by order of the court dated
December 2, 1996. It also seeks unspecified compensatory damages, interest,
costs and expenses, attorneys' fees and extraordinary and/or injunctive relief.
In December 1996, one of our shareholders filed in the U.S. District
Court for the District of Massachusetts a derivative action, purportedly on our
behalf, against us as nominal defendant, our directors and certain of our
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 us to the expense and
inconvenience of defending the Securities Litigation and has harmed our
reputation, thereby limiting its access to capital markets. It also alleges
breach of fiduciary duty, gross negligence and insider trading against
individual defendants. It seeks damages, interest, costs and expenses and
attorneys' fees.
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PATENT LITIGATION
Pillar Point Partners, Summit Partner and VISX Partner commenced patent
infringement litigation against an ophthalmologist believed to have used or be
using homemade laser systems not licensed under patents held by Pillar Point
Partners and one alleged manufacturer of such laser systems. These actions were
originally pending as Pillar Point Partners, et al. v. Jon G. Dishler, et al.
(U.S. District Court, District of Colorado) and Pillar Point Partners, et al. v.
Jui-Teng Lin, et al. (U.S. District Court, Middle District of Florida). Each
action was transferred to the District of Arizona. The defendants in the Dishler
action have asserted counterclaims against Summit Partner, VISX Partner, and
Pillar Point Partners seeking declarations that the patents in suit are invalid
and unenforceable. They have also raised antitrust counterclaims alleging
price-fixing, tying, monopolization, concerted refusal to deal, conspiracy to
monopolize, and attempted monopolization. Defendants seek unspecified actual
damages, trebling of those damages, attorneys' fees, costs and injunctive
relief.
In December 1998, we filed a patent infringement lawsuit in the U.S.
District Court for the District of Massachusetts against Nidek, whose laser
system recently received FDA approval. The suit alleges that Nidek's excimer
laser system infringes certain of our U.S. patents and seeks damages and
injunctive relief. On January 29, 1999, a district court in Tokyo, Japan ruled
against us in a patent infringement lawsuit which we initiated against Nidek in
1996. The Japanese lawsuit involved the Japanese counterpart of one of the two
U.S. patents which we have alleged Nidek infringes in the U.S. lawsuit. We have
appealed the Tokyo district court decision.
In June 1999, we commenced a patent infringement lawsuit against George
I. Bekov in the U.S. District Court for the District of Massachusetts. The suit
alleges that Bekov has induced infringement of certain of our patents, including
by disabling card readers and maintaining systems which are not licensed by us,
and seeks damages and injunctive relief.
In June 1999, we commenced a patent infringement lawsuit against Robert
T. Lin, Ferzaad Moosa, and Randa M.R. Garrana in the U.S. District Court for the
Central District of California. The suit alleges that the defendant physicians
have infringed certain of our patents by using excimer laser systems
manufactured by us without having a license to do so, and seeks damages and
injunctive relief.
OTHER LITIGATION
In October 1992, Joseph Seriani brought suit against Lens Express and
certain of its former shareholders in the Florida Circuit Court. The suit
alleged violations of the Florida Civil Remedies for Criminal Practices
Act -- the Florida civil RICO statute -- based on events which allegedly
occurred in the mid-1980s. Seriani's claims against Lens Express were dismissed
several times for failure to state a viable claim, but in each instance with
leave to amend and refile. On May 15, 1996, the date of our acquisition of Lens
Express, Seriani and his wife Rhonda Seriani filed an amended complaint which
included us as an additional defendant. On November 25, 1996, the Serianis
voluntarily dismissed their action against us and on March 7, 1997 voluntarily
dismissed their action against the remaining defendants, in each case without
prejudice. On March 24, 1997, the Serianis commenced a new lawsuit against Lens
Express and others in the U.S. District Court for the Southern District of
Illinois, alleging substantially similar claims.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning our
executive officers and directors as of June 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert J. Palmisano........... 54 Director and Chief Executive Officer
D. Verne Sharma............... 49 President and Chief Operating Officer
Robert J. Kelly............... 54 Executive Vice President, Chief Financial Officer and
Treasurer
Randy W. Frey................. 41 Director, Executive Vice President, and President,
Autonomous Technologies Corporation
Peter E. Litman............... 48 Executive Vice President, Corporate Business Development
Eric P. Ankerud............... 42 Vice President, Quality, Regulatory and Clinical Affairs
John P. Coffidis.............. 49 Vice President, Global Customer Support
P. Bernard Haffey............. 36 Vice President, Sales and Marketing
James A. Lightman............. 41 Vice President, General Counsel and Clerk
Bernard R. Patriacca.......... 55 Vice President and Controller
James L. Richey............... 51 Vice President, Operations
Alex C. Sacharoff............. 42 Vice President, Research and Development
Menderes Akdag................ 38 President, Lens Express, Inc.
Jeffrey A. Bernfeld(2)........ 42 Director
C. Glen Bradley............... 56 Director
Richard F. Miller(1).......... 47 Director
John A. Norris................ 52 Director
Richard M. Traskos(1,2)....... 51 Chairman of the Board and Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Robert J. Palmisano joined us in April 1997 as Chief Executive Officer
and a member of the board and was re-elected to the board in 1996 for a term
expiring in 2002. From 1984 to January 1996, Mr. Palmisano was employed at
Bausch and Lomb, Inc., where he served from 1988 to 1996 as Senior Vice
President and as President of the Eyewear Division. From January 1996 to April
1997, Mr. Palmisano was a private consultant. Mr. Palmisano holds a BA from
Providence College.
D. Verne Sharma joined us in April 1996 as President and served as
Interim Chief Executive Officer from September 1996 to April 1997. From 1994 to
1996 Mr. Sharma served as Vice President of Marketing and Strategic Planning at
United States Surgical Corporation, and from 1991 to 1994 was General Manager of
Global Nuclear Medicine and Positron Emission Tomography Business at General
Electric Medical Systems and Rohm and Hass Company. Mr. Sharma holds an MBA from
the Wharton School and an undergraduate degree in Chemical Engineering from the
University of the West Indies, Trinidad and Tobago.
Robert J. Kelly joined us in November 1997 as Executive Vice President,
Chief Financial Officer and Treasurer. From 1972 to 1997 Mr. Kelly was employed
by Bull HN Information Systems Inc., where
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he served from 1992 to February 1997 as Executive Vice President and Chief
Financial Officer. Mr. Kelly holds an MBA from Harvard Business School and a BS
from the University of Massachusetts.
Randy W. Frey was elected to the board in April 1999 for a term expiring
in 2001. Mr. Frey is one of our Executive Vice Presidents and is President of
Autonomous Technologies Corporation, our wholly-owned subsidiary. Since 1985,
Mr. Frey has been the Chief Executive Officer of Autonomous. From 1985 to March
1998, and again since October 1998, Mr. Frey was President of Autonomous.
Peter E. Litman joined us in September 1990 as Vice President and General
Counsel and was promoted to Executive Vice President of Corporate Business
Development in January 1998. Prior to joining us, Mr. Litman was a member of
Goldstein and Manello, P.C., a Boston law firm. Mr. Litman holds a JD from
Columbia University School of Law and a BA from the University of Pennsylvania.
Eric P. Ankerud joined us in July 1997 as Vice President of Quality,
Regulatory and Clinical Affairs. From 1994 to 1997 Mr. Ankerud served as
Director of Corporate Regulatory Affairs at Bausch and Lomb, Inc. From 1991 to
1994, Mr. Ankerud was Vice President of Regulatory Affairs for the Surgical
Products Group at C.R. Bard, Inc. Mr. Ankerud holds a JD from the Faculty of Law
and Jurisprudence, SUNY at Buffalo and a BA in economics from St. Lawrence
University.
John P. Coffidis joined us in November 1987 as manager of customer
support, became international service manager in 1994 and was promoted to Vice
President, Global Customer Support in August 1997. Mr. Coffidis previously
served with Johnson and Johnson in the Medical Instrumentation Division from
1973 to 1987. During his employment with Johnson and Johnson, Mr. Coffidis
served ten years in Europe as International Customer Support Manager. Mr.
Coffidis holds a Masters Degree in management from Cambridge College and a BA in
biology from the University of Massachusetts.
P. Bernard Haffey joined us in September 1997 as Vice President, Sales
and Marketing. Prior to joining us, Mr. Haffey was employed since 1990 at Mentor
Opthalmics, Inc., most recently serving as the Vice President of Marketing and
Sales. Mr. Haffey holds an MBA from Cornell University and a BA from Colgate
University.
James A. Lightman joined us in February 1996 as Assistant General Counsel
and was promoted to Vice President and General Counsel in January 1998. Prior to
joining us, Mr. Lightman was a member of Goldstein and Manello, P.C., a Boston
law firm which he joined in 1984. Mr. Lightman holds a JD from Boston University
Law School and a BS from Boston University School of Management.
Bernard R. Patriacca joined us in November 1997 as Vice President and
Controller. From 1994 until joining us, Mr. Patriacca served as Vice President
of Errands Etc., Inc., a privately-held homeowners' personal service company.
From 1991 to 1994, Mr. Patriacca held senior financial management positions at
several privately-held consumer services companies. From 1973 to 1991, Mr.
Patriacca was employed in various capacities at Dunkin Donuts, Inc., including
Chief Financial Officer and a Director. Mr. Patriacca also serves as a director
of Video Update, Inc., a publicly-held international chain of video stores. Mr.
Patriacca received a BS and an MBA from Northeastern University.
James L. Richey joined us in September 1997 as Vice President of
Operations. Prior to joining us, Mr. Richey served since 1994 as Vice President
and General Manager of U.S. Operations for Datapoint Corporation, a manufacturer
of computer servers, operating systems, LANs and video communication systems.
Mr. Richey holds an MBA from Clark University, an MS in electrical engineering
from Northeastern University and a BS in electrical engineering from Worcester
Polytechnic Institute.
Alex C. Sacharoff joined us in April 1986 as Senior Staff Scientist and
has been Vice President, Research and Development since July 1996. From February
1993 to July 1996, he was our Director, Product Development. From February 1991
to February 1993, he served as Manager, New Product Development and was Manager,
Applications Development from February 1989 to February 1991. Prior
44
<PAGE> 48
to joining us, Dr. Sacharoff was a Senior Staff Scientist at Raytheon
Corporation. Dr. Sacharoff holds a Ph.D. in physics from Harvard University and
a BS in physics from Stevens Institute of Technology.
Menderes Akdag joined Lens Express, Inc. in May 1991 as Chief Financial
Officer. Mr. Akdag was promoted to the position of Chief Executive Officer in
1992. He has been in his current position as President of Lens Express since May
1995. Prior to joining Lens Express, Mr. Akdag was the Finance Manager for Beksa
Steel Cord Manufacturing and Trading, Inc. Mr. Akdag holds a BS in business
administration with a major in finance from the University of Florida. Mr. Akdag
is not an officer of Summit Technology, Inc.
Jeffrey A. Bernfeld was first elected to the board in October 1988 and
was re-elected in 1998 for a three-year term expiring in 2001. Mr. Bernfeld is
Vice President and General Counsel of American Science and Engineering, a
manufacturer of X-ray based detection equipment. Mr. Bernfeld was Vice President
and General Counsel of Spire Corporation, a publicly-held company specializing
in biomaterials, optoelectronics and energy technologies, from June 1992 to
February 1996. From 1991 through June 1992, Mr. Bernfeld was a principal of the
consulting firm Global Solutions, Inc. and from 1988 to 1990, Mr. Bernfeld was
Vice President and General Counsel of the Mediplex Group, Inc. Prior to joining
Mediplex, Mr. Bernfeld was a member of the law firm of Goldstein & Manello, P.C.
Dr. C. Glen Bradley was elected to the board in April 1999 for a term
expiring in 2000. Dr. Bradley has been the Chief Executive Officer of CIBA
Vision Corporation since 1990.
Richard F. Miller was first elected to the board in June 1988 and was
re-elected in 1997 for a three-year term expiring in 2000. Since April 1998, Mr.
Miller has been employed as Senior Vice President at Leerink Swann & Co., a
financial services firm in Boston. From August 1994 to April 1998, Mr. Miller
has served as an investment executive with First Albany Corporation, a financial
services firm. From 1991 through August 1994, Mr. Miller was a private investor,
and prior to that was an investment banker employed by Tucker, Anthony & R.L.
Day, Inc., from 1979 to 1991, where he last held the position of First Vice
President.
John A. Norris was first elected to the board in May 1990, was re-elected
in 1996 for a term expiring in 1999 and was re-elected in 1999 for a term
expiring in 2002. Since February 1994, Mr. Norris has served as President of
John A. Norris, Esquire, P.C., a health care law, public policy and management
consulting firm founded in February 1994. Mr. Norris was President and Chief
Executive Officer of National Pharmaceutical Council, Inc., an educational
resource for research-based pharmaceutical companies, from April 1995 to March
1996. From June 1988 through February 1994, he was Executive Vice President of
Hill and Knowlton, Inc., a consulting and public relations firm, and served as
the worldwide director of its Health Sciences Consulting Group. Prior to joining
Hill and Knowlton in 1988, Mr. Norris served as Deputy Commissioner and Chief
Operating Officer of the FDA from 1985 to 1988, where his main responsibility
was overseeing the operations of the FDA. Mr. Norris has taught health care
policy at Harvard University since 1988. Mr. Norris currently serves as a
director of Cytologies, Inc., Horus Inc. and National Applied Sciences, Inc.
Richard M. Traskos was first elected to the board in March 1987 and was
re-elected in 1998 for a three-year term expiring in 2001 and was elected
Chairman of the board in 1997. Mr. Traskos is a vice president of Shoreline
Insurance Co., Inc., a business insurance brokerage firm located in Clinton,
Connecticut. From March 1993 to September 1997, Mr. Traskos was a vice president
of Arthur A. Watson, Inc., a business insurance brokerage firm located in
Wethersfield, Connecticut. Before joining Arthur A. Watson, Mr. Traskos served
as a director and senior vice president of Allen, Russell & Allen, Inc., a
business insurance brokerage and consulting firm. Mr. Traskos is a licensed
insurance broker and certified insurance consultant.
45
<PAGE> 49
EXECUTIVE COMPENSATION
The following table shows for the years ended December 31, 1998, 1997 and
1996 compensation paid or accrued by us to (1) our Chief Executive Officer and
(2) our four other most highly compensated executive officers who were serving
as executive officers as of December 31, 1998 (collectively, the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ------------
OTHER SECURITIES ALL OTHER
NAME AND SALARY BONUS ANNUAL UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($) OPTIONS (#) ($)(1)
- ------------------ ---- ------- ------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Palmisano...................... 1998 324,692 112,668 32,112(2) 40,000(3) 6,400
Chief Executive Officer 18,430(4) 2,446(5)
4,813(6)
1997 206,539 165,000 100,062(2) 300,000(3) --
11,562(4)
45,039(6)
1996 -- -- -- -- --
D. Verne Sharma....................... 1998 275,738 25,000 -- 10,000(7) 9,600
President & Chief 1997 250,000 74,375 62,633(2) -- 472
Operating Officer 65,978(6)
1996 174,308 35,960 38,436(2) 100,000(7) --
10,000(7)
Robert J. Kelly....................... 1998 238,846 59,234 -- 120,000(8) 5,338
Executive Vice President, 1997 30,962 -- -- 100,000(8) --
Chief Financial Officer & 1996 -- -- -- -- --
Treasurer
Peter Litman.......................... 1998 229,517 45,903 -- 3,689(9) 9,600
Executive Vice President, 1997 211,313 67,620 -- 100,000(9) --
Corporate Business 1996 187,502 -- -- 15,000 2,996
Development
Menderes Akdag........................ 1998 202,022 93,948 -- 20,000(10) --
President, Lens Express, Inc. 1997 204,552 119,322 -- -- --
1996 156,940 -- -- 5,000(10) --
</TABLE>
- -------------------------
(1) Except where otherwise noted, the indicated amounts represent our
contributions to our 401(k) plan.
(2) Moving and relocation expenses reimbursed by us.
(3) During 1998, Mr. Palmisano received options to purchase 40,000 shares of
common stock. During 1997, Mr. Palmisano received options to purchase
300,000 shares of common stock.
(4) During 1998, the indicated amount represents an automobile allowance of
$12,462 and imputed interest income of $5,968 because of a loan. During
1997, the indicated amount represents an automobile allowance of $8,262 and
imputed interest income of $3,300 because of a loan.
(5) Our contribution to our Supplemental Deferral Plan.
(6) Employment tax paid on behalf of the employee by us.
(7) During 1998, Mr. Sharma received options to purchase 10,000 shares of
common stock. During 1996, Mr. Sharma received options to purchase 100,000
shares of common stock and 10,000 shares of common stock of Refractive
Centers International, Inc., a former wholly-owned subsidiary of Summit.
(8) During 1998, Mr. Kelly received options to purchase 120,000 shares of
common stock. During 1997, Mr. Kelly received options to purchase 100,000
shares of common stock, which have subsequently been canceled.
46
<PAGE> 50
(9) During 1998, Mr. Litman received options to purchase 3,689 shares of common
stock. During 1996, Mr. Litman received options to purchase 100,000 shares
of common stock and 15,000 shares of common stock of Refractive Centers
International.
(10) During 1998, Mr. Akdag, the president of Lens Express, Inc. and not an
officer of Summit Technology, Inc., received options to purchase 20,000
shares of common stock. During 1996, Mr. Akdag received options to purchase
5,000 shares of common stock.
The following table contains information concerning the grant of options
to purchase shares of our common stock to each of the Named Executive Officers
during the year ended December 31, 1998. Each of the options vests in three
equal annual installments beginning September 1, 1999, except that Mr. Kelly's
option to purchase 100,000 shares vests in three equal annual installments
beginning October 22, 1998.
The potential realizable values represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock price appreciation of 5%
and 10% compounded annually from the date the respective options were granted to
their expiration date. These numbers are calculated based on rules promulgated
by the SEC and do not reflect our estimate of future stock price growth. Actual
gains, if any, on stock options exercises and common stock are dependent on the
timing of such exercise and the future performance of the common stock.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OF OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ----------- ---------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Menderes Akdag..................... 20,000 3.34 3.50 09/01/2008 44,023 111,562
Robert Kelly....................... 100,000 16.72 4.53 10/22/2007 450,180 950,811
20,000 3.34 3.50 09/01/2008 44,023 111,562
Peter Litman....................... 3,689 0.62 3.50 09/01/2008 8,120 20,578
Robert Palmisano................... 40,000 6.69 3.50 09/01/2008 88,045 223,124
D. Verne Sharma.................... 10,000 1.67 3.50 09/01/2008 22,011 55,781
</TABLE>
47
<PAGE> 51
The following table sets forth information for each of the Named
Executive Officers with respect to the value of options outstanding as of
December 31, 1998. None of the Named Executive Officers exercised any options in
1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)
------------------ -------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---- ------------------ -------------------
<S> <C> <C>
Menderes Akdag........................................... 5,000/2,000 --/17,500
Robert Kelly............................................. 33,334/86,666 --/17,500
Peter Litman............................................. 166,373/5,189 900/3,228
Robert Palmisano......................................... 100,000/240,000 --/35,000
D. Verne Sharma.......................................... 100,000/10,000 --/8,750
</TABLE>
DIRECTOR COMPENSATION
We adopted a comprehensive compensation plan for our outside directors in
December 1998, which became effective January 1, 1999 and was approved by our
stockholders at the 1999 annual meeting. The 1999 Outside Directors'
Compensation Plan replaces the 1992 Stock Option Plan for Outside Directors and
provides for compensation in the form of cash, shares of common stock and stock
options. Outside directors receive an annual retainer of $10,000, meeting fees
of $2,000 for each regularly scheduled meeting of the board they attend, $2,000
for each special meeting of the board they attend, $1,000 annually for each
committee membership and $500 for each meeting of a committee they attend. One
half of the annual retainer will be paid in restricted shares of common stock
and one-half of the meeting fees for regularly scheduled meetings will be paid
in unrestricted shares of common stock. Additionally, outside directors will
receive an option to purchase 5,000 shares of common stock in each July
beginning July 1999. Outside directors who join the board after January 1, 1999
will receive an option on the date they join the board to purchase 10,000
shares.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Robert J. Palmisano was elected as our Chief Executive Officer and a
director on April 15, 1997. Mr. Palmisano's employment arrangement with us
provides that he will receive a base salary of $300,000 per year and will be
eligible for discretionary bonuses, based on criteria established from time to
time. In addition, Mr. Palmisano has been granted options to purchase 300,000
shares of our common stock pursuant to our 1997 Stock Option Plan, at an option
price of $5.63 per share. In the event Mr. Palmisano's employment is terminated
without cause, Mr. Palmisano will be entitled to severance payments equal to one
year's base compensation. In the event Mr. Palmisano's employment terminates
within twelve months of a change in control of Summit, Mr. Palmisano's severance
payments will be equal to two years' base compensation.
Randy W. Frey was elected as our Executive Vice President and a director
in April 1999. Mr. Frey's employment arrangement with us provides that he will
receive a base salary of $212,000 per year and will be eligible for
discretionary bonuses based on criteria established from time to time. In
addition, Mr. Frey has been granted options to purchase 200,000 shares of our
common stock pursuant to our 1997 Stock Option Plan, at an option price of
$5.625 per share. In the event Mr. Frey's employment is terminated without
cause, he will be entitled to severance payments equal to one year's base
48
<PAGE> 52
compensation. In the event Mr. Frey's employment terminates within twelve months
of a change in control of Summit, his severance payments will be equal to two
years' base compensation.
All of our executive officers, including Mr. Palmisano and Mr. Frey, are
employees-at-will.
Our board of directors has approved severance agreements for our officers
and director-level employees. These severance arrangements become available only
in the event of a change of control of Summit and entitle covered employees to
continuation of salary, standard bonuses and benefits in the event they are
terminated without cause after a change of control or terminate their employment
for good reason after a change of control. The severance arrangements would not
apply to a termination for cause after a change of control. The arrangements
approved by the board provide for salary continuation for two years for each of
the Chief Executive Officer, the President and all Executive Vice Presidents,
one year for all other Vice Presidents and six months for director-level
employees.
49
<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth information about the beneficial ownership
of our outstanding common stock on June 30, 1999, (1) by each person who is
known by us to own beneficially more than 5% of our common stock, (2) by each of
our directors, (3) by each of the Named Executive Officers and (4) by all of our
directors and executive officers as a group. We believe that the persons named
in the table have sole voting and investment power with respect to the shares of
common stock set forth opposite their names. The address of each of our
executive officers and directors is c/o Summit Technology, Inc., 21 Hickory
Drive, Waltham, Massachusetts 02451.
In accordance with SEC rules, beneficial ownership includes any shares as
to which the individual has sole or shared voting power or investment power and
any shares as to which the individual has the right to acquire beneficial
ownership within 60 days after June 30, 1999 through the exercise of any stock
option or other right. Percentage of beneficial ownership is based on 42,555,015
shares of common stock outstanding as of June 30, 1999 and 46,555,015 shares of
common stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------
NUMBER PERCENTAGE
---------------------- --------------------
RIGHT TO BEFORE AFTER
NAME OWNED ACQUIRE OFFERING OFFERING
- ---- --------- -------- -------- --------
<S> <C> <C> <C> <C>
C. Glen Bradley..................................... 1,365,877(1) 10,000 3.23% 2.95%
Randy W. Frey....................................... 577,012 17,787 1.40% 1.28%
Menderes Akdag...................................... 17,885 5,000 * *
John A. Norris...................................... 6,808 41,834 * *
Richard M. Traskos.................................. 5,279 41,834 * *
Robert J. Kelly..................................... 3,000 33,334 * *
Jeffrey A. Bernfield................................ 2,700 53,501 * *
Richard F. Miller................................... 1,600 33,334 * *
Peter E. Litman..................................... 1,550 146,374 * *
Robert J. Palmisano................................. 1,000 200,000 * *
D. Verne Sharma..................................... 800 100,000 * *
All executive officers and directors as a group (18
persons).......................................... 2,029,985 820,147 6.57% 6.02%
</TABLE>
- -------------------------
* Less than 1%.
(1) The shares listed as owned are owned by CIBA Vision Corporation of which Dr.
Bradley is the president and chief executive officer. Dr. Bradley disclaims
beneficial ownership of these shares.
50
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
U.S. Bancorp Piper Jaffray Inc. and Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, have severally agreed to purchase from us the following
respective number of shares of our common stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
U.S. Bancorp Piper Jaffray Inc. ............................
Dain Rauscher Wessels.......................................
---------
Total................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to conditions that we must satisfy, including the
receipt of certificates, opinions and letters from us, our counsel and our
independent auditors. The nature of the underwriters' obligation is such that
they are committed to purchase all shares of common stock offered in this
prospectus if any of the shares are purchased.
The underwriters propose to offer the shares of our common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to dealers at such price less a concession not in excess of $
per share. The underwriters may allow and such dealers may reallow a concession
not in excess of $ per share to other dealers. After the public offering of
the shares, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to 600,000 additional
shares of our common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares said underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of common stock offered in this
prospectus.
The following table summarizes the compensation that we will pay to the
underwriters in connection with this offering:
<TABLE>
<CAPTION>
TOTAL
----------------------
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
-------- --------- ---------
<S> <C> <C> <C>
Underwriting discounts paid by us...........................
</TABLE>
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We have agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect thereof.
51
<PAGE> 55
Our executive officers and directors, and CIBA Vision, have agreed that,
with certain exceptions, they will not, directly or indirectly, without the
prior written consent of Hambrecht & Quist LLC, offer, sell, or otherwise
dispose of any shares of our common stock, options or warrants to acquire shares
of common stock or securities exchangeable for or convertible into shares of
common stock owned by them during the 90-day period following the date of this
prospectus. Hambrecht & Quist LLC has agreed that up to 130,000 shares owned by
executive officers and directors will not be subject to these lock-up
arrangements and that these lock-up arrangements will not apply to any executive
officer after cessation of his or her employment. We have agreed that we will
not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock during the 90-day period following the date of this prospectus,
except that we may issue shares upon the exercise of options granted prior to
the date hereof and may grant additional options under our stock option plan,
provided that, without the prior written consent of Hambrecht & Quist LLC, such
additional options shall not be exercisable during such period.
In general, the rules of the Securities and Exchange Commission will
prohibit the underwriters from making a market in our common stock during the
"cooling off" period immediately preceding the commencement of sales in the
offering. The Commission has, however, adopted exemptions from these rules that
permit passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in our common stock during the cooling off period.
Certain persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
our common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
Hambrecht & Quist LLC served as our financial advisor in connection with
our acquisition of Autonomous. We paid a fee of $1.8 million to Hambrecht &
Quist LLC for those services. U.S. Bancorp Piper Jaffray Inc. has from time to
time provided us with investment banking services. During 1997 and 1998, we paid
aggregate fees of $1.4 million to U.S. Bancorp Piper Jaffray Inc. for those
services.
U.S. Bancorp Piper Jaffray Inc., one of the representatives of the
underwriters, also was a representative of the underwriters of our common stock
offering in October 1995. It is a defendant in a shareholder action commenced in
the District of Massachusetts against us, our directors, certain of our officers
and the four representatives of the underwriters of that offering. The action
claims violations of Sections 11, 12(2) and 15 of the Securities Act arising out
of alleged material misstatements of fact in the registration statement and
prospectus for that offering. See "Business -- Legal Proceedings -- Shareholder
Litigation." Under the underwriting agreement for the October 1995 offering, we
are indemnifying U.S. Bancorp Piper Jaffray Inc. and the other underwriters
against liabilities, including liabilities under the Securities Act.
52
<PAGE> 56
VALIDITY OF COMMON STOCK
The validity of the shares of common stock being offered is being passed
upon for us by Ropes & Gray, Boston, Massachusetts. Legal matters will be passed
upon for the underwriters by Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and the financial statement
schedule as of December 31, 1998 and for the year then ended included and
incorporated by reference in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports (which reports
express an unqualified opinion and include an explanatory paragraph referring to
a change in accounting principles described in Note 2 to the consolidated
financial statements) which are included and incorporated by reference herein,
and have been so included and incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and the financial statement
schedule of Summit Technology, Inc. as of December 31, 1997, and for each of the
years in the two-year period ended December 31, 1997, have been included and
incorporated by reference herein in reliance upon the report of KPMG LLP,
independent certified public accountants, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Autonomous Technologies
Corporation and subsidiary as of December 31, 1998, and for the year then ended
and for the period from July 23, 1985 (date of inception) to December 31, 1998,
incorporated by reference in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report (which report
expresses an unqualified opinion and includes an explanatory paragraph which
indicates that there are matters that raise substantial doubt about Autonomous'
ability as a going concern) which is incorporated by reference herein, and is so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing. Autonomous Technologies Corporation's
financial statements for the cumulative period from inception (July 23, 1985) to
December 31, 1997 were audited by other auditors whose report included an
explanatory paragraph with respect to the uncertainty regarding Autonomous
Technology Corporation's ability to continue as a going concern. The other
auditors' report has been furnished to Deloitte & Touche LLP, and the Deloitte &
Touche LLP opinion, insofar as it relates to the amounts included for such prior
period, is based solely on the report of such other auditors.
The financial statements of Autonomous as of December 31, 1997, and for
each of the two years in the period ended December 31, 1997, and for the
cumulative period from inception (July 23, 1985) to December 31, 1997,
incorporated by reference in this prospectus have been audited by Arthur
Andersen LLP, independent certified public accountants, as stated in their
report which is incorporated by reference herein, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing. Reference is made to such report, which includes an
explanatory paragraph with respect to the uncertainty regarding Autonomous'
ability to continue as a going concern as discussed in Note 1 to the financial
statements.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information that we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our public
filings are also available to the public from commercial document retrieval
services and at the SEC's world wide web
53
<PAGE> 57
site at "http://www.sec.gov." You may also inspect reports, proxy statements and
other information about us at the offices of the Nasdaq National Market, 1735 K
Street, N.W., Washington, D.C. 20006.
We have filed a registration statement to register with the SEC the
shares of our common stock that are being offered. This prospectus is a part of
the registration statement and, as the SEC rules permit, does not contain all
the information that stockholders can find in the registration statement or the
exhibits to the registration statement.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document we have filed with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information contained directly in the prospectus.
This prospectus incorporates by reference the documents set forth below that
have previously been filed with the SEC. These documents contain important
information about us and our financial condition.
<TABLE>
<CAPTION>
OUR SEC FILINGS PERIOD
- --------------- ------
<S> <C>
Annual Reports on Form 10-K and Year ended December 31, 1998 and December 31, 1997
Form 10-K/A
Quarterly Report on Form 10-Q For the quarter ended March 31, 1999
Current Reports on Form 8-K and Filed on May 4, 1999, April 28, 1999, March 23, 1999,
8-K/A January 14, 1999 and July 19, 1999
Registration Statements on Form 8-A Filed May 16, 1998, setting forth a description of our
common stock (including any amendments or reports filed for
the purpose of updating such description), and filed April
3, 1990, describing our common stock purchase rights
(including any amendments or reports filed for the purpose
of updating such description)
</TABLE>
We incorporate by reference in this prospectus additional documents that
we may file with the SEC between the date the registration statement was
initially filed and the date of termination of the offering. These include
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as proxy statements.
You can obtain any of the documents incorporated by reference through us,
the SEC or the SEC's world wide web site described above. Documents that we
incorporate by reference are available without charge, excluding all exhibits
unless specifically incorporated by reference as an exhibit to this prospectus.
You may obtain documents incorporated by reference in this prospectus by
requesting them in writing or by telephone at the following address:
SUMMIT TECHNOLOGY, INC.
21 Hickory Drive
Waltham, Massachusetts 02451
Attention: Kate Sturgis Burnham
(781) 890-1234
54
<PAGE> 58
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTHS ENDED MARCH 31, 1999
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Comprehensive Income (Loss)...... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1998
Independent Auditors' Reports............................... F-13
Consolidated Balance Sheets................................. F-15
Consolidated Statements of Operations....................... F-16
Consolidated Statements of Comprehensive Income (Loss)...... F-17
Consolidated Statements of Stockholders' Equity............. F-18
Consolidated Statements of Cash Flows....................... F-19
Notes to Consolidated Financial Statements.................. F-20
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
Balance Sheet as of March 31, 1999.......................... F-44
Statement of Operations for the three months ended March 31,
1999...................................................... F-45
Statement of Operations for the year ended December 31,
1998...................................................... F-46
Notes to Pro Forma Combined Financial Statements............ F-47
</TABLE>
F-1
<PAGE> 59
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 40,113 $ 31,314
Short-term investments.................................... 30,474 33,295
Receivables, net of allowances............................ 13,127 12,764
Inventories............................................... 15,644 17,403
Other current assets...................................... 6,555 5,965
-------- --------
Total current assets.................................... 105,913 100,741
Long-term investments....................................... 40,025 25,253
Property and equipment, net................................. 8,574 8,802
Patents and other intangibles, net.......................... 7,485 7,497
Other assets................................................ 2,823 2,632
-------- --------
TOTAL ASSETS............................................ $164,820 $144,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,466 $ 4,132
Accrued expenses.......................................... 6,097 5,081
Current maturities of long-term debt...................... 5,173 6,431
Deferred revenue.......................................... 5,529 6,144
-------- --------
Total current liabilities............................... 20,265 21,788
Deferred revenue -- noncurrent.............................. 4,004 3,653
Long-term debt, less current maturities..................... 111 150
-------- --------
TOTAL LIABILITIES....................................... 24,380 25,591
======== ========
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000
shares; none issued..................................... -- --
Common stock, $.01 par value. Authorized 60,000,000
shares; issued 31,352,641 shares in 1999 and 31,322,880
shares in 1998; outstanding 31,187,926 shares in 1999
and 31,153,765 shares in 1998........................... 314 314
Additional paid-in capital................................ 149,534 149,482
Accumulated deficit....................................... (17,833) (20,219)
Accumulated other comprehensive income (loss)............. 9,233 (9,411)
Treasury stock, at cost, 164,715 shares in 1999 and
169,115 shares in 1998.................................. (808) (832)
-------- --------
Total stockholders' equity.............................. 140,440 119,334
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $164,820 $144,925
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-2
<PAGE> 60
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1999 1998
------- -------------
(AS RESTATED,
NOTE 6)
<S> <C> <C>
Revenues:
Systems................................................... $ 3,335 $ 3,288
License fees, service and other........................... 10,185 6,835
Contact lens and related products......................... 12,164 11,917
------- --------
Total revenues.............................................. 25,684 22,040
Cost of revenues:
Systems................................................... 3,300 2,865
License fees, service and other........................... 2,717 2,794
Contact lens and related products......................... 7,361 7,649
Total cost of revenues...................................... 13,378 13,308
------- --------
Gross profit................................................ 12,306 8,732
------- --------
Operating expenses:
Selling, general and administrative....................... 8,625 7,175
Research, development and regulatory...................... 2,086 1,838
------- --------
Total operating expenses................................ 10,711 9,013
------- --------
Operating income (loss)..................................... 1,595 (281)
Interest income............................................. 1,086 928
Interest expense............................................ (114) (240)
Other income (expense)...................................... (116) (6)
------- --------
Income before provision for income taxes.................... 2,451 401
Provision for income taxes.................................. 65 24
------- --------
Income before cumulative effect of accounting principle
change.................................................... 2,386 377
Cumulative effect of accounting principle change, net of
tax....................................................... -- (10,103)
------- --------
Net income (loss)......................................... $ 2,386 $ (9,726)
======= ========
Basic and diluted earnings per share:
Income before cumulative effect of accounting principle
change.................................................. $ 0.08 $ 0.01
Cumulative effect of accounting principle change, net of
tax....................................................... -- (0.32)
------- --------
Net income (loss)......................................... $ 0.08 $ (0.31)
------- --------
Weighted average number of common shares:
Basic..................................................... 31,165 31,082
Effect of dilutive options outstanding.................... 293 --
------- --------
Diluted................................................... 31,458 31,082
======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-3
<PAGE> 61
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1999 1998
------- -------------
(AS RESTATED,
NOTE 6)
<S> <C> <C>
Net income (loss)........................................... $ 2,386 $(9,726)
Net unrealized gain on investments, net of tax.............. 18,644 4,702
------- -------
Comprehensive income (loss)................................. $21,030 $(5,024)
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-4
<PAGE> 62
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1999 1998
------- -------------
(AS RESTATED,
NOTE 6)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 2,386 $ (9,726)
Cumulative effect of accounting principle change............ -- 10,103
Other non-cash items........................................ 24 --
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization............................. 1,126 837
Provision for losses on accounts receivables.............. 13 55
Changes in operating assets and liabilities:
Receivables............................................. (376) (2,113)
Inventories............................................. 1,759 745
Other current assets.................................... (280) (550)
Accounts payable........................................ (666) (1,256)
Accrued expenses........................................ 1,016 (125)
Deferred revenue........................................ (264) (670)
------- --------
Net cash provided (used) by operating activities........ 4,738 (2,700)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments......................... (754) (15,399)
Purchases of long-term investments.......................... (1,797) (9,295)
Maturities of short-term investments........................ 3,575 12,233
Maturities of long-term investments......................... 5,669 1,403
Sales of short-term investments............................. -- 983
Additions to property and equipment......................... (583) (943)
Purchase of intangibles..................................... (303) --
Decrease in restricted cash................................. -- 1,264
Loan to Autonomous and deferred acquisition costs........... (352) --
Note receivable and other................................... (149) --
------- --------
Net cash provided (used) by investing activities........ 5,306 (9,754)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt................................ (1,250) (2,500)
Payments of capital lease obligations....................... (47) (38)
Proceeds from exercise of stock options..................... 52 --
Proceeds from other shares issued........................... -- 3
Purchases of treasury stock................................. -- (1,360)
------- --------
Net cash used by financing activities................... (1,245) (3,895)
------- --------
Increase (decrease) in cash and cash equivalents............ 8,799 (16,349)
Cash and cash equivalents at beginning of period............ 31,314 33,720
------- --------
Cash and cash equivalents at end of period.................. $40,113 $ 17,371
======= ========
Supplemental cash flow information:
Interest paid............................................. $ 96 $ 336
Income taxes paid......................................... $ 35 $ 24
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-5
<PAGE> 63
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. NATURE OF BUSINESS
The operations of Summit Technology, Inc. and subsidiaries (the
"Company") presently consist of two operating segments: (i) laser vision
correction which includes manufacturing, selling and servicing laser systems and
related products to correct vision disorders and collecting per procedure
license fees from users of its systems and (ii) contact lenses and related
products which are sold via mail order through its wholly-owned subsidiary, Lens
Express, Inc. ("Lens").
On April 29, 1999, the Company completed its acquisition of Orlando,
FL-based Autonomous Technologies Corporation ("Autonomous") for approximately
11.2 million shares of the Company's common stock and $46.8 million in cash. The
Company had entered into a definitive merger agreement with Autonomous to
acquire all of Autonomous' outstanding shares in October 1998. As part of the
agreement, the Company provided Autonomous an $8.0 million revolving line of
credit under which Autonomous could borrow up to $1.5 million in any calendar
month. One half of the amount outstanding under the revolver on the closing date
of the transaction reduced the cash consideration paid by the Company. As of
March 31, 1999, other current assets include $4,184 of costs related to this
acquisition, of which $3,000 represents borrowings by Autonomous under the
revolver and $1,184 represents deferred costs incurred in connection with this
acquisition.
The Company is continuing to evaluate its operations and strategies,
which may result in the acquisition by the Company of one or more additional
businesses, or additional dispositions of all or part of one or more of the
Company's businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, these condensed consolidated financial statements contain all
adjustments (consisting of only normal, recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations,
comprehensive income (loss) and cash flows of the Company for the interim
periods. The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the full year.
Earnings Per Share: Basic earnings per share amounts are based on the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share amounts include the effect of all potential common shares, if
dilutive, that were outstanding during the period.
Reclassifications: Certain prior period information has been
reclassified to conform with current period presentation of data.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and subassemblies............................. $ 5,634 $ 5,599
Work in process............................................. 1,239 1,244
Finished goods.............................................. 8,771 10,560
------- -------
Total................................................... $15,644 $17,403
======= =======
</TABLE>
F-6
<PAGE> 64
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CONTINGENCIES
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.
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 Dulaney action was subsequently settled.
The defendant in the Dishler action has asserted counterclaims seeking
declarations that the patents in suit are invalid and unenforceable and has also
raised antitrust counterclaims.
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, among other 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. 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, among other
compensatory damages on the fraud claim against the Company of at least
F-7
<PAGE> 65
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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 April 29, 1999, Antoine L. Garabet, M.D., Inc. and
Abraham V. Shammas, M.D., Inc., both doing business as the Laser Eye Center,
filed suit in the United States District Court for the Central District of
California against the Company and Autonomous Technologies Corporation. The suit
alleges violations of Section 7 of the Clayton Act, 15 U.S.C. ss. 18, Section 1
of the Sherman Act, and California unfair competition law, among other things,
in connection with the Company's acquisition of Autonomous. The complaint seeks,
among other things, unspecified treble damages, a permanent injunction barring
consummation of the Company's acquisition of Autonomous, divestiture in the
event that the acquisition is consummated, restitutionary relief, including
disgorgement of alleged unlawful profits and the imposition of a constructive
trust over alleged ill gotten gains, and attorneys' fees and costs. Plaintiffs
also have threatened to seek a temporary restraining order, preliminary
injunction, and other unspecified preliminary injunctive relief directed at the
acquisition.
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.
Carolina Eye Associates, P.A. and Carolina-South Eye Associates filed
suit against VISX and the Company in the U.S. District Court for the District of
New Jersey on February 4, 1999. 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
F-8
<PAGE> 66
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subsidiary or affiliate thereof, at any time after September, 1995. The
complaint alleges, among other things, price-fixing in violation of Section 1 of
the Sherman Act and seeks, among other things, compensatory damages of at least
$100,000 plus $8,300 per month from the filing of the complaint until the date
of judgment, trebling of those damages, attorneys' fees, costs, and declaratory
and injunctive relief. The Judicial Panel on Multidistrict Litigation has
transferred this case to Federal District Court in Arizona.
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.
The parties have stipulated to the conditional certification of a class of
natural persons in California, Alabama, Arizona, the District of Columbia,
Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico, New York,
North Carolina, North Dakota, South Dakota, Tennessee, West Virginia, and
Wisconsin who have undergone ophthalmic refractive surgery with an excimer laser
manufactured by the Company or VISX.
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.
F-9
<PAGE> 67
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Plaintiff has filed a motion
seeking class certification. In January, 1999, Karen Frankson, Virginia Harmes,
and Beth Luetschwager, three individuals who allegedly have had laser vision
correction surgery performed, filed a similar purported class action in
Wisconsin state court. Defendants removed this action to Federal District Court
in Wisconsin, and it has been transferred to Federal District Court in Arizona.
In May, 1999, Linda Brisson, an individual who allegedly has had laser
vision correction surgery performed, commenced an action in Minnesota state
court against the Company, VISX, Pillar Point Partners, and related defendants.
The case purports to be a class action on behalf of all Minnesota purchasers of
refractive laser surgery procedures. The complaint alleges, among other things,
violations of Minnesota antitrust law. The complaint seeks, among other things,
compensatory damages alleged to be at least in the millions of dollars, trebling
of those damages, attorneys' fees and costs, and injunctive and other relief.
Also in May, 1999, John Castino, an individual who allegedly has had
laser vision correction surgery performed, commenced an action in Minnesota
state court against the Company and VISX. The case purports to be a class action
under various state antitrust laws on behalf of a purported class of all
residents of Alabama, the District of Columbia, Hawaii, Kansas, Maine, Michigan,
Minnesota, Mississippi, New Mexico, North Carolina, North Dakota, South Dakota,
Tennessee, and Wisconsin who have paid for laser vision correction surgery. The
complaint seeks, among other things, unspecified actual and multiple damages,
attorneys' fees and costs, and injunctive and other 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 the Company's U.S. patents and seeks
damages and injunctive relief. On January 29, 1999, a district court in Tokyo,
Japan ruled against the Company in a patent infringement lawsuit which the
Company initiated against Nidek in 1996. The Japanese lawsuit involved the
Japanese counterpart of one of the two U.S. patents which the Company has
alleged Nidek infringes in the U.S. lawsuit. The Company intends to appeal the
Tokyo district court decision.
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.
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
F-10
<PAGE> 68
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
5. BUSINESS SEGMENTS
The Company is internally organized and operates in two operating
segments: laser vision correction and contact lens and related products. The
Company's laser vision correction business consists of manufacturing, selling
and servicing laser systems and related products to correct vision disorders and
collecting per procedure license fees from users of its systems. The Company's
mail order contact lens business operates under its wholly-owned subsidiary,
Lens. Lens is primarily a retailer and wholesaler of contact lens and related
products.
The category "Other" includes the Company's investments, interest income,
interest expense and other non-operating income (expense).
F-11
<PAGE> 69
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
LASER VISION CONTACT LENS AND
CORRECTION RELATED PRODUCTS OTHER TOTAL
------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Three Months Ended March 31, 1999................ $13,520 $12,164 $ -- $ 25,684
Three Months Ended March 31, 1998 (as restated,
Note 6)........................................ 10,123 11,917 -- 22,040
Income (loss) from continuing operations before
provision for income taxes:
Three Months Ended March 31, 1999........... $ 678 $ 917 $ 856 $ 2,451
Three Months Ended March 31, 1998 (as
restated, Note 6)......................... (1,583) 1,302 682 401
Total assets:
March 31, 1999................................... $48,831 $11,280 $104,709 $164,820
December 31, 1998................................ 47,744 10,048 87,133 144,925
</TABLE>
6. RESTATEMENT
During the fourth quarter of 1998, the Company changed its method of
accounting for membership fee revenues which were previously recognized when
received. Under the new accounting method, the Company recognizes membership fee
revenues ratably over the term of the membership, which is one to five years.
Adoption of the new method resulted in a one-time charge of $10,103, or $.32 per
basic and diluted share, representing the cumulative effect of adopting the new
accounting principle as of January 1, 1998. The Company has restated the first
three quarters of 1998 in accordance with SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements".
F-12
<PAGE> 70
INDEPENDENT AUDITOR'S REPORT
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. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements.
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.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for membership fee revenues in 1998.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 17, 1999
F-13
<PAGE> 71
INDEPENDENT AUDITOR'S 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 LLP
KPMG LLP
Boston, Massachusetts
March 6, 1998, except as to Note 11, 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-14
<PAGE> 72
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
-------- --------
<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 $1,399 in 1998 and $758
in 1997................................................. 12,764 8,896
Inventories............................................... 17,403 14,494
Other current assets...................................... 5,965 2,046
Restricted cash........................................... -- 1,264
-------- --------
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
-------- --------
TOTAL ASSETS............................................ $144,925 $115,103
======== ========
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 in 1997.......................................... (832) (160)
-------- --------
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-15
<PAGE> 73
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
-------- ------- --------
<S> <C> <C> <C>
Revenues:
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-16
<PAGE> 74
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-17
<PAGE> 75
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 TREASURY STOCK TOTAL
------------------ PAID-IN ACCUMULATED COMPREHENSIVE ----------------- STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT INCOME (LOSS) SHARES AT COST EQUITY
------ --------- ---------- ----------- ------------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996.... 30,935 $309 $170,392 $(32,330) $ -- (5) $ (132) $138,239
Exercise of stock options..... 184 2 1,396 -- -- (1) (28) 1,370
Other shares issued........... 9 1 94 -- -- -- -- 95
Shares canceled............... (103) (1) (899) -- -- -- -- (900)
Net loss...................... -- -- -- (36,857) -- -- -- (36,857)
------ ---- -------- -------- -------- ---- -------- --------
BALANCE AT DECEMBER 31,
1996........................ 31,025 311 170,983 (69,187) -- (6) (160) 101,947
Exercise of stock options..... 40 -- 214 -- -- -- -- 214
Other shares issued........... 235 2 335 -- -- -- -- 337
Dividend...................... -- -- (23,625) -- -- -- -- (23,625)
Net unrealized loss on
investment.................. -- -- -- -- (11,284) -- -- (11,284)
Net income.................... -- -- -- 21,398 -- -- -- 21,398
------ ---- -------- -------- -------- ---- -------- --------
BALANCE AT DECEMBER 31,
1997........................ 31,300 313 147,907 (47,789) (11,284) (6) (160) 88,987
Exercise of stock options..... 7 -- 37 -- -- -- -- 37
Other shares issued........... 16 1 72 -- -- -- -- 73
Net unrealized gain on
investment.................. -- -- -- -- 1,873 -- -- 1,873
Purchases of treasury stock... -- -- -- -- -- (381) (1,855) (1,855)
Effect of adjustment to Lens
acquisition exchange
ratio....................... -- -- (1,351) -- -- 218 1,183 (168)
Tax benefit related to stock
options..................... -- -- 2,817 -- -- -- -- 2,817
Net income.................... -- -- -- 27,570 -- -- -- 27,570
------ ---- -------- -------- -------- ---- -------- --------
BALANCE AT DECEMBER 31,
1998........................ 31,323 $314 $149,482 $(20,219) $ (9,411) (169) $ (832) $119,334
====== ==== ======== ======== ======== ==== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 76
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
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-19
<PAGE> 77
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 April 29, 1999, the Company completed its acquisition of Orlando,
FL-based Autonomous Technologies Corporation ("Autonomous") for approximately
11.2 million shares of the Company's common stock and $46.8 million in cash. The
Company had entered into a definitive merger agreement with Autonomous to
acquire all of Autonomous' outstanding shares in October 1998. As part of the
agreement, the Company provided Autonomous an $8.0 million revolving line of
credit under which Autonomous could borrow up to $1.5 million in any calendar
month. One half of the amount outstanding under the revolver on the closing date
of the transaction reduced the cash consideration paid by the Company. As of
March 31, 1999, other current assets include $4.2 million of costs related to
this acquisition, of which $3.0 million represents borrowings by Autonomous
under the revolver and $1.2 million represents deferred costs incurred in
connection with this acquisition.
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).
F-20
<PAGE> 78
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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:
<TABLE>
<S> <C>
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
</TABLE>
F-21
<PAGE> 79
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-22
<PAGE> 80
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
F-23
<PAGE> 81
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
<CAPTION>
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>
<CAPTION>
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-24
<PAGE> 82
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
F-25
<PAGE> 83
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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.
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 OPERATING
TERM LOAN CAPITAL LEASES DEBT 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>
F-26
<PAGE> 84
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 WEIGHTED-AVERAGE
OF 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
F-27
<PAGE> 85
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-28
<PAGE> 86
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-29
<PAGE> 87
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-30
<PAGE> 88
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-31
<PAGE> 89
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the Company's U.S. patents and seeks
damages and injunctive relief. On January 29, 1999, a district court in Tokyo,
Japan ruled against the Company in a patent infringement lawsuit which the
Company initiated against Nidek in 1996. The Japanese lawsuit involved the
Japanese counterpart of one of the two U.S. patents which the Company has
alleged Nidek infringes in the U.S. lawsuit. The Company intends to appeal the
Tokyo district court decision.
F-32
<PAGE> 90
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July, 1997, John Taboada filed a complaint in the United States
District Court for the Western District of Texas against Stephen L. Trokel,
VISX, VISX Partner, Inc., Summit Partner, Inc., and Pillar Point Partners. In
December, 1997, Taboada amended his complaint to include the Company as an
additional defendant. Taboada seeks a declaration that he is either the sole
inventor or a joint inventor of U.S. Patent No. 5,108,388 (the " '388 Patent")
which names Dr. Trokel as the inventor. The '388 Patent has been assigned to
VISX and is licensed to Pillar Point Partners. Taboada also seeks to recover
royalties paid to one or more of the defendants for licenses granted under '388
Patent, charges defendants with infringement of the '388 Patent, alleges Lanham
Act claims, and seeks monetary damages and injunctive relief. 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
F-33
<PAGE> 91
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-34
<PAGE> 92
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-35
<PAGE> 93
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
F-36
<PAGE> 94
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-37
<PAGE> 95
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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).
F-38
<PAGE> 96
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONTACT LENS
LASER VISION AND RELATED
CORRECTION 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 provisions 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 provisions 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-39
<PAGE> 97
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 AS
RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
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 30,054 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
======== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
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)
</TABLE>
F-40
<PAGE> 98
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
QUARTER
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations................ $ (0.04) $ 0.08 $ -- $ (0.01)
Gain on sale of discounted operations................... -- -- 0.76 --
Loss from discontinued operations....................... -- -- (0.11) --
Net income (loss)....................................... (0.04) 0.08 0.65 (0.01)
======= ======= ======= =======
</TABLE>
- -------------------------
(1) Diluted -- $0.97
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 10-K/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 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 9,000,000 shares
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-41
<PAGE> 99
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The pro forma combined balance sheet assumes that the Autonomous
acquisition took place on March 31, 1999 and combines the balance sheets of the
two companies on that date. The pro forma combined statements of operations
assume that the acquisition took place on January 1, 1998 and combines Summit's
and Autonomous' results of operations for the year ended December 31, 1998 and
for the three-month period ended March 31, 1999.
PRO FORMA PRESENTATIONS WERE PREPARED USING ACTUAL DATA AS OF THE CLOSING
DATE OF THE MERGER, APRIL 29, 1999. THE EXCHANGE RATIO WAS 0.72719040 SHARES OF
SUMMIT COMMON STOCK AND $3.04285962 IN CASH FOR EACH SHARE OF AUTONOMOUS COMMON
STOCK. THE ISSUANCE OF 11,190,306 SHARES OF SUMMIT COMMON STOCK WAS VALUED AT
$4.2917 PER SHARE, WHICH REPRESENTS THE PRICE AT WHICH THE TOTAL SHARE AND CASH
CONSIDERATION PAID BY US BECOME SUBSTANTIALLY FIXED.
We will account for the acquisition of Autonomous under the purchase
method of accounting and will allocate the consideration we paid in the
transaction to the assets we acquired and the liabilities we assumed based on
their estimated fair values. The pro forma adjustments are preliminary and are
based on management's estimates of the value of Autonomous' tangible and
intangible assets. In addition, our management is assessing and formulating our
integration plans. The finalization of these plans could result in a material
change to the estimates used in the preparation of the pro forma financial data.
An independent third-party appraisal company is conducting a valuation of
the intangible assets that we acquired. These intangibles include purchased
technologies, in-process research and development and other intangible assets.
Purchased technologies which primarily consist of Autonomous' LADARVision
technology have been assigned a value of $28.1 million which will be amortized
over 15 years. See "Business" beginning on page 22 for additional information
surrounding the LADARVision system. The fair value of the in-process research
and development which relates to Autonomous' CustomCornea research project is
currently estimated to be $19.8 million and will be recorded as an expense in
the second quarter of 1999.
The valuation of these intangibles was determined using the income
method. Revenue projections were completed through year 2012 and were separately
identified as follows: (i) revenue derived from products relying on current
technology, (ii) revenue derived from products relying on a new in-process
research and development program -- CustomCornea, and (iii) revenue from future
technologies not yet developed. Revenue generated from the CustomCornea product
has similar margin and expense levels as those generated from the LADARVision
product. The projected cash flows were discounted using a 27.5% rate. The fair
value of in-process research and development was determined separately from all
other acquired assets using the percentage of completion method. The percentage
of completion ratio was calculated by dividing total expected expenditures on
CustomCornea through the acquisition closing date by the total estimated
expenditures to achieve technological feasibility. Management is responsible for
the estimate of the value of the in-process research and development.
Under the CustomCornea research project, Autonomous is attempting to
develop a diagnostic device and method that would increase the number of data
elements used in a laser vision correction surgical procedure from three
variables to hundreds of variables with the goal of substantially improving
surgical accuracy and therefore surgical outcomes for patients. To date,
Autonomous' work on CustomCornea has yielded:
- A U.S. patent application for the device and certain methods which have
had claims allowed
- A working prototype of the measurement device itself
- A 100 patient trial using the device's measurement capabilities
- Computer simulations that demonstrate that virtually any eye has
correctable refractive aberrations and a scope and location of those
aberrations
- Development of the software algorithms to translate the data from the
diagnostic into an adjusted laser ablation plan for any given eye
F-42
<PAGE> 100
The remaining significant steps in the CustomCornea project include:
- Making application to the FDA for the approval necessary to begin
clinical surgeries to gather data for later FDA submission for approval
- Conducting surgeries under an approved FDA protocol and subsequently
measuring those patients at several post-operative intervals to measure
efficacy
- Continuing engineering development and testing of the device to
optimize its performance, cost of manufacture, usability, etc.
- Preparing for manufacture of the device
- Receiving FDA approval to market the device in the U.S.
There are a number of factors that may affect the completion and
commercialization of the CustomCornea project. These include:
- Inability to demonstrate that the safety or efficacy of the laser
vision correction surgical outcome is materially improved by the
diagnostic measurement and surgical ablation modifications made
- Inability to receive FDA approval of the device due to poor trial
execution or poor safety or efficacy results
- Inability to develop a device with appropriate physical and usability
characteristics to render it a viable commercial choice for physicians
and optometrists
- Technology obsolescence risk, i.e., the risk that this technology will
be bettered, before it is widely marketed and accepted, by another
technology concept, including non-laser refractive surgical modalities
Based on the finalization of the integration plans and other factors, the
pro forma adjustments may differ materially from those presented in the pro
forma financial information. A change in the pro forma adjustments would result
in a reallocation of the purchase price affecting the value assigned to
purchased in-process technology and long-term assets. The income statement
effect of these changes will depend on the nature and amount of the assets or
liabilities adjusted.
We estimate that acquisition-related fees and expenses, consisting
primarily of transaction costs including fees of investment bankers, attorneys,
the independent appraisal company, accountants, financial printing and other
related charges, will be approximately $3.4 million. The impact of the fees and
expenses has been reflected in the pro forma combined balance sheet and income
statements as an increase in the purchase price of the transaction and is
allocated to the assets acquired and liabilities assumed, based upon their
estimated fair values.
The pro forma financial information does not purport to represent what
the consolidated financial position or results of operations actually would have
been in if the acquisition in fact had occurred on March 31, 1999 or at the
beginning of the period indicated or to project the consolidated financial
position or results of operations as of any future date or any future period. It
should be read in conjunction without historical consolidated financial
statements, including the related notes, and other financial information
included and incorporated by reference into this prospectus. See "Where You Can
Find More Information" on page 53.
The unaudited pro forma financial information does not give effect to any
cost savings and other synergies that may result from the acquisition. In
addition, one-time integration costs that may include severance and related
costs have not been reflected in the pro forma financial information. We are
developing our plans for integration of the business. However, we believes that
the likely maximum amount that will be accrued for such costs will be in the
range of $1.0 million to $1.5 million.
F-43
<PAGE> 101
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET(A)
AS OF MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
SUMMIT AUTONOMOUS ADJUSTMENTS COMBINED
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 40,113 $ 648 $ 1,563(B) $ --
(42,324)(C)
Short-term investments.................................... 30,474 -- (6,742)(C) 23,732
Receivables, net of allowances............................ 13,127 59 -- 13,186
Inventories............................................... 15,644 4,531 (2,800)(D) 17,375
Other current assets...................................... 6,555 439 (1,183)(C) 2,811
-------- -------- --------
(3,000)(F)
---------
Total current assets.................................... 105,913 5,677 (54,486) 57,104
Long-term investments..................................... 40,025 -- -- 40,025
Property and equipment, net............................... 8,574 3,388 -- 11,962
Patents and other intangibles, net........................ 7,485 -- -- 7,485
Other assets.............................................. 2,823 779 -- 3,602
In-process research and development....................... -- -- 19,800(C) --
(19,800)(E)
Purchased technologies.................................... -- -- 28,100(C) 28,100
Goodwill and other intangible asset....................... -- -- 54,715(C) 54,715
-------- -------- -------- --------
Total Assets............................................ $164,820 $ 9,844 $ 28,329 $202,993
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,466 $ 559 $ -- $ 4,025
Accrued expenses.......................................... 6,097 673 -- 6,770
Note payable.............................................. -- 3,000 (3,000)(F) --
Current maturities of long-term debt...................... 5,173 69 -- 5,242
Deferred revenue.......................................... 5,529 276 -- 5,805
Obligation under Strategic Alliance Agreement............. -- 600 (600)(B) --
-------- -------- -------- --------
Total current liabilities............................... 20,265 5,177 (3,600) 21,842
Deferred revenue -- noncurrent.............................. 4,004 4,004
Long-term debt, less current maturities..................... 111 134 -- 245
-------- -------- -------- --------
Total liabilities....................................... 24,380 5,311 (3,600) 26,091
-------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock........................................... -- 3,966 (3,966)(C) --
Common stock.............................................. 314 136 18(B) 426
112(C)
(154)(C)
Additional paid-in capital................................ 149,534 50,881 6,111(B) 208,484
58,950(C)
(56,992)(C)
Accumulated deficit....................................... (17,833) (50,450) 50,450(C) (40,433)
(19,800)(E)
(2,800)(D)
Accumulated other comprehensive income...................... 9,233 -- -- 9,233
Treasury stock, at cost..................................... (808) -- -- (808)
-------- -------- -------- --------
Total stockholders' equity.............................. 140,440 4,533 31,929 176,902
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity.............. $164,820 $ 9,844 $ 28,329 $202,993
======== ======== ======== ========
Common shares outstanding................................... 31,188 13,613 42,378
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-44
<PAGE> 102
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(A)
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
SUMMIT AUTONOMOUS ADJUSTMENTS COMBINED
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Systems....................................... $3,335 $ -- $ -- $ 3,335
License fees, service and other............... 10,185 129 -- 10,314
Contact lens and related products............. 12,164 -- -- 12,164
------- ------- ------- -------
Total revenues................................ 25,684 129 -- 25,813
------- ------- ------- -------
Cost of revenues:
Systems....................................... 3,300 -- -- 3,300
License fees, service and other............... 2,717 905 468(G) 4,090
Contact lens and related products............. 7,361 -- -- 7,361
------- ------- ------- -------
Total cost of revenues........................ 13,378 905 468 14,751
------- ------- ------- -------
Gross profit.................................... 12,306 (776) (468) 11,062
------- ------- ------- -------
Operating expenses:
Selling, general and administrative........... 8,625 1,768 804(G) 11,197
Research, development and regulatory.......... 2,086 1,337 -- 3,423
------- ------- ------- -------
Total operating expenses...................... 10,711 3,105 804 14,620
------- ------- ------- -------
Operating income (loss) from continuing
operations.................................... 1,595 (3,881) (1,272) (3,558)
Interest income................................. 1,086 19 (653)(I) 452
Interest expense................................ (114) (37) (151)
Other expense................................... (116) -- -- (116)
------- ------- ------- -------
Income (loss) from continuing operations before
provision for income taxes.................... 2,451 (3,899) (1,925) (3,373)
Provision for income taxes...................... 65 -- -- 65
------- ------- ------- -------
Income (loss) from continuing operations........ $2,386 $(3,899) $(1,925) $(3,438)
======= ======= ======= =======
Income (loss) per share from continuing
operations -- basic and diluted............... $ 0.08 $ (0.08)
Weighted average number of common shares:
Basic......................................... 31,165 -- 11,190(J) 42,355
Diluted....................................... 31,458 -- 10,897(J) 42,355
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-45
<PAGE> 103
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS(A)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
SUMMIT AUTONOMOUS ADJUSTMENTS COMBINED
------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Systems.................................... $14,105 $ -- $ -- 14,105
License fees, service and other............ 30,782 222 -- 31,004
Contact lens and related products.......... 46,754 -- -- 46,754
------- -------- ------- --------
Total revenues............................. 91,641 222 91,863
------- -------- ------- --------
Cost of revenues:
Systems.................................... 11,333 -- -- 11,333
License fees, service and other............ 12,187 3,393 1,873(G) 17,453
Contact lens and related products.......... 28,800 -- -- 28,800
------- -------- ------- --------
Total cost of revenues..................... 52,320 3,393 1,873 57,586
------- -------- ------- --------
Gross profit................................. 39,321 (3,171) (1,873) 34,277
------- -------- ------- --------
Operating expenses:
Selling, general and administrative........ 30,217 7,176 3,216(G) 40,095
(514)(H)
Research, development and regulatory....... 7,223 6,442 -- 13,665
------- -------- ------- --------
Total operating expenses................... 37,440 13,618 2,702 53,760
------- -------- ------- --------
Operating income (loss) from continuing
operations................................. 1,881 (16,789) (4,575) (19,483)
Litigation settlement, net of related
expenses................................... 34,386 -- 34,386
Interest income.............................. 4,351 191 (2,613)(I) 1,929
Interest expense............................. (780) (45) -- (825)
Other income................................. 1,913 -- -- 1,913
------- -------- ------- --------
Income (loss) from continuing operations
before provision for income taxes.......... 41,751 (16,643) (7,188) 17,920
Provision (benefit) for income taxes......... 5,021 -- (3,662)(K) 1,359
------- -------- ------- --------
Income (loss) from continuing operations..... $36,730 $(16,643) $(3,526) $ 16,561
======= ======== ======= ========
Income per share from continuing operations--
basic and diluted.......................... $ 1.17 $ 0.39
Weighted average number of common shares:
Basic...................................... 31,244 11,190(J) 42,434
Diluted.................................... 31,292 11,650(J) 42,942
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
F-46
<PAGE> 104
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(A) See the introductory paragraphs under "Unaudited Pro Forma Combined
Financial Data."
(B) To record as of March 31, 1999 the actual issuance of 1,775,727 shares of
Autonomous common stock during the period from March 31, 1999 through April
29, 1999, the closing date of the merger. These shares were issued pursuant
to the conversion of Autonomous preferred stock, exercise of options and
warrants and settlement of the obligations under the Strategic Alliance
Agreement.
(C) To record the purchase accounting adjustments (pursuant to Accounting
Principles Board Opinion No. 16) related to the merger of Summit and
Autonomous. The allocation of the purchase price is subject to change based
on final valuation and appraisals and was estimated as follows:
<TABLE>
<S> <C>
TOTAL PURCHASE PRICE
Summit common stock (11,190,306 shares @ $4.2917 per
share)................................................... $ 48,025
Cash paid to Autonomous equity holders..................... 46,826
Estimated merger-related fees and expenses................. 3,423
Fair value of Autonomous options and warrants exchanged for
equivalent Summit stock options and warrants at the
closing of the merger.................................... 11,037
--------
Total purchase price....................................... $109,311
========
ALLOCATION OF PURCHASE PRICE
Conversion of Autonomous preferred stock (see Note B)...... $ 3,966
Exercise of Autonomous options and warrants (see Note B)... 1,563
Settlement of Strategic Alliance Agreement obligation (see
Note B).................................................. 600
Net worth of Autonomous as of March 31, 1999............... 567
In-process research and development........................ 19,800
Purchased technologies..................................... 28,100
Goodwill and other intangible asset........................ 54,715
--------
$109,311
========
</TABLE>
(D) To record the write-down of Summit's inventory for laser systems to its net
realizable value. As a result of the merger with Autonomous, there will be a
reduction in the future requirements of work-in-process inventory and spare
parts inventory. See Note L.
(E) To record the write-off of the in-process research and development upon
consummation of the merger.
(F) To eliminate borrowings by Autonomous from Summit under the revolving credit
line as of March 31, 1999. One half of the amount outstanding under the
revolver on the closing date reduced the cash consideration paid by Summit
to Autonomous equity holders. As of the closing date of the merger, (April
29, 1999) the amount outstanding under the revolver was $2,500.
(G) To record the amortization of goodwill, purchased technologies and other
intangible assets from the allocation of the purchase price. The
amortization of purchased technologies is included in the cost of revenues.
Amortization will be recognized on a straight line basis over the following
number of years:
Goodwill -- 25 years
Purchased technologies -- 15 years
Other intangible assets -- 5 years
F-47
<PAGE> 105
(H) To eliminate legal fees related to Autonomous' litigation against Pillar
Point Partners of which Summit was a partner.
(I) To eliminate interest income earned on cash paid to Autonomous stockholders
and cash paid for estimated merger-related fees offset by interest income
earned on cash received from options and warrants exercised in (B).
(J) To record the effect of Summit common stock distributed to Autonomous
stockholders and, if dilutive, the effect of Autonomous stock options and
warrants exchanged for equivalent Summit stock options and warrants and, if
anti-dilutive, the effect of Summit stock options.
(K) To record the income tax effect of combining Summit's and Autonomous'
results of operations and pro forma adjustments, excluding the impact of
nondeductible amounts.
(L) As required by Article 11 of Regulations S-X under the Securities and
Exchange Act of 1934, the unaudited pro forma condensed combined statement
of operations excludes material nonrecurring charges which result directly
from the merger and which will be recorded within twelve months following
the merger. The following schedule shows the effects of the write-off of the
in-process research and development estimated to be $19,800 (see Note E) and
the write-down of inventory estimated to be $2,800 (See Note D).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Loss from continuing operations............................ $(7,239)
Loss per share from continuing operations -- basic and
diluted.................................................. $ (0.17)
</TABLE>
F-48
<PAGE> 106
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 SHARES
[LOGO]
SUMMIT TECHNOLOGY, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
------------------------
, 1999
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States
to permit a public offering of the common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, other than the underwriting discounts and commissions. All amounts shown
below will be paid by Summit. All amounts shown are estimates except for the
various filing fees.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission............ $ 24,298
Filing Fee -- NASD Regulations Inc.......................... $ 9,240
Listing Fee -- Nasdaq National Market....................... $ 17,500
Blue Sky fees and expenses.................................. $ 5,000
Legal fees and expenses..................................... $125,000
Accounting fees and expenses................................ $ 65,000
Transfer Agent and Registrar fees and expenses.............. $ 2,500
Printing, Engraving and Mailing expenses.................... $100,000
Miscellaneous expenses...................................... $ 26,462
--------
Total.................................................. $375,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In Massachusetts, a corporation's articles of organization may limit the
personal liability of its directors for breaches of their fiduciary duties.
Under the Massachusetts Business Corporation Law, this limitation is generally
unavailable for acts or omissions by a director which (1) were in violation of
such director's duty of loyalty, (2) were in bad faith or which involved
intentional misconduct or a knowing violation of law, or (3) involved a
financial profit or other advantage to which the director was not legally
entitled. Massachusetts law also prohibits the elimination or limitation of
director liability for unauthorized loans to insiders or distributions that
occur when a corporation is, or which renders a corporation, insolvent.
Massachusetts law also generally permits indemnification of directors, officers,
employees and certain others for expenses incurred by them by reason of their
position with the corporation, if such person has acted in good faith and with
the reasonable belief that his or her conduct was in, or not opposed to, the
best interest of the corporation.
Summit's articles allow for limitations on directors' liability as
permitted by Massachusetts law. Summit's by-laws provide that the corporation
shall indemnify against all liabilities and expenses, including reasonable fees
of counsel, any person threatened with or made a party to any action, suit or
other proceeding by reason of the fact that he, she, his or her testator or
intestate, is or was a director, officer, employee or other agent of the
corporation, or is or was a director, officer, employee or other agent of the
corporation who serves or served, at the request of the corporation, as a
director, officer, employee or other agent of another organization or who, at
the request of the corporation, serves or served in any capacity with respect to
an employee benefit plan. However, as to matters disposed of by a compromise
payment, pursuant to a consent decree or otherwise, no reimbursement, either for
said payment or for any other expenses in connection with the matter so disposed
of, shall be provided unless such compromise shall be approved: (1) by a
disinterested majority of the directors then in office; or (2) if a majority of
such directors are interested, by a majority of the disinterested directors then
in office, provided that independent legal counsel has given a written opinion
to the effect that such director or officer does not appear not to have acted in
good faith in the reasonable belief that his action was in the best interests of
the corporation or, to the extent that such matter relates to service, in the
II-1
<PAGE> 108
best interests of the participants of an employee benefit plan; or (3) by the
holders of a majority of the outstanding stock at the time entitled to vote for
directors, not counting as outstanding any stock owned by any interested person.
Notwithstanding the foregoing, no indemnification shall be provided for any
person with respect to any matter as to which such person shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that his or her action was in the best interests of the corporation or of
the participants or beneficiaries of the employee benefit plan.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1 Form of Underwriting Agreement regarding the issuance and
sale of the common stock between Summit Technology, Inc. and
the underwriters.*
4.1 Articles of Organization, as amended, of Summit
(incorporated by reference to Exhibit 3.1 of Summit's Annual
Report on Form 10-K for the year ended December 31, 1992).
4.2 Amendment to the Articles of Organization of Summit dated
September 7, 1994 (incorporated by reference to Exhibit 3.1
of Summit's Annual Report on Form 10-K for the year ended
December 31, 1994).
4.3 Amendment to the Articles of Organization of Summit dated
July 16, 1997 (incorporated by reference to Exhibit 4.3 of
Summit's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on May 6, 1999).
4.4 By-laws, as amended, of Summit (incorporated by reference to
Exhibit 3(b) of Summit's Annual Report on Form 10-K for the
year ended December 31, 1994).
4.5 Amendment to the Articles of Organization of Summit dated
April 29, 1999 (incorporated by reference to Exhibit 3.1 of
Summit's Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 19, 1999).
4.6 Rights Agreement (incorporated by reference to Exhibit 1 to
Summit's Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on April 2, 1990).
5 Opinion of Ropes & Gray regarding the legality of the
securities being registered.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Ropes & Gray (included in Exhibit 5).*
24 Powers of Attorney (included on signature page hereto).
</TABLE>
- -------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for the purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
II-2
<PAGE> 109
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the indemnification provisions described
herein, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant, will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Waltham, The Commonwealth of Massachusetts, on the
16th day of July 1999.
SUMMIT TECHNOLOGY, INC.
By: /s/ Robert J. Palmisano
---------------------------------------
Robert J. Palmisano
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the 16th day of July 1999. Each person whose signature appears
below hereby authorizes Robert J. Palmisano and James A. Lightman or either of
them, singly, with full power of substitution, to execute in the name and on
behalf of such person any amendment (including any post-effective amendment) to
this Registration Statement (or any other registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act) and to file the same, with exhibits thereto, and other documents
in connection therewith, making such changes in this Registration Statement as
the person(s) so acting deems appropriate, and appoints each of such persons,
each with full power of substitution, attorney-in-fact to sign any amendment
(including any post-effective amendment to this Registration Statement (or any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act) and to file the same,
with exhibits thereto, and other documents in connection therewith.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
<C> <S> <C>
/s/ ROBERT J. PALMISANO Chief Executive Officer and July 16, 1999
- --------------------------------------------------- Director (principal executive
Robert J. Palmisano officer)
/s/ ROBERT J. KELLY Executive Vice President, Chief July 16, 1999
- --------------------------------------------------- Financial Officer and Treasurer
Robert J. Kelly (principal accounting and
financial officer)
/s/ RANDY W. FREY Director July 16, 1999
- ---------------------------------------------------
Randy W. Frey
/s/ JEFFREY A. BERNFELD Director July 16, 1999
- ---------------------------------------------------
Jeffrey A. Bernfeld
/s/ C. GLEN BRADLEY Director July 16, 1999
- ---------------------------------------------------
C. Glen Bradley
</TABLE>
II-4
<PAGE> 111
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
<C> <S> <C>
/s/ RICHARD F. MILLER Director July 16, 1999
- ---------------------------------------------------
Richard F. Miller
/s/ JOHN A. NORRIS Director July 16, 1999
- ---------------------------------------------------
John A. Norris
/s/ RICHARD M. TRASKOS Director July 16, 1999
- ---------------------------------------------------
Richard M. Traskos
</TABLE>
II-5
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1 Form of Underwriting Agreement regarding the issuance and
sale of the common stock between Summit Technology, Inc. and
the underwriters.*
4.1 Articles of Organization, as amended, of Summit
(incorporated by reference to Exhibit 3.1 of Summit's Annual
Report on Form 10-K for the year ended December 31, 1992).
4.2 Amendment to the Articles of Organization of Summit dated
September 7, 1994 (incorporated by reference to Exhibit 3.1
of Summit's Annual Report on Form 10-K for the year ended
December 31, 1994).
4.3 Amendment to the Articles of Organization of Summit dated
July 16, 1997 (incorporated by reference to Exhibit 4.3 of
Summit's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on May 6, 1999).
4.4 By-laws, as amended, of Summit (incorporated by reference to
Exhibit 3(b) of Summit's Annual Report on Form 10-K for the
year ended December 31, 1994).
4.5 Amendment to the Articles of Organization of Summit dated
April 29, 1999 (incorporated by reference to Exhibit 3.1 of
Summit's Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 19, 1999).
4.6 Rights Agreement (incorporated by reference to Exhibit 1 to
Summit's Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on April 2, 1990).
5 Opinion of Ropes & Gray regarding the legality of the
securities being registered.*
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Arthur Andersen LLP.
23.5 Consent of Ropes & Gray (included in Exhibit 5).*
24 Powers of Attorney (included on signature page hereto).
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration
Statement of Summit Technology, Inc. (the "Company") on Form S-3 of our reports
dated March 17, 1999 (which express an unqualified opinion and include an
explanatory paragraph relating to a change in accounting principle described in
Note 2 to the consolidated financial statements) appearing in the Annual Report
on Form 10-K of the Company for the year ended December 31, 1998 and in the
Company's Current Report on Form 8-K dated March 23, 1999, and to the use 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 the Prospectus,
which is part of this Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
July 16, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Summit Technology, Inc.
We consent to the use of our reports included and incorporated herein by
reference and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG LLP
Boston, Massachusetts
July 16, 1999
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Summit Technology, Inc. (the "Company") on Form S-3 of our report related to the
consolidated financial statements of Autonomous Technologies Corporation and
subsidiary, dated February 22, 1999, except for Note 13, as to which the date is
March 16, 1999, appearing in the Annual Report on Form 10-K of Autonomous
Technologies Corporation incorporated by reference in the Company's Current
Report on Form 8-K dated July 19, 1999 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
Orlando, Florida
July 19, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference in this registration statement on Form S-3 filed on
or about July 19, 1999, to register 4,000,000 shares of Summit Technology,
Inc.'s common stock, of our report dated June 2, 1998, included in Autonomous
Technologies Corporation's Form 10-K for the year ended December 31, 1998, and
to all references to our firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
July 19, 1999
Orlando, Florida
