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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - ---
EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - --- EXCHANGE ACT OF 1934
For the Year Ended December 31, 1998 Commission File Number: 0-16937
SUMMIT TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2897945
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21 HICKORY DRIVE, WALTHAM, MASSACHUSETTS 02451
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(Address of principal executive officer) (Zip Code)
(781) 890-1234
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock and Common Share Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based on the closing price for the registrant's voting stock on March 19, 1999,
the aggregate market value of such voting stock held by non-affiliates of the
registrant was approximately $173.3 million on said date. The number of shares
of the registrant's Common Stock, $.01 par value, outstanding on March 19, 1999
was 31,153,765.
DOCUMENTS INCORPORATED IN TEXT BY REFERENCE
Certain portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Report.
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PART I
ITEM 1. BUSINESS
GENERAL
The operations of Summit Technology, Inc. and subsidiaries (the "Company")
presently consist of two operating segments: (i) 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.
On October 1, 1998, the Company entered into a definitive merger agreement
with Orlando, FL-based Autonomous Technologies Corporation ("Autonomous") to
acquire all of Autonomous' outstanding shares in exchange for 11.7 million
shares of the Company's common stock and an equal value of cash, not to exceed
$50.0 million. The actual value of the transaction will not be determinable
until closing and is dependent upon numerous factors including, but not limited
to, the market price of the Company's common stock prior to closing and any
outstanding loan balance due from Autonomous. This acquisition is subject to
the approval of the stockholders of the Company and Autonomous and is expected
to close in April 1999.
In October 1998, the Company acquired all rights to the Krumeich-Barraquer
Microkeratome, a high-precision surgical cutting device utilizing disposable,
single-use blades. This device is used by ophthalmologists in corneal surgery.
The Company immediately began marketing the product in international markets and
in December 1998, received 510K clearance from the Food and Drug Administration
("FDA") to begin marketing the product in the United States.
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.
VISION CORRECTION BUSINESS
Overview
The Company develops, manufactures, sells and services ophthalmic laser
systems ("Excimer Systems") and related products designed to correct common
refractive vision disorders such as nearsightedness (myopia), farsightedness
(hyperopia) and astigmatism with a procedure known as Laser Vision Correction.
The Company also collects per procedure license fees from users of its systems.
On October 20, 1995, the Company's excimer system became the first excimer laser
system to be approved by the FDA for commercial sale in the United States to
treat nearsightedness. That approval covered use of the Company's Apex excimer
system ("Apex") to treat nearsightedness between 1.5 and 7.0 diopters with a six
millimeter ablation zone. On February 7, 1997, an advanced model of the
Company's Excimer System, known as the Apex Plus ("Apex Plus"), was approved by
the FDA for the same indications. On March 11, 1998, the FDA approved the Apex
Plus for the treatment of nearsightedness with concomitant astigmatism using the
Company's emphasis(R) laser disc ("Laser Disc"), a single use polymer disc that
the Company has developed. Applications for Premarket Approval ("PMA") of the
Apex Plus to treat farsightedness and higher ranges of nearsightedness ("high
myopia") are presently pending before the FDA. However, the FDA has not yet
approved the Excimer System for farsightedness or high myopia.
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Per Procedure License Fees
The Company derives a substantial portion of its revenue from the per
procedure license fees it collects from users of its Excimer Systems in the U.S.
through technology licensing. Accordingly, a principal element of the Company's
business strategy is to increase the volume of refractive procedures performed
on its U.S. systems through placement of new systems and increasing the volume
of procedures performed on existing systems.
Market
It is estimated that over 140 million people in the U.S. use eyeglasses or
contact lenses to correct common vision disorders. Based on presently existing
treatment modalities (some of which have not yet received FDA approval) and
demographic considerations such as age and median income, the Company estimates
the current potential U.S. market for Laser Vision Correction to be
approximately 30 million people. The Company believes that Laser Vision
Correction performed with the Excimer System will make it possible for many of
these people to eliminate or reduce their reliance on corrective eyewear. The
Company estimates that approximately 20%-25% of the estimated 400,000 laser
vision correction procedures performed in the U.S. in 1998 were performed on
Company Systems.
The principal purchasers of the Company's laser systems have been
ophthalmologists, universities, clinics, hospitals and businesses which have
been created specifically to participate in the Laser Vision Correction market
in the U.S. The Company believes that U.S. ophthalmologists, who number
approximately 13,000, are receptive to Laser Vision Correction as a treatment
for refractive vision disorders.
Products Uses
Ophthalmologists use the Company's Excimer System to treat refractive
vision disorders and corneal pathologies.
Refractive Vision Disorders. Light enters the human eye through the cornea.
In a properly functioning eye, the cornea bends (refracts) incoming light,
causing the light to focus on the retina of the eye. A refractive vision
disorder is the inability of the cornea to refract properly incoming light
resulting in blurred vision. Nearsightedness (myopia), farsightedness
(hyperopia) and astigmatism are the three most common refractive vision
disorders. In a nearsighted eye, light is focused in front of the retina. In a
farsighted eye, light is focused behind the retina. In an astigmatic eye, light
is not focused at any one point. These disorders are commonly treated with
corrective eyewear. The Company's excimer laser systems are used to change the
shape of the cornea in a controlled manner so that light is properly focused on
the retina thereby eliminating or reducing the need for corrective eyewear.
Corneal Pathologies. Corneal pathologies, which include certain diseases,
injuries and conditions of the cornea, can result in impaired vision, discomfort
or blindness. Such pathologies include corneal opacities, irregular corneal
surfaces and abnormal tissue growths on the cornea.
Products
Excimer System. The Company's principal laser systems presently in use are
the Apex and Apex Plus Excimer Systems. The Company no longer manufactures the
Apex, which was replaced by the Apex Plus. Existing Apex Systems can, however,
be upgraded to Apex Plus specifications. The FDA has approved both the Apex and
Apex Plus for sale in the U.S. to treat mild to moderate nearsightedness and has
approved the Apex Plus for treatment of mild to moderate nearsightedness with
concomitant mild to moderate astigmatism. PMA applications seeking approval for
the Apex Plus to treat farsightedness and high myopia are presently pending with
the FDA. In addition to the U.S., the Company is seeking regulatory
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approval for the sale of its Excimer Systems in Japan. The Company's Excimer
Systems deliver pulses of ultraviolet laser light to an eye to ablate (remove)
submicron layers of tissue from the cornea. Most of the laser light that is
generated is absorbed by the ablated (removed) corneal tissue during a
procedure. As a result, the laser light does not penetrate interior portions of
the eye and does not create substantial amounts of heat in the surrounding
tissue. All Excimer System procedures are performed on an outpatient basis with
topical anesthesia. These attributes make the Company's Excimer Systems well
suited to corneal surgery.
The Company's Apex and Apex Plus Systems are configured to treat
nearsightedness using a mechanical iris device that shapes light. The Apex Plus
is also configured to treat farsightedness, astigmatism and both nearsightedness
or farsightedness with concomitant astigmatism using the Company's
emphasis(R)Laser Disc. To use the Laser Disc, an ophthalmologist determines the
correction, selects the appropriate Laser Disc and places it in the laser beam
path. As the laser ablates the Laser Disc, its shape is replicated on the
cornea. The Company's Apex System requires a hardware upgrade, to Apex Plus, to
permit treatment of astigmatism and farsightedness using the Laser Disc. The
Apex Plus, which the FDA approved in February 1997 for treatment of mild to
moderate nearsightedness with a mechanical iris (the same indications for which
the Apex model is approved), and which the FDA approved in March of 1998 for
treatment of mild to moderate nearsightedness between 1.0 and 5.9 diopters with
concomitant mild to moderate astigmatism between 1.0 and 3.9 diopters with a
combined spherical equivalent of up to 5.9 diopters, is capable, without
significant hardware modification, of treating nearsightedness without the Laser
Disc, and of treating astigmatism, farsightedness (and combinations of
nearsightedness, farsightedness and astigmatism) using the Laser Disc. Because
the Apex Plus is not yet approved by the FDA for treatment of farsightedness and
high myopia, the Company is presently offering the Apex Plus in the U.S. for
treatment of mild to moderate nearsightedness using a mechanical iris and for
treatment of mild to moderate nearsightedness with concomitant mild to moderate
astigmatism using the Laser Disc. Since FDA approval of the Apex Plus platform
in early 1997, the Company has been offering its U.S. customers upgrades from
Apex to Apex Plus at prices approximating the Company's cost. The international
version of the Apex Plus is configured to treat a full range of refractive
disorders, including astigmatism, farsightedness, high myopia and combinations
of these disorders.
Laser Disc. The emphasis(R) Laser Disc, a proprietary single use polymer
disc developed and manufactured by the Company, can be used with the Apex Plus
to treat a wide range of refractive disorders. The Disc is designed to create
very smooth and precise corneal ablations, without reliance on complicated
optomechanics, resulting in improved healing and enhanced refractive outcomes.
This technology permits the ophthalmologist to select a Disc that is matched to
the patient's refractive error, in much the same way that an appropriate contact
lens might be selected. Using special tweezers, the doctor places the coin-size
Disc into a cassette which is snapped into the downtube of the laser, directly
in the path of the beam. As the laser ablates the Disc, the shape of the Disc is
precisely replicated on the cornea. The Company presently produces Discs for
correcting astigmatism, myopic astigmatism, hyperopia and hyperopic astigmatism.
To date the FDA has approved the Disc in the United States for treatment of mild
to moderate myopic astigmatism only. The Company is working to develop
additional applications for the Laser Disc, including development of patient-
specific, customized Discs for treatment of difficult or unusual cases.
Microkeratome. The Summit Krumeich-Barraquer Microkeratome ("SKBM") is a
medical device designed exclusively for use in ophthalmic surgery. The SKBM is
used as a means of creating a lamellar flap on the anterior corneal surface.
The SKBM may 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 size of
the hinge, the blade traverse distance, the advancement speed of the steel
blade, and the oscillation speed of the blade can be independently controlled
and changed from case to case by the operator, by means of front panel settings.
The SKBM utilizes disposable, single use blades. The SKBM received 510(k)
concurrence from
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the FDA in December, 1998, allowing it to be marketed in the United States.
Prior to 510(k) concurrence, the Company was marketing the SKBM in international
markets only.
Laser Vision Correction
Laser Vision Correction, also known as Photorefractive Keratectomy ("PRK"),
is an outpatient surgical procedure performed with the Excimer System to treat
nearsightedness, farsightedness and astigmatism, wherein submicron layers of
tissue are ablated (removed) from the surface of the cornea in a predetermined
pattern to reshape the cornea. The goal of Laser Vision Correction is to
eliminate or to reduce a person's reliance on corrective eyewear.
When performing Laser Vision Correction with the Excimer System, the
ophthalmologist determines the exact correction required (which is measured by
the same examination used to prescribe eyeglasses or contact lenses) and
programs the correction into the Excimer System's computer. The ophthalmologist
prepares the cornea and positions the patient for the laser procedure. In some
instances, the ophthalmologist prepares the cornea by using a microkeratome to
surgically create a corneal flap and uses the laser to ablate tissue from the
corneal surface exposed under the flap. This form of Laser Vision Correction is
commonly referred to as LASIK (an acronym for Laser In Situ Keratomileusis).
Neither the Company's Excimer Systems nor the SKBM have been FDA approved to
perform LASIK procedures, nor does the Company believe that any laser or
microkeratome products marketed by competing manufacturers have been FDA
approved for LASIK. One of the Company's high myopia submissions presently
pending before the FDA includes LASIK but has not yet been approved for this
indication. The Company believes the majority of Laser Vision Correction
procedures presently being performed in the U.S. are LASIK procedures being
performed by opthalmologists as an "off-label" use. The Excimer System emits
laser pulses, each of which lasts several billionths of a second, to ablate
submicron layers of tissue from the cornea in a predetermined pattern to reshape
the cornea and improve refraction of incoming light to the eye. The average
procedure consists of approximately 150 laser pulses and lasts approximately 15
to 60 seconds. Cumulative exposure to the laser light is less than one second.
The entire procedure, including patient preparation and post-operative dressing,
generally lasts no more than thirty minutes.
Following the procedure, the ophthalmologist may prescribe topical
pharmaceuticals to promote corneal healing and to alleviate discomfort. Post-
procedure responses vary depending upon the individual patient and the manner in
which the ophthalmologist prepares the cornea and performs the procedure.
Individuals undergoing Laser Vision Correction often experience discomfort for
approximately 24 hours, and blurred vision for approximately 48 to 72 hours,
after the procedure. Although many patients experience improvement in
uncorrected vision within a few hours or days of the procedure, it can take up
to two to six months for the correction to stabilize and for the full benefit of
the procedure to be realized.
Phototherapeutic Keratectomy ("PTK"). PTK is an outpatient surgical
procedure performed with the Excimer System to treat corneal pathologies. In
this procedure, submicron layers of tissue are ablated from the surface of the
cornea in order to remove diseased, scarred or sight-inhibiting tissue. The goal
of PTK is not necessarily to cure the corneal pathology, but rather to alleviate
the symptoms associated with the pathology. In March 1995 the FDA approved the
Company's Excimer System to perform PTK, and as a result the Company became the
first ophthalmic laser manufacturer to receive FDA approval to sell ophthalmic
excimer laser systems in the U.S.
Sales and Marketing
The Company sells its Excimer Systems and related products worldwide
(subject to regulatory restrictions) through a direct sales force, independent
sales representatives and distributors. The Company sells its products on open
credit to select distributors and end users, but in many instances requires a
letter of credit or a commitment from a third
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party lessor to secure payment. Through its Partnership Vision Plan program, the
Company offers U.S. customers innovative programs which can bundle equipment,
per procedure license fees, Laser Discs and service. The Company's sales force
includes five refractive marketing representatives who assist customers in
developing programs and materials to help to grow their laser vision correction
practices.
Patents and Pillar Point Partners
General. There are a number of U.S. patents covering methods and apparatus
for performing corneal surgery with excimer lasers, including a large number
owned by the Company and VISX. There also are many foreign patents covering
apparatus for performing excimer laser corneal surgery, including patents or
patent rights held by the Company, VISX and others.
Pillar Point Partners. From June 3, 1992 to June 4, 1998, the Company,
through a subsidiary, was a partner in Pillar Point Partners, a Delaware general
partnership formed with a subsidiary of VISX, Inc. On June 3, 1992, the
Company, through a subsidiary, entered into a Formation Agreement ("Formation
Agreement") with a subsidiary of VISX to settle disputes regarding their U.S.
patents covering methods and apparatus for performing ultraviolet laser corneal
surgery (the "Subject Matter"). All U.S. patents then or thereafter granted to
the Company or VISX which could have precluded either company from making, using
or selling in the U.S. its excimer laser corneal surgery systems as designed on
that date were, or were required to be, exclusively licensed or offered for
exclusive license to Pillar Point Partners. Pursuant to the Formation Agreement,
the Company and VISX (the "Partners") each contributed to Pillar Point Partners
(also referred to as the "Partnership") the exclusive right to make, use and
sell apparatus and perform (including the right to license others to perform)
procedures covered by any of their U.S. patents relating to the Subject Matter
(the "Pillar Point Patents"). The Partnership arrangement did not cover foreign
patents. The Partnership's policy was to license Pillar Point Patents to
manufacturers and sellers of ophthalmic excimer laser systems in the U.S.,
including the Company and VISX, in return for per procedure royalties and
royalties on equipment sales.
Simultaneously with the formation of the Partnership, the Company and VISX
entered into separate license agreements with the Partnership, for the life of
the Pillar Point Patents, whereby each was entitled to the benefit of the Pillar
Point Patents. The patents which were included in the Partnership will begin to
expire in May 2004 (seventeen years from the issuance date of the first patent),
subject to the possible extension of the term of certain patents covering
products regulated by the FDA.
The Company, VISX and Pillar Point Partners 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 ("FTC") commenced an administrative enforcement proceeding
against the Company and VISX alleging antitrust violations in connection with
the Partnership's patent arrangements. The FTC also alleged that certain of the
patents licensed by VISX to the Partnership were fraudulently obtained by VISX.
The FTC did not, however, challenge the validity of any of the Company's
patents. The FTC sought, inter alia, an order dissolving Pillar Point Partners
and requiring that VISX cease charging royalties on the patents alleged by the
FTC to have been fraudulently obtained. On November 12, 1997, VISX informed the
Company that in September of 1997, it had begun withholding royalty payments to
the Partnership for LASIK procedures performed on VISX systems in the U.S.,
based upon an interpretation of its license agreement with the Partnership. On
the same day, VISX commenced a lawsuit against the Company and the Partnership
seeking a declaration that its contract interpretation was correct. The Company
disagreed with the VISX interpretation and asserted counterclaims on behalf of
itself and the Partnership, seeking to enforce the VISX license agreement. On
February 17, 1998, VISX commenced a lawsuit against the Company seeking a
dissolution of the Partnership, and the Company asserted counterclaims alleging
breach of the Partnership's prohibition against voluntary dissolution.
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On June 4, 1998, the Company and VISX settled all outstanding disputes and
litigation between them. Under the settlement, VISX and the Company dissolved
Pillar Point Partners 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 Pillar Point. These cross-licenses permit each company, inter
alia, to license each other's patents to users of their equipment. The Company
and VISX retain all rights to license their own patents to other manufacturers.
As part of the settlement, VISX made a single, lump sum cash payment to the
Company in the amount of $35 million.
Other. In 1992, IBM granted the Company a non-exclusive license to its
patent covering excimer laser ablation of tissue and the Company agreed to pay
to IBM a royalty of 2% of the net selling price of its Excimer Systems sold or
leased in the U.S. and certain other countries. Although the Company has been
notified that IBM's rights under its license agreement with the Company have
been transferred, the Company does not believe the transfer will materially
affect the Company's rights or obligations under the license. The Company has
also entered into a license agreement with Patlex Corporation which holds
certain patents on lasers. Under this agreement, the Company has agreed to pay a
royalty on certain laser components of its products.
Research and Product Development
The Company expended $7.2 million, $6.2 million, and $5.9 million for
research, engineering and product development, including regulatory and clinical
affairs, during 1998, 1997 and 1996, respectively. The Research and Development
and Regulatory/Clinical Departments, as of February 28, 1999, were comprised of
58 full-time employees.
Installation, Service and Training
The Company installs and maintains its Excimer Systems through a
combination of directly employed technicians and Company-trained employees of
its distributors. Installation, training and the first year of maintenance are
generally included in the purchase price of the Excimer System, except for sales
to certain distributors who are required to install Excimer Systems and provide
maintenance to their customers for one year. Thereafter, the Company offers
annual equipment maintenance contracts to owners of Excimer Systems. Upon
installation of an Excimer System, a clinical specialist from the Company may
travel to the site to train the ophthalmologist in the clinical use and
operation of the Excimer System. The Company maintains a 24-hour telephone
service for emergency maintenance calls.
Competition
Competition in the Vision Correction Industry Generally. The vision
correction industry is subject to intense competition. Laser Vision Correction
competes with eyeglasses, contact lenses and RK as well as with other
technologies and surgical techniques currently under development, such as
implantable corneal rings, intraocular lenses and surgery using different types
of lasers. On February 16, 1999, Keravision, Inc. announced it had received an
approvable letter from the FDA for its implantable corneal ring product for
correction of nearsightedness. On January 13, 1999, Keravision announced that
the FDA Ophthalmic Devices Panel had recommended its corneal ring product for
approval, with conditions, of up to 3.5 diopters of nearsightedness. Certain of
the Company's competitors may have greater financial resources than the Company,
which may enable them to market their products or procedures to the consumer and
to the ophthalmic community in a more effective manner. The success of any
competitive alternatives to Laser Vision Correction would have a material
adverse effect on the Company's business, financial condition and the results of
operations.
Competition in the Laser Vision Correction Industry. The Company's Excimer
System currently competes with other manufacturers' excimer laser systems sold
in the U.S. and
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abroad. To date, the Company's principal competition in the U.S. market for
ophthalmic excimer laser equipment has been VISX. VISX received FDA approval for
its excimer system for Laser Vision Correction to treat nearsightedness in March
of 1996, astigmatism in April of 1997, high myopia in January of 1998 and
farsightedness in November of 1998. The Company's PMA applications for high
myopia and farsightedness are presently pending before the FDA. However, the
Company's Excimer System is not presently approved to treat high myopia or
farsightedness in the U.S., and there can be no assurance that it will ever be
approved to do so. The version of the Apex Plus currently sold by the Company
internationally permits treatment of moderate and high myopia, astigmatism,
hyperopia and combinations of these disorders. The Company believes that
approval of the VISX system for treatment of astigmatism prior to approval of
the Company's Apex Plus System for treatment of astigmatism placed the Company
at a competitive disadvantage in 1997 which adversely affected equipment sales
and prompted some users to exchange their Excimer Systems for VISX systems. The
Company believes that approval of the VISX system to treat high myopia in
January of 1998 and hyperopia in November of 1998 has also given rise to a
competitive advantage for VISX. The Company believes that in 1998 approximately
75-80% of U.S. laser vision correction procedures were performed on VISX
systems. Additionally, competitors, both in the U.S. and abroad, have entered
the equipment manufacturing business. Competing manufacturers of excimer laser
systems may have greater financial resources than the Company, may be able to
offer their products at a lower cost or may develop products that involve a
lower per procedure cost. Competition from new entrants may be particularly
prevalent in those countries where significant regulatory approvals are not
required. In the U.S., two additional competitors received FDA approval to
market their systems in the U.S. in 1998: Autonomous and Nidek. The Nidek system
was approved for up to 13 diopters of myopia 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. In December, 1998, the Company
commenced a patent infringement lawsuit against Nidek in the United States
District Court for the District of Massachusetts. The Autonomous system was
approved for up to 10 diopters of myopia and up to 4 diopters of astigmatism but
has not been approved for farsightedness. The Company believes that one or both
of LaserSite and Bausch & Lomb are likely to obtain regulatory approval to
market ophthalmic excimer laser equipment in 1999. Although the Company believes
that its Excimer Systems and unique Laser Disc technology leave it competitively
well-positioned, there can be no assurance that the Company will compete
successfully in the Laser Vision Correction Industry.
Competition in the Microkeratome Market
There is substantial competition in the microkeratome market. Bausch & Lomb
and Moria hold significant market share. In addition, there are several smaller
companies offering microkeratomes for sale. Microkeratomes compete based on
safety, efficacy, reliability, versatility, and price. Based on the Company's
limited experience to date with the SKBM, the Company believes that it can
compete effectively.
Government Regulation
Background. The Company's Excimer Systems and related disposables
(including the Laser Disc) are regulated as medical devices by the FDA under the
Federal Food, Drug and Cosmetic Act (the "FDC Act"). As such, these devices
require a premarket clearance or premarket approval (a "PMA") by the FDA prior
to commercialization in the U.S. Pursuant to the FDC Act, the FDA regulates the
manufacture, distribution and production of medical devices in the U.S.
Noncompliance with applicable requirements can result, among other things, in
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, denial or withdrawal of premarket clearance or
approval of devices, recommendations by the FDA that the Company not be allowed
to enter into government contracts and criminal prosecution. The FDA also has
authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a Class
III device for which the FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive data,
including preclinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. The PMA application must contain the results of
clinical trials, the results of all relevant bench tests, laboratory and animal
studies, a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and
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training materials (if required). Upon receipt of a PMA application, the FDA
makes a threshold determination as to whether the application is sufficiently
complete to permit a substantive review. If the FDA determines that the PMA
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for filing. The FDA review of a PMA application
generally takes one to two years from the date such application is accepted for
filing but may take significantly longer. The review time is often significantly
extended by the FDA asking for more information, including additional clinical
trials or clarification of information already provided in the submission. A
number of devices for which FDA approval has been sought by other companies have
never been approved for marketing.
Modifications to a device that is the subject of a PMA, its labeling or
manufacturing process may require approval by the FDA of PMA supplements or new
PMAs. Supplements to a PMA often require the submission of the same type of
information required for an initial PMA, except that the supplement is generally
limited to that information needed to support the proposed change from the
product covered by the original PMA. The Company believes that its Excimer
Systems require a PMA or a PMA supplement for each of the surgical procedures
which they are intended to perform. The FDA may grant a PMA with respect to a
particular procedure only when it is satisfied that the use of the device for
that particular procedure is safe and effective. In granting a PMA, the FDA may
restrict the types of patients who may be treated, thereby limiting the market
potential of the device.
The Company received an Approval Letter from the FDA dated October 20, 1995
for the Company's use of the Apex Excimer System in the U.S. to treat between
1.5D and 7.0D of myopia using Laser Vision Correction. On February 7, 1997, the
FDA approved the Apex Plus for the same indications and on March 11, 1998, the
FDA approved the Apex Plus for the treatment of mild to moderate nearsightedness
between 1.0 and 5.9 diopters with concomitant mild to moderate astigmatism
between 1.0 and 3.9 diopters with a combined spherical equivalent of up to 5.9
diopters, using the Laser Disc.
The FDC Act authorizes any interested person to petition for administrative
review of the FDA's decision to approve a PMA application. After reviewing the
petition, the agency decides whether to grant or deny the petition and publishes
a notice of its decision in the Federal Register. If the FDA grants the
petition, the notice will state the issue to be reviewed, the form of the review
to be used, the persons who may participate in the review, the time and place
where the review will occur, and other details. Challenges to an FDA approval of
a PMA application since enactment of the Medical Device Amendments of 1976 on
May 28, 1976 have been rare and, to the Company's knowledge, no PMA application
has ever been revoked by the agency based on such a challenge. The Company is
aware that at least two persons have filed a petition with the FDA calling for
reconsideration of the FDA's approval of the Company's PMA for its Excimer
System as described above, although one such petition was subsequently
withdrawn. If the FDA were to grant such a petition, the Company could continue
to market the device during the agency's deliberations. If, however, the FDA,
after a hearing, were to revoke its approval of the Company's PMA application,
the Company would be required to cease marketing the device. Such an FDA action
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
The Company has obtained FDA approval to conduct several additional studies
involving subsets of patients under the Company's Investigational Device
Exemptions for Laser Vision Correction. In addition to the continuation, for
patent monitoring purposes, of studies for which PMA supplements have already
been submitted to the FDA (farsightedness and high myopia), the Company is
currently conducting clinical trials with the Apex Plus for treatment of
hyperopia with concomitant astigmatism using LASIK. The Company is also
conducting clinical research at international sites in the area of customized
ablations using the emphasis(R) Laser Disc and in large zone extended
astigmatism treatment using LASIK.
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Other Regulatory Requirements. Any products that the Company manufactures
or distributes pursuant to a premarket clearance notification or a PMA are or
will be subject to pervasive and continuing regulation by the FDA. The FDC Act
also requires the Company to manufacture its products in registered
establishments and in accordance with its Quality System Regulations(QSR) and to
list its devices with the FDA. The Company's facilities in the U.S. and Ireland
are subject to periodic QSR inspections by the FDA. These regulations impose
certain procedural and documentation requirements upon the Company with respect
to manufacturing and quality assurance activities. The FDA has proposed changes
to the QSR regulations which will likely increase the cost of compliance with
QSR requirements. Labeling and promotional activities are subject to scrutiny by
the FDA and, in certain instances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, denial or withdrawal of
premarket clearance or approval of devices, recommendation by the FDA that the
Company may not be allowed to enter into government contracts and criminal
prosecution. The FDA also has the authority to request the repair, replacement
or refund of the cost of any device manufactured or distributed by the Company.
All lasers manufactured by the Company are subject to the Radiation Control
for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users pursuant to a performance standard, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product under the performance
standard.
There can be no assurance that future changes in review guidelines,
regulations or administrative interpretations by the FDA or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.
In addition to the foregoing, the manufacture, sale and use of the Company's
products are subject to numerous federal, state, local and foreign government
laws and regulations relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to conduct business.
Furthermore, the introduction of the Company's products in foreign
countries may require obtaining foreign regulatory clearances. Presently, the
Company is seeking regulatory approval for the Excimer System in Japan. There
can be no assurance that the Company will be able to obtain regulatory
clearances for its products in Japan or other foreign markets.
The Summit Krumeich-Barraquer Microkeratome ("SKBM") received clearance for
US commercial distribution from FDA in December, 1998 through the "Premarket
Notification" process. The 510(k) process requires that a manufacturer
demonstrates the substantial equivalency of the subject device to a device
already 510(k) cleared by FDA for commercial distribution in the United States.
The "Premarket Notification" process is distinguished from the "Premarket
Approval" (PMA) process that is applicable to the excimer laser in the United
States. In the PMA process, typically requiring extensive clinical study data,
approval from FDA requires a manufacturer to demonstrate the safety and efficacy
of the subject. Unlike the 510(k) process which clears devices for United States
commercial distribution, successful completion of a PMA leads to FDA approval of
the device. The SKBM's approved indications for use are (i) keratoplasty and
corneal harvesting and (ii) microlamellar keratoplasty.
LENS EXPRESS
Overview
On May 15, 1996, the Company acquired Lens Express ("Lens"), a leading mail
order distributor of contact lenses and related products in the United States.
Lens' retail sales consist of new orders of contact lenses, reorders of contact
lenses, program sales, sales of eye care solutions, lens case sales, sunglass
sales, membership sales, vitamin sales and shipping and handling fees. Lens'
wholesale sales are made to pharmacies and similar retail outlets and consist of
sales of contact lenses, sales of eye care solutions and shipping and handling
fees. Lens also markets certain of its eye care programs to large employers as a
cost effective alternative to more traditional vision indemnity programs. Retail
and group sales consisted of over 97% of total sales in 1998. See "Cautionary
Statements and Risk Factors Affecting Future Operating Results - Risks
Associated With Lens."
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The process of purchasing contact lenses through Lens Express consists of a
few simple steps. A customer first places a call to the Lens 800 telephone
number to order contact lenses. The Lens operators then explain that the
company's services are available to the customer after Lens first receives a
valid prescription. For customers without a valid prescription, Lens will supply
the names of ophthalmologists or optometrists located in a customer's immediate
location from its nationwide network of over 2,800 doctors who will provide an
examination and prescription. Lens cannot distribute contact lenses to a patient
without a verified prescription. Many states permit Lens to obtain telephone
verification from the patient's contact lens prescriber; other states have
stricter requirements, including at least one state which requires that Lens
obtain a written copy of the patient's prescription before lenses may be
shipped. Some practitioners resist verifying prescriptions to Lens because they
regard Lens as their competitor in the sale of lenses to their customers.
Approximately 30% of Lens' orders are shipped on the day the order is received.
Of the balance, approximately 20% cannot be shipped on the day the order is
received because the product is not in stock, and approximately 35% cannot be
shipped on the day the order is received because Lens has not yet been able to
verify the customer's prescription.
Several manufacturers of contact lenses have historically refused to sell
lenses to mail order distributors including Lens, and accordingly, Lens obtains
most of its contact lens inventory from others. The price Lens pays for its
inventory is therefore higher in some cases than those paid by practitioners,
chains and others who are able to buy directly from the manufacturers. Although
Lens has been able to obtain most contact lens brands at competitive prices in
sufficient quantities on a regular basis, there are some lens models that are
difficult and/or expensive for Lens to obtain. This has resulted in Lens being
unable to fill some customer orders at all or filling them at little or no
profit and has negatively impacted Lens' growth and profitability. Lens believes
that the manufacturers' "refusal to deal" with Lens is being challenged on
antitrust grounds by the Florida State Attorney General and 31 other states.
Most orders are shipped via two day air and paid for with a valid credit
card or check by phone and Lens has little collection or bad debt expenses.
Most of Lens' retail customers join the Lens Express Discount Club for a
fee of $25 for three years or $40 for five years. Membership in this club
entitles a member to purchase contact lenses and related products at member
prices.
Competition
The contact lens and solutions business is extremely competitive, and Lens
competes actively for customers. Ophthalmologists/optometrists are Lens' primary
competition, representing approximately 62% of all U.S. contact lens sales. Some
of these practitioners are reluctant to provide Lens with prescription
information for their patients, which can make it difficult for Lens to obtain
the timely prescription verification it requires in order to ship contact
lenses. National optical chains represent an estimated 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. Lens believes
its principal mail order competitor to be 1-800-CONTACTS, Inc. Lens believes
that 1-800-CONTACTS' stated policy of ignoring states' prescription verification
laws and regulations, combined with extensive advertising, has enabled it to
make significant inroads into Lens' market share. A number of companies offer
vision care programs and indemnity plans which compete with the Lens Express
Vision Care Program. Competition for eye care solutions is extremely intense and
price sensitive with generic or private label solutions providing a cost
advantage over traditional higher-priced branded products.
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Marketing and Advertising
Lens' sales are highly dependent upon the amount and effectiveness of its
marketing and advertising. Lens utilizes primarily print, radio, television,
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. The use of a well-known
celebrity spokesperson, in combination with the Company's reputation for
quality, reliability and service, have contributed to Lens' growth and expanding
name recognition. Lens has determined that the use of television represents the
greatest opportunity for customer awareness and, therefore, sales of Lens
products and services. In addition to television, Lens advertises in print. Lens
also uses promotions with major credit cards to market its services and
products. Periodically, Lens places coupons offering replacement contact lenses
at special discounts in credit card monthly statements.
Government Regulation
While some states impose little or no specific regulation of mail order
dispensing of replacement contact lenses, other states have stricter
requirements. Burdensome regulatory requirements imposed by certain states, such
as prohibiting dispensing of replacement lenses prior to receipt of a written
prescription, make it more difficult and expensive for Lens to sell replacement
lenses in such states. There can be no assurance that other states will not
enact or impose laws or regulations that prohibit mail order dispensing of
replacement contact lenses or otherwise impair Lens' ability to sell lenses and
operate profitably.
EMPLOYEES
As of March 19, 1999, the Company and its subsidiaries employed 425 persons
full-time in the U.S., Ireland and other countries. Of this number (i) 234 were
employed in the Company's vision correction business (of whom approximately 51
were in manufacturing, 58 in research, engineering, product development and
regulatory and clinical affairs, 47 in customer service and 78 in selling,
marketing and administration, and (ii) 191 were employed by Lens. Of such
employees, 356 are located in the U.S., 57 in Ireland and 12 in other parts of
the world. None of such employees is represented by a union. The Company and its
subsidiaries believe that relations with employees are good.
BACKLOG
As of March 19, 1999, the Company had no significant backlog.
RECENT DEVELOPMENTS
On February 23, 1999, the United States District Court for the Western
District of Texas, San Antonio Division, granted summary judgment in favor of
Summit, Summit Partner, Inc., and Pillar Point Partners in John Taboada v. VISX,
Inc., et al. (Civil Action No. SA-97-CA-794-FB). Summit, Summit Partner, Inc.,
and Pillar Point Partners had filed a motion for summary judgment on November
20, 1998 and are no longer defendants in the case.
On February 16, 1999, The Company withdrew its motion to dismiss a suit
brought by Antoine Garabet, M.D., Inc. and Abraham Shammas, M.D., Inc., d/b/a
Laser Eye Center against the Company, Pillar Point Partners, VISX and certain of
its affiliates. The Company also filed a counterclaim against the plaintiffs and
Antoine Garabet and Abraham Shammas, as individuals, alleging patent
infringement. The plaintiffs filed suit on November 5, 1997 in the United States
District Court for the Northern District of California asserting that The
Company engaged in fraud in certain of its marketing and sales activities and
seeking a declaratory judgment that patents held by Pillar Point are invalid and
unenforceable because of alleged violations of the antitrust laws. The case is
currently pending in the
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United States District Court for the District of Arizona as part of In re:
Pillar Point Partners Antitrust and Patent Litigation (Civil Action No. MDL
1202).
On February 10, 1999, The Company submitted a PMA supplement to the FDA for
use of the Company's Apex Plus Excimer System for reduction or elimination of
myopia from 0 to -14.0 diopters with or without astigmatism ranging from -0.50
to -5.0 diopters using LASIK in patients with documentation of a stable manifest
reaction of 1 diopter during the one-year period prior to treatment and who are
18 years of age or older. On March 25, 1999, FDA notified the Company that it
had filed this application and granted it expedited review. On January 30, 1998,
the Company submitted a PMA supplement to the FDA for use of the Company's Apex
and Apex Plus Excimer Systems to treat myopia of -6.0 to -22.0 diopters using
photorefractive keratectomy and laser in situ keratomileusis. On September 10,
1998, the Company amended the January, 1998 submission to reduce the applied for
range to myopia of -6.0 to -15.0 diopters using photorefractive keratectomy
only. These submissions are presently pending.
On December 28, 1998, the Company 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.
In December 1998, the Company and Field Service Engineering Associates,
Inc., an independent service organization, entered into a settlement agreement
resolving their outstanding litigation. In 1995, the Company filed a lawsuit
against Field Service alleging that it had serviced unapproved laser systems. As
part of the settlement, the Company agreed to purchase a portion of Field
Service's parts and tools inventory. Field Service agreed to the entry of a
permanent injunction barring it from, among other things, servicing unapproved
excimer systems or tampering with the Company's systems to disable the
cardreaders which facilitate the Company's collection of per procedure license
fees.
On March 23, 1999, the Company was served with a complaint filed by Gary D.
Vatter against the Company, the Massachusetts Eye and Ear Infirmary, and an
ophthalmologist. The complaint characterizes patent license fees charged by the
Company as "kickbacks" and alleges that the Company "encouraged the other
defendants to select an assembly line method of operation in order to maximize
their individual and collective profits." The complaint further alleges that,
because of this, the plaintiff was offered only the "cheapest and fastest"
method of eye fixation which "excluded medical or mechanical eye fixation and/or
general anesthesia" and that, as a result, the plaintiff suffered personal
injuries. Based on a preliminary review of the complaint, the Company believes
it to be without merit and has turned the matter over to its insurer. The case
is presently pending in the Massachusetts Superior Court as Civil Action No.
99-1205C.
On March 24, 1999, the Company's Chief Executive Officer received a letter
written on behalf of Olivia N. Serdarevic, M.D., claiming inventorship rights in
the Company's Marshall and Azema patents (U.S. Patent Nos. 4,941,093 and
4,973,330, respectively). These patents, which issued in 1990, are the patents
the Company claims are infringed in its lawsuit against Nidek described above.
Based on its preliminary review, the Company believes these claims to be without
merit. However, any successful inventorship claims to these patents would have a
material adverse effect on the Company's business.
CAUTIONARY STATEMENTS AND RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
This report contains information about the Company's future business
prospects including, without limitation, statements about the size of the
potential markets for Laser Vision Correction and the Company's Excimer Systems,
the potential for per procedure license fees, FDA approvals, pending litigation,
and the success of Lens. These statements are considered "forward-looking"
within the meaning of the Private Securities Litigation Reform Act. These
statements are based on the Company's current plans and expectations and involve
risks and uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the forward-
looking statements. The following cautionary statements identify important
factors that may cause actual results to differ materially from those reflected
in, or implied by, any such forward looking statements. The Company expressly
undertakes no duty to update any forward-looking statement.
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Risks Related to the Acquisition of Autonomous
If, as and when the Company completes its acquisition of Autonomous, it may
experience difficulty in integrating the operations of the two companies and in
realizing the benefits of the acquisition
The proposed acquisition of Autonomous (the "Merger") involves the
integration of two companies that have previously operated independently. The
Company may not be able to integrate the operations of Autonomous 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 customers view the Merger of the companies as a negative
development, the Company may lose customers and market share. In addition, there
can be no assurance that the Company will realize anticipated synergies from the
Merger. For example, Autonomous has only had limited experience manufacturing
its LADARVision(R) Systems and has had no experience producing the system in
significant quantities. Following the Merger the Company intends to assist
Autonomous in developing its manufacturing capabilities. If it is unsuccessful
in doing so, or if the effort requires greater resources, the expected benefits
of the Merger may not be realized.
The Company and Autonomous might not be able to complete the proposed Merger if
it is challenged on antitrust grounds
There are a limited number of FDA approved manufacturers of laser vision
correction equipment. Although we were not required to file for the Merger under
the Hart Scott Rodino Antitrust Improvements Act of 1976, the Federal Trade
Commission has evaluated the transaction and has advised us that is does not
intend to challenge it on antitrust grounds. However, state attorneys general
and private parties may bring actions under the antitrust laws under certain
circumstances. We cannot predict whether any such party will take action to
block the proposed transaction or what the outcome of any such proceeding would
be. If such an action were commenced, the companies might not be able to
complete the proposed transaction as currently structured or in a timely manner,
if at all.
The Company's use of significant cash resources for the Merger and continuing
operations may strain its liquidity and place the Company in technical default
under financial covenants in its loan agreement
A significant amount of the Company's cash resources will be used to
complete the Merger and support the Autonomous operation after the Merger. This
will put a significant strain on the Company's liquidity and could preclude the
Company from having cash available to fund operations, make other acquisitions,
or for other purposes. The cash portion of the purchase price of up to $50
million represented approximately 68% of the Company's cash, short-term
investments and long-term investments excluding the value of LCA common stock at
December 31, 1998 and net of bank borrowings. The Company expects that the
Autonomous operation could require as much as $20 million before it reaches a
cash flow break-even status, although this amount could fluctuate up or down
depending on a variety of factors. The Company's use of cash to make loans to
Autonomous and to complete the Merger places the Company in technical default
under financial covenants contained in its bank loan agreement. This could give
rise to an acceleration of the Company's bank indebtedness, further straining
the Company's liquidity. As of March 19, 1999, the total principal amount of
this indebtedness was $5,000,000.
The Merger will be dilutive to the Company's earnings in the near term
The Merger is likely to delay the Company's efforts to achieve consistent
profitability until at least the year 2000. Expenses related to research and
development of Autonomous' CustomCornea/TM /technology as well as the
amortization of goodwill and other capitalized items created by the Merger will
reduce the Company's operating income or
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increase its operating loss for the applicable period. Earnings dilution from
amortization of goodwill will increase to the extent the value of the
consideration paid to Autonomous shareholders increases as a result of gains in
the price of Summit stock prior to closing. In addition, the Company expects
that the Autonomous operation will continue to have operating losses for at
least the next twelve months as it ramps up manufacturing, commences a
significant marketing campaign and continues incurring substantial research and
development expenses. These operating losses will reduce the Company's operating
income and will likely cause the Company to report operating losses during this
period.
The market acceptance of two laser vision correction systems is unpredictable
The Company cannot predict how existing and potential customers for laser
vision correction systems will respond to the Company's offering two distinctly
different laser vision correction systems. For example, sales of the Company's
Apex Plus system could decline in anticipation of the availability of the
Autonomous system, or the Company could lose existing Apex Plus customers who
perceive that the Company's acquisition of the Autonomous system would result in
less support for its existing installed base. However, the Company has not seen
any evidence of this since publicly announcing the proposed Merger on October 1,
1998. The actual availability of the Autonomous system from a manufacturing
viewpoint may not be sufficient to make up for any loss of sales of the
Company's Apex Plus system while the Autonomous operation ramps up its
manufacturing capability for the LADARVision System.
Competition Risks
New competitors may erode the Company's U.S. market share
Nidek Co., Ltd. obtained FDA approval of its EC-5000 excimer laser system
in December 1998. Other manufacturers, including Bausch & Lomb and LaserSight,
are expected to obtain approval during 1999, giving them the right to market
their systems commercially in the U.S. If ophthalmologists perceive new
competitors' systems to be technologically or economically superior to the
Company's, the Company could lose market share to these competitors. This could
have a material adverse effect on the Company's business, financial conditions
and results of operations.
Competitors may have broader approvals which could give them a competitive
advantage over the Company
In the United States, the FDA strictly regulates the types and ranges of
surgical treatments that a manufacturer's laser vision system can perform. To
the extent the FDA approves one manufacturer's system for a wider range of
treatments than a competitor's system, a competitive advantage will arise. At
present, the laser vision correction system manufactured by VISX, Inc. is FDA
approved to perform a wider range of treatments than the Company's system,
including farsightedness and higher degrees of nearsightedness and astigmatism.
The laser vision correction system manufactured by Nidek is approved for a
higher degree of nearsightedness than the Company's system (but is not approved
for farsightedness or astigmatism). The Company's system is presently approved
for mild to moderate nearsightedness and astigmatism. If the Company is
unsuccessful in obtaining timely FDA approvals for farsightedness and for higher
ranges of nearsightedness (applications for which are presently pending before
the FDA), its ability to effectively compete in the U.S. against these companies
(or future entrants with broader approvals) may be compromised.
Competitors may not charge their customers per procedure fees which, in turn,
could affect the Company's ability to collect license fees
The Company presently licenses a number of patents to users of its systems
on a per procedure basis. The Company derives a substantial portion of its
revenue from the per procedure fees it charges to license these patents. If
competitors do not charge per procedure fees to users of their systems, the
Company could be forced to reduce or eliminate the fees it collects. This could
have a material adverse effect on the Company's
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revenues and financial performance. Nidek, one of the Company's competitors, has
publicly stated that it does not intend to charge per procedure fees to users of
its systems.
Proliferation of unapproved systems could adversely affect the Company's
revenues
The Company is aware that certain U.S. physicians are performing refractive
procedures in the United States with laser vision correction systems that have
not been approved by the FDA, including earlier versions of the Company's
systems originally sold in international markets and so-called "homemade" or
"black box" systems. Pursuing these potential infringers could be costly and
might not result in any significant recoveries. Although the Company believes
FDA enforcement action has had some positive impact on this problem, continued
use or proliferation of these systems will negatively affect the Company's
system sales and per procedure revenues. In addition, any adverse clinical
consequences resulting from the use of these systems could negatively affect
consumer acceptance of laser vision correction generally.
Illegal tampering with system configurations could adversely affect revenue
collection
The Company believes that some users of its Apex excimer systems in the
United States have tampered with the software configuration of their systems to
defeat the card reading system that facilities the collection of per procedure
license fees. The Company's loss of per procedure fees as a result of this
tampering could adversely affect its revenues and operating results.
New products and technologies could erode demand for the Company's products or
make them obsolete
In addition to competing with eyeglasses and contact lenses, excimer laser
vision correction competes or may compete with newer technologies such as
intraocular lenses, corneal rings and surgical techniques using different types
of lasers. To the extent that any of these or other new technologies are
perceived to be clinically superior or economically more attractive than excimer
laser vision correction, they could erode demand for the Company's excimer laser
products or render such products obsolete. The Company believes that the
Autonomous LADARVision System and CustomCornea/TM/ technology represents the
next generation of excimer laser based vision correction technology and will
remain technologically competitive into the next decade. However, if one or more
competing technologies achieve broader market acceptance or render the
LADARVision System obsolete, the Company may never realize the anticipated
benefits of the Merger. This could have a material adverse effect on the
Company's business, financial condition and results of operations.
Company Risks
The Company is involved in litigation that could subject it to significant
liabilities and consume Company resources
Since August 2, 1996, stockholders have commenced sixteen separate legal
actions against the Company and its directors and officers. In addition, there
are multiple state and federal antitrust lawsuits pending against the Company
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 and other lawsuits has and will continue to consume
considerable resources, including management time and attention, which has been
diverted from operating the business. The potential recoveries, if the
plaintiffs are successful, would have a significant negative effect on the
Company's cash position. Litigation is inherently uncertain, and an adverse
resolution of these actions may have a material adverse effect on the Company's
financial position and operating results in the period they are resolved. See
"Legal Proceedings."
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Challenges to owned or licensed intellectual property could adversely affect our
business
Failure to maintain the protection afforded by certain of the Company's
owned and licensed patents would have a material adverse effect on the Company's
future revenues and earnings. These patents might ultimately be found to be
invalid, or others might elect to infringe these patents or develop
substantially equivalent or competitive products. On March 24, 1998, the FTC
commenced an action challenging certain of the patents that VISX has licensed to
the Company. Although the Company has settled its part of this litigation, the
FTC is seeking an order to invalidate these VISX patents. In July 1997, a
private party commenced a lawsuit against VISX in which he asserts that he is
the sole inventor of a certain VISX patent. In March 1999 the Company received a
notice from an individual claiming inventorship rights in certain of its key
patents (see "Recent Developments"). Successful challenges to the validity and
enforceability of any of the Company's patents or the patents licensed from VISX
could have a material adverse effect on the Company's ability to collect per
procedure license fees. Even if an unlicensed party's products or procedures
infringe upon the Company's patents, it may be costly to enforce these rights.
An infringement action may require the diversion of funds from the Company's
operations and may require management to expend funds and effort that might
otherwise be devoted to the Company's operations. Furthermore, the Company may
not be successful in enforcing its patent rights. Any failure by the Company to
prevail in patent infringement actions against others, or any success by others
in invalidating or being found not to infringe patents owned or licensed by the
Company, could have a material adverse effect on the Company's ability to
collect per procedure fees.
There are a number of U.S. and foreign patents covering methods and
apparatus for performing corneal surgery that neither the Company nor Autonomous
owns or has the right to use. If the Company or Autonomous were found to
infringe a patent in a particular market, the Company and its customers may be
enjoined from making, using and selling that product in the market or be
required to obtain a fee-bearing license, if available on acceptable terms.
Alternatively, the Company might be required to redesign the infringing aspects
of these products. Any redesign efforts that the Company undertakes 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, the
Company could be prevented from manufacturing and selling the infringing
products, which would have a material adverse effect on its business, financial
and results of operations.
Failure or delay in obtaining regulatory approvals for products would adversely
affect the Company's business
The Company's excimer systems and related disposables are regulated medical
devices under the Food, Drug and Cosmetics Act. As such, these devices, expanded
treatment types and levels for these devices and significant design or
manufacturing modifications require a premarket clearance by the FDA prior to
commercialization in the United States. This approval process, which is lengthy
and uncertain, requires underlying clinical studies and requires substantial
commitments of financial resources and management's time and effort. Delays in
obtaining or failure to obtain required regulatory approvals or clearances in
the United States and other countries would prevent the marketing of these
systems and other devices or the marketing of these systems and other devices to
treat expanded indications and impair the Company's ability to generate sales,
which in turn would have a material adverse effect on its business, financial
condition and results of operations.
The Company's and Autonomous' reliance on vendors for certain critical system
components could jeopardize operations if alternative sources are not readily
available
The Company currently purchases certain components used in the production,
operation and maintenance of its excimer systems and related products from a
limited number of suppliers. Similarly, Autonomous obtains key components from a
limited number of suppliers. If these suppliers were to cease providing
components, the Company would be required to
17
<PAGE>
locate and contract with substitute suppliers, which it may not be able to do in
a timely manner. Any interruption in the Company's ability to manufacture and
service excimer systems on a timely basis would have a material adverse effect
on its business, financial condition and results of operations.
Inadequacy or unavailability of insurance may expose the Company to significant
liability
The testing and use of human health care products entails an inherent risk
of physical injury to patients and physicians and exposes the manufacturer to
potential product liability and other damage claims. In addition, 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 have a
material adverse effect on our business, financial condition and results of
operations.
Competitive factors beyond its control could adversely affect Lens Express'
competitive position and negatively affect the Company's revenues and
profitability
The operations of the Company's Lens Express unit could be adversely
affected by certain risks beyond its control, including:
. lack of consistent sources of supply
. inability to obtain suitable advertising spots in selected media at cost-
effective prices
. state regulations
. 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 to obtain product through indirect channels at the
times, prices and quantities it requires. If it is unable to obtain product from
indirect suppliers, or is forced to do so on unfavorable terms, Lens Express'
sales and profitability could be adversely affected. Lens Express' operations
are subject to numerous state laws and regulations that govern the dispensing of
replacement contact lenses. Although some states impose little regulation on
mail order dispensing of contact lenses, other states have stricter
requirements. Burdensome regulatory requirements imposed by certain states, such
as prohibiting dispensing of replacement lenses without receipt of a written
prescription, make it more difficult and expensive for Lens Express to sell
replacement contact lenses in these states, and place Lens Express at a
competitive disadvantage versus competing mail order sellers that are able to
avoid or ignore these laws and 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.
The market price of the Company's stock historically has been volatile
The volatility of the Company's common stock imposes a greater risk of
capital losses on stockholders as compared to less volatile stocks. In addition,
such volatility makes it difficult to ascribe a stable valuation to a
stockholder's holdings of the Company's common stock. Factors such as
announcements of technological innovations or new products by the
18
<PAGE>
Company or its competitors, changes in domestic or foreign governmental
regulations or regulatory approval processes, developments or disputes relating
to patent or proprietary rights and public concern as to the safety and efficacy
of the procedures for which the excimer system is used, has and may continue to
have a significant impact on the market price of the Company's common stock.
Moreover, the possibility exists that the stock market (and in particular the
securities of technology companies such as the Company) could experience extreme
price and volume fluctuations unrelated to operating performance.
Safety and Efficacy Concerns
Concerns with respect to the safety and efficacy of the Company's Excimer
System to perform Laser Vision Correction include predictability and stability
of results. Potential complications and side effects include: post-operative
discomfort (which can include pain, itching, tearing and dryness of the eye);
corneal haze during healing (an increase in the light scattering properties of
the cornea); glare/halos (undesirable visual sensations produced by bright
lights); decreases in contrast sensitivity (which can lead to night vision
difficulties); temporary increase in intraocular pressure and/or pupil
enlargement in reaction to post-procedure medication; modest fluctuations in
refractive capabilities during healing; modest decreases in best corrected
vision (i.e., vision with corrective eyewear); unintended over- or under-
corrections; disorders of corneal healing (including so-called "central
islands"); corneal scars; corneal ulcers; induced regular or irregular
astigmatism (which may cause blurred or double vision and/or shadow images);
drooping of the eyelid; and iris inflammation. There can be no assurance that
long-term follow-up data will not reveal additional complications that may have
a material adverse effect on acceptance of Laser Vision Correction which in turn
would have a material adverse effect on the Company's business, financial
condition and results of operations.
ITEM 2. PROPERTIES
MANUFACTURING AND FACILITIES
The Company presently leases 50,000 square feet of manufacturing and office
space in Waltham, Massachusetts, under a ten-year lease expiring in August 2000.
The Company also leases a 25,000 square foot manufacturing facility in Cork,
Ireland, under a lease expiring in 2026. At present, the Company manufactures
its Excimer Systems exclusively at its Cork, Ireland facility and manufactures
Laser Discs at both its Waltham and Cork facilities. The Company's
microkeratome product is presently manufactured in Germany by a contract
manufacturer. The Company believes that it has the capacity to manufacture a
sufficient number of its products to satisfy demand. The Company also has the
manufacturing space to produce products in greater volumes; however, any
significant increase in manufacturing capacity will require the hiring and
training of qualified manufacturing personnel.
Lens presently leases a 38,000 square foot office/warehouse facility in the
Fort Lauderdale, Florida area, under a seven-year lease expiring in August,
1999.
ITEM 3. LEGAL PROCEEDINGS
Pillar Point Partners Antitrust And Patent Litigation. Pillar Point Partners,
the Company, VISX and certain affiliates of the Company and VISX are presently
involved in a series of patent and antitrust lawsuits which have been
administratively consolidated for pretrial purposes in the United States
District Court for the District of Arizona by the Federal Judicial Panel on
Multidistrict Litigation ("MDL Panel"). These cases are presently pending as IN
RE: PILLAR POINT PARTNERS ANTITRUST AND PATENT LITIGATION (CIVIL ACTION NO. MDL
1202) and are described below.
Patent Litigation. Pillar Point Partners commenced patent infringement
litigation against certain ophthalmologists believed to have used or be using
homemade laser systems not licensed under patents held by Pillar Point Partners,
as well as one alleged manufacturer of such laser systems. These actions were
originally pending as PILLAR POINT
19
<PAGE>
PARTNERS, et al. v. DAVID DULANEY, et al. (U.S. DISTRICT COURT, DISTRICT OF
ARIZONA, CIVIL ACTION NO. 96-2051PHXPGR), PILLAR POINT PARTNERS, et al. v. JON
G. DISHLER, et al. (U.S. DISTRICT COURT, DISTRICT OF COLORADO, CIVIL ACTION NO.
96-N-2351), and PILLAR POINT PARTNERS, et al. v. JUI-TENG LIN, et al. (U.S.
DISTRICT COURT, MIDDLE DISTRICT OF FLORIDA, CIVIL ACTION NO. 97-54-CV-ORL-22).
The defendants in the Dulaney and Dishler actions have asserted counterclaims
seeking declarations that the patents in suit are invalid and unenforceable.
Those defendants have also raised antitrust and Lanham Act counterclaims. A
settlement has been reached in the Dulaney action, and a stipulation of
dismissal has been lodged with the court.
Federal Antitrust Litigation. In June, 1996, a Texas ophthalmologist,
Robert G. Burlingame, sued Pillar Point, VISX, the Company and certain
affiliates of VISX and the Company in the Federal District Court for the
Northern District of California alleging that the defendants have violated and
are violating federal and state antitrust laws and alleging fraud in connection
with certain of the Company's sales and marketing activities. The plaintiff
seeks, things, antitrust damages of at least $30 plus $2 to $3 per month until
the date of judgment, trebling of those damages, compensatory and punitive
damages on the fraud claim against the Company of at least $500 plus $2 to $3
per month until the date of judgment, attorney's fees, and a permanent
injunction against future violations. On September 5, 1996, a Nevada
ophthalmologist, John R. Shepherd, through his professional corporation,
commenced a similar lawsuit against the same parties, in the same court,
alleging substantially similar antitrust claims and seeking substantially
similar relief, including damages before trebling of at least $125 plus $12 per
month until the date of judgment. The Company has denied the substantive
allegations in these actions. Plaintiff's counsel in the Shepherd case has
indicated that he intends to seek certification of the case as a class action.
On November 5, 1997, Antoine Garabet, M.D., Inc. and Abraham Shammas, M.D.,
Inc., d/b/a Laser Eye Center, sued Pillar Point, VISX, the Company and certain
affiliates of VISX and the Company in the Federal District Court for the
Northern District of California seeking a declaratory judgment that the patents
held by Pillar Point are invalid and unenforceable on account of alleged
antitrust violations and alleging fraud in connection with certain of the
Company's sales and marketing activities. The plaintiffs seek compensatory
damages on the fraud claim against the Company of at least $49, disgorgement of
revenues and profits, punitive damages of an unspecified amount, injunctions
against enforcement of the Pillar Point patents and against alleged continuing
violations of the antitrust laws, attorneys' fees and costs. The Company has
withdrawn its motion to dismiss and has filed a counterclaim for patent
infringement against the plaintiffs and Antoine Garabet and Abraham Shammas,
individually. On March 12, 1999, the Company was served with a complaint filed
against it and Antoine Garabet, M.D., by Kathy Tedesco. In her complaint, Ms.
Tedesco alleges that she was negligently treated for farsightedness by Dr.
Garabet on a Company laser and asserts strict liability claims against the
Company as manufacturer. The complaint seeks unspecified compensatory and
punitive damages. The Company has never provided Dr. Garabet with equipment,
software or service, nor are Company systems presently approved for treatment of
farsightedness in the U.S. The Tedesco matter has been turned over to the
Company's insurer. It is presently pending in the Superior Court of Los Angeles
County, California, as Case No. B0203838.
In May, 1998, The Eye Professionals, P.A. of Millville, New Jersey
commenced an action in the Federal District Court for the District of New Jersey
against the Company and VISX. The case purports to be a class action on behalf
of all individuals or entities that have paid a per-procedure fee directly to
either defendant for use of a Summit or VISX laser to perform laser vision
correction surgery. The complaint alleges, inter alia, price-fixing in violation
of Section 1 of the Sherman Act. The action seeks, inter alia, treble damages,
costs of suit, attorneys' fees, and various forms of declaratory and injunctive
relief. Similar actions were also filed in May, 1998 by Metropolitan Eye Center
and
20
<PAGE>
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
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
21
<PAGE>
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, the Company 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.
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,
22
<PAGE>
and seeks monetary damages and injunctive relief. On February 23, 1999, the
court granted summary judgement in favor of the Company, Summit Partner, Inc.
and Pillar Point Partners.
Seriani Litigation. On October 26, 1992, Joseph Seriani brought suit
against Lens and certain of its former shareholders in the Florida Circuit
Court. The suit alleged violations of the Florida Civil Remedies for Criminal
Practices Act- - - the Florida civil RICO statute -- based on events which
allegedly occurred in the mid-1980s. Seriani's claims against Lens were
dismissed several times for failure to state a viable claim, but in each
instance with leave to amend and refile. On May 15, 1996, the date of the
Company's acquisition of Lens, Seriani and his wife Rhonda Seriani filed an
amended complaint which included the Company as an additional defendant. On
November 25, 1996, the Serianis voluntarily dismissed their action against the
Company and on March 7, 1997 voluntarily dismissed their action against the
remaining defendants, in each case without prejudice. On March 24, 1997, the
Serianis commenced a new lawsuit against Lens and others in the United States
District Court for the Southern District of Illinois, alleging substantially
similar claims. The Company believes that the Serianis' suits against the
Company and Lens are and were without merit.
Lens Express Employee Litigation. On or about February, 1997, a former
employee allegedly filed an administrative complaint with the Florida Commission
on Human Relations against Lens and a former employee of Lens, alleging sexual
discrimination and harassment by the former employee, retaliatory demotion, and
constructive discharge. On or about May, 1997, a current employee filed an
administrative complaint with the same Florida agency, also alleging sexual
discrimination and harassment by the same former employee. The Florida
Commission referred both complaints to the U.S. Equal Employment Opportunity
Commission for investigation. No administrative investigations were completed
before each complainant, represented by the same counsel, sued Lens and the
former employee in Florida state court on or about September, 1997. Each
complaint alleges sexual discrimination and harassment under the Florida Civil
Rights Act and various other state common law claims; the former employee also
alleges retaliatory demotion under the Florida Civil Rights Act. Each plaintiff
seeks a court order prohibiting such alleged discrimination as well as
unspecified compensatory and punitive damages. Lens answered each complaint,
denying the allegations. On or about June 15, 1998, Lens settled all claims of
the current employee for a nominal amount and without admitting any wrongdoing
or liability. On or about October 30, 1998, another current employee filed an
administrative complaint with the same Florida agency against Lens, alleging
sexual discrimination by the same former employee and retaliation. Soon
thereafter, this current employee filed a complaint in Florida state court
against Lens and the former employee alleging battery, intentional infliction of
emotional distress, invasion of privacy, negligent infliction of emotional
distress, and false imprisonment against both Lens and the former employee, and
negligent retention and supervision and negligent investigation against Lens.
While Lens believes the claims in both remaining cases to be without merit,
there can be no assurance that it will prevail in either litigation. Lens cannot
predict the range of possible compensatory damages, if any, or whether punitive
damages may be assessed.
Lens Express Woodstock Litigation. On or about April, 1997, three then
current and two former employees sued Lens, ten employees and four former
employees of Lens, alleging racial discrimination under 42 USC ss. 1981. The
plaintiffs sought an unspecified amount of compensatory damages, punitive
damages, lost wages and a court order declaring the alleged conduct unlawful.
Lens and the other employees denied the allegations; the former employees
apparently were never served with the complaint. After the Court dismissed most
claims in plaintiffs' third amended complaint, plaintiffs filed a fourth amended
complaint in which they dropped claims against most of the individual
defendants. Lens moved to dismiss the fourth amended complaint, and plaintiffs
requested leave to file yet another amendment, which was granted. This case was
pending as WOODSTOCK, et al. v. LENS EXPRESS, INC., et al., in the United States
District Court for the Southern District of Florida, Case No. 97-6529-Civ-
Hurley. Lens made offers of judgement for .75 to each plaintiff; one plaintiff
accepted the offer. Thereafter, two former employees settled for nominal amounts
and the two remaining current employees resigned and also settled for nominal
amounts.
23
<PAGE>
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of 1998.
24
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock $.01 par value ("Common Stock") is traded on the
NASDAQ National Market System, under the symbol "BEAM." The following chart sets
forth the high and low sales prices for the Common Stock during the indicated
periods.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
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
1997
First quarter $ 8.88 $5.63
Second quarter 7.75 5.38
Third quarter 7.75 6.13
Fourth quarter 10.13 4.13
</TABLE>
The closing price of the Common Stock on March 19, 1999 was $5.56. On
March 19, 1999, the Common Stock was held of record by 2,593 persons and
entities, including significant amounts of stock held in "street name."
ITEM 6. SELECTED FINANCIAL DATA
The Company's Selected Historical 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 the Company's audited consolidated financial statements. This
selected consolidated financial data should be read in conjunction with the
Company's audited consolidated financial statements and notes and the related
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are included in Item 7 of Part II of this Report.
25
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA
Revenues .............................................. $ 91,641 $79,650 $ 73,912 $95,258 $ 71,410
Income (loss) from continuing operations(1) ........... 36,730 828 (13,491) 1,575 (14,433)
Cumulative effect of accounting principle change(2) ... (10,103) -- -- -- --
Net income (loss) ..................................... 27,570 21,398 (36,857) (2,967) (16,799)
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations ............ $ 1.17 $ .03 $ (.43) $ .06 $ (.54)
Cumulative effect of accounting principle change .... (.32) -- -- -- --
Net income (loss) ................................... .88 .68 (1.18) (.11) (.63)
Weighted average number of common shares--basic ....... 31,244 31,400 31,174 27,892 26,593
Weighted average number of common shares--diluted ..... 31,292 31,591 31,174 27,892 26,593
Pro forma amounts assuming accounting principle
change had been applied retroactively:
Net income (loss) ..................................... $ 37,673 $22,682 $(37,772) $(6,073) $(19,966)
Net income (loss) per share--basic and diluted ........ $ 1.20 $ .72 $ (1.21) $ (.22) $ (.75)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA
Working capital ....................................... $ 78,953 $ 67,404 $ 73,085 $108,374 $23,560
Total assets .......................................... 144,925 115,103 133,660 161,661 54,288
Long-term debt, less current maturities ............... 150 6,330 11,472 537 503
Stockholders' equity .................................. 119,334 88,987 101,947 138,239 38,692
</TABLE>
__________
(1) In the second quarter of 1998, the Company received a litigation settlement
of $29.9 million, net of related taxes and expenses.
(2) In the fourth quarter of 1998, the Company changed its method of accounting
for Lens Express 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.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The operations of Summit Technology, Inc. and subsidiaries (the "Company")
presently consist of two operating segments: (i) laser vision correction which
includes manufacturing, selling and servicing laser systems and related products
to correct vision disorders and collecting per procedure license fees from users
of its systems and (ii) contact lenses and related products which are sold via
mail order through its wholly-owned subsidiary Lens Express, Inc. ("Lens").
Prior to June 1998, the Company participated in per procedure license fees
from its ownership interest in Pillar Point Partners ("PPP"), a partnership
formed by the Company and VISX, Inc. ("VISX") to hold certain U.S. patents
covering excimer laser systems and procedures. The Company recorded as license
fees, service and other revenues its equity (approximately 44%) in the net
income of PPP. On June 4, 1998, the Company and VISX entered into a settlement
agreement that dissolved PPP and granted to each other worldwide, royalty-free
cross-licenses to all of their respective U.S. and foreign patents in the field
of laser ablation of corneal tissue, including all patents that were included or
includable in PPP. The impact of dissolution of PPP on the Company's future
results is not readily determinable primarily because the Company cannot
estimate the amount of license fees that it would have received from users of
VISX's systems through PPP. Under the terms of the settlement, the Company
received a payment from VISX of $35.0 million and recorded a gain of $34.4
million, net of expenses associated with the settlement. Subsequent to the
dissolution of PPP, the Company effectively retains 100% of all per procedure
license fees performed on its systems because it no longer owes license fees to
PPP for these procedures.
On October 1, 1998, the Company entered into a definitive merger agreement
with Orlando, FL-based Autonomous Technologies Corporation ("Autonomous") to
acquire all of Autonomous' outstanding shares in exchange for 11.7 million
shares of The Company's common stock and an equal value of cash, not to exceed
$50.0 million. The actual value of the transaction will not be determinable
until closing and is dependent upon numerous factors including, but not limited
to, the market price of the Company's common stock prior to closing and any
outstanding loan balance due from Autonomous. As part of the agreement, the
Company has provided Autonomous an $8.0 million revolving line of credit under
which Autonomous may borrow $1.5 million in any calendar month. One half of the
amount outstanding under the revolver on the closing date of the transaction
will reduce the cash consideration paid by the Company. This acquisition is
subject to the approval of the stockholders of the Company and Autonomous and is
expected to close in April 1999.
In October 1998, the Company acquired all rights to the Krumeich-Barraquer
Microkeratome, a high-precision surgical cutting device utilizing disposable,
single-use blades. This device is used by ophthalmologists in corneal surgery.
The Company immediately began marketing the product in international markets and
in December 1998, received 510K clearance from the Food and Drug Administration
("FDA") to begin marketing the product in the United States.
In August 1997, the Company sold its wholly-owned subsidiary Refractive
Centers International, Inc. ("RCII") to LCA-Vision Inc. ("LCA") for 16,164,361
shares of LCA common stock. Prior to the sale, RCII owned and operated the
Company's vision center business, which was accounted for as a discontinued
operation in 1996.
The Company is continuing to evaluate its operations and strategies, which
may result in the acquisition by the Company of one or more additional
businesses, or additional dispositions of all or part of one or more of the
Company's businesses.
27
<PAGE>
RESULTS OF OPERATIONS
1998 as compared with 1997
Revenues: Revenues in 1998 increased 15% to $91.6 million from $79.7
million in 1997. Revenues from the Company's laser vision correction business
increased 36% to $44.9 million in 1998 compared to $33.1 million in 1997.
Revenues from system sales, which include new placements as well as upgrades of
laser systems, increased by 86% in 1998 compared to 1997. System sales in 1998
also include revenues from the Company's microkeratome product line, which was
acquired in the fourth quarter of 1998. The volume of laser vision correction
procedures performed on the Company's laser systems in the U.S. increased 25% in
1998 compared to 1997. Revenues from the Company's laser vision correction
business during 1998 were also favorably impacted by the FDA approval in March
1998 of the Apex Plus to treat astigmatism utilizing the Company's emphasis(TM)
disc. In 1998 and 1997, revenues from contact lens and related products were
$46.8 million and $46.6 million, respectively. As discussed below in "Accounting
Principle Change", the Company changed its method of accounting for Lens'
membership fee revenues which resulted in a $2.6 million increase in 1998
contact lens and related products revenues.
Cost of Revenues: Cost of revenues as a percentage of revenues decreased
to 57% in 1998 from 63% in 1997. This decrease was primarily attributable to the
favorable impact from increased manufacturing levels and lower cost of revenues
associated with contact lens and related products and license fee revenues. Cost
of system revenues as a percentage of its revenue decreased to 80% in 1998
compared to 112% in 1997. In 1997, cost of system revenues exceeded system
revenues primarily due to unabsorbed manufacturing costs. In 1998, cost of
contact lens and related products revenues as a percentage of its revenues was
62% compared to 68% in 1997. This cost of revenue percentage in 1997 would have
been 66% assuming the accounting principle change had been in effect in 1997.
Operating Expenses: Selling, general and administrative expenses in 1998
were $30.2 million compared to $24.1 million in the prior year, a 25% increase.
Selling, general and administrative expenses as a percentage of revenues were
33% and 30% in 1998 and 1997, respectively. The Company has incurred significant
expenditures in sales and marketing in order to grow laser vision correction
procedure volume, that included hiring additional personnel, increased
promotions and development of product marketing materials for users of the
Company's lasers. In 1998, increases in general and administrative expenses were
primarily attributable to higher payroll and benefit costs associated with new
management hires which occurred in the latter part of 1997. In 1997, the Company
received a net payment of $4.5 million from VISX resulting from the settlement
of patent litigation. This settlement resulted in a reduction of legal costs of
$.6 million in 1998 and $2.6 million in the second quarter of 1997. The Company
also recorded a $1.4 million reduction in legal expenses in 1997 resulting from
the settlement of a patent litigation.
Research, development and regulatory expenses in 1998 increased to $7.2
million from $6.2 million a year ago, primarily as a result of increased
spending on the Company's research and development efforts in developing
enhancements to the Apex Plus and increased regulatory efforts to obtain
additional FDA approvals for the use of the Apex Plus to treat hyperopia as well
as a wider range of myopia.
Other Income (Expense): In 1998, the Company received a $35.0 million
payment from VISX pursuant to a settlement agreement, under which The Company
and VISX agreed to dissolve Pillar Point Partners and settle all pending
litigation between the two companies. The litigation settlement, net of related
expenses was $34.4 million. Interest income in 1998 increased slightly to $4.4
million in 1998 from $4.0 million in 1997, primarily due to higher average
balances of cash and cash equivalent balances and short and long-term
investments. Interest expense decreased to $.8 million in 1998 from $1.2 million
as a
28
<PAGE>
result of lower borrowings. In the fourth quarter of 1998, other income included
a $2.0 million gain from the sale of assets and in 1997 other income included a
$.7 million loss on investment in connection with the distribution of LCA common
stock as discussed below.
Discontinued Operations: In January 1997, the Company announced its plan to
discontinue its Vision Center business owned and operated by RCII, a wholly-
owned subsidiary of the Company. Accordingly, the results of operations for this
business were classified as discontinued operations at December 31, 1996.
On August 18, 1997, the Company sold RCII to LCA in exchange for 16,164,361
newly issued shares of LCA common stock. The sale of the discontinued operations
resulted in a net gain of $23.9 million, which included a gain on the sale of
net assets held for discontinued operations and accruals for other estimated
costs to be incurred in connection with the sale of RCII and distribution of LCA
common stock. On December 29, 1997, the Company distributed 9,000,000 shares of
LCA common stock to its shareholders in the form of a dividend. Due to the
distribution, the Company recorded a loss on investment of $.7 million,
representing the difference between the fair market value of LCA common stock on
the dividend declaration date of $23.6 million and its cost basis of $24.3
million.
In the fourth quarter of 1998, the Company reversed an accrual related to
the sale of discontinued operations which resulted in an additional gain on the
sale of discontinued operations of $.9 million.
Accounting Principle Change: Customers of Lens pay membership fees which
entitle members to purchase contact lens and related products at member prices.
During the fourth quarter of 1998, the Company changed its method of accounting
for membership fee revenues which were previously recognized when received.
Under the new accounting method, the Company recognizes membership fee revenues
ratably over the term of the membership, which is one to five years. The Company
believes that this method is preferable because it spreads revenue over the
period that benefits are provided to members. In accordance with the provisions
of Accounting Principles Board Opinion No. 20 "Accounting Changes", the Company
recorded a one-time non-cash charge of $10.1 million, or $.32 per basic and
diluted share, representing the cumulative effect of adopting the new accounting
principle as of January 1, 1998.
Net Income: Income from continuing operations was $36.7 million, or $1.17
per basic and diluted share, in 1998 compared to $.8 million, or $.03 per basic
and diluted share in 1997. Excluding the $35.0 million litigation settlement and
related expenses of $.6 million and related taxes of $4.5 million and the $1.9
million gain, net of tax, on the sale of assets, income from continuing
operations in 1998 was $4.9 million, or $.16 per basic and diluted share
compared to $2.1 million, or $.07 per basic and diluted share, in 1997 assuming
that the accounting principle change had been in effect in 1997.
Net income for 1998 was $27.6 million, or $.88 per basic and diluted share,
compared to net income of $21.4 million for 1997, or $.68 per basic and diluted
share. On a pro forma basis, assuming the accounting principle change had been
in effect in 1997, net income for 1997 would have been $22.7 million, or $.72per
basic and diluted share.
Income Taxes: The effective tax rate for 1998 was 12% compared to 14% for
1997. The Company has continued to provide a 100% valuation allowance against
its net deferred tax asset of $11.3 million as of December 31, 1998. In 1998,
the valuation allowance decreased $13.8 million primarily due to usage of net
operating loss carryforwards.
1997 as compared with 1996
Revenues: Revenues in 1997 increased 8% to $79.7 million from $73.9 million
in 1996, primarily as a result of increased revenues from license fees, service
and other revenues. License fees, service and other revenues increased 76% from
$14.5 million in 1996 to $25.5
29
<PAGE>
million in 1997. License fees, including the Company's equity in the income of
PPP, more than doubled due to the substantial growth of laser vision correction
procedures performed in the U.S. In 1997, sales of laser systems decreased to
$7.6 million from $11.5 million in 1996, a 34% decrease. Contact lenses and
related products revenues decreased slightly to $46.6 million in 1997 from $48.0
million in 1996.
Cost of Revenues: Cost of revenues as a percentage of revenues decreased to
63% in 1997 from 76% in 1996. This decrease was primarily attributable to lower
costs of revenues associated with license fee revenues and leasing programs.
Cost of system revenues as of percentage of system revenues decreased to 112% in
1997 from 120% in 1996. In 1997 and 1996, cost of system revenues exceeded
system revenues primarily due to unabsorbed manufacturing costs.
Operating Expenses: Selling, general and administrative expenses for 1997
decreased 20% to $24.1 million from $30.3 million for 1996. This decrease
reflects lower spending in both sales and marketing as well as general and
administrative costs. Selling, general and administrative expenses as a
percentage of revenues were 30% and 41% in 1997 and 1996, respectively. Sales
and marketing expenses decreased in 1997 compared to 1996 due to lower payroll
and benefit costs and lower marketing costs associated with the Company's
contact lens and related products business. In 1997, the Company recorded a $4.0
million reduction in legal expenses resulting from settlements of patent
litigations. Legal expense in 1996 were offset by a $.8 million settlement of a
patent litigation.
Research, development and regulatory expenses for 1997 increased 5% to $6.2
million from $5.9 million for 1996. This increase was primarily related to
increased spending on the Company's regulatory efforts to obtain FDA approval
for use of the Apex Plus laser to treat astigmatism and hyperopia as well as a
wider range of myopia.
Discontinued Operations: As previously discussed in "1998 as compared with
1997", the Company recognized a gain of $23.9 million, or $.76 per basic and
diluted share, on the sale of discontinued operations in 1997. Losses from
discontinued operations were $3.3 million, or $.11 per basic and diluted share
in 1997 and $23.4 million, or $.75 per basic and diluted share, in 1996.
Net Income (Loss): Income from continuing operations for 1997 was $.8
million, or $.03 per basic and diluted share, as compared to a loss from
continuing operations of $13.5 million, or $.43 per basic and diluted share, for
1996. The increase in income from continuing operations is primarily
attributable to increased revenues and lower operating expenses. Net income for
1997 was $21.4 million, or $.68 per basic and diluted share, as compared to a
net loss of $36.9 million, or $1.18 per basic and diluted share for 1996.
Income Taxes: The effective tax rate for 1997 was 14% compared to 0% for
1996. The Company has continued to provide a 100% valuation allowance against
its net deferred tax asset of $25.1 million as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements have been met through external debt
and equity financing. As of December 31, 1998, the Company's cash and cash
equivalent balances and short and long-term investments increased to $89.9
million from $74.1 million as of December 31, 1997. Shares of LCA common stock
included in long-term investments as of December 31, 1998 and 1997 were valued
at $9.8 million and $8.1 million, respectively. Working capital increased to
$79.0 million as of December 31, 1998 from $67.4 million as of December 31,
1997. In 1998, net cash provided by operating activities of $30.0 million
resulted primarily from income from continuing operations of $37.7 million which
includes the receipt of a $35.0 million litigation settlement. In 1997, net cash
used by operating activities of $10.8 million resulted primarily from net cash
used by discontinued operations of $14.7 million. Excluding the gain on sale of
discontinued operations,
30
<PAGE>
cumulative effect of accounting principle change and loss on investment, net
income before depreciation and amortization was $40.5 million in 1998 compared
to $.8 million in 1997.
In 1998, net cash used by investing activities of $25.4 million resulted
primarily from a net increase in short and long-term investments of $16.5
million, purchase of patents, intangibles and property and equipment of $6.4
million and a loan to Autonomous and deferred acquisition costs of $3.8 million.
In 1997, net cash provided by investing activities of $5.1 million resulted
primarily from investing activities of discontinued operations of $9.9 million
offset by a net increase in short and long-term investments of $4.2 million and
capital expenditures of $1.8 million.
Net cash used by financing activities of $7.0 million in 1998 and $4.6
million in 1997 included $5.0 million repayments of long-term debt. In 1998,
the Company also repurchased 380,500 shares of its common stock for $1.9
million.
In 1996, the Company entered into a loan agreement consisting of a $20.0
million unsecured revolving credit facility ("facility") and a $20.0 million
unsecured term loan ("term loan"). The $20.0 million facility expired in March
1999 and allowed the Company to borrow at LIBOR plus 75 to 125 basis points,
based upon the financial results of the Company or the prime rate. As of
December 31, 1998 there were no borrowings under the facility. The term loan
requires quarterly principal payments of $1.3 million and monthly interest
payments calculated at prime rate.
In the fourth quarter of 1998, the Company's loan to Autonomous placed the
Company in technical default of a loan agreement covenant. This default permits
the lenders to accelerate payment of the remaining balance of the term loan. The
outstanding balance of the term loan of $6.3 million as of December 31, 1998 has
been included in current maturities of long-term debt. The interest rate of the
term loan at December 31, 1998 was 7.75%.
The Company believes that consummation of the Autonomous acquisition will
place the Company in technical default of certain covenants included in the loan
agreement and place a significant strain on the Company's liquidity. The cash
consideration to be paid to Autonomous stockholders of up to $50.0 million
represents approximately 68% of the Company's cash and cash equivalent balances
and short and long-term investments excluding the value of LCA common stock and
net of the term loan at December 31, 1998. The Company is currently negotiating
with its existing and other institutions for a new line of credit of
approximately $20 million to $25 million. The Company is currently evaluating
its options regarding debt and borrowing capacity. The Company believes that its
existing corporate resources are adequate for at least the next twelve months to
meet working capital needs and to fund corporate requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is exposed to the
risks associated with fluctuations in the market value of its available-for-sale
investment securities, changes in foreign currency exchange rates and changes in
interest rates. The Company's market risk sensitive instruments are entered
into for other than trading purposes.
The Company's available-for-sale investment securities consist of debt
securities, primarily corporate bonds and mortgage-backed securities, and 7.2
million shares of LCA common stock. The fair value of these investment
securities at December 31, 1998 was $58.5 million, which included $48.8 million
of debt securities and $9.8 million of LCA common stock with a corresponding
accumulated unrealized loss of $9.4 million. Substantially all of the unrealized
loss relates to the LCA common stock, which is subject to much more market risk
than the Company's debt securities and which has been more volatile than most
market indices. A 10 percent change in the quoted market price of one share of
LCA common stock would have an impact of approximately $1 million on the fair
value of the Company's
31
<PAGE>
investment in LCA common stock. This impact would be recognized in the Company's
statement of comprehensive income. At December 31,1998, the Company's debt
securities consist of highly-rated debt instruments.
The Company's investment goal surrounding debt securities is to meet
liquidity needs and to preserve the principal.
The functional currency of the Company's foreign operations is the U.S.
dollar. The Company enters into forward exchange contracts to reduce exposure to
exchange rate risk associated with transactions in the ordinary course of
business, primarily payments to vendors and employees in foreign currency. The
forward exchange contracts establish a specific exchange rate at which the
Company will sell U.S. dollars at a future date and have maturities not
exceeding twelve months. Exchange gains or losses on forward exchange contracts
are recognized in other income (expense) when the contracts are settled. In
1998, the Company recorded a loss of $32,000, representing the estimated fair
value, for outstanding forward exchange contracts at December 31, 1998 which had
a notional value of $3 million. A 10% change in the currency exchange rates
associated with these contracts would have $.3 million impact on the Company's
annual operating results.
The Company has a variable rate term loan with an unpaid principal balance
of $6.3 million at December 31, 1998. The term loan requires quarterly principal
payments of $1.3 million and monthly interest payments calculated at prime rate.
A one percentage point change in the prime rate would impact interest expense in
1999 by approximately $32,000. The Company also has an unsecured credit line
which would be subject to market risk associated with changing interest rates.
The credit line expired in March 1999 and there were no borrowings against the
credit line at December 31, 1998.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. Under SFAS No. 133, companies will be required to recognize
derivative instruments on the balance sheet at their fair value and report
corresponding gains or losses either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. The Company has not completed its assessment of the consolidated
financial statement impact of adopting the new standard.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs that are not able to
differentiate between the year 1900 and the year 2000 because they were written
using two digits instead of four digits to define the applicable year.
Internal Operation: A review of the Company's internal computer systems and
software packages has been performed to identify the systems and software that
could be affected by this issue. Discovery of these systems and software is done
through surveys and research of third party suppliers and manufactures. The
Company will also be performing independent testing through the use of testing
applications and scripting to simulate and test for Year 2000 related issues.
Those hardware devices, which include, but are not limited to, desktops,
laptops, file servers, LAN and WAN hardware, PBX and voicemail, found not to be
compliant have been or will be either replaced or upgraded to meet compliance.
The Company currently believes that by either upgrading its software packages to
currently available versions or replacing them, the Year 2000 problem will not
pose a significant operational problem to the Company. These software packages
include, but not limited to, financials, manufacturing, payroll, customer
service, email and local area network operating system. A survey of vendors
providing electronic information will be conducted and addressed. Installation
of and testing of Year 2000
32
<PAGE>
compliant hardware and software is currently expected to be completed within the
next six months. The costs related to software upgrades are not anticipated to
be material and have been incurred in the normal course of operations.
Products: The Company currently offers two products which have the ability
to process and store date/time data the Apex excimer laser and the Apex Plus
excimer laser. These lasers meet Year 2000 compliance requirements although
their capability to record date/time does not impact clinical output. The
Company has not surveyed third parties to inquire into their Year 2000
compliance status. There can be no assurance that the Company will not
experience unexpected costs and delays in achieving Year 2000 compliance, which
could result in a material adverse effect on the Company's results of
operations, financial position or cash flow.
Year 2000 Risks: Efforts are continually being made to ensure proper
operation of the Company's systems during the transition from 1999 to 2000 and
beyond. As well, internal testing, and Year 2000 testing tools will be used to
test the readiness of software applications for the Year 2000. In the event of
unforeseen or unanticipated issues related to the Year 2000, these issues may
have material adverse effect on the Company's results of operations, financial
position or cash flow.
Year 2000 Contingency Plans: The Company has not created a formal
contingency plan for Year 2000 problems. The Company intends to take appropriate
actions to mitigate the effects of third parties' failure to remediate their
Year 2000 issues and for unexpected failures in its own systems. The Company
expects to make arrangements for some alternate suppliers and will continue to
identify potential alternate suppliers. If it becomes necessary for the Company
to take these corrective actions, it is uncertain whether this would result in
significant interruptions in service or delays in business operations or whether
it would have a material adverse effect on the Company's results of operations,
financial position or cash flow.
EURO CONVERSION
On January 1, 1999, eleven of fifteen member countries of the European
Union adopted the conversion of their national currencies to the European
Union's common currency (Euro). A permanent fixed conversion rate between the
existing national currencies of these countries and the Euro was established on
that date. The Euro may be used in business transactions, however, national
currencies will still remain legal tender through June 30, 2002. The Company is
currently conducting an internal analysis to determine the impact of the Euro
conversion on its business and financial condition and does not believe that the
impact will be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about
market risk is included in Item 7 of Part II of this Report, entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports.......................................... F-2-3
Consolidated Balance Sheets as of December 31, 1998 and 1997........... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996....................................... F-5
Consolidated Statements of Comprehensive Income (Loss) for the Years
Ended December 31, 1998, 1997 and 1996................................. F-6
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996....................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-8
Notes to Consolidated Financial Statements............................. F-9
F-1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Summit Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Summit
Technology, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
the related consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule for the year ended December 31, 1998
listed in Item 14.2. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1998 and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule for the year
ended December 31, 1998, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for membership fee revenues in 1998.
Deloitte & Touche LLP
Boston, Massachusetts
March 17, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Summit Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Summit
Technology, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Summit Technology,
Inc. and subsidiaries at December 31, 1997, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 6, 1998, except as to Note 10, which is as
of March 27, 1998, and except for the restatement
referred to in Note 18, as to which the date is
March 9, 1999
F-3
<PAGE>
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 12,764 8,896
$1,399 in 1998 and $758 in 1997
Inventories 17,403 14,494
Other current assets 5,965 2,046
Restricted cash - 1,264
--------- --------
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 (832) (160)
in 1997 --------- --------
Total stockholders' equity 119,334 88,987
--------- --------
Total liabilities and stockholders' equity $144,925 $115,103
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<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)
======== ======= ========
Basic and diluted earnings (loss) per share:
- - --------------------------------------------
Income (loss) from continuing operations $ 1.17 $ 0.03 $(0.43)
Gain on sale of discontinued operations, net of tax 0.03 0.76 -
Loss from discontinued operations - (0.11) (0.75)
-------- ------- --------
Income (loss) before cumulative
effect of accounting principle change 1.20 0.68 (1.18)
Cumulative effect of accounting principle change, net of tax (0.32) - -
-------- ------- --------
Net income (loss) $ 0.88 $ 0.68 $(1.18)
======== ======= ========
Weighted-average number of common shares:
- - ----------------------------------------
Basic 31,244 31,400 31,174
Effect of dilutive stock options outstanding 48 191 -
-------- ------- --------
Diluted 31,292 31,591 31,174
======== ======= ========
Pro forma amounts assuming accounting principle
change had been applied retroactively:
- - -----------------------------------------------------
Net income (loss) $ 37,673 $22,682 $(37,772)
Net income (loss) per share basic and diluted $ 1.20 $ 0.72 $ (1.21)
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- --------- ---------
<S> <C> <C> <C>
Net income (loss) $27,570 $ 21,398 $(36,857)
Net unrealized gain (loss) on investments, net of tax 1,873 (11,284) -
------- -------- --------
Comprehensive income (loss) $29,443 $ 10,114 $(36,857)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
--------------------------- Paid-in Accumulated Comprehensive
Shares Par Value Capital Deficit Income (Loss)
---------- --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 30,935 $ 309 $170,392 $(32,330) $ -
Exercise of stock options 184 2 1,396 - -
Other shares issued 9 1 94 - -
Shares cancelled (103) (1) (899) - -
Net loss - - - (36,857) -
------ ----- -------- -------- --------
Balance at December 31, 1996 31,025 311 170,983 (69,187) -
Exercise of stock options 40 - 214 - -
Other shares issued 235 2 335 - -
Dividend - - (23,625) - -
Net unrealized loss on investment - - - - (11,284)
Net income - - - 21,398 -
------ ----- -------- -------- --------
Balance at December 31, 1997 31,300 313 147,907 (47,789) (11,284)
Exercise of stock options 7 - 37 - -
Other shares issued 16 1 72 - -
Net unrealized gain on investment - - - - 1,873
Purchases of treasury stock - - - - -
Effect of adjustment to Lens
acquisition exchange ratio - - (1,351) - -
Tax benefit related to stock options - - 2,817 - -
Net income - - - 27,570 -
------ ----- -------- -------- --------
Balance at December 31, 1998 31,323 $ 314 $149,482 $(20,219) $ (9,411)
====== ===== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Total
------------------------ Stockholders'
Shares At Cost Equity
--------- -------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996 (5) $ (132) $ 138,239
Exercise of stock options (1) (28) 1,370
Other shares issued - - 95
Shares cancelled - - (900)
Net loss - - (36,857)
--------- -------------- -------------
Balance at December 31, 1996 (6) (160) 101,947
Exercise of stock options - - 214
Other shares issued - - 337
Dividend - - (23,625)
Net unrealized loss on investment (11,284)
Net income - - 21,398
--------- -------------- -------------
Balance at December 31, 1997 (6) (160) 88,987
Exercise of stock options
Other shares issued - - 37
Net unrealized gain on investment - - 73
1,873
Purchases of treasury stock (381) (1,855) (1,855)
Effect of adjustment to Lens
acquisition exchange ratio 218 1,183 (168)
Tax benefit related to stock options - - 2,817
Net income - - 27,570
--------- -------------- -------------
Balance at December 31, 1998 (169) $ (832) $ 119,334
========= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
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-8
<PAGE>
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Years ended December 31, 1998, 1997, and 1996
1. Nature of Business
The operations of Summit Technology, Inc. and subsidiaries (the
"Company")presently consist of two operating segments: (i) laser vision
correction which includes manufacturing, selling and servicing laser systems and
related products to correct vision disorders and collecting per procedure
license fees from users of its systems and (ii) contact lenses and related
products which are sold via mail order through its wholly-owned subsidiary, Lens
Express, Inc. ("Lens").
On October 1, 1998, the Company entered into a definitive merger agreement
with Orlando, FL-based Autonomous Technologies Corporation ("Autonomous") to
acquire all of Autonomous' outstanding shares in exchange for 11.7 million
shares of The Company's common stock and an equal value of cash, not to exceed
$50,000. The actual value of the transaction will not be determinable until
closing and is dependent upon numerous factors including, but not limited to,
the market price of Company's common stock prior to closing and any outstanding
loan balance due from Autonomous. As part of the agreement, the Company has
provided Autonomous a $8,000 revolving line of credit under which Autonomous may
borrow $1,500 in any calendar month. One half of the amount outstanding under
the revolver on the closing date of the transaction will reduce the cash
consideration paid by the Company. As of December 31, 1998, other current assets
include $3,832 of costs related to this acquisition, of which $3,000 represents
borrowings by Autonomous under the revolver and $832 represents deferred costs
incurred in connection with this acquisition. This acquisition is subject to the
approval of the stockholders of the Company and Autonomous and is expected to
close in April 1999.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of intercompany accounts and
transactions.
Revenue Recognition
The Company recognizes revenue on product sales when the products are
shipped and the customer takes ownership and assumes risk of loss. The cost of
any product upgrade obligation is accrued when the product is shipped.
Additionally, the Company provides
F-9
<PAGE>
installation, training and a one-year warranty on its laser system. The costs to
provide these services are incidental to the sale and are accrued when the sale
is recognized. Advance payments received by the Company for products or services
are recorded as deferred revenue. Service contract revenue is recognized ratably
over the term of the contract. The Company recognizes revenue under laser
equipment operating leases based upon the terms of the contract. Non-refundable
per procedure license fees are recognized upon shipment of Omnicards which are
required to perform laser vision correction procedures with the Company's
equipment in the U.S. The Company accounted for its interest in Pillar Point
Partners ("PPP") using the equity method of accounting and recorded its equity
in the net income of PPP as "license fees, service and other revenues"
(see Note 4).
Accounting Principle Change
Customers of Lens pay membership fees which entitle members to purchase
contact lens and related products at member prices. During the fourth quarter of
1998, the Company changed its method of accounting for membership fee revenues
which were previously recognized when received. Under the new accounting method,
the Company recognizes membership fee revenues ratably over the term of the
membership, which is one to five years. The Company believes that this method is
preferable because it spreads revenue over the period that benefits are provided
to members. In accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 20, "Accounting Changes," the Company recorded a one-time
charge of $10,103, or $.32 per basic and diluted share, representing the
cumulative effect of adopting the new accounting principle as of January 1,
1998. Adoption of the new standard resulted in a $2,583 increase in 1998 contact
lens and related products revenues.
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.
F-10
<PAGE>
Useful lives for property and equipment is as follows:
Leasehold improvements 5-10 years
Manufacturing and test equipment 3-10 years
Furniture, fixtures and office equipment 3-10 years
Laser equipment held for lease 3 years
Patents and Other Intangibles
Patents consist of purchased patents and patent application costs. Patents
are amortized using the straight-line method over the patent's economic life
ranging from nine to twenty years. Other intangibles include purchased licenses
and customer databases. Purchased licenses are amortized over, five years using
the straight-line method and customer databases are amortized on an accelerated
method over six years based upon expected customer turnover. The carrying
values of patents and other intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.
Restricted Cash
As of December 31, 1997, restricted cash of $1,264 represented a bond
posted by the Company to enforce an injunction issued by a German court. The
related litigation has been resolved in the Company's favor.
Income Taxes
Deferred tax assets and liabilities have been established for the expected
future tax consequences of events that have been recognized in the Company's
consolidated financial statements and tax returns. These deferred tax assets
and liabilities are determined based on the difference between the financial
statement carrying amounts and tax basis of assets and liabilities using
currently enacted tax rates that are expected to be in effect during the years
in which the differences are anticipated to reverse.
Foreign Currency Translation
The functional currency of the Company's foreign operations is the U.S.
dollar. Assets, liabilities and expenses related to foreign operations are
remeasured in U.S. dollars at the appropriate exchange rates. Gains and losses
resulting from remeasurement are included in other income (expense).
Advertising Expense
The Company expenses advertising costs when the advertising takes place.
For the years ended December 31, 1998, 1997 and 1996, the Company's advertising
expense was $2,741, $3,683 and $6,346, respectively.
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.
F-11
<PAGE>
Fair Value
The carrying amount of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value because of the short-term maturity of
these items. The fair market value of long-term debt approximates the carrying
value due to the floating interest rate.
Concentration of Credit Risk
The Company's financial instruments subject to credit risk are primarily
cash and cash equivalents, short-and long-term investments, trade receivables
and forward contracts. The Company places its investments and enters into
forward exchange contracts with major financial institutions. Investments
primarily consist of highly rated debt instruments to meet liquidity needs and
to preserve the principal. The Company limits its credit risk of U.S.
receivables by obtaining commitments from a third-party leasing company. The
Company limits its credit risk of international receivables by using
distributors with proven credit history or by requiring irrevocable letters of
credit.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Earnings Per Share
Basic earnings per share amounts are based on the weighted-average number
of common shares outstanding during the year. Diluted earnings per share amounts
include the effect of all potential common shares, if dilutive, that were
outstanding during the year.
Reclassifications
Certain prior year information has been reclassified to conform with
present year presentation of data. See Note 4.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. Under SFAS No. 133, companies will be required to recognize
derivative instruments on the balance sheet at their fair value and report
corresponding gains or losses either in the statement of operations or as a
component of comprehensive income, depending on the type of hedging relationship
that exists. The Company has not completed its assessment of the consolidated
financial statement impact of adopting the new standard.
3. Discontinued Operations
In January 1997, the Company announced its plan to discontinue its Vision
Center business owned and operated by Refractive Centers International, Inc.
("RCII"), a wholly-owned subsidiary of the Company. Accordingly, the results of
operations for this business were classified as discontinued operations at
December 31, 1996.
On August 18, 1997, the Company sold RCII to LCA-Vision Inc. ("LCA") in
exchange for 16,164,361 newly issued shares of LCA common stock. The sale of the
discontinued operations resulted in a net gain of $23,910, which included a gain
on the sale of net assets held for discontinued operations and accruals for
other estimated costs to be incurred in connection with the sale of RCII and
distribution of LCA common stock. On December 29, 1997, the
F-12
<PAGE>
Company distributed 9,000,000 shares of LCA common stock to its shareholders in
the form of a dividend. Due to the distribution, the Company recorded a loss on
investment of $675, representing the difference between the fair market value of
LCA common stock on the dividend declaration date of $23,625 and its cost basis
of $24,300. The remaining shares are held by the Company and have been
classified as a long-term investment available for sale. As of December 31, 1998
and 1997, the Company owned 17.3% and 19.5%, respectively, of LCA's outstanding
common stock.
In the fourth quarter of 1998, the Company reversed an accrual related to
the sale of discontinued operations, which resulted in an additional gain on the
sale of discontinued operations of $943.
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:
December 31,
----------------
1998 1997
------- -------
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
======= =======
6. Property and Equipment
Property and equipment consist of the following:
F-13
<PAGE>
<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>
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>
F-14
<PAGE>
9. Leasing and Financing Arrangements
Leases
Capital lease obligations consist of amounts due under equipment lease
agreements. At December 31, 1998, the cost and accumulated depreciation of the
related equipment was $745 and $431, respectively. The Company leases its
facilities in the U.S. under operating leases expiring in 2000 and 2002. The
Company leases an office and manufacturing facility in Ireland under an
operating lease expiring in 2026. Rent expense was approximately $732, $751 and
$898 for the years ended December 31, 1998, 1997, and 1996, respectively.
Financing Arrangements
In 1996, the Company entered into a loan agreement consisting of a $20,000
unsecured revolving credit facility ("facility") and a $20,000 unsecured term
loan ("term loan"). The loan agreement contains the following financial
covenants: debt service coverage ratio, interest coverage ratio, leverage ratio,
minimum net worth and quick ratio. The loan agreement also includes restrictions
on the Company's ability to incur additional indebtedness, to create liens, to
make certain guarantees, loans, advances and investments and to merge or
consolidate with other entities and to dispose of material assets. The $20,000
facility expired in March 1999 and allowed the Company to borrow at LIBOR plus
75 to 125 basis points, based upon the financial results of the Company or the
prime rate. As of December 31, 1998 there were no borrowings under the facility.
The term loan requires quarterly principal payments of $1,250 and monthly
interest payments calculated at prime rate.
In the fourth quarter of 1998, the Company's loan to Autonomous placed the
Company in technical default of a loan agreement covenant. This default permits
the lenders to accelerate payment of the remaining balance of the term loan.
Accordingly, the outstanding balance of the term loan of $6,250 as of December
31, 1998 has been included in current maturities of long-term debt. The interest
rate of the term loan at December 31, 1998 was 7.75%.
The Company believes that consummation of the Autonomous acquisition will
place the Company in technical default of certain covenants included in the loan
agreement and place a significant strain on the Company's liquidity. The cash
consideration to be paid to Autonomous stockholders of up to $50.0 million
represents approximately 68% of the Company's cash and cash equivalent balances
and short and long-term investments excluding the value of LCA common stock and
net of the term loan at December 31, 1998. The Company is currently negotiating
with its existing and other institutions for a new line of credit of
approximately $20 million to $25 million. The Company is currently evaluating
its options regarding debt and borrowing capacity. The Company believes that its
existing corporate resources are adequate for at least the next twelve months to
meet working capital needs and to fund corporate requirements.
At December 31, 1998, future payments of the term loan and capital leases
and minimum rental payments under noncancellable operating leases were as
follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
Total
Long-term
Term Loan Capital Leases Debt Operating Leases
--------- -------------- ------ ----------------
<S> <C> <C> <C> <C>
Year ending December 31:
1999 $6,250 $193 $6,443 $ 861
2000 - 129 129 740
2001 - 34 34 419
2002 - - - 328
2003 - - - 140
Thereafter - - - 3,285
--------- -------------- ------ ----------------
Minimum future payments 6,250 356 6,606 $5,773
========= ============== ====== ================
Less amounts representing interest - 25 25
--------- -------------- ------
Long-term debt 6,250 331 6,581
Less current maturities of long-term debt 6,250 181 6,431
--------- -------------- ------
Long-term debt, less current maturities $ - $150 $ 150
========= ============== ======
</TABLE>
10. Stockholders' Equity
Common and Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock at $.01 par
value and 60,000,000 shares of common stock at $.01 par value. The terms and
conditions of the preferred stock, including any preferences and dividends, will
not be established until such time, if ever, as such shares are issued by the
Company.
Stock Option Plans
In March 1987, the Company adopted a Stock Option Plan (the "1987 Plan")
which permitted the Company to grant both incentive and non-incentive stock
options to employees. The 1987 Plan expired by its terms in March 1997 and the
Company adopted the 1997 Stock Option Plan (the "1997 Plan"). A total of
3,107,415 shares and 1,500,000 shares of common stock were authorized by the
Board of Directors (the "Board") for issuance under the 1987 Plan and the 1997
Plan, respectively. The 1997 Plan permits the Company to grant stock options
(incentive and non-incentive) and stock appreciation rights to employees,
members of the Board, consultants and advisors. Options generally vest within 3
years of grant date and must be exercised not later than 10 years from the date
of grant.
The Company also has a Stock Option Plan for Outside Directors (the
"Directors' Plan") under which a total of 75,000 shares of common stock have
been authorized for issuance. Options granted under the Directors' Plan vest one
year from grant date and must be exercised not later than 10 years from the date
of grant.
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:
F-16
<PAGE>
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Price Per Share
--------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1996 703,075 $14.14
Options granted 832,161 6.23
Options lapsed or canceled (329,012) 17.76
Options exercised (184,308) 7.58
--------- ------
Options outstanding, December 31, 1996 1,021,916 7.72
Options granted 697,684 6.81
Options lapsed or canceled (195,355) 9.25
Options exercised (39,822) 5.39
--------- ------
Options outstanding, December 31, 1997 1,484,423 7.16
Options granted 627,918 3.95
Options lapsed or canceled (296,700) 8.88
Options exercised (6,850) 5.38
--------- ------
Options outstanding, December 31, 1998 1,808,791 $ 5.77
========= ======
</TABLE>
Options to purchase 780,524 shares, 622,879 shares and 482,324 shares were
exercisable under the plans at December 31, 1998, 1997 and 1996, with a
weighted-average exercise price per share of $6.88, $7.92 and $7.82,
respectively. In 1997, options to purchase 225,000 shares, which were granted in
1989 under a separate executive stock option agreement, were exercised. In 1998
and 1996, options to purchase 100,000 shares and 130,342 shares, respectively,
were repriced through cancellation and reissuance. The number of shares of
common stock reserved for granting of future options under the Plans was 321,225
shares, 829,635 shares and 210,256 shares at December 31, 1998, 1997 and 1996,
respectively. The weighted-average fair value of options granted during 1998,
1997 and 1996 was $2.66, $3.94 and $3.43 per option, respectively.
The following table summarizes certain information relating to outstanding
and exercisable options under the Plans at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - ------------------------------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Ranges of Number Remaining Exercise Number Exercise
Exercise Prices of Shares Contractual Life Price of Shares Price
- - ------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
$3.50 to $5.38 1,073,892 8.4 $ 4.51 458,907 $ 5.26
5.50 to 7.75 622,925 8.5 6.11 217,143 6.09
10.50 to 14.87 72,200 4.8 13.88 72,200 13.88
17.33 to 25.31 39,774 6.2 19.41 32,274 19.66
</TABLE>
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted-average assumptions:
F-17
<PAGE>
<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 Generally, a Distribution Date occurs if (a) a person or group
becomes a beneficial owner of 15% or more of the Company's outstanding shares of
Common Stock without the prior approval of the Board ("Acquiring Person"), or
(b) ten business days lapse following the commencement of, or announcement of an
intention to make, a tender or exchange offer for the common stock not approved
by the Board, which, if consummated, would result in a person or group becoming
a beneficial owner of 15% or more of the Company's outstanding shares of Common
Stock.
If a person or group becomes an Acquiring Person, a "Flip-In Event" thereby
occurs concurrently with the Distribution Date, with the effect that each Right
(other than those owned by such Acquiring Person) will entitle its holder to
obtain common stock having a market value of eight times the Right's exercise
price for a purchase price equal to four times the exercise price of the Rights,
in effect allowing a Rights holder to purchase a fixed amount of the Company's
common stock at a discount of 50% off the market price. If a person or group
becomes an Acquiring Person (hence triggering a Flip-In Event), and thereafter
the Company is involved in a merger or other business combination with the
Acquiring Person where the Company is not the surviving entity and the holders
of the Company's common stock are not the holders of all of the surviving
entity's common stock, or the sale of 50% or more of the Company's assets and
earning power to the Acquiring Person occurs (a "Flip-Over Event"), each Right
(other than those owned by the Acquiring Person) will then entitle the holder to
obtain eight times the Right's exercise price for a purchase price equal to four
times the exercise price of the Rights.
F-18
<PAGE>
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 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.
F-19
<PAGE>
The plaintiff seeks, things, antitrust damages of at least $30 plus $2 to $3 per
month until the date of judgment, trebling of those damages, compensatory and
punitive damages on the fraud claim against the Company of at least $500 plus $2
to $3 per month until the date of judgment, attorney's fees, and a permanent
injunction against future violations. On September 5, 1996, a Nevada
ophthalmologist, John R. Shepherd, through his professional corporation,
commenced a similar lawsuit against the same parties, in the same court,
alleging substantially similar antitrust claims and seeking substantially
similar relief, including damages before trebling of at least $125 plus $12 per
month until the date of judgment. The Company has denied the substantive
allegations in these actions. Plaintiff's counsel in the Shepherd case has
indicated that he intends to seek certification of the case as a class action.
On November 5, 1997, Antoine Garabet, M.D., Inc. and Abraham Shammas, M.D.,
Inc., d/b/a Laser Eye Center, sued Pillar Point, VISX, the Company and certain
affiliates of VISX and the Company in the Federal District Court for the
Northern District of California seeking a declaratory judgment that the patents
held by Pillar Point are invalid and unenforceable on account of alleged
antitrust violations and alleging fraud in connection with certain of the
Company's sales and marketing activities. The plaintiffs seek compensatory
damages on the fraud claim against the Company of at least $49, disgorgement of
revenues and profits, punitive damages of an unspecified amount, injunctions
against enforcement of the Pillar Point patents and against alleged continuing
violations of the antitrust laws, attorneys' fees and costs. The Company has
withdrawn its motion to dismiss and has filed a counterclaim for patent
infringement against the plaintiffs and Antoine Garabet and Abraham Shammas,
individually. On March 12, 1999, the Company was served with a complaint filed
against it and Antoine Garabet, M.D., by Kathy Tedesco. In her complaint, Ms.
Tedesco alleges that she was negligently treated for farsightedness by Dr.
Garabet on a Company laser and asserts strict liability claims against the
Company as manufacturer. The complaint seeks unspecified compensatory and
punitive damages. The Company has never provided Dr. Garabet with equipment,
software or service, nor are Company systems presently approved for treatment of
farsightedness in the U.S. The Tedesco matter has been turned over to the
Company's insurer. It is presently pending in the Superior Court of Los Angeles
County, California, as Case No. B0203838.
In May, 1998, The Eye Professionals, P.A. of Millville, New Jersey
commenced an action in the Federal District Court for the District of New Jersey
against the Company and VISX. The case purports to be a class action on behalf
of all individuals or entities that have paid a per-procedure fee directly to
either defendant for use of a Summit or VISX laser to perform laser vision
correction surgery. The complaint alleges, inter alia, price-fixing in violation
of Section 1 of the Sherman Act. The action seeks, inter alia, treble damages,
costs of suit, attorneys' fees, and various forms of declaratory and injunctive
relief. Similar actions were also filed in May, 1998 by Metropolitan Eye Center
and Outpatient Surgical Facility, Inc. in the U.S. District Court for the
Northern District of California against the Company, VISX, Summit Partner, Inc.,
and VISX Partner, Inc., and by New England Laser Vision, Inc. in the U.S.
District Court for the District of New Jersey against the Company and VISX. In
August, 1998, David R. Shapiro, M.D., filed another similar purported class
action against the Company and VISX in the United States District Court for the
District of Arizona. Plaintiffs in each of these cases have agreed to
consolidation of the four purported class actions and filed and served a single
consolidated amended complaint. It purports to be a class action on behalf of
all persons and entities (excluding governmental entities, defendants,
subsidiaries and affiliates of defendants) in the United States who paid a per-
procedure royalty to any defendant or any alleged co-conspirator or any
subsidiary or affiliate thereof, at any time after September 1995. The
Consolidated Amended Complaint seeks, among other things, unspecified treble
damages on behalf of plaintiffs and the alleged class, along with attorneys'
fees, costs, and injunctive and declaratory relief.
In September, 1998, Laser Eye Center of Texas, L.L.P. and Warren D. Cross,
M.D., filed a purported class action against the Company, Summit Partner, Inc.,
VISX, VISX, Partner, Inc., and Pillar Point Partners in the U.S. District Court
for the Southern
F-20
<PAGE>
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
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
F-21
<PAGE>
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.
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.
F-22
<PAGE>
Lens Express Employee Litigation. On or about February, 1997, a former
employee allegedly filed an administrative complaint with the Florida Commission
on Human Relations against Lens and a former employee of Lens, alleging sexual
discrimination and harassment by the former employee, retaliatory demotion, and
constructive discharge. On or about May, 1997, a current employee filed an
administrative complaint with the same Florida agency, also alleging sexual
discrimination and harassment by the same former employee. The Florida
Commission referred both complaints to the U.S. Equal Employment Opportunity
Commission for investigation. No administrative investigations were completed
before each complainant, represented by the same counsel, sued Lens and the
former employee in Florida state court on or about September, 1997. Each
complaint alleges sexual discrimination and harassment under the Florida Civil
Rights Act and various other state common law claims; the former employee also
alleges retaliatory demotion under the Florida Civil Rights Act. Each plaintiff
seeks a court order prohibiting such alleged discrimination as well as
unspecified compensatory and punitive damages. Lens answered each complaint,
denying the allegations. On or about June 15, 1998, Lens settled all claims of
the current employee for a nominal amount and without admitting any wrongdoing
or liability. On or about October 30, 1998, another current employee filed an
administrative complaint with the same Florida agency against Lens, alleging
sexual discrimination by the same former employee and retaliation. Soon
thereafter, this current employee filed a complaint in Florida state court
against Lens and the former employee alleging battery, intentional infliction of
emotional distress, invasion of privacy, negligent infliction of emotional
distress, and false imprisonment against both Lens and the former employee, and
negligent retention and supervision and negligent investigation against Lens.
While Lens believes the claims in both remaining cases to be without merit,
there can be no assurance that it will prevail in either litigation. Lens cannot
predict the range of possible compensatory damages, if any, or whether punitive
damages may be assessed.
Lens Express Woodstock Litigation. On or about April, 1997, three then
current and two former employees sued Lens, ten employees and four former
employees of Lens, alleging racial discrimination under 42 USC ss. 1981. The
plaintiffs sought an unspecified amount of compensatory damages, punitive
damages, lost wages and a court order declaring the alleged conduct unlawful.
Lens and the other employees denied the allegations; the former employees
apparently were never served with the complaint. After the Court dismissed most
claims in plaintiffs' third amended complaint, plaintiffs filed a fourth amended
complaint in which they dropped claims against most of the individual
defendants. Lens moved to dismiss the fourth amended complaint, and plaintiffs
requested leave to file yet another amendment, which was granted. This case was
pending as WOODSTOCK, et al. v. LENS EXPRESS, INC., et al., in the United States
District Court for the Southern District of Florida, Case No. 97-6529-Civ-
Hurley. Lens made offers of judgement for .75 to each plaintiff; one plaintiff
accepted the offer. Thereafter, two former employees settled for nominal amounts
and the two remaining current employees resigned and also settled for nominal
amounts.
Lester Swartz Litigation. On or about June 23, 1998, a former Lens customer
service representative filed a pro se complaint in federal court asserting
eleven counts against Lens, the Company and numerous individual officers and
employees of both corporations. The claims asserted are conspiracy, violation of
Florida's Whistleblower Act, civil theft, fraud and deceit, breach of contract,
breach of duty, gross negligence, negligent representations, negligent
supervision, negligent infliction of emotional distress, and intentional
infliction of emotional distress. Mr. Swartz alleges he suffered an "emotional
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
F-23
<PAGE>
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 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:
F-24
<PAGE>
<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>
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>
F-25
<PAGE>
Due to the uncertainty of the Company generating future taxable income, the
Company has recorded a valuation allowance against its deferred tax assets which
more than likely will not be realized. The decrease in the valuation allowance
in 1998 of $13,827 was due primarily to utilization of net operating loss
carryforwards. The increase in the valuation allowance in 1997 of $5,383 was
due primarily to an increase in deferred tax assets.
The provision for income taxes differs from the amount computed by applying the
federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997 1996
----------- ------ --------
<S> <C> <C> <C>
Expected expense (benefit) at federal income tax rate $ 14,613 $ 338 $(4,706)
Foreign, state, and other taxes, net of federal benefit 920 53 46
Change in valuation allowance for deferred
tax assets allocated to income tax expense (11,010) (490) 4,638
Other 498 236 66
-------- ----- -------
Provision for income tax $ 5,021 $ 137 $ 44
======== ===== =======
</TABLE>
At December 31, 1998, the Company had an operating loss carryforward of $4,434
and tax credit carryforwards of $1,473 available to offset future federal
taxable income. Net operating loss and tax credit benefits related to stock
options of $3,025 will be credited to additional paid-in capital when realized.
The entire operating loss carryforward expires in 2012. Research and
experimentation credit carryforwards of approximately $684 expire in the years
2001 through 2008 and the alternative minimum tax credit of $789 does not
expire.
There are no unremitted earnings in the Company's foreign subsidiaries.
13. Retirement Plans
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.
F-26
<PAGE>
15. Investment Securities
The fair value of short and long term investment securities at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Corporate bonds $42,528 $28,050
Mortgage-backed securities 3,954 2,248
Other debt securities 1,412 1,012
U.S. Government securities 889 983
------- -------
Total debt securities 48,783 32,293
LCA common stock 9,765 8,060
------- -------
$58,548 $40,353
======= =======
</TABLE>
At December 31, 1998 and 1997, the cost of the equity security was $19,176 and
$19,344, respectively and the related unrealized loss of $9,411 and $11,284,
respectively, was included in accumulated other comprehensive loss. The cost of
debt securities approximates fair value at December 31, 1998 and 1997.
Gross realized gains included in other income in 1998, 1997 and 1996 were $22,
$185 and $104, respectively, and gross realized losses included in other income
in 1998, 1997 and 1996 were $1, $721 and $70, respectively.
Contractual maturities of debt securities at fair value at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Due within one year $33,295 $26,770
Due after one year within five years 14,838 4,773
Due after ten years 650 750
------- -------
Total debt securities $48,783 $32,293
======= =======
</TABLE>
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.
F-27
<PAGE>
The Company is internally organized and operates in two operating segments:
laser vision correction and contact lens and related products. The Company's
laser vision correction business consists of manufacturing, selling and
servicing laser systems and related products to correct vision disorders and
collecting per procedure license fees from users of its systems. The Company's
mail order contact lens business operates under its wholly-owned subsidiary,
Lens. Lens is primarily a retailer and wholesaler of contact lens and related
products.
The category "Other" includes the Company's investments, interest income,
interest expense and other non-operating income (expense).
<TABLE>
<CAPTION>
Laser vision Contact lens and
correction related products Other Total
------------- ---------------- ------- ---------
<S> <C> <C> <C> <C>
1998
Revenues $ 44,887 $46,754 $ - $ 91,641
Income (loss) from continuing operations before
provision for income taxes 29,950 6,317 5,484 41,751
Total assets 47,744 10,048 87,133 144,925
1997
Revenues 33,075 46,575 - 79,650
Income (loss) from continuing operations before
provision for income taxes (2,708) 2,015 1,658 965
Total assets 37,024 8,975 69,104 115,103
1996
Revenues 25,949 47,963 - 73,912
Income (loss) from continuing operations before
provision for income taxes (18,873) 238 5,188 (13,447)
Total assets 46,632 8,071 78,957 133,660
</TABLE>
For the following geographic area data, revenues are attributed to
geographic regions based on the location of the customer and property and
equipment (net) are attributed to its physical location.
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Revenues
United States $ 81,909 $70,931 $ 66,122
Other foreign countries 9,732 8,719 7,790
-------- ------- --------
Total revenues $ 91,641 $79,650 $ 73,912
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
-------- -------
<S> <C> <C>
Property and equipment (net)
United States $ 7,768 $ 7,618
Ireland 1,034 975
-------- -------
Total property and equipment (net) $ 8,802 $ 8,593
======== =======
</TABLE>
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
F-28
<PAGE>
restated the first three quarters of 1998 in accordance with SFAS No. 3,
"Reporting Accounting Changes in Interim Financial Statements" as follows:
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------------------------------
First Second Third Fourth
-------------------- -------------------- -------------------- --------
As As As
As Previously As Previously As Previously
1998 Restated Reported Restated Reported Restated Reported
-------- ---------- -------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 22,040 $21,840 $24,100 $23,396 $23,141 $22,284 $22,360
Gross profit 8,732 8,532 9,945 9,241 10,147 9,290 10,497
Income from continuing operations 377 177 31,208 30,504 1,555 698 3,590
Gain on sale of discontinued operations - - - - - - 943
Income before cumulative effect of
accounting principle change 377 177 31,208 30,504 1,555 698 4,533
Cumulative effect of accounting
principle change (10,103) - - - - - -
Net income (loss) (9,726) 177 31,208 30,504 1,555 698 4,533
Basic and diluted earnings per share (unless otherwise indicated):
- - ------------------------------------------------------------------
Income from continuing operations $ 0.01 $ 0.01 $ 1.00 $ 0.98(1)$ 0.05 $ 0.02 $ 0.12
Gain on sale of discontinued operations - - - - - - 0.03
Income before cumulative effect of
accounting principle change 0.01 0.01 1.00 0.98(1) 0.05 0.02 0.15
Cumulative effect of accounting
principle change (0.32) - - - - - -
Net income (loss) (0.31) 0.01 1.00 0.98(1) 0.05 0.02 0.15
(1) Diluted - $0.97
</TABLE>
<TABLE>
<CAPTION>
Quarter
-----------------------------------------
1997 First Second Third Fourth
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $18,353 $21,106 $20,322 $19,869
Gross profit 6,372 8,663 7,520 7,096
Income (loss) from continuing operations (1,400) 2,572 24 (368)
Gain on sale of discontinued operations - - 23,910 -
Loss from discontinued operations - - (3,340) -
Net income (loss) (1,400) 2,572 20,594 (368)
Basic and diluted earnings per share:
- - -------------------------------------
Income (loss) from continuing operations $ (0.04) $ 0.08 $ - $ (0.01)
Gain on sale of discontinued operations - - 0.76 -
Loss from discontinued operations - - (0.11) -
Net income (loss) (0.04) 0.08 0.65 (0.01)
</TABLE>
F-29
<PAGE>
18. Restatement
In response to a review by the Staff of the Securities and Exchange
Commission, the Company has restated its consolidated financial statements as of
December 31, 1997 and for the year then ended, for transactions related to the
sale of the Company's discontinued operations (see Note 3) and has filed such
restated financial statements in an Annual Report on Form 10K/A for the year
ended December 31, 1997. With guidance from the Staff, the 16,164,361 newly
issued shares of LCA common stock, representing the proceeds from the sale, were
valued at a 10% discount from the market price of 9,000,000 shares of LCA common
stock which resulted in a gain on the sale of discontinued operations of $23,910
in the third quarter of 1997, compared to a gain of $10,771 that the Company had
previously recognized. In connection with the distribution of LCA common stock,
the Company recorded a one-time non-cash loss on investment of $675 in the
fourth quarter of 1997, representing the difference between the fair market
value of LCA common stock on the dividend declaration date of $23,625 and its
cost basis of $24,300. Previously, the distribution of LCA common stock was
recorded at cost.
F-30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Summit Technology, Inc.:
Under date of March 6, 1998, except as to Note 10, which is as of March 27, 1998
and except for the restatement referred to in Note 18, as to which the date is
March 9, 1999, we reported on the consolidated balance sheets of Summit
Technology, Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1997, as contained in the 1997
annual report to stockholders. In connection with our audits of the
aforementioned consolidated financial statements, we also audited financial
statement Schedule II. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 6, 1998, except as to Note 10,
which is as of March 27, 1998 and
except for the restatement referred
to in Note 18, as to which the
date is March 9, 1999
F-31
<PAGE>
Schedule II
-----------
SUMMIT TECHNOLOGY, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
December 31, 1996, 1997 and 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
December 31, 1996 Balance at Beginning Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
-------------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $974 $186 $263 $ 897
<CAPTION>
December 31, 1997 Balance at Beginning Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
-------------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $897 $245 $384 $ 758
<CAPTION>
December 31, 1998 Balance at Beginning Additions/ Amounts Balance at End
of Period (Deductions) Written Off of Period
-------------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts $758 $838 $197 $1,399
</TABLE>
F-32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information concerning the change in the Company's certifying accountant is
set forth in the Company's Report on Form 8-K dated June 18, 1998 and is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the Company
is set forth under the "Election of Directors," "Directors and Executive
Officers," "Information Concerning the Board of Directors and Its Committees"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth under "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference,
except that the Report of the Compensation Committee and the Performance Graph
are not incorporated herein for any purpose.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is set forth under "Ownership of Securities" in the Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
set forth under "Other Transactions and Relationships" in the Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The documents listed below are included in Item 8 of Part II of this Report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Comprehensive Income (loss) for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information concerning the change in the Company's certifying accountant is
set forth in the Company's Report on Form 8-K dated June 18, 1998 and is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the Company
is set forth under the "Election of Directors," "Directors and Executive
Officers," "Information Concerning the Board of Directors and Its Committees"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth under "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference,
except that the Report of the Compensation Committee and the Performance Graph
are not incorporated herein for any purpose.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is set forth under "Ownership of Securities" in the Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
set forth under "Other Transactions and Relationships" in the Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The documents listed below are included in Item 8 of Part II of this Report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Comprehensive Income (loss) for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
35
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES
Included in Item 8 of Part II of this report are the following:
Independent Auditors' Report regarding Schedule
Schedule II - Valuation and qualifying accounts
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is presented in the
financial statements or notes thereto.
3. EXHIBITS
The following Exhibits are either filed herewith or were filed as exhibits
to such other document filed with the Commission as is indicated:
EXHIBIT NO. DESCRIPTION
- - ------------ -----------
2.1 Agreement and Plan of Merger dated April 19, 1996 among the
Company, Summit Acquisition Corporation, Lens Express, Inc.,
Mordechai Golan, Creslin Limited, Menderes Akdag and Huseyin
Kizanlikli, incorporated by reference to the Company's Form
8-K dated May 15, 1996
2.2 Agreement and Plan of Merger dated October 1, 1998 among the
Company, Alpine Acquisition Corp. and Autonomous Technologies
Corporation, filed with the Commission as Exhibit 2.1 to the
Report on Form 8-K filed with the Commission on October 7, 1998.
3.1 Articles of Organization, as amended, incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992, as amended (the "1992 10-K")
3.3 By-Laws, as amended, incorporated by reference to Exhibit 3(b)
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1989
4 Rights Agreement, incorporated by reference to Exhibit 1 to
the Company's Report on Form 8-A filed with the Commission on
April 2, 1990
10.1 IBM License Agreement, incorporated by reference to Exhibit
10(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991 (the "1991 10-K")
10.2 Waltham Lease, incorporated by reference to Exhibit 10(c) to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1990
10.3 Irish facility agreement, incorporated by reference to Exhibit
10(g) to the 1991 10-K
10.4 The Industrial Development Authority grant agreements,
incorporated by reference to Exhibit 10(h) to the 1991 10-K
36
<PAGE>
10.5 Formation Agreement, Summit Transfer Agreement, Summit
Contribution Agreement, Partnership Agreement and License-Back
to Summit, each dated June 3, 1992 relating to the formation
of Pillar Point Partners, Incorporated by reference to Exhibit
10(a) to the Company's Current Report on Form 8-K filed with
the Commission on June 5, 1992
10.6 Patlex License, incorporated by reference to Exhibit 10.9 to
the 1993 S-1
10.7 1992 Stock Option Plan For Outside Directors, as amended,
incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995*
10.8 Settlement Agreement with Visx, Inc. dated June 4, 1998 filed
with the Commission as Exhibit 2.1 to the Report on Form 8-KA
filed with the Commission on January 14, 1999 (as to which
confidential treatment has been allowed by the Commission for
certain portions)
11 Statement Re: Computation of Per Share Earnings
22 Subsidiaries, incorporated by reference to Exhibit 22 to the
1992 10-K
23.1 Consent of Deloitte & Touche LLP, attached hereto
23.2 Consent of KPMG Peat Marwick LLP, attached hereto
27 Financial Data Schedule (For EDGAR Filing Purposes Only)
99 Report on Form 8-K filed with the Commission on June 18, 1998
regarding change in certifying accountant
4. Reports on Form 8-K
Form 8-K filed with the Commission on October 7, 1998 regarding the
Company's entry into the Agreement and Plan of Merger with Autonomous
Technologies, Inc. dated October 1, 1998.
*Management Compensation Plan
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUMMIT TECHNOLOGY, INC.
Date: March 31, 1999 By: /s/ Robert J. Palmisano
-------------- -----------------------
Robert J. Palmisano
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature Title Date
/s/ Robert J. Palmisano Director and
- - ------------------------- Chief Executive Officer March 31, 1999
Robert J. Palmisano
/s/ Robert J. Kelly Executive Vice President,
- - ------------------------- Chief Financial Officer and March 31, 1999
Robert J. Kelly Treasurer
/s/ Jeffrey A. Bernfeld
- - ------------------------- Director March 31, 1999
Jeffrey A. Bernfeld
/s/ Richard F. Miller
- - ------------------------- Director March 31, 1999
Richard F. Miller
/s/ John A. Norris
- - ------------------------- Director March 31, 1999
John A. Norris
/s/ Richard M. Traskos Director and
- - ------------------------- Chairman of the Board March 31, 1999
Richard M. Traskos
38
<PAGE>
Exhibit 11
SUMMIT TECHNOLOGY, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT 1998 1997 1996
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
======== ======= ========
BASIC EARNINGS (LOSS) PER SHARE:
- - --------------------------------
Weighted average common shares 31,244 31,400 31,174
-------- ------- --------
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)
======== ======= ========
DILUTED EARNINGS (LOSS) PER SHARE:
- - ----------------------------------
Weighted average common shares 31,244 31,400 31,174
Effect of dilutive stock options outstanding 48 191 210
-------- ------- --------
Total 31,292 31,591 31,384
======== ======= ========
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) (0.74)
-------- ------- --------
Income (loss) before cumulative
effect of accounting principle change 1.20 0.68 (1.17)
Cumulative effect of accounting principle
change, net of tax (0.32) - -
-------- ------- --------
Net income (loss) $ 0.88 $ 0.68 $ (1.17)(A)
======== ======= ========
</TABLE>
(A) This computation is submitted as an exhibit to the Company's Form 10-K in
accordance with Regulation S-K Item 601(b) (11), although presenting the
computation is not in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share, because the computation produces an
antidilutive result.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-25169, 33-41451, 33-49162 and 333-41583 on Form S-8, Nos. 33-79158 and
333-03765 on Form S-3, and No. 333-66947 on Form S-4 of Summit Technology, Inc.
and subsidiaries (the "Company") of our report dated March 17, 1999 (which
expresses an unqualified opinion and included an explanatory paragraph relating
to a change in accounting principle described in Note 2 to the consolidated
financial statements), appearing in this Annual Report on Form 10-K of the
Company for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 23, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Summit Technology, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-25169, 33-41451, 33-49162, 33-79158, 333-03765, 333-26142, 333-41583
and 333-66947) on Forms S-8, S-8, S-8, S-3, S-3, S-8, S-8 and S-4, respectively,
of Summit Technology, Inc. of our report dated March 6, 1998, except as to
Note 10, which is as of March 27, 1998 and except for the restatement referred
to in Note 18, as to which the date is March 9, 1999 relating to the
consolidated balance sheet of Summit Technology, Inc. and subsidiaries as of
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows and related schedules for each of the years
in the two-year period ended December 31, 1997, which report appears in this
current report on Form 10-K of Summit Technology, Inc., dated March 31, 1999.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS SCHEDULE HAS BEEN
RESTATED TO APPLY THE NEW ACCOUNTING PRINCIPLE OF RECOGNIZING MEMBERSHIP
REVENUES OVER THE TERM OF THE MEMBERSHIP WHICH WAS ADOPTED IN THE FOURTH QUARTER
OF 1998 AND TO REFLECT THE RESTATEMENT OF THE COMPANY'S 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<SECURITIES> 28,953
<RECEIVABLES> 11,657
<ALLOWANCES> 703
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<CURRENT-ASSETS> 74,277
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<DEPRECIATION> 13,849
<TOTAL-ASSETS> 114,399
<CURRENT-LIABILITIES> 31,793
<BONDS> 3,814
0
0
<COMMON> 313
<OTHER-SE> 82,293
<TOTAL-LIABILITY-AND-EQUITY> 114,399
<SALES> 22,040
<TOTAL-REVENUES> 22,040
<CGS> 13,308
<TOTAL-COSTS> 22,321
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<LOSS-PROVISION> (55)
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<INCOME-PRETAX> 401
<INCOME-TAX> 24
<INCOME-CONTINUING> 377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10,103)
<NET-INCOME> (9,726)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS SCHEDULE HAS BEEN
RESTATED TO APPLY THE NEW ACCOUNTING PRINCIPLE OF RECOGNIZING MEMBERSHIP
REVENUES OVER THE TERM OF THE MEMBERSHIP WHICH WAS ADOPTED IN THE FOURTH QUARTER
OF 1998 AND TO REFLECT THE RESTATEMENT OF THE COMPANY'S 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,445
<SECURITIES> 36,754
<RECEIVABLES> 14,509
<ALLOWANCES> 938
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<CURRENT-ASSETS> 101,793
<PP&E> 23,693
<DEPRECIATION> 14,538
<TOTAL-ASSETS> 144,359
<CURRENT-LIABILITIES> 25,158
<BONDS> 1,445
0
0
<COMMON> 314
<OTHER-SE> 111,275
<TOTAL-LIABILITY-AND-EQUITY> 144,359
<SALES> 69,281
<TOTAL-REVENUES> 69,281
<CGS> 40,457
<TOTAL-COSTS> 68,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> 630
<INCOME-PRETAX> 38,092
<INCOME-TAX> 4,952
<INCOME-CONTINUING> 33,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (10,103)
<NET-INCOME> 23,037
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,314
<SECURITIES> 33,295
<RECEIVABLES> 14,163
<ALLOWANCES> 1,399
<INVENTORY> 17,403
<CURRENT-ASSETS> 100,741
<PP&E> 23,634
<DEPRECIATION> 14,832
<TOTAL-ASSETS> 144,925
<CURRENT-LIABILITIES> 21,788
<BONDS> 150
0
0
<COMMON> 314
<OTHER-SE> 119,020
<TOTAL-LIABILITY-AND-EQUITY> 119,334
<SALES> 91,641
<TOTAL-REVENUES> 91,641
<CGS> 52,320
<TOTAL-COSTS> 89,760
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 838
<INTEREST-EXPENSE> 780
<INCOME-PRETAX> 41,751
<INCOME-TAX> 5,021
<INCOME-CONTINUING> 36,730
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<EXTRAORDINARY> 0
<CHANGES> (10,103)
<NET-INCOME> 27,570
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
