<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY 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 transition period from __________ to __________
For the quarterly period ended SEPTEMBER 30, 1998
--------------------------------------------
Commission File Number: 000-28278
-----------------------------------------------------
AUTONOMOUS TECHNOLOGIES CORPORATION
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2554729
------------------------------ ------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2800 DISCOVERY DRIVE, ORLANDO, FLORIDA 32826
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(407) 384-1600
-----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 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
On October 31, 1998, there were 11,988,479 shares of the registrant's $.01 par
value Common Stock outstanding.
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
(A Development Stage Company)
Index to Form 10-Q
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Balance Sheets as of September 30, 1998, and December 31, 1997 3
Statements of Operations for the three months ended September 30, 1998 and 1997,
for the nine months ended September 30, 1998 and 1997, and for the cumulative 4
period from inception to September 30, 1998
Statements of Cash Flows for the nine months ended September 30, 1998 and 1997,
and for the cumulative period from inception to September 30, 1998 5
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------ ------------------ ----------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,845,552 $ 109,245
Investments (note 1) - 7,191,827
Accounts receivable 14,000 -
Inventories (note 1) 3,058,829 2,358,934
Prepaid expenses and other assets 211,005 356,892
------------------------------
Total current assets 6,129,386 10,016,898
PROPERTY AND EQUIPMENT, net 1,607,615 1,155,718
LADARVision SYSTEMS-IN-SERVICE, net 575,384 400,584
ADVANCE LICENSING FEES 738,302 747,470
OTHER ASSETS 53,494 95,479
------------------------------
Total assets $ 9,104,181 $ 12,416,149
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 337,129 $ 743,898
Accrued expenses 1,180,037 835,324
Current portion of obligation under capital leases 82,700 97,108
------------------------------
Total current liabilities 1,599,866 1,676,330
OBLIGATION UNDER CAPITAL LEASES, less current portion 122,531 185,007
OBLIGATION UNDER STRATEGIC ALLIANCE AGREEMENT 300,000 1,575,000
------------------------------
Total liabilities 2,022,397 3,436,337
------------------------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock-Series I, $0.01 par value; 1000 and 0
authorized at September 30, 1998 and December 31, 1997,
respectively; 500 and 0 shares issued at September 30, 1998 and
December 31, 1997, respectively, and 436 outstanding at
September 30, 1998 (at adjusted face value) (Note 3) 4,677,213 -
Common stock $.01 par value 25,000,000 and 15,000,000 shares
authorized at September 30, 1998 and December 31, 1997,
respectively; 11,524,467 and 9,986,755 shares issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively 115,245 99,868
Additional paid--in capital 43,722,140 37,787,991
Deficit accumulated during the development stage (41,432,814) (28,908,047)
------------------------------
Total stockholders' equity 7,081,784 8,979,812
------------------------------
$ 9,104,181 $ 12,416,149
==============================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
Cumulative from
Inception (July
23, 1985) to
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES FROM LADARVision System $ 30,935 $ 11,000 $ 135,330 $ 11,000 $ 172,395
REVENUES FROM RESEARCH GRANTS - - - - 3,450,517
OPERATING EXPENSES:
Costs of revenues- LADARVision Systems 32,627 35,528 285,696 35,528 391,588
Costs of revenues- research grants - - - - 3,465,596
Clinical trials 716,163 715,348 2,111,391 2,158,449 7,981,585
Unabsorbed production costs 862,415 - 2,178,538 - 2,937,339
Research and development 803,554 706,637 2,867,603 2,375,933 13,175,918
Selling and marketing 496,802 415,244 1,787,422 1,029,840 5,242,424
General and administrative 834,801 617,542 2,022,936 1,746,226 8,377,807
Other expenses 445,322 366,444 1,119,787 1,453,311 4,375,332
--------------------------------------------------------------------------------------
OPERATING LOSS (4,160,749) (2,845,743) (12,238,043) (8,788,287) (42,324,677)
OTHER INCOME (EXPENSE):
Interest income 45,162 182,850 171,757 453,260 1,459,479
Interest expense (7,823) (14,236) (30,131) (31,274) (134,494)
--------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (4,123,410) (2,677,129) (12,096,417) (8,366,301) (40.999,692)
INCOME TAXES - - - - 4,772
--------------------------------------------------------------------------------------
NET LOSS (4,123,410) (2,677,129) (12,096,417) (8,366,301) (41,004,464)
Deemed dividend for Series I preferred
stock conversion discount (Note 3) 428,350 - 428,350 - 428,350
--------------------------------------------------------------------------------------
Net loss applicable to common
stockholders $(4,551,760) $(2,677,129) $(12,524,767) $(8,366,301) $(41,432,814)
======================================================================================
LOSS PER SHARE:
Basic net loss per share applicable to
common stockholders $(0.40) $(0.27) $(1.18) $(1.06)
=========== =========== ============ ===========
Weighted average common and common
equivalent shares used in computing
basic net loss per share 11,320,269 9,898,367 10,583,677 7,884,019
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements. 4
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
From Inception
(July 23, 1985) to
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998
------------------------------------ -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,096,417) $(8,366,301) $(41,004,464)
Adjustments to reconcile net loss to
net cash used in operating activities:
In-kind services provided by shareholder 177,198 368,069 1,318,357
Compensation expense related to employee stock
options 134,806 374,106 1,220,259
Compensation expense related to common stock placed
in escrow for future services - 37,567 24,050
Convertible preferred stock issued for services - - 162,500
Loss on disposal of property and equipment 181,395 - 266,562
Depreciation and amortization 404,211 203,305 1,098,070
Changes in assets and liabilities:
(Increase) in accounts receivable (14,000) - (14,000)
(Increase) in inventories (699,895) (1,413,455) (3,058,829)
(Increase) decrease in prepaid expenses and other
assets 187,872 (325,703) (264,499)
(Increase) decrease in advance licensing fees 9,168 880 (738,302)
(Decrease) increase in accounts payable (406,769) (360,408) 337,129
Increase in accrued expenses 344,713 702,765 1,180,037
Increase in obligation under strategic alliance
agreement 450,000 450,000 2,025,000
------------ ----------- ------------
Net cash used in operating activities (11,327,718) (8,329,175) (37,448,130)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (775,302) (898,205) (2,258,552)
Investments in LADARVision Systems-in-Service (437,000) - (874,000)
Decrease in restricted cash investment - 50,955 -
Investments made - (9,644,170) (23,788,250)
Investment proceeds 7,191,827 8,362,408 23,788,250
------------ ----------- ------------
Net cash provided by (used in) investing activities 5,979,525 (2,129,012) (3,132,552)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible preferred
stock 4,681,273 - 10,683,981
Proceeds from issuance of common stock, net of
issuance costs 2,904,395 8,014,996 28,899,891
Proceeds from exercise of stock options and warrants 575,716 62,525 647,209
Payments of note payable - (1,715) -
Payment of obligations under capital leases (76,884) (91,207) (179,847)
Advance from shareholder - - 1,000,000
Proceeds from issuance of convertible note payable - - 2,405,000
Proceeds from long-term debt - - 200,000
Repayment of long-term debt - - (200,000)
</TABLE>
Continued
5
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
------------------------
(Unaudited)
Continued
<TABLE>
<S> <C> <C> <C>
Other, net - - (30,000)
---------- ----------- -----------
Net cash provided by financing
activities 8,084,500 7,984,599 43,426,234
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 2,736,307 (2,473,588) 2,845,552
CASH, beginning of period 109,245 2,980,036 -
---------- ----------- -----------
CASH, end of period $2,845,552 $ 506,448 $ 2,845,552
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Noncash transactions -
Equipment acquired under capital leases $ - $ 178,246 $ 206,833
Stockholder advance converted to common stock - - 1,000,000
Convertible note converted to common stock - - 2,405,000
Strategic alliance obligation converted to common
stock 1,725,000 - 1,725,000
Deemed dividend for preferred stock conversion
discount (Note 3) 428,350 - 428,350
Issuance of common stock upon conversion of
convertible preferred stock 751,137 - 751,137
Cash transactions -
Interest paid 7,362 27,277 96,969
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary for a fair
presentation have been included. Operating results for the three month or nine
month periods ended September 30, 1998, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For further
information, refer to the Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and Footnotes
thereto included in the Autonomous Technologies Corporation ("Company") Annual
Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC")
on March 31, 1998, and as amended on June 17, 1998.
The Company formed a wholly-owned subsidiary in May, 1998, to facilitate the
conduct of its business in non-U.S. markets. The accounts of this subsidiary,
Autonomous International Corporation, are consolidated for presentation in these
financial statements at September 30, 1998 and for periods since formation of
the subsidiary to September 30, 1998.
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out method. At September 30, 1998, the Company's components
and purchased sub-assemblies inventory was $2,242,623 and work-in-progress
LADARVision(R) Systems totaled $816,206.
Diluted loss per common and common equivalent share is not presented due to the
anti-dilutive effect (i.e. the effect of reducing loss per share) of the
Company's convertible preferred stock, stock options and warrants in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share."
2. SALE OF SECURITIES
PRIVATE PLACEMENT OF COMMON STOCK. On May 26, 1998, the Company completed a
private placement of 600,573 shares of unregistered Common Stock for $5.166 per
share to four European investors. The Common Stock was sold pursuant to an
exemption from the registration requirements of the Securities Act of 1933
provided by Section 4(2) thereof. EVEREN Securities, Inc. acted as placement
agent for this sale and was paid a commission of 6% of the gross proceeds. The
approximate net proceeds of this sale were $2,884,000. The Company used the
proceeds from the sale of the Common Stock to fund operating expenses and
working capital. The Company filed a Registration Statement on Form S-3 on
behalf of the European investors covering the resale of the shares of Common
Stock in August, 1998. This sale of Common Stock was funded to the Company in
early June 1998.
PRIVATE PLACEMENT OF SERIES I CONVERTIBLE PREFERRED STOCK. On April 16, 1998,
the Company completed a private placement with OZ Master Fund, Ltd. (the
"Investor"). The private placement was of 500 shares of the Company's newly
created Series I Convertible Preferred Stock (the "Initial Shares"), with an
option to purchase 400 shares of Series I Convertible Preferred Stock and a
stock purchase warrant for 300,000 shares of Common Stock with an exercise price
of $6.17 (the "Warrant") (the 400 shares and the Warrant collectively, the
"Option"). The price of each share of Series I Convertible Preferred Stock is
$10,000. The Initial Shares are convertible, subject to a pricing formula to be
invoked upon each periodic conversion, into a maximum of 1,750,000 shares of the
Company's Common Stock (the "Initial Maximum Shares").
7
<PAGE>
The Initial Shares and the 400 shares of Series I Convertible Preferred Stock
(the "Option Shares"), together, may be converted into an aggregate maximum of
2,263,197 shares of Common Stock. The Initial Shares and Option Shares are
convertible into shares of Common Stock upon the election of the Investor, at no
more than 115 shares per month, based on 90% of the average daily low trade
price of the Company's Common Stock, subject to an upper limit after October 1,
1998, the date of the announcement of the merger with Summit (see Note 5).
Upon the announcement of the merger with Summit, the operation of the
Certificate of Designation of the Series I Convertible Preferred Stock permitted
such conversions to be made thereafter at a price no higher than $3.975, the
average daily low trade price of the Company's Common Stock in the five trading
days prior to the announcement.
The Company has used the proceeds from the sale of the Series I Convertible
Preferred Stock to fund operating expenses and working capital. The Series I
Convertible Preferred Stock and Option were sold to the Investor pursuant to an
exemption from the registration requirements of the Securities Act provided by
Section 4(2) thereof. The Company subsequently filed a Registration Statement
on Form S-3 on behalf of the Investor covering the resale of the Initial Maximum
Shares and agreed to file a separate Form S-3 for the additional shares of
Common Stock into which the Option Shares are convertible and the shares of
Common Stock underlying the Warrant, if the Option is exercised. The first
Registration Statement was declared effective by the SEC on August 6, 1998 and
the closing of the purchase of the Initial Shares occurred on August 7, 1998.
The Company received an irrevocable notification of exercise of the Option by
the Investor on November 9, 1998. The closing of the Option is subject to the
effectiveness of a resale Registration Statement for those additional shares of
Common Stock into which the Option Shares are exercisable and the shares of
Common Stock underlying the Warrant.
3. ACCOUNTING FOR CONVERTIBLE PREFERRED STOCK WITH CONVERSION AT DISCOUNT TO
MARKET
Various pronouncements, including provisions of Regulation S-X and certain SEC
Staff Accounting Bulletins, govern the accounting for a convertible preferred
stock issue with a conversion feature calculated at a discount from the market
price of the underlying common stock (see Note 2, "Sale Of Securities - Private
Placement of Series I Convertible Preferred Stock"). Under these pronouncements,
the Company is accounting for the aggregate estimated discount from the
conversions as a "deemed" preferred stock dividend in the Company's Consolidated
Statement of Operations. This accounting treatment takes into account the
earliest schedule upon which the conversions can occur and allocates the
aggregate estimated discount to the periods for which those scheduled shares of
convertible preferred stock are outstanding. In the period from the closing of
the Initial Shares (August 7, 1998) to September 30, 1998, the Company
recognized $428,350 of such deemed dividend on the preferred stock. The Company
will recognize an additional $571,650 of such deemed dividend between October 1,
1998 and March 31, 1999.
4. NEWLY ISSUED ACCOUNTING STANDARDS
The Company has adopted the following Statements of Financial Accounting
Standards at their respective effective dates. There was no impact on the
September 30, 1998 financial statements as a result of the implementation of
these Statements.
SFAS No. 130, "Reporting Comprehensive Income"
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information"
SFAS No. 132, "Employers Disclosures About Pensions and Other Post-retirement
Benefits"
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
8
<PAGE>
5. SUBSEQUENT EVENT - MERGER AGREEMENT WITH SUMMIT TECHNOLOGY, INC.
On October 1, 1998, the Company and Summit Technology, Inc. ("Summit") announced
that they had entered into an agreement whereby Summit would acquire the
Company. The following is a brief summary of the terms of the Agreement and Plan
of Merger and is qualified in its entirety by reference to the Agreement and
Plan of Merger, dated October 1, 1998, filed with the SEC as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated October 7, 1998 and to the
Registration Statement on Form S-4 filed by Summit on November 6, 1998.
On October 1, 1998, the Company entered into an Agreement and Plan of Merger
that provides for its merger with and into a wholly owned subsidiary of Summit
Technology, Inc. ("Summit"). The merger transaction is subject to the approval
of the stockholders of both the Company and Summit. The merger consideration is
11,650,400 shares of Summit stock and an equivalent amount in value of cash,
subject to a maximum of $50 million in cash. This consideration will be divided
among the outstanding shares of Autonomous common stock, the outstanding shares
of Autonomous Series I Preferred Stock and options and warrants for Autonomous
common stock. Autonomous common stockholders will receive part stock and part
cash for their Autonomous shares. The exact value, and the relative mix of cash
and Summit stock, will vary depending on the market price of Summit stock prior
to the closing, the amount of the loan to Autonomous described below, if any,
whether the holder of the Series I Preferred Stock exercises its right to redeem
its shares for cash and certain other factors.
Randy W. Frey, Chairman, President and Chief Executive Officer of the Company,
and CIBA Vision Corporation, together owning approximately 21% of the Company's
outstanding shares, and each of the Company's officers and directors have agreed
to vote, as shareholders, for the merger.
In connection with the merger agreement, Summit agreed to lend up to $5 million
to the Company on a revolving credit basis. Under the revolving credit
agreement, the Company may not draw more than $1.5 million per month. One half
of the amount borrowed by the Company as of the closing date of the merger will
reduce the amount of the aggregate cash consideration in the merger. No use has
been made of this revolving credit facility as of the date of this filing. In
the event the merger does not occur through no fault of the Company, the amount
drawn on the revolving credit facility is due and payable 180 days from the date
of the termination of the merger agreement. A copy of the Letter Agreement re:
Revolving Credit Line, dated October 1, 1998, is filed in the aforementioned
Current Report on Form 8-K as Exhibit 10.2.
Under the terms of the merger agreement, the Company must pay Summit a
termination fee of $2.6 million in cash if the merger agreement is terminated in
either of the following circumstances:
. the Autonomous stockholders have not approved the merger by February 28,
1999 and a proposal by a third party for an alternative transaction has
been made prior to the Autonomous Special Meeting of Stockholders that will
be called in order to vote on the merger agreement; or
. the Company materially breaches any representation or warranty in the
merger agreement or fails to comply with any of its obligations under the
merger agreement if these result in a material adverse change incapable of
being cured by the Company.
Upon the effectiveness of the aforementioned Summit S-4 registration statement,
the Company and Summit plan to distribute a joint proxy statement to their
respective shareholders. Depending on the timing of the effectiveness of the
registration statement and other factors, the Company and Summit plan to hold
their respective shareholder meetings as soon as practicable, with the earliest
date being in late December 1998 and the most likely date being late January
1999.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements containing terms such as
"believes," "does not believe," "no reason to believe," "expects," "plans,"
"intends," "estimates," "anticipated," or "anticipates" are considered to
contain uncertainty and are forward-looking statements. Actual results could
differ materially from those projected in the forward-looking statements as a
result of a number of important factors. For a discussion of important factors
that could affect the Company's results, please refer to the Overview section,
the Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Risk Factors section contained in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 1997.
Additionally, the planned merger of the Company and Summit Technology, Inc.,
described below, is a future expected event that might affect the Company's
financing and business plans and results of operations.
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I -- Item 1 of this
Quarterly Report; and in conjunction with the audited financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's Annual Report on Form 10-K
filed with the SEC on March 31, 1998, and as amended on June 17, 1998.
OVERVIEW
Autonomous, a Florida corporation formed in 1985, has been engaged since 1993 in
the design and development of the next generation of excimer laser instruments
for laser vision correction ("LVC") to reduce or eliminate a person's dependence
on eyeglasses or contact lenses. The Company's technology combines eye tracking
with a narrow beam excimer laser to treat common refractive vision disorders
such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism
(blurred vision). The Company's objective is to improve refractive surgical
outcomes for these conditions over those achieved by earlier LVC systems.
Vision correction is one of the largest medical markets, with over 136 million
people in the United States using eyeglasses or contact lenses. Within this
group, approximately 60 million people are myopic. Industry sources estimate
that Americans spend approximately $13 billion on eyeglasses, contact lenses and
other vision correction products and services each year.
The Company is a development stage enterprise. Since inception, the Company has
experienced significant operating losses, and, as of September 30, 1998, had an
accumulated deficit of approximately $41.4 million. To date, the Company has had
significant revenues relating only to research grants, which is an endeavor no
longer pursued by the Company. The Company anticipates that its operating losses
will continue for the foreseeable future because it plans to expend substantial
resources in funding clinical trials, U.S. sales and marketing activities,
commercial manufacturing, and research and development. Additionally, the
Company is funding, and expects to continue to fund, a legal action against
successors to a patent pooling partnership that operated from 1992 until June,
1998, in the U.S. LVC industry. The Company expects that research and
development expenses, including clinical trials, will remain at relatively high
levels for the foreseeable future due to continued development of the Company's
CustomCornea project. The foregoing forward-looking statements could be
affected by certain risks and uncertainties, including: the ability to complete
research and development projects (and register their capabilities with the FDA)
that the Company judges to be necessary to be a viable competitor in the future
LVC marketplace; the ongoing results from past and future clinical trials; the
U.S. market acceptance of the LADARVision System; the ability of the Company to
demonstrate the adequacy of its continuing adherence to the FDA's Quality System
Regulations ("QSR"); the ability of the Company to
10
<PAGE>
increase production to adequate levels to meet demand and generate net revenues
to cover the overhead of the business; and the ability of the Company to operate
commercially in the U.S. LVC marketplace in the post-patent pooling partnership
environment.
As described more fully in Note 5 to the Financial Statements herein, the
Company and Summit entered into an agreement to merge whereby Summit would
acquire the Company. The Agreement and Plan of Merger is filed with the SEC as
Exhibit 10.1 to the Company's Report on Current Form 8-K dated October 7, 1998.
Certain of the forward-looking statements contained in the discussion of the
results of operations below might have different outcomes if the merger is
consummated within the expected timeframe.
RESULTS OF OPERATIONS
Operating Expenses
Clinical trials expenses were $716,163 and $715,348 in the quarters ended
September 30, 1998 and 1997, respectively. Clinical trials expenses were
$2,111,391 and $2,158,449 in the nine months ended September 30, 1998 and 1997,
respectively. These expenses were flat in the comparative quarters and decreased
2% in the comparative nine month periods, respectively, due to the Company's
near finalization of its myopia/astigmatism PRK clinical trial expenses. The
Company's clinical trial expenses are expected to increase as the Company
expands its work toward other clinical indications such as higher levels of
myopia and astigmatism, hyperopia, LASIK and begins it's CustomCornea clinical
trials in 1999. Additionally, the cost of the compliance organization grouped
here for financial reporting purposes will also increase as the full impact of
operating under FDA QSR and ISO9001 regulations is felt in a commercial setting.
Unabsorbed production costs were $862,415 and $0 in the quarters ended September
30, 1998 and 1997, respectively. Unabsorbed production costs were $2,178,538
and $0 in the nine months ended September 30, 1998 and 1997, respectively.
Until the third quarter of 1997, when the first foreign commercial placements
were made, the cost of the production organization was charged to research and
development. Subsequently, the production organization expenses not absorbed by
limited production were presented in Other Expenses. As the size and cost of
the production organization has grown in anticipation of commercial levels of
activity, these costs have been presented separately herein. Such costs in
prior periods have been reclassified to conform to this presentation. The
unabsorbed labor and overhead costs of the production organization will be
presented here into 1999 until such time as the Company reaches a continuous
production state, which is expected several months after receiving it's PMA.
Research and development expenses were $803,554 and $706,637 in the quarters
ended September 30, 1998 and 1997, respectively. Research and development
expenses were $2,867,603 and $2,375,933 in the nine months ended September 30,
1998 and 1997, respectively. These increases of 14% and 21% in the quarters and
nine months, respectively, are due to (a) research and development staffing
increases in 1998, primarily to add engineering management and certain other
engineering specialists for continued LADARVision System improvements, and (b)
for engineering contracts to outside parties and consultants in order to
facilitate the continuance of the Company's outsourcing strategy in
manufacturing.
Selling and marketing expenses were $496,802 and $415,244 in the quarters ended
September 30, 1998 and 1997, respectively. Selling and marketing expenses were
$1,787,422 and $1,029,840 in the nine months ended September 30, 1998 and 1997,
respectively. These increases of 20% and 74% in the quarters and nine months,
respectively, are due to increased staff and activities in preparation for
addressing the U.S. market upon achieving its PMA for the LADARVision System
from the FDA. CIBA in-kind services booked in the first nine months of 1998
were $177,198. In June 1998, the CIBA in-kind services agreement expired and
these costs or their equivalent will be borne by the Company on a cash
expenditure basis hereafter. Sales and marketing expenses will increase
substantially in the future as the Company enters the U.S. market with its
product and programs.
11
<PAGE>
General and administrative expenses were $834,801 and $617,542 in the quarters
ended September 30, 1998 and 1997, respectively. General and administrative
expenses were $2,022,936 and $1,746,226 in the nine months ended September 30,
1998 and 1997, respectively. These increases of 35% and 16% in the quarters and
nine months, respectively, are due to an accrual for concluding the Company's
agreed upon obligations to its former President, who left the Company due to the
plan to merge with Summit Technology, Inc. ("Summit").
Other expenses were $445,322 and $1,119,787 in the quarters ended September 30,
1998 and 1997, respectively. Other expenses were $1,119,787 and $1,453,311 in
the nine months ended September 30, 1998 and 1997, respectively. There are two
major components of this expense category:
1) An accrual which is being made for the remaining 171,713 shares that may be
issued to CIBA Vision in May, 1999 under the terms of the 1995 Strategic
Alliance Agreement. Should the planned merger with Summit consummate before
May 1999, as expected, these shares will be issued immediately prior to the
closing of the merger transaction. See the Company's Annual Report on Form
10-K, as amended, for December 31, 1997, page 47.
2) Legal expenses that relate to the Company's pursuit, beginning in the
latter half of 1996, of legal actions having to do with alleged
infringement, unenforceability and invalidity of certain LVC patents held
in various jurisdictions by other participants in the LVC industry. The
Company is still pursuing, as the plaintiff, one remaining case in the U.S.
The legal expenses will be unpredictable as to their size and timing due to
various phases through which the trial may proceed. There can be no
assurance that the continued pursuit of this remaining case will result in
any change in commercial terms for the Company's LADARVision System in the
U.S. Further, there can be no assurances that other legal matters will not
be opened that the Company cannot presently foresee. Summit has a royalty-
free cross license with VISX, Incorporated ("VISX") which, by the terms of
the cross license, applies to wholly owned subsidiaries of Summit. The
Company believes the claims of the Company and VISX relating to alleged
infringement of the VISX patents as to the manufacture, use, sale or
placement of the LADARVision System after the proposed merger with Summit
will become moot.
Interest income and interest expense
Interest income was $45,162 and $182,850 in the quarters ended September 30,
1998 and 1997, respectively. Interest income was $171,757 and $453,260 for the
nine months ended September 30, 1998 and 1997, respectively. These decreases of
75% and 62% in the quarters and nine months, respectively, is due to both lower
average cash and investment balances and lower available short-term rates in the
1998 quarter as compared to the 1997 quarter. In the 1998 and 1997 quarters,
the Company's cash and investments balance averaged approximately $2.8 million
and $12.3 million, respectively. Interest expense was $7,823 and $14,236 in the
quarters ended September 30, 1998 and 1997, respectively. Interest expense was
$30,131 and $31,274 for the nine months ended September 30, 1998 and 1997,
respectively.
Operating and Net Losses
The net effect of the foregoing expense items was that the Company's operating
loss increased to $4,160,749, or by 46%, in the quarter ended September 30,
1998, from $2,845,743 in the quarter ended September 30, 1997. The Company's net
loss increased to $4,123,410 or by 54%, in the quarter ended September 30, 1998,
from $2,677,129 in the quarter ended September 30, 1997.
For the nine month period ended September 30, 1998 the Company's operating loss
increased by 39% to $12,238,043, from $8,788,287 in 1997. The net loss
increased by 45% to $12,096,417 in the nine month period ended September 30,
1998, from $8,366,301 in 1997.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General Comments
The Company's cash, cash equivalents and available-for-sale investments were
$2,845,552 at September 30, 1998 and $7,301,072 at December 31, 1997. The
Company used cash of $11,327,718 to support operations and $775,302 for capital
expenditures during the nine months of fiscal 1998. With the addition of
approximately $3.8 million, net of expenses, assuming the exercise of the Option
closes (see note 2 in the Notes to the Unaudited Financial Statements), the
Company's cash resources will be sufficient to fund the operations until early
in 1999. See "Merger Agreement with Summit Technology" below.
Merger Agreement with Summit Technology
In connection with the merger agreement, Summit agreed to lend up to $5 million
to the Company on a revolving credit basis. Under the revolving credit
agreement, the Company may not draw more than $1.5 million per month and will be
charged interest on such draws at a rate of 5.25% per annum. One half of the
amount borrowed by the Company as of the closing date of the merger will reduce
the amount of the aggregate cash consideration in the merger. No use has been
made of this revolving credit facility as of the date of this filing. In the
event the merger does not occur through no fault of the Company, the amount
drawn on the revolving credit facility is due and payable 180 days from the date
of the termination of the merger agreement. A copy of the Letter Agreement re:
Revolving Credit Line, dated October 1, 1998, is filed on the Company's Current
Report on Form 8-K dated October 7, 1998 as Exhibit 10.2.
The Company's common stock is quoted on NASDAQ under the symbol "ATCI".
YEAR 2000 COMPUTER PROGRAMMING
The Year 2000 issue relates to the method used by computer systems and software
for displaying dates using two digits to represent a four-digit year. Such
computer systems and software may recognize a year represented by "00" as 1900
instead of 2000. This could result in unexpected behavior in the affected
systems or software. These systems and software will need to be able to accept
four-digit entries to distinguish years beginning with 2000 from prior years.
As a result, systems that do not accept four-digit year entries will need to be
upgraded or replaced to comply with such "Year 2000" requirements.
In early 1998, the Company's accounting and manufacturing requirements planning
("MRP") software vendor produced a Year 2000-specific update, which the Company
installed at that time. There was no cost of this upgrade to the Company as
such maintenance updates are included in the annual maintenance fee paid to the
vendor. As a result of this upgrade, the Company believes that its accounting
and MRP programs are fully Year 2000 compliant. The Company is the sole author
of the system application software in its LADARVision System. All versions of
that software have always been Year-2000 compliant, including the current 32-bit
version that will be delivered in commercial systems in the near future. The
Company believes that it will not incur any further material direct costs in
hardware or software upgrades from third party vendor software used internally
in its business operations.
The Company is currently in the process of vendor certification for Year 2000
compliance. The Company is requiring a written statement from its key vendors
that such vendor's systems are Year 2000 compliant as well as requiring a
description of the testing methods used by the vendor. At this time, the
Company has received such written statements from two of the four vendors it
considers its key vendors. The written statements the Company has received
represent to its' satisfaction that these two vendors are currently Year 2000
compliant. The Company anticipates that it will receive written statements from
the other two key vendors by the end of 1998. The Company has arranged for
system parts and/or sub-systems to be made by these key vendors in low volumes
and in a highly customized fashion. Therefore, it is not believed that
manufacture of such parts or sub-systems are automated such as to be wholly or
even partially dependent on imbedded manufacturing systems that may not be
compliant.
13
<PAGE>
Nevertheless, the greatest potential risk from Year 2000 issues relates to a key
vendor whose systems are not Year 2000 compliant and who may be unable to meet
delivery requirements for parts or components until they correct their Year 2000
problem. Until the Company receives written statements from the other two key
vendors, it will not have reached maximum levels of assurance that there will be
no effect, if any, of possible non-Year 200 compliance by these vendors on the
Company's business, results of operations, liquidity and financial condition.
The Company does not currently have any U.S. commercial customers of its
LADARVision System and thus does not anticipate surveying potential customers
for Year 2000 compliance.
The Company has not completed a contingency plan for dealing with the most
reasonably likely worst case scenario (wherein, in the Company's judgement, one
of these four key vendors would not be able to deliver its parts or sub-systems
to the Company on a timely basis). The Company currently plans to complete such
analysis and contingency planning by March 31, 1999.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
PART II -- OTHER INFORMATION AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
Item 1. Legal Proceedings
On September 24, 1998, VISX, Incorporated ("VISX") filed a patent infringement
counterclaim in Autonomous Technologies Corporation's (the "Company") October
1996 lawsuit in the United States District Court for the District of Delaware
(Civil Action No. 96-515) in which the Company is seeking a declaratory judgment
of non-infringement. VISX is seeking a declaratory judgment and injunctive
relief to prevent the Company from manufacturing, promoting and selling
infringing equipment in the U.S. The Company does not believe it infringes on
the two patents named in the counterclaim.
Summit Technology, Inc. ("Summit") has a royalty-free cross license with VISX
which, by the terms of the cross license, applies to wholly owned subsidiaries
of Summit. The Company believes the claims of VISX relating to alleged
infringement of the VISX patents as to the manufacture, use, sale or placement
of the LADARVision System after the proposed merger with Summit will become
moot.
Item 2. Changes in Securities
On April 16, 1998, the Company completed a private placement with OZ Master
Fund, Ltd. (the "Investor"). The Investor is managed by the Och-Ziff Capital
Management Group. The private placement was of 500 shares of the Company's newly
created Series I Convertible Preferred Stock (the "Initial Shares"), with an
option to purchase 400 shares of Series I Convertible Preferred Stock and a
stock purchase warrant for 300,000 shares of Common Stock (the "Warrant")
(collectively, the "Option"). The price of each share of Series I Convertible
Preferred Stock is $10,000. The Initial Shares are convertible, subject to a
pricing formula to be invoked upon each periodic conversion, into a maximum of
1,750,000 shares of the Company's Common Stock (the "Initial Maximum Shares").
In the event the Option is exercised, the Initial Shares and the 400 shares of
Series I Convertible Preferred Stock (the "Option Shares"), together, may be
converted into an aggregate maximum of 2,263,197 shares of Common Stock. The
Series I Convertible Preferred Stock is convertible into shares of Common Stock
upon the election of the Investor, at no more than 115 shares per month, based
on a formula whereby the conversion price is set at the time of the notice of
conversion based on 90% of the average daily low trade price of the Company's
Common Stock, subject to an upper limit after October 1, 1998 upon the
announcement of the merger with Summit (see Note 5 to the Financial Statements
in Part I of this Report on Form 10-Q).
Upon the announcement of the merger with Summit, the operation of the
Certificate of Designations of the Series I Convertible Preferred Stock
permitted such conversions to be made thereafter at a price no higher than
$3.975, the average daily low trade price of the Company's Common Stock in the
five trading days prior to the announcement.
The Company received an irrevocable notification of exercise of the Option by
the Investor on November 9, 1998, the closing of which is subject only to an
effective registration statement for the additional shares of Common Stock into
which the Option Shares are exercisable and the Common Stock underlying the
Warrant. EVEREN Securities, Inc. was paid a commission of $150,000 in connection
with this sale of the Initial Shares and is due a commission of $120,000 due to
the exercise of the Option. The final net proceeds of the sale of the Initial
Shares was $4.7 million and in the event the Option exercise closes, the Company
estimates the final net proceeds of the sale of the Option Shares to be an
additional $3.8 million. The Company is using the proceeds from the sale of the
Initial Shares of Series I Convertible Preferred Stock to fund operating
expenses and working capital. The Series I Convertible Preferred Stock and
Option were sold to the Investor pursuant to an exemption from the registration
requirements of the Securities Act provided by Section 4(2) thereof. The Company
filed a Registration Statement on Form S-3, declared effective on August 6,
1998, on behalf of the Investor covering the resale of the Initial Maximum
Shares.
Item 3. Defaults Upon Senior Securities
Not Applicable
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Current Report on Form 8-K filed July 22, 1998. The Company filed this Form
8-K to report that it had amended its Convertible Preferred Stock Stock
Purchase Agreement with OZ Master Fund, Ltd. (the "Investor") regarding the
exercise period for the Option (as described in the Company's Current
Report on Form 8-K filed April 27, 1998) such that the Option may be
exercised before the later of 56 days following the effective date of an
initial resale registration statement to be filed pertaining to the shares
of common stock underlying the initial 500 shares of Preferred Stock or
November 10, 1998. Also under the amendment, the Company has agreed to file
a second resale registration statement pertaining to the additional shares
of common stock underlying the 400 additional shares of Series I
Convertible Preferred Stock and the warrant within 20 days of the Company's
receipt of the Investors irrevocable notice to exercise the Option. The
Company will use its best efforts to have this resale registration
statement declared effective by the Securities and Exchange Commission.
(b) Current Report on Form 8-K filed August 18, 1998. The Company filed this
Form 8-K to report that on July 20, 1998, the Company's board or directors
authorized an amendment to the Company's Third Amended and Restated
Articles of Incorporation. On August 3, 1998, the Company filed the
Articles of Amendment to the Third Amended and Restated Articles of
Incorporation, which set forth the terms of the newly designated Series I
Convertible Preferred Stock. The Third Amended and Restated Articles of
Incorporation, as amended, are filed as Exhibit 3.1 to the Form 8-K filed
August 18, 1998.
Exhibit 27 - Financial Data Schedule (for SEC use only)
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTONOMOUS TECHNOLOGIES CORPORATION
November 12, 1998
By: /s/ Monty K. Allen
-------------------------
Monty K. Allen
Vice President and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,845,552
<SECURITIES> 0
<RECEIVABLES> 14,000
<ALLOWANCES> 0
<INVENTORY> 3,058,829
<CURRENT-ASSETS> 6,129,386
<PP&E> 2,602,025
<DEPRECIATION> 994,410
<TOTAL-ASSETS> 9,104,181
<CURRENT-LIABILITIES> 1,599,866
<BONDS> 0
0
4,677,213
<COMMON> 115,245
<OTHER-SE> 2,289,326
<TOTAL-LIABILITY-AND-EQUITY> 9,104,181
<SALES> 0
<TOTAL-REVENUES> 135,330
<CGS> 285,696
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,087,677
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,131
<INCOME-PRETAX> (12,096,417)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,096,417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,096,417)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
