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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
COMMISSION FILE NO. 0-28278
AUTONOMOUS TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-2554729
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2800 DISCOVERY DRIVE
ORLANDO, FLORIDA 32826
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 384-1600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
- ---------------------------- -----------------------------
COMMON STOCK, $.01 PAR VALUE NASDAQ NATIONAL MARKET SYSTEM
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
_______________
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. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ([]229.405 of this chapter) 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. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on February 27, 1998 was approximately $37,837,620 based on the last
sales price reported for such date on the NASDAQ National Market System. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. On February 27, 1998, there were
10,086,871 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
stockholders to be filed on or prior to April 24, 1998, are incorporated by
reference into Part III of this Form 10-K.
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Autonomous Technologies Corporation: 1997 10-K TABLE OF CONTENTS
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ITEM 1. BUSINESS........................................................... 3
Overview.................................................................. 3
Product - the LADARVision System.......................................... 4
Market in the United States............................................... 5
The Company's Business Strategy and Distribution Plans.................... 6
Background Information on Refractive Surgery.............................. 7
Clinical Trials........................................................... 8
Research and Development..................................................10
Manufacturing.............................................................11
Sales and Marketing; Customer Service.....................................12
Competition...............................................................13
Relationship with CIBA....................................................14
Patents and Proprietary Intellectual Property.............................15
Pillar Point Partners; Other Licenses.....................................15
Government Regulation.....................................................16
Product Liability and Insurance...........................................18
Employees.................................................................19
Executive Officers and Directors of the Registrant......................20
Other Key Personnel of the Registrant...................................22
Risk Factors..............................................................23
ITEM 2. PROPERTIES.........................................................33
ITEM 3. LEGAL PROCEEDINGS..................................................34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................35
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................36
ITEM 6. SELECTED FINANCIAL DATA............................................37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES....................................45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................46
ITEM 11. EXECUTIVE COMPENSATION............................................46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................46
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................................49
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SIGNATURES.............................................................. 52
INDEX TO FINANCIAL STATEMENTS........................................... 53
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K 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.
OVERVIEW
Autonomous Technologies Corporation ("Autonomous" or the "Company"), 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 has been to improve refractive surgical outcomes for
these conditions over those achieved by earlier LVC systems. Clinical results
obtained on the LADARVision System during 1997 for myopia and myopic astigmatism
demonstrate clinical superiority over any label data from such earlier LVC
systems.
Vision correction is one of the largest medical markets, with approximately 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, at retail prices, on
eyeglasses, contact lenses and other vision correction products and services
each year.
The Company's marketing strategy is designed to broaden the penetration of the
LADARVision(R) System (formerly called the T-PRK(R) System) in the refractive
surgery market by offering better clinical outcomes to surgeons and patients
than is currently available and by significantly reducing the up-front cost to
the ophthalmologist of current LVC systems. This marketing strategy would allow
physicians to utilize the LADARVision System by paying an advance procedure fee
for the equipment and paying a per procedure service fee thereafter. In 1997,
the Company and CIBA conducted a market research project that buttresses those
performed in 1995 and 1996 demonstrating that there is significant interest in
both the clinical outcomes achieved in Phase III clinicals by the LADARVision
System and the pricing strategy of lower up-front costs and competitive
procedure fees. The Company may, however, elect to change this marketing
strategy on a country-by-country and account-by-account basis depending on
applicable law and regulation, tax considerations, and competitive conditions.
In 1994, the Company entered into a strategic alliance with CIBA Vision Group
Management, Inc. ("CIBA"), a subsidiary ultimately of Novartis, Ltd. of Basel,
Switzerland, for the worldwide
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co-promotion of the LADARVision System. To date, CIBA has invested an aggregate
of approximately $5 million in cash and $1,141,000 in services in the Company
(services contributions will terminate per the agreement in June 1998). As a
result of this investment, CIBA owns approximately 16% of the Company's Common
Stock, not including shares that may be issuable to CIBA in 1999. See "Item
13. - Certain Relationships and Related Transactions." With experience in
physician and retail marketing and the second largest worldwide market share for
contact lens and lens care products, CIBA provides the Company with credibility
and awareness in both the ophthalmic and consumer markets. Under the strategic
alliance, the Company plans co-promotion strategies, such as product tie-ins,
joint advertising and shared exhibit space, on a project-by-project basis. The
Company retains the worldwide marketing rights for its LADARVision System.
PRODUCT - THE LADARVISION SYSTEM
The Company's LADARVision System incorporates technology for laser in-situ
keratomileusis ("LASIK") and photorefractive keratectomy ("PRK") that combines
high speed, laser radar eye tracking with narrow beam shaping to form its new
and proprietary technology platform. The LADARVision System is designed to
address a need for sophisticated eye tracking to compensate for eye movement
during surgery, including saccadic eye movements. Saccadic eye movements are
very rapid, involuntary and random in amplitude and direction and are not
suppressed or reduced by medication used during LVC. These eye movements degrade
predictability and visual quality from the procedure. The Company believes that
the LADARVision System provides higher accuracy ablation by virtually
eliminating decentration and shaping error caused by eye movement. Additionally,
the narrow beam excimer provides a smooth ablation, and the Company's shaping
algorithms offer high speed ablations to minimize surgical duration while
retaining high pointing accuracy to achieve predictable shaping.
The Company believes the LADARVision System will yield more stable, predictable
results with less post-operative regression, potentially improving visual
quality and clinical outcomes for low to moderate myopia compared to first
generation excimer laser LVC systems manufactured and sold by competitors. The
Company has completed its Phase III U.S. clinical trials for low to moderate
myopia (up to -8 diopters) and astigmatism (up to -4 diopters). Data from
LADARVision clinical trials to date, through Phase III trials, are supportive of
improved stability and predictability for low to moderate myopia patients
compared with other data supporting FDA approvals of LVC systems. Further, the
Company believes extensions of its LADARVision technology platform may yield
even greater improvements in patient results for vision disorders that require
more complex corneal reshaping such as hyperopia, astigmatism and the many
combinations of hyperopic and myopic sphere and cylinder.
The LADARVision optical system includes many proprietary features. The LADAR eye
tracker measures and adjusts more than 4,000 times per second. The LADARVision
System's narrow beam excimer moves over the cornea very rapidly and with high
accuracy. This feature allows complex shaping algorithms to be implemented with
a much smaller laser device while minimizing surgical duration.
The LADARVision System may offer advantages over current excimer laser LVC
systems in manufacturing, installation and maintenance costs. The system is
compact: all circuitry and systems are contained in the patient bed and overhead
arm. The narrow beam excimer requires
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less energy and is designed to be more reliable and easier to service, all of
which tend to reduce life cycle costs. Finally, the Company has been granted a
U.S. patent on it's laser cartridge approach, which offers the potential for
simple field replacement conceptually similar to replacing a toner cartridge for
a laser printer.
The Company's proprietary software in the LADARVision System is a user friendly,
32-bit Windows(R)-based/1/, graphical user interface incorporating high
resolution, real-time imaging of both the tracked and untracked eye images. The
software is designed with full patient database features and unique eye tracker
information available to identify and count surgical procedures on humans.
MARKET IN THE UNITED STATES
The principal market for LVC is the correction of refractive vision disorders
such as myopia, hyperopia and astigmatism. Estimates from trade publications
indicate that more than 136 million people in the United States wear eyeglasses
or contact lenses to correct refractive vision disorders, and 60 million are
myopic. Of these, approximately 80% have myopia from 1 to 7 diopters, the level
of myopia for which the U.S. Food & Drug Administration ("FDA") has currently
approved LVC treatment. In the United States alone, consumers spend
approximately $13 billion on eyeglasses, contact lenses and other vision
correction products and services each year. The Company believes a receptive
segment of the consumer market to LVC will be contact lens wearers and eyeglass
wearers who were unsuccessful at wearing contact lenses, because they have
already pursued an alternative to eyeglasses. Approximately 26 million people in
the United States wear contact lenses, and nearly an equal number have
discontinued contact lens use.
Calendar 1997 was the second full year that LVC systems were on the U.S.
commercial market following the first pre-market approvals ("PMAs") issued by
the FDA to two of the Company's competitors. The Company believes that
approximately 200,000 LVC procedures were done in the U.S. during 1997, up from
just under 100,000 procedures in 1996. Forecasts vary for 1998 but range from
310,000 to 375,000. Procedure counts in 1998 have started out strongly. It is
believed that U.S. consumer awareness of the availability of LVC is increasing
now that nearly a third of a million procedures have been performed and that
radio and print advertising is being distributed. With a substantial increase in
procedures performed per machine in 1997 in the U.S. market, it is also believed
that ophthalmologists will accelerate their efforts to secure access to an LVC
system, obtain the requisite training, and offer the procedure to their patients
and referral sources such as optometrists. The Company believes many
ophthalmologists are seeking new sources of practice revenue as a result of a
decline in Medicare reimbursement for cataract surgery and will be seeking not
to lose local market position as refractive surgery becomes widespread.
Refractive surgery offers practitioners what the Company believes is the largest
single new revenue opportunity for their practices in the near future.
Currently, the prevailing price of an LVC procedure to a consumer is $1,800 to
$2,200 per eye, although there is significant price variation by national and
local market. The lower price is more typical for PRK and the higher one more
typical for LASIK. Vision correction is typically paid for by the individual
receiving treatment (patient pay) and does not rely on reimbursement
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/1/ Windows is a registered trademark of Microsoft Corporation
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from governmental or private health care payers.
THE COMPANY'S BUSINESS STRATEGY AND DISTRIBUTION PLANS
The Company's objective is to become the leader in the treatment of refractive
vision disorders through the commercialization of its LADARVision System. The
principal elements of the Company's strategy are as follows:
[]Seek Market Acceptance Through Innovative Marketing Strategy. In order to
broaden market acceptance of the LADARVision System, the Company has
developed an innovative marketing strategy which is directed toward
reducing the initial cost to the ophthalmologist. Under the Company's
marketing approach, the physician would pay an advance procedure fee as
well as an ongoing per procedure service fee. This approach permits the
physician to obtain the LADARVision System without either a substantial
capital investment or the risk that the equipment and technology purchased
will become obsolete, both of which can create barriers to physician
acceptance. The Company believes that this marketing strategy, combined
with comparable total cost of ownership, may appeal to physicians who have
already purchased a first generation LVC instrument and have established an
LVC component to their practice but wish to utilize the advanced features
contained in the Company's LADARVision System.
[]Prepare for United States Market Penetration Through Targeted Foreign
Placements. Although the Company cannot commercialize its LADARVision
System in the United States until it has received its PMA from the FDA, the
Company is beginning to develop consumer and physician awareness of the
LADARVision System and its potential advantages over first generation LVC
technology through initial product placement outside the United States.
Initial foreign placements have been targeted to opinion leaders in the
ophthalmic communities in their respective countries. The Company believes
that these foreign marketing activities will assist the Company in gaining
experience that will facilitate marketing activities in the United States
market once the PMA is received.
[]Accelerate Clinical Trials and the Regulatory Process. The Company has
conducted a strategy of accelerating the completion of the regulatory
process by conducting concurrent trials at a select group of institutions
in the United States and one in Europe that have had prior clinical trial
experience in the use of excimer lasers for LVC. By concentrating its
efforts in a limited number of experienced institutions and conducting
extensive data review and site audits, the Company believes that it can
attain better accountability over the clinical process and ensure high data
integrity. The Company believes a combination of highly accountable data
with efficacious results has expedited the regulatory review process. The
Company has submitted its PMA application and on February 13, 1998 the
Ophthalmic Devices Panel recommended to the FDA that approval be granted to
the Company.
[]Leverage Technology Platform to Expand Indications for Use. The Company
has begun clinical trials to pursue additional clinical indications for its
LADARVision System, such as hyperopia and LASIK. The Company plans to
pursue additional clinical indications such as hyperopia with and without
astigmatism, and
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presbyopia (need for bifocals or reading glasses). The Company believes
that its proprietary combination of eye tracking and narrow beam laser
technology is well suited to addressing these additional indications, and
that its existing LADARVision System could be adapted for additional
indications with software upgrades.
BACKGROUND INFORMATION ON REFRACTIVE SURGERY
The Human Optical System and Refractive Errors. The human eye uses the cornea
and lens to focus, or refract, light through a variable aperture opening onto
the retina on the back of the eye. The retina conducts the refracted image to
the optic nerve which carries the resultant image to the brain for response. In
a substantial proportion of the population, the natural refraction of the eye is
imprecise to some degree, called "refractive error." This natural error is the
result of the focal point of the image not falling precisely on the curvi-linear
plane of the retina. Such natural refractive error is typically caused by
variations in eye length. In many cases this condition requires refractive
correction with eyeglasses or contact lenses. Should the focal point be in front
of the retina, the result is myopia. Should the focal point be behind the
retina, the result is hyperopia. Astigmatism is the refractive error that can
accompany either myopia or hyperopia or be a stand-alone disorder relating to
differences between horizontal and vertical visual performance.
Refractive Surgical Techniques. In the 1970's, a number of ophthalmologists
hypothesized that refractive errors in the human eye could be corrected
surgically by reshaping the cornea since the corneal curvature accounts for a
substantial amount of the refractive power in the human eye. Subsequently,
various surgical techniques were developed, each of which shows some degree of
efficacy but also exhibits various side effects. The primary surgical techniques
are as follows:
RADIAL KERATOTOMY: Radial keratotomy ("RK") uses a diamond-edged scalpel to
cut a varying number of radial incisions in order to reshape the cornea.
Although some practitioners have achieved a moderate degree of accuracy
with RK, significant variability has been noted from surgeon to surgeon,
and a number of clinical problems remain. A longitudinal study, Prospective
Evaluation of Radial Keratotomy ("PERK"), was completed in 1994 showing
that 43% of RK patients did not have a stable surgical outcome over time.
PERK did demonstrate, however, that RK could initially bring about 85% of
patients, within a defined vision disorder, to a visual acuity of 20/40 or
better. Visual acuity of 20/40 is what many states consider the maximum
visual disorder allowed to qualify for a driver's license without
corrective lenses. Because RK is a surgical procedure that does not use any
instrument or device other than a scalpel, it is not regulated by the FDA.
PRK: PRK uses a non-thermal, ultraviolet excimer laser to surgically
remove, or ablate, sub-micron layers of tissue to reshape the cornea. While
results with PRK have been somewhat better than RK, as defined by the
percentage of patients achieving 20/40 vision or better, problems in early
generation technologies have been observed such as regression, haze, halos
and reduced night vision. PRK systems are medical devices regulated in the
United States by the FDA. At this time, only two companies, Summit
Technologies and VISX, Inc., have been granted a United States PMA for PRK
systems. Additional PMA's can be anticipated during 1998.
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For patients who undergo PRK surgery, the re-growth of the epithelium in
the two to five days post-operatively is the cause of moderate discomfort.
Additionally, the corneal ablation engenders wound healing which is
sometimes a cause of post-operative regression. As a result, the laser in-
situ keratomileusis ("LASIK") procedure was developed. In the LASIK
procedure, the front edge of the cornea is cut across its face and laid
back with an attachment (a corneal flap) to reveal the corneal "bed" or
stroma. An excimer laser then ablates tissue to reshape the stroma. The
procedure is completed by replacing the corneal flap. In contrast to first
generation PRK, early LASIK clinical results show faster return to best
corrected visual acuity, more stable results within the first year,
increased predictability for higher degrees of myopia and decreased patient
discomfort. However, due to the mechanical complexity required to cut the
very thin (150 micron) corneal flap, additional complications unique to
LASIK are sometimes reported. After evaluating these tradeoffs in the LASIK
procedure, the ophthalmology community is rapidly adopting it due to the
aforementioned advantages for patients.
CLINICAL TRIALS
FDA guidelines prescribe three steps or phases of clinical testing for excimer
refractive surgical systems. During Phase I, the device manufacturer conducts
feasibility studies to confirm design and operating parameters. During Phase II,
the manufacturer attempts to rule out major safety risks and assure reasonable
stability of results and may make minor modifications to the device and
treatment protocols. During Phase III, the manufacturer provides reasonable
safety and efficacy assurances of the final device to be submitted for PMA by
virtue of treating an expanded patient population.
The Company conducted pre-clinical trials with the LADARVision System in late
1994 in primates. In January 1995, the Company began a Phase I trial on five
blind eyes, closely followed by a Phase IIa sighted eye study under the
direction of Dr. Ioannis Pallikaris, an associate professor of ophthalmology at
the University of Crete, Greece and co-inventor of the LASIK procedure. The
Company was granted an investigational device exemption ("IDE") to begin U.S.
trials by the FDA in January 1996. The Company then conducted a Phase II
confirming trial in the U.S. under the direction of Dr. Marguerite McDonald, the
Company's Medical Director. Following these surgeries and data submission, the
FDA permitted the Company to begin Phase III surgeries at up to seven U.S. sites
and 500 eyes. Beginning in October 1996 and proceeding until May 1997, the
Company's Phase III multi-site procedures have been compiled to six months post-
operative data for myopia and myopic astigmatism as follows:
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PHASE III MYOPIA - U.S. RESULTS UNCORRECTED VISUAL ACUITY
% OF EYES
INTERVAL
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VISUAL ACUITY 1M 3M 6M 9M
- --------------------------- ---- ---- ---- ----
LESS THAN OR EQUAL TO 20/20 59 69 70 68
LESS THAN OR EQUAL TO 20/25 78 83 85 84
LESS THAN OR EQUAL TO 20/32 90 92 92 94
LESS THAN OR EQUAL TO 20/40 96 96 96 97
- ---------------------------------------------------------------------
N= 460 450 417 171
PHASE III MYOPIC ASTIGMATISM UNCORRECTED VISUAL ACUITY
% OF EYES
INTERVAL
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VISUAL ACUITY 1M 3M 6M
- --------------------------- ---- ---- ----
LESS THAN OR EQUAL TO 20/20 48 55 59
LESS THAN OR EQUAL TO 20/25 72 77 81
LESS THAN OR EQUAL TO 20/32 84 85 88
LESS THAN OR EQUAL TO 20/40 92 92 93
- ------------------------------------------------------------
N= 210 208 187
M-MONTHS, POST-OPERATIVELY
The FDA's primary measure of efficacy regarding LVC is the uncorrected visual
acuity ("UCVA"), or the percentage of patients who can read to the specified
levels on the standard
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Snellen eye chart post-operatively with no additional refractive correction. The
FDA has concluded that certain percentage levels of patients achieving 20/20 and
20/40 of UCVA constitute efficacy.
The FDA's primary measure of safety regarding LVC is the best corrected visual
acuity ("BCVA"), or the percentage of patients treated who lose the ability to
read as far down the standard Snellen eye chart post-operatively as they
previously could. The FDA has concluded that a 2 line (or more) loss on the
Snellen eye chart is a compromise of visual function. The Company's clinical
results has an extremely small number of patients losing 2 or more lines of
BCVA. These results are superior to other FDA clinical file results from other
company's systems.
Another key part of the information for the FDA about an LVC system is the
stability of results for patients. The mean manifest refraction in both the
Greek and U.S. trials changed less than diopter in any three month post-
operative interval.
In September 1997, the Company began its hyperopia clinical protocol and in
October 1997, its LASIK clinical protocol.
See "Business - - Other Key Personnel of the Registrant" for more information on
the Company's medical and regulatory advisors and employees.
RESEARCH AND DEVELOPMENT
The Company has expended approximately $19.6 million on research and development
efforts for its LADARVision technology platform. This includes $3+ million in
United States government research and development grants in laser radar
technology for military use the Company received between 1985 and 1993, and over
$16 million in financing allocated directly to LADARVision development and
clinicals since February 1993.
Tracker-assisted LASIK ("T-LASIK") has recently come out of development at the
Company and the initial clinical protocol surgeries have been accomplished. The
Company's goal in pursuing T-LASIK is to incorporate the eye tracking capability
of the LADARVision System in the LASIK procedure. First, T-LASIK intends to
assist and improve the surgeon's placement of the LASIK microkeratome on the
center of the cornea prior to cutting a flap. Second, T-LASIK is being designed
to automatically center (by tracking) the laser ablation in the stromal bed
after it is exposed by the cutting of a flap. Although LASIK is a non-regulated
procedure, the FDA maintains that for LVC equipment manufacturers (including the
Company) to make claims regarding the performance of LASIK, the equipment
manufacturer must conduct a Phase III clinical evaluation of the equipment used
in conjunction with the procedure. The company marketing one of the two U.S.
approved LVC systems has indicated that they will conduct trials seeking LASIK
approval.
The Next Technology Advance in LVC: Custom Cornea(TM)
The Company is actively developing CustomCornea, a patent pending technology
designed to further extend the precision and flexibility of the LADARVision
System by incorporating advanced eye measurement technology to determine the
more subtle errors of the human visual system and generate custom ablation
patterns ideally suited for each patient. CustomCornea is
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intended to offer correction of the degrading effects of complex corneal
topographical anomalies, including irregular astigmatism. The Company believes
that CustomCornea will improve the night vision performance of patients over
current PRK performance. The Company has applied for a patent covering certain
aspects of this technology and certain claims of that application have been
allowed in 1997. During 1997, the Company conducted a successful clinical trial
of the measurement aspects of the CustomCornea concept on approximately 100 eyes
with a prototype device. During 1998, the Company intends to submit its
application for a PMA for the device and begin surgical procedures that offer
unique, customized corrections. Such corrections offer the promise of increasing
contrast sensitivity, improved night vision and uncorrected visual acuity beyond
what current technology can provide.
The Company's long term research and development plan includes extension of the
CustomCornea and LADARVision technology to include multi-focal correction of
presbyopia. The correction of presbyopia would require ablation of a highly
complex and precise shape which the Company believes may be achievable with
LADARVision technology. The CustomCornea technology has measurement features the
Company believes will aid in the development aspects of this project. Presbyopic
correction is a multi-year development program.
There can be no assurance that the Company will be able to successfully develop
any of these technologies or that any of these technologies will achieve market
acceptance.
MANUFACTURING
The Company's manufacturing operations consist of the final assembly of parts
and components, followed by testing to maintain performance and quality control.
Most parts and components are supplied by outside vendors. The completed System
must pass a series of final integration and systems tests prior to shipment.
The Company has funded the development of a custom, small excimer laser. The
small excimer laser device is built for the Company by a U.S.-based laser
specialty contractor who developed the device for the Company over the course of
1994 and 1995. This contractor is currently the Company's sole source of the
laser device. If this source were unable to meet the Company's demand, the
Company's ability to build LADARVision Systems would be adversely affected.
Although the Company has full and exclusive proprietary rights to the small
excimer laser device and could move the manufacture of the device to another
vendor or to additional vendors, this process could take several months. In
addition to the laser device, the most significant system component is the
optical module. The LADARVision optical module had been previously independently
built and tested by the Company. During 1996 and 1997, the Company outsourced
the optical module to one sole source supplier to improve manufacturability,
serviceability and to achieve higher performance and begin positioning the
Company to enter higher volume manufacture. If these sources were unable to meet
the Company's demand, the Company's ability to build LADARVision Systems would
be adversely affected. The Company wrote the LADARVision System software (all
versions thereof) and intends to protect this software by copyright and, in
certain instances, by protecting portions of it as a trade secret. The balance
of the LADARVision System, consisting of common, non-proprietary components
purchased from third parties, is assembled and tested by the Company.
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In 1997, the Company moved to a leased, newly-built main office and production
facility of approximately 25,000 square feet. The new facility will enable the
Company to maintain inventory levels and to move production rates up to what
will be needed for commercial placements. See Item 2 - Properties.
In March 1998, the Company delayed for at least ninety days the completion of
several systems in commercial production and the production of new systems in
order to finalize quality system requirements and complete implementation of
several engineering changes. This action by the Company will result in a delay
in installing several commercial systems outside of the United States. Although
the Company expects to commence the delivery of commercially produced systems in
June 1998, there can be no assurance that the Company will have resolved the
matters by that time. Further, because of these delays, the Company is
uncertain as to how many commercial systems it can produce for the remainder of
the 1998 to serve the United States market after the Company's PMA is granted.
The Company is actively implementing policies and procedures to enable it to
achieve International Standards Organization ("ISO") 9001 and CE Mark
qualifications and to meet the FDA's Quality System Requirements ("QSR")
guidelines.
The Company's manufacturing facility and manufacturing procedures must comply
with QSR guidelines before the Company's PMA can be granted. In preliminary
reviews for both QSR and ISO 9001, the reviews found deficiencies that must be
corrected before approval can be obtained for both QSR and ISO 9001. One of the
matters that must be handled by the Company is its ability to control the
quality of components and sub-assemblies manufactured or assembled by suppliers
to the Company. The Company believes it can meet requirements for QSR and ISO
9001, including the supplier control matter, by the time its PMA is ready for
approval by the FDA. However, there can be no assurance that the Company will
meet these requirements. The Company will not be able to enter into full scale
commercial production of systems for the United States market until it meets the
QSR requirements. Any delay beyond June 1998 in meeting the QSR and ISO 9001
requirements will have a material adverse effect on the operations of the
Company.
SALES AND MARKETING; CUSTOMER SERVICE
The Company plans to employ its own sales and service personnel to launch the
LADARVision System first in markets outside the United States and, following FDA
approval, within the United Sates. The Company and CIBA intend to co-promote
their products at industry meetings.
CIBA has a line of products that can be used by the practitioner in conjunction
with performing LVC. These include topical anesthetics, post-operative wound
healing compounds and bandage contact lenses. These products have been employed
by physicians in the Company's clinical trials. The Company believes that
affiliation with the CIBA name in ophthalmic products will initially assist it
in gaining attention and added credibility from ophthalmologists who have an
interest in LVC.
The Company is actively building its capabilities in both sales and service
personnel at the
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current time. There are limited experienced sales and service personnel
available and the Company is conducting training of such personnel, especially
service personnel, after their initial hiring that will limit their productivity
in their first months with the Company.
The Company recently contracted for market research regarding the current state
of the market for LVC procedures and equipment. The market research results
have permitted the Company to refine the LADARVision selling proposition in
light of the current stage of market development.
COMPETITION
The refractive surgery market is characterized by rapidly evolving technology
and intense competition. The Company is aware of two companies, Summit and VISX,
that have received FDA approval for their respective LVC excimer lasers for
treating low myopia. Additionally, VISX received approval to commercially offer
astigmatism treatment 1997. Both Summit and VISX are forecasting that they will
receive approvals on additional indications during 1998, providing both
additional feature competition and broadening the size of the patient market for
LVC. Several companies, including Bausch & Lomb's Surgical Division (in part,
formerly Chiron/Technolas), Coherent/Schwind, Nidek, Meditek, Lasersight and
Novatec, have introduced LVC systems outside the United States, where LVC has
been commercialized for treating myopia and other vision disorders. Two of these
companies have made announcements of PMA filings with the FDA in late 1997,
indicating substantial completion of their U.S. Phase III protocols. Other
companies either have begun or may soon begin clinical trials in the United
States, including Phase III trials, the last stage before approval. LVC
providers who purchase equipment from Summit or VISX may be reluctant to change
to the new LADARVision System because of the significant capital investment they
have made or the familiarity with the equipment and the inconvenience of
changing to a new system. The ability of Summit and VISX to sell additional
machines in the U.S. market in 1997 appeared less than their large initial sales
achieved pre-PMA on the basis of a non-refractive indication and immediately
post-PMA based on the new LVC indication. If other providers of LVC systems are
able to saturate the United States market (or if it is saturated already) with
their equipment before the Company obtains FDA approval to market the
LADARVision System in the United States, the Company could experience a
significantly lower share of the market than anticipated which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's several prospective commercial competitors such as Summit, VISX,
Bausch & Lomb, Nidek and perhaps others, have substantially greater capabilities
than the Company in the areas of capital resources, research and development
resources and regulatory, manufacturing and marketing experience. There can be
no assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective and/or less
expensive than those developed or marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive.
During 1996, after FDA approval to Summit and VISX, another competitive
phenomenon occurred. There have been reports of "black box" lasers being
employed in commercial surgeries in the U.S. A black box laser is one that has
been made independently of any manufacturer who is pursuing a clinical trial
path following the rules for a Class III medical device. There are also reports
of "gray market" lasers entering the U.S. and being used to treat
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patients. A gray market laser is one made by an approved manufacturer (Summit or
VISX) but sold earlier into a foreign market. The existence of a U.S. equipment
market has spawned some amount of activity in selling older, non-U.S. approved
systems into the U.S. market illegally. After proposing that such illegal lasers
be allowed to continue operating if their owner/operators file for an
investigational device exemption ("IDE") from the Agency by January 15, 1997,
the FDA began vigorous enforcement actions against certain remaining illegal
devices and manufacturing sites. It is believed that the FDA enforcement actions
have been successful in reducing the growth and numbers of such illegal devices
in the U.S. LVC marketplace. The primary risk with such systems lies in the fact
that with no rigorous clinical testing as part of an FDA approval process, any
adverse patient results could be sensationally publicized and thereby reduce
primary demand for legitimate LVC procedures.
During 1996, in order to gain market share from the larger number of existing
Summit systems in the U.S. installed base, VISX offered a discount on the price
of their system if the buyer "traded-in" a Summit system. The Company may find,
upon its entry to the U.S. or foreign markets, that competitive conditions
require it to modify its normal economic terms in order to induce owners of
previous laser models to make the change to a LADARVision System.
Additionally, non-laser corrective refractive procedures and technologies, such
as implantable ring devices and contact lenses, are under development and/or in
clinical trials in the U.S., and it is possible that these new technologies and
procedures will successfully emerge as competition to the Company's technology.
RELATIONSHIP WITH CIBA
The Company and CIBA entered into an agreement in 1994 whereby CIBA purchased
certain securities of the Company for $4,000,000 which subsequently converted to
1,256,550 shares of common stock. In 1995, CIBA and the Company replaced their
existing agreement with a Strategic Alliance Agreement whereby CIBA advanced
$1,000,000 to the Company and agreed to provide in-kind services worth over
$1,000,000 over a three-year period.
Under the Strategic Alliance Agreement, CIBA has agreed to allow the Company to
use the trademarks CIBA Vision(R) and CIBA Vision Ophthalmics(R)/2/ to promote
its ophthalmic refractive laser products for the duration of the agreement
(eight years unless terminated earlier). As part of the in-kind services to be
provided by CIBA for three years, CIBA may provide exhibit space at appropriate
ophthalmic conventions or congresses attended by CIBA worldwide and participate
in co-promotional activities with the Company.
Terence A. Walts, a vice-president of CIBA, was a full-time consultant to the
Company who is paid by CIBA. Services provided by Mr. Walts have constituted a
significant portion of the in-kind services to be provided by CIBA. Mr. Walts
and the Company have agreed that Mr. Walts will not become an employee of the
Company in June 1998, as contemplated in the Strategic Alliance Agreement
between the Company and CIBA. Mr. Walts was a valuable consultant and
contributor to the Company and its progress over the last three years, and was
particularly instrumental in finalizing and supporting the Strategic Alliance
with CIBA. See "Item 13. - Certain Relationships and Related Transactions."
- -----------------------------
/2/ CIBA Vision and CIBA Vision Ophthalmics are registered trademarks of
Novartis, Ltd.
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<PAGE>
The Strategic Alliance Agreement provides that the Company shall pay commissions
to CIBA on all ophthalmic refractive laser equipment revenues, including patient
procedures fees, net of royalties to IBM, Pillar Point Partners, Summit and
VISX, in the amount of 6% of such revenues. The CIBA commissions are limited to
an aggregate of $10,000,000 unless the Company chooses to continue paying such
commissions for five additional years in lieu of issuing a certain number of its
shares of Common Stock to CIBA. The agreement may be terminated by CIBA under
certain circumstances. See "Item 13. - Certain Relationships and Related
Transactions."
PATENTS AND PROPRIETARY INTELLECTUAL PROPERTY
The Company's LADARVision eye tracking and excimer shaping technologies are the
product of several years of contract research and development for the Strategic
Defense Initiative and the National Aeronautic and Space Administration. The
Company has retained all commercial rights to these technologies and has filed
a total of eleven patent applications in the United States and numerous foreign
patent applications related to these technologies. Three of the eleven United
States patent filings have resulted in patents being issued to the Company and
several others have an indication of allowable subject matter.
The patent applications generally relate to the following areas:
[]A cartridge excimer laser device for high serviceability;
[]Fast response eye tracking;
[]Fast and accurate optical narrow beam delivery system with tracking;
[]Ablation with shot pattern, with minimal sensitivity to ablation debris;
[]The algorithm for shaping with arbitrary combinations of plus and minus
sphere and cylinder; and
[]CustomCornea
The ability to protect the Company's proprietary tracking and small-beam
technology under patents and as trade secrets, is critically important to the
Company's ability to differentiate its technology from earlier-to-market,
competitive LVC systems. In the United States and overseas, there is a large
field of prior art covering methods and apparatus for performing corneal surgery
with ultraviolet laser ablation.
The Company's success will depend in part on its ability to obtain patents for
its products and processes, to preserve its trade secrets and to operate without
infringing the patent rights of third parties.
PILLAR POINT PARTNERS; OTHER LICENSES
Two of the Company's competitors, Summit and VISX, have formed a U.S.
partnership, Pillar Point, to pool certain of their respective patents related
to corneal sculpting technologies. Pursuant to this partnership, companies using
excimer lasers for LVC, including the two partners, may be required to pay
royalties and per procedure fees to the partnership for all sales generated in
the United States depending upon the extent to which their excimer laser product
incorporates patented technology owned by the partnership and as required by the
terms of any applicable license. The Company has sued Pillar Point contending
non-infringement, non-
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enforceability and invalidity of certain of these patents and contests the need
for a license or to pay royalties. See "Legal Proceedings." Should such
litigation prove unfruitful, the Company may have to pay to the partnership per
procedure fees related to a feature of the LADARVision System. Pillar Point was
established in part to license its patents to others, and thus the Company
believes that Pillar Point is willing to grant a license to the Company,
although there can be no assurance that they will do so.
In 1995, the Federal Trade Commission ("FTC") initiated an investigation of
Pillar Point. In the most recent available Form 10-Q's filed with the Securities
Exchange Commission, Summit and VISX have disclosed that the FTC investigating
staff has informed the Pillar Point that it has reason to believe that a
violation of the Federal Trade Commission Act may have occurred and that it is
prepared to recommend that the Commission issue an administrative complaint
under the Act. On March 24, 1998, the FTC voted to bring charges against VISX
and Summit alleging that this patent pooling arrangement was essentially a
conspiracy to fix prices in the LVC market. A hearing on these charges is
scheduled for April 16, 1998 before an administrative law judge. Additionally,
the FTC alleged that VISX acted with inequitable conduct and willful fraud in
obtaining one of their patents contributed to the patent pooling partnership.
Additionally, the two partners in Pillar Point are in various forms of
litigation between themselves, initiated in 1996 and expanded in 1997 and 1998,
that challenge the details of what payments have been (or not been) remitted to
Pillar Point and what form of LVC procedure is actually covered under the
formation agreement between the parties. Additionally one of the parties to
Pillar Point, VISX, has sued for dissolution of the partnership. It is uncertain
whether Pillar Point will survive as an entity due to these matters or, if it
does, what changes may result in competitive market conditions or in the ability
of any equipment company to market its products without allegations of patent
infringement. Any substantial uncertainty or confusion intentionally created or
simply caused in the marketplace for new equipment and services as a result of
these possible structural changes in the intellectual property environment could
create delays or deferments in buying decisions by ophthalmologists, clinics or
hospitals. Such delays or deferments could adversely affect the Company's
ability to make placements, thereby affecting the Company's procedure market
share and have a material adverse effect on the Company's business, financial
condition and results of operations.
During 1996, the Company licensed from IBM rights to its patents related to
ultraviolet laser ablation of biological material. In 1997, IBM sold certain
patent property to Lasersight, Inc., which also makes LVC equipment. The Company
has been informed by IBM that while the patent and certain licenses thereto are
to be included in the sale to Lasersight, Inc., the Autonomous license is still
owned by IBM. Under the terms of the license with IBM, the Company has an
automatic right of renewal in 2000 for another four year term, subject to a
fixed limit increase in the royalty rates thereafter. Upon expiration of the
second term, the patent will have expired.
There may be several other United States and foreign patents for which the
Company will need to negotiate licenses in order to sell, lease or use the
LADARVision System in certain markets. There can be no assurance that the
Company will be successful in securing licenses for these patents, or that if
the Company does obtain licenses for these patents, such licenses will be on
terms acceptable to the Company. An inability to license these patents would
have a material adverse effect on the business, financial condition and results
of operations of the Company.
GOVERNMENT REGULATION
FDA. Before medical devices can be marketed, they must be subjected to rigorous
pre-clinical and clinical testing in order to satisfy regulatory requirements
imposed by the FDA, comparable agencies in other countries and, to a lesser
extent, by certain state regulatory authorities.
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Medical devices are classified by the FDA as Class I, II or III based upon the
amount of regulatory review necessary to reasonably ensure their safety and
effectiveness to the public. Class III devices, such as the Company's
LADARVision System, are subject to the most stringent regulatory review and
cannot be marketed for commercial sale in the United States until the FDA grants
a PMA for the device.
The process of obtaining approval of a PMA application is lengthy, expensive and
uncertain. It requires the submission of extensive clinical data and supporting
information to the FDA. Human clinical studies may be conducted only under an
FDA-approved IDE and must be conducted in accordance with FDA regulations. In
addition to the results of clinical trials, the PMA application includes other
information relevant to the safety and efficacy of the device, a description of
the facilities and controls used in the manufacturing of the device, and
proposed labeling. After the FDA accepts a PMA application for filing, and after
the FDA's review of the application, a public meeting is held before an FDA
advisory panel comprised of experts in the field. After the PMA is reviewed and
discussed, the panel issues a favorable or unfavorable recommendation to the FDA
or recommends approval and conditions. Although the FDA is not bound by the
panel's recommendations, it historically has given them significant weight.
Products manufactured and distributed by the Company pursuant to a PMA will be
subject to extensive, ongoing regulation by the FDA.
In late 1996, the FDA issued a definitive statement entitled "FDA Guidance for
Photorefractive Keratectomy Laser Systems: IDE Studies and PMA Applications"
(the "Guidance Document"). The Guidance Document offers companies pursuing FDA
approval of LVC systems substantially more defined filing paths, study design
and execution requirements, and safety and efficacy data levels that will have
to be achieved in order to be a candidate for issuance of a PMA. The Company
believes that the Guidance Document will make the process of obtaining PMA
approvals for LVC systems less uncertain and more predictable. The Company
believes that its engineering, clinical trials and data gathering and analysis,
including that which was accomplished before the existence of the Guidance
Document, are in substantial compliance with the Guidance Document.
The FDA enabling legislation, the Food, Drug and Cosmetic Act, also requires the
Company to manufacture its products in accordance with its GMP regulations. The
Company's facilities will be subject to periodic, surprise GMP 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 amendments to the GMP regulations
which will likely increase the cost of compliance with GMP requirements.
Additionally, product and procedure labeling and all forms of promotional
activities are subject to examination by the FDA, and current FDA enforcement
policy prohibits the marketing of approved medical devices for un-approved uses.
Noncompliance with these requirements may result in warning letters, fines,
injunctions, recall or seizure of products, suspension of manufacturing, denial
or withdrawal of PMAs and criminal prosecution.
The Company also is regulated by the FDA's Center for Devices and Radiological
Health under the United States Radiation Control for Health and Safety Act,
which requires any laser product to comply with certain performance standards
and manufacturers to certify in product labeling and in reports to the FDA that
their products comply with all such standards. The law also requires laser
manufacturers to file new product and annual reports, maintain manufacturing,
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testing and sales records, and report product defects. Various warning labels
must be affixed and certain protective devices must be installed in order to be
in compliance. The Company believes it is in compliance with these reporting and
operating requirements.
The Company has submitted its PMA application for its initial indications of
myopia and astigmatism. On February 13, 1998, the FDA's Ophthalmic Devices
Panel reviewed the application and unanimously recommended that the FDA grant
the PMA approval for myopia up to -8 diopters and astigmatism up to -4 diopters.
Normally, the FDA takes several months after a recommendation from a panel to
complete its work on the file, conduct audits of the Company and grant a PMA.
Other Regulation. Sales, including international, manufacture and product
development of the LADARVision System, also may be subject to federal
regulations pertaining to export laws and environmental and worker protection,
as well as to state and/or local health and safety regulations, which may
require obtaining various permits. The impact of such regulations on the Company
cannot be fully predicted.
In the state of Florida, where the Company's primary facilities are located, the
Department of Health and Rehabilitative Services' Office of Radiation Control
governs reporting and record keeping requirements that the Company follows.
Furthermore, each country in which the Company anticipates marketing the
LADARVision System requires certain filings and other information and procedures
with regard to laser devices used in medicine.
In Europe, the member countries of the European Community have rules that
require that medical products receive, by June 14, 1998, certifications
necessary to affix the "CE" mark to the device. The CE mark has gained
acceptance as an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives.
Certification under the ISO 9000 series of standards for quality assurance and
manufacturing processes is one of the CE mark requirements. The Company is
implementing policies and procedures to enable it to achieve ISO 9000
qualification and the CE mark within the required time frame.
Changes in existing regulatory requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will not be required to incur significant costs to comply with laws and
regulations in the future or that laws and regulations will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. The
Company has not experienced any product liability claims to date. The Company
maintains a "claims made" product liability insurance policy with coverage
limits of $5 million per occurrence and $5 million in the aggregate. The
inability of the Company to maintain adequate insurance coverage at any time
could, in the event of product liability or other claims in excess of the
Company's insurance coverage, have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, the
Company has agreed in the past, and is likely to agree in the future, to
indemnify certain medical institutions and their personnel who
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participate in the Company's clinical studies.
EMPLOYEES
As of February 28, 1998, the Company had 61 full-time and one part-time
employee. Additionally, from time to time, the Company has retained the services
of agency contract employees or consultants. The Company expects additional
staffing during the remainder of 1998 to be primarily in the sales and marketing
and production functions. No employees are covered by collective bargaining
agreements, and the Company believes that it maintains good relations with its
employees.
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Executive Officers and Directors of the Registrant
The following table sets forth certain information with respect to the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
AGE (AT
FEBRUARY
NAME 28, 1998) TITLE
- ------------------------------ -------- --------------------------------------------
<S> <C> <C>
Randy W. Frey 40 Chairman of the Board, Director, and Chief
Executive Officer
Richard C. Capozza, Ph.D. 55 Director, President and Chief Operating
Officer
Monty K. Allen 45 Vice President, Treasurer and Chief Financial
Officer; Corporate Secretary
George H. Pettit, Ph.D., MD 37 Vice President of Research
Donald I. Martin 50 Vice President of Manufacturing & Engineering
G. Arthur Herbert 72 Director
Stanley Ruffett 74 Director
Timothy Barabe 44 Director
Richard H. Keates, MD 65 Director
Whitney A. McFarlin 57 Director
</TABLE>
Pursuant to the Company's Third Amended and Restated Articles of Incorporation,
the Board of Directors of the Company has fixed the number of directors at
seven. Each elected Director will serve until the next Annual Meeting of
Stockholders or until his successor shall be elected and shall qualify.
Randy W. Frey founded Autonomous in 1985 and serves as its Chairman of the
Board, and Chief Executive Officer. He previously spent seven years in the
aerospace industry with Martin Marietta and Raytheon Company and was involved in
the development of laser radar technology for object tracking and guidance
systems. Mr. Frey was integral in the development of the LADARVision eye
tracking technology for the Company's LADARVision System. Mr. Frey earned a
Bachelor of Science in Electrical Engineering from the Polytechnic Institute of
Brooklyn.
Richard C. Capozza, Ph.D. joined the Company in September 1995 as Executive Vice
President and Chief Operating Officer. In March 1998 he assumed the title of
President and Chief Operating Officer. He has over 20 years experience in
ophthalmic products from devices to pharmaceuticals. From 1985 to September
1995, Dr. Capozza was employed by Pilkington Barnes Hind, a worldwide
manufacturer of contact lenses and contact lens care products, and
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from 1990 to September 1995 was Corporate Executive Vice President for Science
and Technology, responsible for worldwide operations and research and
development. From 1981 to 1985 he was President of Syntex Ophthalmics, a
worldwide manufacturer of premium priced, high performance contact lens
products. Dr. Capozza earned his Ph.D. in Chemistry from the University of
Maryland, a Bachelor of Science in Chemistry from Providence College and is a
graduate of the Stanford University Business School executive program.
Monty K. Allen joined the Company in August 1995 as Vice President, Treasurer
and Chief Financial Officer. He assumed the duties of Corporate Secretary in
1997. From May 1994 until August 1995, Mr. Allen served as an independent
consultant to software, telecommunications and medical/biotech firms. From
February 1993 until April 1994, he served as Vice President, Chief Financial
Officer and Secretary of Clarus Medical Systems, Inc., a privately held, spinal
endoscopy medical device business. From 1990 to February 1993, he served as Vice
President, Chief Financial Officer and Secretary of AgriDyne Technologies Inc.,
a publicly held, agricultural biotech firm. Mr. Allen is a certified public
accountant and earned a Masters in Business Administration from Harvard
University and a Bachelor of Science in Accounting from Florida State
University.
George H. Pettit, Ph.D., MD joined the Company in July 1996 as Vice President of
Research. Dr. Pettit's primary career focus and expertise is in the area of
ultraviolet laser ablation and applications in medicine. From 1990 until June
1996, Dr. Pettit was a Medical Research Officer at the U.S. Food & Drug
Administration's Center for Devices & Radiological Health. Dr. Pettit earned his
Ph.D. in Electrical Engineering from Rice University and attended the University
of Texas Southwestern Medical School.
Donald I. Martin, joined the Company in August 1997 as Vice President of
Manufacturing & Engineering. From January 1995 to July 1997, Mr. Martin was
with Bio-Rad Laboratories, Inc., a maker of diagnostic and analytical
instruments for the life sciences industry. From 1977 to December 1994, he was
with the MedSystems Division of C.R. Bard, Inc. and, subsequently, Baxter
International, a maker of IV drug delivery products. Mr. Martin earned his
Bachelor of Science in Industrial Engineering from Northeastern University.
G. Arthur Herbert has been a consultant and director of Autonomous for over five
years during which time he has assisted in strategic planning for the Company.
Since 1989, Mr. Herbert has been the principal in a business consulting firm,
CEO Advisors, Orlando, Florida. Mr. Herbert has accumulated over 40 years of
experience in business development in such capacities as President and Managing
General Partner for three venture capital funds managed by Electro-Science
Management Corporation, Vice President of Corporate Development of Radiation
Incorporated and treasurer for the National Venture Capital Association. Mr.
Herbert is currently a Director of Techne Corporation, a publicly held
diagnostics firm, Seavin, Inc., a privately held vineyard and wineries firm and
Vitacare, Inc., a privately held independent physicians association. He received
his Masters in Business Administration from Harvard University and Bachelor of
Science in Engineering from the United States Naval Academy.
Stanley Ruffett has served as the Company's finance and defense contracts
consultant for over
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five years, has been a Director since September 1992 and has over 45 years of
experience in finance and accounting. From 1989 to the present, Mr. Ruffett has
been self-employed as a business consultant. Prior to consulting with the
Company, Mr. Ruffett served as Vice President of Finance with International
Laser Systems, Inc., a manufacturer of military lasers, Treasurer of Applied
Devices, Inc., a military electronics manufacturer, Controller of the Connector
Division of Plessey, Ltd., a manufacturer of connectors that had commercial and
military applications and Finance Director of Gyrodyne Company of America, Inc.,
a developer and producer of un-manned helicopters. Mr. Ruffett received a
Bachelor of Business Administration from Pace College.
Timothy Barabe is CIBA's designee on the Board of Directors. Since July 1993 he
has held the position of Vice President, Planning, Information and Control for
the Worldwide CIBA Vision Division. From 1990 to June 1993, Mr. Barabe was Vice
President, Strategic Planning and Control for the Worldwide Composites Division
of Ciba Geigy, a predecessor firm to Novartis, Ltd. Mr. Barabe joined Ciba Geigy
in 1982 and has held numerous positions in the United States and in Switzerland
in financial and strategic planning areas. Mr. Barabe received a Masters in
Business Administration from the University of Chicago and a Bachelor of
Business Administration from the University of Massachusetts.
Richard H. Keates, MD joined the Company's Board of Directors in July 1996.
Since September 1997, Dr. Keates has served as a Professor of Ophthalmology at
New York Medical College. Until January 1997, Dr. Keates was the holder of the
Irving H. Leopold Endowed Chair in Ophthalmology and was a Professor of
Ophthalmology at the University of California, Irvine for more than five years.
He received his medical training at Jefferson Medical Center, Philadelphia, PA.
He was twice a Member of the Board of Directors of the American Society of
Cataract and Refractive Surgery and actively conducted clinical trials in LVC
during his career.
Whitney A. McFarlin, joined the Company's Board of Directors in December 1997.
Since September 1993, Mr. McFarlin is the Chief Executive Officer, President and
Chairman of Angeion Corporation. Angeion is a developer and manufacturer of
implantable cardioverter defibrillators and catheter ablation systems for the
tachyarrythmia market. From 1990 to September 1993, he held the same positions
at Clarus Medical Systems, Inc. Mr. McFarlin has over 20 years experience in
medical device businesses, including executive positions at Medtronic and
Everest & Jennings. He is a registered professional engineer and also serves on
the Board of Directors of publicly-held Zero Corporation and Medical Alley, a
Minnesota-based trade association for companies and organizations in health
care. He holds an MS degree in Nuclear Engineering from Texas A&M University, a
BS in Physics and Mathematics from Henderson College, and attended the Executive
Development Program at UCLA.
Other Key Personnel of the Registrant
Charline A. Gauthier, OD, Ph.D. joined the Company in July 1995 as Director of
Clinical Affairs. From March 1992 to May 1995 she was a postgraduate researcher
at the Cooperative Research Centre for Eye Research and Technology at the
University of New South Wales, Australia. From 1991 to February 1992, Dr.
Gauthier served as the Manager of Basic Research and Graphics in the Cornea and
Contact Lens Research Unit at the School of Optometry, University of New South
Wales. Prior to that time, Dr. Gauthier was a senior research
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optometrist at the University of Waterloo in Ontario, Canada and in private
practice. Dr. Gauthier received a Ph.D. from the University of New South Wales,
her Doctor of Optometry from the University of Waterloo, and a degree in General
Science from the University of Alberta.
Shirley K. McGarvey is the Company's lead clinical and regulatory affairs
consultant has been a consultant in the ophthalmology area since 1986. From 1986
to 1992 Ms. McGarvey was Vice President of Research and Development/Clinical and
Regulatory Affairs for Chiron Vision. Earlier, Ms. McGarvey was Vice President
of Research and Development and Regulatory Affairs for American Medical Optics,
a division of American Hospital Supply Corporation. Ms. McGarvey earned her
Masters in Business Administration from Northwestern University and her Bachelor
of Science in Chemistry from the University of British Columbia.
Marguerite B. McDonald, MD has been the Medical Director and a consultant for
the Company since July 1993. Dr. McDonald also served as a Director of the
Company between July 1993 and March 1994. Dr. McDonald has been the Director of
the Refractive Surgery Center of the South at the Eye, Ear, Nose & Throat
Hospital since 1994 and, until 1996, was a Clinical Professor of Ophthalmology
at Tulane University, New Orleans, Louisiana for two years. Prior to 1994, she
was a Professor of Ophthalmology for Louisiana State University (LSU), where she
had been conducting research at the LSU Eye Center since 1981. Prior to her
affiliation with the company, Dr. McDonald was an excimer laser Clinical
Investigator and Consultant to VISX. Dr. McDonald is the author of over 150
journal articles and abstracts and has received both the Barraquer and Trokel
awards for her contributions to the field of refractive surgery. Dr. McDonald
earned her MD from Columbia University in 1976 and her Bachelor of Arts in
Biology from Manhattanville College in 1974.
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following risk factors. This Annual Report on Form 10-K contains
certain 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 of plans, intentions and objectives by the Company and statements of
future economic performance contained in this Prospectus should be deemed to be
forward-looking statements. 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. Cautionary statements are made
in certain sections of this document. These cautionary statements should be
read as being applicable to all related forward-looking statements wherever they
appear in this document, the materials referred to in this document or the
materials incorporated by reference into this Annual Report on Form 10-K.
ABSENCE OF OPERATING HISTORY AND PROFITABILITY; EXPECTED FUTURE LOSSES. The
Company was founded in 1985 to develop laser tracking technology for the
Department of Defense under the Strategic Defense Initiative and did not pursue
development of the LADARVision System product until 1993. The Company has
generated limited revenues to date, of which very little so far relate to its
LADARVision System, and has incurred net losses since 1991. The Company's
LADARVision System may require additional product development, will require
additional
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clinical studies for indications beyond low and moderate myopia and astigmatism
and will require marketing investment as well as its PMA from the FDA as a Class
III device prior to United States commercialization. There can be no assurance
that any of the Company's product, clinical or market development efforts will
be successfully completed, that regulatory approvals will be obtained, or that
the Company's products will be capable of being produced in commercial
quantities at reasonable cost and quality. Further, it is expected that the
Company will continue to incur substantial losses for some time after it enters
the United States market for laser vision correction, and there can be no
assurance that the Company will attain profitability at any time in the future.
GOVERNMENT REGULATION; FOOD AND DRUG ADMINISTRATION; POSSIBLE FAILURE TO OBTAIN
REGULATORY APPROVAL FOR PRODUCTS. Medical devices are subject, prior to
clearance for marketing, to rigorous pre-clinical and clinical testing mandated
by the FDA and comparable agencies in other countries and, to a lesser extent,
by state regulatory authorities. The Company has filed a PMA application with
the FDA for approval of its LADARVision System as a Class III device for
treating low myopia and must file an amendment thereto or additional PMA
applications for other vision disorders.
The process of obtaining approval of a PMA application is lengthy, expensive and
uncertain. It requires the submission of extensive clinical data and supporting
information to the FDA. The PMA process also typically has required a public
hearing before an advisory panel comprised of experts in the field. However,
the FDA is not bound by the advisory panel's recommendations when it seeks them.
In late 1996, the FDA issued a definitive statement entitled "FDA Guidance for
Photorefractive Keratectomy Laser Systems: IDE Studies and PMA Applications"
(the "Guidance Document"). The Guidance Document offers companies pursuing FDA
approval of LVC systems substantially more defined filing paths, study design
and execution requirements, and safety and efficacy data levels that will have
to be achieved in order to be a candidate for issuance of a PMA. The Company
believes that the Guidance Document will make the process of obtaining PMA
approvals for LVC systems less uncertain and more predictable but will not
eliminate the risk that the Company will not be granted a PMA. The Company
believes that its engineering, clinical trials and data gathering and analysis,
including that which was accomplished before the existence of the Guidance
Document, are in substantial compliance with the Guidance Document.
Products manufactured and distributed by the Company pursuant to a PMA will be
subject to extensive, ongoing regulation by the FDA. The FDA enabling
legislation, the Food, Drug and Cosmetic Act (the "FDC Act") also requires the
Company to manufacture its products in accordance with its current Quality
System Regulations ("QSR"). The Company's facilities will be subject to
periodic, surprise QSR inspections by the FDA. These regulations impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. QSR regulations are consistent,
to the extent possible, with the requirements for quality systems contained in
applicable international standards, primarily, the International Standards
Organization (ISO) 9001.
The Company's manufacturing facilities eventually must comply with current ISO
9001 qualifications and FDA QSR guidelines before the Company's PMA can be
granted. The Company's facilities are being readied to comply with such
requirements. If any noncompliance with these regulations is noted during
facility inspections, the initial or continued marketing of
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the Company's products may be adversely affected.
Additionally, product and procedure labeling and all forms of promotional
activities are subject to examination by the FDA, and current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved uses.
Noncompliance with these requirements may result in warning letters, fines,
injunctions, recall or seizure of products, suspension of manufacturing, denial
or withdrawal of PMAs, and criminal prosecution.
The FDA Quality System Regulation and ISO 9001 require the Company to maintain a
supplier-quality program with major sub-contractors in order for the Company's
product to carry the claim of having been manufactured in a quality environment.
As a result, at least two of the Company's current sub-contractors will be
required to establish documented quality systems. Currently one of those sub-
contractors meets those standards. There can be no assurance that the remaining
sub-contractor can meet the standards in a timely fashion. Furthermore, there
is always the risk that existing sub-contractors who meet the requirements
currently will not meet them at some time in the future. As a result, it is
possible that the Company's commercial capability could be hindered at some time
in the future because it is unable to pass QSR inspections by the FDA, its
subcontractor's documented quality systems fail to be sufficient, or the Company
is unable to obtain the "CE" mark to enable the Company to distribute products
in Europe in 1998 and beyond. (See "Risks Associated with International
Commercial Activities" for a discussion of the "CE" mark.)
Requirements for regulatory approval relating to the LADARVision System may vary
widely from country to country, ranging from simple product registrations to
detailed submissions such as those required by the FDA. No regulatory
clearances have been obtained in any such countries, and there is no assurance
that any will be issued.
Changes in existing regulatory requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will not be required to incur significant costs to comply with laws and
regulations in the future or that laws and regulations will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
NEED FOR ADDITIONAL CAPITAL TO FUND PLACEMENT OF THE LADARVISION SYSTEMS AND FOR
OPERATIONS. The Company's business strategy calls for the placement of the
LADARVision Systems with ophthalmologists primarily under procedure fee
agreements. As a result, the Company will be required to fund the cost of
manufacturing and installation of each system. Although the Company intends to
receive prepaid fees for the placement of each machine and to seek financing for
additional balances of capital investment, such prepaid fees and funding will
not cover the initial manufacturing and installation costs of each system. The
Company will be required to obtain financing at some point prior to achieving
high volume commercial use of its LADARVision Systems. There can be no
assurance that the Company will be able to borrow the funds or raise equity
capital as needed for the commercial placement of its LADARVision Systems or, if
such funding is obtained, that the terms of such funding will be favorable to
the Company. Until such time as the cash provided from the cumulative
LADARVision System placements is sufficient to cover the costs of the Company's
clinical, research, development and administrative endeavors, the Company will
need additional capital for funding of such operations. To the extent that such
additional capital is obtained via equity sales, the holdings
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of existing shareholders may be materially diluted. Further, additional dilution
will occur to existing shareholders upon the exercise of outstanding warrants,
stock options, and the potential issuance of shares to CIBA in 1999.
LIMITED MANUFACTURING EXPERIENCE; QSR AND ISO 9001 REQUIREMENTS. The Company's
manufacturing operations consist primarily of the final assembly of out-sourced
parts and components, followed by testing to assure field performance and
quality control. The Company must expand its manufacturing capabilities for
commercial production of the LADARVision System to have the capacity to address
the market. The Company has recently experienced delays in the production of
LADARVision Systems. The Company delayed shipment of commercial systems to
foreign customers in March 1998 for at least ninety days in order to finalize
its QSR systems and complete implementation of several engineering changes.
There can be no assurance that the Company will not continue to experience
difficulties as it converts from a research and development operation into a
commercial manufacturing operation. Any delay in commercial production beyond
June 1998 could have a material adverse effect on the Company's operations. In
addition, the Company must meet the FDA's QSR guidelines in order to ship
systems for use in the United States and must meet the requirements of ISO 9001
and receive a CE Mark in order to market in the European Community. Preliminary
reviews have identified deficiencies that must be corrected by the Company in
order to meet both the QSR and ISO 9001 requirements. If the Company is delayed
in meeting the aforementioned requirements beyond June 1998, such delay could
have a material adverse effect on the operations of the Company. In addition, if
any of the Company's suppliers of significant components or sub-assemblies
cannot meet the quality requirements of the Company, the Company could be
delayed in producing commercial systems for the United States market.
RELIANCE ON THIRD PARTY AND SOLE SOURCE SUPPLIERS. The Company relies on third
party suppliers to provide the components necessary for the manufacture of the
LADARVision System. The Company-patented laser component of the LADARVision
System is currently supplied by a single source according to the Company's
specifications under an exclusive supply agreement. The Company has the right
at any time to seek other producers of the laser. In addition to the laser
device, the most significant system component is the tracking hardware. Other
components of the LADARVision System such as the stereo microscope, computer
hardware and system casing are available from several sources. The Company may
be unable to obtain sufficient quantities of these components from single-source
or other suppliers or it may be unable to effect a change from a single source
supplier to another or other suppliers. In these instances, reductions in
manufacturing capability could occur that could cause delays in clinical trials,
regulatory approvals and commercialization which would have a material adverse
effect on the business, financial condition, and results of operations of the
Company.
DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's success will
depend in part on its ability to obtain patents for its products and processes,
to preserve its trade secrets and to operate without infringing upon the
proprietary rights of third parties. In particular, whether the Company can
protect its proprietary tracking and narrow-beam shaping technology is critical
to its ability to differentiate it from existing LVC systems. The Company has
filed eleven patent applications in the United States and several foreign patent
applications related to several features of its eye tracking technology as well
as to its narrow beam delivery, corneal
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sculpting methods and advanced topographical analysis. Three of these
applications have resulted in the issuance of United States patents, all claims
for two additional patents have been allowed, and 13 claims in one additional
patent application have been allowed. It is uncertain as to whether any other
patents will be issued, whether the scope of any patent protection will exclude
competitors or provide meaningful competitive advantages to the Company, whether
any of the Company's patents will be held valid if subsequently challenged, or
whether others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company.
In both the United States and overseas, there are a number of patents covering
methods, procedures and apparatus for performing corneal surgery with
ultraviolet laser ablation. Furthermore, there are existing patents in eye
tracking and narrow beam excimer shaping. The patent positions of medical
technology are generally uncertain and involve complex legal and factual
questions. Consequently, the Company does not know whether any of its pending
applications will result in the issuance of any patents or whether issued
patents will provide significant proprietary protection or will be circumvented
or invalidated. Since patent applications in the United States are maintained
in secret until patents are granted and since publication of inventions in
scientific or patent literature tend to lag behind patent grants by several
months, the Company cannot be certain that it was the first creator of
inventions covered by its pending patent applications or that it was the first
to file patent applications for such inventions.
PATENT LITIGATION. There has been significant patent litigation in the medical
device industry generally, and in LVC in particular. The defense and
prosecution of patent proceedings is costly and involves substantial commitments
of management time. Adverse determinations in litigation or other patent
proceedings to which the Company may become a party could subject the Company to
significant legal judgments or other liabilities to third parties and could
require the Company to seek licenses from third parties that may or may not be
obtainable and may or may not be economically viable. Patent and other
intellectual property disputes in the medical device industry often are settled
through licensing arrangements. The costs associated with such arrangements may
be substantial, and could include ongoing royalties. Furthermore, there can be
no assurances that a settlement through licensing can be reached, accordingly,
an adverse determination in a judicial or administrative proceeding, or the
Company's failure to obtain necessary licenses, could prevent the Company from
manufacturing and selling its products in one or more markets, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Two of the Company's competitors, Summit Technologies, Inc. ("Summit") and VISX,
have formed a United States partnership, Pillar Point Partners ("Pillar Point"),
to pool certain of their respective patents related to corneal sculpting
technologies. In October 1996, the Company filed suit in the U.S. against
Pillar Point alleging non-infringement, unenforceability and invalidity of
certain of the patents of Pillar Point. There can be no assurance that the
Company will prevail in this lawsuit or that other such suits will not arise.
See "Item 3. - Legal Proceedings"
TECHNOLOGY LICENSES FROM PILLAR POINT AND OTHERS. Pursuant to the Pillar Point
partnership, Summit and VISX, whose products use excimer lasers for PRK, have
agreed to pay royalties and per procedure fees to Pillar Point under licenses
granted by Pillar Point. Depending upon whether the Company's LADARVision
System incorporates patented technology owned by or
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licensed to Pillar Point and as may be required by any license agreement that
the Company may enter into with Pillar Point, the Company or its LADARVision
System users may be required to pay royalties and per procedure fees to Pillar
Point for all revenues generated in the United States. The Company has not
obtained a license from Pillar Point as of this date, and the actual per
procedure fee and other terms of any license, if such license is granted, have
yet to be determined.
In addition, there may be other United States and foreign patents for which the
Company will need to negotiate licenses in order to sell, lease or use the
LADARVision System in certain markets.
There can be no assurance that the Company or its customers will be successful
in securing licenses, including any necessary licenses from Pillar Point, or
that if the Company does obtain licenses, such licenses will be on terms
acceptable to the Company. The failure to either obtain required licenses or to
obtain licenses on terms favorable to the Company could have a material adverse
effect on the business of the Company.
LIMITED HUMAN CLINICAL TRIAL DATA IN HYPEROPIA AND LASIK; LACK OF LONG-TERM
FOLLOW-UP. Substantial additional human clinical trials must be completed under
rigorous protocols at multiple sites in order to submit the required outcome
data for hyperopia/astigmatism and LASIK with the Company's PMA application(s).
The results of the Company's early clinical trials in myopia/astigmatism appear
satisfactory, but may not be indicative of results to be expected in future
clinical trials for expanded indications. If the Company's clinical trials do
not show consistently good outcomes, the Company may not be able to secure a PMA
for its products. Moreover, the results of clinical trials are not within the
Company's control, and the Company could experience delays in completing its
clinical trials for a variety of reasons. Any failure to obtain a PMA or delay
in clinical trials would have a material adverse effect on the Company's
business, financial condition and results of operations.
There have been concerns with respect to the safety and efficacy of LVC,
including the predictability and stability of results. Potential complications
and side effects in early LVC systems have included post-operative discomfort
due to re-epithelialization (eye membrane re-growth); 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; temporary increases in intraocular pressure in reaction
to topical medication administered during and after the procedure; fluctuations
in refractive capabilities during healing; occasional decreases or permanent
loss in best corrected vision post-operatively (i.e., with corrective eyewear);
unintended over-corrections or under-corrections; regression of operative
effect; disorders of corneal healing; corneal scars; corneal ulcers and
unintentionally induced astigmatism. It is entirely unpredictable as to whether
long-term follow-up data on either clinical or later commercial patients from
any LVC system will reveal additional complications that may have a material
adverse effect on acceptance of LVC and market size which in turn would have a
material adverse effect on the Company's business, financial condition and
results of operations. Concern over the safety of LVC in general could, in
turn, result in adverse regulatory action which could have a material adverse
effect on the Company's business, financial condition and results of operations.
UNCERTAIN MARKET ACCEPTANCE OF LVC. The Company believes that its long-term
growth and
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ultimate profitability will depend upon acceptance of LVC in the United States
and certain international markets and the Company's ability to penetrate the LVC
market successfully. LVC has only been marketed in the United States for
approximately 30 months and initial market growth has been slower than
anticipated (published market estimates have shown approximately 100,000 and
200,000 U.S. procedures for the calendar years 1996 and 1997, respectively). The
degree of eventual acceptance of LVC by ophthalmologists and persons needing
refractive correction as an alternative to existing methods of treating or
correcting vision disorders is still undeterminable. The acceptance of LVC by
the general population may be affected adversely by its retail price, concerns
relating to its safety and efficacy, and the accepted effectiveness of
alternative methods of correcting refractive vision disorders. Additionally, the
current lack of long-term follow-up data, the possibility of unknown side
effects, and the expected lack of third-party reimbursement for the procedure
might also adversely affect demand. Any future reported adverse events or other
unfavorable publicity involving patient outcomes from the use of legal or
illegal LVC systems manufactured by any participant in the LVC market could also
adversely affect consumer acceptance. Ophthalmologist and optometrist acceptance
(the latter for referrals) could also be affected by the high costs and expenses
of excimer laser systems, which might preclude access to such systems by some
professionals. In addition, the Company's marketing strategy relies, in part, on
ophthalmologists who are currently using an existing excimer laser system to
replace their equipment with the Company's LADARVision System. Emerging new
refractive surgery technologies and procedures may also have the potential to
compete with or materially limit the acceptance of LVC. Current ophthalmic
product suppliers whose products, including eyeglasses and contact lenses, are
alternatives to LVC also may adversely affect the market acceptance of LVC by
their retail marketing strategies, including aggressive pricing. The failure of
LVC to achieve broad market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that there will be demand for the Company's LADARVision System.
RAPIDLY CHANGING TECHNOLOGY; HIGHLY COMPETITIVE MARKETS. The refractive surgery
market is characterized by rapidly evolving technology and intense competition.
The Company is aware of two companies, Summit and VISX, that have been granted
their PMA's and are actively marketing LVC systems in the United States for
myopia, and, in the case of VISX, astigmatism. Several companies, including
Bausch & Lomb's Surgical Division (formerly Chiron/Technolas), Coherent/Schwind,
Nidek, Meditek, Lasersight and Novatec, have introduced LVC systems outside the
United States, where LVC has been commercialized for treating refractive
disorders. Two of these companies have made announcements of PMA filings with
the FDA in late 1997, indicating substantial completion of their U.S. Phase III
protocols. Other companies either have begun or may soon begin clinical trials
in the United States, including Phase III trials, the last stage before
approval. LVC providers who purchase equipment from Summit or VISX may be
reluctant to change to the new LADARVision System because of the significant
capital investment they have made or the familiarity with the equipment and the
inconvenience of changing to a new system. If other providers of LVC systems
are able to saturate the United States market with their equipment before the
Company obtains FDA approval to market the LADARVision System in the United
States, the Company could experience a significantly lower share of the market
than anticipated which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Several of the Company's competitors have allied with or developed their own
vision care centers in Europe and the United States and have entered into
strategic alliances with prominent
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corporations in the worldwide ophthalmic industry to promote their LVC excimer
lasers. Many of these companies have substantially greater capabilities than the
Company in the areas of capital resources, research and development resources
and regulatory, manufacturing and marketing experience. There can be no
assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that are more effective and less expensive
than those developed or marketed by the Company or that would render the
Company's technology and products obsolete or noncompetitive.
Non-laser corrective refractive procedures and technologies are under
development, and it is possible that these technologies and procedures will be
successfully developed as competition to the Company's technology.
RELIANCE ON A SINGLE POTENTIAL PRODUCT. Currently the Company's only
significant planned product is the LADARVision System for refractive correction.
The Company's existing plans assume that it will derive substantially all of its
revenues from the LADARVision System. If the Company is unable to make
significant commercial placements of the LADARVision System for vision
correction, the viability of the Company would be jeopardized. Furthermore, if
the Company is unable to successfully design, clinically test and gain FDA
approval on additional indications, such as astigmatism, higher levels of
myopia, and hyperopia, the Company's future growth could be significantly
limited.
DEPENDENCE ON AND NEED FOR KEY PERSONNEL; POTENTIAL FAILURE TO MANAGE GROWTH.
Prior to 1995, the Company relied on consultants and contractors to assist
senior management in certain financial, regulatory, marketing and manufacturing
functions. During the latter half of 1995 and in 1996 and 1997, the Company
attracted senior personnel in marketing, clinical trials management, finance,
research and operations. As the Company continues the clinical development of
the LADARVision System and prepares for regulatory approvals and other
commercialization activities, it will need to continue to implement and expand
its operational, financial and management resources and controls. Particularly
important will be the need of the Company to build a manufacturing and field
service organization. The failure of the Company to attract and retain
experienced individuals for these positions, as well as any inability of the
Company to effectively manage growth in its domestic and international
operations as it transitions from a development stage enterprise to a commercial
entity, could have a material adverse effect on the Company's business,
financial condition and results of operations.
NO SIGNIFICANT SALES AND MARKETING EXPERIENCE; RELIANCE TO DATE ON STRATEGIC
ALLIANCE PARTNER. The Company's efforts to date have focused on the development
and evaluation of the LADARVision System for treating refractive disorders. As
the Company continues clinical studies with the LADARVision System and prepares
for commercialization of the product internationally and in the United States,
it must build a sales and marketing infrastructure. The Company has limited
experience in the sales and marketing of capital equipment for laser vision
correction. In 1994 and 1995, the Company entered into agreements that form a
strategic alliance with CIBA for the worldwide co-promotion of the Company's T-
PRK System excimer laser. Although it has developed a strong reputation in
certain ophthalmic markets such as contact lenses, lens care and ophthalmic
pharmaceuticals, CIBA does not have considerable experience in the sale of
ophthalmic equipment or in the refractive surgery market. It is possible that
the Company will not be able to attract the personnel to develop the
infrastructure to effectively market the LADARVision System or that CIBA will
not be able to provide sufficient
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or effective co-marketing and business support.
RISKS ASSOCIATED WITH INTERNATIONAL COMMERCIAL ACTIVITIES. International
commercial activities, from which the Company expects to earn its first
commercial revenues from the LADARVision System, may be limited by or disrupted
by the imposition of government controls, unique license requirements, political
instability, trade restrictions, changes in tariffs or taxes, and difficulties
in staffing and managing such complexities.
In order to make commercial placements in Europe, the Company is required to
receive a "CE" mark certification, an international symbol of quality and
compliance with applicable European medical device directives, by June 1998. In
order to receive a CE mark certification, the Company must have obtained an ISO
9001 certification. Failure to receive a CE mark certification will prohibit
the Company from placing the LADARVision System in Europe and would have a
material adverse effect on the business, financial condition, and results of
operations of the Company.
COMMISSION OBLIGATION TO CIBA; FUTURE DILUTION. As part of the strategic
alliance with CIBA, the Company will pay a 6% commission on net revenue
worldwide from all equipment sales and patient procedure fees relating to
ophthalmic refractive surgery. The initial commission is limited to $10,000,000
in the aggregate. In the event the Company has not paid commissions to CIBA
totaling $10,000,000 or more by May 15, 1999, the Company must deliver to CIBA
171,713 shares Common Stock (the "Additional Shares"), and continue to pay
commissions until the $10,000,000 aggregate amount is reached. If the
Additional Shares are issued, the number of such shares must be adjusted so that
the Additional Shares have a market value of at least $675,000 on May 15,
1999. The Company's current business plan contemplates that commissions to CIBA
by May 15, 1999 will not total $10,000,000. Therefore, it should be assumed
that the Company will issue the Additional Shares on May 15, 1999. The 6%
commission will reduce the Company's income and margins from its business for
the period it is payable, and the potential future shares are prospectively
dilutive to stockholders in 1999.
POSSIBLE TERMINATION OF STRATEGIC ALLIANCE WITH CIBA. The strategic alliance
provides CIBA and the Company with certain termination rights. CIBA may, at its
sole discretion, terminate the strategic alliance upon 180 days notice to the
Company. In such event, the Company would be obligated to continue to pay to
CIBA for up to three years beyond termination the 6% commission on procedure fee
revenue derived from LADARVision Systems that were commercially placed at the
time of the termination. Additionally, CIBA has the right to terminate the
strategic alliance upon 30 days notice should there be a change of control of
the Company (defined as the transfer of greater than 50% of the voting stock or
substantially all of the assets of the Company in a single transaction or series
of related transactions, excluding a bona fide public offering). CIBA also has
the right to terminate the strategic alliance upon 30 days notice if it
determines, in its sole discretion, that the Company's core technology or the
commercial essence of the technology is not patentable, or that additional
licenses (other than that with Pillar Point) are necessary, are not obtained or
would have a material adverse impact upon the commercial value of the Company's
technology. CIBA also has the right to terminate such agreement (i) if the
Company materially breaches such agreement and does not cure such breach within
the cure period, (ii) if the Company becomes insolvent, or (iii) if the control
of the Company falls into the hands of a competitor to CIBA. In the event that
CIBA terminates the
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strategic alliance, such termination would have a material adverse effect on the
operations, financial condition and the results of operations of the Company, in
that the Company would be unable to utilize the CIBA name in connection with
marketing the LADARVision System, or to utilize other planned services as agreed
to in the strategic alliance.
POTENTIAL PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS. The Company's business
involves the risk of product liability claims. Any inability of the Company to
maintain adequate insurance coverage at any time could, in the event of product
liability or other claims in excess of the Company's insurance coverage, have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has in the past agreed, and is likely to in
the future agree, to indemnify certain medical institutions and personnel
thereof conducting and participating in the Company's clinical studies.
VOLATILITY OF STOCK PRICE. The Company's Common Stock has experienced
substantial price volatility, and such volatility may occur in the future.
Additionally, the stock market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of
the shares of Common Stock is likely to be highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of technological
innovations or new products by the Company or its competitors, FDA and
international regulatory actions, developments with respect to patents or
proprietary rights, including lawsuits, the perceived ability of the Company to
obtain any new financing necessary, public concern as to the safety of products
developed by the Company or its competitors, changes in health care policy in
the United States and internationally, changes in analysts' recommendations
regarding the Company, other LVC or medical device companies or the medical
device industry generally and general market conditions may have a significant
effect on the market price of the Common Stock.
CONTROL BY CERTAIN EXISTING STOCKHOLDERS. The directors, executive officers and
certain entities affiliated with directors of the Company beneficially own
approximately 24.9% of the Company's outstanding Common Stock. Accordingly,
these stockholders, individually and as a group, may be able to influence the
outcome of stockholder votes, including votes concerning the election of
directors, the adoption or amendment of provisions in the Company's Third
Amended and Restated Articles of Incorporation (the "Articles") and Bylaws and
the approval of certain mergers or other similar transactions. Such control by
existing stockholders could also have the effect of delaying, deferring or
preventing a change in control of the Company.
NO FORESEEABLE DIVIDENDS. The Company has never paid cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future. The Company intends to retain future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant.
ANTI-TAKEOVER MEASURES; POTENTIAL ADVERSE EFFECT ON COMMON STOCK PRICE. The
Company's Articles authorize the Company's Board of Directors to issue shares of
the Company's Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any vote or action by the
stockholders. The issuance of Preferred Stock
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<PAGE>
under such circumstances could have the effect of delaying or preventing a
change in control of the Company. The rights of the holders of the Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be created and issued in the future.
On April 7, 1997, the Company's Board approved, and on June 12, 1997 the
stockholders approved, an amendment to the Company's Articles, providing that
any action to be taken by written consent in lieu of an annual or special
meeting of the stockholders is prohibited unless the use of written consents is
approved in advance thereof by the Board of Directors. The Company's Board and
stockholders further approved, an amendment to the Articles providing that an
affirmative vote of the holders of not less than two-thirds of the outstanding
voting shares is required to amend such prohibition of use of written consents
by the stockholders set forth above.
In addition, certain provisions of the Florida Business Corporation Act have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These statutory provisions are intended to encourage any person
interested in acquiring the Company to negotiate with and obtain the approval of
the Board of Directors in connection with such a transaction. One of the
effects of the provisions described above may be to discourage a future attempt
to acquire control of the Company that is not presented to and approved by the
Board of Directors, but which a substantial number, and perhaps even a majority
of the Company's stockholders, might believe to be in their best interests or in
which stockholders might receive a substantial premium for their shares over the
current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so.
ITEM 2. PROPERTIES
The Company leases approximately 25,250 square feet of building space in
Orlando, Florida at an approximate annual cost of $325,000, including operating
costs. In May 1997 the Company began occupancy of this facility that expands the
Company's capabilities to hold adequate inventory levels and to move production
rates up to what will be needed for foreign and later U.S. commercial
placements.
The Company's business plan calls for placing its LADARVision Systems in
commercial accounts. Since the Company retains ownership of these Systems
placed in commercial surgery settings, it will, over time, build its revenue
base from its hardware located in such commercial surgery sites. The Company
believes that its current and future Systems so placed will be covered with
adequate commercial hazard and related insurances.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is currently a party to one lawsuit: On October 24, 1996, the
Company filed suit in the United States District Court for the District of
Delaware (Civil Action No. 96-515) against Pillar Point Partners, Summit
Technologies, Inc., VISX, Inc., Summit Partner, Inc. and VISX Partner, Inc. The
defendants hold a portfolio of U.S. patents (including U.S. patent #4,718,418)
relating to refractive laser surgery. The complaint seeks a declaratory judgment
that U.S. Patent No. 4,718,418 is not infringed, invalid, unenforceable and/or
misused, with regard to the Company's LADARVision System. The complaint seeks a
declaratory judgment that all the patents pooled in Pillar Point Partners are
unenforceable. The complaint is also seeking to enforce Summit's, VISX's and
Pillar Point Partner's promises to license the Company's LADARVision System. The
Company believes that it does not infringe on the Pillar Point patents and that
it must aggressively assert this position in order to bring its products to the
commercial markets in the United States, Canada and the European Community.
There can, however, be no assurances that pursuit of these actions will bring
the Company any relief from the license arrangements that might be required nor
is there any assurance that such licenses as might be needed to enter certain
markets will be available to the Company if the Company does not prevail in its
actions. During 1997, despite the action being on the court docket for the
entire year, very little progress was made as the defendants filed a motion to
dismiss the Company's suit. The defendants motion has been briefed but not
ruled on. The pursuit of this litigation by the Company to assert its beliefs
continues to be expected to be a multi-year endeavor.
The Company currently intends to enter the U.S. market without a license from
Pillar Point, based on the points in the case mentioned above. Pillar Point
Partners, Summit Technologies, Inc., VISX, Inc., Summit Partner, Inc., VISX
Partner, Inc. or any one or all of them may proceed against the Company and its
customers for such marketing efforts, perhaps on a System-by-System basis. Until
the aforementioned case is settled or litigated to conclusion, the Company
intends to indemnify its customers in the United States against claims that may
be asserted by Pillar Point Partners.
During 1997, the Company settled two other suits, both with VISX (in the High
Court of Justice, Chancery Division of the Patents Court in London, England
against the Company and Laservision Centers, Inc. and in Federal Court of
Canada, Trial Division - Court File No. T-2358-96) resulting in certain royalty
obligations upon each non-U.S. placement by the Company.
As a result of the Company-initiated Pillar Point action above and other actions
that might be anticipated, the Company has incurred and anticipates that it will
incur significant expenses consisting primarily of management resources, legal
fees, expert witness fees and related expenses. These expenses are not possible
to estimate at the present time but will be a function of the stage of
proceeding that the Company's action reaches and the number and nature of
additional actions that might be filed should it attempt to market its product
in the U.S.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None submitted in the fourth calendar and fiscal quarter of 1997.
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<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the NASDAQ National Market System ("NASDAQ
NMS") under the symbol ATCI. The following table sets forth, for the periods
indicated, the range of high and low closing sale prices per share, as reported
by the NASDAQ National Market. The Company's Common Stock began trading on the
NASDAQ NMS on May 1, 1996 and previously was not traded on any exchange or
market. Price data usually reflect actual transactions at inter-dealer prices
and do not reflect mark-ups, mark-downs or commissions.
HIGH LOW
------ ------
FISCAL YEAR ENDED DECEMBER 31, 1996
- -----------------------------------
May 1 to June 30 (Second Quarter) $8.875 $5.750
Third Quarter $6.125 $3.500
Fourth Quarter $4.750 $3.375
FISCAL YEAR ENDED DECEMBER 31, 1997
- -----------------------------------
First Quarter $6.500 $4.000
Second Quarter $5.375 $3.375
Third Quarter $5.500 $3.250
Fourth Quarter $7.125 $5.000
The stock market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Like the stock price of other early stage medical device companies,
the market price of the Company's Common Stock is subject to significant
volatility. Factors such as reports on the clinical efficacy and safety of the
Company's and competitors' products, product and component supply issues,
government approval status, fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, developments and litigation with respect to patents or proprietary
rights, public concern as to the safety of products developed by the Company or
others in LVC may have a significant effect on the market price of the Common
Stock. In addition, the price of the Company's stock could be affected by stock
price volatility in the medical device industry or the capital markets in
general without regard to the Company's operating performance.
As of February 28, 1998, there were 155 holders of record and approximately 800
additional beneficial holders of the Company's Common Stock.
The Company currently intends to retain current cash and future earnings to fund
the development and growth of its business and, therefore, does not anticipate
paying cash dividends within the foreseeable future. Any future payment of
dividends will be determined by the Company's Board of Directors and will depend
on the Company's financial condition, results of operations and other factors
deemed relevant by its Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data, which should be
read in conjunction with the Company's Financial Statements and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein. The selected financial data as of December
31, 1997, 1996 and 1995, and for each of the fiscal years in the three fiscal-
year period ended December 31, 1997 are derived from financial statements that
have been audited by Arthur Andersen LLP, independent public accountants, which
are included elsewhere herein and are qualified by reference to such financial
statements. The selected financial data as of March 31, 1995 and 1994, and for
each of the years in the two year period ended March 31, 1995, are derived from
audited financial statements not included herein. There were no cash dividends
declared during any of the periods presented below.
STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
Cumulative
from Inception
Nine Months (July 23, 1985)
Year Ended Year Ended Ended Year Ended Year Ended to
December 31, December 31, December 31, March 31, March 31, December 31,
1997 1996 1995 1995 1994 1997
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
LADARVision systems
and services $ 37,605 $ - $ - $ - $ - $ 37,065
Research grants - - - - 378,274 3,450,517
OPERATING EXPENSES:
Costs of revenues -
LADARVision
systems and services 105,892 - - - - 105,892
Costs of revenues from
research grants - - - - 300,186 3,465,596
Clinical trials 2,980,317 1,715,412 602,847 569,389 2,229 5,870,194
Research and development 2,954,559 3,521,381 1,698,056 1,608,032 468,307 10,308,315
Selling and marketing 1,493,069 1,190,898 478,439 40,349 252,247 3,455,002
General and administrative 2,328,222 1,852,351 974,738 562,042 379,313 6,354,871
Other expenses 2,355,472 1,283,874 375,000 - - 4,014,346
------------- ------------ ------------ ------------ ------------ -------------
OPERATING LOSS (12,180,466) (9,563,916) (4,129,080) (2,779,812) (1,024,008) (30,086,634)
Interest income
(expense), net 541,111 555,872 30,035 84,463 (13,942) 1,183,359
PROVISION FOR INCOME TAXES - - - - - 4,772
------------- ------------ ------------ ------------ ------------ -------------
NET LOSS $ (11,639,355) $ (9,008,044) $ (4,099,045) $ (2,695,349) $ (1,037,950) $ (28,908,047)
============= ============ ============ ============ ============ =============
LOSS PER SHARE:
Basic net loss per share $ (1.43) $ (2.36) $ (3.37) $ (2.40) $ (0.92)
============= ============ ============ ============ ============
Shares used in computing
basic net loss per share 8,151,395 3,812,039 1,217,509 1,125,000 1,125,000
============= ============ ============ ============ ============
</TABLE>
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<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31, March 31,
---------------------------------------------- -------------------------
1997 1996 1995 1995 1994
------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Cash and investments $ 7,301,072 $ 12,405,790 $ 492,326 $ 975,428 $ 4,893
Total assets 12,416,149 14,144,249 799,493 1,252,317 111,533
Long-term obligations 1,760,007 1,097,133 2,802,832 2,405,000 89,124
Stockholders' equity
(deficit) 8,979,812 11,583,648 (3,564,616) (1,304,568) (277,137)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K 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 and this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Risk Factors section.
OVERVIEW
Autonomous Technologies Corporation ("Autonomous" or the "Company"), 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.
At this time, the Company is still in the development stage with a commercial
product just introduced in certain foreign markets, and there can be no
assurance that it will receive the required regulatory approvals for
commercialization of any of its products in other markets not yet commercially
addressed. The Company has made progress in the U.S. regulatory process.
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<PAGE>
The Company's PMA application was reviewed and recommended for approval by the
Ophthalmic Devices Panel of the FDA on February 13, 1998.
In December 1995, the Company changed its fiscal year-end from March 31 to
December 31, effective with the nine months ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table shows the summary sources and uses of the Company's funds
for the five fiscal years ended December 31, 1997 (comprising 57 months of
operations). These five fiscal years represent a substantial majority of the
Company's operating history to date, including all of the time the Company has
been focused on the LVC market.
Sources of Cash:
Preferred and common stock sales, net of expenses........ $12,019,000
CIBA equity and debt investments, net.................... 4,943,000
Initial public offering, net............................. 17,893,000
-----------
TOTAL SOURCES OF CASH............................... 34,855,000
-----------
Uses of cash:
Operations............................................... 25,679,000
Capital expenditures..................................... 1,789,000
Debt repayment and other................................. 473,000
-----------
TOTAL USES OF CASH.................................. 27,941,000
-----------
NET INCREASE IN CASH BALANCES $ 6,914,000
===========
The cash expenditure for operations of over $25 million dollars in the last five
fiscal years has been used to develop the LADARVision System and its enabling
technologies as applied to LVC, to fund clinical investigation, to build company
infrastructure and systems and to build production capacity and to commence
early sales and marketing efforts toward non-U.S. markets. As the Company
continues to conduct clinical investigations aimed at adding additional
indications to the expected FDA PMA approval, more fully develop a sales and
marketing capability, and increase commercial production of the LADARVision
System, it is expected that additional losses will be incurred that will require
substantial funding by equity or debt placements, or both. The Company believes
that its cash resources in excess of $7 million at December 31, 1997, will be
sufficient to fund operations and continued development into the second
quarter of 1998. As a result of the need to procure financing for operations
during 1998, the Company has commenced efforts in the first quarter of 1998 to
raise additional funds for operations for the balance of 1998 and into 1999. The
Company believes it has made sufficient progress in compiling clinical evidence
of LADARVision System safety and efficacy, in moving through the attendant
regulatory processes, and in readying the LADARVision System for commercial
launch to warrant the type of additional investment that would constitute this
1998 funding. During the latter half of 1996 and continuing into 1997, however,
the LVC industry saw its equity market valuations come under intense pressure by
the investment community due to questions raised about the speed of development
of patient demand. To date, those valuations have not recovered to and do not
appear likely to recover to their highs of early 1996. As a result, the equity
environment for LVC companies and for small cap and development stage companies
is not as favorable for the Company as it was in the first half of 1996 (the
time of the
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<PAGE>
Company's initial pubic offering) and there can be no assurances that the
Company will be able to raise funds at all or of sufficient amount to fund
operations for a sufficiently lengthy period to enable a meaningful U.S. launch.
Additionally, should the Company be successful in raising adequate funds in 1998
to fund operations for a reasonable period thereafter, it may be on terms that
may cause dilution for current stockholders.
At December 31, 1997, the Company's long-term obligations consisted of its
accrual of $1,575,000 for future share issuance to CIBA which is not expected to
be settled in cash (See "Item 13. - Certain Relationships and Related
Transactions"), and approximately $185,000 of obligation remaining under
capitalized lease obligations.
RESULTS OF OPERATIONS
Revenues from Research Grants
The Company had no material revenues in the three fiscal years ended December
31, 1997. The Company did make two commercial LADARVision system placements in
late 1997, one of which began to generate limited procedure fee revenues before
year-end. Previous revenues generated by the Company during the period from
inception to the year ended March 31, 1994 were from Defense Department, NASA
and SBIR research work that totaled approximately $3.5 million in the nine years
ended March 31, 1994. The Company concluded its research grant activity in order
to pursue commercialization of the LADARVision System for its own account in the
ophthalmology market.
Operating Expenses
Cost of Revenues
- ----------------
Cost of revenues from LADARVision systems placed in 1997 included local country
import taxes, shipping, installation and training costs, and certain royalty
accruals.
The Company incurred no costs of revenues from research work in the three fiscal
years ended December 31, 1997. Previous such costs during the period from
inception, which offset the Revenues from Research Grants (see above), totaled
$3.5 million in the nine years ended March 31, 1994.
Clinical trials expenses 1997
- -----------------------------
Clinical trials expenses were $2,980,317 and $1,715,412 in the years ended
December 31, 1997 and 1996, respectively. This increase of 74% is attributable
to the an increase in the staff of the clinical function during 1997 and a
greatly increased number of patient surgeries performed in the first half of the
year during the closing phases of the Company's initial Phase III trials for the
initial indications low and moderate myopia with astigmatism. The Company's
clinical trials expenses are expected to continue to increase as the Company
expands its work toward other clinical indications such as higher levels of
myopia and astigmatism, hyperopia and begins it's CustomCornea clinical trials
in 1998. A clinical training organization for commercial site training will
also be additive in 1998. Additionally, the cost of the compliance organization
grouped here will also increase in 1998 as the full impact of operating under
FDA QSR and ISO9001 regulations is felt in a commercial setting.
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<PAGE>
Clinical trials expenses 1996
- -----------------------------
Clinical trials expenses were $1,715,412 in the year ended December 31 1996, and
$602,847 for the nine month period ended December 31, 1995. This increase of
185% is attributable to the incremental effect of a twelve month year in 1996
vs. a nine month period in 1995 and, additionally, a greatly expanded clinical
trials program during 1996 and the staffing of a compliance function within the
Company. The Company began both Phase II and III trials in the U.S. during 1996.
The number of patients treated under these protocols increased significantly
over any prior period for the Company. Staffing of the clinical department was
also expanded. The compliance organization increased by approximately 6 persons
during the year in order to ready the company for ISO 9000 certification, FDA
GMP compliance, and to assist in documenting the Company's production processes.
The Company's Phase III clinical trial surgeries in the U.S. were less than half
completed at December 31, 1996. The completion of those patient surgeries, the
subsequent follow-up of those patients, and the expansion of clinical trials to
protocols for other indications of refractive correction, will cause clinical
trial expense to continue to expand at a substantially reduced rate in 1997.
Research and development expenses 1997
- --------------------------------------
Research and development expenses were $2,954,559 and $3,521,381 in the years
ended December 31, 1997 and 1996, respectively. This decrease of 16% was caused
primarily by the re-allocation of resources as the Company began manufacturing
commercial systems for foreign placement. Three commercial systems were
produced and placed from mid-1997 through mid-March 1998. The underlying cost of
the research and development organization continued to increase as the Company
required new investment in its CustomCornea research program and added to its
engineering staff to handle the increased need for product and process drawing
and documentation for the Company's first and second generation LADARVision
Systems. Going forward, the cost of R&D will be more reflective of actual
research and engineering costs since the production organization will be charged
hereafter to the product or to other operating expenses. Such "true" R&D costs
are expected to increase moderately.
Research and development expenses 1996
- --------------------------------------
Research and development expenses were $3,521,381 in the year ended December 31,
1996 and $1,698,056 in the nine month period ended December 31, 1995. This
increase of 107% is due to the incremental effect of a twelve month year in 1996
vs. a nine month period in 1995 and, additionally, due to increased staffing of
the production function, the initial organization of the Company's CustomCornea
project, and increased U.S. and foreign patent filing activities. The Company
has chosen to expense the cost of the production organization and the clinical
trial systems that it builds until it begins producing commercial systems due to
the fact that these assets will not produce revenue. During all of 1996, the
growing production function costs are presented in research and development
expenses due to this accounting treatment. At year-end the Company had not fully
completed its conversion to commercial production. The Company also added three
persons during 1996 to pursue the CustomCornea research project. Those costs
will continue to increase into 1997 as the project advances. The Company has
filed a U.S. and certain foreign patent applications during the year regarding
CustomCornea and has continued to prosecute other additional patent property
during the year.
Selling and marketing expenses 1997
- -----------------------------------
Selling and marketing expenses were $1,493,069 and $1,190,898 in the years ended
December
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<PAGE>
31, 1997 and 1996, respectively. This increase of 25% was largely incurred in
the latter months of 1997 as the Company began increasing staffing and travel
activities to secure contracts for the initial foreign placements of the
LADARVision System. This area of expenditure is expected to more than double in
1998 as the Company continues with foreign placements and expects to increase
staff and activities to address the U.S. market upon achieving its initial PMA
on the LADARVision System from the FDA. CIBA in-kind services reached $471,000
for 1997, meaning just over $1,000,000 of such expenses were cash or accrual
outlays by the Company. In mid-1998, the CIBA in-kind services agreement will
expire and the equivalent of those costs will be borne by the Company on an
expenditure basis.
Selling and marketing expenses 1996
- -----------------------------------
Selling and marketing expenses were $1,190,898 and $478,439 in the year ended
December 31, 1996 and the nine month period ended December 31, 1995,
respectively. This increase of 149% was due to the incremental effect of a
twelve month year in 1996 vs. a nine month period in 1995 and, additionally, to
the effect of having a full year of CIBA in-kind services contributed which are
charged to sales and marketing expenses in the financial statements. CIBA's in-
kind service contribution increased from approximately $220,000 to $450,000. The
Company also incurred substantially increased salary and travel costs for its
marketing staff as they began presenting the LADARVision System as a commercial
opportunity to prospective accounts outside the U.S.
General and administrative expenses 1997
- ----------------------------------------
General and administrative expenses were $2,328,222 and $1,852,351 in the years
ended December 31, 1997 and 1996, respectively. This increase of 26% was due
largely to increased costs in human resources as personnel and programs were
expanded to manage the increased levels of recruiting and headcount throughout
the Company; to the costs of the Company's May 1997 move into a new office and
plant facility; and increased non-allocated operating costs of the new facility.
Increases in general and administrative costs in 1998, if any, are expected to
be modest.
General and administrative expenses 1996
- ----------------------------------------
General and administrative expenses were $1,852,351 and $974,738 in the year
ended December 31, 1996 and the nine month period ended December 31, 1995,
respectively. This increase of 90% was due to the incremental effect of a twelve
month year in 1996 vs. a nine month period in 1995 and, additionally, to
increased salary costs due to the fact that the cost of the Company's Chief
Operating Officer and Chief Financial Officer were incurred for the full year in
1996 and only the latter few months of the short period 1995 year. The Company
also added a Controller's position in 1996 and licensed accounting and
production software that added to costs. Employee benefits expense increased due
to the commencement of the Company's 401(k) Retirement Plan and its Employee
Stock Purchase Plan. Telephone, fax and office consumables expenses also
increased due to the fact that the Company's employment increased by over 100%
during the most recent year. The Company added the cost of directors and
officers liability insurance as well as certain investor relations expenses
after the initial public offering that is also being charged to general and
administrative expenses.
Other expenses 1997
- -------------------
Other expenses were $2,355,472 and $1,283,874 for the years ended December 31,
1997 and 1996, respectively. This increase of 84% is due to two factors:
First, the Company's legal
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<PAGE>
expenses continued to increase compared to 1996 as the Company settled the VISX
litigation at the end of the first quarter and continued to incur legal costs to
maintain its plaintiffs position in the Pillar Point litigation. In the 1996
year, such litigation costs were largely incurred in the second half of the year
vs. the full year for 1997. Litigation costs will continue in 1998 as the
Company continues to pursue its position of non-infringement with regard to the
LADARVision System vs. the Pillar Point patent portfolio. The legal expenses
will be unpredictable as to their timing due to various phases that the trials
may proceed through. Additionally, should new litigation arise from the
Company's entry into the U.S. market, such additional costs could be significant
and will be charged here. Secondly, the Company's production organization is not
yet producing units as efficiently as will be required to be in commercial
production. The unabsorbed labor and overhead costs still being incurred have
been charged to other expense since the Company has not yet reached a continuous
production state. It is expected that such unabsorbed labor and overhead will
continue to be charged here for a part of 1998 until such time as production
rates increase to match the size of the production organization. The Company has
experienced delays in manufacturing and placing commercial systems while it
resolves quality system matters and implements engineering changes. The Company
is unable to predict at this time the number of systems it will be able to
commercially produce per month after its PMA has been granted by the FDA
allowing the Company to market its system in the United States. The Company
anticipates being granted PMA approval by the FDA in June 1998. However, there
can be no assurance that the Company will be granted such approval.
Other expenses 1996
- -------------------
Other expenses were $1,283,874 and $375,000 for the year ended December 31,
1996, and the nine month period ended December 31, 1995, respectively. This
increase of 242% was due to the incremental effect of a twelve month year in
1996 vs. a nine month period in 1995 as it relates to the CIBA Strategic
Alliance Agreement accrual (See "Item 13. - Certain Relationships and Related
Transactions"). The most substantial component of the increase, however, was
legal expenses that the Company began incurring to defend itself in the VISX UK
suit and to prepare, file and prosecute the suits against Pillar Point and its
respective partner entities and VISX in Canada (See "Legal Proceedings"). The
legal expenses will be ongoing in 1997 and will be unpredictable as to their
timing due to various phases that the trials may proceed through. The Company
anticipates that it will incur approximately $100,000 per month or $1.2 million
dollars per year in expenses relating to these suits during 1997. Should
unexpected events occur in those suits or should the pursuit of similar claims
be expanded with additional suits by or among the parties, the related costs
could increase significantly.
Interest Income (Expense), Net
Interest income (expense), net was $541,111 and $555,872 for the years ended
December 31, 1997 and 1996, respectively. This decrease of 3%, or nearly level
with the prior year, was due to the fact that available interest rates declined
on the short-term investments in Treasuries and Agencies that the Company
utilizes for interest income. Average earning balances in cash and investments,
as computed on monthly ending amounts, were approximately equal in 1997
($10,400,000) and 1996 ($10,300,000). Additionally, the Company's interest
expense, netted into these amounts, increased by approximately $15,000 for the
year as the Company financed its cubicle furniture for the new facility with
capital leases. 1998 interest income will be almost solely a function of the
timing and size of the Company's equity and debt financings during the year.
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<PAGE>
Interest income (expense), net was $555,872 and $30,035 for the year ended
December 31, 1996, and the nine month period ended December 31, 1995,
respectively. This increase of over 17 times is due entirely to the Company's
investable balances during 1996 being substantially higher than in previous
periods due to the initial public offering proceeds of over $17 million being
invested since May 7, 1996. Although those invested balances are being reduced
to meet operating cash needs, the Company ended the year with over $12 million
invested. The Company's available-for-sale investment portfolio has been earning
approximately 5.9% and the Company's cash and cash equivalent funds has been
earning approximately 4.9% during the period subsequent to the initial public
offering.
Net Loss
The net effect of the foregoing revenue and expense items was the Company's net
loss of $11,639,355, $9,008,044, and $4,099,045 in the years ended December 31,
1997 and 1996, and the nine month period ended December 31, 1995, respectively.
The Company's net loss for 1998 is not expected to be reduced due to the fact
that most commercial revenues for the year will be in the second half. The
Company's procedure fee pricing plan will lengthen the time needed for the
Company to earn a return on its investment in LADARVision Systems, thereby
potentially delaying profitability.
YEAR 2000 COMPUTER PROGRAMMING
The Company believes that its network programs as well as its LADARVision System
software are fully Year 2000 compliant. In early 1998, the Company's accounting
and MRP software vendor produced, and the Company installed, a Year 2000-
specific update.
AMENDMENT TO 1995 STOCK OPTION PLAN
On October 14, 1997, the Board of Directors approved an amendment to the
Company's 1995 Stock Option Plan to include provisions effecting acceleration of
the vesting on options in certain conditions of a change of control or
acquisition of the Company. The amended 1995 Stock Option Plan is filed as
Exhibit 10.10 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-20 hereof.
Page 44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
Page 45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors of the Company contained under the
caption "Election of Directors" in the Company's Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held on June 12, 1998,
is incorporated herein by reference in response to this Item. See "Business -
Executive Officers and Directors of the Registrant" for the disclosures
regarding Executive Officers and information repeated from the reference
regarding Directors of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to executive compensation contained under the
caption "Executive Compensation" in the Company's Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held June 12, 1998, is
incorporated herein by reference in response to this Item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership of certain beneficial owners
and management contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement to be used in
connection with the Annual Meeting of Stockholders to be held on June 12, 1998,
is incorporated herein by reference in response to this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994, the Company and CIBA entered into an agreement whereby CIBA purchased
2,927 shares of Series C Convertible Preferred Stock in the Company and a
$2,405,000 note convertible into 5,450 shares of Series C Convertible Preferred
Stock for the aggregate amount of $4,000,000. Upon the closing of the Company's
initial public offering, the CIBA shares and convertible note automatically
converted into 1,256,550 shares of Common Stock. In 1995, CIBA and the Company
replaced their existing marketing agreement with a Strategic Alliance Agreement
whereby CIBA paid $1,000,000 to the Company, which was accounted for as a
shareholder advance that converted to additional paid-in capital at the time of
the initial public
Page 46
<PAGE>
offering. CIBA also agreed to provide in-kind services worth $1,000,000 over a
three-year period, including services provided by Mr. Walts, a Vice President of
CIBA, who was a full-time consultant to the Company and the Company's Chief
Marketing Officer until March 1998.
The Strategic Alliance Agreement with CIBA provides that the Company shall pay
commissions to CIBA on all ophthalmic refractive laser equipment revenues,
including patient procedure fees, net of royalties to IBM, Pillar Point
Partners, Summit and VISX, in the amount of 6% of such revenues. The CIBA
commissions are limited to an aggregate of $10,000,000 except as described
below. In the event the Company has not paid commissions to CIBA totaling
$10,000,000 or more by May 15, 1999, the Company must deliver to CIBA shares
Common Stock (the "Additional Shares"), and continue to pay commission until the
$10,000,000 aggregate amount is reached. If the Additional Shares are issued,
the number of such shares must be adjusted so that the Additional Shares have a
market value of at least $2,400,000 on May 15, 1999. In March 1998, the Company
and CIBA agreed to the issuance of 438,821 of the Additional Shares under an
amendment to the Strategic Alliance Agreement. The number of Additional
Shares remaining to be delivered to CIBA in 1999, 171,713 shares of Common
Stock, is subject to certain adjustments pursuant to anti-dilution provisions,
such as selling stock at a price lower than $5.33 per share, stock splits and
stock dividends. In 1997 the number of Additional Shares was increased by 81,034
as a result of the Company's dilutive financing at mid-year. If the Company has
paid $10,000,000 or more in commissions to CIBA by May 15, 1999 (not expected by
management), the Company may, at its option, deliver the Additional Shares to
CIBA or continue paying commissions for five additional years at the rate of 6%
of revenues derived from the LADARVision System. At March 31, 1998, CIBA owned
a total of 1,695,371 shares of common stock of the Company.
CIBA may, at its sole discretion, terminate the Strategic Alliance Agreement
upon 180 days notice to the Company. In such event, the Company would be
obligated to continue to pay to CIBA for up to three years beyond termination
the 6% commission on procedure fee revenue derived from LADARVision Systems that
were commercially placed at the time of the termination. Additionally, CIBA has
the right to terminate the Strategic Alliance Agreement upon 30 days notice
should there be a change of control of the Company. CIBA also has the right to
terminate the Strategic Alliance Agreement upon 30 days notice if it determines,
in its sole discretion, that the Company's core technology or the commercial
essence of the technology is not patentable, or that additional licenses (beyond
those with Pillar Point and IBM) are necessary, are not obtained or would have a
material adverse impact upon the commercial value of the Company's technology.
CIBA also has the right to terminate such agreement (i) if the Company
materially breaches such agreement and does not cure such breach within the cure
period, (ii) if the Company becomes insolvent, or (iii) if the control of the
Company falls into the hands of a competitor to CIBA. In the event that CIBA
terminates the Strategic Alliance Agreement for any of the reasons set forth in
the Strategic Alliance Agreement, such termination would have a material adverse
effect on the operations, financial condition and the results of operations of
the Company. Early termination of the Strategic Alliance Agreement pursuant to
its terms would not relieve the Company from its obligation to deliver the
Additional Shares. However, in the event CIBA exercises its discretionary
authority to terminate the Strategic Alliance Agreement prior to the expiration
of the three-year in-kind service period, and prior to the expenditure of
$1,000,000 for in-kind services, the Company would be entitled to a pro rata
reduction in the number of Additional Shares to be delivered.
Terence A. Walts, a vice-president of CIBA, was a full-time consultant to the
Company who was paid by CIBA. Services provided by Mr. Walts have constituted a
significant portion of the
Page 47
<PAGE>
in-kind services to be provided by CIBA. Mr. Walts and the Company have agreed
that Mr. Walts will not become an employee of the Company in June 1998, as
contemplated in the Stategic Alliance Agreement between the Company and CIBA.
Mr. Walts was a valuable consultant and contributor to the Company and its
progress over the last three years, and was particularly instrumental in
finalizing and supporting the Strategic Alliance with CIBA.
Page 48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed with Report
1. The Financial Statements and Schedules listed below are located
after the signature page beginning on page F-1:
DESCRIPTION PAGE NO.
----------- --------
Report of Independent Certified Public Accountants........... F-1
Balance Sheets - - December 31, 1997 and 1996................ F-2
Statements of Operations..................................... F-3
Statements of Stockholders' Equity for the Period from
Inception (July 23, 1985) to December 31 1997................ F-4
Statements of Cash Flows..................................... F-6
Notes to Financial Statements................................ F-8
2. Financial Statement Schedules: Not required or the information
required to be included therein is reflected in the Financial
Statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT LOCATION
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Third Restated and Amended Articles of Quarterly Report on Form 10-Q
Incorporation for the period ended September
30, 1996, Exhibit 3 therein
- -------------------------------------------------------------------------------------------------
3.2 Bylaws Registration Statement No.
333-2068, dated May 1, 1996,
Exhibit 3.2
- -------------------------------------------------------------------------------------------------
10.1 Strategic Alliance Agreement, dated May 15 1995, Registration Statement No.
between CIBA Vision Group Management, Inc. 333-2068, dated May 1, 1996,
("CIBA") and the Company Exhibit 10.1
- -------------------------------------------------------------------------------------------------
10.2 Letter Agreement, dated November 22, 1995, between Registration Statement No.
CIBA and the Company, amending Section 9 of the 333-2068, dated May 1, 1996,
Strategic Alliance Agreement, dated May 15, 1995 Exhibit 10.2
- -------------------------------------------------------------------------------------------------
10.3 Amended and Restated Convertible Subordinated Registration Statement No.
Note, dated November 16, 1995, executed by the 333-2068, dated May 1, 1996,
Company in favor of CIBA Exhibit 10.3
- -------------------------------------------------------------------------------------------------
10.4 Amendment to the Strategic Alliance Agreement, Registration Statement No.
dated March 5, 1996, between the Company and CIBA 333-2068, dated May 1, 1996,
Exhibit 10.4
- -------------------------------------------------------------------------------------------------
</TABLE>
Page 49
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
10.5 Purchase Agreement, dated May 27, 1994, between Registration Statement No.
CIBA and the Company 333-2068, dated May 1, 1996,
Exhibit 10.5
- -------------------------------------------------------------------------------------------------
10.6 Amendment to Purchase Agreement, dated March 5, Registration Statement No.
1996, between the Company and CIBA 333-2068, dated May 1, 1996,
Exhibit 10.6
- -------------------------------------------------------------------------------------------------
10.7 Amended and Restated Investors' Rights Agreement, Registration Statement No.
dated May 27, 1994, by and among the Company, the 333-2068, dated May 1, 1996,
holders of a majority of the outstanding Exhibit 10.7
Registrable Securities and CIBA
- -------------------------------------------------------------------------------------------------
10.8 Voting Agreement, dated May 27, 1994, among the Registration Statement No.
Company, CIBA, and certain stockholders of the 333-2068, dated May 1, 1996,
Company Exhibit 10.8
- -------------------------------------------------------------------------------------------------
10.9 Letter Agreement, dated June 2, 1995, between the Registration Statement No.
Company and Terence A. Walts, as amended 333-2068, dated May 1, 1996,
Exhibit 10.9
- -------------------------------------------------------------------------------------------------
10.10 Autonomous Technologies Corporation 1995 Stock Filed herewith
Option Plan, as amended by the Board of Directors
on October 14, 1997
- -------------------------------------------------------------------------------------------------
10.11 Autonomous Technologies Corporation Employee Stock Registration Statement No.
Purchase Plan 333-2068, dated May 1, 1996,
Exhibit 10.11
- -------------------------------------------------------------------------------------------------
10.12 Autonomous Technologies Corporation 401(k) Registration Statement No.
Retirement Plan 333-2068, dated May 1, 1996,
Exhibit 10.12
- -------------------------------------------------------------------------------------------------
10.13 Lease Agreement dated July 11, 1994, as amended, Registration Statement No.
between the Company and Barton Partners, Ltd. 333-2068, dated May 1, 1996,
Exhibit 10.13
- -------------------------------------------------------------------------------------------------
10.14 Lease Agreement dated June 1, 1996 between the Quarterly Report on Form 10-Q
Company and Orlando TechCenter II for the period ended September
30, 1996, Exhibit 10 therein
- -------------------------------------------------------------------------------------------------
10.15 Amendment to the Strategic Alliance Agreement, Filed herewith
dated March 26, 1998, between the Company and
CIBA
- -------------------------------------------------------------------------------------------------
23.1 Consent of Arthur Andersen LLP Filed herewith
- -------------------------------------------------------------------------------------------------
</TABLE>
(b) Reports on Form 8-K
The Company filed three reports on Form 8-K during 1997:
On June 24, 1997 it filed announcing that on June 17th it had entered into
Agreements with accredited investors for the purchase of 3,000,000 shares of its
common stock at $3.00 per share.
On July 2, 1997, it filed announcing that a) the Company had filed amendments to
its Third Amended and Restated Articles of Incorporation wherein the number of
authorized shares of its common stock was increased from 15,000,000 to
25,000,000 and that b) certain other provisions of its Articles, concerning
actions to be taken by written consent in lieu of an annual or special meeting
of the stockholders is prohibited unless such is approved in advance by the
Board of
Page 50
<PAGE>
Directors and that a two-thirds affirmative vote of outstanding voting shares is
required to amend such prohibition of the use of such written consents.
On December 23, 1997, it filed announcing that appointment of Whitney A.
McFarlin to the Board of Directors and the resignation of G. Richard Downes, Jr.
from that post to accommodate the election of Mr. McFarlin.
(c) Exhibits
See Item 14(a)3. of this Form 10-K.
(d) Financial Statement Schedules
See Item 14(a)2. of this Form 10-K.
Page 51
<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.
Autonomous Technologies Corporation
By: /s/ Randy W. Frey
-----------------------------------------------
Randy W. Frey
Chairman of the Board & Chief Executive Officer
By: /s/ Monty K. Allen
-----------------------------------------------
Monty K. Allen
Chief Financial Officer &
Principal Accounting Officer
Dated: March 20, 1998
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 date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- ----------- -------- ----
<S> <C> <C>
/s/ Randy W. Frey President, Chief Executive Officer and March 20, 1998
- ---------------------------------- Chairman of the Board
/s/ Richard C. Capozza, Ph.D. Director, President and Chief Operating March 20, 1998
- ---------------------------------- Officer
/s/ G. Arthur Herbert Director March 20, 1998
- ----------------------------------
/s/ Stanley Ruffett Director March 20, 1998
- ----------------------------------
/s/ Timothy Barabe Director March 20, 1998
- ----------------------------------
/s/ Richard H. Keates, MD Director March 20, 1998
- ----------------------------------
/s/ Whitney A. McFarlin Director March 20, 1998
- ----------------------------------
</TABLE>
Page 52
<PAGE>
Autonomous Technologies Corporation
INDEX TO FINANCIAL STATEMENTS
===============================================================================
DESCRIPTION Page No.
- -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
- -------------------------------------------------------------------------------
Balance Sheets - - December 31, 1997 and 1996 F-2
- -------------------------------------------------------------------------------
Statements of Operations F-4
- -------------------------------------------------------------------------------
Statements of Stockholders' Equity for the Period from Inception
(July 23, 1985) to December 31 1997 F-5
- -------------------------------------------------------------------------------
Statements of Cash Flows F-7
- -------------------------------------------------------------------------------
Notes to Financial Statements F-9
- -------------------------------------------------------------------------------
Consent of Arthur Andersen LLP F-21
===============================================================================
Page 53
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Autonomous Technologies Corporation:
We have audited the accompanying balance sheets of Autonomous Technologies
Corporation (a Florida corporation in the development stage) as of December 31,
1997 and 1996, and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1997 and 1996, the nine months
ended December 31, 1995, and the period from inception (July 23, 1985) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the financial position of Autonomous Technologies
Corporation as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years ended December 31, 1997 and 1996, the nine
months ended December 31, 1995, and the period from inception (July 23, 1985) to
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying
financial statements, the Company is in the development stage with no
significant operating results to date. The factors discussed in Note 1 to the
financial statements raise a substantial doubt about the ability of the Company
to continue as a going concern. Management's plans in regard to those matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
Arthur Andersen LLP
Orlando, Florida,
January 31, 1998
(except with respect to
the matter discussed in
Note 11, as to which the
date is March 30, 1998)
F-1
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
--------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------- ------------- ------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 109,245 $ 2,980,036
Investments 7,191,827 9,263,754
Restricted investment - 162,000
Inventories 2,358,934 262,607
Prepaid expenses and other assets 356,892 63,018
------------- ------------
Total current assets 10,016,898 12,731,415
PROPERTY AND EQUIPMENT, net (Note 2) 1,155,718 453,555
LADARVision SYSTEMS-IN-SERVICE, net (Note 2) 400,584 -
ADVANCE LICENSING FEES 747,470 750,000
OTHER ASSETS 95,479 209,279
------------- ------------
Total assets $ 12,416,149 $ 14,144,249
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 743,898 $ 834,785
Accrued expenses 835,324 422,254
Note payable - 151,299
Current portion of obligations under capital leases (Note 3) 97,108 55,130
------------- ------------
Total current liabilities 1,676,330 1,463,468
OBLIGATIONS UNDER CAPITAL LEASES, less current portion (Note 3) 185,007 122,133
OBLIGATION UNDER STRATEGIC ALLIANCE AGREEMENT (Notes 4 and 11) 1,575,000 975,000
------------- ------------
Total liabilities 3,436,337 2,560,601
------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 5, 6 and 9)
STOCKHOLDERS' EQUITY (Notes 4, 5 and 6):
Undesignated series, $.01 par value; 1,000,000 shares authorized at
December 31, 1997 and 1996; 0 shares issued and outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized, 9,986,755
shares issued and outstanding at December 31, 1997; 15,000,000 shares
authorized, 6,763,187 shares issued and outstanding at December 31, 1996 99,868 67,632
Additional paid-in capital 37,787,991 28,784,708
Deficit accumulated during the development stage (28,908,047) (17,268,692)
------------- ------------
Total stockholders' equity 8,979,812 11,583,648
------------- ------------
Total liabilities and stockholders' equity $ 12,416,149 $ 14,144,249
============= ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Cumulative
Nine Months from Inception
Year Ended Year Ended Ended (July 23, 1985) to
December 31, December 31, December 31, December 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
LADARVision systems and services $ 37,065 $ $ $ 37,065
Research grants - - - 3,450,517
OPERATING EXPENSES:
Costs of revenues - LADARVision systems and
services 105,892 - - 105,892
Costs of revenues - research grants - - - 3,465,596
Clinical trials 2,980,317 1,715,412 602,847 5,870,194
Research and development 2,954,559 3,521,381 1,698,056 10,308,315
Selling and marketing (Notes 4 and 5) 1,493,069 1,190,898 478,439 3,455,002
General and administrative 2,328,222 1,852,351 974,738 6,354,871
Other expenses (Notes 4 and 9) 2,355,472 1,283,874 375,000 4,014,346
------------ ------------ ------------ ------------------
OPERATING LOSS (12,180,466) (9,563,916) (4,129,080) (30,086,634)
OTHER INCOME (EXPENSE):
Interest income 582,219 581,866 32,155 1,287,722
Interest expense (41,108) (25,994) (2,120) (104,363)
------------ ------------ ------------ ------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (11,639,355) (9,008,044) (4,099,045) (28,903,275)
PROVISION FOR INCOME TAXES (Note 7) - - - 4,772
------------ ------------ ------------ ------------------
NET LOSS $(11,639,355) $(9,008,044) $(4,099,045) $ (28,908,047)
============ ============ ============ ==================
LOSS PER SHARE (Notes 1 and 10):
Basic net loss per share $ (1.43) $ (2.36) $ (3.37)
============ ============ ============
Weighted average common shares used in computing
basic net loss per share 8,151,395 3,812,039 1,217,509
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (JULY 23, 1985) TO DECEMBER 31, 1997
------------------------------------------------------------------
(Note 5)
<TABLE>
<CAPTION>
Convertible Deficit
Accumulated
Preferred Stock Common Stock Additional During the
---------------------- ------------------ Paid-in Development
Shares Amount Shares Amount Capital Stage
-------- ------- --------- ------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 23, 1985 - $ - - $ - $ - $ -
Issuance of common stock - - 1,125,000 11,250 76,250 -
Issuance of Series A
convertible preferred stock 3,000 3,000 - - 723,233 -
Issuance of Series B
convertible preferred stock 1,313 1,313 - - 374,071 -
Net loss - - - - - (1,466,254)
-------- ------- --------- ------- ------------- -------------
BALANCE, March 31, 1994 4,313 4,313 1,125,000 11,250 1,173,554 (1,466,254)
Issuance of Series A
convertible preferred stock 354 354 - - 80,180 -
Issuance of Series B
convertible preferred stock 170 170 - - 49,017 -
Issuance of Series C
convertible preferred stock 2,927 2,927 - - 1,535,270 -
Net loss - - - - - (2,695,349)
-------- ------- --------- ------- ------------- -------------
BALANCE, March 31, 1995 7,764 7,764 1,125,000 11,250 2,838,021 (4,161,603)
Common stock placed in escrow
for future services - - 120,000 1,200 22,850 -
Issuance of Series D
convertible preferred stock 2,456 2,456 - - 1,211,717 -
In-kind services provided by
stockholder - - - - 220,148 -
Compensation under stock
option plan - - - - 380,626 -
Net loss - - - - - (4,099,045)
-------- ------- --------- ------- ------------- -------------
BALANCE, December 31, 1995 10,220 $10,220 1,245,000 $ 12,450 $ 4,673,362 $ (8,260,648)
</TABLE>
F-4
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
FOR THE PERIOD FROM INCEPTION (JULY 23, 1985) TO DECEMBER 31, 1997
------------------------------------------------------------------
(Note 5)
(Continued)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Deficit Accumulated
------------------- ------------------- Additional Paid-in During the
Shares Amount Shares Amount Capital Development Stage
-------- -------- --------- -------- ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 10,220 $ 10,220 1,245,000 $ 12,450 $ 4,673,362 $ (8,260,648)
Issuance of Series D convertible
preferred stock 4,363 4,363 - - 2,177,137 -
Conversion of all preferred stock
upon closing of initial public
offering (14,583) (14,583) 2,187,450 21,875 (7,292) -
Conversion of note payable and
advance from stockholder upon
closing of initial public offering - - 817,500 8,175 3,396,825 -
Issuance of common stock in initial
public offering, net of
offering costs - - 2,500,000 25,000 17,868,000 -
In-kind services provided by stockholder - - - - 449,736 -
Compensation under stock plans and
agreements - - - - 218,890 -
Exercise of stock options - - 13,237 132 8,050 -
Net loss - - - - - (9,008,044)
-------- -------- --------- -------- ------------------ --------------------
BALANCE, December 31, 1996 - - 6,763,187 67,632 28,784,708 (17,268,692)
Issuance of common stock, net of
offering costs - - 3,000,000 30,000 7,984,996 -
In-kind services provided by stockholder - - - - 471,275 -
Compensation under stock plans and
agreements - - - - 485,937 -
Exercise of stock options and warrants - - 223,568 2,236 61,075 -
Net loss - - - - - (11,639,355)
-------- -------- --------- -------- ------------------ --------------------
BALANCE, December 31, 1997 - $ - 9,986,755 $ 99,868 $ 37,787,991 $ (28,908,047)
======== ======== ========= ======== ================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Cumulative from
Inception
Nine Months (July 23, 1985)
Year Ended Year Ended Ended to
December 31, December 31, December 31, December 31,
1997 1996 1995 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,639,355) $ (9,008,044) $ (4,099,045) $ (28,908,047)
Adjustments to reconcile net loss to net cash
used in operating activities-
In-kind services provided by stockholder 471,275 449,736 220,148 1,141,159
Compensation expense under stock option plan 485,937 218,890 380,626 1,085,453
Compensation expense related to common stock
placed in escrow for future services - - 24,050 24,050
Convertible preferred stock issued for services - - 132,500 162,500
Loss on disposal of property and equipment - 85,167 - 85,167
Depreciation and amortization 315,054 173,724 33,886 693,859
Changes in assets and liabilities-
Increase in inventory (2,096,327) (262,607) - (2,358,934)
Decrease (increase) in prepaid expenses and
other assets (180,074) (200,770) 35,248 (452,371)
Decrease (increase) in advance licensing fees 2,530 (750,000) - (747,470)
Increase (decrease) in accounts payable (90,887) 508,258 267,263 743,898
Increase in accrued expenses 413,070 191,973 137,660 835,324
Increase in obligation under strategic alliance
agreement 600,000 600,000 375,000 1,575,000
------------- ------------ ------------ -------------
Net cash used in operating activities (11,718,777) (7,993,673) (2,492,664) (26,120,412)
------------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on property and equipment (802,556) (298,287) (71,098) (1,483,250)
Investments in LADARVision Systems-in-Service (437,000) - - (437,000)
Restricted investment (made) proceeds 162,000 (162,000) - -
Investments made (9,644,170) (14,144,080) - (23,788,250)
Investment proceeds 11,716,097 4,880,326 - 16,596,423
------------- ------------ ------------ -------------
Net cash used in investing activities 994,371 (9,724,041) (71,098) (9,112,077)
------------- ------------ ------------ -------------
</TABLE>
F-6
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
------------------------
(continued)
<TABLE>
<CAPTION>
Cumulative from
Inception
Nine Months (July 23, 1985)
Year Ended Year Ended Ended to
December 31, December 31, December 31, December 31,
1997 1996 1995 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible
preferred stock - 2,181,500 1,081,673 6,002,708
Net proceeds from issuance of common stock 8,014,996 17,893,000 - 25,995,496
Proceeds from exercise of stock options and
warrants 63,311 8,182 - 71,493
Payment of obligations under capital leases (73,393) (28,557) (1,013) (102,963)
Net proceeds from (payments of) note payable (151,299) 151,299 - -
Advance from stockholder - - 1,000,000 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)
Other, net - - - (30,000)
------------- ------------ ------------ -------------
Net cash provided by financing activities 7,853,615 20,205,424 2,080,660 35,341,734
------------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,870,791) 2,487,710 (483,102) 109,245
CASH AND CASH EQUIVALENTS, beginning of year 2,980,036 492,326 975,428 -
------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of year $ 109,245 $ 2,980,036 $ 492,326 $ 109,245
============= ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash transactions-
Interest paid $ 36,518 $ 22,057 $ 2,120 $ 59,318
Non-cash transactions-
Property and equipment purchases subject to
capital lease obligations $ 178,246 $ 178,519 $ 28,314 $ 206,833
Advance from stockholder converted to common
stock $ - $ 1,000,000 $ - $ 1,000,000
Convertible note converted to common stock $ - $ 2,405,000 $ - $ 2,405,000
</TABLE>
The accompanying notes are an integral part of these statements
F-7
<PAGE>
AUTONOMOUS TECHNOLOGIES CORPORATION
-----------------------------------
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997, 1996 AND 1995
--------------------------------
1. ORGANIZATION, FUNDING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------------------------------------------
Organization and Funding
- ------------------------
Autonomous Technologies Corporation (the Company) was incorporated in the State
of Florida in 1985. The Company was formed to pursue applications in the
specialized field of laser radar (LADAR). The Company has now focused its
efforts on applying unique LADAR tracking technology to the medical field of
ophthalmology and has developed an ophthalmic laser product for vision
correction, tradenamed the LADARVision System (formerly called the T-PRK(R)
System).
The Company generated revenues under government research grants during the early
years of its existence while it was developing commercial applications of the
LADAR technology. The final grant under which the Company conducted such
research was completed in February 1994. All subsequent research and clinical
development efforts have been devoted toward ophthalmic commercial applications
for its LADARVision System.
In May 1996, the Company completed its initial public offering of common stock.
The Company sold 2,500,000 shares of common stock in this offering. Concurrent
with this event, all of the outstanding convertible preferred stock and certain
debt of the Company were converted to common shares. In June 1997, the Company
completed a secondary offering of 3,000,000 shares of common stock.
The Company's management believes that its current cash and investment resources
will be sufficient to fund operations through the first quarter of 1998.
Management intends to seek additional funding during 1998 to fund the Company's
operations as it: (a) progresses through the clinical and regulatory process
directed at seeking approval from the U.S. Food & Drug Administration (FDA) for
its initial indications of moderate myopia (up to -10 diopters) and astigmatism,
(b) initiates and executes new clinical protocols for additional indications and
clinical capabilities, including hyperopia and the Company's Custom Cornea(TM)
technology, and (c) prepares and launches the LADARVision System in markets to
include Canada, Europe and the U.S. Such funding may be sought from one or more
sources, including: debt financing to support the Company's commercial
placements, and equity financing and/or the sale of marketing rights to fund on-
going operations.
F-8
<PAGE>
Summary of Significant Accounting Policies
- ------------------------------------------
Basis of Presentation
- ---------------------
Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Accordingly, the financial statements do not
include any adjustments that might result from the Company's inability to
continue as a going concern.
Development Stage Company
The Company's primary operations since inception have been devoted to developing
commercial applications of its LADAR technology. No significant operating
revenue has yet been generated. As a result, the financial statements are
presented in accordance with Statement of Financial Accounting Standards (SFAS)
No. 7, "Accounting and Reporting by Development Stage Enterprises." In order to
generate significant revenues and become an operating business, the Company is
in the process of building both U.S. and non-U.S. sales and marketing
capabilities and commercially introducing the LADARVision System overseas.
Additionally, the Company must continue FDA clinical trial protocols for its
submitted indications and achieve a Pre-Market Approval (PMA) from the FDA
before commencing U.S. sales and marketing activities. Several companies are
actively marketing ophthalmic laser devices outside the U.S. Two such devices
have been approved by the FDA for U.S. marketing.
Change in Fiscal Year
The Company changed its fiscal year from March 31 to December 31 effective
December 31, 1995. This change was made to be consistent with general medical
device industry practice. As a result, the fiscal period ended December 31,
1995, presented herein is a nine-month period.
Cash and Cash Equivalents
Cash in excess of immediate operating needs is invested for up to 90 days in
overnight repurchase agreements and/or marketable debt securities, such as
commercial paper, in accordance with the Company's investment policy. Such cash
equivalents are stated at cost plus accrued interest which approximates market
value. The Company considers these investments as cash for cash flow statement
purposes.
Investments
Certain other liquid funds of the Company have been invested for terms in excess
of 90 days in Treasury and Agency securities. These investments are being
accounted for as "available-for-sale" securities under SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Realized gains and
losses are computed using the specific identification method. As of December
31, 1997 and 1996, the investments are stated at amounts which approximate
quoted market value. All of the Company's investments held at December 31,
1997, mature in 1998.
F-9
<PAGE>
Inventories
As of December 31, 1997, inventory is made up of component parts for LADARVision
Systems ($988,822) and work-in-progress on LADARVision Systems ($1,370,111).
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
Property and Equipment, Net
Property and equipment is recorded at cost less accumulated depreciation and
amortization. The Company provides depreciation primarily using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the term of the lease or the life
of the asset. Asset lives range as follows:
Years
-----
Furniture and office equipment................................ 3-7
Assembly, design and test equipment........................... 3-7
LADARVision Systems-in-Service
The Company's LADARVision Systems-in-Service are LVC systems placed under the
Company's Autonomous Affiliates ProgramSM wherein the ophthalmology clinic or
hospital pays the Company a per- procedure fee for the use of the system in LVC
procedures. The Company is depreciating LADARVision Systems-in-Service for
financial reporting purposes over five years on a straight-line basis.
Advance Licensing Fee
The Company paid an advance licensing fee for the right to use certain patented
technology in commercial applications of its LADARVision System in the future.
License fees, which began to accrue in 1997, are due based on agreed upon
percentages of certain of the Company's future revenues, as defined in the
license agreement.
Research and Development
Research and development costs, which include the costs to pursue new patents
and the costs of building prototype LADARVision System and Custom Cornea units,
are expensed as incurred.
Software Development Costs
Costs of developing software that will be used in the LADARVision System units
have been included in research and development expenses since technological
feasibility has not yet been established. Once technological feasibility is
established, the Company intends to capitalize such costs thereinafter incurred
and report them at the lower of unamortized cost or net realizable value. Due
to uncertainties surrounding the FDA approval process, technological feasibility
will not be considered established until the approval process has advanced to
the point when the Company has received its PMA from the FDA.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred income taxes have
F-10
<PAGE>
been provided for the differences between the financial reporting and income tax
reporting basis of the Company's assets and liabilities. These temporary
differences consist of differences between the timing of the deduction of
certain amounts between income tax reporting purposes and financial statement
purposes. Due to uncertainties regarding the Company's ability to realize the
benefits of its deferred tax assets through future operations, a valuation
allowance has been established that completely offsets the net deferred tax
asset.
Net Loss Per Share; Statement of Financial Accounting Standards 128
Effective December 15, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128 replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS. Additionally, for many companies with potential
common stock instruments outstanding (options, warrants, convertible securities,
or other contingent issuances), a dual presentation of basic and diluted EPS is
required. The Company's presentation of basic EPS is found in the accompanying
statements of operations. The Company's net losses for the periods presented
cause the inclusion of potential common stock instruments outstanding to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required to present a diluted EPS.
All share and per-share information in the financial statements have been
adjusted to give effect to the 150-for-1 stock split and par value restatement
which became effective upon Board of Directors (the Board) and shareholder
approval in February 1996, as further discussed below in the notes.
Stock Authorization and Stock Split
In February 1996, the Board approved a 150-for-1 stock split of the Company's
common stock and a restatement of the par value of the Company's common stock to
$.01 per share, accompanied by an increase in authorized common shares to
15,000,000. The Board also approved the creation of a new class of convertible
preferred stock of the Company and approved an authorization of 1,000,000 shares
of such stock, whose price, rights, privileges and related terms shall be
determined by the Board at the time of issuance. On June 12, 1997, the
stockholders of the Company authorized an increase in authorized common shares
to 25,000,000.
Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), which encourages, but
does not require, companies to adopt the fair value method of accounting for
stock-based employee compensation plans. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board ("APB") Opinion No. 25, but are
required to disclose on a pro forma basis, net income and, if presented,
earnings per share, as if the fair value based method of accounting had been
applied.
Effective January 1, 1996, the Company elected to adopt only the disclosure
requirements of SFAS No. 123. Accordingly, the Company will continue to account
for stock based employee compensation under APB Opinion No. 25.
F-11
<PAGE>
Fair Value of Financial Instruments
The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents and accounts payable at December 31, 1997
and 1996, approximate fair value because of the short maturity of these items.
The carrying amount of the Company's obligations under capital leases
approximates fair value at December 31, 1997 and 1996, since the interest rates
approximate rates currently available to the Company for borrowings and
investments.
Estimates
The preparation of 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.
Effective January 1, 1996, the Company changed the estimated useful lives for
some of its property and equipment from five years to three years. The effect
of this change in accounting estimate on net loss and net loss per share for the
year ended December 31, 1996 was immaterial.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the current-
year presentation.
2. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment consisted of the following as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Furniture and office equipment....................................... $ 941,298 $ 475,732
Assembly, design and test equipment.................................. 662,252 298,823
Leasehold improvements............................................... 151,178 -
---------- -----------
1,754,728 774,555
Less- Accumulated depreciation and amortization...................... (599,010) (321,000)
---------- -----------
Property and equipment, net................................. $1,155,718 $ 453,555
========== ===========
</TABLE>
As of December 31, 1997, the Company held equipment under capital leases with a
net book value of $242,251. Depreciation expense totaled $278,638, $173,724,
and $33,886 for the periods ended December 31, 1997, 1996, and 1995,
respectively.
3. LEASE OBLIGATIONS:
------------------
The Company has acquired furniture, computer, design and communications
equipment under capital lease arrangements. The effective interest rate on the
leases range from 9 percent to 21 percent.
In May 1997, the Company began occupying a main office and production facility
with approximately 25,000 square feet under a lease. The lease term is 10 years,
with two five-year renewal options and termination opportunities at years five
and seven. Base rent under this lease for the first year is $237,500, with
annual 3 percent increases in subsequent years, plus the Company's allocated
portion of common area maintenance and other operating costs. The lease payments
include rent on $500,000 of landlord
F-12
<PAGE>
provided and tenant specified improvements, including certain outfitting of
production areas. Minimum future obligations under noncancelable operating
leases (including the aforementioned facilities lease) and the present value of
future minimum capital lease payments as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
------------ ---------- ------------
<S> <C> <C>
1998............................................................ $ 125,983 $ 244,595
1999............................................................ 94,919 251,933
2000............................................................ 56,828 259,491
2001............................................................ 46,930 267,276
2002............................................................ 21,499 275,294
2003 and thereafter............................................. - 1,505,419
---------- ------------
Total minimum lease payments.................................... 346,159 $ 2,804,008
Less- Amount representing interest.............................. (64,044) ============
----------
Present value of minimum lease payments......................... 282,115
Less- Current portion........................................... (97,108)
----------
Long-term obligation............................................ $ 185,007
==========
</TABLE>
Rent expense totaled $362,876, $168,741, and $80,720 for the periods ended
December 31, 1997, 1996 and 1995, respectively.
4. STRATEGIC ALLIANCE:
-------------------
In May 1994, the Company entered into a strategic marketing alliance (the
Purchase Agreement) with CIBA Vision Group Management, Inc. (CIBA), whereby CIBA
invested $2,405,000 into the Company and received an interest-free, convertible
note of $2,405,000 (the Note) with a three-year term, made an equity investment
in the Company (see Note 5), and acquired exclusive marketing rights outside of
North America to the LADARVision System. The Note automatically converted into
common stock upon the Company's initial public offering in May 1996.
On May 15, 1995, the Company entered into a Strategic Alliance Agreement (SAA)
with CIBA which terminated the aforementioned marketing agreement with CIBA and
amended the Purchase Agreement. Under this agreement, the Company regained
control of all marketing rights, received a $1,000,000 cash payment (see below),
and a commitment of $1,000,000 worth of contributed sales and marketing services
over three years. In return, CIBA obtained the right to a 6 percent commission
on net revenue worldwide, as defined in the SAA, from all of the Company's
equipment sales and patient procedure fees pertaining to ophthalmic refractive
surgery. The commission is limited to $10,000,000 in the aggregate unless the
Company chooses to continue paying such commissions for five additional years in
lieu of issuing the stock discussed below. Unless the commission period is
extended, the Company is required to issue 610,534 shares of common stock
(Additional Shares) to CIBA on May 15, 1999. The number of such Additional
Shares was increased from 529,500 during 1997 due to the operation of an
anti-dilution provision in connection with the Company's 1997 equity financing.
See Note 11.
The Company is accruing for the obligation to issue the additional shares to
CIBA under the SAA on a straight line basis from the agreement date of May 15,
1995, to the expected issuance date of May 15, 1999. The obligation being
accrued over this four-year period is $2.4 million, which represents the value
of the originally issuable preferred shares at the date of agreement. In the
periods ended December 31, 1997, 1996 and 1995, the Company recorded $600,000,
$600,000 and $375,000, respectively,
F-13
<PAGE>
of expenses under this agreement which are included in other expenses on the
accompanying statements of operations. This amount is recorded as the obligation
under strategic alliance agreement in the accompanying balance sheets as of
December 31, 1997 and 1996.
Under the SAA, CIBA has the right, at its sole discretion, to terminate the SAA
upon 180 days notice to the Company whereby the Company would continue to be
obligated to pay to CIBA the 6 percent commission for three years beyond
termination on those LADARVision Systems that were commercially placed at the
time of termination. In this case, CIBA's right to the additional shares on May
15, 1999, would be terminated. Additionally, CIBA has the right to terminate
the SAA upon 30 days notice should there be a change of control of the Company
or if the commercial value of the Company's technology is materially impacted.
The $1,000,000 cash payment from CIBA referred to above was, in accordance with
the terms of the SAA, reclassified to additional paid-in capital upon the
Company's initial public offering. This amount was previously reflected as
advance from shareholder in balance sheets prior to the initial public offering.
During the periods ended December 31, 1997, 1996 and 1995, CIBA contributed
sales and marketing services of $471,275, $449,736 and $220,148, respectively,
to the Company. This amount has been recorded as selling and marketing expense
in the accompanying statements of operations, with a corresponding increase to
additional paid-in capital.
5. COMMON STOCK:
-------------
Common Stock and Common Stock Warrants
- --------------------------------------
The Company issued detachable warrants for the purchase of 1,048,350 shares of
common stock in connection with a preferred stock issuance prior to its initial
pubic offering. The warrants have a weighted average exercise price of $3.47
per share. These warrants expire on February 28, 1999, have a cashless exercise
provision, and are exercisable at any time during their term. As of December
31, 1997, warrants for 93,000 of these shares have been exercised resulting in
the issuance of 46,246 shares of common stock.
Upon completion of its initial public offering, the Company issued warrants for
the purchase of 75,000 shares of common stock to the managing underwriters of
the offering. These warrants have an exercise price of $9.60 per share, are
exercisable after May 7, 1997, and have an expiration date of May 7, 1999.
In connection with its 1997 equity offering, the Company issued warrants for the
purchase of 90,000 shares of common stock to an investment banking firm and the
placement agent for the offering. These warrants have a weighted average
exercise price of $3.61 per share, are currently exercisable, and have
expiration dates in April 1999 and June 2002.
In June 1995, the Company agreed to place 120,000 shares of common stock in
escrow for the benefit of a CIBA employee who is providing sales and marketing
services to the Company. A portion of these shares was to be released to the
individual in fixed annual increments over a three-year period. In June 1997,
the original agreement was amended by the Board of Directors to remove any
performance based vesting on the variable shares under the agreement. Of the
120,000 shares, 32,100 remain in escrow for the individual pending his
commencement of employment with the Company. With the removal of variability of
the stock grant based on performance, the grant was deemed to have become fixed
and the Company recorded its final compensation expense using the then current
fair market value of the stock. Compensation expense of approximately $215,000,
$156,000 and $24,000 was recorded under this
F-14
<PAGE>
agreement during the periods ended December 31, 1997, 1996 and 1995,
respectively. These amounts are included in selling and marketing expense in the
statements of operations for those periods.
Investor Rights Agreement
- -------------------------
In connection with the Purchase Agreement, CIBA entered into an Amended and
Restated Investors' Rights Agreement (the Rights Agreement) between the Company
and certain holders of its shares. The Rights Agreement provides, among other
things, for uniform registration and information among such holders and gives
CIBA the right of first offer with respect to future offerings of any shares of
any class of the Company's capital stock.
6. EMPLOYEE BENEFIT PLANS:
-----------------------
Stock Options
- -------------
In 1995, the Board established the Autonomous Technologies Corporation 1995
Stock Option Plan (1995 Option Plan), authorizing a total of 1,050,000 common
shares for the purpose of attracting and retaining the services of qualified
employees, directors and consultants. In June 1997, the Company's stockholders
approved an increase in authorized shares under the 1995 Option Plan to
1,750,000. Options under the 1995 Option Plan can be either incentive stock
options for employees or non-qualified stock options for consultants or
directors and generally vest ratably over the five-year period following their
grant. Options granted under the 1995 Option Plan can have a term of no more
than 10 years.
In 1996, the Board established the Autonomous Technologies Corporation Employee
Stock Purchase Plan (1996 ESPP), authorizing a total of 75,000 common shares for
the purpose of providing qualifying employees the opportunity to purchase shares
in accordance with the terms of the 1996 ESPP at a discount of 15 percent from
market. The 1996 ESPP began operation on July 1, 1996.
A summary of the Company's 1995 Option Plan and 1996 ESPP as of December 31,
1997, 1996, and 1995 and changes during the periods then ended is presented
below:
F-15
<PAGE>
<TABLE>
<CAPTION>
1995 Option Plan 1996 ESPP
------------------------------- -------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Granted in 1995 597,600 $ .29 - $ -
---------- ========= ---------- =========
Outstanding as of December 31, 1995 597,600 .29 - -
========= =========
Granted in 1996 283,550 5.02 1,417 3.40
========= =========
Exercised in 1996 (11,820) .28 (1,417) 3.40
---------- ========= ---------- =========
Outstanding as of December 31, 1996 869,330 1.84 - -
========= =========
Granted in 1997 694,000 5.16 9,346 3.47
========= =========
Exercised in 1997 (173,620) .29 (9,346) 3.47
---------- ========= ---------- =========
Cancellations in 1997 (22,720) 3.14 - -
========= =========
Outstanding as of December 31, 1997 1,366,990 $ 3.70 - $ -
---------- ========= ---------- =========
SFAS 123 weighted-average fair value of options granted during the year:
1995 597,600 $ 2.08 - -
1996 283,550 $ 3.42 1,417 $ 1.02
1997 694,000 $ 3.57 9,346 $ 1.13
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Number Number
Range of Outstanding at Weighted-Average Weighted- Exercisable at Weighted-
Exercise December 31, Remaining Average December 31, Average
Prices 1997 Contractual Life Exercise Price 1997 Exercise Price
------------- ------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ .13 - $ .33 430,940 7.8 years $ .30 156,080 $ .25
$3.50 - $4.88 290,550 9.3 years $ 4.08 31,810 $ 4.40
$5.13 - $8.00 645,500 9.6 years $ 5.79 45,600 $ 5.63
------------- --------------
1,366,990 $ 3.70 233,490 $ 1.87
============= ======== ============== ========
</TABLE>
The options outstanding at December 31, 1997, expire from February 2003 to
December 2007. There are 197,570 shares remaining available for grant in the
1995 Option Plan and 64,237 shares remaining available for grant in the 1996
ESPP at December 31, 1997.
For options granted during the periods ended December 31, 1997, 1996 and 1995,
the Company recognized compensation expense under APB 25 of $244,145, $218,890
and $380,626, respectively. According to the current vesting schedules related
to those individual option grants, the Company will recognize additional
compensation expense under APB 25 as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
- -------------- ------------
<S> <C>
1998........................................................................... 184,000
1999........................................................................... 173,500
2000........................................................................... 108,200
2001........................................................................... 300
------------
$466,000
============
</TABLE>
The Company has not elected to adopt the compensation measurement provisions of
SFAS 123. Had the Company elected to measure compensation using the methodology
prescribed in SFAS 123 for options during the periods ended December 31, 1997,
1996 and 1995, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Nine Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
1997 1996 1995
---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net loss As reported $ 11,639,355 $ 9,008,044 $ 4,099,045
Pro forma $ 12,205,000 $ 9,296,000 $ 4,126,000
Basic net loss per share As reported $ 1.43 $ 2.36 $ 3.37
Pro forma $ 1.50 $ 2.44 $ 3.39
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions summarized as
follows:
<TABLE>
<CAPTION>
Expected
Grant type and period Volatility Life Interest Rates
------------------------------------ --------------- ------------- -------------------
(in years)
<S> <C> <C> <C>
1995 option grants 60% 4.1 5.8%
1996 option grants 60% 6.3 5.6% - 6.8%
1997 option grants 70% 6.4 5.7% - 6.9%
Employee stock purchase plan grants 60%-70% 0.5 5.0% - 5.4%
</TABLE>
401(k) Plan
- -----------
In December 1995, the Board authorized the formation of a retirement plan for
the Company's employees that qualifies under Internal Revenue Code (IRC) Section
401(k). The Plan, which began January 1, 1996, covers employees who have
attained at least 18 years of age with three or more months of service. The
Company may, at the Board's discretion, make matching contributions to the
employee contributions. The Company has never made any matching contributions.
7. INCOME TAXES:
-------------
The reconciliation of the benefit for income taxes based upon the U.S. statutory
federal rate (34 percent) to the Company's provision for income taxes is as
follows for the periods ended:
F-17
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
Expected tax benefit at statutory rate $ (3,958,000) $ (3,063,000) $ (1,394,000)
(Increase) decrease resulting from:
State income tax benefit,
net of federal tax benefit (423,000) (327,000) (149,000)
Costs incurred but not deductible for tax
purposes 11,000 6,000 18,000
Increase in the valuation allowance 4,370,000 3,384,000 1,525,000
------------------ ------------------ ------------------
Total provision for income taxes $ - $ - $ -
================== ================== ==================
</TABLE>
The Company's deferred tax accounts consisted of the following as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
Assets:
<S> <C> <C>
Net operating loss (NOL) carryforwards........................ $ 9,220,000 $ 5,382,000
Accruals and other............................................ 1,559,000 1,042,000
---------------- ----------------
10,779,000 6,424,000
Less - Valuation allowance.................................... (10,779,000) (6,424,000)
---------------- ----------------
$ - $ -
================ ================
</TABLE>
The NOL carryforwards expire in years 2005 through 2012.
The Company has had greater than 50 percent ownership changes in 1993, 1994 and
1996, as defined under the rules of IRC Section 382. Consequently, the use of
the NOL carryforwards generated in periods prior to the changes in control
against future taxable income in any one year may be limited. The deferred tax
asset is fully reserved.
8. RELATED PARTY TRANSACTIONS:
---------------------------
The Company received general and medical advisory services from three of its
directors. The Company was charged $151,625, $72,000, and $18,194 in
professional fees for such services in the periods ended December 31, 1997, 1996
and 1995, respectively. See also Note 4 which describes the relationship with
CIBA, a related party.
9. CONTINGENCIES:
--------------
Legal Matters
- -------------
In July 1996, VISX, Inc. (VISX) sued the Company in London, England, alleging
that the Company infringed on certain European Community patents held by VISX.
In October 1996, the Company filed suit in Federal Court of Canada, Trial
Division against VISX. VISX is the holder of certain Canadian Letters patents
relating to refractive laser surgery. In March 1997, the Company was able to
reach a settlement in these two cases whereby the Company received a license
from VISX to utilize certain patents outside the U.S.
In October 1996, the Company filed suit in the United States District Court for
the District of Delaware against Pillar Point Partners (Pillar Point), Summit
Technologies, Inc. (Summit), VISX, Summit Partner, Inc. (Summit Partner) and
VISX Partner, Inc. (VISX Partner) (collectively, the Defendants). The
Defendants hold a portfolio of U.S. patents relating to refractive laser
surgery. The complaint seeks a
F-18
<PAGE>
declaratory judgment of non-infringement, invalidity, and/or unenforceability,
with regard to the Company's LADARVision System.
As a result of these actions, the Company has incurred and anticipates that it
will incur significant expenses consisting primarily of management resources,
legal fees, expert witness fees and related expenses. The expenses incurred in
1997 and 1996 are classified as other expenses in the accompanying statements of
operations. These expenses could amount to over $100,000 per month for the
foreseeable future depending on whether or not the remaining matter can be
settled and when the court proceedings, including jury trials, will be held
concerning these matters. The Company believes that it does not infringe on the
VISX or Pillar Point apparatus patents and that it must aggressively assert this
position in order to bring its products to the commercial markets in the United
States, Canada and the European Community. There can, however, be no assurances
that pursuit of these actions will bring the Company any relief from the license
arrangements that might be required nor is there any assurance that such
licenses as might be needed to enter certain markets will be available to the
Company if the Company does not prevail in its actions.
Product Liability and Insurance
- -------------------------------
The Company's business involves the risk of product liability claims. The
Company has not experienced any product liability claims to date. The Company
maintains a "claims made" product liability insurance policy with coverage
limits of $5 million per occurrence and $5 million in the aggregate. The
inability of the Company to maintain adequate insurance coverage at any time
could, in the event of product liability or other claims in excess of the
Company's insurance coverage, have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, the
Company has agreed in the past, and is likely to agree in the future, to
indemnify certain medical institutions and their personnel who participate in
the Company's clinical studies.
10. QUARTERLY FINANCIAL INFORMATION - UNAUDITED:
--------------------------------------------
The tables below contain summarized unaudited quarterly data for the years ended
December 31, 1997 and 1996. The Company believes this information reflects all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of the quarterly information presented. The operating results
for any quarter are not necessarily indicative of the results that may be
expected for future periods.
<TABLE>
<CAPTION>
First Second Third Fourth Annual
Quarter Quarter Quarter Quarter Totals
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Operating loss $ 2,597,840 $ 3,091,332 $ 2,677,129 $ 3,273,054 $ 11,639,355
Net loss $ (0.38) $ (0.45) $ (0.27) $ (0.33) $ (1.43)
Basic net loss per share
Shares used in computing
basic net loss per share 6,852,814 6,888,689 9,900,212 9,958,832 8,151,395
1996
- ---- $ 1,365,696 $ 2,061,456 $ 3,104,560 $ 3,032,204 $ 9,563,916
Operating loss $ 1,354,597 $ 1,923,320 $ 2,891,380 $ 2,838,747 $ 9,008,044
Net loss $ (1.09) $ (0.43) $ (0.43) $ (0.42) $ (2.36)
Basic net loss per share
Shares used in computing
basic net loss per share 1,245,000 4,511,674 6,749,950 6,753,012 3,812,039
</TABLE>
F-19
<PAGE>
* - Due to the adoption of SFAS No. 128 concerning the computation of a basic
net loss per share, the loss per share amounts reported in this Note 10 differ,
in some cases, from those previously reported in Company filings with the
Securities and Exchange Commission. See Note 1 for a further explanation of
SFAS No. 128 and the specifics of the Company's adoption thereof.
11. SUBSEQUENT EVENT
----------------
On March 30, 1998, the Company and CIBA agreed to the issuance of 438,821 shares
of common stock to CIBA under an amendment to the SAA. These shares comprise a
portion of the Additional Shares discussed in Note 4. Concurrent with this
issuance, the Company's Obligation under Strategic Alliance Agreement was
reclassified to common stock and additional paid-in capital. The remaining
shares of the Additional Shares to be issued in 1999 (171,713) shall still be
governed by the terms of the SAA.
F-20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S>
- ------------------------------------------------------------------------------------------
10.10 Autonomous Technologies Corporation 1995 Stock Option Plan, as amended by the
Board of Directors on October 14, 1997
- ------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
Exhibit 10.10
AUTONOMOUS TECHNOLOGIES CORPORATION
1995 STOCK OPTION PLAN
----------------------
Autonomous Technologies Corporation, a Florida corporation (the "Company"),
hereby adopts the 1995 Stock Option Plan (the "Plan") for its key employees,
officers and directors, in accordance with the following terms and conditions:
1. Purpose of the Plan. The purpose of the Plan is to advance the growth
-------------------
and development of the Company by affording an opportunity to executives,
consultants and key employees of the Company, as well as directors of the
Company and its affiliates, to purchase shares of the Company's common stock and
to provide incentives for them to put forth maximum efforts for the success of
the Company's business. The Plan is intended to permit certain designated stock
options granted under the Plan to qualify as incentive stock options under
Section 422A of the Internal Revenue Code of 1986.
2. Definitions. For purposes of this Plan, the following capitalized
-----------
terms shall have the meanings set forth below:
(a) "Board of Directors" means the board of directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as currently in
effect or as hereafter amended.
(c) "Company" means Autonomous Technologies Corporation, a Florida
corporation.
(d) "Eligible Employee" means all directors, consultants, officers, and
executive, managerial, and other key employees of the Company or any Parent or
Subsidiary. In order to be eligible for an Incentive Stock Option, a director or
a consultant must also be a common law employee of the Company as provided in
Section 422A of the Code; however, in order to be eligible for a Nonqualified
Stock Option, a director or consultant need not be a common law employee of the
Company.
(e) "Incentive Stock Option(s)" means a stock option granted to an
Eligible Employee to purchase shares of Stock which is intended to qualify as an
"incentive stock option," as defined in Section 422A of the Code.
(f) "Nonqualified Stock Option(s)" means a stock option granted to an
Eligible Employee to purchase shares of Stock which is not intended to qualify
as an "incentive stock option" as defined in Section 422A of the Code.
(g) "Option" means any unexercised and unexpired Incentive Stock option
or Nonqualified Stock Option issued under this Plan, or any portion thereof
remaining unexercised and unexpired.
(h) "Option Agreement" means a written agreement by and between the
Company and an Optionee setting forth the terms and conditions of the Option
granted by the Board of Directors to such Optionee.
<PAGE>
(i) "Optionee" means any Eligible Employee who is granted an Option as
provided in the Plan.
(j) "Parent" means any present or future "parent corporation" of the
Company as such term is defined in Section 425 (e) of the Code and which the
Board of Directors of the Company has elected to be covered by the Plan.
(k) "Plan" shall mean the Company's Stock Option Plan.
(l) "Stock" means authorized and unissued shares of the Company's
Common Stock, or treasury shares of such class.
(m) "Subsidiary" means any present or future "subsidiary corporation"
of the Company, as such term is defined in Section 425 (f) of the Code and which
the Board of Directors has elected to be covered by the Plan.
(n) Where applicable, the terms used in this Plan have the same meaning
as the terms used in the Code and the regulations and rulings issued thereunder
and pursuant thereto, with reference to Options.
(o) Wherever appropriate, words used in this Plan in the singular may
mean the plural, the plural may mean the singular and the masculine may mean the
feminine or neuter.
3. Stock Subject to Option.
-----------------------
(a) Total Number of Shares. The total number of shares of Stock which
----------------------
may be issued by the Company to all Optionees under this Plan is 1,750,000
shares. The total number of shares of Stock which may be so issued may be
increased only by a resolution adopted by the Board of Directors and approved by
the shareholders of the Company.
(b) Expired Options. If any Option granted under this Plan is
---------------
terminated or expires for any reason whatsoever, in whole or in part, the shares
(or remaining shares) of Stock subject to that particular Option shall again be
available for grant under this plan.
4. Administration of the Plan.
--------------------------
(a) Board of Directors. This plan shall be administered by the Board of
------------------
Directors who may, from time to time, issue orders or adopt resolutions, not
inconsistent with the provisions of the Plan, to interpret the provisions and
supervise the administration of the Plan. All determinations shall be by the
affirmative vote of a majority of the members of the Board of Directors at a
meeting called for such purpose, or reduced to writing and signed by a majority
of the members of the Board of Directors. Subject to the Company's Bylaws, all
decisions made by the Board of Directors in selecting Optionees, establishing
the number of shares and terms applicable to each option, and in construing the
provisions of this Plan shall be final, conclusive and binding on all persons,
including the Company, shareholders, Optionees, and purchasers of shares
pursuant to this Plan. No member of the Board of Directors shall be liable for
any action or determination made in good faith with respect to the Plan or an
Option granted hereunder.
(b) Stock Option Plan Committee. The Board of Directors may from time
---------------------------
to time appoint a Stock Option Plan Committee, consisting of not less than two
(2) directors (the
<PAGE>
"Committee"). The Board of Directors may delegate to such Committee full power
and authority to take any action required or permitted to be taken by the Board
of Directors under this Plan, subject to restrictions on affiliate participation
under the Securities Exchange Act of 1934, pertaining to, among other things,
Section 16(b). The Board of Directors may from time to time, at its sole
discretion, remove members from or add members to the Committee. Vacancies may
be filled by the Board of Directors only. Where the context requires, the Board
of Directors shall mean the Committee, if appointed, for matters dealing with
administration of the Plan.
(c) Compliance with Internal Revenue Code. The Board of Directors (or
-------------------------------------
committee if appointed) shall at all times administer this Plan and make
interpretations hereunder in such a manner that Options granted hereunder
designated as Incentive Stock Options will meet the requirements of Section 422A
of the Code.
5. Selection of Optionees.
----------------------
(a) Discretion of the Board of Directors. In determining which Eligible
------------------------------------
Employees shall be offered Options, as well as the terms thereof, the Board of
Directors shall evaluate, among other things, (I) the duties and
responsibilities of Eligible Employees, (ii) their past and prospective
contributions to the success of the Company, (iii) the extent to which they are
performing and will continue to perform outstanding services for the benefit of
the Company, and (iv) such other factors as the Board of Directors deems
relevant.
(b) Limitation on Grant of Options. An Incentive Stock option may not
------------------------------
be granted to any optionee if the grant of such Option to such Optionee would
otherwise cause the aggregate fair market value (determined at the time the
Option is granted) of the Stock for which Options are exercisable for the first
time by such Optionee under all incentive stock option plans of the Company
during any calendar year to exceed $100,000. Non qualified Stock Options may be
granted to Eligible Employees at the sole discretion of the Board of Directors.
6. Option Agreement. Subject to the provisions of this Plan, each Option
----------------
granted to an Optionee shall be set forth in an Option Agreement upon such terms
and conditions as the Board of Directors determines, including a vesting
schedule. Each such Option Agreement shall incorporate the provisions of this
Plan by reference. The date of the grant of an Option is the date specified in
the Option Agreement. Any Option Agreement shall clearly identify such Options
as Incentive Stock Options
7. Option Prices.
-------------
(a) Determination of Option Price. The option price for Stock shall not
-----------------------------
be less than one hundred percent (100%) of the fair market value of the Stock on
the date of the grant of such Option. The option price for Stock granted to an
Eligible Employee who possesses more than ten percent (10%) of the total
combined voting power of all classes of common stock of the Company shall not be
less than one hundred ten percent (110%) of the fair market value of the Stock
on the date of the grant of such Option.
(b) Determination of Fair Market Value. For the purpose of this Plan,
----------------------------------
the fair market value of the Stock on the date of granting an Option shall be
determined by the Board of Directors in accordance with the applicable
regulations under the Code.
<PAGE>
(c) Determination of Stock Ownership. For purposes of paragraphs 7 and
--------------------------------
8, an optionee's common stock ownership shall be determined by taking into
account the rules of constructive ownership set forth in Section 425(d) of the
Code.
8. Term of Option. The term of an Option may vary within the sole
--------------
discretion of the Board of Directors, provided, however, that the term of an
Incentive Stock Option granted to an Eligible Employee shall not exceed ten (10)
years from the date of grant of such Incentive Stock Option. An Incentive Stock
Option may be canceled only in connection with the termination of employment or
death of the Optionee (as more particularly described in paragraph 9 hereof). A
Nonqualified Stock Option may be canceled only in connection with the
termination of employment (or consulting contract) or death of an Optionee, or
the removal or resignation of an Optionee who is a director.
9. Exercise of Option.
------------------
(a) Limitation on Exercise of Option. Except as otherwise provided
--------------------------------
herein, the Board of Directors, in its sole discretion, may limit an Option by
restricting its exercise in whole or in part to specified vesting periods or
until specified conditions have occurred. The vesting periods and any
restrictions will be set forth in the Option Agreement.
(b) Exercise Prior to Cancellation. An Option shall be exercisable only
------------------------------
during the term of the Option as long as the Optionee is in "Continuous
Employment" with the Company or is continually on the Board of Directors of the
Company or any Subsidiary, or any successor thereof. Notwithstanding the
preceding sentence, as long as the Option's term has not expired, as Option
which is otherwise exercisable in accordance with its provisions shall be
exercisable
(i) for a period ending ninety (90) days after the Optionee's
Continuous Employment with the Company has terminated, unless the Optionee was
terminated for cause by the Company, in which case the Option terminates on
notice of termination of employment; or
(ii) for a period ending ninety (90) days after the removal or
resignation of the Optionee from the Board of Directors, on which such Optionee
has served; or
(iii) by the estate of the Optionee, within one (1) year after the
date of the Optionee's death, if the Optionee should die while in the Continuous
Employment of the Company or while serving on the Board of Directors of the
Company or any Subsidiary, or any successor thereof; or
(iv) within one (1) year after the Optionee's employment with the
Company terminates, if the Optionee becomes disabled during Continuous
Employment with the Company and such disability is the cause of termination.
For purposes of this Plan, the term "Continuous Employment" shall mean the
absence of any interruption or termination of employment (or termination of a
consulting contract) by the Company or any Parent or Subsidiary which now exists
or hereafter is organized or acquired by the Company. Continuous Employment
with the Company shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Company or in the
case of transfers between locations of the Company or between any Parent or
Subsidiary, or successor thereof. The term "cause" as used in this subparagraph
9(b) shall mean: (i)
<PAGE>
commission of a felony or a charge of theft, dishonesty, fraud or embezzlement;
(ii) failure to adhere to Company's reasonable directives and policies, willful
disobedience or insubordination; (iii) disclosing to a competitor or other
unauthorized person, proprietary information, confidences or trade secrets of
the Company or any Parent or Subsidiary; (iv) recruitment of Company or any
Parent or Subsidiary personnel on behalf of a competitor or potential competitor
of the Company, any Parent or Subsidiary, or any successor thereof; or (v)
solicitation of business on behalf of a competitor or potential competitor of
the Company, any Parent or Subsidiary, or any successor thereof.
(c) Method of exercising an Option. Subject to the provisions of any
------------------------------
particular Option, including any provisions relating to vesting of an Option, an
Optionee may exercise an Option, in whole or in part, by written notice to the
Company stating in such written notice the number of shares of Stock such
Optionee elects to purchase under the Option, and the time of the delivery
thereof, which time shall be at least fifteen (15) days after the giving of such
notice, unless an earlier date shall have been mutually agreed upon. Upon
receipt of such written notice, the Company shall provide the Optionee with that
information required by the applicable state and federal securities laws. If
after receipt of such information, the Optionee desires to withdraw such notice
of exercise, the Optionee may withdraw such notice of exercise by notifying the
Company, in writing, prior to the time set forth for delivery of the shares of
Stock. In no event may an Option be exercised after the expiration of its term.
An Optionee is under no obligation to exercise an Option or any part thereof.
(d) Payment for Option Stock. The exercise of any Option shall be
------------------------
contingent upon receipt by the Company of cash or certified bank check to its
order (or in the discretion of the Board of Directors, with shares of the
Company's Common Stock or cancellation of a vested portion of the Stock Option,
or any combination of the foregoing) in an amount equal to the full option price
of the shares of Stock being purchased. For purposes of this paragraph 9, shares
of the Company's Common Stock that are delivered in payment of the option price
shall be valued at their fair market value, as determined under the provisions
of the Plan. In the alternative, the Board of Directors may, but is not required
to, accept a promissory note, secured or unsecured, in the amount of the option
price made by the Optionee on terms and conditions satisfactory to the Board of
Directors.
(e) Delivery of Stock to Optionee. Provided the optionee has delivered
-----------------------------
proper notice of exercise and full payment of the option price, the Company
shall undertake and follow all necessary procedures to make prompt delivery of
the number of shares of Stock which the Optionee elects to purchase at the time
specified in such notice. Such delivery, however, may be postponed at the sole
discretion of the Company to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any governmental agency,
stock exchange or regulatory authority. As a condition to the issuance of shares
of Stock, the Company may require such additional payments from the Optionee as
may be required to allow the Company to withhold any income taxes which Company
deems necessary to insure the Company that it can comply with any federal or
state income tax withholding requirements.
10. Nontransferability of Options. Except as otherwise provided in
-----------------------------
paragraph 9(b) (iii) and (iv) hereof, an Option granted to an Optionee may be
exercised only during such Optionee's lifetime by such Optionee. An Option may
not be sold, exchanged, assigned, pledged, encumbered, hypothecated or otherwise
transferred except by will or by the laws of decent and distribution. No Option
or any right thereunder shall be subject to execution, attachment or similar
process by any creditors of the Optionee. Upon any attempted assignment,
transfer,
<PAGE>
pledge, hypothecation or other encumbrance of any Option contrary to the
provisions hereof, such Option and all rights thereunder shall immediately
terminate and shall be null and void with respect to the transferee or assignee.
11. Compliance with the Securities Laws.
-----------------------------------
(a) Optionee's Written Statement. The Board of Directors may, in its
----------------------------
sole discretion, require that at the time an Optionee elects to exercise his
Option, he shall furnish a written statement to the Company that he is acquiring
such shares of Stock for investment purposes only and that he has no intention
of reselling or otherwise disposing of such Stock, along with a written
acknowledgment that the Option and the shares of Stock pertaining to the Option
are not registered under the Securities Act of 1933, as amended (the "Act"), the
Florida securities laws, or any other state securities laws. In the event that
shares of Stock subject to the Option are registered with the Securities and
Exchange Commission, an Optionee shall no longer be required to comply with this
subparagraph 11(a).
(b) Registration Requirements. If at any time the Board of Directors
-------------------------
determines, in its sole discretion, that the listing, registration or
qualification of the shares of Stock subject to the Option upon any securities
exchange or under any state or federal securities laws, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, then the Option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained (and the same shall have been free of any conditions not
acceptable to the Board of Directors).
(c) Restrictions on Transfer of Shares. Subject to the Company's
----------------------------------
repurchase agreement and right of first refusal, as more particularly set forth
in paragraph 15 hereof, the shares of Stock acquired by an Optionee pursuant to
the exercise of an Option hereunder shall be freely transferable; provided,
however, that such shares of Stock may not be sold, transferred, pledged or
hypothecated, unless (i) a registration statement covering the securities is
effective under the Act and appropriate state securities laws, or (ii) an option
of counsel, satisfactory to the Company, that such sale, transfer, pledge or
hypothecation may legally be made without registration of such shares under
federal or state securities laws has been received by the Company.
(d) Restrictive Legend. In order to enforce the restrictions imposed
------------------
upon shares of Stock under this Plan, the Company shall make appropriate
notation in its stock records or, if applicable, shall issue an appropriate
stock transfer instruction to the Company's stock transfer agent. In addition,
the Company may cause a legend or legends to be placed on any certificates
representing shares of Stock issued pursuant to this Plan, which legend or
legends shall make appropriate reference to such restrictions in substantially
the following form:
The shares of Common Stock evidenced by this certificate have been
issued under the Autonomous Technologies Corporation 1995 Stock Option
Plan (the "Plan") and are subject to the terms and provisions of such
Plan.
These shares have not been registered under the Securities Act of 1933,
as amended, the Florida Securities and Investor Protection Act or any
other state securities laws, and, therefore, cannot be sold unless they
are subsequently registered under the Act and
<PAGE>
any applicable state securities laws, or unless an exemption from
registration is available.
These shares are subject to a repurchase option and right of first
refusal as set forth in the Plan, and any sale, transfer, gift, pledge,
or encumbrance of these shares is subject to this repurchase agreement
and right of first refusal.
(e) In the event of a transaction (as defined in Section 14 of the
Plan), Optionee will comply with Rule 145 of the Securities Act of 1933 and any
other restrictions imposed under other applicable legal or accounting principles
if Optionee is an "affiliate" (as defined in such applicable legal and
accounting principles) at the time of the transaction, and Optionee will execute
any documents necessary to ensure compliance with such rules.
12. Changes in Capital Structure of Company. In the event of a capital
---------------------------------------
adjustment resulting from a stock dividend, stock spit, reclassification,
recapitalization, or by reason of a merger, consolidation, or other
reorganization in which the Company is the surviving corporation, the Board of
Directors shall make such adjustment, if any, as it may deem appropriate in the
number and kind of shares authorized by this Plan, or in the number, option
price and kind of shares covered by the Options granted. The Company shall give
notice of any adjustment to each Optionee and such adjustment shall be deemed
conclusive. The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined solely by the Board of Directors, and
any such adjustment may provide for the elimination of fractional shares.
13. Reorganization, Dissolution or Liquidation. In the event of the
------------------------------------------
dissolution or liquidation of the Company, or any merger or combination in which
the Company is not a surviving corporation is involved, or the Company transfers
substantially all of its assets or property to another corporation, or in the
event any other corporation acquires control of the Company in a reorganization
within the meaning of Section 368(a) of the Code, all outstanding Options shall
thereupon terminate, subject to the provisions of Section 14 herein, unless such
Options are assumed or substitutes therefor are issued (within the meaning of
Section 425(a) of the Code) by the surviving or acquiring corporation in any
such merger, combination or other reorganization. Not withstanding the previous
sentence, the Company shall give at least fifteen (15) days written notice of
such transaction to holders of unexercised Options prior to the effective date
of such merger, combination, reorganization, dissolution or liquidation.
14. Accelerated Vesting Upon Certain Events. Not withstanding the
---------------------------------------
provisions of the foregoing sections 12 and 13, and unless otherwise provided in
the Option Agreement, in the event of an acquisition of the Company through the
sale of substantially all of the Company's assets and the consequent
discontinuance of its business or through a merger, consolidation, exchange,
reorganization, reclassification, extraordinary dividend, divestiture or
liquidation of the Company (collectively referred to as a "change in control
transaction" or "transaction"), all outstanding Options shall become immediately
exercisable, whether such Options had become exercisable prior to the
transaction; provided, however, that if the acquiring party seeks to have the
transaction accounted for on a "pooling of interests" basis and, in the opinion
of the Company's independent certified public accountants and the Company's
counsel, accelerating the exercisability of such options would preclude a
pooling of interests under generally accepted accounting principles, the
exercisability of such options shall not accelerate. In addition to the
foregoing, in the event of such a transaction, the Board may provide for one or
more of the following:
<PAGE>
(a) the complete termination of this Plan and the cancellation of
outstanding options not exercised prior to a date specified by the Board (which
date shall give Optionees a reasonable period of time in which to exercise the
options prior to or simultaneously with the effectiveness of such transaction);
(b) that Optionees holding outstanding options shall receive, with
respect to each share of Option Stock subject to such options, as of the
effective date of any such transaction, cash in an amount equal to the excess of
the Fair Market Value of such Option Stock on the date immediately preceding the
effective date of such transaction over the option price per share of such
options; provided that the Board may, in lieu of such cash payment, distribute
to such Optionees shares of stock of the Company or shares of stock of any
corporation succeeding the Company by reason of such transaction, such shares
having a value equal to the cash payment herein; or
(c) the continuance of the Plan with respect to the exercise of options
which were outstanding as of the date of adoption by the Board of such plan for
such transaction and provide to Optionees holding such options the right to
exercise their respective options as to an equivalent (in value) number of
shares of stock of the corporation succeeding the Company by reason of such
transaction.
The Board may restrict the rights or applicability of this Section 14 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation or
to qualify to have the transaction accounted for on a "pooling of interests"
basis.
15. Option to Repurchase: Right of First Refusal.
--------------------------------------------
(a) Company's Option. Any Stock purchased pursuant to this Plan shall
----------------
be subject to an option to repurchase such Stock by the Company until the
Company becomes publicly held. Such option may be exercised by the Company
during said period only in the event of the voluntary termination of employment
or the involuntary termination of employment of the Optionee (except in the
event of a sale or liquidation of the Company in an acquisition), or in the
event of the resignation or removal of the Optionee from the Board of Directors
of the Company or any Parent, Subsidiary or successor thereof. The Company must
elect to exercise the option to repurchase within sixty (60) days following the
termination of the Optionee, otherwise such option shall expire. In order to
exercise the option, the Company must notify the optionee of its intent to
exercise its option by mailing a notice to the Optionee or the representative of
the Optionee's estate at the last address contained in the Company's files for
such Optionee. Such notice shall state that the Company intends to exercise its
option and shall state the purchase price per share which will be paid by the
Company and the date on which such option will be exercised, which date will not
be earlier than ten (10) days following the date of mailing said notice nor
later than sixty (60) days following the date (the "Termination") of termination
of employment, resignation or removal from the Board of Directors, or death of
the Optionee, as the case may be. The purchase price, in the case of termination
of employment or removal or resignation as a director, voluntarily or without
cause, shall be the fair market value of the Stock as determined by the Board of
Directors as of the date of the optionee's termination of employment or death.
The purchase price, in the case of termination of employment or removal as a
Director for cause, shall be the price paid by the Optionee for said shares. The
purchase price shall be evidenced by a promissory note, bearing interest at the
applicable federal rate
<PAGE>
under Section 1274(d) of the Code. Payments on said note shall be made in three
(3) equal annual installments commencing six (6) months after the Termination
Date. The term "cause" as used in this paragraph shall mean a determination by
the Board of Directors that Optionee breached a material agreement with the
Company or committed an offense against the Company which constituted a breach
of fiduciary duty or a material civil tort.
(b) Right of First Refusal. Until the Company becomes publicly held,
----------------------
the Company will have the irrevocable right, privilege, and option to purchase
any Stock purchased by the Optionee pursuant to an option at any time when the
Optionee or any subsequent holder of said Stock ("Holder") receives a bonafide
offer to purchase part or all of said Stock by any other party, which offer is
acceptable to such Optionee or Holder, at the same price and upon the same terms
as such other party offers for the Stock or at fair market value of the Stock as
determined by the Board of Directors, whichever price is lower. If the Optionee
or Holder objects to the fair market value set by the Board of Directors, the
Optionee has the right to have the Stock appraised by a qualified, independent
appraiser with the cost of such appraisal to be paid by the optionee or Holder.
After such appraisal, the Company shall have the option to purchase the Stock on
the terms of the bona fide offer or the appraisal, whichever is less. The
Optionee or Holder will, upon receipt will be, or will be deemed to be, a holder
of any share of Stock subject to an option unless and until stock certificates
of such shares of Stock are issued to such person or persons pursuant to the
terms of this Plan. Except as otherwise provided in paragraph 12 of this Plan,
no adjustment shall be made for dividends or other rights for which the record
date occurs prior to the date such stock certificate is issued.
(c) Dividends. Purchasers of Stock pursuant to this Plan will be
---------
entitled, after issuance of their stock certificates, to any dividends that may
be declared and paid on the shares of Stock registered in their names. A stock
certificate representing dividends declared and paid in shares of Stock shall be
issued and delivered to the purchaser after such shares have been registered in
the purchaser's name. Such stock certificate shall bear the legends set forth
above and shall be subject to the provisions of this Plan, the Option Agreement
and any escrow arrangement.
(d) Voting Rights. Purchasers of shares of the Stock shall be entitled
-------------
to receive all notices of meetings and exercise all voting rights of a
shareholder with respect to the shares of Stock purchased.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Discretion of the Board of Directors. The Board of Directors may
------------------------------------
amend or terminate this Plan at any time provided; however, that (i) any such
amendment or termination shall not adversely affect the rights of Optionees who
were granted Options prior thereto, (ii) any such amendment shall not result in
a "modification" of any Option within the meaning of Section 425(h) of the Code
and (iii) any amendment which increases the total number of shares of Stock
covered by this Plan or changes the definition of Eligible Employee shall be
subject to obtaining the approval of the Company's shareholders.
(b) Automatic Termination. This Plan shall terminate ten (10) years
---------------------
after its approval by the shareholders of the Company or its adoption by the
Board of Directors, whichever is earlier, unless the Board of Directors shall,
in its discretion, elect to terminate this Plan at an earlier date. Options may
be granted under this Plan at any time and from time to time prior to
termination of the Plan under this subparagraph 17(b). Any Option outstanding at
the time the
<PAGE>
Plan is terminated under this subparagraph 17(b) shall remain in effect until
the Option is exercised or expires.
17. Miscellaneous.
-------------
(a) Notices. All notices and elections by an Optionee shall be in
-------
writing and delivered in person or by mail to the President or Treasurer of the
Company at the principal office of the Company.
(b) Effective Date of the Plan. The effective date of this Plan shall
--------------------------
be the earlier of the date on which the Board adopts the Plan, or the date of
this approval by the shareholders of the Company.
(c) Employment. Nothing in the Plan or in any Option granted hereunder,
----------
or in any Stock Option Agreement relating thereto shall confer upon any employee
of the Company or any Subsidiary, or any successor thereof, the right to
continue in the employ of the Company or any Subsidiary.
(d) Plan Binding. The Plan shall be binding upon the successors and
------------
assigns of the Company.
(e) Gender. Whenever used herein, nouns in the singular shall include
------
the plural, and the masculine pronoun shall include the feminine gender.
(f) Headings. Captioned headings of paragraphs and subparagraphs hereof
--------
are inserted for convenience and reference, and constitute no part of the Plan.
(g) Applicable Law. The validity, interpretation and enforcement of
--------------
this Plan are governed in all respects by the laws of the State of Florida and
the United States of America.
- --------------------------------------------------------------------------------
Originally adopted by the Board of Directors on October 25, 1995.
Originally adopted by the Shareholders on February 14, 1996.
Amended by the Shareholders on June 12, 1997 to increase the shares in the
Plan by 700,000.
Amended by the Board of Directors on October 14, 1997 to include provisions
effecting acceleration of options in certain conditions of a change in control
or acquisition of the Company.
<PAGE>
AMENDMENT NO. 2 TO
STRATEGIC ALLIANCE AGREEMENT
This second Amendment to the Strategic Alliance Agreement dated May 15, 1995, is
made by and between CIBA Vision Group Management, Inc. ("CIBA") and Autonomous
Technologies Corporation ("Autonomous") as of this 26th day of March 1998.
Summary
-------
The parties hereto desire to accelerate the issuance of certain common stock by
Autonomous to CIBA that would have otherwise occurred on May 15, 1999.
Amendment
---------
The parties agree to amend the Strategic Alliance Agreement as follows:
1. The parties agree that as a result of the operation of paragraph 3 of the
Amendment to the Strategic Alliance Agreement dated May 5, 1996 as it relates to
the private placement of common stock by Autonomous in June 1997, that the
number of common shares that would be issuable to CIBA on May 15, 1999 is
currently 610,534 (the "CIBA Stock").
2. The parties agree that Autonomous will issue to CIBA on March 31, 1998, for
good and valuable considerations, the number of shares of stock of the CIBA
Stock that the Autonomous periodic accrual shall represent at March 31, 1998 to
the total expected accrual at May 15, 1999 ($2,400,000). By means of
illustration, the Autonomous accrual at March 31, 1998 shall be $1,725,000.
This accrual divided by $2,400,000 results in a decimal of .718750, which, when
applied to the CIBA Stock, yields an issuance to CIBA on March 31, 1998 of
438,821 common shares with an accrued value of $1,725,000.
3. The parties specifically agree that the remaining shares of Autonomous that
are to be issued in accordance with the terms of the Strategic Alliance
Agreement (currently 171,713 shares of CIBA Stock) shall still be governed by
the applicable provisions of the Strategic Alliance Agreement and the Amendment
thereto, including the provision whereby Autonomous shall deliver stock with a
minimum value of $2,400,000 on May 15, 1999, to be reduced by the $1,725,000
accrued value of the common stock issued pursuant to paragraph 2 herein.
4. All other provisions of the Strategic Alliance Agreement and its Amendment
shall remain as set forth in such Agreement.
CIBA Vision Group Management, Inc. Autonomous Technologies Corporation
By: /s/ Christopher G. Fitzpatrick By: /s/ Monty K. Allen
------------------------------ ------------------------------
Christopher G. Fitzpatrick Monty K. Allen
Corporate Secretary Vice President, Treasurer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Registration Statement File Nos. 333-13581, 333-29499 and 333-
43853.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Arthur Andersen LLP
Orlando, Florida
March 27, 1998
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 109,245
<SECURITIES> 7,191,827
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,358,934
<CURRENT-ASSETS> 10,016,898
<PP&E> 1,754,728
<DEPRECIATION> (599,010)
<TOTAL-ASSETS> 12,416,149
<CURRENT-LIABILITIES> 1,676,330
<BONDS> 0
0
0
<COMMON> 99,868
<OTHER-SE> 8,879,944
<TOTAL-LIABILITY-AND-EQUITY> 12,416,149
<SALES> 37,065
<TOTAL-REVENUES> 37,065
<CGS> 105,892
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,111,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,108
<INCOME-PRETAX> (11,639,355)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,639,355)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,639,355)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> 0
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<EPS-PRIMARY> (3.37)<F1> (1.09)<F1> (0.43)<F1> (0.43)<F1> (2.36)<F1>
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<FN>
<F1>RESTATED FOR SFAS 128 ACCOUNTING CHANGE CONCERNING COMPUTATION OF PER SHARE AMOUNTS.
</FN>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
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<FN>
<F1>RESTATED FOR SFAS 128 ACCOUNTING CHANGE CONCERNING COMPUTATION OF PER SHARE AMOUNTS.
</FN>
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