10-Q 1 e10-q.txt SUMMIT AUTONOMOUS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: JUNE 30, 2000 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number: 0-16937 SUMMIT AUTONOMOUS INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2897945 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 21 Hickory Drive, Waltham, Massachusetts 02451 (Address of principal executive offices) (Zip Code) (781) 890-1234 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock and Common Share Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date. On June 30, 2000, 47,102,411 shares of common stock, par value $0.01 per share were outstanding. 2 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS SUMMIT AUTONOMOUS INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

See accompanying notes to unaudited condensed consolidated financial statements. -2- 3 SUMMIT AUTONOMOUS INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying notes to unaudited condensed consolidated financial statements. -3- 4 SUMMIT AUTONOMOUS INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)

See accompanying notes to unaudited condensed consolidated financial statements. -4- 5 SUMMIT AUTONOMOUS INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See accompanying notes to unaudited condensed consolidated financial statements. -5- 6 SUMMIT AUTONOMOUS INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. NATURE OF BUSINESS The operations of Summit Autonomous Inc. and subsidiaries (the "Company" or "Summit"), formerly known as Summit Technology, Inc., presently consist of one operating segment: laser vision correction which includes manufacturing, selling and servicing laser systems and related products to correct vision disorders and collecting per procedure license fees from users of its systems. On April 29, 1999, the Company completed its acquisition of Autonomous Technologies Corporation ("Autonomous"). Results of operations include the effects of operations of Autonomous from the date of the acquisition. In May 2000 the Company committed to a formal plan to sell its mail order contact lens business operated by its wholly-owned subsidiary, Lens Express, Inc. ("Lens"). Accordingly, the results of operations for this business were classified as discontinued operations. On June 16, 2000, the Company sold Lens Express to Strategic Optical ("SAH") for $31 million cash, plus an ownership interest in SAH of approximately 10%. On May 26, 2000, the Company entered into a definitive agreement under which Alcon Holdings Inc. ("Alcon") will acquire the Company for $19.00 per share in cash. Pursuant to the agreement Alcon began a tender offer for all the outstanding shares of the Company on June 5, 2000. On June 30, 2000, the tender offer expired. On July 3, 2000 Alcon accepted for payment all the Shares that were validly tendered and not withdrawn pursuant to the tender offer. As of July 7, 2000, a total of 41,944,555 shares, representing approximately 88.9% of the outstanding shares, had been validly tendered and not withdrawn. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, these unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods. The Company has been advised by Deloitte & Touche LLP ("Deloitte") that, due to the acquisition of a controlling interest in the Company by Alcon Acquisition Corp. (a wholly owned subsidiary of Alcon Holdings Inc., an indirect wholly owned subsidiary of Nestle S.A.) on July 7, 2000, Deloitte may not be independent with respect to the Company. Accordingly, Deloitte has advised the Company that, at this time, it is unable to complete a review of the Company's unaudited condensed consolidated financial statements as of and for the three and six month periods ended June 30, 2000 included in this Quarterly Report on Form 10-Q. The accompanying consolidated financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year. Earnings Per Share: Basic earnings per share amounts are based on the weighted-average number of common shares outstanding during the period. Diluted earnings per share amounts include the effect of all potential common shares, if dilutive, that were outstanding during the period. Reclassifications: Certain prior period information has been reclassified to conform to current period presentation of data. -6- 7 3. INVENTORIES Inventories consist of the following:

4. RESTRUCTURING AND TERMINATION OF STRATEGIC ALLIANCE On March 28, 2000, the Company's Board of Directors voted to approve a restructuring of the Company to fully integrate its laser vision correction businesses. In the first quarter of 2000, the Company recorded a pretax restructuring charge of $2,992 for involuntary employee severance payments for approximately 20 personnel. In a separate matter, the Company also recorded a one-time charge of $8,103 to terminate a strategic alliance agreement with Ciba Vision Group Management, Inc. which was assumed as part of the acquisition of Autonomous. During the second quarter, approximately $.4 million of payments were made to terminated employees and the remaining portion of these payments is expected to be finalized by the end of 2000. The payment to Ciba Vision was made during the second quarter of 2000. 5. CONTINGENCIES The Company is a party to various litigation matters as described below. The Company has denied, or will deny, the substantive allegations in each of these actions, and intends to defend them vigorously. The Company may be served with additional complaints of a similar nature in the future. The Company may not prevail in the pending or any possible additional actions, and the resolutions of the actions, individually or in the aggregate, may have a material adverse effect on the Company's financial position, results of operations, or cash flows. The Company has not made any provision for any loss that may result upon resolution of these matters in the accompanying consolidated financial statements. Dollar amounts below are in thousands. Antitrust Litigation The Company, VISX, and certain of their affiliates (including Pillar Point Partners, a partnership between affiliates of the Company and VISX) are involved in a number of antitrust lawsuits which, among other things, allege price-fixing in connection with per-procedure patent royalties charged by the Company and VISX. These suits are pending in both federal and state court, on behalf of both direct purchasers from the Company and VISX and patients/consumers, and include both purported class actions and individual actions. Most of the federal lawsuits have been transferred for pretrial purposes to the U.S. District Court for the District of Arizona by the Judicial Panel on Multidistrict Litigation as In re: Pillar Point Partners Antitrust and Patent Litigation. Federal Antitrust Litigation Cases Consolidated for Pre-Trial Proceedings In April 1998, The Eye Professionals, P.A. commenced an action in the U.S. District Court for the District of New Jersey against the Company and VISX. The case purported to be a class action on behalf of all individuals or entities that have paid a per-procedure -7- 8 fee directly to either defendant for use of a Summit or VISX laser to perform laser vision correction surgery at any time after November 1, 1995. The complaint alleged, inter alia, price-fixing in violation of Section 1 of the Sherman Act. The action sought treble damages, costs of suit, attorneys' fees, and various forms of declaratory and injunctive relief. Similar actions were also filed in May 1998 by Metropolitan Eye Center and Outpatient Surgical Facility, Inc. in the U.S. District Court for the Northern District of California against the Company, VISX, Summit Partner and VISX Partner and by New England Laser Vision, Inc. in the U.S. District Court for the District of New Jersey against the Company and VISX. In August 1998, David R. Shapiro, M.D., filed another similar purported class action against the Company and VISX in the U.S. District Court for the District of Arizona. Plaintiffs in these cases have agreed to consolidation of the four purported class actions and filed a single consolidated amended complaint in the U.S. District Court for the District of Arizona. It purports to be a class action on behalf of all persons and entities (excluding governmental entities, defendants subsidiaries and affiliates of defendants) in the United States who paid a per-procedure royalty to any defendant or any alleged co-conspirator or any subsidiary or affiliate thereof, at any time after September 1995. The Consolidated Amended Class Action Complaint seeks, among other things, unspecified treble damages on behalf of plaintiffs and the alleged class, along with attorneys' fees, costs, and injunctive and declaratory relief. In September 1998, Laser Eye Center of Texas, L.L.P. and Warren D. Cross, M.D., filed a purported class action against the Company, Summit Partner, VISX, VISX Partner and Pillar Point Partners in the U.S. District Court for the Southern District of Texas. The suit purports to be a class action on behalf of all persons and entities who have paid money to defendants, or any of their subsidiaries, on a per-procedure basis for the ability to use defendants' laser equipment or technology to perform laser vision correction surgery. Plaintiffs allege, among other things, price-fixing and monopolization in violation of Sections 1 and 2 of the Sherman Act. They seek, among other things, treble damages on behalf of the alleged class, costs of suit, including attorneys' fees, and declaratory and injunctive relief. This case was transferred to the District of Arizona for consolidated pre-trial proceedings. In February 1999, Carolina Eye Associates, P.A. and Carolina-South Eye Associates filed suit against VISX and the Company in the U.S. District Court for the District of New Jersey. This action, like the consolidated federal actions described above, purports to be a class action on behalf of all persons and entities (excluding governmental entities, defendants, subsidiaries and affiliates of defendants) in the United States who paid a per-procedure royalty to any defendant or any alleged co-conspirator or any subsidiary or affiliate thereof, at any time after September 1995. The complaint alleges, among other things, price-fixing in violation of Section 1 of the Sherman Act and seeks, among other things, compensatory damages of at least $100,000 plus $8,300 per month from the filing of the complaint until the date of judgment, trebling of those damages, attorneys' fees, costs, and declaratory and injunctive relief. This case was transferred to the District of Arizona for consolidated pre-trial proceedings. Plaintiffs in the various class actions described above have now moved for certification of a class including all persons in the United States who paid a per-use royalty to any defendant or any co-conspirator or any subsidiary or affiliate thereof, at any time after September 1995. In June 1996, a Texas ophthalmologist, Robert G. Burlingame, sued the Company, Summit Partner, VISX, VISX Partner and Pillar Point Partners in U.S. District Court for the Northern District of California alleging price-fixing in violation of Section 1 of the Sherman Act and state antitrust laws and fraud and deceit in connection with certain of the Company's sales and marketing activities. The plaintiff seeks, among other things, compensatory damages of at least $30 plus $2 to $3 per month until the date of judgment, trebling of those damages, compensatory and punitive damages on the fraud claim against the Company of at least $500 plus $2 to $3 per month until the date of judgment, attorneys' fees, costs and declaratory and injunctive relief. This case was transferred to the District of Arizona for consolidated pre-trial proceedings. In September 1996, a Nevada ophthalmologist, John R. Shepherd, through his professional corporation, commenced a similar lawsuit against the same parties, in the -8- 9 same court, alleging substantially similar antitrust claims and seeking substantially similar relief, including damages before trebling of at least $125 plus $13 per month until the date of judgment. This case was transferred to the District of Arizona for consolidated pre-trial proceedings. In May 1999, Freedom Vision Laser Center, L.P. filed suit in the United States District Court for the Central District of California against the Company, Autonomous, Summit Partner, VISX, VISX Partner and Pillar Point Partners. The complaint alleges, among other things, price-fixing, monopolization, attempted monopolization, and conspiracy to monopolize, in violation of Sections 1 and 2 of the Sherman Act, as well as violations of the California Business and Professions Code. Plaintiff seeks, among other things, damages that are alleged to be more than $1,000 before trebling, disgorgement of alleged illegal and ill-gotten gains, declaratory and injunctive relief, and attorneys' fees and costs. This case has been transferred to the District of Arizona for consolidated pre-trial proceedings. Cases Not Consolidated for Pre-Trial Proceedings In April 1999, Antoine L. Garabet, M.D., Inc. and Abraham V. Shammas, M.D., Inc., d/b/a The Laser Eye Center, filed suit in the U.S. District Court for the Central District of California against the Company and Autonomous. The suit alleges, among other things, that the Company's acquisition of Autonomous may substantially lessen competition or tend to create a monopoly in violation of Section 7 of the Clayton Act, Section 1 of the Sherman Act, and the California Business and Professions Code. The complaint seeks, among other things, unspecified compensatory damages, trebling of those damages, declaratory and injunctive relief, divestiture in the event that the acquisition of Autonomous is consummated, restitutionary relief, including disgorgement of alleged unlawful profits and the imposition of a constructive trust over alleged ill-gotten gains, and attorneys' fees and costs. Plaintiffs also threatened to seek a temporary restraining order, preliminary injunction, and other unspecified preliminary injunctive relief directed at the acquisition. The Company filed a counterclaim for copyright infringement and unfair competition against the plaintiffs and Antoine L. Garabet, M.D. and Abraham V. Shammas, M.D., individually. The parties have agreed to a dismissal of this counterclaim, without prejudice. Counterclaims The Company is the subject of additional Federal antitrust litigation as a result of counterclaims to patent litigation initiated by Pillar Point Partners and the Company. A discussion of those counterclaims is presented below under "Patent Litigation." State Antitrust Litigation Beginning in March 1998, a number of actions brought by individuals under the Cartwright Act and the California Business and Professions Code were commenced against the Company, Summit Partner, VISX and VISX Partner in Superior Court of Santa Clara County. In May 1998, these actions were consolidated as In re PRK/LASIK Consumer Litigation. In June 1998, plaintiffs B.J. Snyder, Donna McMahan, Paula Mobsby, Helen Thomas, Carmen Ocariz, Martin Hermans, Ken Bartlett, Jackie Kirk, Grace Geniusz, Jocelyn Joseph, Andrew Stoddard, and Cynthia Brubecker filed an Amended Consolidated Master Complaint for Damages ("Amended Complaint") in this matter against the Company, Summit Partner, VISX, and VISX Partner. The Amended Complaint purports to be filed on behalf of all natural persons in the United States who underwent excimer laser surgery with a laser manufactured by the Company or VISX during the period beginning October 1995, and paid a per-procedure fee indirectly to a defendant, excluding defendants, any unnamed co-conspirators of defendants, defendants' predecessors, successors, parents, subsidiaries, affiliates, officers and directors, governmental entities, and any and all judges and justices assigned to hear any aspect of the litigation. The Amended Complaint seeks unspecified compensatory damages, restitution and/or disgorgement of alleged ill-gotten gains, prejudgment and postjudgment interest, costs of suit, and attorneys' fees, as well as various forms of declaratory and injunctive relief, including an order permitting any person or entity with which the Company or VISX or both have entered into any agreement -9- 10 since June 3, 1992, for the purchase, license, or use of any of the Pillar Point Patents to withdraw from such agreement without penalty or obligation. James Ballard filed a similar suit against the Company, Summit Partner, VISX, VISX Partner, Pillar Point Partners, and other individual defendants in Superior Court of San Diego County. This suit has been transferred to Santa Clara County and consolidated as part of In re PRK/LASIK Consumer Litigation. The parties have stipulated to the conditional certification of a class of natural persons in California, Alabama, Arizona, the District of Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New Mexico, New York, North Carolina, North Dakota, South Dakota, Tennessee, West Virginia, and Wisconsin who have undergone ophthalmic refractive surgery with an excimer laser manufactured by the Company or VISX. In April 1998, Penny S. Marks, an individual who allegedly has had laser vision correction surgery performed, commenced an action in Florida state court against the Company and VISX. The case purports to be a class action on behalf of all persons who have had a PRK procedure in the State of Florida from October 20, 1995 up to and including the date the class certification hearing begins. The complaint alleges various violations of the Florida Deceptive and Unfair Trade Practices Act, the Florida Antitrust Act and Section 5 of the Federal Trade Commission Act. The complaint seeks unspecified compensatory damages, costs and attorneys' fees, as well as declaratory and injunctive relief. Plaintiff filed a motion seeking class certification. Thereafter, the parties filed a joint motion to stay this action pending resolution of In re PRK/LASIK Consumer Litigation, the consolidated class action litigation described immediately above. The court has granted this motion to stay. In June 1998, Barbara Worcester, an individual who allegedly has had laser vision correction surgery performed, filed an action in Wisconsin state court against the Company, Summit Partner, VISX, VISX Partner and Pillar Point Partners. The case purports to be a class action on behalf of all Wisconsin purchasers of refractive laser surgery procedures. The complaint alleges violations of the antitrust laws of the State of Wisconsin. The complaint seeks unspecified damages, trebling of those damages, attorneys' fees and costs, and declaratory and injunctive relief. Defendants removed this action to federal court, and it has been transferred to the District of Arizona. Plaintiff has filed a motion seeking class certification. In January 1999, Karen Frankson, Virginia Harmes, and Beth Luetschwager, three individuals who allegedly have had laser vision correction surgery performed, filed a similar purported class action in Wisconsin state court. Defendants removed this action to federal district court in Wisconsin, and it was transferred to the District of Arizona. The parties recently agreed to a dismissal of this action, without prejudice. In May 1999, Linda Brisson, an individual who allegedly has had laser vision correction surgery performed, commenced an action in Minnesota state court against the Company, Summit Partner, VISX, VISX Partner and Pillar Point Partners. The case purports to be a class action on behalf of all Minnesota purchasers of refractive laser surgery procedures. The complaint alleges, among other things, price-fixing in violation of Minnesota antitrust law. The complaint seeks, among other things, compensatory damages alleged to be at least in the millions of dollars, trebling of those damages, attorneys' fees and costs, and injunctive and other relief. The court has granted defendants' motion to stay this action pending resolution of In re PRK/LASIK Consumer Litigation, discussed above. In January 2000, Antoine L. Garabet, M.D. and Abraham V. Shammas, M.D. filed an action individually and on behalf of the general public against the Company and VISX in Superior Court of the State of California, Santa Clara County. The suit alleges violations of the California Unfair Business Practices Act in connection with, among other things, per procedure fees charged by the Company and VISX. The action seeks, among other things, disgorgement of alleged ill-gotten gains and monies that defendants have earned by means of alleged unlawful, unfair, and fraudulent business practices (with defendants' per procedure revenues elsewhere alleged to be in the millions of dollars annually), a constructive trust over such gains and monies, declaratory and injunctive relief, and attorneys' fees and costs. -10- 11 Shareholder Litigation Between August 1996 and February 1997 various shareholder actions were commenced against the Company and certain of its present or former officers in the U.S. District Court for the District of Massachusetts claiming, among other things, violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 arising out of public statements made by defendants and violations of Section 20A of the Securities Exchange Act of 1934 arising out of alleged insider trading by certain defendants. The actions were consolidated, by order of the Court entered December 2, 1996, as In re Summit Technology Securities Litigation. By order dated August 11, 1998, the Court certified the action as a class action on behalf of all purchasers of Summit common stock, other than defendants and certain affiliated persons and entities, between March 31, 1995 and July 3, 1996. Plaintiffs seek unspecified damages, interest, costs and expenses, attorneys' fees and extraordinary and/or injunctive relief. Discovery was completed in February 2000. Defendants have filed motions for summary judgment on certain claims. In October 1996, an additional class action was commenced in the U.S. District Court for the District of Massachusetts against the Company, its directors, certain of the Company's present or former officers and the four underwriters of the Company's October 1995 common stock offering claiming violations of Sections 11, 12(2) and 15 of the Securities Act of 1933 arising out of alleged material misstatements of fact in the Registration Statement issued in connection with the offering. By order dated August 11, 1998, the Court certified the action as a class action on behalf of all purchasers of Summit stock in the offering other than defendants and certain affiliates. The action was coordinated with the securities litigation by order of the court dated December 2, 1996. The action seeks unspecified compensatory damages, interest, costs and expenses, attorneys' fees and extraordinary and/or injunctive relief. Cross motions for summary judgment were filed in November 1999 and February 2000 with respect to certain claims. Additional motions for summary judgment may be filed as well. In December 1996, one of the Company's shareholders filed in the U.S. District Court for the District of Massachusetts a derivative action, purportedly on behalf of the Company, against the Company as nominal defendant, directors of the Company and certain present or former officers of the Company. This action was consolidated with the securities litigation by order of the Court entered July 22, 1997. The complaint alleges that the conduct of the individual defendants has exposed the Company to the liability, expense and inconvenience of the securities litigation and has harmed the Company's reputation, thereby limiting its access to capital markets. It also alleges breach of fiduciary duty, gross negligence and insider trading against individual defendants. It seeks damages, interest, costs and expenses and attorneys' fees. Patent Litigation In December 1998, the Company filed a patent infringement lawsuit in the U.S. District Court for the District of Massachusetts against Nidek, whose laser system received FDA approval in December, 1998. The suit alleges that Nidek's excimer laser system infringes certain of the Company's U.S. patents and seeks damages and injunctive relief. On January 29, 1999, a district court in Tokyo, Japan ruled against the Company in a patent infringement lawsuit which the Company initiated against Nidek in 1996. The Japanese lawsuit involved the Japanese counterpart of one of the two U.S. patents which the Company has alleged Nidek infringes in the U.S. lawsuit. The Tokyo district court's decision was upheld on appeal. In June 1999, the Company commenced a patent infringement lawsuit against George I. Bekov in the U.S. District Court for the District of Massachusetts. The suit alleges that Bekov has induced infringement of certain of the Company's patents, including by disabling card readers and maintaining systems which are not licensed by the Company, and seeks damages and injunctive relief. This case has been transferred to the District of Arizona for consolidated pre-trial proceedings. In February 1999, the Company asserted patent infringement claims against Antoine L. Garabet, M.D., Antoine L. Garabet, M.D., Inc., Abraham V. Shammas, M.D., Abraham V. Shammas, M.D., Inc., and the Laser Eye Center in a case then pending in the District of -11- 12 Arizona. The suit alleges that these parties have infringed certain of the Company's patents by using excimer laser systems manufactured by the Company without having a license to do so, and seeks damages and injunctive relief. In June 1999, the Company commenced a similar patent infringement lawsuit against Robert T. Lin, Ferzaad Moosa, and Randa M.R. Garrana in the U.S. District Court for the Central District of California. This case has been transferred to the District of Arizona, and the parties have stipulated to consolidation of these two cases. In November 1999, the parties opposing the Company in these two actions filed a counterclaim against the Company for declaratory relief and for fraud and deceit. The counterclaim seeks, among other things, judgment that the patents in suit are not infringed and, in any event, not enforceable as a result of the Company's alleged inequitable conduct, unclean hands, and patent misuse; judgment enjoining the Company from attempting to enforce the Pillar Point patents, including the patents in suit; attorneys' fees and costs; judgment that the Company has committed fraud and deceit in connection with the sale of a Summit laser system; compensatory damages on the fraud claim of at least $49, plus prejudgment interest; and punitive damages. In October 1999, the Company commenced a patent infringement lawsuit against Icon Laser Centers (U.S.), Inc. in the U.S. District Court for the District of Delaware. The suit alleges that the defendant has infringed and/or contributed to and/or induced infringement of certain of the Company's patents by using the Nidek EC-5000 Excimer Laser System without having a license to do so, and seeks damages and injunctive relief. -12- 13 PART I: FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We currently operate in one principal segment: laser vision correction which includes manufacturing, selling and servicing laser systems and related products to correct vision disorders and collecting per procedure license fees from users of our systems. On May 26, 2000, the Company entered into a definitive agreement under which Alcon Holdings Inc. ("Alcon") will acquire the Company for $19.00 per share in cash. Pursuant to the agreement Alcon began a tender offer for all the outstanding shares of the Company on June 5, 2000. On June 30, 2000, the tender offer expired. On July 3, 2000 Alcon accepted for payment all the Shares that were validly tendered and not withdrawn pursuant to the tender offer. As of July 7, 2000, a total of 41,944,555 shares, representing approximately 88.9% of the outstanding shares, had been validly tendered and not withdrawn. In May 2000 the Company committed to a formal plan to sell its mail order contact lens business operated by its wholly-owned subsidiary, Lens Express, Inc. ("Lens"). Accordingly, the results of operations for this business were classified as discontinued operations. On June 16, 2000, the Company sold Lens Express to Strategic Optical ("SAH") for $31 million cash, plus an ownership interest in SAH of approximately 10%. On April 29, 1999, we completed our acquisition of Autonomous Technologies Corporation ("Autonomous"). Results of operations discussed in this section include the effects of operations of Autonomous from the date of the acquisition. On February 22, 2000, our competitor, VISX, Inc. ("VISX") announced that it was lowering its U.S. per procedure licensing fee to $100. For obvious competitive reasons, we responded by lowering our own U.S. per procedure licensing fee. Effective February 23, 2000, we instituted a tiered pricing program for our customers. Our Apex Plus(TM)/Infinity(TM) excimer laser system will be value priced and will carry a per procedure licensing fee of $100. Prior to February 23, 2000, the list price of the licensing fee for the Apex Plus(TM)/Infinity(TM) System was $250 per procedure, with actual pricing variable based on factors including volume discounts and promotions, participation in one of our innovative bundled pricing programs which combine license fees with other products and services, and whether the customer is or was one of our clinical investigators. The emphasis(R) disc used in conjunction with the Apex Plus(TM)/Infinity(TM) System for astigmatism and farsightedness corrections will be priced at $25 in the U.S. and $75 in international markets. LADARVision(R) system procedures will be premium priced at $150 per procedure for purchased units. Customers who have acquired Apex Plus(TM)/Infinity(TM) and/or LADARVision(R) Systems utilizing a program which bundles the licensing fee with other products and services will receive adjustments to their programs to reflect the reduced pricing. As part of the new pricing structure, the Company also adopted a new retreatment policy. Prior to February 23, 2000, the Company did not charge for bona fide retreatments. Under the new program, there will be no charge for retreatments related to procedures originally performed before February 23, 2000. Retreatments related to procedures performed after that date will be charged at the same rate as other procedures. Actual pricing for procedures and retreatments may continue to vary based on factors such as volume discounts and promotions, and participation in one of our bundled pricing programs which combine license fees with other products and services. We expect that these reductions in per procedure pricing will materially reduce our revenues and revenue growth in 2000. Information about U.S. procedure volume is based on our sale of OmniCards to U.S. customers and procedures performed on the LADARVision(R) excimer laser system and includes retreatments under our new retreatment program described above. OmniCards are credit card-sized, data encrypted plastic cards that must be inserted into the Apex -13- 14 Plus(TM)/Infinity(TM) excimer laser system to enable customers to perform a procedure. OmniCards may be encoded with a single procedure or with several procedures, and they are priced based on the number of procedures they permit. We may bundle the OmniCard price with other products and services, and/or offer volume discounts to our customers that cause them to purchase an inventory of procedures in advance. As a result, our per procedure pricing can vary and procedure volume data do not necessarily reflect the actual number of procedures performed during a particular period. Procedures are tracked on the LADARVision(R) system by internal software that enables billing information to be processed via modem, and are thus likely to offer a more direct correlation to actual procedure volume in any given period. SECOND QUARTER RESULTS OF OPERATIONS Revenues: Revenues for the three months ended June 30, 2000 increased 27.4% to $20.0 million from $ 15.7 million for the three months ended June 30, 1999. Revenues from system sales increased 145.8% in the second quarter of 2000 compared to the same period a year ago. We placed 41 laser systems in the second quarter of 2000 compared to 25 laser systems in the second quarter of 1999. Revenues from license fees, service and other decreased 18.9% in the second quarter of 2000 compared to the second quarter of 1999. On February 23, 2000, we reduced our per procedure licensing fee to $100 on the Apex Plus(TM)/Infinity(TM) system and $150 on the LADARVision(R) system. In connection with the price reduction, we introduced a new program for retreatments. This program provides that the new pricing will apply to retreatments if the original procedure was after February 23, 2000, and that free retreatments will continue to be provided for cases originally performed before that date. Our second quarter procedure volume, exclusive of OmniCard shipments after February 23, 2000 for retreatments under our new retreatment program, increased 9% over the first quarter of 2000 and 49% over the second quarter of 1999. Cost of Revenues: Cost of revenues as a percentage of revenues increased to 93.9% in the second quarter of 2000 from 66.7% in the second quarter of 1999. This increase was primarily attributable to the increase in the infrastruture of the customer service organization partially offset by the favorable impact from lower cost of revenues associated with license fee revenues. Cost of revenues in the second quarter of 2000 include a $1.5 million reserve for the upgrade of installed LADARVision(R) system to the new LADARVision(R) 4000 system and a $3.4 million write-down against the Company's Apex Plus(TM) and Infinity(TM) system inventory to its net realizable value due to a reduction in future requirements Operating Expenses: Selling, general and administrative expenses as a percentage of revenues were 60.4% in the second quarter of 2000 and 46.5% in the second quarter of 1999. Selling, general and administrative expenses in the second quarter of 2000 were $12.1 million compared to $7.3 million in the second quarter of 1999, a 65.0% increase. The expenses in the second quarter of 2000 reflect the effects of the Autonomous acquisition, increased sales and marketing costs to grow laser vision correction procedure volume and increased legal fees. The effects of the Autonomous acquisition includes Autonomous' operations and amortization of goodwill and other intangible assets. Research, development and regulatory expenses in the second quarter of 2000 increased to $4.7 million from $3.8 million in the second quarter of 1999. The increased spending is primarily related to the development of our CustomCornea(TM) wavefront measurement device and engineering improvements on our LADARVision(R) and Infinity laser systems and SKBM microkeratome. Other Income (Expense): Interest income was $.9 million in the second quarter of 2000 and $.6 million in the second quarter of 1999. Interest expense was $18 thousand in the second quarter of 2000 compared to interest income of $80 thousand in the second quarter of 1999. Net Income (Loss): The loss from continuing operations for the second quarter of 2000 was $14.8 million, or $0.31 per diluted share compared to a loss from continuing operations of $25.4 million, or $0.65 per diluted share for second quarter of 1999. Income from discontinued operations was $1.1 million, or $0.02 per diluted share in the -14- 15 second quarter of 2000 compared to $1.5 million in the second quarter of 1999, or $0.04 per diluted share. The net income for the second quarter of 2000 was $15.1 million, or $0.32 per diluted share compared to net loss of $23.9 million, or $0.61 per diluted share, for the second quarter of 1999. Income Taxes: The provision for income taxes in the second quarter of 2000 was $.3 million and $92 thousand for the second quarter of 1999. We have continued to provide a 100% valuation allowance against our net deferred tax asset as of June 30, 2000. FIRST HALF RESULTS OF OPERATIONS Revenues: Revenues for the six months ended June 30, 2000 increased 39.2% to $40.7 million from $ 29.2 million for the six months ended June 30, 1999. Revenues from system sales increased 156.7% in the first half of 2000 compared to the same period a year ago. Revenues from license fees, service and other decreased 3.0% in the second quarter of 2000 compared to the second quarter of 1999. Cost of Revenues: Cost of revenues as a percentage of revenues increased to 72.4% in the second half of 2000 from 56.4% in the second half of 1999. This increase was primarily attributable to the increase in the infrastruture of the customer service organization partially offset by the favorable impact from lower cost of revenues associated with license fee revenues. Cost of revenues in the second half of 2000 includes a $1.5 million reserve for the upgrade of installed LADARVision(R) system to the new LADARVision(R) 4000 system and a $3.4 million write-down against the Company's Apex Plus(TM) and Infinity(TM) system inventory to its net realizable value due to a reduction in future requirements. Operating Expenses: Selling, general and administrative expenses as a percentage of revenues were 52.3% in the second half of 2000 and 41.2% in the second half of 1999. Selling, general and administrative expenses in the first half of 2000 were $21.4 million compared to $12.0 million in the first half of 1999, a 78.3% increase. The expenses in the first half of 2000 reflect the effects of the Autonomous acquisition, increased sales and marketing costs to grow laser vision correction procedure volume and increased legal fees. Research, development and regulatory expenses in the first half of 2000 increased to $8.9 million from $5.9 million in the first half of 1999. The increased spending is primarily related to the development of our CustomCornea(TM) wavefront measurement device and engineering improvements on our LADARVision(R) and Infinity laser systems and SKBM microkeratome. On March 28, 2000, our Board of Directors voted to approve a restructuring to fully integrate our laser vision correction businesses. In the first quarter of 2000, we recorded a pretax restructuring charge of $3.0 million for involuntary employee severance payments for approximately 20 personnel. Of this $3.0 million, $2.7 million relates to severance payments and related benefits in selling, general and administrative departments. The annualized benefit of the restructuring is expected to be $3.0 million. In a separate matter, we also recorded a one-time charge of $8.1 million to terminate a strategic alliance agreement with Ciba Vision Group Management, Inc. ("Ciba") which was assumed as part of last year's acquisition of Autonomous. The payment was made late in the second quarter of 2000. After weighing the impact of recent changes that have taken place in the laser vision correction industry, the Board of Directors decided to accelerate the integration of the Summit and Autonomous operations. This process began in January when we consolidated our sales operation into our facility in Cork, Ireland in 1999. Under the restructuring, we have been realigned into three operational groups: (1) the commercial organization encompassing sales, marketing, after sales support and clinical education; (2) the operations organization comprised of research and development, quality, regulatory, clinical affairs and operations; and (3) the administrative organization encompassing finance, human resources, information technology, corporate communications and investor relations. -15- 16 Other Income (Expense): Interest income was $1.9 million in the first half of 2000 and $1.6 million in the first half of 1999. Interest income was $173 thousand in the first half of 2000 compared to $186 thousand in the first half of 1999. Net Income (Loss): Excluding one-time charges related to the restructuring, the termination of the strategic alliance with Ciba, the inventory write-down and the acquired in-process research & development, the loss from continuing operations for the first half of 2000 was $13.8 million, or $0.29 per diluted share compared to loss from continuing operations of $1.4 million, or $0.04 per diluted share for the first half of 1999. Including these one-time charges, the loss from continuing operations for the first half of 2000 was $28.6 million, or $0.61 per diluted share compared to $24.0 million or $.68 per diluted share in the first half of 1999. Income from discontinued operations was $2.5 million, or $0.05 per diluted share in the first half of 2000 compared to $2.4 million in the first half of 1999, or $0.07 per diluted share. The net income for the first half of 2000 was $2.8 million, or $0.06 per diluted share compared to net loss of $21.5 million, or $0.61 per diluted share, for the first half of 1999. Income Taxes: The provision for income taxes in the first half of 2000 was $.3 million versus $.2 million in the first half of 1999. We have continued to provide a 100% valuation allowance against our net deferred tax asset as of June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Our liquidity requirements have been met through external debt and equity financing. As of June 30, 2000, our cash and cash equivalent balances and short and long-term investments decreased to $89.3 million from $106.0 million as of December 31, 1999. Shares of LCA Vision Inc. common stock included in long-term investments as of June 30, 2000 and December 31, 1999 were valued at $16.1 million and $30.9 million, respectively. Working capital increased to $105.1 million as of June 30, 2000 from $98.7 million as of December 31, 1999. In the first half of 2000, net cash used by operating activities was $22.7 million compared to net cash provided by operating activities of $116 thousand in the first half of 1999. In the first half of 2000, net cash used by investing activities of $5.2 million resulted from the sale of short-term investments partially offset by capital expenditures of $8.1 million. In the first half of 1999, net cash provided by investing activities of $16.9 million resulted primarily from a net decrease in short and long-term investments of $26.3 million offset by capital expenditures of $3.1 million and deferred acquisition costs of $46.3 million. In the first half of 2000, net cash provided by financing activities of $29.1 million was attributable to the gain recognized on Lens Express and proceeds of $.6 million from option exercises. In the first half of 1999, net cash used by financing activities of $2.7 million was primarily attributable to repayments of long-term debt of $3.8 million offset by proceeds of $1.1 million in stock option exercises. We are currently discussing with our existing and other institutions a new line of credit of approximately $20 million to $25 million. We believe that our existing corporate resources are adequate for at least the next twelve months to meet working capital needs and to fund corporate requirements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We, in the normal course of doing business, are exposed to the risks associated with fluctuations in the market value of our available-for-sale investment securities, changes in foreign currency exchange rates and changes in interest rates. Our market risk sensitive instruments are entered into for other than trading purposes. Our available-for-sale investment securities consist of debt securities, primarily corporate bonds and mortgage-backed securities, and 6.6 million shares of LCA Vision Inc. common stock. The fair value of these investment securities at June 30, 2000 was $16.1 million, which includes LCA Vision Inc. common stock with a corresponding -16- 17 accumulated unrealized loss of $1.7 million. Substantially all of the unrealized gain relates to the LCA Vision Inc. common stock, which is subject to much more market risk than our debt securities and which has been more volatile than most market indices. A 10 percent change in the quoted market price of one share of LCA Vision Inc. common stock as of March 31, 2000 would have a pre-tax impact of approximately $3.4 million on the fair value of our investment in LCA Vision Inc. common stock. This impact would be recognized net of tax in our statement of comprehensive income. At June 30, 2000, our debt securities consist of highly rated debt instruments. Our investment goal surrounding debt securities is to meet liquidity needs and to preserve the principal. In November 1999, we issued a $3.0 million secured promissory note. The note bears interest at 10% per annum and requires a fixed monthly payment of $97 thousand over three years. The note is collateralized by certain laser equipment leased to customers and payments due to us under these leases. Changes in interest rates may affect the fair market value of this fixed rate debt, however, they will not affect our cash flow or earnings. NEW ACCOUNTING STANDARDS In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain views of the SEC staff on applying generally accepted accounting principles to revenue recognition in financial statements. We have not completed our assessment of the consolidated financial statement impact of this bulletin. This bulletin is effective beginning the fourth quarter of fiscal 2000. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It requires that changes in the derivative's fair value be recognized currently in the earnings unless specific hedge accounting criteria are met. A company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is currently effective for fiscal years beginning after June 15, 2000. We will adopt SFAS 133 in the first quarter of fiscal 2001. We are currently evaluating this statement, but do not expect the adoption of SFAS 133 to have a material effect on our consolidated financial position or results of operations. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs that are not able to differentiate between the year 1900 and the year 2000 because they were written using two digits instead of four digits to define the applicable year. Currently, we are not aware of any Year 2000 issues that have had a significant interruption in service or delays in business operations. A review of our internal computer systems and software packages was performed to identify the systems and software that could be affected by this issue. Installation of and testing of Year 2000 compliant hardware and software was completed. The costs related to these upgrades were not material and have been incurred in the normal course of operations. Our products, which were Year 2000 compliant, have not experienced any Year 2000 related problems. We are not aware of any of our supplier's inability to remediate their Year 2000 issues. However, not all vendors have been used at this date and future problems could develop. We will continue to monitor our internal and external sources for delayed complications or disruptions arising from the Year 2000 issue. In the event of unforeseen or unanticipated issues related to the Year 2000, these issues may have material adverse effect on our results of operations, financial position or cash flow. EURO CONVERSION -17- 18 On January 1, 1999, eleven of fifteen member countries of the European Union adopted the conversion of their national currencies to the European Union's common currency ("Euro"). A permanent fixed conversion rate between the existing national currencies of these countries and the Euro was established on that date. The Euro may be used in business transactions; however, national currencies will still remain legal tender through June 30, 2002. We do not believe that adoption of the Euro will have a material adverse effect on our results of operations, financial position or cash flow. CAUTIONARY STATEMENTS AND RISK FACTORS AFFECTING FUTURE OPERATING RESULTS Cautionary Statement under "Safe harbor" Provisions of the Private Securities Litigation Reform Act of 1995: Statements made in this filing contain information about the Company's future business prospects. These statements may be considered "forward looking". These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward looking statements. Among these risks and uncertainties are: competition from other manufacturers and vision correction technologies, delays in obtaining regulatory approvals, challenges to patents owned and licensed by the Company affecting per procedure revenues, adverse litigation results, difficulties in commercializing the LADARVision system and dependence on sole source suppliers. For additional information and risks associated with the Company's business prospects and future operating results, please refer to the Company's public filings with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to quantitative and qualitative disclosure about market risk is included in Item 2 of Part I of this Report, entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." -18- 19 PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS a) See Note 5 to Notes to Condensed Consolidated Financial Statements above (Part I, Item 1 of this filing), for description of pending material litigation b) Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The following matters were submitted to a vote of the shareholders at the Company's annual meeting held on May 19, 2000: PROPOSAL 1: The shareholders re-elected Dr. C. Glen Bradley and Richard F. Miller to the Board of Directors, each for a three-year term with the following votes:

PROPOSAL 2: The shareholders approved the proposal to reserve an additional two million shares of common stock for issuance under the Company's common stock for issuance under the Company's 1997 Stock Option Plan. PROPOSAL 3: The shareholders approved the proposal to change the name of the Company to Summit Autonomous Inc. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K a.) Exhibits: 27 Financial Data Schedule (For EDGAR Filing Purposes Only) b.) Reports of Form 8-K: On May 30, 2000, the Company filed a report on Form 8-K related to the Board of Directors of Summit Autonomous Inc. who adopted an amendment to the Company's Rights Agreement between the Company and Fleet National Bank. On March 28, 2000 the Board of Directors of Summit Autonomous Inc. had declared a dividend of one right to purchase one one-thousandth (1/1000th) of a share of Series A preferred stock, par value $.01 per share, of the Company for each outstanding share of common stock, $.01 par value per share, of the Company. The dividend was made March 29, 2000 to shareholders of record at the close of business on such date. On May 30, 2000 the Company filed a report on Form 8-K related to Summit Autonomous Inc., Alcon Holdings Inc. and Alcon Acquisition Corp.,a wholly-owned subsidiary of the Alcon Holdings, entered into an Agreement and Plan of Merger. In connection with the Agreement, Acquisition Holdings commenced a tender offer to purchase any and all outstanding shares of common stock, $0.01 par value per share of the Summit Autonomous, at a price of $19.00 per share, net to the seller in cash, without interest thereon, and upon such terms and conditions as will be set forth in an Offer to Purchase and related Letter of Transmittal. On June 30, 2000 the Company filed a report on Form 8-K related to Summit Autonomous Inc. who entered into a previously announced Asset Purchase Agreement by and between the Summit Autonomous, Lens Express, Inc., and Strategic Optical Holdings, Inc. for the sale of substantially all of the -19- 20 assets of the Seller to the Buyer (the "Agreement"). On June 16, 2000, the Company completed the transaction and sold substantially all of the assets of Lens Express, Inc. -20- 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT AUTONOMOUS INC. Date: August 21, 2000 By: /s/ Robert J. Palmisano ----------------------------- Robert J. Palmisano Chief Executive Officer Date: August 21, 2000 By: /s/ Bernard Patriacca ----------------------------- Bernard Patriacca Vice President and Controller -21-

SUMMIT AUTONOMOUS INC 10-Q