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
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
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 - ------------------------------------ /1/ Windows is a registered trademark of Microsoft Corporation
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
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.
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:
PHASE III MYOPIA - U.S. RESULTS UNCORRECTED VISUAL ACUITY
% OF EYES INTERVAL ---------------------------- 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 -------------------- 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
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
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.
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
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.
ITEM 3.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None submitted in the fourth calendar and fiscal quarter of 1997.
PART II
ITEM 5.
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.
ITEM 6.
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
BALANCE SHEET DATA
ITEM 7.
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.
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
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.
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
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
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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
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 through hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10.
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.
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.
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.
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
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
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.
PART IV
ITEM 14.
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:
DESCRIPTION PAGE NO. ----------- -------- Report of Independent Certified Public Accountants........... Balance Sheets - - December 31, 1997 and 1996................ Statements of Operations..................................... Statements of Stockholders' Equity for the Period from Inception (July 23, 1985) to December 31 1997................ Statements of Cash Flows..................................... Notes to Financial Statements................................
2. Financial Statement Schedules: Not required or the information required to be included therein is reflected in the Financial Statements.
3. Exhibits
(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
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.
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.
Autonomous Technologies Corporation
=============================================================================== DESCRIPTION Page No. - ------------------------------------------------------------------------------- Report of Independent Certified Public Accountants - ------------------------------------------------------------------------------- Balance Sheets - - December 31, 1997 and 1996 - ------------------------------------------------------------------------------- Statements of Operations - ------------------------------------------------------------------------------- Statements of Stockholders' Equity for the Period from Inception (July 23, 1985) to December 31 1997 - ------------------------------------------------------------------------------- Statements of Cash Flows - ------------------------------------------------------------------------------- Notes to Financial Statements - ------------------------------------------------------------------------------- Consent of Arthur Andersen LLP ===============================================================================
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)
AUTONOMOUS TECHNOLOGIES CORPORATION ----------------------------------- (A Development Stage Company)
BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996 --------------------------------------------
The accompanying notes are an integral part of these balance sheets.
AUTONOMOUS TECHNOLOGIES CORPORATION ----------------------------------- (A Development Stage Company)
STATEMENTS OF OPERATIONS ------------------------
The accompanying notes are an integral part of these statements.
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)
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)
The accompanying notes are an integral part of these statements.
AUTONOMOUS TECHNOLOGIES CORPORATION ----------------------------------- (A Development Stage Company)
STATEMENTS OF CASH FLOWS ------------------------
AUTONOMOUS TECHNOLOGIES CORPORATION ----------------------------------- (A Development Stage Company)
STATEMENTS OF CASH FLOWS ------------------------ (continued)
The accompanying notes are an integral part of these statements
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.
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.
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
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.
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:
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
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:
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,
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
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:
The following table summarizes information about stock options outstanding at December 31, 1997:
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:
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:
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:
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:
The Company's deferred tax accounts consisted of the following as of December 31, 1997 and 1996:
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
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.
* - 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.
INDEX TO EXHIBITS