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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-19671
LASERSIGHT INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 65-0273162
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(State of incorporation) (I.R.S. Employer
Identification No.)
3300 University Blvd, Suite 140, Winter Park, Florida 32792
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 678-9900
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Preferred Share Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sale price on March 28, 2001 was
approximately $43,564,156. Shares of common stock held by each officer and
director and by each person who has voting power of 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of common stock outstanding as of March 29, 2001:
23,562,814.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be included in Part III is incorporated
herein by reference to the Company's definitive proxy materials to be filed with
the Securities and Exchange Commission on or before April 30, 2001.
LASERSIGHT INCORPORATED
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relations and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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The information in this Annual Report on Form 10-K contains forward
looking-statements, as indicated by words such as "anticipates," "expects,"
"believes," "estimates," "intends," "projects," and "likely," by statements of
the Company's plans, intentions and objectives, or by any statements as to
future economic performance. Forward-looking statements involve risks and
uncertainties that could cause the Company's actual results to differ materially
from those described in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in Item 7 under the caption "Risk Factors and Uncertainties" as well
as those discussed elsewhere in this Report. All references to "LaserSight(R)"
"we," "our" and "us" in this Report refer to LaserSight Incorporated and its
subsidiaries unless the context otherwise requires.
PART I
ITEM 1. BUSINESS
OVERVIEW
We develop, manufacture and market quality product technologies for
laser refractive surgery and other areas of vision correction. Our products
include precision beam microspot scanning excimer laser systems used to perform
procedures that correct common refractive vision disorders such as
nearsightedness (myopia), farsightedness (hyperopia) and astigmatism, as well as
keratome systems, keratome blades, diagnostic and other products for use in
refractive vision correction procedures. We believe that our precision beam
microspot scanning lasers have significant technological advantages and produce
smoother and more precise ablation areas than older, broad-beam laser systems
and other scanning systems offered by many of our competitors. We also believe
that the breadth of our product offering provides us with a competitive
advantage relative to many other excimer laser system manufacturers because it
provides us with a platform to become a single-source supplier of refractive
vision correction products to refractive surgeons. Moreover, our broad product
offering affords us the opportunity to participate in the anticipated growth in
refractive laser vision correction procedure volume by collecting per procedure
fees and by selling our single-use keratome products and keratome blades.
We have over seven years of experience in the manufacture, sale and
service of precision beam microspot scanning laser systems for refractive vision
correction procedures. Since 1994, we have sold our scanning laser systems
commercially in over 30 countries worldwide. As a result, we believe that our
installed base of over 350 scanning laser systems, including approximately 180
of our most advanced laser system, the LaserScan LSX(R), is among the largest
installed bases of scanning laser systems in the industry. In November 1999, the
FDA approved our LaserScan LSX scanning laser system for commercial sale in the
U.S. for the treatment of nearsightedness of up to 6.0 diopters using a pulse
repetition rate of 100 Hz. Subsequently the FDA approved our PMA Supplement to
increase the pulse repetition rate of the LaserScan LSX to 200 Hz, which we
believe is the fastest pulse repetition rate available in our industry.
Currently, all LSX systems delivered into the U.S. and international markets
operate at the 200 Hz rate. The labeling stipulations of our FDA approval allows
for the treatment of nearsightedness up to 10.0 diopters at the surgeon's
discretion and under specific labeling warnings. We currently have pending with
the FDA PMA Supplement applications seeking approval of the use of our laser
system for the laser in-situ keratomileusis (LASIK) treatment of
nearsightedness, nearsightedness with astigmatism, farsightedness,
farsightedness with astigmatism and mixed astigmatism.
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We are currently in litigation with one of our major competitors
regarding intellectual property claims. We have a broad intellectual property
portfolio, and believe that we own or license all intellectual property
necessary for commercialization of our products. See Item 3 ("Legal
Proceedings") below.
Our family of products for individualized refractive treatments (often
referred to as custom ablations) includes the AstraMax(TM) diagnostic work
station designed to provide precise diagnostic measurements of the eye and our
new AstraPro(TM) surgical planning software that utilizes advanced levels of
diagnostic measurements for the planning of custom ablation treatments. The
AstraMax integrated diagnostic workstation was introduced in October 2000 at the
Annual Meeting of the American Academy of Ophthalmology and we anticipate a
commercial launch for this product during the fourth quarter of 2001.
International clinical testing of the AstraPro planning software has already
begun, and we plan to begin our U.S. IDE trials in this area during 2001.
Our MicroShape(R) family of keratome products includes our UniShaper(R)
single-use keratome, UltraShaper(TM) durable keratome, a control console that
may be used interchangeably with our single-use and durable keratomes, and our
UltraEdge(R) keratome blades. Our MicroShape family of keratome products work
with the LaserScan LSX and also with other laser systems used to perform LASIK.
We began commercial shipment of keratome blades in July 1999 and of our
single-use keratomes and control consoles in December 1999. We anticipate that
sales of our UniShaper single-use keratome and our UltraEdge keratome blades
will provide us with the opportunity to participate in the expected growth in
refractive laser vision correction procedure volume by generating recurring
revenue streams, regardless of which laser system a refractive surgeon uses. We
intend to aggressively develop and market other refractive vision correction
products in the future, including our UltraShaper durable keratome product that
is FDA 510(k) cleared, and that we expect to commercially launch in the second
quarter of 2001. We believe the UltraShaper will compare favorably to existing
keratome products in the marketplace due to its relative ease of assembly and
consistency of performance.
OPERATING SEGMENTS. LaserSight Incorporated and its subsidiaries
(collectively, "LaserSight") operate in three major operating segments:
refractive products, patent services and health care services. Our principal
wholly-owned subsidiaries include: LaserSight Technologies, Inc. ("LaserSight
Technologies"), LaserSight Patents, Inc. ("LaserSight Patents"), and MRF, Inc.
("The Farris Group" or "TFG").
Our refractive products segment, that primarily includes the laser
vision correction products and services of LaserSight Technologies, develops,
manufactures and markets ophthalmic lasers with a galvanometric scanning system
for use in performing refractive surgery. The LaserScan LSX uses a 0.8
millimeter scanning laser beam to ablate microscopic layers of corneal tissue to
reshape the cornea and to correct the eye's point of focus in persons with
myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. Our patent
services segment consists primarily of LaserSight Patents, that owns and
licenses various patents related to the use of excimer lasers to ablate
biological tissue. The health care services segment consists of TFG. TFG
provides health care and vision care consulting services to hospitals, managed
care companies and physicians. For information regarding our export sales and
operating revenues, operating profit (loss) and identifiable assets by industry
segment, see Note 14 of the Notes to Consolidated Financial Statements.
ORGANIZATION AND HISTORY. LaserSight was incorporated in Delaware in
1987, but was inactive until 1991. In April 1993, we acquired LaserSight Centers
Incorporated in a stock-for-stock exchange with additional shares issued in
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March 1997 pursuant to an amended purchase agreement. In February 1994, we
acquired TFG. In July 1994, LaserSight was reorganized as a holding company. In
October 1995, we acquired MEC Health Care, Inc. (MEC). In July 1996, our LSI
Acquisition, Inc. (LSIA) subsidiary acquired the assets of the Northern New
Jersey Eye Institute, P.A. On December 30, 1997, we sold MEC and LSIA in
connection with a transaction that was effective as of December 1, 1997. Late in
2000, we abandoned the LaserSight Centers mobile laser strategy due to industry
conditions and our increased focus on development and commercialization of our
refractive products. Our principal offices and mailing address are 3300
University Boulevard, Suite 140, Winter Park, Florida 32792, and our telephone
number is (407) 678-9900 and our address on the world wide web is www.lase.com.
INDUSTRY OVERVIEW
REFRACTIVE VISION CORRECTION
Laser vision correction is a surgical procedure for correcting vision
disorders such as nearsightedness, farsightedness and astigmatism using an
excimer laser. This procedure uses ultraviolet laser energy to ablate, or
remove, tissue from the cornea and sculpt the cornea into a predetermined shape.
Because the excimer laser is a cold laser, it is possible to ablate precise
amounts of corneal tissue without causing thermal damage to surrounding tissue.
The goal of laser vision correction is to achieve patient vision levels that
eliminate or significantly reduce a person's reliance on corrective eyewear. The
first laser vision correction procedure on a human eye was conducted in 1985 and
the first human eye was treated with the excimer laser in the U.S. in 1988.
There are currently two principal methods for performing laser vision
correction with excimer laser systems: photorefractive keratectomy, or PRK, and
laser in-situ keratomileusis, or LASIK. According to industry sources,
approximately 95% of the refractive vision correction procedures performed in
the U.S. in 2000 were LASIK procedures. In both PRK and LASIK procedures, a
refractive surgeon determines the exact refractive correction required to be
made to the cornea, typically using the same examination used to prescribe
eyeglasses and contact lenses. Required corrections are then programmed into the
excimer laser system's computer. During the procedure, the excimer laser system
emits laser pulses, each of which lasts several billionths of a second, to
remove submicron layers of corneal tissue. While the length of laser treatments
range from 15 to 60 seconds, cumulative exposure to the laser light during each
procedure is less than one second. The entire procedure, including patient
preparation and post-operative dressing, generally lasts no longer than thirty
minutes.
PHOTOREFRACTIVE KERATECTOMY (PRK)
In PRK, the refractive surgeon prepares the eye by gently removing the
surface layer of the cornea called the epithelium. The surgeon then applies the
excimer laser beam, reshaping the curvature of the cornea. A bandage contact
lens is then placed on the eye to protect it. Following PRK, a patient typically
experiences blurred vision and discomfort until the epithelium heals. It
generally takes one month, but may take up to six months, for the full benefit
of PRK to be realized. PRK has been used commercially since 1988.
LASER IN-SITU KERATOMILEUSIS (LASIK)
LASIK was commercially adopted internationally in 1994 and in the U.S.
in 1996. Immediately prior to a LASIK procedure, the refractive surgeon uses a
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surgical instrument called a keratome to create a thin, hinged flap of corneal
tissue. Patients do not feel or see the cutting of the corneal flap, which takes
only a few seconds. The flap is flipped back, the laser beam is directed to the
exposed corneal surface, the flap is placed back and the flap and interface are
rinsed. Once the procedure is completed, surgeons generally wait two to three
minutes to ensure the corneal flap has fully re-adhered. At this point, patients
can blink normally and the corneal flap remains secured in position by the
natural suction within the cornea. Since the surface layer of the cornea remains
intact during LASIK, no bandage contact lens is required and the patient
experiences virtually no discomfort. The LASIK procedure often results in a
higher degree of patient satisfaction due to an immediate improvement in visual
acuity and generally involves less post-operative discomfort than PRK.
REFRACTIVE VISION CORRECTION MARKET
The worldwide market for products and services to correct common
refractive vision disorders such as nearsightedness, farsightedness and
astigmatism is large and growing. Industry sources estimate that 50% of the U.S.
population, or approximately 140 million people, presently wear eyeglasses or
contact lenses. There are approximately 14,000 practicing ophthalmologists in
the U.S., of whom approximately 4,000 reportedly perform refractive laser vision
correction procedures on a regular basis.
Laser vision correction is a fast growing segment of the vision
correction market. Total laser refractive procedure volume in the U.S. has
increased rapidly each year since 1996 to an estimated 1,400,000 procedures in
2000 and a projected 1,800,000 procedures in 2001. A procedure refers to laser
treatment on a single eye, and most patients have procedures performed on both
eyes during a single visit to a refractive surgeon. Laser vision correction's
growth in the U.S. is also reflected in the expansion of excimer laser
installations and in the rise in average annual procedure volume per laser.
Many, but not all, manufacturers of excimer laser systems seek to share
in the anticipated growth in procedure volume by receiving a fee for each
procedure performed by a refractive surgeon using laser systems manufactured by
them. The per procedure fees charged by these manufacturers vary and have been
significantly reduced during 2000 due to competitive pressures and changing
market conditions. See "Business-Competition."
DEVELOPMENT OF EXCIMER LASER SYSTEM AND KERATOME TECHNOLOGY
EXCIMER LASER SYSTEMS
The excimer laser systems utilized for laser vision correction have
evolved over time with improvements in laser and beam delivery technology. Until
recently, broad beam laser systems, that were initially developed during the
late 1980's, were the only systems approved by the FDA for commercial use in the
U.S. As a result, broad beam laser systems reportedly represent about 75% of the
installed laser systems in the U.S., down from over 90% at the end of 1999. This
downward trend appears to be continuing as the newer generation of narrow beam
scanning laser systems obtain the broader range of treatment approvals currently
held by the older generation systems. Broad beam laser systems are characterized
by the use of a relatively large, fixed laser beam of six to eight millimeters
in diameter to deliver relatively high amounts of laser energy (100 - 200 mj) at
low laser pulse repetition rates (generally 10 Hz) to the corneal surface.
Because of the relatively large diameter of the laser beam, these systems
require a number of mechanical elements to condition, size, shape and deliver
the beam profiles necessary to produce the required ablation. These mechanical
means of beam shaping have limited the flexibility of broad beam systems and
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require hardware modifications in order to adapt to more complex applications
such as custom ablation.
Broad beam laser systems operate by delivering a consistent laser beam
across the entire vision field of the cornea. In order to reduce the likelihood
of possible adverse effects resulting from constant exposure, the beam width is
reduced incrementally, or in steps, during the course of the procedure. The use
of broad beam laser systems can result in a corneal ablation profile
characterized by ridges on the corneal surface as a result of the stepping
action of the laser's mechanical elements, and may also result in central
islands, an irregularity formed on the corneal bed resulting from the fixed
nature of the laser beam. Additionally, the relatively high laser energy of
broad beam systems can lead to corneal damage from acoustic shock and the
possibility of retinal detachment in those patients needing higher levels of
correction. Glare, halo when looking at lights and other bright objects, and
reduction in night vision and contrast sensitivity have also been associated
with the use of broad beam systems.
Improvements in excimer laser technology during the early 1990's have
made it possible to develop refractive excimer laser systems that have
significantly narrower laser beams (less than one millimeter in diameter) that
use reduced amounts of laser energy (10 mj) at higher pulse repetition rates (up
to 200 Hz) to achieve corneal ablations. LaserSight was the leader in the
development of precision microspot beam technology and the first company to
commercialize it. This new generation of narrow beam scanning excimer laser
systems incorporated scanning mirrors and computer control to shape the ablation
profile, making it unnecessary to utilize mechanical elements to size and shape
the laser beam to attain the desired results. Techniques incorporated into
scanning laser technology such as purposeful overlapping of laser pulses and
random scanning patterns can lead to overall improved clinical results as
evidenced by smoother ablations, the elimination of corneal ridges and central
islands, and the reduction in the incidence of glare, halos, loss or reduction
of night vision and contrast sensitivity. Narrow beam scanning excimer laser
systems are currently the most flexible laser vision correction platforms
available as they can be adapted to expansions in treatment modalities and the
incorporation of new technologies such as higher laser pulse repetition rate,
active eye tracking and custom ablation through software and minor hardware
upgrades.
KERATOMES
Keratomes used to cut the thin corneal flap during the LASIK procedure
are similar in design to those used to perform earlier non-laser surgical
refractive techniques such as automated lamellar keratoplasty (ALK). The
Automated Corneal Shaper (ACS), developed by Luis A. Ruiz, M.D. and Sergio
Lenchig, is an example of an ALK keratome that is utilized extensively in
association with LASIK procedures without modification from its original design.
The ACS durable keratome, manufactured and marketed by Bausch & Lomb
pursuant to a license agreement, was the leading keratome during the early and
mid-1990's at a time when many refractive surgeons learned to perform LASIK.
Since we licensed the rights to commercially market keratomes based on the same
technology in 1997, Bausch & Lomb has discontinued the ACS, and has introduced
an alternative durable keratome product that requires a modified surgical
technique. We believe that a significant number of refractive surgeons prefer
the surgical technique associated with the ACS.
The introduction of our MicroShape family of keratome products provides
refractive surgeons with the opportunity to not only utilize keratomes based on
the original design of the ACS, but to also incorporate a number of significant
improvements intended to make the performance of the instruments safer and more
consistent. Working with refractive surgeons we were able to develop an advanced
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design for our UltraShaper durable keratome incorporating advancements that
address a number of the issues encountered with current keratome designs. Ease
of assembly after cleaning has been improved by utilizing a three-piece
construction. Drive gears have been recessed to minimize the possibility of lid
or lash entrapment, a constant speed drive motor is utilized and the applanation
plate has been integrated into the keratome head. The blade angle is 25 degrees
for a more predictable flap thickness and cut. The open design of the keratome
head allows the surgeon to observe the creation of the flap. A unique LaserSight
patent-pending blade handling and insertion system allows the surgeon to inspect
the blade and insert it into the keratome head without the blade ever being
touched by hands or instruments. This handling system also ensures a more
positive blade location and alignment. In addition, the UltraShaper can
accommodate a surgeon's preference by creating nasal and temporal flaps.
The MicroShape control console utilized with the UltraShaper
incorporates operating and safety features not available with prior generation
systems. A high and low suction level have been incorporated into the console,
allowing use of a lower suction setting during fixation of the keratome on to
the globe of the eye. A "low suction" warning prevents the keratome from
advancing when the console detects suction below a preset limit.
Our UniShaper single-use keratome provides the refractive surgeon with
a sterilized, fully assembled and tested keratome solution that eliminates the
cleaning and maintenance associated with durable keratomes. We believe our
UltraEdge blades offer refractive surgeons the ability to use the only blades
currently offered in the market that are precision ground from surgical grade
stainless steel and cleaned and sterilized utilizing a proprietary process.
LASERSIGHT RECENT DEVELOPMENTS
Our LaserScan LSX excimer laser system is based on patented precision
beam microspot scanning technology rather than broad beam technology, that until
recently was the only commercially available excimer laser vision correction
technology in the U.S. We believe we are well-positioned to become a leading
provider of excimer laser systems, diagnostic products, disposable and durable
keratomes and blades and other related products as a result of our technology
and the following recent developments:
o REISSUANCE OF SCANNING PATENT. In February 2001, the United
States Patent and Trademark Office issued a Notice of Allowance,
thereby completing its examination of LaserSight's reissue
application for our U.S. Patent No. 5,520,679, ("'679 patent").
After a more than 2 1/2 year review of the reissue application,
including detailed analysis of a number of public protests filed
by a third party, the Patent and Trademark Office has confirmed
our broad patent rights to precision beam microspot scanning laser
refractive surgery and issued LaserSight 68 additional patent
claims. Prior to the reissue, the original '679 patent included
one independent claim and 23 total claims, whereas the reissue
application adds nine new independent claims, and a total of 68
additional claims to better encompass the breadth of technology to
which we are entitled. The 23 original claims remain essentially
unchanged. The reissue of the `679 patent should allow us to
protect the uniqueness of our LaserScan LSX's precision beam
microspot scanning technology since the fundamental teachings of
the original `679 patent encompass a refractive laser system
utilizing an excimer laser with a low fluence and high repetition
rate that ablates corneal tissue using small pulses delivered to
the corneal surface in an overlapping pattern. We believe that
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many of the other laser manufacturers will have to respect the
intellectual property rights granted to us through the reissue of
the `679 patent.
o SALE OF BLUM PATENT. In March 2001, we completed the sale of
U.S. Patent No. 4,784,135 ("Blum Patent") for a cash payment of
$6.5 million. We retained a non-exclusive royalty free license
under the patent, that relates to the use of ultraviolet light for
the removal of organic tissue. The book value of the patent at
December 31, 2000, was approximately $2.4 million.
o CREDIT FACILITY. In March 2001, we entered into a loan agreement
with Heller Healthcare Finance, Inc. ("Heller") for a $3.0 million
term loan at an annual interest rate of prime plus 2.5% and a
revolving loan in an amount up to $10.0 million with availability
based on 85% of eligible receivables at an annual interest rate of
prime plus 1.25%. In connection with the loan, we paid a
commitment fee of $130,000 and issued warrants to purchase 243,750
shares of common stock at an exercise price per share of $3.15.
Borrowings under the loan agreement are secured by substantially
all of the Company's assets. The loan agreement requires the
Company to meet certain covenants, including the maintenance of a
minimum level of net worth.
o COMMERCIAL LAUNCH OF OUR LASERSCAN LSX EXCIMER LASER SYSTEM IN THE
U.S. In November 1999, the FDA approved our LaserScan LSX
precision beam microspot scanning excimer laser system for use in
the U.S. for the treatment of nearsightedness. We aggressively
entered the U.S. market in February 2000, and began commercial
shipment of our laser systems to customers in the U.S. in March
2000. We currently have a number of PMA Supplements pending with
the FDA seeking approval of the use of our laser system for the
LASIK treatment of nearsightedness, nearsightedness with
astigmatism, farsightedness, farsightedness with astigmatism and
mixed astigmatism. Our laser systems sold to both U.S. and
international customers operate at a 200 Hz pulse repetition rate,
which we believe is the fastest laser pulse rate currently
available in our industry . We are currently in litigation with
Visx, one of our major competitors, regarding intellectual
property claims. We have a broad intellectual property portfolio,
that was recently strengthened and broadened through reissue of
our `679 patent, and believe that we own or license all
intellectual property necessary for commercialization of our
products. See Item 3 ("Legal Proceedings--Visx, Incorporated")
below.
o COMMERCIAL LAUNCH OF OUR ULTRASHAPER KERATOME PRODUCT. We began
commercial shipments of our UltraEdge keratome blades in July 1999
and of our UniShaper single-use keratomes and our control console
in December 1999. We plan to commercially launch our UltraShaper
durable keratome during the second quarter of 2001. We believe
that the combination of our UltraShaper durable keratome and our
UltraEdge keratome blades, that are intended to be replaced after
each procedure when used in durable keratomes, provide us with an
attractive opportunity to generate recurring revenues on a per
procedure basis.
o INDIVIDUALIZED ABLATIONS. In March 2000, we purchased from
` Premier Laser Systems, Inc. all intellectual property related to
a development project designed to provide front-to-back analysis
and total refractive measurement of the eye. The technology we
acquired includes the acquisition of two U.S. patents, six foreign
patents, and a pending patent application along with an exclusive
license to nine patents that are intended to be used to complete
development of an integrated refractive diagnostic work station.
This diagnostic tool is intended to be utilized as a stand-alone
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diagnostic unit and as part of our Astra(TM)system for
personalized treatment plans. Upon completion of development, we
believe the AstraMax integrated diagnostic work station will be
the first product to integrate precision diagnostic measurements
such as anterior and posterior corneal elevation, corneal
thickness, anterior chamber depth and measurements of photopic and
scotopic pupil size into a single instrument. We plan to add
wavefront analysis to the AstraMax's capabilities at a later time.
The precision measurements from the AstraMax integrated
workstation will be utilized in our AstraPro software for planning
individualized ablations. We believe our Astra system represents a
new standard of eye care that goes beyond conventional laser
vision correction by individualizing the laser treatment utilizing
a patient-specific set of diagnostic criteria intended to address
and control both refractive error and optical aberrations. We
began international research for personalized treatment plans
during the second quarter of 2000.
PRODUCTS
EXCIMER LASERS
LaserSight was the first company to develop an advanced precision beam
microspot scanning excimer laser system, the LaserScan LSX, that has evolved
from the patented optical scanning system incorporated in the Compak-200
Mini-Excimer laser system, introduced internationally in 1994. Since the
introduction of the Compak-200 laser system we have offered several generations
of our scanning laser, each incorporating enhancements and new features. We have
sold our precision beam microspot scanning excimer laser systems in over 30
countries and believe our installed base of over 350 scanning laser systems,
including approximately 180 of our most advanced laser system, the LaserScan
LSX, is among the largest installed bases of scanning laser systems in the
industry. Throughout the evolution of our precision beam microspot scanning
excimer laser systems, the core concept of utilizing our proprietary precision
beam microspot scanning software to ablate corneal tissue with a low energy,
microspot laser beam at a rapid pulse repetition rate has remained the
underlying basis for our technology platform.
In November 1999, the LaserScan LSX was approved by the FDA for
commercialization in the U.S., and we began commercial shipments to U.S.
customers in March 2000. We believe that the patented precision beam microspot
scanning technology and other advanced features incorporated into our LaserScan
LSX excimer laser system offer refractive surgeons and patients significant
advantages over broad beam and other scanning laser systems. The key benefits of
the LaserSight LSX include the following:
o PRECISION BEAM MICROSPOT SCANNING LASER. We believe that
techniques like the patented purposeful overlapping of laser
pulses and random scanning patterns used by our patented precision
beam microspot scanning technology can lead to overall
improvements in clinical results with smoother ablations, the
elimination of surgical anomalies associated with broad beam laser
systems such as rings, ridges and central islands, and reductions
in the incidence of glare, halos and loss of night vision. The
LaserScan LSX uses patented precision beam microspot scanning to
deliver a high resolution, 0.8 millimeter low-energy "flying
spot," in a proprietary, randomized pattern. The LaserScan LSX is
a true precision scanning software-controlled laser that uses a
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pair of galvanometer controlled mirrors to reflect and scan the
laser beam directly onto the corneal surface, without the
mechanical elements used by broad beam excimer laser systems.
o HIGHER PULSE REPETITION RATE. Operating at higher pulse repetition
rates can result in a number of benefits, including reduced
average procedure times and elimination or reduction of
dehydration problems associated with longer exposure of the
corneal tissue to ambient conditions. The LaserScan LSX operates
at a pulse repetition rate of 200 Hz. Many competitive laser
systems currently operate at lower pulse repetitions, often 50 Hz
or less.
o EYE TRACKING. Proper alignment of the refractive correction is
important in all laser vision correction procedures, and is
essential in order to perform custom ablations. Our AccuTrack(R)
eye tracking system maintains alignment of the refractive
correction relative to the visual axis of the eye, and can be
turned on or off based on the refractive surgeon's clinical
preference. The LaserSight AccuTrack eye tracker is an "active"
system that is capable of following even small, involuntary eye
movements. The tracking system eliminates most errors normally
introduced by eye movements during untracked laser refractive
surgery, and does not require dilation of the pupil or any
apparatus to be in contact with the eye. Our AccuTrack eye
tracking system is currently available only on international
versions of the LaserScan LSX, and we are currently pursuing a PMA
Supplement that seeks approval for use of this system in the U.S.
o SOFTWARE DRIVEN FLEXIBLE PLATFORM. Individualized ablations have
resulted in increased patient satisfaction in international
studies and we believe the ability to perform individualized
ablations will generally result in improved, more predictable
results and less post-operative regression relative to other
refractive surgery techniques. We also believe that individualized
ablation will also be the technique most preferred by refractive
surgeons for correction of irregular astigmatism. In our LaserScan
LSX scanning laser, ablation profiles and spot location are
determined by system software, not mechanical elements. The
LaserScan LSX is able to perform individualized ablations because
its software has the ability to move the "flying spot" beam to
the precise predetermined areas on the cornea requiring treatment.
Upon receipt of FDA approvals, software upgrades can be used to
readily update U.S. models to include features currently available
only on international models, including the ability to treat
farsightedness, astigmatism and mixed astigmatism.
o ADVANCED DESIGN AND ERGONOMICS. The LaserScan LSX's relatively
light weight and compact design allows it to fit into small
spaces, and its wheels enable it to be easily moved around in a
multi-surgeon practice. This allows for higher utilization of the
laser system. The efficient design also enables users to implement
a mobile strategy, since the laser is readily transportable to
other locations.
o IMPROVED RELIABILITY AND LOWER MAINTENANCE REQUIREMENTS. Our
LaserScan LSX laser system uses a lower energy laser, fewer
optical elements, and a smaller laser head compared to broad beam
laser systems and other scanning systems on the U.S. market. This
design requires less frequent replacement of expensive optical
elements and a lower volume of laser gas. Savings achieved from
less frequent replacement of optical elements and reduced laser
gas usage translate directly into reduced down time and
maintenance costs.
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CLINICAL EXPERIENCE AND OUTCOME QUALITY
We believe that there are several measures to evaluate with regard to
the safety and clinical effectiveness of a laser vision correction system,
including the incidence of adverse side effects such as double vision, night
driving problems like glare, halos or haze, the post-operative best visual
acuity that can be obtained using corrective eyewear such as glasses or contact
lenses, BSCVA, and the post-operative uncorrected visual acuity, or UCVA (such
as 20/20 or 20/40).
We believe that the degree to which negative, and sometimes permanent,
side effects occur as a result of refractive procedures performed using a laser
system is a key measure of a laser system's performance. In some cases, the
BSCVA deteriorates following a laser vision correction procedure. In addition,
the incidence of side effects such as double vision or haze can substantially
reduce patient satisfaction even if a high level of post-operative visual acuity
is achieved. The data from FDA clinical trials shows that with respect to
symptoms such as corneal haze and night vision problems the LaserSight LSX
compares favorably to the data for the Visx and/or Summit broad beam laser
systems. We believe these qualitative improvements are a result of the
technological features of the LaserScan LSX, including larger treatment zones
and a small scanning microspot that provides a smoother corneal ablation.
CLINICAL RESULTS
FDA clinical trials for the LaserScan LSX laser were conducted in the
U.S. on patients with nearsightedness with required levels of correction of 6
diopters and less. We believe that the average pre-operative level of required
correction is a significant factor that must be taken into account in evaluating
the clinical results of an excimer laser system. The average pre-operative level
of required correction in our FDA clinical trials was 4.8 diopters. Six months
following the procedure, approximately 88% of patients could see 20/40 or
better, the refractive condition required to drive in most states without
corrective lenses.
We expect the post-procedure uncorrected visual acuity (UCVA) of
patients treated with our LaserScan LSX laser system following FDA approval to
exceed the results obtained in our FDA clinical trials as refractive surgeons
gain experience using our laser system.
We intend to continue to develop and improve our technology and to
aggressively continue the process of gaining regulatory approvals for our laser
products in order to expand our access to the U.S. market for refractive
procedures. We currently have a PMA supplement pending with the FDA to expand
the use of our laser systems for the treatment of nearsightedness with
astigmatism, using PRK, and additional PMA supplements on file for the LASIK
treatment of nearsightedness with and without astigmatism, farsightedness with
and without astigmatism and mixed astigmatism.
DIAGNOSTIC AND CUSTOM TREATMENT PRODUCTS
Our Astra family of diagnostic instruments and individualized ablation
planning tools includes the AstraMax integrated diagnostic workstation and the
AstraPro individualized ablation planning software. The AstraMax is an
integrated diagnostic workstation that obtains precision diagnostic measurements
such as anterior and posterior corneal elevation, corneal thickness, anterior
chamber depth and measurements of photopic and scotopic pupil size. Prior to the
AstraMax these measurements would have to be taken utilizing two or more
instruments. We plan to add wavefront analysis to the AstraMax's capabilities at
a later time. The precision diagnostic measurements from the AstraMax integrated
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workstation will be utilized in our upcoming AstraPro software for planning
individualized ablations. We believe our Astra system will represent a new
standard of eye care that goes beyond conventional laser vision correction by
individualizing the laser treatment utilizing a patient-specific set of
diagnostic criteria intended to correct both refractive error and optical
aberrations.
KERATOME PRODUCTS
Our MicroShape family of keratome products includes our UltraShaper
durable keratome, UniShaper single-use keratome, a control console that may be
used interchangeably with our durable and single-use keratomes, and our
UltraEdge keratome blades. We began commercial shipment of keratome blades in
July 1999 and of our single-use keratomes and control consoles in December 1999.
We plan to commercially launch our UltraShaper durable keratome during the
second quarter of 2001.
The following is an overview of our MicroShape family of keratome
products:
FDA Status Product Features/Benefits
---------- -------------------------
UltraShaper durable 510(k) o Easy-to-use blade insertion
keratome clearance eliminates manual handling of blades
received o Built-in stopper provides consistent
stopping point for flaps
o Integrated components provide reduced
assembly time
o Design reduces possible eyelash or
eyelid entrapment or injury
o Automated dual-drive mechanism
with 7,500 RPM blade speed can create
a consistent flap size of 8.7 mm
with an average thickness of 160
microns and hinge width of 5.5 mm
UniShaper single-use 510(k) o Pre-assembled (including blade),
keratome clearance sterile and ready to use
received o Built-in stopper provides consistent
stopping point for flaps
o Covered gears reduces possible
eyelash or eyelid entrapment or
injury
o Automated dual-drive mechanism with
7,500 RPM blade speed can create flap
size of 8.5 mm or larger
Control console 510(k) o Interchangeable for use with the
clearance UniShaper single-use keratome and the
received UltraShaper durable keratome
o Continuous suction monitoring
features including visual and
auditory cautionary alarms and
indicated total time elapsed at high
suction
o Low suction setting for surgeons
using suction ring for globe fixation
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UltraEdge keratome No 510(k) o Manufactured to precise
blades notification specifications for dimensional
required accuracy and consistency
o Proprietary finishing processes
applied to every blade
o Manufactured with surgical grade
steel
o Extensive testing and verification
We acquired the right to manufacture and sell the UniShaper single-use
disposable keratome in September 1997 from inventors Ruiz and Lenchig, who had
invented the ACS distributed by another company. The UniShaper single-use
keratome and the UltraShaper durable keratome each incorporate the market proven
features found in the ACS with new enhancements and features, including
pre-assembly, transparent components for improved visibility while cutting the
flap, and a dual drive mechanism with covered gears. We plan to launch our
UltraShaper durable keratome during the second quarter of 2001 after completion
of the quality evaluation phase of our product release requirements. We believe
that, when launched, the UltraShaper will have undergone a more rigorous
clinical evaluation than any other keratome currently on the market. See "Risk
Factors - Company and Business Risks -- Required Minimum Payments Under Our
UniShaper License Agreement may Exceed Our Gross Profits From Sales of Our
UniShaper Product."
PRODUCT UPGRADES AND OTHER PRODUCTS. As a convenience to our customers,
we also offer a number of ancillary products that either complement our core
laser system, diagnostic products and keratome product portfolio or leverage our
laser technology. We offer various upgrades and modules to purchasers of prior
models of our excimer laser systems, including the AccuTrack eye tracking system
for international customers, a video display system for observation or recording
of refractive procedures, and the latest version of our proprietary software,
version 9.0, that provides international users with features including expanded
treatment options and patient databases. In addition, we offer certain
scientific lasers and related equipment for medical research and scientific
research applications. During 2000, our focus on the refractive industry
resulted in the elimination of our erbium laser, the Crystalase, as a product
line, that was used to perform dermatological procedures. Our revenue from sales
of our ancillary and other products generally is included in refractive product
net revenue and represents, in the aggregate, less than 5% of our total
refractive product net revenue.
GROWTH STRATEGY
Our goal is to become a leading worldwide provider of excimer laser
systems, diagnostic and individualized ablation planning products, single-use
and durable keratomes and other products for the refractive vision correction
industry. We believe that our more than seven years of experience in the
manufacture, sales and service of excimer laser systems, our significant
penetration of international markets and the advanced technology of our laser
systems diagnostic instruments and keratome products provide us with a strong
platform for future growth as we continue to penetrate the U.S. and
international markets for refractive surgical lasers and instruments.
The following are the key elements of our growth strategy:
o PENETRATE U.S. EXCIMER LASER MARKET. We believe that our LaserScan
LSX precision beam microspot scanning excimer laser system
represents a significant technological advancement over the broad
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beam and other scanning laser systems currently being marketed in
the U.S., as our precision beam microspot scanning lasers can
provide more precise corneal ablations, reduced visual side
effects, enhanced visual acuity and shorter procedure times.
o PENETRATE WORLDWIDE DIAGNOSTIC INSTRUMENT MARKET. We believe that
our AstraMax integrated diagnostic workstation also represents a
significant technological advancement over existing corneal
topographers since it is a single instrument that more precisely
obtains a wide variety of diagnostic information not provided by
current topographers. In addition, the AstraMax's precise
measurements are over the total area of the cornea thus providing
the necessary information for planning individualized ablations.
o PENETRATE WORLDWIDE KERATOME AND KERATOME BLADE MARKETS. We
believe that a key competitive strength of our MicroShape family
of keratome products is the relative simplicity and ease of use of
our UltraShaper durable keratome and fact that the flexibility of
the keratome control console offers refractive surgeons the option
to utilize either a single-use or durable keratome based on their
clinical preference. Commercial shipments of our UniShaper
single-use keratome product began in December 1999 and the
commercial launch of our UltraShaper durable keratome is expected
to occur in the second quarter of 2001. In addition to the
keratome blades we make for use in our keratome products, in July
1999 we also began distributing our UltraEdge keratome blades for
use in the keratomes of other manufacturers.
o GENERATE RECURRING REVENUE STREAMS. We have positioned our
business to benefit from the anticipated future growth in
refractive vision correction procedure volume. In addition to
receiving the purchase price for each laser system sold in the
U.S., we believe we will generate recurring revenue streams by
participating in per procedure fees resulting from the use of our
laser systems. We also believe that our AstraPro ablation
planning software, our UniShaper single-use keratome and our
UltraEdge keratome blades, that are intended to be replaced after
each procedure when used in durable keratomes, provide additional
sources of recurring revenue for us. In addition, we also plan to
continue to develop or acquire additional single-use ophthalmic
products in order to complement our line of products for
refractive vision correction.
o PROPRIETARY TECHNOLOGY LEADERSHIP. We believe that technological
advances in the refractive vision correction market will continue
to evolve through the advancement of existing technologies and the
introduction of new treatment modalities. Accordingly, we intend
to strategically develop and/or acquire complementary products and
other refractive vision correction modalities. For example, in
March 2000, we acquired the intellectual property that we have
developed into our AstraMax integrated diagnostic workstation. In
February 2001, we received notice of allowance of the reissuance
of our `679 patent, covering methods for performing ophthalmic
surgery using a scanning laser with 68 additional claims.
SALES AND MARKETING
We sell our excimer laser systems, diagnostic products, keratomes and
related products through a direct sales force, independent sales representatives
and distributors, and through the sales and marketing capabilities of our
strategic allies. Since 1994, we have marketed our laser systems commercially in
15
over 30countries worldwide and currently have an installed base of over 350
scanning lasers, including over 180 of our LaserScan LSX laser systems.
EXCIMER LASER SYSTEMS
Following receipt of FDA approval of the LaserScan LSX in November
1999, we began to commercially market our excimer laser systems in the U.S. We
employ five dedicated sales professionals targeting key refractive markets
within the U.S. These territorial managers are responsible for sales within
their respective territories.
Laser system sales in international markets are generally to hospitals,
corporate centers or established and licensed ophthalmologists. We market our
excimer laser systems in Canada, Europe, Russia, the Pacific Rim, Asia, South
and Central America, and the Middle East. We are also exploring potential
clinical trial advisors and distribution agents in Japan. As of December 31,
2000, we employed five territorial managers who are responsible for sales in
international markets, both directly and through our approximately 35
independent distributors and representatives within their respective
territories.
All of our distributors and representatives have been selected based on
their experience and knowledge of their respective ophthalmic equipment market.
In addition, the selection of international distributors and representatives is
also based on their ability to offer technical support. Distributor and
representative agreements provide for either exclusive territories, with
continuing exclusivity dependent upon achievement of mutually-agreed levels of
annual sales, or non-exclusive agreements without sales minimums. Currently,
separate distributor and representative agreements are in place for all major
market areas. During 2000, approximately 68% of our product sales resulted from
distributors and representatives with the balance from sales made by employees
of LaserSight. No single customer or distributor was responsible for generating
sales in excess of 10% of our consolidated revenues in 2000. TLC Laser Eye
Centers Inc. ("TLC") represented approximately 14% of our consolidated revenues
in 1999.
In conjunction with our sales activities, we participate in a number of
foreign and domestic ophthalmology meetings, exhibits and seminars.
Historically, two large U.S. meetings, the American Academy of Ophthalmology and
the American Society of Cataract and Refractive Surgery, have yielded
substantial interest in our products.
We believe that educating our customers and informing them about system
developments is an important way to ensure customer satisfaction and desirable
clinical results. Our clinical specialists are available to travel to a customer
site to train the refractive surgeon on how to safely operate our excimer laser
system and achieve optimum clinical results. We have also developed an extensive
set of written materials to inform refractive surgeons about how our laser
system works and a series of marketing related materials to assist the surgeon
in marketing his refractive practice to his patient base.
KERATOME PRODUCTS
In October 1999, we entered into a marketing and distribution alliance
with Becton Dickinson, the current manufacturer of our UltraEdge keratome blades
and a leading worldwide manufacturer of medical supplies, devices and diagnostic
systems. We recently received notice from Becton Dickinson claiming that they
have the right to end our marketing arrangement in six months and are currently
involved in discussions with Becton Dickinson regarding modifications to this
agreement. See "Risk Factors and Uncertainties--Industry and Competitive
Risks--We cannot assure you that our keratome products will achieve market
acceptance." We have developed alternative strategies for marketing and
distributing our keratome products in the event we are unable to agree on the
terms of a modified relationship with Becton Dickinson. Currently, Becton
Dickinson is, subject to limited exceptions, the exclusive distributor of our
keratomes and keratome related products in the U.S., the U.K., Ireland and
Japan, and has a non-exclusive right to distribute kits including keratome
products in other countries. We have retained the right to sell directly to TLC
and to market and
16
sell our keratome products in markets other than the U.S., U.K., Ireland and
Japan. In these markets, our keratome products are marketed both through our
existing distributor network for excimer laser system sales and through direct
sales efforts.
MANUFACTURING
EXCIMER LASER SYSTEMS
MANUFACTURING FACILITIES. Our manufacturing operations primarily
consist of assembly, inspection and testing of parts and system components to
assure performance and quality. We acquire components of our laser system and
assemble them into a complete unit from components that include both
"off-the-shelf" materials and assemblies and key components that are produced by
others to our design and specifications. We conduct a series of final system
integration and acceptance tests prior to shipping a completed system. The
proprietary computer software that operates the scanning system in our laser
systems was developed and is maintained internally.
We have excimer laser system manufacturing operations in Winter Park,
Florida and San Jose, Costa Rica. LaserScan LSX excimer laser systems assembled
in our Florida facility are shipped to U.S. customers and systems assembled in
our Costa Rica facility are shipped to our international customers. We relocated
our U.S. manufacturing operation to a larger leased facility in Winter Park, FL
during the second quarter of 2000. In October 1996, we received certification
under ISO 9002, an international system of quality assurance, for our
manufacturing and quality assurance activities in our Florida and Costa Rica
facilities. Since that time we have maintained our ISO 9002 certification
through a series of periodic surveillance audits and have also been certified at
our Winter Park facility to ISO 9001 quality system standards.
AVAILABILITY OF COMPONENTS. We purchase the vast majority of components
for our laser systems from commercial suppliers. These include both standard,
"off-the-shelf" items, as well as components produced to our designs and
specifications. While most components are acquired from single sources, we
believe that in many cases there are multiple sources available to us in the
event a supplier is unable or unwilling to perform. Since we need an
uninterrupted supply of components to produce our laser systems, we are
dependent upon these suppliers to provide us with a continuous supply of
integral components and sub-assemblies.
We contracted with TUI Lasertechnik und Laserintegration GmbH, Munich,
Germany, in 1996 to develop an improved performance laser head based on their
innovative technology and our performance specification and laser lifetime
requirements. We began to incorporate this new laser head into our products,
notably the LaserScan LSX, in the fourth quarter of 1997. Currently, TUI is a
single source for the laser heads used in the LaserScan LSX. Currently,
SensoMotoric Instruments GmbH, Teltow, Germany, is a single source for the eye
tracker boards used in the LaserScan LSX. We continue to evaluate joint ventures
with critical suppliers as well as other potential supplier relationships.
DIAGNOSTIC AND CUSTOM TREATMENT PRODUCTS
Our AstraMax integrated diagnostic workstation will be manufactured in
our Winter Park manufacturing facility. The AstraPro software is under
development by LaserSight's software engineers and will be distributed from
Winter Park when it has been completed and receives the necessary approvals.
17
KERATOME PRODUCTS
The UltraShaper durable keratome is being manufactured exclusively for
us by Owens Industries, Inc. Owens is experienced in the machining and assembly
of precision instruments. The control console for our keratomes is manufactured
for us by Humphrey Instruments, a division of Carl Zeiss, Inc., located in San
Leandro, California.
The UniShaper single-use keratome is manufactured for us under an
exclusive agreement with Frantz Medical Development Ltd., an ISO 9001 certified
company experienced in the manufacture of disposable medical devices from
engineering-grade polymer. This agreement has a 30-month term that expires in
May 2002, and we are obligated to purchase 50,000 units during each year of the
contract following receipt of final product approval, that occurred in October
1999. This agreement has been suspended indefinitely until the UltraShaper
durable keratome is commercialized and design changes from the UltraShaper are
incorporated into the UniShaper.
Our UltraEdge keratome blades are manufactured by Becton Dickinson
pursuant to our manufacturing agreement with them. Becton Dickinson has agreed
to manufacture keratome blades exclusively for us, and we have agreed to
purchase keratome blades exclusively from them. We generally are required to
purchase one million keratome blades over a five-year period. The consummation
of this agreement resulted in the cessation of internal blade manufacturing
operations by LaserSight. We recently received notice from Becton Dickinson
claiming that they have the right to end our manufacturing agreement and are
currently involved in discussions with Becton Dickinson regarding modifications
to this agreement. See "Risk Factors and Uncertainties--Industry and
Competitive Risks--We cannot assure you that our keratome products will achieve
market acceptance." We are developing alternative strategies for manufacturing
our keratome blades in the event we are unable to agree on the terms of a
modified relationship with Becton Dickinson.
COMPETITION
The vision correction industry is subject to intense, increasing
competition. We operate in this highly competitive environment that has numerous
well-established U.S. and foreign companies with substantial market shares, as
well as smaller companies. Many of our competitors are substantially larger,
better financed, better known, and have existing products and distribution
systems in the U.S. marketplace. FDA approval requirements are a significant
barrier to entry into the U.S. market for commercial sales of medical devices.
Two of our competitors, Visx and Alcon (Summit), received FDA approval of their
broad beam laser systems more than four years ago, and have manufactured and
sold laser systems that currently account for about 66% of the installed excimer
laser systems in the U.S. Visx, Alcon, Bausch & Lomb and Nidek currently
manufacture laser systems specifically approved by the FDA for use in LASIK
procedures. In the market for keratome products, Bausch & Lomb sold a
significant majority of the keratomes and keratome blades used by refractive
surgeons in the U.S. in 1999 and 2000.
We believe competition in the excimer laser system market is primarily
based on safety and effectiveness, technology, price, regulatory approvals, per
procedure fee payments, royalty payments, dependability, warranty coverage and
customer service capabilities. We believe that safety and effectiveness,
technology, price, dependability, warranty coverage and customer service
capabilities are among the most significant competitive factors, and we believe
that we compete favorably with respect to these factors.
Currently, five manufacturers, Visx, Alcon, Nidek, Bausch & Lomb and
LaserSight, have excimer laser systems with the required FDA approval to
commercially sell the systems in the U.S. Some of the approvals are for broader
18
labeled indications, a key competitive element in the industry. A laser system
with broader labeling approvals is attractive because it enlarges the pool of
laser vision correction candidates to whom the procedure can be marketed. At
present, the laser systems manufactured by all of our competitors in the U.S.
market have FDA approval to perform a wider range of treatments than our laser
system, including higher degrees of nearsightedness, astigmatism, and in the
case of Visx and Alcon, farsightedness. These approvals have given Visx a
competitive advantage, with laser systems sold by Visx having performed nearly
70% of the laser vision correction procedures performed in the U.S. in 1999 and
2000. Our LaserScan LSX excimer laser system is not presently approved to treat
farsightedness, astigmatism or more than 10 diopters of nearsightedness in the
U.S. Our PMA supplements for treatment of nearsightedness with astigmatism,
farsightedness with astigmatism and mixed astigmatism are presently pending.
While regulatory approvals play a significant role with respect to the U.S.
market, competition from new entrants may be prevalent in other countries where
regulatory barriers are lower.
In February 2000, Visx announced that it was reducing the fee it
charges to customers from $250 to $100 for each laser vision correction
procedure performed on an excimer laser manufactured by Visx. Shortly after this
announcement, Alcon announced it would also reduce its licensing fee to $100,
plus an additional $25 for astigmatism and hyperopia correction and $150 for its
Ladarvision systems. Bausch & Lomb has indicated it will charge a fee of $100
for each laser vision correction procedure performed on an excimer laser
manufactured by Bausch & Lomb. We are currently charging a per procedure fee of
up to $130. Nidek has indicated that it does not intend to charge per procedure
fees. The per procedure fees received by us as well as our competitors who
currently receive such fees are subject to change based on competitive factors
and changing market conditions, and there can be no assurance that such fees
will not be reduced or eliminated in the future.
In addition to conventional vision correction treatments such as
eyeglasses and contact lenses, we also compete against other surgical
alternatives for correcting refractive vision disorders such as surgically
implantable rings that recently received FDA approval, as well as implantable
intraocular lenses and a holmium laser system developed for the treatment of
farsightedness, that have also been approved by the FDA.
We believe competition in the market for keratome products is primarily
on the basis of performance, ease of use, design, automation, price,
availability, regulatory approvals, royalty payments, warranty coverage and
customer service capabilities. We believe that performance, ease of use, design,
automation, and price are among the most significant, and believe that we
compete favorably with respect to these factors. In addition to Bausch & Lomb,
who manufactured a significant majority of the keratomes and keratome blades
used by refractive surgeons in the U.S. in 1999 and 2000, our principal
competitors in the keratome and keratome blade business include Moria and
Innovative Optics.
INTELLECTUAL PROPERTY
There are a number of U.S. and foreign patents or patent rights
relating to the broad categories of laser devices, use of laser devices in
refractive surgical procedures, delivery systems for using laser devices in
refractive surgical procedures, keratometers, and keratomes. We maintain a
portfolio of what we believe to be strategically important patents, patent
applications, and licenses. Our patents, patent applications and licenses
generally relate to the following areas of technology: UV and
infrared-wavelength laser ablation for refractive surgery, our precision beam
microspot laser scanning system, harmonic conversion techniques for solid state
lasers, calibration of refractive lasers, treatment of glaucoma and other
19
retinal abnormalities, keratometer design, enhanced techniques for corneal
topography, techniques for treatment of nearsightedness and farsightedness,
techniques to optimize clinical outcomes of refractive procedures, and keratome
design. We monitor intellectual property rights in our industry on an ongoing
basis and take action, as we deem appropriate, including protecting our
intellectual property rights and securing additional patent or license rights.
Among the more significant of our intellectual properties are our `679
patent, solid-state laser-related, and keratometer patents. In May 1996, we were
granted the original '679 Patent relating to an ophthalmic surgery method
utilizing a non-contact scanning laser. In 1998 we petitioned the U.S. Patent
and Trademark Office for reissue of this patent, and in February 2001, we
received a Notice of Allowance from the U.S. Patent and Trademark Office
indicating that our '679 Patent will be reissued. Prior to the reissue the
original '679 Patent included one independent claim and 23 total claims. The
reissue application added nine new independent claims, and a total of 68
additional claims to better encompass the breadth of technology to which we are
entitled. The 23 original claims remain essentially unchanged. The fundamental
teachings of the original '679 Patent cover a refractive laser system using an
excimer laser with low energy and a high laser pulse repetition rate to ablate
corneal tissue with small pulses delivered to the corneal surface in an
overlapping pattern. Through the reissue process, we were able to broaden
several elements of the `679 Patent's original claims by removing certain
restrictive elements.
Our U.S. Patent No. 5,144,630 relates to a solid state laser operating
at multi-wavelengths using harmonic frequency conversion techniques. This is the
technology incorporated into our developmental solid state system that can
produce both infrared and ultraviolet wavelengths.
Two of our U.S. patents, Nos. 5,847,804 and No. 5,953,100, cover a
multi-camera corneal analysis system that is the underlying technology for our
AstraMax diagnostic workstation. This state-of-the-art multi camera (stereo)
technology provides the precise corneal height measurements that will be needed
for the planning of individualized, or custom ablation, treatments when these
treatments are commercially available.
A number of our competitors, including Visx and Alcon, have asserted
broad intellectual property rights in technology related to excimer laser
systems and related products, and intellectual property lawsuits are sometimes a
competitive factor in our industry. In November 1999, Visx asserted that the
Company's technology infringed one of Visx's U.S. patents for equipment used in
ophthalmic surgery. See "Legal Proceedings--Visx, Incorporated" in Item 3 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors and Uncertainties - We are subject to risks and
uncertainties relating to our patent litigation with Visx" in Item 7. We believe
that we own or have a license to all intellectual property necessary for
commercialization of our products.
PATENT SEGMENT. We have generated royalty income pursuant to license
agreements with respect to certain of our intellectual property rights,
primarily the Blum Patent and related license agreements we acquired from
International Business Machines Corporation ("IBM") in August 1997. These
patents ("IBM Patents"), the Blum Patent and U.S. Patent No. 4,925,523 ("Braren
Patent") relate to the use of ultraviolet light for the removal of organic
tissue and may be used in laser vision correction, as well as for non-ophthalmic
applications, and is the fundamental blocking patent that underlies the
technology of ultraviolet laser refractive surgery. Under the license agreements
with Visx and Alcon we acquired from IBM, Visx and Alcon were each obligated to
pay a royalty to us on all excimer laser systems they manufacture, sell or lease
in the U.S., excluding those systems manufactured in the U.S. and sold into a
country where a foreign counterpart to the IBM Patents exists.
20
We purchased the Blum and Braren patents from IBM in August 1997 for
$14.9 million. Shortly thereafter, we granted an exclusive paid up license in
the cardiovascular field in exchange for a payment of $4 million. In February
1998, we entered into an agreement with Nidek pursuant to which we retained all
of the IBM Patent rights within the U.S. and sold to Nidek, for $7.5 million,
the foreign counterparts to those patents. We also granted Nidek a non-exclusive
license to utilize the IBM Patents in the U.S. In addition, Nidek granted us an
exclusive license to the foreign counterparts to the IBM Patents in the
non-ophthalmic, non-vascular and non-cardiovascular fields. Since our 1997
purchase of the IBM Patents we have realized over $5 million in royalty revenues
from licenses to the patent.
In March 2001, we entered into a business arrangement with Alcon
regarding the Blum Patent. As part of the arrangement, we sold the Blum Patent
to Alcon for $6.5 million and assigned to Alcon certain licenses to the Blum
Patent. We have retained a non-exclusive royalty free license under the Blum
Patent and have also retained the license to the Blum Patent that was granted to
Visx. LaserSight and Alcon will share in royalties received from any future
licenses to the Blum Patent and we will also receive a portion of any recovery
from parties found to be infringing the Blum Patent. Including the transaction
with Alcon, we will have received a total of approximately $24 million from the
Blum Patent and will continue to enjoy a royalty free license in the U.S.
OTHER INTELLECTUAL PROPERTY. We also believe that our other
intellectual property rights are valuable assets of our business. For example,
we entered into an agreement with a subsidiary of TLC in October 1998 that
grants us an exclusive license under U.S. Patent No. 5,630,810 (TLC Patent)
relating to a treatment method for preventing the formation of central islands
during laser surgery. Central islands are a problem generally associated with
laser refractive surgery performed with broad beam laser systems used to ablate
corneal tissue. In 1999 we filed a lawsuit against Visx, our competitor,
asserting that they infringe this patent. We have agreed to pay TLC for the term
of the exclusive license 20% of the aggregate net royalties we receive in the
future from licensing the TLC patent and other patents currently owned by us.
The TLC Patent is currently in reissue at the U.S. Patent and Trademark Office.
The extent of protection that may be afforded to us by our patents, or
whether any claim embodied in our patents will be challenged or found to be
invalid or unenforceable, cannot be determined at this time. Our patents and
other pending applications may not afford a significant advantage or product
protection to us.
We maintain an internal program that encourages development of
patentable ideas. As of March 15, 2001, we have approximately 30 U.S. patent
applications undergoing prosecution at the U.S. Patent and Trademark Office and
a number of counterparts to these applications filed internationally. Our patent
applications generally relate to the use of laser devices in refractive surgical
procedures, delivery systems and other technology related to the use of laser
devices in refractive surgical procedures, diagnostic devices for eye
measurements, and keratomes.
In the U.S., our trademarks include LaserSight(R), AccuTrack(R),
LSX(R), LaserScan LSX(R), MicroShape(R), UltraEdge(R), and UniShaper(R). We have
also applied for registration of 11 additional trademarks.
21
REGULATION
MEDICAL DEVICE REGULATION
The FDA regulates the manufacture, use, distribution and production of
medical devices in the U.S. Our products are regulated as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act. In order to sell such
medical devices in the U.S., a company must file a 510(k) premarket notice or
obtain premarket approval after filing a PMA application. Noncompliance with
applicable FDA regulatory requirements can result in one or more of the
following:
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products;
o total or partial suspension of production;
o denial or withdrawal of premarket clearance or approval of devices;
o exclusion from government contracts; and
o criminal prosecution.
The FDA also has authority to request repair, replacement or refund of the cost
of any device manufactured or distributed by a company.
Medical devices are classified by the FDA as Class I, Class II or Class
III based upon the level of risk presented by the device and whether the device
is substantially equivalent to an already legally marketed Class I or II device.
Class III devices are subject to the most stringent regulatory review and cannot
be marketed in the U.S. until the FDA approves a PMA for the device.
CLASS III DEVICES. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a Class III device for which the FDA requires PMAs. The
process of obtaining approval of a PMA application is lengthy, expensive and
uncertain. It requires the submission of extensive clinical data and supporting
information to the FDA. Human clinical studies may be conducted only under an
FDA-approved protocol and must be conducted in accordance with FDA regulations.
In addition to the results of clinical trials, the PMA application includes
other information relevant to the safety and efficacy of the device, a
description of the facilities and controls used in the manufacturing of the
device, and proposed labeling. After the FDA accepts a PMA application for
filing and reviews the application, a public meeting may be held before an FDA
advisory panel comprised of experts in the field.
After the PMA is reviewed and discussed, the panel issues a favorable
or unfavorable recommendation to the FDA and may recommend conditions. Although
the FDA is not bound by the panel's recommendations, it historically has given
them significant weight. If the FDA's evaluation of the PMA application is
favorable, the FDA typically issues an "approvable letter" requiring the
applicant's agreement to comply with specific conditions (such as specific
labeling language) or to supply specific additional data (such as post-approval
patient follow-up data) or other information in order to secure final approval.
Once the approvable letter is satisfied, the FDA will issue approval for certain
indications that may be more limited than those originally sought by the
manufacturer. The PMA approval can include post-approval conditions that the FDA
22
believes necessary to ensure the safety and effectiveness of the device
including, among other things, restrictions on labeling, promotion, sale and
distribution. Failure to comply with the conditions of approval can result in
enforcement action, including withdrawal of the approval. Products manufactured
and distributed pursuant to a PMA will be subject to extensive, ongoing
regulation by the FDA. The FDA review of a PMA application generally takes one
to two years from the date such application is accepted for filing but may take
significantly longer. The review time is often significantly extended by FDA
requests for additional information, including additional clinical trials or
clarification of information previously provided.
Modifications to a device subject to a PMA generally require approval
by the FDA of PMA supplements or new PMAs. We believe that our excimer laser
systems require a PMA or a PMA supplement for each of the surgical procedures
that they are intended to perform. The FDA may grant a PMA with respect to a
particular procedure only when it is satisfied that the use of the device for
that particular procedure is safe and effective. In granting a PMA, the FDA may
restrict the types of patients who may be treated.
FDA regulations authorize any interested person to petition for
administrative review of the FDA's decision to approve a PMA application.
Challenges to an FDA approval have been rare. We are not aware that any
challenge has been asserted against us and do not believe any PMA application
has ever been revoked by the agency based on such a challenge.
During 1994, we began the clinical studies required for approval and
commercialization of our laser scanning system in the U.S. In April 1998, we
filed a PMA application for PRK treatment of nearsightedness using our scanning
laser system. We received notification from the FDA that our laser system had
received PMA approval for low to moderate nearsightedness in November 1999. The
QSR/GMP regulations impose certain procedural and documentation requirements
upon us with respect to our manufacturing and quality assurance activities. Our
facilities will be subject to ongoing inspections by the FDA, and compliance
with QSR/GMP regulations is required for us to continue marketing our laser
products in the U.S. In addition, our suppliers of significant components or
sub-assemblies must meet quality requirements established and monitored by
LaserSight, and some may also be subject to FDA regulation.
The following table summarizes the FDA regulatory status of the
LaserScan LSX excimer laser system. The labeling for each device contains a more
detailed description of the ranges summarized below.
Condition Regulatory Status
--------- -----------------
Low to Moderate Nearsightedness.....Approved (to -6 diopters) (PRK) (1)
PMA supplement filed (LASIK)
Moderate to High Nearsightedness PMA supplement filed (PRK/LASIK)
-- with astigmatism...............
Higher Degrees of Nearsightedness...PMA supplement filed (LASIK)
-- with astigmatism...............PMA supplement filed (LASIK)
Moderate to High Farsightedness.....PMA supplement filed (LASIK)
-- with astigmatism...............PMA supplement filed (LASIK)
200 Hz pulse rate...................PMA supplement approved
AccuTrack eye tracking system.......PMA supplement in process
23
(1) The LaserScan LSX has been approved by the FDA for treatment of
nearsightedness of up to -6 diopters. The labeling stipulations of our
approval allows for the treatment of nearsightedness up to 10.0
diopters at the surgeon's discretion and under specific labeling
warnings.
During 1998, we submitted and received approval to begin U.S. clinical
trials of our scanning laser for treatment of nearsightedness and
farsightedness, with and without astigmatism, utilizing the LASIK procedure. In
early 2001, we submitted PMA supplements seeking approvals based on the data
from such clinical trials. We also began a clinical trial of our scanning laser
system for LASIK treatment of nearsightedness and nearsightedness astigmatism in
Canada in late 1998 and received Device License Approval from Canadian Medical
Devices Bureau in mid-1999. During 1996, we began clinical trials for
photo-astigmatic refractive keratectomy, or PARK, in the U.S. The PMA supplement
reflecting this data is currently pending with the FDA.
In July 1997, we acquired from Photomed the rights to a PMA application
filed with the FDA by Dr. Kremer for an excimer laser system for LASIK
treatment. In July 1998, the FDA approved the PMA application for the laser to
perform LASIK for correction of nearsightedness and nearsightedness with
astigmatism. This approval, however, was for the treatment of nearsightedness
and nearsightedness with astigmatism, specifically using LASIK at a single-site
only. The commercial sale of the Photomed laser in the U.S. would require
additional FDA approvals and compliance with QSR/GMP. Based on these factors and
our submission in December 2000 of a PMA supplement for LASIK based on clinical
data from our LaserScan LSX laser systems, we have abandoned further efforts to
commercialize this PMA. The FDA's approval of this PMA is unrelated to the PMA
for our LaserScan LSX scanning laser system. Laser systems approved by the FDA
for PRK are routinely used off-label to perform LASIK. A physician may decide,
as part of the practice of medicine, to use a medical device outside of its
FDA-approved indications for an unapproved or "off-label" use. Prior to late
1999, all LASIK procedures performed in the U.S. with commercially available
lasers were performed in accordance with the practice of medicine. See
"Products--Overview of Competitive Laser Systems" above.
CLASS I OR II DEVICES. Devices deemed to pose relatively less risk are
placed in either Class I or II, which requires the manufacturer to submit a
510(k) premarket notification, unless an exemption applies. The premarket
notification must demonstrate that the proposed device is "substantially
equivalent" to a "predicate device" that is either in Class I or II, or is a
"pre-amendment" Class III device that was in commercial distribution before May
28, 1976, for which the FDA does not require PMA approval. The FDA issued
determinations of equivalency for our UniShaper single-use keratome in January
1998 and for our UltraShaper durable keratome in January 2000. Our UltraEdge
keratome blades are exempt from the 501(k) requirement.
After the FDA has issued a determination of equivalency for a device,
any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k)
notice. The FDA requires each manufacturer to make this determination in the
first instance, but the FDA can review any such decision. If the FDA disagrees
with a manufacturer's decision not to submit a new 510(k), the agency may
retroactively require the manufacturer to submit a premarket notification. The
FDA also can require the manufacturer to cease marketing and/or recall the
modified device until receipt of the necessary 510(k).
In February 2001, we received notification from the FDA that the
Company may begin commercial distribution of its AstraMax diagnostic
workstation.
24
OTHER REGULATORY REQUIREMENTS. Labeling and promotional activities are
subject to scrutiny by the FDA and by the Federal Trade Commission. Current FDA
enforcement policy prohibits manufacturers from marketing and advertising their
approved medical devices for unapproved or off label uses. The scope of this
prohibition has been the subject of recent litigation. The only materials
related to unapproved devices that may be disseminated by companies are peer
reviewed articles. Our lasers are also subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health of the FDA. The law requires laser manufacturers to file new product and
annual reports and to maintain quality control, product testing and sales
records. In addition, laser manufacturers must incorporate specified design and
operating features in lasers sold to end users and comply with labeling and
certification requirements. Various warning labels must be affixed to the laser
depending on the class of the product under the performance standard. The
manufacture, sale and use of our products is also subject to numerous federal,
state and local government laws and regulations relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
INTERNATIONAL REGULATORY REQUIREMENTS. The manufacture, sale and use of
our products is also subject to regulation in countries other than the U.S.
During November 1996 we completed all requirements necessary to obtain authority
to apply the CE Mark to our LaserScan 2000 System, an earlier generation of
excimer laser system we sold in international markets. In September 1998, we
received similar certification to apply the CE Mark to our LaserScan LSX excimer
laser system. The CE Mark, certifying that the LaserScan Models 2000 and
LaserScan LSX meet all requirements of the European Community's medical
directives, provides our products with marketing access in all member countries
of the EU. All countries in the EU require the CE Mark certification of
compliance with the EU Medical Directives as the standard for regulatory
approval for sale of excimer laser systems.
The EU Medical Directives include requirements under EU laws regarding
the placement of various categories of medical devices on the EU market. This
includes a "directive" that an approved "Notified Body" will review technical
and medical requirements for a particular device. All clinical testing of
medical devices in the EU must be done under the Declaration of Helsinki, which
means that companies must have ethics committee approval prior to commencement
of testing, must obtain informed consent from each patient tested, and the
studies must be monitored and audited. Patient records must be maintained for 15
years. Companies must also comply with the Medical Device Vigilance reporting
requirements. In obtaining the CE Mark for our excimer laser system, we
demonstrated that we satisfied all engineering and electro-mechanical
requirements of the EU by having our manufacturing processes and controls
evaluated by a Notified Body (Semko) for compliance with ISO 9002 and ISO 9001
requirements, and conducted a clinical study in France to confirm the safety and
efficacy of the excimer laser system on patients.
RESEARCH AND DEVELOPMENT
We continue to research and develop new laser products, laser systems,
product upgrades enhancements, keratome products, including the UltraShaper
durable keratome, and ancillary product lines. In March 2000, we acquired the
intellectual property that we have developed into the AstraMax. We believe the
AstraMax will assist us in developing our personalized treatment plan
capabilities.
Other research and development efforts include the continued
development of a solid-state laser and enhancements for our advanced
eye-tracking system that is standard on the international model of LaserScan
25
LSX. The solid-state is the first true non-gas laser capable of delivering a
laser beam in the ultraviolet spectrum (common to all excimer lasers used for
refractive surgery). In addition, the solid-state laser could be capable of
generating multiple wavelengths, thus permitting its use for other ophthalmic
procedures that now require separate lasers.
Past solid-state research and development efforts resulted in the
identification of many features that were subsequently incorporated into our
excimer laser system. Further efforts will continue to be directed at an
appropriate level towards the development of this system. As is the case with
many new technology products, the commercialization of the solid-state laser is
subject to potential delays.
While the risk of failure of these specific activities may be
significant, we believe that if developed, these products could provide us with
a leading edge technology that would further differentiate our products from
other companies in the industry. There is no assurance that any of these
research and development efforts will be successful.
HEALTH CARE CONSULTING SERVICES
We also provide health care and vision care consulting services to
hospitals, managed care companies and physicians through our TFG subsidiary. The
core business of TFG is two-fold: developing and maintaining physician databases
for clients' needs and providing customized strategic plans. Services included
are physician recruitment tools, competitive intelligence, demand studies,
community health analyses and distribution channel mapping. TFG clients include
multi-hospital health systems, community hospitals, academic medical centers,
specialty health care providers and manufacturers and distributors of health
care products. In 1998, as a result of losses incurred in previous years, TFG
reduced staffing substantially, tightened it business focus and began
outsourcing certain services such as teleresearch and physician recruiting. In
1999, two senior consultants joined who have helped develop new business during
2000, resulting in improved financial results for TFG.
The senior consulting staff of TFG includes seven individuals with
significant experience in health care. We believe that new business will
increase as a result of existing business relationships and previously developed
leads for new business. In addition to working with former clients, sales
efforts are in development to generate new clients in the hospital, academic
medical center, hospital system and other health care provider categories. TFG
served approximately 10 clients in 2000.
Industry projections indicate continued turbulence in the health care
industry as prices paid by government and managed care organizations continue to
decrease. Consolidation, diversification, divestiture and downsizing are among
the actions many health care providers are being forced to consider in order to
solidify a position in the fast changing market place. TFG believes it is
positioned to assist health care managers in understanding the range of
available options and selecting an appropriate course of action. See
"Management's Discussion and Analysis -- Results of Operations -- Revenues."
Clients are generally asked to pay a certain amount at the commencement
of the engagement and at the point where predefined milestones are reached, but
no less than monthly. Certain clients pay a monthly retainer. Projects may be
priced on an hourly rate or at a fixed project price, exclusive of out of pocket
expenses.
26
We believe that the key competitive factors in the health care
consulting services segment is the experience of consultants, contacts within
the industry, pricing of services and satisfaction of clients. Primary
competitors are national consulting firms and small health care consulting
firms.
EMPLOYEES
As of December 31, 2000, we had 180 full-time and two part-time
employees. None of our employees is a member of a labor union or subject to a
collective bargaining agreement. LaserSight generally considers its employee
relations to be good.
ITEM 2. PROPERTIES
Our principal offices, including executive offices and administrative,
marketing and U.S. manufacturing facilities, are located in approximately 22,700
square feet of space that we have leased in Winter Park, Florida. This lease
expires on June 14, 2002. We have leased approximately 15,600 square feet of
additional space in Winter Park, Florida for administrative office space and to
provide capacity for an increase in U.S. manufacturing. The lease of this
additional space in Winter Park expires January 31, 2004. We lease approximately
3,900 square feet of office space in St. Louis, Missouri, which lease expires
July 31, 2001. We lease approximately 6,400 square feet of space near San Jose,
Costa Rica, that we use as a manufacturing facility. The lease of the San Jose
manufacturing facility expires November 30, 2003. We lease approximately 5,500
square feet of space in Munich, Germany, that we use as our European base of
operations. The Munich lease expires in February 2004. In our opinion, the
various properties used in our operations are generally in good condition and
are adequate for the purposes for which we utilize them.
ITEM 3. LEGAL PROCEEDINGS
VISX, INCORPORATED. On November 15, 1999, we were served with a
complaint filed by Visx asserting that the Company's technology infringed one of
Visx's U.S. patents for equipment used in ophthalmic surgery. On November 16,
1999, LaserSight and Visx reached agreement to stay the patent litigation and to
continue negotiations toward a U.S. license agreement in our effort to
facilitate commercialization of its laser systems in the U.S. During the stay,
we could commence manufacturing our laser systems in the U.S. but could not
sell, offer to sell, ship or use commercially our laser systems in the United
States until the parties entered into a license agreement or the stay was
otherwise lifted. On February 1, 2000, we announced that we withdrew from the
licensing negotiations and allowed the litigation to proceed. The stay was
lifted effective February 16, 2000. In addition, on February 1, 2000, we filed
suit against Visx claiming non-infringement and invalidity of the Visx patent
and asserting that Visx infringes U.S. Patent No. 5,630,810. Management believes
that we do not infringe Visx's patent and that this action will not have a
material adverse effect on our business, financial condition or results from
operations. However, the outcome of patent litigation, particularly in jury
trials, is inherently uncertain, and an unfavorable outcome in the Visx
litigation could have a material adverse effect on our business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk Factors and
Uncertainties - We are subject to risks and uncertainties relating to our patent
litigation with Visx" in Item 7.
FORMER NNJEI OWNERS. On March 22, 1999, we received notice of an action
filed on March 15, 1999 by the former owners of Northern New Jersey Eye
Institute, or NNJEI, and related assets and entities against LaserSight in U.S.
District Court for the District of New Jersey. The complaint alleged breach of
27
contract in connection with a provision in our July 1996 acquisition agreements
related to the assets of NNJEI and related assets and entities. Such provision
provided for additional issuance of LaserSight common stock if our stock price
was not at certain levels in July 1998. We issued the additional common stock in
July 1998 in accordance with the provisions of the agreements. The plaintiffs
allege that, based on the price of LaserSight common stock in July 1998,
additional payments were required of approximately $540,000. In November 2000,
we settled this litigation in exchange for a one-time payment of $135,000.
J.T. LIN. On June 24, 1999, Jui-Teng Lin, a former president, chief
executive officer and director of LaserSight, filed an action in the Circuit
Court of the Ninth Judicial Circuit in Orange County, Florida, against
LaserSight. This action asserts that LaserSight is currently in default on a
promissory note executed in June 1991, and payable to Mr. Lin in the principal
amount of $1,180,000. In February 2001, this matter was settled with prejudice
at no cost to LaserSight.
FORMER SHAREHOLDER OF TFG. On November 12, 1999 a lawsuit was filed in
the U.S. District Court for the Eastern District of Missouri on behalf of a
former shareholder of TFG, a wholly-owned subsidiary of LaserSight. The lawsuit
names Michael R. Farris, our Chief Executive Officer, as the sole defendant and
alleges fraud and breach of fiduciary duty by Mr. Farris in connection with the
redemption by TFG of the former shareholder's capital stock in TFG. At the time
of the redemption, which occurred prior to LaserSight's acquisition of TFG, Mr.
Farris was the President and Chief Executive Officer of TFG. Our Board of
Directors has authorized LaserSight to retain and, to the fullest extent
permitted by the Delaware General Corporation Law, pay the fees of counsel to
defend Mr. Farris, TFG and LaserSight in the litigation so long as a court has
not determined that Mr. Farris failed to act in good faith and in a manner Mr.
Farris reasonably believed to be in the best interest of TFG at the time of the
redemption. Management has reviewed the lawsuit and believes that the
allegations set forth therein are without merit, and that our obligations with
respect to Mr. Farris' legal defense will not have a material adverse effect on
our financial condition or results from operations.
LAMBDA PHYSIK, INC. On January 20, 2000 a lawsuit was filed in the
Circuit Court of Broward County, Florida on behalf of Lambda Physik, Inc.
("Lambda") against LaserSight. The action alleges that we breached an agreement
we entered into with Lambda for the purchase of lasers from Lambda. Lambda has
requested $1,852,813 in damages, plus interest, costs and attorney's fees. We
believe that the allegations made by the plaintiff are without merit, and we
intend to vigorously defend the action. Management believes that we have
satisfied our obligations under the agreement and that this action will not have
material adverse effect on our financial condition or results from operations.
KREMER. On November 16, 2000 a lawsuit was filed in the United States
District Court for the Eastern District of Pennsylvania on behalf of Frederic B.
Kremer, M.D. and Eyes of the Future, P.C. The action alleges that LaserSight is
in breach of certain terms and conditions of an agreement it entered into with
Dr. Kremer relating to LaserSight's purchase of a patent from Dr. Kremer. Dr.
Kremer has requested equitable relief in the form of a declaratory judgment as
well as damages in excess of $1,600,000, plus interest, costs and attorney's
fees. LaserSight believes that the allegations made by the plaintiff are without
merit, and intends to vigorously defend the action. Management believes that
LaserSight has satisfied its obligations under the agreement and that this
action will not have material adverse effect on tour financial condition or
results from operations.
ROUTINE MATTERS. In addition, we are involved from time to time in
routine litigation and other legal proceedings incidental to our business.
Although no assurance can be given as to the outcome or expense associated with
any of these proceedings, we believe that none of such proceedings, either
28
individually or in the aggregate, will have a material adverse effect on the
financial condition of LaserSight.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on The Nasdaq Stock Market(R) under the symbol
LASE. The following table sets forth, for the fiscal quarters indicated, the
high and low sale prices for our common stock on The Nasdaq Stock Market.
1998: High Low
---- ---- ---
First Quarter $3.38 $1.56
Second Quarter 5.38 2.25
Third Quarter 8.03 3.38
Fourth Quarter 6.00 2.75
1999:
----
First Quarter $5.94 $3.88
Second Quarter 20.38 5.22
Third Quarter 17.63 12.13
Fourth Quarter 18.31 7.19
2000:
----
First Quarter $13.00 $5.50
Second Quarter 6.75 3.25
Third Quarter 5.56 3.09
Fourth Quarter 3.81 0.91
On March 28, 2001, the closing sale price for our common stock on the
Nasdaq National Market was $2.06 per share. As of March 29, 2001, LaserSight had
23,562,814 shares of common stock outstanding held by approximately 261
stockholders of record and, to our knowledge, approximately 9,423 total
stockholders, including stockholders of record and stockholders in "street
name."
We have never declared or paid any cash dividends on our common stock
and do not anticipate paying cash dividends on our common stock in the
foreseeable future. Our current policy is to retain all available funds and any
future earnings to provide funds for the operation and expansion of our
business. Any determination in the future to pay dividends will depend upon our
financial condition, capital requirements, results of operations and other
factors deemed relevant by our board of directors, including any contractual or
statutory restrictions on our ability to pay dividends.
29
POSSIBLE DILUTIVE ISSUANCES OF COMMON STOCK
Each of the following issuances of common stock may depress the market
price of the common stock. See "Management's Discussion and Analysis - Risk
Factors and Uncertainties - Common Stock Risks--The Significant Number of Shares
Eligible for Future Sale and Dilutive Stock Issuances may Adversely Affect Our
Stock Price."
LaserSight Centers and Florida Laser Partners. Based on
previously-reported agreements entered into in 1993 in connection with our
acquisition of LaserSight Centers (our development-stage subsidiary) and
modified in July 1995 and March 1997, we may be obligated as follows:
o To issue up to 600,000 unregistered shares of common stock ("Centers
Contingent Shares") to the former stockholders and option holders of
LaserSight Centers (including two trusts related to our Chairman of
the Board and certain of our former officers and directors). The
Centers Contingent Shares will be issued only if we achieve certain
pre-tax operating income levels through March 2002. Such income
levels must be related to our use of a fixed or mobile excimer laser
to perform PRK, the arranging for the delivery of PRK or receipt of
license or royalty fees associated with patents held by LaserSight
Centers. The Centers Contingent Shares are issuable at the rate of
one share per $4.00 of such operating income.
o To pay to a partnership whose partners include our Chairman of the
Board and certain of our former officers and directors a royalty of
up to $43 (payable in cash or in shares of common stock ("Royalty
Shares")), for each eye on which PRK is performed on a fixed or
mobile excimer laser system owned or operated by LaserSight Centers
or its affiliates.
o Royalties do not begin to accrue until the earlier of March 2002 or
the delivery of all of the 600,000 Centers Contingent Shares.
As of March 29, 2001, we have not accrued any obligation to issue
Centers Contingent Shares or Royalty Shares. We cannot assure you that any
issuance of Centers Contingent Shares or Royalty Shares will be accompanied by
an increase in our per share operating results. We are not obligated to pursue
strategies that may result in the issuance of Centers Contingent Shares or
Royalty Shares and, in fact, late in 2000 we abandoned the LaserSight Centers
mobile laser strategy due to industry conditions and our increased focus on
development and commercialization of our refractive products. It may be in the
interest of our Chairman of the Board for us to pursue business strategies that
maximize the issuance of Centers Contingent Shares and Royalty Shares.
FOOTHILL WARRANT. In April 1997, we issued to Foothill Capital
Corporation a warrant to purchase 500,000 shares of common stock (the "Foothill
Warrant") at a price of $6.067 per share. We are required to make anti-dilution
adjustments to both the number of warrant shares and the warrant exercise price
if we sell common stock or common stock-equivalents (such as convertible
securities or warrants) at a price per share that is (or could be) less than the
fair market value of the common stock at the time of such sale (a "Below-Market
issuance"). To date, such anti-dilution adjustments have resulted in (1) an
increase in the number of Foothill Warrant shares to 595,367, and (2) a
reduction to the exercise price of the Foothill Warrant shares to $5.06 per
share. Additional anti-dilution adjustments to the Foothill Warrant could also
result from any future Below-Market Issuance. The Foothill warrants may be
30
exercised at any time through March 31, 2002. As of March 29, 2001, warrants for
98,367 shares of our common stock remain outstanding.
SERIES B WARRANT. In connection with our issuance of the Series B
Preferred Stock in August 1997, we issued to the former holders of the Series B
Preferred Stock warrants to purchase 750,000 shares of common stock (the "Series
B Warrant") at a price of $5.91 per share at any time before August 29, 2002. In
connection with a March 1998 agreement whereby we obtained the option to
repurchase the Series B Preferred Stock and a lock-up on conversions, the
exercise price of the Series B Warrant shares was reduced to $2.753 per share.
We are required to make anti-dilution adjustments to both the number of warrant
shares and the warrant exercise price in the event we make a Below-Market
Issuance. To date, these anti-dilution adjustments and other agreements among
the former holders of the Series B Preferred Stock and us have resulted in (1)
an increase in the number of Series B Warrant shares to 807,506, and (2) a
reduction to the exercise price of Series B Warrant shares to $2.53 per share.
Additional anti-dilution adjustments to the Series B Warrants could also result
from any future Below-Market Issuance. As of March 29, 2001, 140,625 of such
warrants had been exercised and 666,881 of such warrants remained outstanding.
SHORELINE WARRANT. In connection with our sale of the Series B
Preferred Stock in August 1997, we issued to four individuals associated with
our placement agent warrants to purchase 40,000 shares of common stock (the
"Shoreline Warrant") at a price of $5.91 per share at any time before August 29,
2002. We are required to make anti-dilution adjustments to both the number of
warrant shares and the warrant exercise price in the event we make a
Below-Market Issuance. To date, these anti-dilution adjustments have resulted in
(1) an increase in the number of Shoreline Warrant shares to 43,269, and (2) a
reduction to the exercise price of Shoreline Warrant shares to $5.42 per share.
Additional anti-dilution adjustments to the Shoreline Warrants could also result
from any future Below-Market Issuance of common stock. As of March 29, 2001,
8,589 of such warrants had been exercised and 34,680 of such warrants remained
outstanding.
SERIES D PREFERRED STOCK. In accordance with the terms of our
Certificate of Designation, Preferences and Rights of the Series D Preferred
Stock, the holders of the Series D Preferred Stock are entitled to certain
anti-dilution adjustments if we issue common stock or common stock-equivalents
(such as convertible securities or warrants) at a price per share (or having a
conversion or exercise price per share) less than $4.00 per share. To date, no
anti-dilution adjustments have been made.
MARCH 1999 PRIVATE PLACEMENT WARRANTS. In connection with our sale of
common stock in March 1999, we issued the purchasers warrants to purchase a
total of 225,000 shares of common stock at an exercise price of $5.125 per
share, the closing price of the Company's common stock on March 22, 1999. The
warrants have a term of five years. As of March 29, 2001, 45,000 of such
warrants had been exercised and 180,000 of such warrants remained outstanding.
CONSULTING WARRANTS. On February 22, 1999, in connection with a
consulting services agreement that we entered into with Guy Numann, we issued
warrants to purchase a total of 67,500 shares of our common stock at a price of
$5.00 per share. One-third of the warrants become vested on each annual
anniversary of the grant until all the warrants are vested. To the extent
vested, the warrants are exercisable at any time prior to February 22, 2004. As
of March 29, 2001, 45,000 of such warrants had vested and all such warrants
remained outstanding.
31
SEPTEMBER 2000 PRIVATE PLACEMENT WARRANTS. In connection with our sale
of common stock in September 2000, we issued the purchasers warrants to purchase
a total of 600,000 shares of common stock at an exercise price of $3.60 per
share. The warrants have a term of three years. As of March 29, 2001, all such
warrants remained outstanding.
HELLER WARRANTS. In connection with our March 2001 loan agreement with
Heller Healthcare Finance, Inc., we issued the Heller warrants to purchase a
total of 243,750 shares of common stock at an exercise price of $3.15 per share.
The warrants have a term of three years. As of March 29, 2001, all such warrants
remained outstanding.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The summary financial information as of
and for each of the years in the five-year period ended December 31, 2000 is
derived from our consolidated financial statements for such years.
(In thousands, except for per share amounts)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 34,518 $ 21,728 $ 17,756 $ 24,389 $ 21,504
Gross profit 19,283 11,951 11,410 11,687 11,381
Loss from operations (22,196) (15,102) (11,461) (9,262) (4,960)
Gain on sale of subsidiaries -- -- 364 4,129 --
Net loss (21,430) (14,424) (11,882) (7,253) (4,074)
Conversion discount
on preferred stock -- -- (859) (42) (1,011)
Dividends and accretion
on preferred stock -- -- (2,752) (298) (359)
Loss attributable to common
stockholders (21,430) (14,424) (15,493) (7,593) (5,444)
Basic loss per
common share (1.02) (0.89) (1.26) (0.80) (0.69)
Diluted loss per share (1.02) (0.89) (1.26) (0.80) (0.69)
Working capital 20,680 21,648 14,875 12,730 10,021
Total assets 51,876 49,379 43,873 50,461 34,250
Long-term obligations 110 100 560 500 642
Redeemable convertible
preferred stock -- -- -- 11,477 --
Stockholders' equity 37,335 39,578 34,015 27,040 26,769
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of LaserSight's consolidated
results of operations and consolidated financial position should be read in
conjunction with the Selected Consolidated Financial Data and LaserSight's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this report.
All references to years are to LaserSight's fiscal years ended December
31, 2000, 1999 and 1998, unless otherwise indicated.
OVERVIEW
LaserSight's net loss and loss attributable to common shareholders for
2000 was $21,430,081, or $1.02 per basic and diluted common share, on net sales
of $34,517,601, while the net loss and loss attributable to common shareholders
for 1999 was $14,423,980, or $0.89 per basic and diluted common share, on net
sales of $21,728,452. The net losses are primarily attributable to the expenses
generated by our technology segment.
LaserSight is principally engaged in the manufacture and supply of
microspot scanning excimer laser systems, keratomes, keratome blades and other
related products used to perform procedures that correct common refractive
vision disorders such as nearsightedness, farsightedness and astigmatism. Since
1994, we have marketed our laser systems commercially in over 30 countries
worldwide and currently have an installed base of over 350 scanning laser
systems outside the U.S., including approximately 180 of our LaserScan LSX laser
systems.
In November 1999, we received FDA approval for commercialization of our
LaserScan LSX laser systems in the U.S., and shipments of that product in the
U.S. began in March 2000.
Our MicroShape family of keratome products includes our UltraShaper
durable keratome, UniShaper single-use keratome, a control console that may be
used interchangeably with our single-use and durable keratomes, and our
UltraEdge keratome blades. We began commercial shipment of keratome blades in
July 1999 and of our single-use keratomes in December 1999. We currently expect
to begin commercial shipments of our UltraShaper durable keratomes during the
second quarter of 2001, and anticipate that both of these products will provide
us with the opportunity to participate in the significant growth in refractive
laser vision correction procedure volume by generating recurring revenue streams
As a result of these significant developments, our historical financial
statements may not be indicative of our future performance. In particular, we
anticipate that our LaserScan LSX laser system will make a more significant
contribution to our future operating results as a result of the anticipated
increased shipments of these laser systems to U.S. customers after we receive
FDA approval for treatment of myopia with astigmatism. In addition, we expect to
commercially launch our UltraShaper durable keratome in the second quarter of
2001, which we also expect to contribute to our future operating results.
However, we expect to continue to incur a loss and a deficit in cash flow at
least through the first half of 2001.
We also license to other participants in the excimer laser industry
various patents held by LaserSight related to the use of excimer lasers to
ablate biological tissue, and provide health care and vision care consulting
services to hospitals, managed care companies and physicians. For information
33
regarding our export sales and operating revenues, operating profit (loss) and
identifiable assets by industry segment, see note 13 of the notes to our
consolidated financial statements included in this report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from our consolidated statements of operations expressed as a percentage
of net sales, and the percentage change in such items from the comparable prior
year period. Any trends illustrated in the following table are not necessarily
indicative of future results.
Percentage Increase (Decrease)
As a Percentage of Net Sales Over Prior Periods
Year Ended December 31, Year Ended December 31,
1998 1999 2000 1998 to 1999 1999 to 2000
---- ---- ---- ------------ ------------
Statements of Operations Data:
Net revenues:
Refractive products 89.9% 89.3% 90.0% 21.5% 60.1%
Patent services 6.3 9.1 7.6 77.2 33.6
Healthcare services 3.8 1.6 2.4 (47.6) 131.7
------ ------ ------ ------ ------
Net revenues 100.0 100.0 100.0 22.4 58.9
Gross profit(1) 64.3 55.0 55.9 4.7 61.3
Research, development and
regulatory expenses (2) 21.6 14.4 13.4 (18.3) 47.2
Other general and administrative
expenses 68.5 76.7 65.2 37.1 35.1
Selling-related expenses (3) 25.7 21.7 22.1 3.2 61.8
Amortization of intangibles 13.0 11.7 7.6 9.9 2.8
Impairment loss - - 11.9 N/M N/M
------ ------ ------ ------ ------
Loss from operations (64.5) (69.5) (64.3) 31.8 47.0
- --------------------------------------------------------------------------------
N/M Not meaningful.
1. As a percentage of net revenues, the gross profit for refractive
products only for each of the three years ended December 31, 1998, 1999 and
2000 were 62%, 50% and 52%, respectively.
2. As a percentage of refractive product net revenues, research, development
and regulatory expenses for each of the three years ended December 31,
1998, 1999 and 2000 were 24%, 16% and 15%, respectively.
3. As a percentage of refractive product net revenues, selling-related
expenses for each of the three years ended December 31, 1998, 1999 and 2000
were 29%, 24% and 25%, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Net revenues for the year ended December 31, 2000 increased
by $12.8 million, or 59%, to $34.5 million from $21.7 million in 1999.
During the year ended December 31, 2000, refractive products revenues
increased $11.7 million, or 60%, to $31.1 million from $19.4 million in 1999.
This revenue increase was primarily the result of increased sales of the
LaserScan LSX due to our ability to sell laser systems in the U.S., the higher
34
price of the LaserScan LSX excimer laser system and the introduction of our
blade and keratome related products. See "Risk Factors and
Uncertainties--Industry and Competitive Risks--We cannot assure you that our
keratome products will achieve market acceptance." During the year ended
December 31, 2000, excimer laser system sales accounted for approximately $27.5
million in revenues compared to $17.0 million in 1999. During the years ended
December 31, 2000 and 1999, respectively, LaserScan LSX system sales accounted
for substantially all excimer laser system sales. During the year ended December
31, 2000, 90 laser systems were sold, compared to 65 laser system sales in 1999.
Of the 90 laser systems sold in 2000, 7 were discounted sales to existing
customers compared to 65 laser systems sold that included 14 discounted sales to
existing customers in 1999.
Net revenues from patent services for the year ended December 31, 2000
increased approximately $0.6 million, or 34%, to $2.6 million from $2.0 million
in 1999, due to increased licensing fees.
Net revenues from health care services for the year ended December 31,
2000 increased approximately $0.5 million, or 132%, to $0.8 million from $0.3
million in 1999. This increase primarily resulted from additional consulting
services provided, partially attributable to the two senior level consultants
added during the third quarter of 1999.
COST OF REVENUE; GROSS PROFITS. For the years ended December 31, 2000
and 1999, gross profit margins were 56% and 55%, respectively. The gross margin
increase during the year ended December 31, 2000 was primarily attributable to
increased sales of the LaserScan LSX excimer laser system and higher patent and
health care services revenues. These increased sales were partially offset by
higher raw material costs relating to the LaserScan LSX excimer laser system and
an increase in our inventory obsolescence reserve of $1.0 million. This
additional reserve primarily relates to a write down of our aesthetic inventory,
consisting mainly of erbium lasers used for skin resurfacing. This product line
is not part of our focus on refractive products.
RESEARCH, DEVELOPMENT AND REGULATORY EXPENSE. Research, development and
regulatory expenses for the year ended December 31, 2000 increased $1.5 million,
or 47%, to $4.6 million from $3.1 million in 1999. We continued to develop our
keratome systems, excimer laser systems and continued to pursue expanded FDA
approvals for our refractive products. As a result of a continuation of these
efforts plus the development of new technologies like our AstraMax diagnostic
workstation, we expect research and development expenses during 2001 to
approximate the levels incurred during 2000. Regulatory expenses are expected to
remain constant as a result of our continued pursuit of FDA approvals, protocols
added during 1999 related to the potential use of our laser systems for
treatments utilizing the LASIK procedure, pre-market approval supplements added
during 2000 and the possible development of additional pre-market approval
supplements and future protocols for submission to the FDA.
OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and
administrative expenses for the year ended December 31, 2000 increased $5.8
million, or 35%, to $22.5 million from $16.7 million in 1999. This increase was
due to an increase in expenses incurred at our refractive products subsidiary of
approximately $6.3 million over 1999. These included enhancements primarily to
the customer support and training, sales and marketing departments, including
the establishment of a U.S. sales department, of $1.1 million, the establishment
of our European operation of $0.6 million, higher depreciation costs of $0.4
million and $1.2 million of legal fees related to patent issues and litigation.
See "Risk Factors and Uncertainties--Financial and Liquidity Risks--If our
35
uncollectible receivables exceed our reserves we will incur additional
unanticipated expenses, and we may experience difficulty collecting restructured
receivables with extended payment terms."
SELLING-RELATED EXPENSES. Selling-related expenses consist of those
items directly related to sales activities, including commissions on sales,
royalty or license fees, warranty expenses, and costs of shipping and
installation. Commissions and royalties, in particular, can vary significantly
from sale to sale or period to period depending on the location and terms of
each sale. Selling-related expenses for the year ended December 31, 2000
increased $2.9 million, or 62%, to $7.6 million from $4.7 million in 1999. This
increase was primarily attributable to a $1.0 million increase in sales
commissions resulting from increased laser system sales, an increase of $1.1
million in license fees primarily resulting from the introduction of our
keratome products and an increase of $1.0 million of warranty expense primarily
related to increased laser system sales. During the last six months of 2000,
$0.8 million of keratome-related royalties resulted from minimum royalty
obligations. See "Risk Factors and Uncertainties - Company and Business Risks -
Required minimum payments under our keratome license agreement may exceed our
gross profits from sales of our keratome products."
AMORTIZATION OF INTANGIBLES. During the year ended December 31, 2000,
costs relating to the amortization of intangible assets was $2.6 million,
approximately the same as in 1999. Items directly related to the amortization of
intangible assets are acquired technologies, patents, license agreements and
goodwill.
IMPAIRMENT LOSS. During the fourth quarter of 2000, we recorded an
impairment loss of approximately $2.3 million related to goodwill of our
LaserSight Centers subsidiary. The combination of increased price competition
and resulting losses in many other laser centers businesses during 2000 and our
increased focus on refractive product development and commercialization resulted
in management's decision in late 2000 to abandon the strategy of a mobile laser
business. As a result, management performed an evaluation of the recoverability
of such goodwill, and concluded that a significant impairment of intangible
assets had occurred. An impairment charge was required because the carrying
value of the assets could not be recovered through estimated net cash flows.
During the fourth quarter of 2000, we also recorded an impairment loss
of approximately $1.8 million related to the PMA application acquired in 1997.
In December 2000, we submitted to the FDA our own PMA supplement representing
data from clinical trials performed on our LSX laser system, an advantage over
the PMA application acquired in 1997. In addition, the FDA has audited and
approved our manufacturing operation for the LSX laser system. This December
2000 submission resulted in management's decision to abandon further efforts
related to the PMA application acquired in 1997. As a result, management
performed an evaluation of the recoverability of such intangible asset, and
concluded that a significant impairment of it had occurred. An impairment charge
was required because the carrying value of the assets could not be recovered
through estimated net cash flows.
LOSS FROM OPERATIONS. The operating loss for the year ended December
31, 2000 was $22.2 million compared to the operating loss of $15.1 million in
1999. This increase in the loss from operations was primarily due to the
increase in sales of our LaserScan LSX excimer laser system and an improvement
in the operating gain generated by our patent services subsidiary, more than
offset by an increase in other general and administrative expenses related to
our refractive products operations as well as impairment loss of $4.1 million.
36
OTHER INCOME AND EXPENSE. Interest and dividend income for the year
ended December 31, 2000 was $0.9 million, an increase of $0.1 million over the
comparable period in 1999. Interest and dividend income was earned from the
investment of cash and cash equivalents and the collection of long-term
receivables related to laser system sales. Interest expense for the years ended
December 31, 2000 and 1999 was not material.
INCOME TAXES. For the years ended December 31, 2000 and 1999,
LaserSight had no income tax expense as a result of net losses.
NET LOSS. Net loss for the year ended December 31, 2000, was $21.4
million compared to a net loss of $14.4 million in 1999. The increase in net
loss for the year ended December 31, 2000 can be attributed to the increase in
sales of our LaserScan LSX excimer laser system and an improvement in the
operating gain generated by our patent services subsidiary, more than offset by
an increase in other general and administrative expenses related to our
refractive products operations as well as an impairment loss of $4.1 million.
LOSS PER SHARE. The loss per basic and diluted share was $1.02 for the
year ended December 31, 2000 and $0.89 in 1999. During the year ended December
31, 2000, the weighted average shares of common stock outstanding increased
primarily due to the conversion of preferred stock, private placements of common
stock and the exercise of options and warrants.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Net revenues for the year ended December 31, 1999 increased
by $3.9 million, or 22%, to $21.7 million from $17.8 million for the comparable
period in 1998. During the year ended December 31, 1999, refractive products
revenues increased $3.4 million, or 22%, to $19.4 million from $16.0 million for
the comparable period in 1998. This revenue increase was primarily the result of
increased sales of our higher priced LaserScan LSX excimer laser system. During
the year ended December 31, 1999, excimer laser system sales accounted for
approximately $17.0 million in revenues compared to $14.6 million in revenues
over the same period in 1998. During the year ended December 31, 1999 and 1998,
respectively, LaserScan LSX system sales accounted for 89% and 60%,
respectively, of total excimer laser system sales. During the year ended
December 31, 1999, 65 laser systems were sold compared to 50 system sales over
the comparable period in 1998. The 65 systems sold during 1999 include 51 system
sales to new customers and 14 LaserScan LSX excimer laser systems sold to
existing customers to replace older laser systems. The replacement systems were
sold at discounted prices at a positive gross margin, though at a lower gross
margin than sales to new customers. Additional improvements in refractive
products related revenues during the year ended December 31, 1999 were
attributable to an increase in the level of service contract revenues and
increased revenues generated from our aesthetic product line, that was acquired
in April 1998. These increases were slightly offset by a reduction in revenues
generated from miscellaneous part sales for the year ended December 31, 1999 as
compared to the year ended December 31, 1998. Net revenues from patent services
for the year ended December 31, 1999 increased approximately $0.9 million, or
77%, to $2.0 million from $1.1 million for the comparable period in 1998, due to
increased licensing fees. Net revenues from health care services for the year
ended December 31, 1999 decreased approximately $0.3 million, or 48% to $0.4
million from $0.7 million for the comparable period in 1998. This decrease was
primarily attributable to a reduction in consulting services provided and was
accompanied by a reduction in expenses of approximately $0.2 million over the
year ended December 31, 1998. Such revenue and expense reductions are primarily
37
the result of staffing reductions instituted during mid-1998 to more closely
match the cost structure of this segment with anticipated revenues going
forward.
COST OF REVENUES; GROSS PROFITS. For the years ended December 31, 1999
and 1998, gross profit margins were 55% and 64%, respectively. The gross profit
margin decrease during the year ended December 31, 1999 was primarily
attributable to higher raw material costs relating to the LaserScan LSX excimer
laser system of $2.0 million, an increase in manufacturing overhead of $0.5
million, an increase in our inventory obsolescence reserve of $0.9 million, and
an increase of $0.2 million in raw materials relating to our aesthetics
division, that was acquired in April 1998.
RESEARCH, DEVELOPMENT AND REGULATORY EXPENSES. Research, development
and regulatory expenses for the year ended December 31, 1999 decreased by $0.7
million, or 18%, to $3.1 million from $3.8 million for the comparable period in
1998. We continued to develop our keratome systems, excimer laser systems and
continued to pursue protocols in our effort to attain FDA approval for our
products. As a result of a continuation of these efforts plus the anticipated
development of new product concepts, we expect research and development expenses
during 2000 to increase over levels incurred during 1999. Regulatory expenses
are expected to increase as a result of our continued pursuit of FDA approval
for our PMA supplements, protocols added during 1999 related to the potential
use of our laser systems for treatments utilizing LASIK procedures and the
possible development of additional pre-market approval supplements and future
protocols for submission to the FDA.
OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and
administrative expenses for the year ended December 31, 1999 increased $4.5
million, or 37%, to $16.7 million from $12.2 million for the comparable period
in 1998. This increase was due to an increase in expenses related to our
refractive products business of approximately $4.6 million over the comparable
period in 1998. These included enhancements to the customer support and
training, quality assurance, marketing, software development and engineering
departments of $2.5 million, $0.4 million of costs relating to our efforts to
develop a blade manufacturing operation, $0.5 million of higher depreciation and
lease costs (including the second Winter Park, Florida facility and larger
office space), $0.4 million of salaries primarily resulting from staffing
additions to accounting, information systems and human resources departments and
bad debt expense of $0.8 million, which represented a general increase in
reserves. See "Risk Factors--Financial and Liquidity Risks - If our
uncollectible receivables exceed our reserves we will incur additional
unanticipated expenses, and we may experience difficulty collecting restructured
receivables with extended payment terms." The total increase was partially
offset by a $0.2 million reduction of expenses related to our patent services
business from the comparable period in 1998.
SELLING-RELATED EXPENSES. Selling-related expenses consist of those
items directly related to sales activities, including commissions on sales,
royalty or license fees, warranty expenses, and costs of shipping and
installation. Commissions and royalties, in particular, can vary significantly
from sale-to-sale or period-to-period depending on the location and terms of
each sale. Selling-related expenses for the year ended December 31, 1999
increased $0.1 million, or 3%, to $4.7 million from $4.6 million during the
comparable period in 1998. This increase was primarily attributable to an $0.5
million increase in estimated warranty expense being accrued resulting from
higher sales and an increase in the per system estimate to provide annual
warranty coverage from the comparable 1998 period, partially offset by a $0.4
million decrease in sales commissions, which vary depending on the location of
sale. There were no material changes in the levels of royalty fees, system
installation and shipping costs in the comparable periods.
38
AMORTIZATION OF INTANGIBLES. During the year ended December 31, 1999,
costs relating to the amortization of intangible assets increased by $0.2
million, or 10%, to $2.5 million from $2.3 million for the comparable period in
1998. Items directly related to the amortization of intangible assets are
acquired technologies, patents, license agreements and goodwill.
LOSS FROM OPERATIONS. The operating loss for the year ended December
31, 1999 was $15.1 million compared to the operating loss of $11.5 million for
the same period in 1998. This increase in the loss from operations was primarily
due to the increase in other general and administrative expenses related to the
sale of our refractive products and the decrease in our gross profit margin,
partially offset by an improvement in the operating gain generated by our patent
services subsidiary.
OTHER INCOME AND EXPENSE. Interest and dividend income for the year
ended December 31, 1999 was $0.8 million compared to $0.6 million for the
comparable period in 1998. Interest and dividend income was earned from the
investment of cash and cash equivalents and the collection of long-term
receivables related to laser system sales. Interest expense for the year ended
December 31, 1999 was $0.1 million compared to interest expense of $0.8 million
for the comparable period in 1998. Interest expense incurred during the year
ended December 31, 1999 related primarily to an adjustment to the fair value of
the warrant issued to Foothill Capital Corporation and interest paid on a
capital lease obligation during the first half of 1999. Interest expense
incurred during the year ended December 31, 1998 related primarily to the credit
facility established with Foothill on April 1, 1997 that was repaid in full in
June 1998. In addition to interest paid on the outstanding note payable balance,
interest expense in 1998 included the amortization of deferred financing costs,
the accretion of the discount on the note payable, and fees associated with
amendments to the original loan agreement. During the year ended December 31,
1998, LaserSight recognized gains on the sale of subsidiaries and securities of
$0.4 million resulting from the sale of marketable equity securities that were
received in December 1997 in exchange for the sale of two health care
subsidiaries.
INCOME TAXES. For the year ended December 31, 1999, LaserSight had no
income tax expense, while income tax expense of $0.2 million was recognized
during the year ended December 31, 1998.
NET LOSS. Net loss for the year ended December 31, 1999, was $14.4
million compared to a net loss of $11.9 million for the comparable period in
1998. The increase in net loss for the year ended December 31, 1999 can be
attributed to the increase in other general and administrative expenses incurred
by our refractive products operations and the decrease in our gross profit
margin, partially offset by an improvement in the operating gain generated by
our patent services subsidiary.
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. The loss attributable to
common shareholders for the year ended December 31, 1998 was impacted by the
$1.1 million premium paid on the repurchase of the 525 remaining shares of
Series B Preferred Stock, the accretion of $0.6 million of financing costs
related to such shares, the $0.8 million value of the conversion discount on the
Series C Preferred Stock and Series D Preferred Stock, the impact of the $0.7
million premium paid on the first quarter 1998 repurchase of 351 shares of
Series B Preferred Stock and the accretion of $0.4 million of financing costs
related to such shares. The comparable period in 1999 was not impacted by any
such adjustments.
39
LOSS PER SHARE. The loss per basic and diluted share decreased to $0.89
for the year ended December 31, 1999, compared to $1.26 for the comparable
period in 1998. Of the basic and diluted losses per share for the year ended
December 31, 1998, $0.29 was a result of the value of the conversion discount on
preferred stock in accordance with EITF Topic D-60 and accretion and dividend
requirements on the Series B Preferred Stock. During the year ended December 31,
1999, the weighted average shares of common stock outstanding increased
primarily due to the exercise of options and warrants and the private placement
completed in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds have historically been from sales of
preferred stock and common stock, sales of subsidiaries and patent rights and,
to a lesser extent, our operating cash flows. We issued securities totaling
approximately $14.8 million in 1997, $15.8 million in 1998, $8.9 million in
1999, and $19.1 million in 2000, and received proceeds from the exercise of
stock options and warrants and purchases under our Employee Stock Purchase Plan
of approximately $98,000 in 1997, $0.5 million in 1998, $10.4 million in 1999
and $85,000 in 2000. In addition, we sold subsidiaries and various patent
rights, resulting in proceeds to us of approximately $10.5 million in 1997,
$12.7 million in 1998 and $6.5 million to date in 2001. We have principally used
these capital resources to fund operating losses, working capital requirements,
capital expenditures, acquisitions and retirement of debt. At December 31, 2000,
we had an accumulated deficit of $59.6 million.
In March 2001, we completed the sale of the Blum Patent for a cash
payment of $6.5 million. We retained a non-exclusive royalty free license under
the patent, which relates to the use of ultraviolet light for the removal of
organic tissue. Our book value of the patent at December 31, 2000, was
approximately $2.4 million.
On March 12, 2001, we established a $3.0 million term loan and $10.0
million revolving credit facility with Heller. We borrowed
$3.0 million under the term loan at a rate per annum equal to two and one-half
percent (2 1/2%) above the prime rate. Interest is payable monthly and the loan
must be repaid on March 12, 2003. Under the credit agreement, we have the option
to borrow amounts at a rate per annum equal to one and one-quarter percent (1
1/4%) above the prime rate for short term working capital needs or such other
purposes as may be approved by Heller. Borrowings are limited to 85% of
qualified accounts receivable related to U.S. sales. Borrowings under the Credit
Agreement are secured by substantially all of the Company's assets. The term
and credit facility require us to maintain a minimum net worth. The terms of the
loans extend to March 12, 2003. In addition to the costs and fees associated
with the transaction, we issued to Heller a warrant to purchase 243,750 shares
of common stock at an exercise price of $3.15. The warrant expires on March 12,
2004. The credit facility replaces a $5.0 million credit facility that was
entered into in September 2000. At March 29, 2001, we had no borrowings under
the credit facility.
Our working capital decreased $0.9 million from $21.6 million at
December 31, 1999 to $20.7 million as of December 31, 2000. This decrease in
working capital resulted primarily from the private placements of common stock
in January, February and September 2000 and other equity transactions, which
resulted in gross proceeds of $19.2 million, offset primarily by our loss before
depreciation, amortization and impairment losses of $13.6 million and our
acquisition of property and intangible assets for $6.1 million.
Operating activities used net cash of $15.7 million during 2000,
compared to $11.7 million during 1999. We expect to incur a loss and a deficit
in cash flow from operations for the first half of 2001. There can be no
40
assurance that we can regain or sustain profitability or positive operating cash
flow in any subsequent fiscal period. Net cash used in investing activities of
$6.1 million during 2000 can be attributed primarily to the purchase of patents
and property and equipment. As of December 31, 2000, we had no significant
commitments for capital expenditures. Net cash provided from financing
activities during 2000 of $19.2 million resulted primarily from the issuance of
3,060,316 shares of common stock in private placements to five investors for
gross proceeds of $19.3 million (including $10.0 million from TLC).
We are currently exploring opportunities for additional equity
financing through a private placement of our common stock. We believe that, in
addition to our existing balances of cash and cash equivalents and our cash
flows from operations, some form of equity or debt financing may be necessary to
fund our anticipated working capital requirements for the next 12 months in
accordance with our current business plan. Our belief regarding future working
capital requirements is based on various factors and assumptions including: the
growth in laser sales resulting from our entrance into the U.S. market in March
2000 with corresponding increases in accounts receivable and inventory purchases
to date, the uncertain timing of astigmatism and other supplemental FDA
approvals for our LaserScan LSX excimer laser system, that could continue to
impact our sales during 2001, the uncertain timing of the market introduction of
our UltraShaper durable keratomes, commercial acceptance of our UltraEdge
keratome blades and UniShaper single-use keratomes, which we believe is
partially dependent upon the successful introduction of the UltraShaper, the
anticipated timely collection of receivables, and the absence of unanticipated
product development and marketing costs. See "Risk Factors and
Uncertainties--Industry and Competitive Risks--We cannot assure you that our
keratome products will achieve market acceptance." These factors and assumptions
are subject to certain contingencies and uncertainties, some of which are beyond
our control. Similarly, our long-term liquidity will be dependent on the
successful entrance into the U.S. market with our laser systems, the successful
entrance into U.S. and international markets of our diagnostic workstation and
keratome products, and our ability to collect our receivables on a timely basis.
We may seek additional debt or equity financing in the future to implement our
business plan or any changes thereto in response to future developments or
unanticipated contingencies. Other than the $3.0 million term loan and $10.0
million credit facility completed in March 2001 with Heller, we currently do not
have any commitments for additional financing. There can be no assurance that we
can obtain financing that we believe will be necessary to finance our working
capital requirements for the next 12 months. See "Risk Factors and
Uncertainties--Financial and Liquidity Risks--We could require additional
financing which might not be available if we need it."
SEASONALITY, BACKLOG AND CUSTOMER PAYMENT TERMS
Based on our historical activity, we do not believe that seasonal
fluctuations have a material impact on our financial performance.
To date, we have been able to ship laser units as orders are received.
As a result, order backlog is not a meaningful factor in our business.
In the U.S., we expect that sales of our laser systems will generally
be to customers with approved credit, and we anticipate that the purchase price
for such laser systems will generally be paid to us within 60 days of shipment.
In international markets, unless a letter of credit or other acceptable security
has been obtained, we generally require a down payment or deposit from our laser
system customers at or before installation. At December 31, 2000, we were the
payee on letters of credit with foreign financial institutions aggregating
approximately $0.3 million (compared to approximately $0.6 million at December
41
31, 1999). On occasion, it is necessary to meet a competitor's more liberal
terms of payment. In those and other cases, we may provide term financing. Our
internally-financed sales with repayment periods exceeding 18 months (measured
from the installation date) decreased from 10 systems in 1998, to five systems
in 1999 and consisted of 12 systems during 2000. In our experience, sales of
major capital equipment such as excimer laser systems in certain areas,
including much of South and Central America, often require payment terms ranging
from 12 to 24 months.
RISK FACTORS AND UNCERTAINTIES
The business, results of operations and financial condition of
LaserSight and the market price of our common stock may be adversely affected by
a variety of factors, including the ones noted below:
INDUSTRY AND COMPETITIVE RISKS
WE CANNOT ASSURE YOU THAT OUR LASERSCAN LSX LASER SYSTEM WILL ACHIEVE
MARKET ACCEPTANCE IN THE U.S., AND OUR BUSINESS MODEL FOR SELLING OUR LASER
SYSTEM IN THE U.S. IS NEW AND UNPROVEN.
We received the FDA approval necessary for the commercial marketing and
sale of our LaserScan LSX excimer laser system in the U.S. in late 1999 and
commercial shipments to customers in the U.S. began in March 2000. Our previous
experience marketing and selling our LaserScan LSX excimer laser system in the
U.S. had been limited to cost-recovery sales to refractive surgeons
participating in our FDA clinical trials.
The required level of per procedure fees payable to us by refractive
surgeons upon receipt of anticipated FDA approval for treatment of myopia with
astigmatism may not be accepted by the marketplace or may exceed those charged
by our competitors. While we believe that gaining access to our
recently-approved scanning microspot laser technology justifies the required per
procedure fee levels, we cannot assure you that this business model will be
accepted by a large number of refractive surgeons. If our competitors reduce or
do not charge per procedure fees to users of their systems, we could be forced
to reduce or eliminate the fees charged under this business model, which could
significantly reduce our revenues. For example, Nidek Co., Ltd., one of our
competitors, has publicly stated that it will not charge per procedure fees to
users of its laser systems in the U.S. and internationally.
Successful implementation of this business model is crucial to our
success in selling our LaserScan LSX laser system in the U.S. and may require
the expenditure of significant financial and other resources to create awareness
of the LaserScan LSX laser system and create demand by refractive surgeons. If
our laser system fails to achieve market acceptance in the U.S., we may not be
able to execute our business plan, which would have a material adverse effect on
our business, financial condition and results of operations.
WE CANNOT ASSURE YOU THAT OUR KERATOME PRODUCTS WILL ACHIEVE MARKET
ACCEPTANCE.
Keratomes are surgical devices used to create a corneal flap
immediately prior to LASIK laser vision correction procedures. We began to roll
out our MicroShape family of keratome products with the commercial launch of our
UltraEdge keratome blades in July 1999 and of our UniShaper single-use keratomes
and control consoles in December 1999. We anticipate the commercial launch of
our UltraShaper durable keratomes during the second quarter of 2001. We had
previously estimated the launch of this product during the second quarter of
42
2000. We cannot assure you that there will not be further unanticipated delays
in the launch of our UltraShaper durable keratome, which has continued a process
of engineering refinement and validity testing prior to commercial release. Our
UniShaper single-use keratome was the first disposable keratome product to be
commercially marketed, and we cannot assure you that refractive surgeons,
including in particular refractive surgeons who perform a large volume of LASIK
procedures, will accept our UniShaper product as either a replacement for or a
supplement to the durable keratomes traditionally used to create corneal flaps.
In our recent experience, many surgeons are reluctant to use a disposable
keratome product as their primary keratome. Also, market acceptance of the
UniShaper may be hindered by surgeons needing to alter their surgical technique
in order to achieve the desired clinical results. Our UltraShaper durable
keratome incorporates the features found in the Automated Corneal Shaper
keratome previously marketed by Bausch & Lomb, Inc. with new enhancements and
features. However, Bausch & Lomb has not aggressively marketed or serviced the
ACS since 1997 when we licensed the rights to commercially market keratomes
based on the same technology, and has successfully transitioned a large number
of refractive surgeons from the ACS to its Hansatome durable keratome product.
We believe that many refractive surgeons learned to perform the LASIK procedure
using the ACS and prefer the surgical technique required by the ACS, which is
also used to operate our UltraShaper durable keratome, to the surgical technique
required to operate the Hansatome keratome product. However, we cannot assure
you that we will be successful in commercially introducing or achieving broad
market acceptance of our UltraShaper durable keratome or our other keratome
products.
We have previously indicated that the successful implementation of our
keratome product sales strategy is in part dependent upon our marketing and
distribution alliance with Becton Dickinson. Due to the delay in the commercial
launch of our UltraShaper durable keratome we initiated discussions with Becton
Dickinson in order to modify our manufacturing and marketing agreements. While
these discussions were ongoing we recently received notices from Becton
Dickinson claiming that they have the right to end our marketing arrangement in
six months and that they are not bound by the terms of our manufacturing
agreement. Following our receipt of these notices Becton Dickinson indicated a
willingness to discuss modified terms for a marketing and manufacturing
relationship. While we do not agree that Becton Dickinson has the right to
unilaterally end our current agreements we intend to discuss mutually
beneficial modified agreements. If we cannot successfully market and sell our
keratome products or if we are unable to successfully modify or replace our
marketing and distribution alliance with Becton Dickinson, we may not be able to
execute our business plan, which would have a material adverse effect on our
business, financial condition and results of operations. See also "--Company and
Business Risks--Required minimum payments under our keratome license agreement
may exceed our gross profits from sales of our keratome products."
THE VISION CORRECTION INDUSTRY CURRENTLY CONSISTS OF A FEW ESTABLISHED
PROVIDERS WITH SIGNIFICANT MARKET SHARES AND WE MAY ENCOUNTER DIFFICULTIES
COMPETING IN THIS HIGHLY COMPETITIVE ENVIRONMENT.
The vision correction industry is subject to intense, increasing
competition, and we do not know if we will be able to compete successfully
against our current and future competitors. Many of our competitors have
established products, distribution capabilities and customer service networks in
the U.S. marketplace, are substantially larger and have greater brand
recognition and greater financial and other resources than we do. Visx
Incorporated, the historical industry leader for excimer laser system sales in
the U.S., sold laser systems that performed a significant majority of the laser
vision correction procedures performed in the U.S. in 1999 and 2000. Similarly,
Bausch & Lomb sold a significant majority of the keratomes used by refractive
surgeons in the U.S. in 1999 and 2000. In 2000, Alcon acquired Summit Autonomous
Inc. The merger resulted in a combined entity with enhanced market presence,
technology base and distribution capabilities and provided Summit with a narrow
beam laser technology platform which will compete more directly with our
43
precision beam scanning microspot LaserScan LSX excimer laser system. In
addition, as a result of the acquisition, the combined entity will be able to
sell narrow beam laser systems under a royalty-free license to certain Visx
patents without incurring the expense and uncertainty associated with
intellectual property litigation with Visx. We anticipate that Alcon will
leverage the sale of its laser systems with its other ophthalmic products.
MANY OF OUR COMPETITORS RECEIVED EARLIER REGULATORY APPROVALS THAN US
AND MAY HAVE A COMPETITIVE ADVANTAGE OVER US DUE TO THE SUBSEQUENT EXPANSION OF
THEIR REGULATORY APPROVALS AND THEIR SUBSTANTIAL EXPERIENCE IN THE U.S. MARKET.
We received the FDA approval necessary for the commercial sale of our
LaserScan LSX excimer laser system in the U.S. in November 1999, and commercial
shipments to customers in the U.S. began in March 2000. Our direct competitors
include large corporations such as Visx and Alcon, each of whom received FDA
approval of excimer laser systems more than three years ago and has substantial
experience manufacturing, marketing and servicing laser systems in the U.S. In
addition to Visx and Alcon, Nidek and Bausch & Lomb have also received FDA
approval for their laser systems.
In the U.S., a manufacturer of excimer laser vision correction systems
gains a competitive advantage by having its systems approved by the FDA for a
wider range of treatments. Initial FDA approvals of excimer laser vision
correction systems historically have been limited to PRK treatment of low to
moderate nearsightedness, with additional approvals for other and broader
treatments granted only as a result of subsequent FDA applications and clinical
trials. Our LaserScan LSX is currently approved only for the PRK treatment of
low to moderate nearsightedness (up to -6.0 diopters) without astigmatism. In
August 2000, we received FDA approval to operate our laser systems at a 200 Hz
pulse repetition rate, twice the originally approved rate. Currently, excimer
laser vision correction systems manufactured by Visx, Alcon, Bausch & Lomb and
Nidek have been approved for higher levels of nearsightedness than the LaserScan
LSX and are also approved for the treatment of nearsightedness with astigmatism
for which the LaserScan LSX currently does not have approval. The Visx and Alcon
excimer laser systems are also approved for the treatment of moderate
farsightedness.
We have submitted a PMA supplement to the FDA for approval to utilize
LASIK for the treatment of nearsightedness with astigmatism and have responded
to FDA requests for additional patient data related to our submission. We
anticipate FDA approval of this application during the second quarter of 2001,
though we cannot ensure when the approval will be received. In addition, we have
submitted PMA supplements to the FDA to permit our laser systems sold to
customers in the U.S. to utilize LASIK to treat hyperopia, hyperopic
astigmatism, and mixed astigmatism. FDA approval of these applications is
anticipated by the end of 2001, though we cannot ensure when the approval will
be received. Our ability to sell our laser systems in the U.S. may be severely
impaired if the FDA does not timely approve our application for our LaserScan
LSX to treat nearsightedness with astigmatism, our application to permit our
laser systems sold to customers in the U.S. to include our latest eye tracking
technology, or our application to permit our laser systems sold to customers in
the U.S. to utilize LASIK to treat myopic astigmatism, hyperopic astigmatism,
and mixed astigmatism.
Alcon's Apex Plus and Ladarvision Excimer Laser Workstations, Visx's
Star S2 Excimer Laser System and Nidek's EC-5000 Excimer Laser System have
received FDA approval for the LASIK treatment of myopia (nearsightedness) with
or without astigmatism. The approvals for most of the systems are for the
correction of myopia in the range of 0 diopters to -14.0 diopters and myopia
with astigmatism generally in the range of -0.5 diopters to -5.0 diopters.
Bausch & Lomb's Technolas 217 excimer laser has also received FDA approval for
the treatment of myopia up to -7.0 diopters with up to -3.0 diopters of
44
astigmatism. These laser systems are currently the only laser systems
commercially available in the U.S. with FDA approval for use in LASIK. A
physician may decide, as part of the practice of medicine, to use a medical
device outside of its FDA-approved indications for an unapproved or "off-label"
use. Prior to these laser approvals, all LASIK procedures performed in the U.S.
with commercially available lasers were performed as the practice of medicine.
In September 2000, the FDA approved Alcon's Ladarvision system for the
correction using LASIK of farsightedness of up to +6.0 diopters and an
astigmatism range of up to 6.0 diopters. In October 2000, the FDA approved
Visx's Star S2 and S3 systems for the correction using PRK of farsightedness of
up to +5.0 diopters and an astigmatism range of up to 4.0 diopters. Competitors'
receipt of LASIK-specific FDA regulatory approvals could give them a significant
competitive advantage that could impede our ability to successfully sell our
LaserScan LSX system in the U.S. or discourage physicians from using our or
other manufacturers' lasers off-label. Our failure to successfully market our
product could have a material adverse effect on our business, financial
condition and results of operations.
All of our principal competitors in the keratome business, including
current market leader Bausch & Lomb, received FDA clearance prior to the
commercialization of our keratome products and have substantial experience
marketing their keratome products. The established market presence in the U.S.
of previously-approved laser systems and keratome products, as well as the entry
of new competitors into the market upon receipt of new or expanded regulatory
approvals, could impede our ability to successfully introduce our LaserScan LSX
system in the U.S. and our keratome products worldwide and may have a material
adverse effect on our business, financial condition and results of operations.
WE DEPEND UPON OUR ABILITY TO ESTABLISH AND MAINTAIN STRATEGIC
RELATIONSHIPS.
We believe that our ability to establish and maintain strategic
relationships will have a significant impact on our ability to meet our business
objectives. These strategic relationships are critical to our future success
because we believe that these relationships will help us to:
o extend the reach of our products to a larger number of refractive
surgeons;
o develop and deploy new products;
o further enhance the LaserSight brand; and
o generate additional revenue.
Entering into strategic relationships is complicated because some of
our current and future strategic partners may decide to compete with us in some
or all of our markets. In addition, we may not be able to establish
relationships with key participants in our industry if they have relationships
with our competitors, or if we have relationships with their competitors.
Moreover, some potential strategic partners have resisted, and may continue to
resist, working with us until our products and services have achieved widespread
market acceptance. Once we have established strategic relationships, we will
depend on our partners' ability to generate increased acceptance and use of our
products and services. To date, we have established only a limited number of
strategic relationships, and many of these relationships are in the early stages
of development. There can be no assurance as to the terms, timing or
consummation of any future strategic relationships. If we lose any of these
strategic relationships or fail to establish additional relationships, or if our
strategic relationships fail to benefit us as expected, we may not be able to
execute our business plan, and our business will suffer.
45
BECAUSE THE SALE OF OUR PRODUCTS IS DEPENDENT ON THE CONTINUED MARKET
ACCEPTANCE OF LASER-BASED REFRACTIVE EYE SURGERY USING THE LASIK PROCEDURE, THE
LACK OF BROAD MARKET ACCEPTANCE WOULD HURT OUR BUSINESS.
We believe that whether we achieve profitability and growth will
depend, in part, upon the continued acceptance of laser vision correction using
the LASIK procedure in the U.S. and other countries. We cannot be certain that
laser vision correction will continue to be accepted by either the refractive
surgeons or the public at large as an alternative to existing methods of
treating refractive vision disorders. The acceptance of laser vision correction
and, specifically, the LASIK procedure may be adversely affected by:
o possible concerns relating to safety and efficacy, including the
predictability, stability and quality of results;
o the public's general resistance to surgery;
o the effectiveness and lower cost of alternative methods of
correcting refractive vision disorders;
o the lack of long-term follow-up data;
o the possibility of unknown side effects;
o the lack of third-party reimbursement for the procedures;
o the cost of the procedure; and
o possible future unfavorable publicity involving patient outcomes
from the use of laser vision correction.
Unfavorable side effects and potential complications that may result
from the use of laser vision correction systems manufactured by any manufacturer
may broadly affect market acceptance of laser-based vision correction surgery.
Potential patients may not distinguish between our precision beam scanning spot
technology and the laser technology incorporated by our competitors in their
laser systems, and customers may not differentiate laser systems and procedures
that have not received FDA approval from FDA-approved systems and procedures.
Any adverse consequences resulting from procedures performed with a competitor's
systems or an unapproved laser system could adversely affect consumer acceptance
of laser vision correction in general. In addition, because laser vision
correction is an elective procedure which is not typically covered by insurance
and that involves more significant immediate expense than eyeglasses or contact
lenses, adverse changes in the U.S. or international economy may cause consumers
to reassess their spending choices and to select lower-cost alternatives for
their vision correction needs. Any such shift in spending patterns could reduce
the volume of LASIK procedures performed that would, in turn, reduce our
revenues from per procedure fees and sales of single-use products such as our
UniShaper keratome and our UltraEdge keratome blades.
The failure of laser vision correction to achieve continued market
acceptance could have a material adverse effect on our business prospects. Even
if laser vision correction achieves and sustains market acceptance, sales of our
keratome products could be adversely impacted if a laser procedure that does not
require the creation of a corneal flap were to emerge as the procedure of
choice.
NEW PRODUCTS OR TECHNOLOGIES COULD ERODE DEMAND FOR OUR PRODUCTS OR
MAKE THEM OBSOLETE, AND OUR BUSINESS COULD BE HARMED IF WE CANNOT KEEP PACE WITH
ADVANCES IN TECHNOLOGY.
In addition to competing with eyeglasses and contact lenses, excimer
laser vision correction competes or may compete with newer technologies such as
46
intraocular lenses, corneal rings and surgical techniques using different or
more advanced types of lasers. Two products that may become competitive within
the near term are implantable contact lenses, which are pending FDA approval,
and corneal rings, which have been approved by the FDA. Both of these products
require procedures with lens implants, and their ultimate market acceptance is
unknown at this time. To the extent that any of these or other new technologies
are perceived to be clinically superior or economically more attractive than
currently marketed excimer laser vision correction procedures or techniques,
they could erode demand for our excimer laser and keratome products, cause a
reduction in selling prices of such products or render such products obsolete.
In addition, if one or more competing technologies achieves broader market
acceptance or render laser vision correction procedures obsolete, it would have
a material adverse effect on our business, financial condition and results of
operations.
As is typical in the case of new and rapidly evolving industries, the
demand and market for recently-introduced products and technologies is
uncertain, and we cannot be certain that our LaserScan LSX laser system,
UniShaper single-use keratome, UltraShaper durable keratome, UltraEdge keratome
blades or future new products and enhancements will be accepted in the
marketplace. In addition, announcements or the anticipation of announcements of
new products, whether for sale in the near future or at some later date, may
cause customers to defer purchasing our existing products.
If we cannot adapt to changing technologies, our products may become
obsolete, and our business could suffer. Our success will depend, in part, on
our ability to continue to enhance our existing products, develop new technology
that addresses the increasingly sophisticated needs of our customers, license
leading technologies and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. The development of
our proprietary technology entails significant technical and business risks. We
may not be successful in using new technologies effectively or adapting our
proprietary technology to evolving customer requirements or emerging industry
standards.
COMPANY AND BUSINESS RISKS
WE ARE SUBJECT TO RISKS AND UNCERTAINTIES RELATING TO LITIGATION.
Visx commenced a lawsuit in November 1999 in the United States District
Court, District of Delaware, against us alleging that our LaserScan LSX laser
system infringes one of Visx's U.S. patents for equipment used in ophthalmic
surgery. The LaserScan LSX is the only laser system we are currently marketing
and is the only laser system manufactured by us that is approved for sale to
U.S. customers. The suit requests, among other things, injunctive relief, treble
damages and attorneys' fees and expenses. Management does not believe that our
LaserScan LSX laser system infringes the asserted Visx patent. However, we had
agreed to a stay of such litigation to pursue license negotiations with Visx in
an effort to help facilitate commercialization of the LaserScan LSX in the U.S.
market. We withdrew from license negotiations with Visx in February 2000, and
after the stay of the litigation was lifted, we filed suit against Visx,
claiming non-infringement and invalidity of the Visx patent and asserting that
Visx infringes U.S. Patent No. 5,630,810 to which we hold an exclusive license.
We also began to sell and ship our LaserScan LSX laser systems in the U.S.
during March 2000.
We believe that the claims Visx has made against us are without merit
and we intend to vigorously contest them. However, if we are unsuccessful in
defending this lawsuit, we may be enjoined from manufacturing and selling our
LaserScan LSX laser system in the U.S. without a license from Visx. In addition,
we may be subject to damages for past infringement. No assurance can be given as
47
to whether we will be subject to such damages or, if so, the amount of damages
that we may be required to pay. In addition, such patent litigation is
time-consuming, is causing us to incur substantial expense, could divert
management's attention, could cause product shipment delays or require us to
develop non-infringing technology or enter into license agreements in order to
market our products. Such license agreements, if required, may not be available
on acceptable terms, or at all. The outcome of patent litigation, particularly
in jury trials, is inherently uncertain, and an unfavorable outcome in the Visx
litigation could have a material adverse effect on our business, financial
condition and results of operations.
WE WILL BE REQUIRED TO SIGNIFICANTLY EXPAND OUR U.S. MANUFACTURING
OPERATIONS TO MEET OUR BUSINESS PLAN AND MUST COMPLY WITH STRINGENT REGULATION
OF OUR MANUFACTURING OPERATIONS.
We manufacture our LaserScan LSX laser systems for sale in the U.S. at
our manufacturing facility in Winter Park, Florida, and continue to manufacture
our laser systems for sale in international markets at our manufacturing
facility in Costa Rica. Our U.S. personnel have limited experience manufacturing
laser systems. We cannot, therefore, assure you that we will not encounter
difficulties in increasing our production capacity for our laser systems at our
Florida facility, including problems involving production delays, quality
control or assurance, component supply and lack of qualified personnel. Any
products manufactured or distributed by us pursuant to FDA clearances or
approvals are subject to extensive regulation by the FDA, including record
keeping requirements and reporting of adverse experience with the use of the
product. Our manufacturing facilities are subject to periodic inspection by the
FDA, certain state agencies and international regulatory agencies. We require
that our key suppliers comply with recognized standards as well as our own
quality standards, and we regularly test the components and sub-assemblies
supplied to us. Any failure by us or our suppliers to comply with applicable
regulatory requirements, including the FDA's quality systems/good manufacturing
practice (QSR/GMP) regulations, could cause production and distribution of our
products to be delayed or prohibited, either of which could have a material
adverse effect on our business, financial condition and results of operations.
REQUIRED MINIMUM PAYMENTS UNDER OUR KERATOME LICENSE AGREEMENT MAY
EXCEED OUR GROSS PROFITS FROM SALES OF OUR KERATOME PRODUCTS.
In addition to the risk that the UniShaper single-use keratome or
UltraShaper durable keratome will not be accepted in the marketplace, we are
required to make certain minimum payments to the licensor under our amended and
restated keratome license agreement. Under the original agreement, we were
required to provide an excimer laser system and pay a total of $300,000 to the
licensor in two equal installments due six and 12 months after the date of our
receipt of the production molds for the UniShaper product. We provided the laser
system to the licensor during the quarter ended June 30, 1998, and we received
the molds in late 1999. We shipped the first UniShaper single-use keratome in
December 1999 and paid one-half of the $300,000 in July 2000. In addition,
beginning seven months after the first commercial shipment, we were required to
make royalty payments equal to 50% of our defined gross profits from the sale of
our UniShaper and UltraShaper keratomes, with a minimum royalty of $400,000 per
calendar quarter for a period of eight quarters. On January 4, 2001, we entered
into an amended and restated license and royalty agreement related to certain
keratome related products. This amendment replaced a January 18, 2000 amendment
in its entirety. Under the terms of the amendment we issued 730,552 shares of
common stock to the licensors, valued at approximately $1.1 million, in partial
payment for royalties during the term of the license. The term of the license
was extended three years until July 31, 2005. In addition, minimum royalty
payments totaling approximately $6.2 million will be due in quarterly
installments through the term of the amendment. As a result of our obligations
48
under this license arrangement, the minimum royalty payments we are required to
make to the licensors may exceed our gross profits from sales of our UniShaper
and UltraShaper keratome products. The amendment eliminated the restriction on
us manufacturing, marketing and selling other keratomes, but the sale of such
other keratomes is included in the gross profit to be shared with the licensors.
The licensor's share of the gross profit, as defined in the agreement, decreased
from 50% to 10%.
OUR FAILURE TO TIMELY OBTAIN OR EXPAND REGULATORY APPROVALS FOR OUR
PRODUCTS AND TO COMPLY WITH REGULATORY REQUIREMENTS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our excimer laser systems and keratome products are subject to strict
governmental regulations that materially affect our ability to manufacture and
market these products and directly impact our overall business prospects. FDA
regulations impose design and performance standards, labeling and reporting
requirements, and submission conditions in advance of marketing for all medical
laser products in the U.S. New product introductions, expanded treatment types
and levels for approved products, and significant design or manufacturing
modifications require a premarket clearance or approval by the FDA prior to
commercialization in the U.S. The FDA approval process, which is lengthy and
uncertain, requires supporting clinical studies and substantial commitments of
financial and management resources. Failure to obtain or maintain regulatory
approvals and clearances in the U.S. and other countries, or significant delays
in obtaining these approvals and clearances, could prevent us from marketing our
products for either approved or expanded indications or treatments, that could
substantially decrease our future revenues. Additionally, product and procedure
labeling and all forms of promotional activities are subject to examination by
the FDA, and current FDA enforcement policy prohibits the marketing by
manufacturers of approved medical devices for unapproved uses. Noncompliance
with these requirements may result in warning letters, fines, injunctions,
recall or seizure of products, suspension of manufacturing, denial or withdrawal
of PMAs, and criminal prosecution. Laser products marketed in foreign countries
are often subject to local laws governing health product development processes,
that may impose additional costs for overseas product development. Future
legislative or administrative requirements, in the U.S. or elsewhere, may
adversely affect our ability to obtain or retain regulatory approval for our
products. The failure to obtain approvals for new or additional uses on a timely
basis could have a material adverse effect on our business, financial condition
and results of operations.
OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE
UNABLE TO PROTECT THEM, OUR COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED.
Our business plan is predicated on our proprietary systems and
technology, including our precision beam scanning spot technology laser systems.
We protect our proprietary rights through a combination of patent, trademark,
trade secret and copyright law, confidentiality agreements and technical
measures. We generally enter into non-disclosure agreements with our employees
and consultants and limit access to our trade secrets and technology. We cannot
assure you that the steps we have taken will prevent misappropriation of our
intellectual property. Misappropriation of our intellectual property would have
a material adverse effect on our competitive position. In addition, we may have
to engage in litigation or other legal proceedings in the future to enforce or
protect our intellectual property rights or to defend against claims of
invalidity. These legal proceedings may consume considerable resources,
including management time and attention, which would be diverted from the
operation of our business, and the outcome of any such legal proceeding is
inherently uncertain.
We are aware that certain competitors are developing products that may
potentially infringe patents owned or licensed exclusively by us. In order to
protect our rights in these patents, we may find it necessary to assert and
49
pursue infringement claims against such third parties. We could incur
substantial costs and diversion of management resources litigating such
infringement claims and we cannot assure you that we will be successful in
resolving such claims or that the resolution of any such dispute will be on
terms that are favorable to us. See "--We are subject to risks and uncertainties
relating to litigation."
PATENT INFRINGEMENT ALLEGATIONS MAY IMPAIR OUR ABILITY TO MANUFACTURE
AND MARKET OUR PRODUCTS.
There are a number of U.S. and foreign patents covering methods and
apparatus for performing corneal surgery that we do not own or have the right to
use. If we were found to infringe a patent in a particular market, we and our
customers may be enjoined from manufacturing, marketing, selling and using the
infringing product in the market and may be liable for damages for any past
infringement of such rights. In order to continue using such rights, we would be
required to obtain a license, which may require us to make royalty, per
procedure or other fee payments. We cannot be certain if we or our customers
will be successful in securing licenses, or that if we obtain licenses, such
licenses will be available on acceptable terms. Alternatively, we might be
required to redesign the infringing aspects of these products. Any redesign
efforts that we undertake could be expensive and might require regulatory
review. Furthermore, the redesign efforts could delay the reintroduction of
these products into certain markets, or may be so significant as to be
impractical. If redesign efforts were impractical, we could be prevented from
manufacturing and selling the infringing products, which would have a material
adverse effect on our business, financial condition and results of operations.
In 1992, Summit and Visx formed a U.S. partnership, Pillar Point
Partners, to pool certain of their patents related to corneal sculpting
technologies. As part of their agreement to dissolve Pillar Point in June 1998,
Summit and Visx granted each other a worldwide, royalty free cross-license
whereby each party has full rights to license for use with its own systems all
existing patents owned by either company relating to laser vision correction. In
connection with our March 1996 settlement of litigation with Pillar Point
regarding alleged infringement by our lasers of certain U.S. and foreign
patents, we entered into a license agreement with Visx covering various foreign
patents and patent applications pursuant to which we pay royalties to Visx.
Litigation involving patents is common in our industry. While we do not
believe our laser systems or keratome products infringe any valid and
enforceable patents held by Visx, Alcon or any other person, Visx has asserted
that we infringe their intellectual property, and we cannot assure you that one
or more of our other competitors or other persons will not assert that our
products infringe their intellectual property, or that we will not in the future
be deemed to infringe one or more patents owned by them or some other party. We
could incur substantial costs and diversion of management resources defending
any infringement claims. Furthermore, a party making a claim against us could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief that could effectively block our ability to market one or more
of our products. In addition, we cannot assure you that licenses for any
intellectual property of third parties that might be required for our products
will be available on commercially reasonable terms, or at all. See "--We are
subject to risks and uncertainties relating to litigation."
50
WE ARE SUBJECT TO CERTAIN RISKS ASSOCIATED WITH OUR INTERNATIONAL
SALES.
Our international sales accounted for 45% and 72% of our total revenues
during the years ended December 31, 2000 and 1999, respectively. In the future,
we expect that sales to international accounts will continue to represent a
lower percentage of our total sales as a result of our recent and anticipated
additional regulatory approvals to market our LaserScan LSX laser system in the
U.S.and the anticipated commercial launch of our UltraShaper durable keratome in
the second quarter of 2001. See "--Industry and Competitive Risks--We cannot
assure you that our keratome products will achieve market acceptance." The
majority of our international revenues for the year ended December 31, 2000 were
from customers in Korea, Mexico, Malaysia, and Italy, and for the year ended
December 31, 1999 were from customers in Canada, Mexico, Spain, Italy, Belgium
and France.
International sales of our products may be limited or disrupted by:
o the imposition of government controls;
o export license requirements;
o economic or political instability;
o trade restrictions;
o difficulties in obtaining or maintaining export licenses;
o changes in tariffs; and
o difficulties in staffing and managing international operations.
Our sales have historically been and are expected to continue to be
denominated in U.S. dollars. The European Economic Union's conversion to a
common currency, the euro, is not expected to have a material impact on our
business. However, due to our significant export sales, we are subject to
exchange rate fluctuations in the U.S. dollar, which could increase the
effective price in local currencies of our products. This could result in
reduced sales, longer payment cycles and greater difficulty in collecting
receivables relating to our international sales.
OUR SUPPLY OF CERTAIN CRITICAL COMPONENTS AND SYSTEMS MAY BE
INTERRUPTED BECAUSE OF OUR RELIANCE ON A LIMITED NUMBER OF SUPPLIERS.
We currently purchase certain components used in the production,
operation and maintenance of our laser systems and keratome products from a
limited number of suppliers and certain key components are provided by a single
vendor. For example, all of our keratome blades are currently manufactured
exclusively by Becton Dickinson and all of our UniShaper single-use keratome
products are manufactured exclusively by Frantz Medical Development Ltd.
pursuant to our agreement with them. We do not have written long-term contracts
with providers of some key laser system components, including TUI Lasertechnik
und Laserintegration GmbH, which currently is a single source supplier for the
laser heads used in our LaserScan LSX excimer laser system. Currently,
SensoMotoric Instruments GmbH, Teltow, Germany, is a single source supplier for
the eye tracker boards used in the LaserScan LSX. Any interruption in the supply
of critical laser or keratome components could have a material adverse effect on
our business, financial condition and results of operations. If any of our key
suppliers ceases providing us with products of acceptable quality and quantity
at a competitive price and in a timely fashion, we would have to locate and
contract with a substitute supplier and, in some cases, such substitute supplier
would need to be qualified by the FDA. If substitute suppliers cannot be located
and qualified in a timely manner or could
51
not provide required products on commercially reasonable terms, it would have a
material adverse effect on our business, financial condition and results of
operations.
UNLAWFUL TAMPERING OF OUR SYSTEM CONFIGURATIONS COULD RESULT IN REDUCED
REVENUES.
We include a procedure counting mechanism on LaserScan LSX lasers
manufactured for sale and use in the U.S. Users of our LaserScan LSX excimer
laser system could tamper with the software or hardware configuration of the
system so as to alter or eliminate the procedure counting mechanism that
facilitates the collection of per procedure fees. Unauthorized tampering with
our procedure counting mechanism by users could result in the loss of per
procedure fees.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our ability to maintain our competitive position depends in part upon
the continued contributions of our executive officers and other key employees,
especially Michael R. Farris, our president and chief executive officer. A loss
of one or more such officers or key employees could have a material adverse
effect on our business. We do not carry "key person" life insurance on any
officer or key employee.
As we commercially launch our laser system and keratome products in the
U.S., we will need to continue to implement and expand our operational, sales
and marketing, financial and management resources and controls. While to date we
have not experienced problems recruiting or retaining the personnel necessary to
expand our business, we cannot assure you that we will not have such problems in
the future. If we fail to attract and retain qualified individuals for necessary
positions, and if we are unable to effectively manage growth in our domestic or
international operations, it could have a material adverse effect on our
business, financial condition and results of operations.
INADEQUACY OR UNAVAILABILITY OF INSURANCE MAY EXPOSE US TO SUBSTANTIAL
PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability risks and
possible adverse publicity that are inherent in the development, testing,
manufacture, marketing and sale of medical devices for human use. These risks
increase with respect to our products that receive regulatory approval for
commercialization. We have agreed in the past, and we will likely agree in the
future, to indemnify certain medical institutions and personnel who conduct and
participate in our clinical studies. While we maintain product liability
insurance, we cannot be certain that any such liability will be covered by our
insurance or that damages will not exceed the limits of our coverage. Even if a
claim is covered by insurance, the costs of defending a product liability,
malpractice, negligence or other action, and the assessment of damages in excess
of insurance coverage in the event of a successful product liability claim,
could have a material adverse effect on our business, financial condition and
results of operations. Further, product liability insurance may not continue to
be available, either at existing or increased levels of coverage, on
commercially reasonable terms.
52
FINANCIAL AND LIQUIDITY RISKS
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND OPERATING CASH FLOW DEFICITS
AND WE EXPECT THAT OPERATING CASH FLOW DEFICITS WILL CONTINUE THROUGH AT LEAST
THE FIRST HALF OF 2001.
We experienced significant net losses and deficits in cash flow from
operations for the years ended December 31, 2000, 1999 and 1998, as set forth in
the following table. We cannot be certain that we will be able to achieve or
sustain profitability or positive operating cash flow in the future.
Year Ended December 31,
1998 1999 2000
---- ---- ----
Net Loss $11.9 million $14.4 million $21.4 million
Deficit in Cash Flow
from Operations $14.3 million $11.7 million $15.7 million
As of December 31, 2000, we had an accumulated deficit of $59.6
million.
IF OUR UNCOLLECTIBLE RECEIVABLES EXCEED OUR RESERVES WE WILL INCUR
ADDITIONAL UNANTICIPATED EXPENSES, AND WE MAY EXPERIENCE DIFFICULTY COLLECTING
RESTRUCTURED RECEIVABLES WITH EXTENDED PAYMENT TERMS.
Although we monitor the status of our receivables and maintain a
reserve for estimated losses, we cannot be certain that our reserves for
estimated losses, which were approximately $4.7 million at December 31, 2000,
will be sufficient to cover the amount of our actual write-offs over time. At
December 31, 2000, our net trade accounts and notes receivable totaled
approximately $16.4 million, and accrued commissions, the payment of which
generally depends on the collection of such net trade accounts and notes
receivable, totaled approximately $2.3 million. Actual write-offs that exceed
amounts reserved could have a material adverse effect on our consolidated
financial condition and results of operations. The amount of any loss that we
may have to recognize in connection with our inability to collect receivables is
principally dependent on our customer's ongoing financial condition, their
ability to generate revenues from our laser systems, and our ability to obtain
and enforce legal judgments against delinquent customers.
Our ability to evaluate the financial condition and revenue generating
ability of our prospective customers located outside of the U.S., and our
ability to obtain and enforce legal judgments against customers located outside
of the U.S., is generally more limited than for our customers located in the
U.S. Our agreements with our international customers typically provide that the
contracts are governed by Florida law. We have not determined whether or to what
extent courts or administrative agencies located in foreign countries would
enforce our right to collect such receivables or to recover laser systems from
customers in the event of a customer's payment default. When a customer is not
paying according to established terms, we attempt to communicate and understand
the underlying causes and work with the customer to resolve any issues we can
control or influence. In most cases, we have been able to resolve the customer's
issues and continue to collect our receivable, either on the original schedule
or under restructured terms. If such issues are not resolved, we evaluate our
legal and other alternatives based on existing facts and circumstances. In most
such cases, we have concluded that the account should be written off as
uncollectible.
At December 31, 2000, we had extended the original payment terms of
laser customer accounts totaling approximately $1.3 million by periods ranging
from 12 to 60 months. Such restructured receivables represent approximately 5.9%
53
of our gross receivables as of that date. Our liquidity and operating cash flow
would be adversely affected if additional extensions become necessary in the
future. In addition, it would be more difficult to collect laser system
receivables if the payment schedule extends beyond the expected or actual
economic life of the system, which we estimate to be approximately five to seven
years. To date, we do not believe any payment schedule extends beyond the
economic life of the applicable laser system.
WE COULD REQUIRE ADDITIONAL FINANCING WHICH MIGHT NOT BE AVAILABLE IF
WE NEED IT.
During the years ended December 31, 2000 and 1999, we experienced
deficits in cash flow from operations of $15.7 million and $11.7 million,
respectively. We are currently exploring opportunities for additional equity
financing through a private placement of our common stock. We believe that, in
addition to our existing balances of cash and cash equivalents and our cash
flows from operations, some form of equity or debt financing may be necessary to
fund our anticipated working capital requirements for the next 12 months in
accordance with our current business plan. Our belief regarding future working
capital requirements is based on various factors and assumptions including: the
growth in laser sales resulting from our entrance into the U.S. market in March
2000 with corresponding increases in accounts receivable and inventory purchases
to date, the uncertain timing of astigmatism and other supplemental FDA
approvals for our LaserScan LSX excimer laser system, which could continue to
impact our sales during 2001, the uncertain timing of the market introduction of
our UltraShaper durable keratomes, commercial acceptance of our UltraEdge
keratome blades and UniShaper single-use keratomes, which we believe is
partially dependent upon the successful introduction of the UltraShaper, the
anticipated timely collection of receivables, and the absence of unanticipated
product development and marketing costs. See "--Industry and Competitive
Risks--We cannot assure you that our keratome products will achieve market
acceptance." These factors and assumptions are subject to certain contingencies
and uncertainties, some of which are beyond our control. If we do not collect a
material portion of current receivables in a timely manner, or experience less
market demand for our products than we anticipate, our liquidity could be
materially and adversely affected.
In March 2001, we entered into a $3.0 million term loan and $10.0
million revolving credit facility with Heller. We may borrow amounts under this
credit facility at an annual rate equal to 1.25% above the prime rate for
short-term working capital needs or for such other purposes as may be approved
by Heller. Borrowings are limited to 85% of qualified accounts receivable
related to U.S. sales. The credit facility replaces a $5.0 million credit
facility that was entered into in September 2000. Borrowings under the loan
agreement are secured by substantially all of the Company's assets. The facility
requires us to maintain a minimum net worth. At March 29, 2001, we had no
borrowings under the credit facility.
We expect to seek additional equity financing in the future to
implement our business plan or any changes thereto in response to future
developments or unanticipated contingencies. We currently do not have any
commitments for additional financing. We cannot be certain that additional
financing will be available in the future to the extent required or that, if
available, it will be on commercially acceptable terms. If we raise additional
funds by issuing equity or convertible debt securities, the terms of the new
securities could have rights, preferences and privileges senior to those of our
common stock. If we raise additional funds through debt financing, the terms of
the debt could require a substantial portion of our cash flow from operations to
be dedicated to the payment of principal and interest and may render us more
vulnerable to competitive pressures and economic downturns. If we are not able
54
to obtain financing necessary to meet our working capital needs, it could have a
material adverse effect on our financial condition and results of operations.
COMMON STOCK RISKS
VARIATIONS IN OUR SALES AND OPERATING RESULTS MAY CAUSE OUR STOCK PRICE
TO FLUCTUATE.
Our operating results have fluctuated in the past, and may continue to
fluctuate in the future, as a result of a variety of factors, many of which are
outside of our control. For example, historically a significant portion of our
laser system orders for a particular quarter have been received and shipped near
the end of the quarter. As a result, our operating results for any quarter often
depend on the timing of the receipt of orders and the subsequent shipment of our
laser systems. Other factors that may cause our operating results to fluctuate
include:
o timing of regulatory approvals and the introduction or delays in
shipment of new products;
o reductions, cancellations or fulfillment of major orders;
o the addition or loss of significant customers;
o the relative mix of our business;
o changes in pricing by us or our competitors;
o costs related to expansion of our business; and
o increased competition.
As a result of these fluctuations, we believe that period-to-period
comparisons of our operating results cannot be relied upon as indicators of
future performance. In some quarters our operating results may fall below the
expectations of securities analysts and investors due to any of the factors
described above or other uncertainties.
THE MARKET PRICE OF OUR COMMON STOCK MAY CONTINUE TO EXPERIENCE EXTREME
FLUCTUATIONS DUE TO MARKET CONDITIONS THAT ARE UNRELATED TO OUR OPERATING
PERFORMANCE.
The stock market, and in particular the securities of technology
companies like us, could experience extreme price and volume fluctuations
unrelated to our operating performance. Our stock price has historically been
volatile. Factors such as announcements of technological innovations or new
products by us or our competitors, changes in domestic or foreign governmental
regulations or regulatory approval processes, developments or disputes relating
to patent or proprietary rights, public concern as to the safety and efficacy of
refractive vision correction procedures, and changes in reports and
recommendations of securities analysts, have and may continue to have a
significant impact on the market price of our common stock.
THE SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE AND DILUTIVE
STOCK ISSUANCES MAY ADVERSELY AFFECT OUR STOCK PRICE.
Sales, or the possibility of sales, of substantial amounts of our
common stock in the public market could adversely affect the market price of our
common stock. Substantially all of our 23,562,814 shares of common stock
outstanding at March 29, 2001 were freely tradable without restriction or
further registration under the Securities Act of 1933, except to the extent such
shares are held by "affiliates" as that term is defined in Rule 144 under the
55
Securities Act or subject only to the satisfaction of a prospectus delivery
requirement.
Shares of common stock that we may issue in the future in connection
with acquisitions or financings or pursuant to outstanding warrants or
agreements could also adversely affect the market price of our common stock and
cause significant dilution in our earnings per share and net book value per
share. We may be required to issue more than 7,800,000 additional shares of
common stock upon the conversion of outstanding preferred stock, the exercise of
outstanding warrants and stock options, and the satisfaction of certain
contingent contractual obligations. See "Capitalization--Description of Capital
Stock--Warrants and Other Agreements to Issue Shares."
The anti-dilution provisions of certain of our existing securities and
obligations require us to issue additional shares if we issue shares of common
stock below specified price levels. If a future share issuance triggers these
adjustments, the beneficiaries of such provisions effectively receive some
protection from declines in the market price of our common stock, while our
other stockholders incur additional dilution of their ownership interest. We may
include similar anti-dilution provisions in securities issued in connection with
future financings.
ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW AND IN OUR CERTIFICATE OF
INCORPORATION, BY-LAWS AND STOCKHOLDER RIGHTS PLAN MAY MAKE AN ACQUISITION OF
LASERSIGHT MORE DIFFICULT AND COULD PREVENT YOU FROM RECEIVING A PREMIUM OVER
THE MARKET PRICE OF OUR STOCK.
Certain provisions of our certificate of incorporation, by-laws,
stockholder rights plan and Delaware law could delay or frustrate the removal of
incumbent directors, discourage potential acquisition proposals and delay, defer
or prevent a change in control of us, even if such events could be beneficial,
in the short term, to the economic interests of our stockholders. For example,
our certificate of incorporation allows us to issue preferred stock with rights
senior to those of the common stock without stockholder action, and our by-laws
require advance notice of director nominations or other proposals by
stockholders. We also are subject to provisions of Delaware corporation law that
prohibit a publicly-held Delaware corporation from engaging in a broad range of
business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's common stock (an interested
stockholder) for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. We also have
adopted a stockholder rights agreement, or "poison pill," and declared a
dividend distribution of one preferred share purchase right for each share of
common stock. The rights would cause substantial dilution to a person or group
that attempts to acquire 15% or more of our common stock on terms not approved
by our board of directors.
ACQUISITION RISKS
PAST AND POSSIBLE FUTURE ACQUISITIONS THAT ARE NOT SUCCESSFULLY
INTEGRATED WITH OUR EXISTING OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
We have made several significant acquisitions since 1994, and we may in
the future selectively pursue strategic acquisitions of, investments in, or
enter into joint ventures or other strategic alliances with, companies whose
business or technology complement our business. We may not be able to identify
suitable candidates to acquire or enter into joint ventures or other
arrangements with entities, and we may not be able to obtain financing on
satisfactory terms for such activities. In addition, we could have difficulty
assimilating the personnel, technology and operations of any acquired companies,
56
which could prevent us from realizing expected synergies, and may incur
unanticipated liabilities and contingencies. This could disrupt our ongoing
business and distract our management and other resources.
AMORTIZATION AND CHARGES RELATING TO OUR SIGNIFICANT INTANGIBLE ASSETS
COULD ADVERSELY AFFECT OUR STOCK PRICE AND REPORTED NET INCOME OR LOSS.
Of our total assets at December 31, 2000, approximately $11.7 million,
or 22%, were goodwill or other intangible assets. Any reduction in net income or
increase in net loss resulting from the amortization of goodwill and other
intangible assets resulting from future acquisitions by us may have an adverse
impact upon the market price of our common stock. In addition, in the event of a
sale of LaserSight or our assets, we cannot be certain that the value of such
intangible assets would be recovered.
In accordance with SFAS 121, we review intangible assets for impairment
whenever events or changes in circumstances, including a history of operating or
cash flow losses, indicate that the carrying amount of an asset may not be
recoverable. If we determine that an intangible asset is impaired, a non-cash
impairment charge would be recognized. We continue to assess the current results
and future prospects of TFG, our subsidiary that provides health care and vision
care consulting services, in view of the substantial reduction in the
subsidiary's operating results in 1997. Though TFG's operating results improved
in 1998 when compared to 1997, operating losses similar to those incurred during
the first half of 1998 continued during 1999. In 1999, two senior consultants
joined who have helped develop new business during 2000. The year ended December
31, 2000 reflected financial improvement over 1999. If TFG is unsuccessful in
continuing to improve its financial performance, some or all of the carrying
amount of goodwill recorded, $3.2 million at December 31, 2000, may be subject
to an impairment adjustment.
OTHER RISKS
The risks described above are not the only risks facing LaserSight.
There may be additional risks and uncertainties not presently known to us or
that we have deemed immaterial which could also negatively impact our business
operations. If any of the foregoing risks actually occur, it could have a
material adverse effect on our business, financial condition and results of
operations. In that event, the trading price of our common stock could decline,
and you may lose all or part of your investment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk for changes in
interest and currency rates is not significant. The Company's investments are
limited to highly liquid instruments with maturities generally three months or
less. At December 31, 2000, the Company had approximately $7.0 million of
short-term investments classified as cash and equivalents. All of the Company's
transactions with international customers and suppliers are denominated in U.S.
dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Consolidated financial statements prepared in accordance with
Regulation S-X are listed in Item 14 of Part IV of this Report, are attached to
this Report and incorporated in this Item 8 by reference.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the Company's directors and executive
officers is incorporated herein by reference to the definitive form of the
Company's proxy materials to be filed with the Commission on or before April 30,
2001.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated
herein by reference to the definitive form of the Company's proxy materials to
be filed with the Commission on or before April 30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners and management is incorporated herein by reference to the
definitive form of the Company's proxy materials to be filed with the Commission
on or before April 30, 2001.
ITEM 13. CERTAIN RELATIONS AND RELATED TRANSACTIONS
Information with respect to certain relations and related transactions
is incorporated herein by reference to the definitive form of the Company's
proxy materials to be filed with the Commission on or before April 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES.
(a) (1) The following financial statements and related items commence on
page F-1:
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statements of Comprehensive Loss for the years
ended December 31, 2000, 1999 and 1998.
58
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedules not filed:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the
consolidated financial statements or related notes.
(3) Exhibits required by Item 601 of Regulation S-K.
The Exhibit Index set forth on page 60 of this Form 10-K is
hereby incorporated herein by this reference.
b) Reports on Form 8-K
None
59
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ --------------------------------------------------------------------
2.1 See Exhibits 10.1, 10.2, 10.6, 10.7, 10.15, 10.20, 10.23, 10.24,
10.27, 10.28, 10.48 and 10.55.
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 1 of Form 8-A/A (Amendment No. 5) fled by the
Company on August 1, 2000*).
3.2 Bylaws, as amended (filed as Exhibit 3.2 to the Company's Form 8-K
filed on December 20, 1999*).
3.3 Rights Agreement, dated as of July 2, 1998, between LaserSight
Incorporated and American Stock Transfer & Trust Company, as Rights
Agent, which includes (I) as Exhibit A thereto the form of
Certificate of Designation of the Series E Junior Participating
Preferred Stock, (ii) as Exhibit B thereto the form of Right
Certificate (separate certificates for the Rights will not be issued
until after the Distribution Date) and (iii) as Exhibit C thereto
the Summary of Stockholder Rights Agreement (incorporated by
reference to Exhibit 99.1 to the Form 8-K filed by the Company on
July 8, 1998*).
3.4 First Amendment to Rights Agreement, dated as of March 22, 1999,
between LaserSight Incorporated and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit 2 to
Form 8-A/A filed by the Company on March 29, 1999*).
3.5 Second Amendment to Rights Agreement, dated as of January 28, 2000,
between LaserSight Incorporated and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit 99.6
to Form 8-K filed by the Company on February 8, 2000*).
4.1 See Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 10.17, 10.21, 10.26, 10.31,
10.32, 10.33, 10.40, 10.42, 10.43, 10.44, 10.45, 10.46, 10.47,
10.51, 10.52, 10.53, 10.54, 10.56, 10.57, 10.59 and 10.60.
10.1 Agreement for Purchase and Sale of Stock by and among LaserSight
Centers Incorporated, its stockholders and LaserSight Incorporated
dated January 15, 1993 (filed as Exhibit 2 to the Company's Form
8-K/A filed on January 25, 1993*).
10.2 Amendment to Agreement for Purchase and Sale of Stock by and among
LaserSight Centers Incorporated, its stockholders, and LaserSight
Incorporated dated April 5, 1993 (filed as Exhibit 2 to the
Company's Form 8-K/A filed on April 19, 1993*).
10.3 Royalty Agreement by and between LaserSight Centers Incorporated and
LaserSight Partners dated January 15, 1993 (filed as Exhibit 10.5 to
the Company's Form 10-K for the year ended December 31, 1995*).
60
10.4 Exchange Agreement dated January 25, 1993 between LaserSight Centers
Incorporated and Laser Partners (filed as Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 1995*).
10.5 Stipulation and Agreement of Compromise, Settlement and Release
dated April 18, 1995 among James Gossin, Francis E. O'Donnell, Jr.,
J.T. Lin, Wen S. Dai, Emanuela Dobrin-Charlton, C.H. Huang, W.
Douglas Hajjar, and LaserSight Incorporated (filed as Exhibit 10.7
to the Company's Form 10-K for the year ended December 31, 1995*).
10.6 Agreement for Purchase and Sale of Stock dated December 31, 1993,
among LaserSight Incorporated, MRF, Inc., and Michael R. Farris
(filed as Exhibit 2 to the Company's Form 8-K filed on December 31,
1993*).
10.7 First Amendment to Agreement for Purchase and Sale of Stock by and
among MRF, Inc., Michael R. Farris and LaserSight Incorporated dated
December 28, 1995 (filed as Exhibit 10.9 to the Company's Form 10-K
for the year ended December 31, 1995*).
10.8 LaserSight Incorporated 1995 Stock Option Plan (filed as Exhibit
10.5 to the Company's Form 10-Q for the quarter ended September 30,
1995*).
10.9 Modified Promissory Note between LaserSight Incorporated,
EuroPacific Securities Services, GmbH and Co. KG and Wolf Wiese
(filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter
ended September 30, 1995*).
10.10 Patent License Agreement dated December 21, 1995 by and between
Francis E. O'Donnell, Jr. and LaserSight Centers, Inc. (filed as
Exhibit 10.21 to the Company's Form 10-K for the year ended December
31, 1995*).
10.11 LaserSight Incorporated Amended and Restated 1996 Equity Incentive
Plan (filed as Exhibit 10.11 to the Company's Form 10-Q filed on
November 14, 2000*).
10.12 LaserSight Incorporated Amended and Restated Non-Employee Directors
Stock Option Plan (filed as Exhibit 10.12 to the Company's Form 10-Q
filed on November 14, 2000*).
10.13 Agreement dated January 1, 1997, between International Business
Machines Corporation and LaserSight Incorporated (filed as Exhibit
10.37 to the Company's Form 10-K for the year ended December 31,
1996*).
10.14 Addendum dated March 7, 1997 to Agreement between International
Business Machines Corporation and LaserSight Incorporated (filed as
Exhibit 10.38 to the Company's Form 10-K for the year ended December
31, 1996*).
10.15 Second Amendment to Agreement for Purchase and Sale of Stock by and
among LaserSight Centers Incorporated, its stockholders and
LaserSight Incorporated dated March 14, 1997 (filed as Exhibit 99.1
to the Company's Form 8-K filed on March 27, 1997*).
61
10.16 Amendment to Royalty Agreement by and between LaserSight Centers
Incorporated, Laser Partners and LaserSight Incorporated dated
March 14, 1997 (filed as Exhibit 99.2 to the Company" Form 8-K
filed on March 27, 1997*).
10.17 Warrant to purchase 500,000 shares of common stock dated March 31,
1997 by and between LaserSight Incorporated and Foothill Capital
Corporation (filed as Exhibit 10.44 to the Company's Form 10-Q filed
on August 14, 1997*).
10.18 License Agreement dated May 20, 1997 by and between Visx
Incorporated and LaserSight Incorporated (filed as Exhibit 10.45 to
the Company's Form 10-Q filed on August 14, 1997*).
10.19 Patent Purchase Agreement dated July 15, 1997 by and between
LaserSight Incorporated and Frederic B. Kremer, M.D. (filed as
Exhibit 2.(I) to the Company's Form 8-K filed on August 13, 1997*).
10.20 Agreement and Plan of Merger dated July 15, 1997 by and among
LaserSight Incorporated, Photomed Acquisition, Inc., Photomed, Inc.,
Frederic B. Kremer, M.D., Linda Kremer, Robert Sataloff, trustee for
Alan Stewart Kremer and Robert Sataloff, Trustee for Mark Adam
Kremer (filed as Exhibit 2.(ii) to the Company's Form 8-K filed on
August 13, 1997*).
10.21 Warrant to purchase 750,000 shares of common stock dated August 29,
1997 by and between LaserSight Incorporated and purchasers of Series
B Convertible Participating Preferred Stock of LaserSight
Incorporated (filed as Exhibit 10.39 to the Company's Form 10-Q
filed on November 14, 1997*).
10.22 Independent Contractor Agreement by and between Byron Santos, M.D.
and LaserSight Technologies, Inc. (filed as Exhibit 10.42 to the
Company's Form 10-Q filed on November 14, 1997*).
10.23 Stock Purchase Agreement, dated December 30, 1997, by and among
LaserSight Incorporated, LSI Acquisition, Inc., MEC Health Care,
Inc. and Vision Twenty-One, Inc. (filed as Exhibit 2.(I) to the
Company's Form 8-K filed on January 14, 1998*).
10.24 Stock Distribution Agreement, dated December 30, 1997, by and among
LaserSight Incorporated, LSI Acquisition, Inc., MEC Health Care,
Inc. and Vision Twenty-One, Inc. (filed as Exhibit 2.(ii) to the
Company's Form 8-K filed on January 14, 1998*).
10.25 Agreement dated April 1, 1992 between International Business
Machines Corporation and LaserSight Incorporated (filed as Exhibit
10.1 on Form 10-K for the year ended December 31, 1995*).
10.26 Securities Purchase Agreement, dated June 5, 1998, by and between
LaserSight Incorporated and TLC The Laser Center, Inc.(filed as
Exhibit 99.1 to the Company's Form 8-K filed on June 25, 1998*).
62
10.27 Letter Agreement dated September 11, 1998, amending the Agreement
and Plan of Merger dated July 15, 1997, by and among LaserSight
Incorporated, Photomed Acquisition, Inc., Photomed, Inc., Frederic
B. Kremer, M.D., Linda Kremer, Robert Sataloff, Trustee for Alan
Stewart Kremer and Robert Sataloff, Trustee for Mark Adam Kremer
(filed as Exhibit 10.31 to the Company's Form 10-Q filed on November
16, 1998*).
10.28 Exclusive License Agreement dated August 20, 1998, by and between
LaserSight Technologies, Inc. and TLC The Laser Center Patents Inc.
(filed as Exhibit 10.32 to the Company's Form 10-Q filed on November
16, 1998*).
10.29 Manufacturing Agreement, dated September 10, 1997, by and between
LaserSight Technologies, Inc. and Frantz Medical Development Ltd.
(filed as Exhibit 10.3 to the Company's Form S-3, Pre-Effective
Amendment No.1 filed on February 1, 1999*).
10.30 Employment Agreement by and between LaserSight Incorporated and
Michael R. Farris dated October 30, 1998 (filed as Exhibit 10.37 to
the Company's Form 10-K filed on March 31, 1999*).
10.31 Securities Purchase Agreement by and between LaserSight Incorporated
and purchasers of common stock dated March 22, 1999 (filed as
Exhibit 10.38 to the Company's Form 10-K filed on March 31, 1999*).
10.32 Warrant to purchase 225,000 shares of common stock dated March 22,
1999 by and between LaserSight Incorporated and purchasers of
common stock of LaserSight Incorporated (filed as Exhibit 10.39 to
the Company's Form 10-K filed on March 31, 1999*).
10.33 Warrant to purchase 67,500 shares of common stock dated February 22,
1999 by and between LaserSight Incorporated and Guy Numann (filed as
Exhibit 10.40 to the Company's Form 10-Q filed on May 17, 1999*).
10.34 Manufacturing and Marketing Agreement, and Addendum thereto, dated
May 14, 1999, by and between LaserSight Technologies, Inc. and
Becton, Dickinson and Company (filed as Exhibit 10.40 to the
Company's Form 10-Q filed on August 11, 1999*)**.
10.35 First Amendment to Manufacturing and Marketing Agreement, dated
October 23, 1999, by and between LaserSight Technologies, Inc. and
Becton, Dickinson and Company (filed as Exhibit 10.1 to the
Company's 8-K, filed on October 27, 1999*)**.
10.36 Distribution Agreement, dated October 23, 1999, by and between
LaserSight Technologies, Inc. and Becton, Dickinson and Company
(filed as Exhibit 10.2 to the Company's 8-K, filed on October 27,
1999*)**.
10.37 Employment Agreement, by and between LaserSight Technologies, Inc.
and J. Richard Crowley, dated as of July 3, 1997 (filed as Exhibit
10.43 to the Company's Form 10-Q filed on November 15, 1999*).
63
10.38 Employment Agreement, by and between LaserSight Incorporated and
Michael P. Dayton, dated November 10, 1998 (filed as Exhibit 10.44
to the Company's Form 10-Q filed on November 15, 1999*).
10.39 Relocation Agreement, by and between LaserSight Incorporated and
Gregory L. Wilson, dated October 13, 1999 (filed as Exhibit 10.45 to
the Company's Form 10-Q filed on November 15, 1999*).
10.40 Technology Development and License Agreement, dated October 23,
1999, by and between LaserSight Technologies, Inc. and Quadrivium,
L.L.C. (filed as Exhibit 10.46 to the Company's Form 10-Q filed on
November 15, 1999*).
10.41 Employment Agreement, by and between LaserSight Technologies, Inc.
and Jack T. Holladay, dated October 27, 1999 (filed as Exhibit 10.47
to the Company's Form 10-Q filed on November 15, 1999*).
10.42 Securities Purchase Agreement by and between LaserSight Incorporated
and TLC Laser Eye Centers Inc. dated January 31, 2000 (filed as
Exhibit 99.2 to the Company's Form 8-K filed on February 8, 2000*).
10.43 Registration Rights Agreement dated January 31, 2000 by and between
LaserSight Incorporated and TLC Laser Eye Centers Inc.(filed as
Exhibit 99.3 to the Company's Form 8-K filed on February 8, 2000*).
10.44 Securities Purchase Agreement by and between LaserSight
Incorporated, BayStar Capital, L.P. and BayStar International, Ltd.
dated January 31, 2000 (filed as Exhibit 99.4 to the Company's Form
8-K filed on February 8, 2000*).
10.45 Registration Rights Agreement dated January 31, 2000 by and between
LaserSight Incorporated, BayStar Capital, L.P. and BayStar
International, Ltd. (filed as Exhibit 99.5 to the Company's Form 8-K
filed on February 8, 2000*).
10.46 Securities Purchase Agreement by and between LaserSight
Incorporated, Engmann Options, Inc. and MDNH Partners, L.P. dated
February 18, 2000. The Company undertakes to provide to the
Commission upon its request the schedules omitted from this exhibit
(filed as Exhibit 10.54 to the Company's Form 10-K filed on March
30, 2000*).
10.47 Registration Rights Agreement dated February 18, 2000 by and between
LaserSight Incorporated, Engmann Options, Inc. and MDNH Partners,
L.P.(filed as Exhibit 10.55 to the Company's Form 10-K filed on
March 30, 2000*).
10.48 Technology Purchase Agreement dated as of March 8, 2000 by and
between LaserSight Technologies, Inc., Premier Laser Systems, Inc.
and Eyesys-Premier, Inc. The Company undertakes to provide to the
Commission upon its request the schedules omitted from this exhibit
(filed as Exhibit 10.56 to the Company's Form 10-K filed on March
30, 2000*).
10.49 Employment Agreement, by and between LaserSight Technologies, Inc
and Donald M. Litscher dated February 23, 2000 (filed as Exhibit
10.57 to the Company's Form 10-Q filed on May 12, 2000*).
64
10.50 Employment Agreement, by and between LaserSight Technologies, Inc.
and L. Stephen Dalton dated March 6, 2000 (filed as Exhibit 10.58 to
the Company's Form 10-Q filed on May 12, 2000*).
10.51 Securities Purchase Agreement dated September 8, 2000 among
LaserSight Incorporated, BayStar Capital, L.P. and BayStar
International, Ltd. The Company undertakes to provide to the
Commission upon its request the schedules omitted from this exhibit
(filed as Exhibit 99.2 to the Company's Form 8-K filed on September
22, 2000*).
10.52 Warrant agreement dated September 8, 2000 among LaserSight
Incorporated and BayStar Capital, L.P. (filed as Exhibit 99.3 to the
Company's Form 8-K filed on September 22, 2000*).
10.53 Warrant agreement dated September 8, 2000 among LaserSight
Incorporated and BayStar International, Ltd. (filed as Exhibit 99.4
to the Company's Form 8-K filed on September 22, 2000*).
10.54 Registration Rights Agreement dated September 8, 2000 among
LaserSight Incorporated, BayStar Capital, L.P. and BayStar
International, Ltd. (filed as Exhibit 99.5 to the Company's Form 8-K
filed on September 22, 2000*).
10.55 Assignment Agreement dated as of February 27, 2001 among LaserSight
Patents, Inc. and Alcon Laboratories, Inc. (filed as Exhibit 99.1
to the Company's Form 8-K filed on March 16, 2001*)**.
10.56 Amended and Restated License and Royalty Agreement dated as of
January 3, 2001 by and between LaserSight Technologies, Inc., Luis
A. Ruiz, M.D. and Sergio Lenchig.
10.57 Registration Rights Agreement dated January 3, 2001 among LaserSight
Incorporated, Luis A. Ruiz, M.D. and Sergio Lenchig.
10.58 Loan and Security Agreement dated March 12, 2001 among LaserSight
Incorporated and subsidiaries and Heller Healthcare Finance, Inc.
10.59 Warrant agreement dated March 12, 2001 among LaserSight Incorporated
and Heller Healthcare Finance, Inc.
10.60 Registration Rights Agreement dated March 12, 2001 among LaserSight
Incorporated and Heller Healthcare Finance, Inc.
Exhibit 11 Statement of Computation of Loss Per Share
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of KPMG LLP
Exhibit 27 Financial Data Schedule
Exhibit 99 Press release dated March 30, 2001
- ----------------------
*Incorporated herein by reference. File No. 0-19671.
**Confidential treatment has been granted for portions of this document. The
redacted material has been filed separately with the commission.
65
SIGNATURES
Pursuant to the requirements of Section 13 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.
Dated: March 30, 2001 LASERSIGHT INCORPORATED
By: /s/ Michael R. Farris
---------------------------------------
Michael R. Farris, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael R. Farris Dated: March 30, 2001
- --------------------------------------------
Michael R. Farris, President,
Chief Executive Officer and Director
/s/ Francis E. O'Donnell, Jr., M.D. Dated: March 30, 2001
- --------------------------------------------
Francis E. O'Donnell, Jr., M.D.,
Chairman of the Board, Director
/s/ D. Michael Litscher Dated: March 30, 2001
- --------------------------------------------
D. Michael Litscher, Chief Operating Officer
and Director
/s/ Terry A. Fuller, Ph.D. Dated: March 30, 2001
- --------------------------------------------
Terry A. Fuller, Ph.D., Director
/s/ Guy W. Numann Dated: March 30, 2001
- --------------------------------------------
Guy W. Numann, Director
/s/ David T. Pieroni Dated: March 30, 2001
- --------------------------------------------
David T. Pieroni, Director
/s/ Gregory L. Wilson Dated: March 30, 2001
- --------------------------------------------
Gregory L. Wilson, Chief Financial Officer
(Principal accounting officer)
66
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
LaserSight Incorporated:
We have audited the accompanying consolidated balance sheets of LaserSight
Incorporated and Subsidiaries (the Company) as of December 31, 2000 and 1999,
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LaserSight
Incorporated and Subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
St. Louis, Missouri
February 9, 2001, except
as to note 16, which is
as of March 12, 2001
F-1
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS 2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 8,593,858 11,247,801
Accounts receivable-trade, net 9,546,368 6,400,980
Notes receivable-current portion, net 4,065,958 4,110,428
Inventories 12,123,877 8,409,823
Deferred tax assets 55,522 68,208
Other current assets 272,745 394,543
------------ ------------
Total current assets 34,658,328 30,631,783
Notes receivable, less current portion, net 2,833,393 2,721,229
Property and equipment, net 2,398,292 1,934,618
Other assets, net 11,986,439 14,091,303
------------ ------------
$ 51,876,452 49,378,933
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,870,791 2,694,494
Accrued expenses 7,030,657 3,757,458
Accrued commissions 1,926,996 1,511,653
Deferred revenue 1,149,415 1,020,044
------------ ------------
Total current liabilities 13,977,859 8,983,649
Accrued expenses, less current portion 398,767 615,942
Deferred royalty revenue, less current portion -- 33,333
Deferred income taxes 55,522 68,208
Long-term obligations 109,730 100,130
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock:
Series C - par value $.001 per share; authorized 10,000,000 shares;
2,000,000 shares issued and outstanding at December 31, 2000
and 1999, respectively 2,000 2,000
Series D - par value $.001 per share; authorized 10,000,000
shares; zero and 2,000,000 shares issued and outstanding at
December 31, 2000 and 1999, respectively -- 2,000
Common stock-par value $0.001 per share; authorized 100,000,000 shares;
22,920,278 and 18,040,313 shares issued and outstanding
at December 31, 2000 and 1999, respectively 22,920 18,040
Additional paid-in capital 98,594,665 82,346,811
Issued shares held in escrow -- (2,936,250)
Stock subscription receivable (1,140,000) (1,140,000)
Accumulated deficit (59,602,364) (38,172,283)
Less treasury stock, at cost; 145,200 common shares
at December 31, 2000 and 1999 (542,647) (542,647)
------------ ------------
Total stockholders' equity 37,334,574 39,577,671
------------ ------------
$ 51,876,452 49,378,933
============ ============
See accompanying notes to consolidated financial statements.
F-2
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Revenues:
Products $ 31,064,505 19,403,781 15,968,035
Royalties 2,632,551 1,970,504 1,111,917
Services 820,545 354,167 676,164
------------ ------------ ------------
34,517,601 21,728,452 17,756,116
Cost of revenues:
Product cost 14,804,797 9,621,351 6,048,730
Cost of services 430,120 155,833 297,512
------------ ------------ ------------
Gross profit 19,282,684 11,951,268 11,409,874
Research, development, and regulatory expenses 4,621,783 3,139,906 3,840,924
Other general and administrative expenses 22,510,049 16,663,864 12,156,982
Selling related expenses 7,620,844 4,710,288 4,562,740
Amortization of intangibles 2,609,506 2,539,072 2,310,169
Impairment loss 4,116,504 -- --
------------ ------------ ------------
36,856,903 23,913,224 19,029,891
------------ ------------ ------------
Loss from operations (22,196,002) (15,101,862) (11,460,941)
Other income and expenses:
Interest and dividend income 930,040 770,967 591,481
Interest expense (29,119) (93,085) (782,668)
Other, net (135,000) -- 1,952
------------ ------------ ------------
Loss before income tax expense (21,430,081) (14,423,980) (11,650,176)
Income tax expense -- -- 232,213
------------ ------------ ------------
Net loss (21,430,081) (14,423,980) (11,882,389)
Conversion discount on preferred stock -- -- (858,872)
Preferred stock accretion and dividend requirements -- -- (2,751,953)
------------ ------------ ------------
Loss attributable to common stockholders $(21,430,081) (14,423,980) (15,493,214)
============ ============ ============
Loss per common share - basic and diluted $ (1.02) (0.89) (1.26)
============ ============ ============
Weighted average number of shares outstanding
- basic and diluted 21,061,000 16,207,000 12,272,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Net loss $(21,430,081) (14,423,980) (11,882,389)
Other comprehensive income (loss), net of tax:
Unrealized gain (reversal) on marketable securities
(net of tax of $(353,675) in 1998) -- -- (577,048)
Reclassification adjustment for gains included in net loss
(net of tax of $16,825) -- -- (27,452)
------------ ------------ ------------
Comprehensive loss $(21,430,081) (14,423,980) (12,486,889)
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
Addi- Issued Subscrip- Total
tional Shares tion Unreal- Accu- Trea- Stock
Common Stock Preferred Stock Paid-in Held In Receiv- ized mulated sury holders'
Shares Amount Shares Amount Capital Escrow able Gain Deficit Stock Equity
------ ------ ------ ------ ------- ------ ---- ---- ------- ------ --------
Balances at
December 31,
1997 10,149,872 $10,150 --$ -- 40,045,564 -- (1,140,000) 604,500 (11,865,914) (614,360) 27,039,940
Conversion
of Series
B prefer-
red
stock 2,392,220 2,392 -- -- 3,714,747 -- -- -- -- -- 3,717,139
Issuance of
Series C
and D
preferred
stock -- -- 4,000,000 4,000 15,815,556 -- -- -- -- -- 15,819,556
Issuance of
shares from
exercise
of stock
options and
warrants 194,625 195 -- -- 513,476 -- -- -- -- -- 513,671
Issuance of
warrants in
conjunction
with
settlement -- -- -- -- 250,000 -- -- -- -- -- 250,000
Issuance of
shares in
conjunction
with
amendment
of purchase
agreement 187,500 187 -- -- 749,813 -- -- -- -- -- 750,000
Issuance of
shares in
conjunction
with
acquisi-
tion 305,820 306 -- -- 1,249,777 -- -- -- -- -- 1,250,083
Issuance of
shares in
conjunction
with 1996
acquisition
agreement 102,798 103 -- -- (103) -- -- -- -- -- --
Premium and
other
adjustments
on redemp-
tion of
Series B
preferred
stock -- -- -- -- (2,969,180) -- -- -- -- -- (2,969,180)
Adjustment
of market-
able equity
securities
to market,
net of tax -- -- -- -- -- -- -- (604,500) -- -- (604,500)
Issuance of
options and
shares in
conjunction
with
consulting
agreements -- -- -- -- 37,742 -- -- -- -- 93,276 131,018
Net loss -- -- -- -- -- -- -- -- (11,882,389) -- (11,882,389)
---------- ------- --------- ----- ---------- -------- ---------- -------- ------------ -------- ------------
Balances at
December 31,
1998 13,332,835 13,333 4,000,000 4,000 59,407,392 -- (1,140,000) -- (23,748,303) (521,084) 34,015,338
F-5a
Issuance of
shares
from
exercise
of stock
options,
warrants
and ESPP 2,257,478 2,257 -- -- 10,873,627 -- -- -- -- (21,563) 10,854,321
Issuance of
options and
warrants
in con-
junction
with
consulting
agreements -- -- -- -- 187,192 -- -- -- -- -- 187,192
Issuance of
shares in
conjunc-
tion with
acquisition
of intang-
ible
assets 200,000 200 -- -- 2,936,050 -- -- -- -- -- 2,936,250
Issuance of
stock
options in
conjunction
with acqui-
sition of
intangible
assets -- -- -- -- 94,800 -- -- -- -- -- 94,800
Issuance of
shares from
financing,
net of
financing
costs 2,250,000 2,250 -- -- 8,847,750 -- -- -- -- -- 8,850,000
Issued
shares held
in escrow -- -- -- -- -- (2,936,250) -- -- -- -- (2,936,250)
Net loss -- -- -- -- -- -- -- -- (14,423,980) -- (14,423,980)
---------- ------- --------- ------ ---------- ---------- --------- -------- ------------ --------- ------------
Balances at
December 31,
1999 18,040,313 18,040 4,000,000 4,000 82,346,811 (2,936,250) (1,140,000) -- (38,172,283) (542,647) 39,577,671
F-5b
Issuance of
shares
from
exercise
of stock
options,
warrants
and ESPP 19,649 20 -- -- 84,513 -- -- -- -- -- 84,533
Issued
shares
returned
from
escrow and
cancelled (200,000) (200) -- -- (2,936,050) 2,936,250 -- -- -- -- --
Issuance of
shares
from
financing,
net of
financing
costs 3,060,316 3,060 -- -- 19,099,391 -- -- -- -- -- 19,102,451
Conversion
of prefer-
red
stock 2,000,000 2,000 (2,000,000)(2,000) -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- -- (21,430,081) -- (21,430,081)
---------- ------- ---------- ------ ---------- ---------- ---------- -------- ----------- -------- ------------
Balances at
December 31,
2000 22,920,278 $22,920 2,000,000 $2,000 98,594,665 -- (1,140,000) -- (59,602,364) (542,647) 37,334,574
========== ======= ========= ====== ========== ========== ========== ======== =========== ======== ============
See accompanying notes to consolidated financial statements.
F-5c
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss $(21,430,081) (14,423,980) (11,882,389)
Adjustments to reconcile net loss to net cash
used in operating activities:
Realized gain on sale of investments and subsidiaries -- -- (364,452)
Depreciation and amortization 3,746,919 3,263,894 3,376,174
Impairment loss 4,116,504 -- --
Provision for uncollectible accounts 2,354,366 1,965,234 1,212,896
Stock, options and warrants issued in conjunction with
consulting agreements and settlement -- 187,192 381,018
Changes in assets and liabilities:
Notes receivable, net (537,162) 595,280 (2,357,750)
Accounts receivable, net (5,030,286) (3,495,128) (2,215,473)
Inventories (3,714,054) (315,451) (2,942,720)
Accounts payable 1,176,297 474,449 11,492
Accrued expenses and commissions 3,471,367 566,624 541,410
Income taxes -- (9,239) (875,752)
Deferred revenue 96,038 (317,558) 1,156,716
Other, net 23,484 (174,328) (370,182)
------------ ------------- -------------
Net cash used in operating activities (15,726,608) (11,683,011) (14,329,012)
------------ ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (1,600,654) (704,298) (648,475)
Proceeds from sale of subsidiaries -- -- 6,527,452
Net proceeds from exclusive and non-exclusive
license of patents -- -- 6,170,000
Acquisition of other intangible assets (4,513,665) -- (989,874)
Transfer to restricted cash account -- -- (4,200,000)
Proceeds from restricted cash account -- -- 4,228,000
------------ ------------- -------------
Net cash provided by (used in)
investing activities (6,114,319) (704,298) 11,087,103
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 19,102,451 8,850,000 --
Proceeds from preferred stock financings, net -- -- 15,819,555
Redemption and repurchase of preferred stock -- -- (10,512,000)
Repayments on notes payable -- -- (2,000,000)
Proceeds from exercise of stock options, warrants and ESPP 84,533 10,367,051 513,672
Repayment of capital lease obligation -- (19,659) --
------------ ------------- -------------
Net cash provided by financing activities 19,186,984 19,197,392 3,821,227
------------ ------------- -------------
Increase (decrease) in cash and
cash equivalents (2,653,943) 6,810,083 579,318
Cash and cash equivalents:
Beginning of year 11,247,801 4,437,718 3,858,400
------------ ------------- -------------
End of year $ 8,593,858 11,247,801 4,437,718
============ ============= =============
See accompanying notes to consolidated financial statements.
F-6
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE 1 - BUSINESS
- -----------------
LaserSight Incorporated (the Company) is the parent company of three major
wholly-owned operating subsidiaries: LaserSight Technologies, Inc., which
develops, manufactures and sells ophthalmic lasers and related products
primarily for use in photorefractive keratectomy (PRK) and laser in-situ
keratomileusis (LASIK) procedures; LaserSight Patents, Inc., which owns and
licenses various patents related to refractive surgical procedures; and MRF,
Inc. d/b/a The Farris Group, a consulting firm servicing health care providers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
- -------------------------
For financial reporting purposes, the Company considers short-term, highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Marketable Securities
- ---------------------
The Company classifies all of its marketable securities as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of income taxes, reported as a component of stockholders'
equity.
F-7
Credit Risk
- -----------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable.
The Company sells products to customers, at times extending credit for such
sales. Exposure to losses on receivables is principally dependent on each
customer's financial condition and their ability to generate revenue from the
Company's products. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses. To mitigate a portion of the
Company's exposure on certain sales, the Company has obtained letters of credit
to be drawn on foreign financial institutions in the event a customer should
default. At December 31, 2000 and 1999, the Company was the payee on letters of
credit with foreign financial institutions aggregating approximately $0.3
million and $0.6 million, respectively.
Income Taxes
- ------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the consolidated
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Inventory
- ---------
Inventory, which consists primarily of laser systems parts and components, is
stated at the lower of cost or market. Cost is determined using the standard
cost method, which approximates cost determined on the first-in, first-out
method.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Furniture and equipment are
depreciated using the straight-line method over the estimated lives (three to
seven years) of the assets. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset. Such depreciation and amortization is included in other general
and administrative expenses on the consolidated statements of operations.
Patents
- -------
Costs associated with obtaining patents are capitalized as incurred and are
amortized over their remaining useful lives (generally 17 years or less).
F-8
Goodwill and Acquired Technology
- --------------------------------
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
up to 20 years. Management evaluates the carrying value of goodwill using
projected future undiscounted operating cash flows of the acquired businesses.
Acquired technology was recorded as an intangible asset and is amortized over a
period of 12 years based on the Company's estimate of the useful life of the
solid-state laser product and related patent acquired. The Company continually
assesses the potential market for solid-state as an improvement to existing
excimer laser technology.
Research and Development
- ------------------------
Research and development costs are charged to operations in the year incurred.
The cost of certain equipment used in research and development activities which
have alternative uses is capitalized as equipment and depreciated using the
straight-line method over the estimated lives (five to seven years) of the
assets. Total expenditures on research and development for the years ended
December 31, 2000, 1999 and 1998 were, approximately $3,165,000, $2,084,000 and
$2,813,000, respectively.
Product Warranty Costs
- ----------------------
Estimated future warranty obligations related to the Company's products,
typically for a period of one year, are provided by charges to operations in the
period in which the related revenue is recognized.
Extended Service Contracts
- --------------------------
The Company sells product service contracts covering periods beyond the initial
warranty period. Revenues from the sale of such contracts are deferred and
amortized on a straight-line basis over the life of the contracts. Service
contract costs are charged to operations as incurred.
F-9
Revenue Recognition
- -------------------
The Company recognizes revenue from the sale of its products in the period that
the products are shipped to the customers.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
(SAB No. 101). It provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
adopted SAB No. 101 as required in the fourth quarter of 2000 and there was no
significant impact to the Company's consolidated financial statements as a
result.
Royalty revenues from the license of patents owned are recognized in the period
earned.
Service revenues from consulting clients are recognized in the period that the
services are provided.
Cost of Revenues
- ----------------
Cost of revenues consist of product cost and cost of services. Product cost
relates to the cost from the sale of its products in the period that the
products are shipped to the customers.
Cost of services consists of the costs related to servicing consulting clients.
Loss Per Share
- --------------
Basic loss per common share is computed using the weighted average number of
common shares and contingently issuable shares (to the extent that all necessary
contingencies have been satisfied), if dilutive. Diluted loss per common share
is computed using the weighted average number of common shares, contingently
issuable shares, and common share equivalents outstanding during each period.
Common share equivalents include options, warrants to purchase Common Stock, and
convertible Preferred Stock and are included in the computation using the
treasury stock method if they would have a dilutive effect. Diluted loss per
share for the years ended December 31, 2000, 1999 and 1998 is the same as basic
loss per share.
F-10
Pursuant to Emerging Issue Task Force (EITF) Announcement No. D-60, the value of
the conversion discount on the Series C and D Convertible Participating
Preferred Stock (Series C and D Preferred Stock) issued in June 1998
(approximately $834,000) has been reflected as an increase to the loss
attributable to common stockholders for the year ended December 31, 1998. The
value of the conversion discounts, $0.07 per share in 1998, have been reflected
as an adjustment to the loss attributable to common shareholders.
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31, 2000, 1999
and 1998:
2000 1999 1998
---- ---- ----
Numerator:
Net loss $(21,430,081) (14,423,980) (11,882,389)
Conversion
discount on
preferred stock -- -- (858,872)
Preferred stock
accretion
and dividends -- -- (2,751,953)
------------ ------------ ------------
Loss attributable
to common
stockholders $(21,430,081) (14,423,980) (15,493,214)
============ ============ ============
Denominator, basic and diluted:
Weighted
average shares
outstanding 21,061,000 16,207,000 12,272,000
============ ============ ============
Basic and diluted
loss per share $ (1.02) (0.89) (1.26)
============ ============ ============
F-11
Common share equivalents, including contingently issuable shares, options,
warrants, and convertible Preferred Stock totaling 2,507,000, 5,538,000 and
2,530,000 common stock equivalents at December 31, 2000, 1999 and 1998,
respectively, are not included in the computation of diluted loss per share
because they had an antidilutive effect.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
- -----------------------------------------------------------------------
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
NOTE 3 - ACQUISITIONS
- ---------------------
Intellectual Property
- ---------------------
On March 8, 2000, the Company acquired all intellectual property related to a
development project designed to provide front-to-back analysis and total
refractive measurement of the eye from Premier Laser Systems, Inc. Of the total
consideration of approximately $4.0 million before transaction costs,
approximately $2.8 million was paid at closing, $0.5 million was paid in April
2000 and approximately $0.7 million was paid in May 2000. Assets purchased
included U.S. and foreign patents and pending patent applications and an
exclusive license to nine patents that are intended to be used to complete
development of an integrated refractive diagnostic work station. The total cost
is included in the net costs of Patents and will be amortized over the life of
the patents, 17 years.
F-12
Technology Development and License Agreement
- --------------------------------------------
On October 23, 1999, the Company entered into a technology development and
exclusive license agreement with Quadrivium, L.L.C. covering patents and patent
applications related to a corneal reshaping procedure that achieves a refractive
correction utilizing low levels of infrared energy. The Company issued 200,000
shares of Common Stock, valued at approximately $3.0 million, which were placed
into escrow. If the Company determined the technology to be capable of producing
a commercially viable system in accordance with the agreement, 100,000 shares
would have been released from escrow. Otherwise, all shares would be returned to
the Company. On the date that clinical trials using this technology were
completed, if the Company determined that the international commercialization of
the system was viable, the remaining 100,000 shares would have been released
from escrow. Otherwise, the remaining shares would be returned to the Company.
At December 31, 1999, the value of these shares was classified as Issued Shares
Held in Escrow in the Stockholders' Equity section of the consolidated balance
sheets. During the year ended December 31, 2000, the Company determined the
technology not capable of producing a commercially viable system and, in
accordance with the agreement, all 200,000 shares of Common Stock were released
from escrow, returned to the Company, and cancelled.
Aesthetic Product
- -----------------
In April 1998, the Company acquired from Schwartz Electro-Optics, Inc. (SEO)
substantially all the assets, and assumed certain liabilities, of SEO's medical
products division (the Division) in exchange for 305,820 shares of the Company's
Common Stock. The value of the acquisition was $1,250,000. The acquisition was
accounted for using the purchase method. Accordingly, the Division's results of
operations are included in the Company's consolidated financial statements
subsequent to the acquisition date. The Division develops, tests, manufactures,
assembles, and sells lasers and their related equipment, accessories, parts, and
software for medical and medical research applications. The Division's primary
focus is erbium lasers, which are primarily used to perform dermatology-related
procedures.
F-13
Photomed, Inc.
- --------------
In July 1997, the Company acquired from Photomed, Inc. the rights to a
Pre-Market Approval (PMA) application filed with the Food and Drug
Administration (FDA) for a laser to perform LASIK, a refractive surgery
alternative to surface PRK. In addition, the Company purchased from a
stockholder of Photomed, Inc. U.S. patent number 5,586,980 for a keratome, the
instrument necessary to create the corneal "flap" in the LASIK procedure. The
Company issued a combination of 535,515 unregistered shares of Common Stock
(valued at $3,416,700) and $333,300 in cash as consideration for the PMA
application and the keratome patent. The seller is entitled to receive a
percentage of any licensing fees or sale proceeds related to the patent. The
total value was capitalized as the cost of PMA application and patent and is
being amortized over 5 and 15 years, respectively. In September 1998, the
Company entered into an amendment with Photomed based on a FDA approval received
in July 1998, and paid Photomed a total of $1,740,000, of which $990,000 was
paid in cash and the balance paid through the issuance of 187,500 shares of
Common Stock. As of December 31, 1999, the unamortized carrying values of the
LASIK PMA application and the keratome patent were included in other assets. In
December 2000, an impairment loss was taken for the unamortized value of the PMA
application. See note 7.
Patents
- -------
In August 1997, the Company finalized an agreement with International Business
Machines Corporation (IBM), in which the Company acquired certain patents (IBM
Patents) relating to ultraviolet light ophthalmic products and procedures for
ultraviolet ablation for $14.9 million. The total value was capitalized and is
being amortized over approximately 8 years. Under the agreement, IBM transferred
to the Company all of IBM's rights under its patent license agreements with
certain licensees. Royalties from such assigned patent licenses totaled
approximately $2,633,000, $1,971,000 and $1,112,000 for the years ended December
31, 2000, 1999 and 1998, respectively. Royalties accrued on or after January 1,
1997 but before September 1997, totaling approximately $581,000, reduced the
Company's cost of the IBM Patents. The acquisition was financed through the
private placement of Series B Preferred Stock (see note 10).
In September 1997, the Company sold an exclusive worldwide royalty-free patent
license covering the vascular and cardiovascular rights included in the IBM
Patents for $4 million, reducing the Company's basis in the IBM Patents. No gain
or loss was recognized as a result of this sale. Approximately $3.2 million of
these funds were placed in a restricted cash account and in October 1997 were
used to voluntarily redeem 305 shares of the Series B Preferred Stock issued to
finance the purchase of the IBM Patents. In connection with such redemption, the
Company paid a total of $3,172,000 including a four percent premium (see note
10).
F-14
In February 1998, the Company sold certain rights in certain of the IBM Patents
to Nidek Co., Ltd. for $6.3 million in cash (of which $200,000 was withheld for
the payment of Japanese taxes). The Company transferred all rights in those
patents issued in countries outside of the U.S. but retained the exclusive right
to use and sublicense the non-U.S. patents in all fields other than ophthalmic,
cardiovascular and vascular. The Company received a non-exclusive license to the
non-U.S. patents in the ophthalmic field. In addition, the Company has granted a
non-exclusive license to use those patents issued in the U.S., which resulted in
$1.2 million of deferred royalties that were amortized to income over three
years. The transaction did not result in any current gain or loss, but reduced
the Company's amortization expense over the remaining useful life of the U.S.
patents. As of December 31, 2000 and 1999, the unamortized carrying value of the
patents was included in other assets. See note 16.
Keratome License
- ----------------
In September 1997, the Company acquired worldwide distribution rights to the
Ruiz-Lenchig disposable keratome for the LASIK procedure and entered into a
limited exclusive license agreement for intellectual property related to the
keratome products formerly known as Automated Disposable Keratomes (A*D*K). The
trade name for this single use keratome is now the LaserSight "UniShaper(TM)"
single use keratome. In exchange, the Company paid $400,000 in cash at closing
and supplied to the licensors one excimer laser. Six months after the first
shipment of the disposable keratome product, the Company paid an additional
$150,000 to the licensors. The total value was capitalized, including the net
book value of the laser, and is being amortized over 31 months. The Company will
also share the product's gross profit with the licensors with minimum quarterly
royalties of $400,000 beginning approximately seven months after the initial
shipment date. Under the arrangement, gross profit is defined as the selling
price less certain costs of sales and commissions. As of December 31, 2000 and
1999, the unamortized carrying value of the keratome license was included in
other assets. UniShaper shipments began in December 1999. See note 16.
F-15
LaserSight Centers Incorporated
- -------------------------------
In 1993, the Company acquired all of the outstanding stock of LaserSight Centers
Incorporated (Centers), a privately held corporation, whose former owners
included two of the Company's former presidents and its chairman. Centers was a
development stage corporation that intended to provide services for ophthalmic
laser surgical centers using excimer and other lasers. The terms for the closing
of this transaction provided for the issuance of 500,000 unregistered shares of
the Company's Common Stock and the agreement of the Company to issue up to an
additional 1,265,333 unregistered shares of its Common Stock based on the
outcome of certain future events and whether Centers achieves certain
performance objectives.
In March 1997, the Company amended the purchase and royalty agreements related
to the 1993 acquisition of Centers. The amended purchase agreement provided for
the Company to issue approximately 625,000 unregistered common shares with
600,000 additional shares contingently issuable based upon future operating
profits. This replaced the provision calling for 1,265,333 contingently issuable
shares based on cumulative revenues or other future events and the uncertainties
associated therewith. The amended royalty agreement reduced the royalty from $86
to $43 per refractive procedure and delayed the obligation to pay such royalties
until the sooner of five years or the issuance of all contingently issuable
shares as described above. The value of shares issued in March 1997, $3,320,321,
was accounted for as additional purchase price based upon historical and
expected growth in the excimer laser industry and undiscounted projected cash
flows.
In December 2000, an impairment loss was taken for the unamortized value of the
goodwill related to Centers. See note 7.
NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------
Accounts and notes receivable at December 31, 2000 and 1999 were net of
allowance for uncollectibles of approximately $4,661,000 and $3,876,000,
respectively. During 2000 and 1999, approximately $1,569,000, and $665,000,
respectively, in accounts and notes receivable, net of associated commissions
and bad debt recoveries, were written off as uncollectible.
The Company currently provides internal financing for sale of its laser systems.
Sales for which there is no stated interest rate are discounted at a rate of
eight percent, an estimate of the prevailing market rate for such purchases.
Note receivable payments due within one year are classified as current. The
maturity dates of long-term notes receivable balances, less an allowance for
uncollectibles, at December 31, 2000 are as follows:
Due in 2002 $ 2,511,815
2003 292,314
2004 29,264
-----------
$ 2,833,393
===========
F-16
NOTE 5 - INVENTORIES
--------------------
The components of inventories at December 31, 2000 and 1999 are summarized as
follows:
2000 1999
---- ----
Raw materials $ 6,704,447 6,381,980
Work in process 121,474 630,342
Finished goods 4,482,276 958,387
Test equipment-clinical trials 815,680 439,114
----------- -----------
$12,123,877 8,409,823
=========== ===========
As of December 31, 2000 and 1999, the Company had two laser systems being used
under arrangements for clinical trials in various countries.
NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment at December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Leasehold improvement $ 675,556 334,135
Furniture and equipment 1,819,398 1,696,601
Laboratory equipment 3,122,289 1,985,853
----------- -----------
5,617,243 4,016,589
Less accumulated depreciation 3,218,951 2,081,971
----------- -----------
$ 2,398,292 1,934,618
=========== ===========
F-17
NOTE 7 - OTHER ASSETS
- ---------------------
Other assets at December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Goodwill, net of accumu-
lated amortization of
$1,274,484 in 2000 and
$1,798,999 in 1999 $ 3,232,425 6,028,235
Acquired technology, net
of accumulated amorti-
zation of $793,620 in 2000
and $647,616 in 1999 958,380 1,104,384
Ultraviolet patents, net of
accumulated amortization of
$1,973,733 in 2000 and
$1,456,413 in 1999 2,414,164 2,931,484
Diagnostic patents, net of
accumulated amortization
of $181,485 in 2000 and
$0 in 1999. 3,932,180 --
LASIK PMA application,
net of accumulated
amortization of
$1,790,956 in 1999 -- 2,754,394
Keratome patents and license,
net of accumulated
amortization of $1,344,826
in 2000 and $1,013,828
in 1999 1,130,063 1,061,060
Other assets 319,227 211,746
----------- -----------
$11,986,439 14,091,303
=========== ===========
During the fourth quarter of 2000, the Company recorded an impairment loss of
approximately $2.3 million related to goodwill of its LaserSight Centers
subsidiary. The combination of increased price competition and resulting losses
in many other laser centers businesses during 2000 and the Company's increased
focus on refractive product development and commercialization resulted in
management's decision in late 2000 to abandon the strategy of a mobile laser
business. As a result, management performed an evaluation of the recoverability
of such goodwill, and concluded that a significant impairment of intangible
assets had occurred. An impairment charge was required because the carrying
value of the assets could not be recovered through estimated net cash flows.
During the fourth quarter of 2000, the Company also recorded an impairment loss
of approximately $1.8 million related to the PMA application acquired in 1997.
In December 2000, the Company submitted to the Food and Drug Administration
(FDA) its own PMA supplement representing data from clinical trials performed on
the Company's LSX laser system, an advantage over the PMA application acquired
in 1997. In addition, the FDA has audited and approved the Company's
manufacturing operation for the LSX laser system. This December 2000 submission
resulted in management's decision to abandon further efforts related to the PMA
application acquired in 1997. As a result, management performed an evaluation of
the recoverability of such intangible asset, and concluded that a significant
impairment of had occurred. An impairment charge was required because the
carrying value of the assets could not be recovered through estimated net cash
flows.
F-18
NOTE 8 - EMPLOYEE BENEFIT PLANS
- -------------------------------
401(k) Plan
- -----------
The Company has a 401(k) plan for the benefit of substantially all of its
full-time employees. The plan provides, among other things, for
employer-matching contributions to be made at the discretion of the Board of
Directors. Employer-matching contributions vest over a seven-year period.
Administrative expenses of the plan are paid by the Company. For the years ended
December 31, 2000, 1999 and 1998, expense incurred related to the 401(k) plan,
including employer-matching contributions, was approximately $78,000, $60,000
and $49,000, respectively.
Employee Stock Purchase Plan
- ----------------------------
During 1999, the Company established a qualified Employee Stock Purchase Plan,
the terms of which allow for qualified employees (as defined) to participate in
the purchase of designated shares of the Company's Common Stock at a price equal
to the lower of 85% of the closing price at the beginning or end of each
semi-annual stock purchase period. The Company issued 12,681 and 6,126 shares of
Common Stock during fiscal 2000 and 1999, respectively, pursuant to this plan at
an average price per share of $3.24 and $8.50, respectively.
NOTE 9 - NOTES PAYABLE
- ----------------------
In April 1997, the Company entered into a loan agreement with Foothill Capital
Corporation (Foothill) for up to $8 million, consisting of a term loan in the
amount of $4 million and a revolving loan in an amount of 80% of the eligible
receivables of LaserSight Technologies, Inc., but not more than $4 million. In
June 1998, the Company fully repaid its note payable to Foothill and also
terminated its line of credit arrangement with Foothill. In connection with the
loan, the Company issued warrants to purchase 500,000 shares of Common Stock.
The warrants are exercisable at any time through April 1, 2002 and currently
have an exercise price per share of $5.06. Subject to certain conditions based
on the market price of the Common Stock, any warrants that remain outstanding on
April 1, 2002 are subject to mandatory repurchase by the Company currently at a
price of $1.25 per warrant. The warrants have certain anti-dilution features
which resulted in approximately 95,000 additional shares being issuable under
the warrants, primarily due to the issuance of the Series B, C & D Preferred
Stock and the September 2000 private placement. The warrants were valued at
$109,730 and $100,130 at December 31, 2000 and 1999, respectively, and were
classified as long-term obligations. A total of 497,000 warrants have been
exercised through December 31, 2000. As a result of a cashless exercise, a total
of 314,941 shares of Common Stock have been issued as a result of such
exercises. The recorded amount of the obligation will change with the fair value
of the warrants, with the corresponding adjustment to interest expense. At
December 31, 2000, 98,367 such warrants remained outstanding.
Interest paid during 2000, 1999 and 1998 approximated $14,000, $25,000 and
$199,000, respectively.
F-19
NOTE 10 - STOCKHOLDERS' EQUITY
- ------------------------------
On September 8, 2000, the Company closed a transaction for the sale of 1,714,286
shares of Common Stock to a total of two investors in exchange for the Company
receiving $6.0 million in cash. In addition, the investors received warrants to
purchase a total of 600,000 shares of Common Stock at an exercise price of $3.60
per share.
On January 31, 2000, the Company closed a transaction for the sale of 1,269,841
shares of Common Stock to a total of two investors, including TLC Laser Eye
Centers Inc. (TLC), in exchange for the Company receiving $12.5 million in cash.
On February 22, 2000, the Company closed a transaction for the sale of 76,189
shares of Common Stock to one investor in exchange for the Company receiving
$750,000 in cash.
During the years ended December 31, 2000 and 1999, LaserSight received
approximately $85,000 and $10.4 million, respectively, in cash from the exercise
of warrants, stock options and the Employee Stock Purchase Plan, resulting in
the issuance of 19,649 and 2,257,478 shares respectively, of Common Stock.
Additionally, approximately $500,000 was applied to additional paid-in capital
resulting from the cashless exercise of a portion of Foothill's warrants in
1999. See note 9.
On March 23, 1999, the Company closed a transaction for the sale of 2,250,000
shares of Common Stock to a total of six investors, including Pequot Capital
Management, Inc. (Pequot) and TLC, in exchange for the Company receiving $9
million in cash. In addition, the investors received a total of 225,000 warrants
to purchase Common Stock at $5.125 each, the Common Stock closing price on March
22, 1999. At December 31, 2000, 180,000 such warrants were outstanding.
In connection with the dismissal and release of claims from an action filed by
Mercacorp, Inc. against the Company in August 1998, the Company issued the
plaintiff two separate warrants to purchase Common Stock. Under the first
warrant, the plaintiff was entitled to purchase up to 750,000 shares of Common
Stock at an exercise price of $4.00 per share, the closing bid price on November
10, 1998, and under the second warrant, the plaintiff was entitled to purchase
up to 750,000 shares of Common Stock at an exercise price of $5.00 per share.
The fair value of the warrants and other costs related to the matter are
included in other expenses in 1998. During 1999, all 1,500,000 warrants were
exercised.
F-20
The Board of Directors of the Company declared a dividend distribution of one
preferred stock purchase right (the "Rights") for each share of the Company's
Common Stock owned as of July 2, 1998, and for each share of the Company's
Common Stock issued until the Rights become exercisable. Each Right, when
exercisable, will entitle the registered holder to purchase from the Company
one-thousandth of a share of the Company's Series E Junior Participating
Preferred Stock, $.001 par value (the Series E Preferred Stock), at a price of
$20 per one- thousandth of a share. The Rights are not exercisable and are
transferable only with the Company's Common Stock until the earlier of 10 days
following a public announcement that a person has acquired ownership of 15% or
more of the Company's outstanding Common Stock, or the commencement or
announcement of a tender offer or exchange offer, the consummation of which
would result in the ownership by a person of 15% or more of the Company's
outstanding Common Stock. The Series E Preferred Stock will be nonredeemable and
junior to any other series of preferred stock that the Company may issue in the
future. Each share of Series E Preferred Stock, upon issuance, will have a
quarterly preferential dividend in an amount equal to the greater of $1.00 per
share or 1,000 times the dividend declared per share of the Company's Common
Stock. In the event of the liquidation of the Company, the Series E Preferred
Stock will receive a preferred liquidation payment equal to the greater of
$1,000 per share or 1,000 times the payment made on each share of the Company's
Common Stock. Each one- thousandth of a share of Series E Preferred Stock
outstanding will have one vote on all matters submitted to the stockholders of
the Company and will vote together as one class with the holders of the
Company's Common Stock.
In the event that a person acquires beneficial ownership of 15% or more of the
Company's Common Stock, holders of Rights (other than the acquiring person or
group) may purchase, at the Rights' then current purchase price, shares of the
Company's Common Stock having a value at that time equal to twice such exercise
price. In the event that the Company merges into or otherwise transfers 50% or
more of its assets or earnings power to any person after the Rights become
exercisable, holders of Rights (other than the acquiring person or group) may
purchase, at the then current exercise price, common stock of the acquiring
entity having a value at that time equal to twice such exercise price.
In June 1998, the Company entered into a Securities Purchase Agreement with TLC,
pursuant to which the Company issued 2,000,000 shares of Series C Preferred
Stock with a face value of $4.00 per share, resulting in an aggregate offering
price of $8 million. The Series C Preferred Stock is convertible by TLC on a
fixed, one-for-one basis into 2,000,000 shares of Common Stock at any time until
June 2001, on which date all shares of Series C Preferred Stock then outstanding
will automatically be converted into an equal number of shares of Common Stock.
F-21
The net proceeds to the Company, after deduction of costs of issuance, was
approximately $7.9 million. The net proceeds were partially used to repurchase
all 525 outstanding shares of the Company's Series B Preferred Stock on June 5,
1998 for approximately $6.3 million, including a 20% premium.
In June 1998, the Company entered into a Securities Purchase Agreement with
Pequot Private Equity Fund, L.P., Pequot Scout Fund, L.P., and Pequot Offshore
Private Equity Fund, Inc. (Pequot Funds), pursuant to which the Company issued,
collectively, 2,000,000 shares of the newly-created Series D Preferred Stock
with a face value of $4.00 per share, resulting in an aggregate offering price
of $8 million. The Series D Preferred Stock was convertible on a one-for-one
basis into 2,000,000 shares of Common Stock at any time until June 2001.
The net proceeds to the Company, after deduction of costs of issuance, was
approximately $7.9 million. During 2000, all 2,000,000 shares of Series D
Preferred Stock were converted into Common Stock.
In August 1997, the Company completed a private placement of 1,600 shares Series
B Preferred Stock yielding net proceeds, after costs of financing, of $14.83
million. The Company also issued warrants to purchase 790,000 shares of Common
Stock for a period of five years at $5.91 per share to the investors and
placement agent. The warrant price to the investors was reduced to $2.75 in
February 1998 in exchange for certain amendments to the agreement as approved by
the Company's shareholders. The warrants have certain anti-dilution features
which have resulted in approximately 61,000 additional shares being issuable
under the warrants, primarily due to the issuance of the Series C and D
Preferred Stock and the September 2000 private placement and a corresponding
reduction in the exercise price to approximately $2.53. At December 31, 2000,
701,561 such warrants remain outstanding. The Series B Preferred Stock was
convertible into the Company's Common Stock at the option of the holders at any
time through August 29, 2000. The conversion price equaled the lesser of $6.68
per share or the average of the three lowest closing bid prices during a
30-trading day period preceding the conversion date. In October 1997, 305 shares
were voluntarily redeemed with a 4 percent redemption premium totaling $122,000,
which was recorded as a dividend to the Series B Preferred Stock stockholders.
At December 31, 1997, 1,295 shares of Series B Preferred Stock were outstanding.
The Series B Preferred Stock was recorded at the amount of gross proceeds less
the costs of the financing and the fair value of the warrants and classified as
mezzanine financing above the stockholders' equity section on the consolidated
balance sheet. In February 1998, 351 shares were repurchased at a 20 percent
premium totaling $702,000 which was recorded as a dividend to the Series B
Preferred Stock stockholders. In June 1998, 525 shares were repurchased at a 20
percent premium totaling $1,050,000, which was recorded as a dividend to the
Series B Preferred Stock stockholders. Prior to June 1998, the holders of Series
B Preferred Stock had converted 419 shares of Series B Preferred Stock into
2,392,220 shares of common stock. At December 31, 2000 and 1999, no shares
Series B Preferred Stock were outstanding.
F-22
NOTE 11 - STOCK OPTION PLANS
- ----------------------------
The Company has options outstanding at December 31, 2000 related to three stock
based compensation plans (the Plans). Options are currently issuable by the
Board of Directors only under the 1996 Equity Incentive Employee Plan (1996
Incentive Plan) and the LaserSight Incorporated Non-employee Directors Stock
Option Plan (Directors Plan), both of which were approved by the Company's
stockholders in June 1996, and which were last amended in June 2000 and June
1999, respectively.
Under the 1996 Incentive Plan, as amended, employees of the Company are eligible
to receive options, although no employee may receive options to purchase greater
than 750,000 shares of Common Stock during any one year. Pursuant to terms of
the 1996 Incentive Plan, 3,750,000 shares of Common Stock may be issued at
exercise prices of no less than 100% of the fair market value at date of grant,
and options generally become exercisable in four annual installments on the
anniversary dates of the grant. The Directors Plan, as amended, provides for the
issuance of up to 500,000 shares of Common Stock to directors of the Company who
are not officers or employees. Grants to individual directors are based on a
fixed formula that establishes the timing, size, and exercise price of each
option grant. At the date of each annual stockholders' meeting, 15,000 options
will be granted to each outside director, and 5,000 options will be granted to
each outside director that chairs a standing committee, at exercise prices of
100% of the fair market value as of that date, with the options becoming fully
exercisable on the first anniversary date of the grant. The options will expire
in ten years or three years after an outside director ceases to be a director of
the Company.
The per share weighted-average fair value of stock options granted during the
years ended December 31, 2000, 1999 and 1998, was $2.90, $6.40 and $2.16,
respectively, on the dates of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
2000 1999 1998
---- ---- ----
Expected dividend yield 0% 0% 0%
Volatility 50% 50% 50%
Risk-free interest rate 6.12%-6.84% 4.57%-6.14% 5.5%
Expected life (years) 5-10 3-10 3-10
F-23
The Company applies Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
the Company's stock-based compensation plans been determined consistent with
SFAS No. 123, the Company's net loss and loss per share would have been reduced
to the pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Net loss:
- --------
As reported $(21,430,081) (14,423,980) (11,882,389)
Pro forma (23,496,356) (16,209,237) (12,834,441)
Basic and diluted EPS
- ---------------------
As reported $(1.02) (0.89) (1.26)
Pro forma (1.12) (1.00) (1.34)
In accordance with SFAS No. 123, the pro forma net loss reflects only options
granted on or after January 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost does not
reflect options granted prior to January 1, 1995, that vested in 1999 or 1998.
Stock option activity for all plans during the periods indicated is as follows:
Weighted
Shares Average
Under Exercise
Option Price
------ -----
Balance at January 1, 1998 1,049,000 8.75
Granted 750,000 4.16
Exercised (54,000) 2.46
Terminated (88,000) 12.01
-----------
Balance at December 31, 1998 1,657,000 6.25
Granted 1,121,000 12.85
Exercised (382,822) 5.99
Terminated (190,900) 5.84
----------
Balance at December 31, 1999 2,204,278 9.68
Granted 1,555,049 5.51
Exercised (6,968) 6.23
Terminated (243,815) 10.74
----------
Balance at December 31, 2000 3,508,544 7.76
==========
On June 12, 1998, the Company repriced 110,000 shares of stock options
previously granted to employees (excluding executive officers) with option
prices ranging from $7.03 to $12.81 to the market value of the stock on June 12,
1998 of $4.31. All shares repriced were not exercisable until the later of
December 12, 1998 or the original vesting date and expire on the later of June
12, 1999 or the original expiration date.
F-24
The following table summarizes the information about stock options outstanding
and exercisable at December 31, 2000:
Range of Exercise Prices
------------------------
$2.38-$5.00 $5.31-$8.13 $9.50-$16.63
----------- ----------- ------------
Options outstanding:
Number outstanding at
December 31, 2000 1,814,544 523,750 1,170,250
Weighted average
remaining contractual
life 4.36 years 4.24 years 4.07 years
Weighted average
exercise price $ 4.55 7.26 12.98
Options exercisable:
Number exercisable at
December 31, 2000 606,915 244,750 532,666
Weighted average
exercise price $ 4.32 6.71 12.97
NOTE 12 - INCOME TAXES
- ----------------------
The components of the income tax expense for the years ended December 31, 2000,
1999 and 1998 were as follows:
2000 1999 1998
---- ---- ----
Current:
Federal $ -- -- 208,992
State -- -- 23,221
---------- ----------- ----------
Total income tax expense $ -- -- 232,213
========== =========== ==========
Deferred tax assets and liabilities consist of the following components as of
December 31, 2000 and 1999:
2000 1999
---- ----
Deferred tax liabilities:
Acquired technology $ 344,239 367,298
Property and equipment -- 50,275
----------- ----------
344,239 417,573
Deferred tax assets:
Intangibles 337,403 689,161
Inventory 1,007,933 593,507
Receivable allowance 1,785,941 1,497,204
Royalty fees -- 159,160
Commissions 146,496 171,137
Warranty accruals 928,782 515,192
Property and equipment 78,585 --
NOL carry forward 18,985,971 12,988,133
Other tax credits 256,173 256,173
Other 58,169 --
----------- -----------
23,585,453 16,869,667
Valuation allowance (23,241,214) (16,452,094)
----------- -----------
344,239 417,573
----------- -----------
Net deferred tax asset (liability) $ -- --
=========== ===========
F-25
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is a
risk that these deferred tax assets may expire unused and, accordingly, has
established a valuation allowance against them.
Payments for income taxes during the years ended December 31, 2000, 1999 and
1998 were $0, $71,000 and $905,000, respectively. Income taxes paid during 1998
primarily related to the sale of two subsidiaries in December 1997.
At December 31, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of $51.2 million which are available to offset
future federal taxable income and begin to expire in the year 2018. In addition,
the Company has other tax credit carryforwards of approximately $256,000 which
begin to expire in the year 2007.
For the years ended December 31, 2000, 1999 and 1998, the difference between the
Company's effective income tax provision and the "expected" tax provision,
computed by applying the federal statutory income tax rate to income before
provision for income taxes, is reconciled below:
2000 1999 1998
---- ---- ----
"Expected" tax benefit $(7,286,228) (4,904,100) (3,961,060)
State income taxes, net
of federal income tax benefit (508,028) (911,999) 48,493
Intangible amortization 950,575 178,374 417,064
Nondeductible expenses 63,387 101,578 26,594
Tax deduction from
exercise of options and warrants (8,826) (6,608,671) --
Valuation allowance 6,789,120 12,289,810 3,989,294
Other items, net -- (144,992) (288,172)
----------- ----------- -----------
Income tax expense $ -- -- 232,213
=========== =========== ===========
At December 31, 2000, of the $51.2 million net operating loss carryforward,
$19.5 million is associated with the exercise of nonqualified stock options,
disqualifying dispositions of incentive stock options and warrants. This tax
benefit will be recorded as an increase to additional paid-in capital when
recognized.
F-26
NOTE 13 - SEGMENT INFORMATION
- -----------------------------
The Company operates principally in three operating segments: refractive
products, patent services and health care services. Refractive product
operations primarily involve the development, manufacture, and sale of
ophthalmic lasers and related devices for use in vision correction procedures.
Patent services involve the revenues and expenses generated from the ownership
of certain refractive laser procedure patents, and health care services provides
health and vision care consulting services to hospital, managed care companies
and physicians.
Operating profit is total revenue less operating expenses. In determining
operating profit for operating segments, the following items have not been
considered: general corporate expenses; expenses attributable to Centers, a
developmental stage company; non-operating income; and income tax expense.
Identifiable assets by operating segment are those that are used by or
applicable to each operating segment. General corporate assets consist primarily
of cash, marketable equity securities and income tax accounts.
2000 1999 1998
---- ---- ----
Operating revenues:
Refractive products $ 31,064,505 19,403,781 15,968,035
Patent services 2,632,551 1,970,504 1,111,917
Health care services 820,545 354,167 676,164
------------ ------------ ------------
Total revenues $ 34,517,601 21,728,452 17,756,116
============ ============ ============
Operating profit (loss):
Refractive products $(19,490,091) (13,376,160) (9,038,922)
Patent services 2,114,230 1,452,231 349,673
Health care services (409,038) (711,571) (541,670)
General corporate (1,863,211) (2,189,666) (1,953,326)
Developmental stage
company-LaserSight
Centers Incorporated (2,547,892) (276,696) (276,696)
------------ ------------ ------------
Loss from operations $(22,196,002) (15,101,862) (11,460,941)
============ ============ ============
Impairment losses of $1,845,322 for Refractive Products and $2,271,182 for
LaserSight Centers for the year ended December 31, 2000, are included in the
operating loss in the table above.
F-27
Identifiable assets:
Refractive products $ 36,555,402 28,049,316 28,818,547
Patent services 3,160,538 3,652,788 3,838,804
Health care services 3,437,181 3,563,517 3,910,200
General corporate assets 8,723,331 11,345,800 4,267,269
Developmental stage
company-LaserSight
Centers Incorporated -- 2,767,512 3,038,163
------------ ------------ ------------
Total assets $ 51,876,452 49,378,933 43,872,983
============ ============ ============
Depreciation and amortization:
Refractive products $ 2,666,031 2,184,727 1,659,571
Patent services 517,320 517,320 567,187
Health care services 276,438 276,766 333,205
General corporate 10,434 8,385 3,731
Development stage
company-LaserSight
Centers Incorporated 276,696 276,696 276,696
------------ ------------ ------------
Total depreciation
and amortization $ 3,746,919 3,263,894 2,840,390
============ ============ ============
Amortization of deferred financing costs and accretion of discount on note
payable of $535,784 for the year ended December 31, 1998, is included as
interest expense in the table below.
2000 1999 1998
---- ---- ----
Capital expenditures:
Refractive products $ 1,581,378 688,432 599,873
Health care services 17,586 3,441 30,228
General corporate 1,690 12,425 18,374
------------ ------------ ------------
Total capital
expenditures $ 1,600,654 704,298 648,475
============ ============ ============
Interest income:
Refractive products $ 228,878 251,066 293,731
Patent service -- -- 9,377
General corporate 697,901 509,425 278,033
Development stage
company-LaserSight
Centers Incorporated 3,261 10,476 10,340
------------ ------------ ------------
Total interest income $ 930,040 770,967 591,481
============ =========== ============
Interest expense:
Refractive products $ -- 20,685 --
General corporate 29,119 72,400 782,668
------------ ------------ ------------
Total interest expense $ 29,119 93,085 782,668
============ ============ ============
F-28
The following table presents the Company's refractive products segment net
revenues by geographic area, based on location of customer, for the three years
ended December 31, 2000. The individual countries shown generated net revenues
of at least 10% of the total segment net revenues for at least one of the years
presented.
2000 1999 1998
---- ---- ----
Geographic area:
Brazil $ * * 1,825,000
Canada * 2,385,000 2,512,000
China * * 1,980,000
United States 15,377,354 3,945,161 *
Other 15,687,151 13,073,620 9,651,035
------------ ------------ ------------
Total refractive products
revenues $ 31,064,505 19,403,781 15,968,035
============ ============ ============
* Less than 10% of annual segment revenues.
Export sales are as follows:
2000 1999 1998
---- ---- ----
North and
Central America $ 3,039,027 4,359,962 3,781,712
South America 2,216,751 1,935,855 4,473,156
Asia 5,162,721 1,254,194 3,746,171
Europe 4,483,410 7,348,609 2,735,631
Africa 785,242 560,000 642,250
------------ ------------ ------------
$ 15,687,151 15,458,620 15,378,920
============ ============ ============
The geographic areas above include significant sales to the following countries:
North and Central America -Mexico; South America - Brazil; Asia - China and
Malaysia; Europe - Italy and Israel. In the Company's experience, sophistication
of ophthalmic communities varies by region, and is better segregated by the
geographic areas above than by individual country.
As of December 31, 2000 and 1999, the Company had approximately $16,000 and
$37,000, respectively, in assets located at a manufacturing facility in Costa
Rica and $85,000 and $0, respectively, in assets located at an administrative
office in Germany. As of December 31, 2000, the Company did not have any other
subsidiaries in countries where it does business. As a result, substantially all
of the Company's operating losses and assets apply to the U.S.
Revenues from one customer of the refractive products segment totaled $3,006,000
in 1999, or 14%, of the Company's consolidated revenues (see note 14).
F-29
NOTE 14 - RELATED PARTY TRANSACTIONS
- ------------------------------------
During January 1993, Centers entered into a royalty agreement with Florida Laser
Partners, a Florida general partnership, in which two of the Company's former
presidents and the Company's chairman are partners. The royalty agreement
provides, among other things, for a perpetual royalty payment to Florida Laser
Partners of a number of shares of Centers' common stock, as determined by a
formula defined in the royalty agreement. Also during January 1993, the Company
entered into an exchange agreement with Florida Laser Partners, which provides
among other things, that Laser Partners shall exchange, from time to time,
shares of Centers' common stock that it acquires pursuant to the royalty
agreement for shares of the Company's stock. This agreement was amended in March
1997 (see note 3).
During 2000 and 1999, the Company sold one and nine laser systems, respectively,
for $375,000 and $2,700,000 respectively, to TLC. As discussed in Note 10, TLC
has invested in securities of the Company in June 1998, March 1999 and January
2000. The Company has received full payment for the systems sold in 1999.
During 2000, the Company sold one laser system to a physician associated with a
director of the Company, which is included in accounts receivable at December
31, 2000.
NOTE 15--COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Visx, Incorporated
- ------------------
On November 15, 1999, the Company was served with a complaint filed by Visx
asserting that the Company's technology infringed one of Visx's U.S. patents for
equipment used in ophthalmic surgery. On November 16, 1999, the Company and Visx
reached agreement to stay the patent litigation and to continue negotiations
toward a U.S. license agreement in an effort by the Company to facilitate
commercialization of its laser systems in the U.S. On February 1, 2000 the
Company announced that it withdrew from the licensing negotiations and allowed
the litigation to proceed. The stay was lifted effective February 16, 2000. In
addition, on February 1, 2000, the Company filed suit against Visx claiming
non-infringement and invalidity of the Visx patent and asserting that Visx
infringes U.S. Patent No. 5,630,810. Management believes that the Company does
not infringe Visx's patent and that this action will not have a material adverse
effect on our business, financial condition or results from operations. However,
the outcome of patent litigation, particularly in jury trials, is inherently
uncertain, and an unfavorable outcome in the Visx litigation could have a
material adverse effect on our business, financial condition and results of
operations.
F-30
Northern New Jersey Eye Institute
- ---------------------------------
In March 1999, the Company received notice of an action filed by the former
owners of Northern New Jersey Eye Institute, or NNJEI, and related assets and
entities against the Company alleging breach of contract in connection with a
provision in our July 1996 acquisition agreements related to the assets of NNJEI
and related assets and entities. Such provision provided for additional issuance
of the Company's Common Stock if such stock price was not at certain levels in
July 1998. The Company issued the additional Common Stock in July 1998 in
accordance with the provisions of the agreements. The plaintiffs alleged that,
based on the price of the Company's Common Stock in July 1998, additional
payments were required of approximately $540,000. In November 2000, the Company
settled this litigation in exchange for a one-time payment of $135,000.
Former Officer
- --------------
In June 1999, a former president, chief executive officer and director of the
Company filed an action asserting that the Company is currently in default on a
promissory note executed in June 1991 in the principal amount of $1,180,000. In
February 2001, this matter was settled with prejudice at no cost to the Company.
Former MRF, Inc. Shareholder
- ----------------------------
In November 1999, a lawsuit was filed on behalf of a former shareholder of MRF,
Inc. (the Subsidiary), a wholly-owned subsidiary of the Company. The lawsuit
names the Company's chief executive officer as the sole defendant and alleges
fraud and breach of fiduciary duty in connection with the redemption by the
Subsidiary of the former shareholder's capital stock in the Subsidiary. At the
time of the redemption, which redemption occurred prior to the Company's
acquisition of the Subsidiary, the Company's chief executive officer was the
president and chief executive officer of the Subsidiary. The Company's Board of
Directors has authorized the Company to retain and, to the fullest extent
permitted by the Delaware General Corporation Law, pay the fees of counsel to
defend the Company's chief executive officer, the Subsidiary and the Company in
the litigation so long as a court has not determined that the Company's chief
executive officer failed to act in good faith and in a manner he reasonably
believed to be in the best interest of the Subsidiary at the time of the
redemption. Management has reviewed the lawsuit and believes that the
allegations set forth therein are without merit, and that the Company's
obligations with respect to the legal defense will not have a material adverse
effect on the Company's financial condition or results from operations.
F-31
Lambda Physik
- -------------
In January 2000, a lawsuit was filed on behalf of Lambda Physik, Inc. (Lambda)
alleging that the Company is in breach of an agreement it entered into with
Lambda for the purchase of lasers from Lambda. Lambda has requested $1,852,813
in damages, plus interest, costs and attorney's fees. The Company has since
successfully argued for a change in venue to Orange County, Florida. The Company
believes that the allegations made by the plaintiff are without merit, and
intends to vigorously defend the action. Management believes that the Company
has satisfied its obligations under the agreement and that this action will not
have material adverse effect on our financial condition or results from
operations.
Kremer
- ------
In November 2000, a lawsuit was filed in the United States District Court for
the Eastern District of Pennsylvania on behalf of Frederic B. Kremer, M.D. and
Eyes of the Future, P.C. alleging that the Company is in breach of certain terms
and conditions of an agreement it entered into with Dr. Kremer relating to the
Company's purchase of a patent from Dr. Kremer. Dr. Kremer has requested
equitable relief in the form of a declaratory judgment as well as damages in
excess of $1,600,000, plus interest, costs and attorney's fees. The Company
believes that the allegations made by the plaintiff are without merit, and
intends to vigorously defend the action. Management believes that the Company
has satisfied its obligations under the agreement and that this action will not
have material adverse effect on tour financial condition or results from
operations.
Lease Obligations
- -----------------
The Company leases office space and certain equipment under operating lease
arrangements.
Future minimum payments under non-cancelable operating leases, with initial or
remaining terms in excess of one year, as of December 31, 2000, are approximated
as follows:
2001 $964,000
2002 567,000
2003 357,000
2004 23,000
Rent expense during 2000, 1999 and 1998 was approximately $1,028,000, $895,000
and $606,000, respectively.
Future minimum purchase commitments for keratome related inventory are
approximately $8.7 million cumulatively by May 2003.
F-32
NOTE 16 - SUBSEQUENT EVENTS
- ---------------------------
License Agreement
- -----------------
In January 2001, the Company entered into an amended and restated license and
royalty agreement related to the Company's keratome products. Under the terms of
the amendment, 730,552 shares of Common Stock were issued, valued at
approximately $1.1 million, in partial payment for royalties during the term of
the license. The term was extended three years until July 31, 2005. In addition,
minimum royalty payments totaling approximately $6.2 million will be due in
quarterly installments through the term of the amendment. The royalty rate was
reduced from 50% to 10% of gross profits.
Sale of Patent
- --------------
On March 1, 2001, the Company completed the sale of a patent for a cash payment
of $6.5 million. The Company retained a non-exclusive royalty free license under
the patent. The Company's book value of the patent at December 31, 2000, was
approximately $2.4 million.
Term Loan and Credit Facility
- -----------------------------
On March 12, 2001, the Company entered into a loan agreement with Heller
Healthcare Finance, Inc. for a $3.0 million term loan at an annual interest rate
of prime plus 2.5% (11% at inception date) and a revolving loan in an amount of
up to 85% of eligible receivables related to U.S. sales, but not more than $10.0
million at an annual interest rate of prime plus 1.25% (9.75% at inception
date). At February 28, 2001, receivables on U.S. sales totaled approximately
$4.7 million. In connection with the loan, the Company paid a commitment fee of
$130,000 and issued a warrant to purchase 243,750 shares of Common Stock at an
exercise price per share of $3.15. Borrowings under the loan agreement are
secured by substantially all of the Company's assets. The loan agreement
requires the Company to meet certain covenants, including the maintenance of a
minimum level of net worth.
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