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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, 2003
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) (IRS Employer Identification No.)
6848 Stapoint Court, 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
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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_____ No__X__
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. (X)
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing sale price on June 30, 2004 was
approximately $279,871. 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 December 31, 2003:
27,841,941. Due to cancellation of old common stock, per the confirmed
bankruptcy re-organization plan, as of June 30, 2004 there are 9,997,195 shares
of common stock outstanding.
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LASERSIGHT INCORPORATED
TABLE OF CONTENTS
PART I
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 25
Item 3. Legal Proceedings............................................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 27
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters........................... 28
Item 6. Selected Consolidated Financial Data......................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 60
Item 8. Financial Statements and Supplemental Data................................................... 60
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 60
Item 9A. Controls and Procedures...................................................................... 61
PART III
Item 10. Directors and Executive Officers............................................................ 61
Item 11. Executive Compensation...................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 66
Item 13. Certain Relations and Related Transactions.................................................. 67
Item 14. Principal Accounting Fees and Services...................................................... 68
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 69
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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. See "Risk Factors and
Uncertainties--Financial and Liquidity Risks--We have experienced significant
losses and operating cash flow deficits.." We can not be certain that we will be
able to achieve or sustain profitability or positive operating cash flow in the
future. 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
PRESENT SITUATION - CHINA TRANSACTION AND LIQUIDITY ISSUES
On September 5, 2003 LaserSight and two of its subsidiaries filed for
Chapter 11 bankruptcy protection and reorganization in the United States
Bankruptcy Court, Middle District of Florida, Orlando Division. The cases filed
were LaserSight Incorporated, ("LSI") Case No. 6-03-bk-10371-ABB; LaserSight
Technologies, Inc., ("LST") Case No. 6-03-bk-10370-ABB; and LaserSight Patents,
Inc., Case No. 6-03-bk-10369-ABB. Under Chapter 11, certain claims against the
Company in existence prior to the filing of the petitions for relief under the
federal bankruptcy laws are stayed while the Company continued business
operations as Debtor-in-possession. These claims are reflected in the December
31, 2003 balance sheet as "liabilities subject to compromise." Claims secured
against the Company's assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for relief from the
stay. The majority of secured claims are held by Heller Healthcare Finance, Inc
("Heller") and GE Healthcare Financial Services, Inc., as successor-in-interest
to Heller (collectively "GE"). $110,000 of bankruptcy related professional fees
for legal services were paid for in 2003.
The company operated as a debtor-in-possession from September 5, 2003
through June 10, 2004 when a final bankruptcy order was obtained. As a result of
the bankruptcy re-structuring, the company expects to record credits for debt
forgiveness of approximately $15.6 during the three months ended June 30, 2004.
The credits are for accounts payable, accrued expenses, accrued warranty, and
deposits. On April 28, 2004, the Plan was confirmed by the Bankruptcy Court. The
effective date of the Plan was June 30, 2004.
On June 30, 2004, the Company cancelled all outstanding stock, options
and warrants and issued 9,997,195 new shares of common stock. The shares were
distributed as follows:
Creditors of LSI 1,116,000
Creditors of LST 1,134,000 (1)
Old Preferred Stockholders 360,000
Old common stockholders 539,997 (2)
Cancel treasury stock (2,802)
Conversion of $1 million DIP
Financing 6,850,000
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9,997,195
(1) These shares were issued upon the resolution of a creditor objection to
claim in January 2005.
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(2) The old common stock was converted at a 51.828 to 1 ratio.
On August 30, 2004, the Company signed a three year amended note with
GE for $2,149,249. The note was effective June 30, 2004 and bears 9% interest.
In the amendment, GE provided a waiver of the Company's failure to comply with
all covenants. In exchange for the amendment and waiver, the Company will pay a
$50,000 commitment fee, a $100,000 termination fee, attorney fees of $126,078
and an audit fee of $8,151. All fees were added to the principal balance.
Revised covenants became effective that adjusted the minimum level of net worth
to $750,000, minimum tangible net worth to $1.0 million and minimum quarterly
net revenue to $1.0 million. GE was issued warrants to purchase 100,000 common
shares, at $0.25 per share, or $0.40 per share if the remaining $1 million of
DIP financing is converted.
The New Industries Investment Consultants (HK), Ltd. ("NIIC" or the
"China Group") provided $2 million of DIP financing, of which $750,000 was
funded at December 31, 2003. On June 30, 2004, $1 million of the total was
converted to 6,850,000 common shares. The remaining $1 million note bears
interest of 9%, with interest only payments due monthly. It is a three year
balloon note. The China Group has the option to convert the note to an
additional 2,500,000 common shares. This note is subject to any GE liens on
Company assets.
In June of 2004, as of the effective date of the re-organization plan, the
following liabilities were relieved:
Accounts Payable 2,905,814
Accrued TLC license fee 825,500
Accrued salaried/severance 235,367
Accrued warranty 6,125,730
Accrued Ruiz license fees 3,471,613
Deposits/service contracts 720,399
Other accrued expenses 1,331,711
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15,616,134
In June 2004, $8.4 million of accounts and notes receivable were written off
against the allowance for doubtful accounts.
The Company has incurred significant losses and negative cash flows
from operations in each of the years in the three-year period ended December 31,
2003 and has an accumulated deficit of approximately $123 million at December
31, 2003. The substantial portion of these losses is attributable to an
inability to sell certain products in the U.S. due to delays in Food and Drug
Administration (FDA) approvals for the treatment of various procedures on the
Company's excimer laser system in the U.S. and the continued development efforts
to expand clinical approvals of the Company's excimer laser and other products.
Outlined below are some of the additional factors that led up to the
Chapter 11 filing.
As previously announced, the Company had been in continuous
negotiations with New Industries Investment Consultants (HK), Ltd. ("NIIC")or
the "China Group" to secure immediate cash payments for purchase of Company
products, to further define the terms of a long-term strategy for the Company in
China, and to
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outline a framework for additional product purchases. The Company reached an
agreement with NIIC on June 20, 2003. That agreement called for NIIC to proceed
with further purchases in order to meet the $10,000,000 purchase requirement
from the August 2002 agreement and purchase additional product above and beyond
the original purchase requirement if the Company was making substantial progress
with regard to it's restructured business plan. While the Company sold products
to NIIC during the second and third quarters of 2003, and NIIC made advance
payments on those purchases, sales levels were well below those contemplated in
the original agreements.
On June 20, 2003 the Company announced that it had been advised by GE
that its loans were in default due to an adverse material change in the
financial condition and business operations of the Company. The Company was
negotiating with GE for a modification and restructuring of its defaulted loans,
and these negotiations had progressed to the "term sheet" stage by early August
of 2003.
As previously announced, in August of 2002, the Company and Shenzhen
New Industries Medical Development Co. ("NIMD") entered into a strategic
relationship, including the purchase of at least $10 million worth of the
Company's products during a twelve-month period ending in August of 2003, to
distribute the Company's products in mainland China, Hong Kong, Macao and
Taiwan, and a $2 million equity investment in the Company by NIIC, an affiliate
of NIMD. NIIC's was in the form of the purchase of Convertible Preferred Stock,
the Series H Stock that, subject to certain restrictions, was convertible into
approximately 40% of the Company's Common Stock.
At the beginning of 2003, the Company did not have cash available to
construct machines under the strategic relationship and requested a modification
of the arrangement that would include prepayment by NIMD. NIMD purchased through
prepayment some additional product, but resisted further purchases by prepayment
without certain cost reductions and changes in operations. Prior to the
execution of the agreement, NIMD had purchased approximately $4.5 million worth
of the Company's products. Thereafter NIMD prepaid for $2.2 million worth of
product, for a total of $6.7 million of the original $10 million envisioned in
the strategic relationship.
The Company also announced that Francis E. O'Donnell, Jr., M.D., and
David Peroni resigned from their positions as members of LSI's Board of
Directors and that Dr. O'Donnell had resigned as Chairman of the Board of
Directors. Xianding Weng was elected Chairman of the Board. Mr. Weng had been a
director since October 2002 and founded NIIC in Shenzhen, China in 1993, serving
as its President and Chief Executive Officer.
On August 22, 2003 the Company announced that Mr. Michael R. Farris
would no longer serve as Chief Executive Officer and President and as a
Director. Danghui ("David") Liu, Ph. D., Vice President of Product Development
and Technical Marketing, was named Interim CEO. In May 2004 Mr. Liu was named
President and CEO.
In September 2003 the Company announced that it had failed to timely
file its second quarter SEC Form 10-Q due on August 14, 2003. The Company did
file a Form 12b-25 on August 14, 2003 advising that it was still working to put
together the necessary data to file the quarterly report.
As a late filer, the Company had a fifth character "E" added to its
security trading symbol to denote securities delinquent in their required
filings. Securities so denoted are removed from the OTCBB after the applicable
30-day grace period expires. Since the Company was removed from OTCBB, it has
been traded in the over-the-counter (OTC) market via the "Pink Sheets". See
"Recent Developments - NASDAQ Stock Market Listing."
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The Company had entered into new discussions related to the payment
terms of its License and Royalty Agreement covering its keratome products. The
licensors issued a third notice of default to the Company on May 6, 2003 and
served legal action against the Company on August 12, 2003 for the entire
balance of approximately $3.3 million under the License Agreement. The Company
continued its discussions, but the lack of resolution of these issues made
things difficult to continue to operate without the protection a bankruptcy
petition would provide.
The Company has significant liquidity and capital resource issues
relative to the timing of our accounts receivable collection and the successful
completion of new sales compared to our ongoing payment obligations.
Even with the Chapter 11 protection, the Company's ability to continue
as a going concern is uncertain and dependent upon continuing to achieve
improved operating results and cash flows or obtaining additional equity capital
and/or debt financing. Consolidated financial statements filed with this report
include substantial charges recorded during the second of 2003
necessary to reflect the diminution of asset carrying values due to Chapter
11-related filing and the Company's re-focus of its products to
core product lines.
OVERVIEW
We develop, manufacture and market quality product technologies for
laser refractive surgery and other areas of vision correction. Our products
include precision microspot scanning excimer laser systems used to perform
procedures that correct common refractive vision disorders such as
nearsightedness (myopia), farsightedness (hyperopia) and astigmatism, software
for custom ablation planning and programming, diagnostic products for precision
measurements of the eye, and other products for use in refractive vision
correction procedures. We believe that our precision 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 have over nine years of experience in the manufacture, sale and
service of precision microspot scanning laser systems for refractive vision
correction procedures. Since 1994, we have sold our scanning laser systems
commercially in over 30 countries worldwide with an installed base of
approximately 400 scanning laser systems, including over 200 of our most
advanced laser systems, the LaserScan LSX(R) and the AstraScan. In November
1999, the Food and Drug Administration (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 photorefractive keratectomy (PRK).
In September 2001, the FDA approved our LaserScan LSX precision microspot
scanning system for the laser in-situ keratomileusis ("LASIK") treatment of
myopia with and without astigmatism up to a manifest refraction spherical
equivalent ("MRSE") of -6.0 diopters with maximum refractive astigmatism
approved for up to 4.5 diopters. Currently, all of our laser systems delivered
into the U.S. and international markets operate at a pulse repetition rate of
200 Hz, or pulses per second, and in December 2002 we received FDA approval to
advance our laser pulse repetition rate to 200 Hz, which we believe is the
fastest pulse repetition rate available in our industry. Our AstraScan laser
system incorporates the same precision microspot scanning features of our
LaserScan LSX along with an advanced eye tracking system, improved lighting and
a redesigned "delivery arm" on the laser to make the microscope and joystick
more functional. Available now as an upgrade in many international markets, the
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AstraScan features will need FDA approval before they can be sold in the U.S. In
the U.S. market we are not currently pursuing FDA approval.
Our family of products for custom refractive treatments (often referred
to as custom ablations) includes the AstraMax(R) diagnostic workstation designed
to provide precise diagnostic measurements of the eye for many refractive
purposes, including generating data needed to plan custom ablation procedures,
our AstraPro(R) custom ablation planning software that utilizes advanced levels
of diagnostic measurements from our AstraMax diagnostic workstation to complete
the planning of custom ablation treatments, and Corneal Interactive Programmed
Topographic Ablation ("CIPTA"). The AstraMax integrated diagnostic workstation
was first shown in October 2000 at the Annual Meeting of the American Academy of
Ophthalmology and was commercially launched during the second quarter of 2002.
We completed international product performance testing of our AstraPro custom
ablation planning software in early 2003 and have released it for international
distribution. Our AstraPro custom ablation planning software is currently the
subject of litigation. See "Item 3. Legal Proceedings--Italian Distributor."
Operating Segments. We have operated in the following operating
segments: refractive products, patent services and health care services. In late
2001, we decided to discontinue the health care services operations and in 2003
we decided to discontinue our keratomes product line, part of the refractive
product segment, historically the revenue was not significant in keratomes, and
re-focus our marketing sales efforts to the international market, mainly China.
Our principal wholly owned subsidiaries during 2003 included: LaserSight
Technologies, Inc. ("LST") and LaserSight Patents, Inc. ("LaserSight Patents").
Both of these units were part of the Chapter 11 petition described earlier.
Our refractive products segment, primarily including our 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. We recently introduced for sale the
AstraScan laser system, both as a new laser product and as an upgrade to our
LaserScan LSX laser system. The AstraScan uses a 0.6 millimeter precision
microspot 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
nearsightedness, farsightedness and astigmatism. Our patent services segment,
consisting primarily of patents licensed by us, included a patent related to the
use of excimer lasers to ablate biological tissue until the patent was sold in
March 2001 and a license to a patent related to the use of scanning lasers. The
health care services segment consisted of The Farris Group ("TFG") until we
decided in late 2001 to discontinue its operations. TFG's financial results were
accounted for as a discontinued operation for the year ended December 31, 2001.
TFG provided 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 15 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
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. In December 2001, we decided to discontinue the operations
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of TFG as described in Note 3 of the Notes to Consolidated Financial Statements.
In September 2003 we filed a Chapter 11 bankruptcy petition, discontinued our
keratomes and cosmetic product lines due to cash flow problems, these items
never generated significant revenues, and re-focused our marketing and sales
efforts to the international market, mainly China. Our principal offices and
mailing address are 6848 Stapoint Court, Winter Park, Florida 32792, 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 1987.
There are currently two principal methods for performing laser vision
correction with excimer laser systems: PRK and LASIK.
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. 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
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 folded back, the laser beam is directed to the
exposed corneal surface, the flap is placed back and the flap and interface are
rinsed with buffered saline solution. 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, 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.
Laser Epithelial Keratomileusis (LASEK)
Laser refractive surgical procedures have undergone a transition from
PRK to the LASIK procedure that has become the procedure of choice for most
patients and surgeons. With the anticipated transition to custom ablations,
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refractive surgeons have expressed concern over the possibility of induced
refractive error related to the LASIK flap. A newly developed technique, LASEK,
is now being considered as an alternative to LASIK when performing custom
ablations. During the LASEK procedure a thin epithelial flap is formed using
alcohol, the flap is lifted up and repositioned after photorefractive ablation.
The LASEK procedure is said to result in less pain and discomfort than the PRK
procedure. Healing and recovery of vision is slower than LASIK, but not as long
as PRK.
Custom Ablation
Most laser system manufacturers are attempting to offer a custom
ablation solution. Custom ablation is believed to offer higher quality clinical
outcomes for patients due to the fact that a specific ablation profile is
planned for each eye. Higher quality outcomes are expected to be a significant
selling point with surgeons. Custom procedures typically involve gathering
diagnostic data from the surfaces of the eye, converting the data into an
individualized laser ablation plan based on the specific diagnostic data of each
eye, and performing the refractive surgery based on the ablation plan. We
believe small spot, high repetition rate scanning lasers are the best suited to
perform custom ablation procedures.
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.
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. See
"Business-Competition."
DEVELOPMENT OF EXCIMER LASER SYSTEM, DIAGNOSTIC 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 and the recent introduction
of custom ablation. Until recently, broad beam laser systems, which 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
were reported to represent over 90% of the installed laser systems in the U.S.
in 1999. This market penetration has declined through 2003 where current reports
represent that about 59% of the installed laser systems in the U.S. are broad
beam laser systems. This downward trend appears to be continuing as the newer
scanning laser systems obtain the broader range of treatment approvals
originally held by the older 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 300 Hz) to achieve corneal ablations. LaserSight was the leader in the
development of precision microspot scanning technology and the first company to
commercialize it. This new generation of narrow beam scanning excimer laser
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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.
Diagnostic and Custom Ablation Products
One of the most important tools ophthalmologists have at their disposal
is corneal topography. With a corneal topographer the ophthalmologist can
literally see the refractive problems that might be present in the cornea.
Corneal topography is used not only for screening all patients before refractive
surgery like LASIK, but also for fitting contacts, adjusting post-surgical
corneal transplants, and diagnosing refractive disorders and diseases.
Of currently available technology, corneal topography provides the most
detailed information about the curvature of the cornea. This information is
useful to evaluate and correct astigmatism, monitor corneal disease, and detect
irregularities in the corneal shape. This diagnostic procedure is essential for
patients being considered for refractive vision correction procedures (such as
LASIK) and may even be necessary in the follow-up of some patients who have
undergone refractive surgical procedures.
Topography instruments have undergone significant changes in technology
and functionality since they were first introduced. The technology has
progressed from stationary placido-based topography in early generation
topographers to scanning slit technology and now to the multi-camera-based
technology in our AstraMax.
We believe our AstraMax diagnostic workstation is the next-generation
topography instrument. The AstraMax uses a unique, patented three-video camera
imaging system to achieve high-precision elevation measurements of the cornea.
Utilizing a patented checkered polar grid and other proprietary features, the
AstraMax obtains, in a single examination, a series of critical measurements of
the cornea and eye including posterior and anterior corneal topography
(elevation), thickness of the cornea (pachymetry) and the diameter of the pupil
under conditions of both low lighting (scotopic) and normal lighting (photopic).
The precision elevation measurements result in elevation maps of the highest
available quality.
The custom treatments using our excimer laser system demonstrate
efficacy, safety, predictability and stability, and such results have been
published in peer-reviewed journals and presented at major ophthalmology venues
throughout the world.
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"). Over the
last few years there have been numerous entrants into the keratome market,
including most excimer laser manufacturing companies.
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Advances in laser technology have made it possible to create the LASIK
flap by utilizing a laser rather than the conventional keratome. In this
technique, an infrared laser and special software are utilized to focally
photodisrupt the cornea at a pre-programmed depth and position. The laser
photodisrupts the corneal tissue at the predetermined depth forming plasma
bubbles of water and carbon dioxide at that plane. These bubbles coalesce to
create a separation that will become the stromal bed and flap interface.
Finally, the laser cuts the edge of the flap circumferentially in a vertical
direction from the depth of the interface up through the epithelium, leaving a
hinge. We do not make or sell this technology. The Company terminated its
keratomes product line in September of 2003.
RECENT DEVELOPMENTS
NASDAQ STOCK MARKET LISTING
Our common stock was listed on The NASDAQ National Market. Because of
the lengthy period during which our common stock traded below $1.00 per share,
it no longer met the listing requirements for the National Market, and on August
15, 2002, NASDAQ approved our application to transfer our listing to the Small
Cap Market via an exception from the minimum bid price requirement. While we
failed to meet this requirement as of February 10, 2003, we were granted a
temporary exception from this standard subject to meeting certain conditions.
The exception required that on or before April 15, 2003, we were to file a
definitive proxy statement with the Securities and Exchange Commission
evidencing our intent to seek shareholder approval for the implementation of a
reverse stock split. Other requirements included that, on or before May 30,
2003, we demonstrated a closing bid price of at least $1.00 per share and,
immediately thereafter, a closing bid price of at least $1.00 per share for a
minimum of ten consecutive trading days. In addition, we must have been able to
demonstrate compliance with the following maintenance requirements for continued
listing on the Small Cap Market:
o stockholders' equity of $2.5 million;
o at least 500,000 shares of common stock publicly held;
o market value of publicly held shares of at least $1.0 million;
o shareholders (round lot holders) of at least 300; and
o at least two registered and active market makers.
We asked for an extension to May 1, 2003 to file the definitive proxy
statement. On April 25, 2003, we asked for a further extension, but because we
did not timely meet the requirements, our request for an extension was denied.
As a result, Listing Qualification Panel determined that our securities would be
delisted from Small Cap Market effective April 30, 2003. Our common stock was
then listed in the OTC Bulletin Board ("OTCBB"). The Company failed to file its
second quarter SEC Form 10-Q due on August 14, 2003. The Company did file a Form
12b-25 on August 14, 2003 advising that the Company would not file the quarterly
report timely. The Company plans on filing all past due SEC filings in March
2005.
LSI traded on the NASDAQ Small Cap Market through April 29, 2003 as
LASE and LASEC (March 5, 2003 - April 29, 2003). On April 30, 2003, it commenced
trading on OTCBB as LASE. The OTCBB symbol was changed on August 27, 2003 to
LASEE due to the late filing status of the company. The Company commenced
trading on the "Pink Sheets" on September 27, 2003 with the symbol LASEQ (Q
indicates bankruptcy). This is a conditional listing due to the bankruptcy
filing by the company. As mentioned above, the existing common and preferred
shares, including options and warrants, were cancelled on June 30, 2004,
pursuant to our re-organization plan. New common shares of 9,997,195 were
issued on June 30, 2004 and commenced trading via the "Pink Sheets" under the
symbol LRST.
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The delisting of our common stock from the Nasdaq Small Cap Market will
result in decreased liquidity of our outstanding shares of common stock (and a
resulting inability of our stockholders to sell our common stock or obtain
accurate quotations as to their market value), and, consequently, will reduce
the price at which our shares trade. The delisting of our common stock may also
deter broker-dealers from making a market in or otherwise generating interest in
our common stock and may adversely affect our ability to attract investors in
our common stock. Furthermore, our ability to raise additional capital may be
severely impaired. As a result of these factors, the value of our common stock
may decline significantly, and our stockholders may lose some or all of their
investment in our common stock.
CHINA BACKGROUND
We have been in a continuous partnership with New Industries Investment
Group ("NII"). Further background on China, and NII follows:
Shenzhen New Industries Medical Development Co., Ltd. ("NIMD")
(previously defined on page 4) was founded and incorporated by the Medical
Investment Department of its parent company, NII in the People's Republic of
China in 1995. It specializes in marketing and distribution of LASIK surgery
devices and equipment, as well as in investment and operation of LASIK clinical
centers in the Chinese market.
NIMD became the exclusive distributor in China for LaserSight in
September of 2002. NIMD purchased more than $7.5 million of LaserSight's
products and services after it was engaged in the exclusive distributorship with
LaserSight and before LaserSight went into Chapter 11. In the past decade, NIMD
invested and operated more than 50 PRK/LASIK refractive surgery centers in joint
ventures with the most prestigious hospitals and medical institutes in China as
its strategic partners. NIMD is now the largest business in Mainland China in
terms of its investment in refractive surgery centers.
New Industries Investment Consultants (H.K.) Ltd ("NIIC") specializes
in hi-tech business investment and consulting services. It is registered in Hong
Kong. It was incorporated in 1994 by its principal investor, Mr. Xianding Weng
(a major shareholder of NIIC, and NIIC's CEO). NIMD, with NIIC, is a pioneer in
laser refractive surgery industry in China.
NII, NIMD and NIIC are collectively referred to as the China Group.
Product-Related Developments
Our LaserScan LSX and AstraScan excimer laser systems are based on
patented precision microspot scanning technology rather than broad beam
technology. Subject to satisfactorily addressing our serious liquidity and
financing needs, we believe we are well-positioned to become a significant
provider of excimer laser systems, diagnostic products and other related
products as a result of our technology and the following recent developments:
o Reissuance of Scanning Patent. In January 2002, the U.S.
Patent and Trademark Office reissued LaserSight's scanning
patent U.S. Patent No. 5,520,679, (the "679 Scanning Patent")
as U.S. Patent No. RE 37,504 (the "504 Scanning Patent"),
thereby completing the reissue process. See "--Intellectual
Property." See "License of Scanning Patent" below.
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o License of Scanning Patent. During 2002, we licensed the `504
Scanning Patent on a non-exclusive basis to two other parties
for total payments of $2.6 million in cash. One such
agreement, with Alcon, also provides that LaserSight and Alcon
will cooperate in the future enforcement of the patent and
share in the funds generated by such future enforcement. See
"Reissuance of Scanning Patent" above.
o Custom Ablation We commercially launched the AstraMax product
during 2002. The AstraMax can be utilized as a stand-alone
diagnostic unit or as part of our CustomEyes approach to
custom ablation planning. We believe that the AstraMax
integrated diagnostic workstation is the first product to
integrate precision diagnostic measurements such as anterior
corneal elevation, corneal thickness, and measurements of
photopic and scotopic pupil size into a single instrument. The
precision measurements from the AstraMax integrated
workstation will be utilized in our AstraPro software for
planning custom ablations. International clinical testing of
our internally developed AstraPro planning software has been
completed for previously untreated eyes, and the product was
released for international distribution in early 2003. Any
custom ablation software will require both clinical trials and
FDA approval prior to sale in the U.S. Currently, we do not
have any on-going efforts pursuing US trials or approvals.
Products
Excimer Lasers
LaserSight was the first company to develop an advanced precision
microspot scanning excimer laser system. The LaserScan LSX and AstraScan (for
international use) excimer laser systems have 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
microspot scanning excimer laser systems in over 30 countries with an installed
base of approximately 400 scanning laser systems. The AstraScan model
incorporates the same precision microspot scanning features along with an
advanced eye tracking system, improved lighting and a redesigned "delivery arm"
on the laser to make the microscope and joystick more functional and allow for
keratome placement. The AstraScan features will need FDA approval before they
can be sold in the U.S. Currently, we do not have any on-going efforts pursuing
US trials or approvals. Throughout the evolution of our precision microspot
scanning excimer laser systems, the core concept of utilizing our proprietary
precision 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 sale in
the U.S., and we began commercial shipments to U.S. customers in March 2000. In
September 2001, our PMA Supplement for the LASIK treatment of myopia and myopia
with astigmatism was approved by the FDA, thereby increasing the range of
indications that can be treated in the U.S. using the LaserScan LSX. We believe
that the "SFR" technology, described below, incorporated into our LaserScan LSX
offers advantages over competitive scanning laser systems. We believe that the
incorporation of the smallest spot size (S), the lowest laser fluence (F) and
highest repetition rate (R), together with techniques like the patented
purposeful overlapping of laser pulses and random scanning patterns used by our
patented precision microspot scanning technology, can lead to smoother
ablations, the elimination of surgical anomalies associated with broad beam
laser systems such as rings, ridges and central islands, and reductions in the
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incidence of glare, halos and loss of night vision. We also believe that our
patented SFR technology is capable of providing the highest resolution and
accuracy in corneal ablations needed for custom ablation treatments. The key
benefits of our laser systems include the following:
o PRECISION MICROSPOT SCANNING LASER. The AstraScan uses
patented precision microspot scanning to deliver a high
resolution, 0.6 millimeter low-energy "flying spot," in a
proprietary, randomized pattern. They are true
precision-scanning software-controlled lasers that use a 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 LOWER FLUENCE. The accuracy and resolution of ablations
produced by a refractive laser system is directly related to
its laser fluence. When low laser fluence is delivered in a
smaller laser spot, the ability of a laser system to
accurately produce a predetermined laser ablation pattern is
increased. Our lasers operate with a fluence of 89 mj/cm2 and
have a beam size of 0.6 to 0.8 mm. Many competitive laser
systems operate with fluences up to 200 mj/ cm2 and have
larger laser spots.
o HIGHER PULSE REPETITION RATE. Our lasers currently operate 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 advanced
adaptive eye tracking system maintains alignment of the
refractive correction relative to the visual axis of the eye.
The LaserSight advanced adaptive eye tracker is a high speed,
synchronous, "active" system that is capable of following even
small, involuntary eye movements. Our advanced adaptive eye
tracking system is currently available only on international
versions of the AstraScan.
o FLEXIBLE PLATFORM. Custom ablations have resulted in increased
patient satisfaction in international clinical use, and we
believe the ability to perform custom ablations will generally
result in improved visual quality, more predictable results
and less post-operative regression relative to other
refractive surgery techniques. We also believe that custom
ablation will be the technique most preferred by refractive
surgeons for correction of irregular astigmatism, decentered
ablations and other surgically induced corneal irregularities.
When programmed by custom ablation software tools like
AstraPro, our laser is able to perform custom ablations.
o ADVANCED DESIGN AND ERGONOMICS. Our laser'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.
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DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
Our CustomEyes family of diagnostic instruments and custom ablation
planning tools includes the AstraMax integrated diagnostic workstation and CIPTA
and AstraPro custom ablation planning software.
ASTRAMAX. The AstraMax is an integrated diagnostic workstation that
obtains precision diagnostic measurements such as corneal elevation, corneal
thickness, and measurements of photopic and scotopic pupil size. Prior to the
AstraMax these measurements would have to be taken utilizing two or more
instruments. In addition to its value as a stand-alone system, the precision
diagnostic measurements provided by the AstraMax integrated workstation will be
utilized in our AstraPro software for planning custom ablations.
We believe the primary benefits of the AstraMax system include:
o Multiple Cameras - The AstraMax has three cameras allowing for
the truest rendering of corneal data to date. Three cameras
capture corneal data with greater precision and accuracy. In
laser vision correction, height and depth data are essential
to perform an accurate laser surgery with reliable accurate
results..
o Scotopic and Photopic Pupilometry - The AstraMax is the only
topographer that offers a full range of measurements including
scotopic and photopic pupil size. We believe the quality of
the patient's vision is partly dependent on the size of the
ablation zone equaling or exceeding the size of the scotopic
pupil, something no other topographer measures.
The technology incorporated into our AstraMax integrated workstation is
covered by six U.S. patents assigned to LaserSight, licenses to related
technologies and a number of patent applications currently undergoing
examination in the U.S. and internationally.
ASTRAPRO. We have completed the international product performance
testing of our AstraPro custom ablation planning software, and it became
commercially available in early 2003. We believe our CustomEyes approach to
custom ablations 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.
For custom ablation treatments, the diagnostic data from the AstraMax
will be exported to our AstraPro custom ablation planning software where the
data will be used initially to plan custom ablation profiles intended to correct
visual anomalies that may have been induced by prior refractive procedures and
improve the overall quality of a patient's vision. LaserSight's approach to
custom ablation is somewhat different from other competitors in that our focus
has been on developing diagnostic and planning tools and techniques that improve
the qualitative aspect of visual performance. Because wavefront devices have
tended to focus on detecting and correcting for spherical aberrations that may
be present in a patient's eye, correction of such visual defects addresses only
visual acuity, or the quantitative aspect, of visual performance. Such
treatments do not address the qualitative aspect of visual performance, or how
well a patient is seeing under a variety of conditions.
Our approach to custom ablation treatment uses precise measurements of
corneal elevation, corneal thickness and pupil size to plan a custom ablation
intended to improve visual performance by post-operatively retaining the natural
prolate shape of the patient's cornea.
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KERATOME PRODUCTS
Our MicroShape family of keratome products was discontinued in
September of 2003.
GROWTH STRATEGY
Our goal, subject to our ability to obtain adequate financing, is to
become a significant provider of excimer laser systems, diagnostic and custom
ablation products and other products for the refractive vision correction
industry, focusing on China. We believe that our more than nine 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, ablation planning software provide us
with a strong platform for future growth as we continue to penetrate the
international markets for refractive surgical lasers and instruments.
The following are the key elements of our growth strategy:
o EXPAND MARKET SHARE IN INTERNATIONAL EXCIMER LASER MARKET,
MAINLY IN CHINA. We believe that our AstraScan precision
microspot scanning excimer laser systems represent a
significant technological advancement over the other scanning
laser systems currently being marketed internationally, as our
precision microspot scanning lasers can provide more precise
corneal ablations, reduced visual side effects, enhanced
visual acuity and shorter procedure times. . We also believe
that the availability of AstraPro and AstraMax provides a
custom ablation solution internationally that will improve our
sales opportunities.
o ESTABLISH STRONG POSITION IN CUSTOM ABLATION MARKET. By
combining the capabilities of our laser system with the
AstraMax and AstraPro, we believe we will be in a position to
benefit from a viable custom ablation package in the
international market in the near future.
SALES AND MARKETING
We sell our excimer laser systems, diagnostic products, and related
products through independent sales representatives and distributors. Since 1994,
we have marketed our laser systems commercially in over 30 countries worldwide
and currently have an installed base of approximately 400 scanning lasers,
including over 200 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.
During 2002, we stopped laser sales efforts in the U.S. pending further FDA
approvals.
Laser system sales in international markets are generally to hospitals,
corporate centers or established and licensed ophthalmologists. Internationally
we marketed our excimer laser systems in Canada, Europe, Asia, South and Central
America, and the Middle East, with particular focus in China. We currently
employ a sales manager who is responsible for sales in international markets,
both directly and through our independent distributors and representatives
within their respective territories.
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All of our distributors and representatives were selected based on
their experience and knowledge of their respective ophthalmic equipment market.
In addition, the selection of international distributors and representatives was
also based on their ability to offer technical support. Distributor and
representative agreements provided for either exclusive territories, with
continuing exclusivity dependent upon achievement of mutually agreed levels of
annual sales, or non-exclusive agreements without sales minimums. Our new China
distributor was responsible for generating sales representing 86% of our
consolidated revenues in 2003. We have a concentration of credit risk, with the
majority of our sales to one customer.
In conjunction with our sales activities, we participate in a limited
number of foreign ophthalmology meetings, exhibits and seminars.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
We currently employ one person responsible for the sales of our
AstraMax products, in addition to our laser system China distributor. We plan to
offer bundled packages including, for example, a laser system with an AstraMax.
KERATOME PRODUCTS
In 2001, all marketing and manufacturing arrangements with Becton
Dickinson were ended. See "Risk Factors and Uncertainties--Industry and
Competitive Risks--We cannot assure you that our keratome product will achieve
market acceptance." Accordingly, we discontinued our keratomes product line in
September of 2003.
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 internally.
During 2002, we consolidated all excimer laser system manufacturing
operations in Winter Park, Florida and closed our manufacturing facility in San
Jose, Costa Rica. In October 1996, we received certification under ISO 9002, an
international system of quality assurance, for our manufacturing and quality
assurance activities in Florida facility. Since that time we have maintained our
ISO 9002 certification through a series of periodic surveillance audits and have
also been certified at our 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
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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. Our current production is focused on
products for the China group. See "--Present Situation--China Transaction and
Liquidity Issues."
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 both the LaserScan LSX and the AstraScan. See
"Concentration of Supplier Issues".
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
Our AstraMax integrated diagnostic workstation is being manufactured in
our Winter Park, Florida, manufacturing facility. These manufacturing operations
also primarily consist of assembly, inspection and testing of parts and system
components to assure performance and quality. We acquire components of the
AstraMax and assemble them into a complete unit from components that include
both "off-the-shelf" materials and assemblies and 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 diagnostic workstation was
developed and is maintained internally.
The AstraPro software was distributed from Winter Park, Florida
beginning in early 2003. The CIPTA software that is being distributed under an
agreement with Ligi Technologie Medicali, Taranto, Italy, was developed by that
company. Any custom ablation software will require clinical trials and FDA
approval prior to sale in the U.S.
COMPETITION
EXCIMER LASER SYSTEMS
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.
We believe competition in the excimer laser system market is primarily
based on product reliability, safety and effectiveness, technology, price,
regulatory approvals, operating costs, 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, six manufacturers, VISX, Alcon, Nidek, Bausch & Lomb,
WaveLight and LaserSight, have excimer laser systems with the required FDA
approval to commercially sell the systems in the U.S. At present, the laser
systems manufactured by 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 and in the case of VISX and Alcon, farsightedness.
While regulatory approvals play a significant role with respect to the U.S.
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market, competition from new entrants may be prevalent in other countries where
regulatory barriers are lower.
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, which have received FDA approval, as well as implantable
intraocular lenses, a holmium laser system and a conductive keratoplasty system
(using radio frequency waves), both developed for the treatment of
farsightedness, which have also been approved by the FDA.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
The topography market is segmented into higher priced (Bausch & Lomb's
Orbscan) and lower priced markets (manufactured by Humphrey, Tomey and others).
We are primarily competing against the Orbscan. Our AstraMax instrument also
competes against another class of instruments based on wavefront technology for
use in planning custom ablation treatments. The target market for higher-priced
topographers is refractive surgeons, general ophthalmologists and optometrists.
Sales for the AstraMax have been targeted mostly to refractive surgeons. The
market has shown acceptance of new technology, and is being fueled by the need
to obtain more accurate corneal height data in an effort to provide consistent
and accurate results in LASIK surgery as well as screen out poor candidates for
the procedure.
We believe the AstraMax competes well against the features offered by
the Orbscan and provides the additional benefits described earlier that should
position the AstraMax as the next generation in corneal topography.
KERATOME PRODUCTS
The Company discontinued its keratomes product line in September of
2003.
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, and delivery systems for using laser devices in
refractive surgical procedures. 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 microspot laser scanning system, harmonic conversion techniques
for solid state lasers, calibration of refractive lasers, eye tracking,
treatment of glaucoma and other 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 `504
Scanning Patent, solid-state laser-related, and keratometer patents. In May
1996, we were granted the original '679 Scanning 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 January 2002 the U.S. Patent and Trademark Office reissued the `679 Scanning
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Patent as the `504 Scanning Patent. Prior to reissue, the original '679 Scanning
Patent included one independent claim and 23 total claims. The reissue
application added nine new independent claims, and a total of 67 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 Scanning 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 Scanning Patent's original claims by removing
certain restrictive elements. In 2001 and 2002, we received a total of $7.6
million in licensing fees for the `504 Scanning Patent; no monies were received
in 2003.
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, No. 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
critical for the planning of custom ablation treatments when these treatments
are commercially available.
In January 2003, we received U.S. Patent No. 6,505,936, our first U.S.
Patent related to the AstraPro custom ablation planning and programming
software.
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. We believe that we own or have a license to
all intellectual property necessary for commercialization of our products.
Patent Segment. Prior to 2001, we 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 are the fundamental blocking patents that underlie the technology of
ultraviolet laser refractive surgery. Under the license agreements with VISX and
Alcon that 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.
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 $4.0 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. From our 1997
purchase of the IBM Patents until March 2001,we realized over $5.0 million in
royalty revenues from licenses to the patent.
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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 retained a non-exclusive royalty free license under the Blum Patent
and at the time retained the license to the Blum Patent that was granted to
VISX. LaserSight and Alcon will share in royalties received from any future
licenses of 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 $24.0 million from
the Blum Patent and will continue to benefit from a royalty free license in the
U.S.
In May 2001 as part of our Settlement and License Agreement with VISX
we sold them a fully paid-up license to the Blum Patent.
Other Intellectual Property. We believe that our other intellectual
property rights are valuable assets of our business. For example, our U.S.
Patent Nos. 5,841,511 and 6,213,605 cover the checkered polar grid utilized in
our AstraMax diagnostic workstation, and our U.S. Patent Nos. 6,234,631 and
6,428,168 cover the combination of advanced corneal topography and wavefront
aberration measurement into a single instrument and relate to future plans for
our AstraMax diagnostic workstation. 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. 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. We owe TLC 20% of the net proceeds of this license, or approximately $0.8
million. The amount was offset against a laser receivable owed to us by TLC. The
TLC exclusive license was eliminated in bankruptcy in 2004.
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 December 31, 2003, we have approximately five 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.
In the U.S., our trademarks include LaserSight(R), LaserSight
Technologies, Inc.(R), LSX(R), LaserScan LSX(R), MicroShape(R), UltraShaper(R),
UltraEdge(R), UniShaper(R) AstraPro(R), AstraMax(R) and AccuTrack(R).
REGULATION
MEDICAL DEVICE REGULATION
The FDA regulates the manufacture, use and distribution 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
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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.
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 may require 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. 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 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
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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 and the ranges of treatment.
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.
The QSR/GMP ("Quality System Regulations", "Good Manufacturing
Processes") regulations impose certain procedural and documentation requirements
upon us with respect to our manufacturing, design controls 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.
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 PRK treatment of low to moderate nearsightedness in
November 1999.
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 the Canadian Medical Devices
Bureau in mid-1999.
In September 2001, we received FDA approval for the LASIK treatment of
myopia with and without astigmatism for correction of manifest spherical
equivalent refractive error of up to -6 diopters with up to -4.5 diopters of
astigmatism. We also received FDA approval to increase our laser pulse rate to
200 Hz.
In December 2002, we received FDA approval to increase our laser pulse
rate from 200 Hz to 300 Hz.
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. Our AstraMax
diagnostic workstation was classified by the FDA as Class I exempt, which does
not require FDA market clearance.
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
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modified device until receipt of the necessary 510(k).
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 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 are 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. In June 2002, the AstraMax was CE Marked. The CE Mark, certifying
that the LaserScan Models 2000, LaserScan LSX and AstraMax 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 EN46001, 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, on a limited basis, to research and develop new laser
products, laser systems, product upgrades enhancements, and ancillary product
lines. In March 2000, we acquired the intellectual property that we have
developed into the AstraMax that was commercialized during the second quarter of
2002. We believe the AstraMax has assisted us in developing our custom ablation
treatment plan capabilities.
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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.
Employees
As of December 31, 2003, we had 23 full-time employees. All of the
employees are located in Winter Park, Florida. Eleven are in manufacturing,
three are in engineering, four are in customer service/sales and five are in
administration. 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. We plan on adding field service staff during 2004 and
occasionally use independent contractors in this area.
Item 2. Properties
Our principal offices, including executive offices and administrative,
marketing and laboratory facilities, and manufacturing facilities are located in
approximately 15,600 square feet of space that we have leased in Winter Park,
Florida. The lease expires January 31, 2006. Monthly lease payments are $15,116
and the Company is also responsible for taxes. In our opinion, the property used
in our operations is generally in good condition and is adequate for the
purposes for which we utilize them.
Item 3. Legal Proceedings
Jarstad. In January 2002, a customer filed a lawsuit in the Superior
Court of the State of Washington in and for the County of King. The lawsuit was
subsequently remanded to federal court. The lawsuit names LaserSight
Technologies and an unaffiliated finance company as defendants. The lawsuit
alleged various claims related to LaserSight Technologies' sale of a laser
system to the plaintiff including breach of contract, breach of express
warranty, breach of implied warranty, fraudulent inducement, negligent
misrepresentation, unjust enrichment, violation of the consumer protection act
and product liability. Plaintiffs requested damages to be determined at trial,
reimbursement for leasing fees, prejudgment and post-judgment interest,
attorneys' fees and costs and other equitable relief. In this matter, a
settlement agreement has been signed by the parties. The terms of the settlement
did not require us to make any cash payments. We agreed to service and calibrate
the plaintiff's laser as well as provide certain software and equipment upgrades
at either no cost to plaintiff or at prices that were negotiated in connection
with the settlement, if and when such upgrades are available in the U.S.
Distributors. In October 2001, three entities that previously served as
distributors for LaserSight's excimer laser system in the United States,
Balance, Inc. d/b/a Bal-Tech Medical, Sun Medical, Inc. and Surgical Lasers,
Inc., filed a lawsuit in the Circuit Court of the Ninth Judicial Circuit, Orange
County, Florida. The lawsuit named LaserSight Technologies, Mr. Michael Farris,
former Chief Executive Officer, and James Spivey, LaserSight Technologies'
former Vice President of Sales, as defendants. The lawsuit alleged various
claims related to LaserSight Technologies termination of the distribution
arrangements with the plaintiffs including breach of contract, breach of the
covenant of good faith and fair dealing, tortuous interference with business
relationships, fraudulent misrepresentation, conversion and unjust enrichment.
Plaintiffs requested actual damages in excess of $5.0 million, punitive damages,
prejudgment interest, attorneys' fees and costs and other equitable relief. We
filed a motion to dismiss that was denied. We then filed an answer and
counterclaim. The plaintiffs had answered the counterclaim and had moved to
strike some of our affirmative defenses, and we had moved to strike portions of
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the plaintiff's answer. To date, limited discovery had occurred. In March 2003,
one of the three entities agreed to dismiss their claims with prejudice.
Management believed that LaserSight Technologies had satisfied its obligations
under the distribution agreements, and that the allegations against LaserSight
Technologies, Mr. Farris and Mr. Spivey were without merit. As a result of the
September 2003 Chapter 11 petition, and subsequent re-structuring, claims such
as these have been resolved with the issuance of a portion of the 9,997,195 new
common shares.
Italian Distributor. In February 2003, an Italian court issued an order
restraining LaserSight Technologies from marketing our AstraPro software at a
trade show in Italy. This restraining order was issued in favor of Ligi
Tecnologie Medicali S.p.a (LIGI), a distributor of our products, and alleged
that our AstraPro software product infringes certain European patents owned by
LIGI. We had retained Italian legal counsel to defend us in this litigation, and
we were informed that the Italian court had revoked the restraining order and
ruled that LIGI must pay our attorney's fees in connection with our defense of
the restraining order. In addition, our Italian legal counsel informed us that
LIGI had filed a motion for a permanent injunction. We believe that our AstraPro
software does not infringe the European patents owned by LIGI, but due to
limited cash flow the Company has not defended its position. Management believes
that the outcome of this litigation will not have a material adverse impact on
LaserSight's business, financial condition or results from operations. Since the
Chapter 11 petition does not apply to foreign courts, this action is still
pending.
VISX, Incorporated. On May 25, 2001, LaserSight settled the patent
infringement action filed by VISX against LaserSight in November 1999 in the
United States District Court for the District of Delaware. In connection with
the resolution of this litigation LaserSight and VISX entered into a Settlement
and License Agreement pursuant to which LaserSight received a license to patents
held by VISX that related to refractive excimer lasers, including United States
Patents Nos. 4,718,418 and B1 5,108,388 and agreed to pay a royalty for each
procedure performed in the United States using a LaserSight refractive laser. As
part of the agreement, VISX purchased a fully paid up license to U.S. Patent No.
4,784,135 (the Blum Patent). The amount of the royalty that we are required to
pay VISX and the amount that VISX paid us for the fully paid-up license to the
Blum Patent are confidential. A copy of the Settlement and License Agreement has
been filed as Exhibit 10.62 to our Form 10-Q for the period ended June 30, 2001.
The parties filed a stipulated order dismissing the patent infringement action
on June 1, 2001.
Former Shareholder of MRF (d/b/a TFG). On May 14, 2001, a motion for
summary judgment was granted in favor of Michael R. Farris, former Chief
Executive Officer, in connection with a lawsuit that was filed on November 12,
1999 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 named Mr. Farris, LaserSight's former chief executive officer, as the
sole defendant and alleged 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 redemption occurred prior to
LaserSight's acquisition of TFG, Mr. Farris was the president and chief
executive officer of TFG. LaserSight's Board of Directors 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 had 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. The
plaintiff appealed the U.S. District Court's order granting summary judgment in
favor of Mr. Farris to the United States Court of Appeals for the 8th Circuit.
The appeal was heard in January 2002; on March 13, 2002 the 8th Circuit reversed
the District Court with respect to the starting date of the statute of
limitations related to an allegation of fraud committed by a fiduciary. We had
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agreed to the terms of a settlement with the plaintiff. The terms of the
settlement require three payments totaling $140,000. The first payment of
$50,000 was paid in October 2002, the second payment of $45,000 was due in
September 2003, and the third payment of $45,000 was due in March 2004. All of
the payments are to be made without interest unless there were to be a default
in payment in which event interest would accrue at 9%. During 2002, we recorded
settlement expense of $140,000 related to this settlement. This creditor did not
file a proof of claim in the bankruptcy case and accordingly the claim was
discharged in bankruptcy.
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 alleged that we breached an agreement
we entered into with Lambda for the purchase of lasers from Lambda. Lambda
requested approximately $1.9 million in damages, plus interest, costs and
attorney's fees. After no activity for over a year, the plaintiff filed a motion
in July 2002 to have the court set a trial date, which they set for December
2002. Subsequently, the plaintiff filed a motion for continuance of the trial to
allow the parties an opportunity to settle the dispute. In October 2002, the
court entered an order continuing the trial and would reschedule only upon the
filing of a new notice for trial by either party. We believe that the
allegations made by the plaintiff are without merit. 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. This action was eliminated in bankruptcy confirmation.
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 alleged that LaserSight was
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 requested equitable relief in the form of a declaratory judgment as well
as damages in excess of $1.6 million, plus interest, costs and attorney's fees.
The parties reached a verbal agreement to have this case dismissed without
prejudice and agreed not to commence any proceedings for 180 days after entry of
the order of dismissal for any claim or cause of action that had been or could
have been asserted in this matter. A stipulated order of dismissal was prepared
but was filed. The parties agreed to postpone discovery and attempted to agree
on the final form of a settlement. The terms of the settlement agreement, as
currently contemplated, do not require us to make any cash payments. LaserSight
believes that the allegations made by the plaintiff were without merit.
Management believes that LaserSight 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. This action was eliminated in
bankruptcy.
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
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
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PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Our common stock traded on The NASDAQ Stock Market(R) under the symbol
LASEC until April 29, 2003. This was a conditional listing on the NASDAQ
SmallCap Market where the fifth character "C" was appended to LaserSight's
symbol. Effective with the open of business on March 5, 2003, the trading symbol
for LaserSight's securities was changed from LASE to LASEC. On April 30, 2003
the common stock was delisted by NASDAQ and commenced trading on OTC Bulletin
Board as LASE. This OTCBB symbol was changed on August 27, 2003 to LASEE due to
the late filing status of the Company. The Company was dropped from the OTCBB
and commenced trading on the "Pink Sheets" on September 27, 2003 with the symbol
LASEQ ("Q" indicates bankruptcy). As mentioned previously, the existing
outstanding common and preferred shares, including options and warrants, were
cancelled by action of the US Bankruptcy Court on June 30, 2004. New common
shares of 9,997,195 were issued on June 30, 2004 and commenced trading via the
"Pink Sheets" under the symbol LRST. The following table sets forth, for the
fiscal quarters indicated, the high and low sale prices for our common stock on
the various markets indicated above.
2002: High Low
---- ---- ---
First Quarter ................... $0.81 $0.45
Second Quarter .................. 0.63 0.07
Third Quarter ................... 0.44 0.04
Fourth Quarter................... 0.33 0.16
2003:
----
First Quarter ................... 0.29 0.04
Second Quarter .................. 0.29 0.07
Third Quarter ................... 0.29 0.01
Fourth Quarter................... 0.16 0.001
On June 30, 2004, the closing sale price for our common stock on the
"Pink Sheets" was $0.01 per share. As of June 30, 2004, LaserSight had
9,997,195 shares of common stock outstanding held by approximately 500
stockholders of record and, to our knowledge, approximately 3,000 total
stockholders, including stockholders of record and stockholders in "street
name." Of these 9,997,195 shares approximately 1,134,000 shares representing
approximately 350 creditors' shares were yet to be issued pending final
bankruptcy court allocation.
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.
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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." All warrants and options outstanding prior to filing Chapter 11
were cancelled on June 30, 2004.
GE Warrants. In connection with our March 2001 loan agreement with GE
Healthcare Financial Services, Inc., as successor-in-interest to Heller
Healthcare Finance, Inc. ("GE"), we issued GE warrants to purchase a total of
243,750 shares of common stock at an exercise price of $3.15 per share. The
warrants expired in March 2004. In connection our with August 2004 Amended loan
Agreement with GE, we issued GE warrants to purchase a total of 100,000 shares
of common stock at an exercise price of $ 0.25 per share, or $0.40 per share if
the remaining $ 1 million of DIP financing is converted to common stock. The
warrant expires June 30, 2008.
China Transaction. In connection with our bankruptcy re-structuring,
NIIC will initially control 7,210,000 or 72% of the newly issued 9,997,195
common shares. Under certain circumstances their control could increase to
approximately 74% with the conversion of $1 million DIP Financing to 2,500,000
common shares.
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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, 2003 is
derived from our consolidated financial statements for such years.
(In thousands, except for per share amounts)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net sales $6,437 $10,502 $17,419 $33,697 $21,374
Gross profit (loss) (715) 4,753 10,034 18,892 11,753
Loss from operations (23,530) (13,258) (22,761) (21,922) (14,390)
Loss from continuing operations
(23,516) (13,569) (22,663) (21,021) (13,712)
Net loss (23,516) (13,569) (26,190) (21,430) (14,424)
Conversion discount on
preferred stock (1,582) (354) -- -- --
Dividends and accretion
Of preferred stock -- -- -- -- --
Loss attributable to common
stockholders (25,098) (13,923) (26,190) (21,430) (14,424)
Basic loss per common share (0.90) (0.51) (1.04) (1.02) (0.89)
Diluted loss per share (0.90) (0.51) (1.04) (1.02) (0.89)
Working capital (14,761) 2,940 13,864 20,680 21,648
Total assets 4,975 23,108 36,310 51,876 49,379
Long-term obligations 750 -- 2,926 110 100
Stockholders' equity (deficit) (19,582) 3,898 15,472 37,335 39,578
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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. We have significant liquidity and capital resource
issues relative to the timing of our accounts receivable collection and the
successful completion of new sales compared to our ongoing payment obligations
and our auditors have indicated that our recurring losses from operations and
net capital deficiency raises substantial doubt about our ability to continue as
a going concern. Our auditors' reports included an explanatory paragraph
regarding our ability to continue as a going concern because we have incurred
significant losses and negative cash flows from operations for several years and
our ability to raise or generate enough cash to survive is questionable. See
"Liquidity and Capital Resources" and "Risk Factors and Uncertainties-We have
experienced significant losses and operating cash flow deficits and we expect
that operating cash flow deficits will continue and absent further financing or
significant improvement in sales, potentially result in our inability to
continue operations."
All references to years are to LaserSight's fiscal years ended
December 31, 2003, 2002 and 2001, unless otherwise indicated.
Executive Summary
On September 5, 2003 LaserSight and two of its subsidiaries filed for
Chapter 11 bankruptcy protection and reorganization in the United States
Bankruptcy Court, Middle District of Florida, Orlando Division. The cases filed
were LaserSight Incorporated, ("LSI") Case No. 6-03-bk-10371-ABB; LaserSight
Technologies, Inc., ("LST") Case No. 6-03-bk-10370-ABB; and LaserSight Patents,
Inc., Case No. 6-03-bk-10369-ABB. Under Chapter 11, certain claims against the
Company in existence prior to the filing of the petitions for relief under the
federal bankruptcy laws are stayed while the Company continued business
operations as Debtor-in-possession. These claims are reflected in the December
31, 2003 balance sheet as "liabilities subject to compromise." Claims secured
against the Company's assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for relief from the
stay. The majority of secured claims are held by Heller Healthcare Finance, Inc
("Heller") and GE Healthcare Financial Services, Inc., as successor-in-interest
to Heller ("GE").
The company operated as a debtor-in-possession from September 5, 2003
through June 10, 2004 when a final bankruptcy order was obtained. As a result of
the bankruptcy re-structuring, the company expects to record credits for debt
forgiveness of approximately $15.6 million during the three months ended June
30, 2004. On April 28, 2004, the Plan was confirmed by the Bankruptcy Court. The
effective date of the Plan was June 30, 2004.
On June 30, 2004, the Company cancelled all outstanding stock, options and
warrants and issued 9,997,195 new shares of common stock. The shares were
distributed as follows:
Creditors of LSI 1,116,000
Creditors of LST 1,134,000 (1)
Old Preferred Stockholders 360,000
Old common stockholders 539,997 (2)
Cancel treasuy stock (2,802)
Conversion of $1 million DIP
Financing 6,850,000
----------
9,997,195
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(1) These shares will be issued upon the resolution of a creditor objection to
claim.
(2) The old common stock was converted at a 51.828 to 1 ratio.
On August 30, 2004, the Company signed a three year amended note with
GE for $2,149,249. The note was effective June 30, 2004 and bears 9% interest.
In the amendment, GE provided a waiver of the Company's failure to comply with
all covenants. In exchange for the amendment and waiver, the Company will pay a
$50,000 commitment fee, a $100,000 termination fee, attorney fees of $126,078
and an audit fee of $8,151. All fees were added to the principal balance.
Revised covenants became effective that adjusted the minimum level of net worth
to $750,000, minimum tangible net worth to $1.0 million and minimum quarterly
net revenue to $1.0 million. GE was issued warrants to purchase 100,000 common
shares, at $0.25 per share, or $0.40 per share if the China Group converts it's
remaining $1 million of DIP financing.
The China Group provided $2 million of DIP financing, of which $750,000
was funded at December 31, 2003. On June 30, 2004, $1 million of the total was
converted to 6,850,000 common shares. The remaining $1 million note bears
interest of 9%, with interest only payments due monthly. It is a three year
balloon note. The China Group has the option to convert the note to an
additional 2,500,000 common shares. This note is subject to any GE liens on
Company assets.
In June of 2004, as of the effective date of the re-organization plan, the
following liabilities were relieved:
Accounts Payable 2,905,814
Accrued TLC license fee 825,500
Accrued salaried/severance 235,367
Accrued warranty 6,125,730
Accrued Ruiz license fees 3,471,613
Deposits/service contracts 720,399
Other accrued expenses 1,331,711
----------
15,616,134
In June 2004, $8.4 million of accounts and notes receivable were
written off against the allowance for doubtful accounts.
Overview
LaserSight's loss attributable to common stockholders for 2003 was
$25,098,059, or $0.90 per basic and diluted common share, on net sales of
$6,437,177 while the net loss for 2002 was $13,922,580, or $0.51 per basic and
diluted common share, on net sales of $10,502,135. The net losses are primarily
attributable to a decline in sales of our excimer laser systems, warranty
charges and write offs of inventory and accounts receivable and notes
receivable.
LaserSight is principally engaged in the manufacture and supply of
microspot scanning excimer laser systems, software for custom ablation planning
and programming, diagnostic products for precision measurements of the eye, 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 approximately 400 scanning
laser systems outside the U.S., including over 200 of our LaserScan LSX laser
systems.
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China Transaction
In July 2002, the Company signed a non-binding letter of intent with a
company based in the People's Republic of China that specializes in advanced
medical treatment services, medical device distribution and medical project
investment. Definitive agreements relating to the China transaction were
executed on August 15, 2002, establishing a strategic relationship that included
the commitment to purchase at least $10.0 million worth of our products during
the 12-month period ending August 15, 2003, distribution of our products in
mainland China, Hong Kong, Macao and Taiwan, and a $2.0 million investment in
LaserSight. The investment was completed in October 2002 by issuance, in
exchange for the $2.0 million payment, of Series H convertible preferred stock
that, subject to certain restrictions, could be converted into 18,561,294 shares
of our common stock and result in the purchaser holding approximately 40% of our
common stock. The products purchased were paid by irrevocable letters of credit,
confirmed by a U.S. bank and payable upon our shipment of products and
presentation of shipping documents. The Company started shipping products under
this agreement in August 2002. Through December 31, 2003, approximately $3.4
million worth of products were sold under these agreements. Our current product
production and shipments are focused on satisfying our delivery requirements
with respect to the China group. Additional production will depend on the future
availability of cash. A new agreement was signed with the China group in
February 2004, where they agreed to purchase $12 million of lasers and products
for the next twelve months. The new agreement allows for two one-year
extensions. The Series H convertible preferred stock was converted into 360,000
shares of common stock on June 30, 2004. See Note 18 to the Notes to
Consolidated Financial Statements.
For information regarding our export sales and operating revenues,
operating profit (loss) and identifiable assets by industry segment, see Note 15
of the Notes to Consolidated Financial Statements.
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. The percentages presented below have been
reclassified to include in results from operations the gain on the sale of
patent and litigation settlement expenses.
Percentage Increase (Decrease)
As a Percentage of Net Sales Over Prior Periods
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
2003 2002 2001 2002 to 2003 2001 to 2002
---- ---- ---- ------------ ------------
Statements of Operations Data:
Net revenues:
Refractive products................ 85.4% 89.5% 75.1% (41.5)% (28.1)%
Patent services.................... 14.6 10.5 2.2 (14.8) 181.1
Gain on sale of patent............. -- -- 22.7 -- (100.0)
----- ----- -----
Net revenues..................... 100.0 100.0 100.0 (38.7) (39.7)
Gross profit (1)..................... (11.1) 45.3 57.6 (115.0) (52.6)
Research, development and
regulatory expenses (2) 5.5 12.6 18.8 (73.3) (59.7)
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Other general and administrative
Expenses 138.6 122.0 136.4 (30.4) (46.1)
Impairment of patents 63.7 -- -- -- --
Selling-related expenses (3) 70.8 31.2 26.8 39.0 (29.8)
Allowed warranty claims 72.1 -- -- -- --
Amortization of intangibles 3.8 4.4 2.9 (46.4) (8.5)
Litigation settlement expense -- 1.3 3.4 -- (76.3)
----- ----- -----
Loss from operations................. (365.6) (126.2) (130.7) 79.4 (41.7)
1. As a percentage of net revenues, the gross profit for refractive
products only for each of the three years ended December 31, 2003, 2002
and 2001 was (30)%, 39% and 44%, respectively.
2. As a percentage of refractive product net revenues, research, development
and regulatory expenses for each of the three years ended December 31,
2003, 2002 and 2001 was 6%, 14% and 25%, respectively.
3. As a percentage of refractive product net revenues, selling-related
expenses for each of the three years ended December 31, 2003, 2002 and
2001 was 83%, 35% and 36%, respectively.
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Quarterly Results of Operations
The following table sets forth selected items from our quarterly financial
results (in thousands, except for per share amounts).
2002 2003
---- ----
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- ------- ------- ------- ------- -------
Net sales 1,973 1,896 2,750 3,883 2,321 1,830 1,851 435
Gross profit 581 854 1,333 1,985 975 (2,709) 1,340 (321)
Loss from continuing
operations (5,079) (4,400) (2,452) (1,638) (2,382) (11,059) (8,867) (1,222)
Net loss (5,079) (4,400) (2,452) (1,638) (2,411) (11,091) (8,915) (1,099)
Loss attributable to common
shareholders (5,079) (4,400) (2,452) (1,992) (2,895) (11,575) (9,403) (1,225)
Loss per common share-basic
and diluted (0.19) (0.16) (0.09) (0.07) (0.10) (0.42) (0.34) (0.04)
Weighted average shares
outstanding 26,488 27,003 27,842 27,842 27,988 27,842 27,842 27,842
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Net revenues for the year ended December 31, 2003 decreased
by $4.1 million, or 39%, to $6.4 million from $10.5 million in 2002.
During the year ended December 31, 2003, refractive products revenues
decreased $3.9 million, or 42%, to $5.5 million from $9.4 million in 2002. This
revenue decrease was primarily the result of decreased sales of our excimer
laser systems and parts. During the year ended December 31, 2003, excimer laser
system sales accounted for approximately $3.4 million in revenues compared to
$6.4 million in revenues in 2002. During the year ended December 31, 2003, 11
laser systems were sold compared to 28 laser systems sold during 2002. Of this
$2.3 million reduction in laser system sales, approximately $0.4 million was off
set by higher average selling prices, which increased approximately 12% from
2002.
Net revenues from patent services for the year ended December 31, 2003
decreased by approximately $0.2 million, or 15%, to $.9 million from $1.1
million in 2002.
Geographically, China continued as our most significant market during
2003, with $4.4 million in revenue. U.S. revenues continued to decline, as we
awaited FDA approval for the treatment of hyperopia with or without astigmatism
and reduced our focus on U.S. sales.
Cost of Revenues; Gross Profit. For the year ended December 31, 2003
and 2002, gross profit margins were (11%) and 45%, respectively. The gross
margin decrease during the year ended December 31, 2003 was primarily
attributable to a $3.6 million inventory obsolescence reserve and decreased
sales and higher average costs of the our excimer laser system components,
causing direct overhead to be a higher percentage of sales. The Company's
reorganization plan, as confirmed by the bankruptcy court, called for a refocus
of the Company's products lines and the reduction of keratome and other obsolete
inventory.
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Research, Development and Regulatory Expenses. Research, development
and regulatory expenses for the year ended December 31, 2003 decreased
approximately $1.0 million, or 73%, to $0.4 million from $1.3 million in 2002.
While decreasing our expenses, we continued to develop our AstraMax diagnostic
workstation and excimer laser systems. If we have sufficient funds, we expect
research and development expenses in 2004 to be at levels similar to the latter
half of 2003. We expect regulatory expenses will be lower than 2003 as a result
of our decision to delay further spending in the pursuit of various FDA
approvals, including pre-market approval supplements, and the possible
development of additional pre-market approval supplements and future protocols
for submission to the FDA. The FDA has recently instituted a fee structure that
will increase the cost of pursuing new or supplemental approvals.
Other General and Administrative Expenses. Other general and
administrative expenses for the year ended December 31, 2003 decreased $3.9
million, or 30%, to $8.9 million from $12.8 million in 2001. This decrease was
primarily due to cost reductions associated with the sales and marketing,
customer support and professional services departments of $2.6 million and a
$0.5 million in depreciation. Conversely, we incurred approximately $0.8 million
in severance costs during 2003 related to staffing reductions.
Selling-Related Expenses including allowed warranty claims.
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, 2003 increased $6.3 million, or 190%, to $9.2
million from $3.3 million during 2002. This increase was primarily attributable
to a $3.5 million increase in license fees resulting from a default in our
keratome license agreement and an increase of $4.6 million of warranty expense
related to allowed claims filed in Chapter 11, offset by lower shipping charges
due to fewer units being sold.
Amortization of Intangibles. During the year ended December 31, 2003,
costs relating to the amortization of intangible assets decreased $214,000, or
46%, to $247,000 from $460,000 in 2002. Items directly related to the
amortization of intangible assets are acquired technologies, patents and license
agreements. The reduction is a result of impairment expenses on patents because
of our product re-focus in our re-organization plan.
Impairment of patents. Impairment of patents for the year ended
December 31, 2003 was $4.1 million. The Company recorded an impairment loss of
approximately $4.1 million related to Keratome, acquired technology and
diagnostic patents. Management decided to write-off the assets due to a lack of
a potential market for its acquired technology.
Loss From Operations. The operating loss for the year ended December
31, 2003 was $23.5 million compared to the operating loss of $13.1 million in
2002. This increase in the loss from operations was primarily due to reserves
and impairment expenses attributable to our bankruptcy re-organization plan.
Other Income and Expenses. Interest and other income for the year ended
December 31, 2003 was $306,000, similar to $276,000 million from 2002. Interest
and other income was earned from the investment of cash and cash equivalents and
the collection of long-term receivables related to laser system sales and
receipt of $253,000 proceeds of a shareholder derivative lawsuit. Interest
expense for the year ended December 31, 2003 was $350,000, a decrease of
$236,000 over 2002 as a result of reduced loan waiver and commitment fees in our
loan transaction with GE.
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Income Taxes. For the years ended December 31, 2003 and 2002,
LaserSight had no income tax expense. In 2003 we received an IRS refund of
$58,000 for tax year 1995.
Net Loss. Net loss for the year ended December 31, 2003, was $23.5
million compared to a net loss of $13.6 million in 2002. The increase in net
loss for the year ended December 31, 2003 can be attributed as of the
significant restructuring charges incurred as a result of the Chapter 11 filing.
Loss Per Share. The loss per basic and diluted share was $0.90 for the
year ended December 31, 2003 and $0.50 for in 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Net revenues for the year ended December 31, 2002 decreased
by $6.9 million, or 40%, to $10.5 million from $17.4 million in 2001.
During the year ended December 31, 2002, refractive products revenues
decreased by $3.7 million, or 28%, to $9.4 million from $13.1 million in 2001.
This revenue decrease was primarily the result of decreased sales of our excimer
laser systems. During the year ended December 31, 2002, excimer laser system
sales accounted for approximately $6.4 million in revenues compared to $11.4
million in revenues in 2001. During the year ended December 31, 2002, 28 laser
systems were sold compared to 46 laser systems sold during 2001. Of this $5.0
million reduction in laser system sales, approximately $0.5 million resulted
from lower average selling prices, which decreased approximately 8% from 2001.
Net revenues from patent services for the year ended December 31, 2002
increased by approximately $0.7 million, or 181%, to $1.1 million from $0.4
million in 2001, due to non-exclusive license agreements we entered into in late
2001 and early 2002. Revenues in 2001 also included a one-time net gain, after
expenses associated with the sale, of $4.0 million from the sale of U.S. Patent
No. 4,784,135 (Blum Patent) in March 2001. The patent was sold for $6.5 million
and, prior to the sale, had a book value of approximately $2.4 million.
Geographically, China became our most significant market during 2002,
with $4.7 million in revenue ($2.7 million of which resulted from the China
transaction beginning in August 2002). U.S. revenues continued to decline,
approximately $2.8 million lower than 2001 levels, as we awaited FDA approval
for the treatment of hyperopia with or without astigmatism.
Cost of Revenues; Gross Profit. For the years ended December 31, 2002
and 2001, gross profit margins were 45% and 58%, respectively. The gross margin
decrease during the year ended December 31, 2002 was primarily attributable to
the gain on the sale of the Blum Patent in 2001 and decreased sales and lower
average selling prices of the our excimer laser system, causing overhead to be a
higher percentage of sales. Excluding the gain on the sale of patent, the gross
profit margin was 45% in 2001. The decreased number of laser sales resulted in a
decrease in general overhead expenses of $0.8 million from 2001.
Research, Development and Regulatory Expenses. Research, development
and regulatory expenses for the year ended December 31, 2002 decreased
approximately $2.0 million, or 60%, to $1.3 million from $3.3 million in 2001.
While decreasing our expenses, we continued to develop our AstraMax diagnostic
workstation and excimer laser systems and continued to pursue protocols in our
effort to attain and expand our FDA approvals for our refractive products.
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Other General and Administrative Expenses. Other general and
administrative expenses for the year ended December 31, 2002 decreased $10.9
million, or 46%, to $12.8 million from $23.8 million in 2001. This decrease was
primarily due to a decrease in expenses incurred at our refractive products
subsidiary of approximately $11.0 million that resulted from cost reductions
associated with the sales and marketing, customer support and professional
services departments of $4.7 million, $1.9 million in cost reductions in other
departments, $0.8 million in reduced bad debt expense, $0.7 million of
reductions in our European operation and a reduction of $2.9 million in legal
fees related to patent issues and litigation. The patent litigation, which
accounted for a significant portion of those legal fees, was settled in May
2001, and we have experienced a significant decrease in our legal expenses in
2002. Conversely, we incurred approximately $0.7 million in severance costs
during 2002 related to staffing reductions.
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, 2002
decreased $1.4 million, or 30%, to $3.3 million from $4.7 million during 2001.
This decrease was primarily attributable to a $0.5 million decrease in sales
commissions resulting from lower sales and a higher percentage of sales to
distributors net of commissions, and a decrease of $0.9 million of warranty
expense primarily related to decreased laser system sales and the terms on those
sales.
Amortization of Intangibles. During the year ended December 31, 2002,
costs relating to the amortization of intangible assets decreased $43,000, or
9%, to $460,000 from $503,000 in 2001. This decrease was due to the sale of a
patent in March 2001 that had an unamortized book value of approximately $2.4
million. Items directly related to the amortization of intangible assets are
acquired technologies, patents and license agreements.
Litigation Settlement Expense. During the year ended December 31, 2002,
litigation settlement expenses include $140,000 related to the settlement of
litigation with a former shareholder of TFG, while 2001 includes approximately
$0.6 million in payments related to the May 2001 settlement of patent
litigation.
Loss From Operations. The operating loss for the year ended December
31, 2002 was $13.3 million compared to the operating loss of $22.8 million in
2001. This decrease in the loss from operations was primarily due to reductions
in operating expenses that more than offset the decrease in sales and related
margins of our excimer laser systems.
Other Income and Expenses. Interest and dividend income for the year
ended December 31, 2002 was $0.3 million, a decrease of $0.3 million from 2001.
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, 2002 was $0.6 million,
an increase of $0.1 million over 2001 as a result of our loan transaction with
GE in March 2001.
Income Taxes. For the years ended December 31,2002 and 2001, LaserSight
had no income tax expense.
Discontinued Operations. Costs related to the discontinued operations
of the health care services segment were $3.5 million during the year ended
December 31, 2001. There were no such costs during 2002.
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Net Loss. Net loss for the year ended December 31, 2002, was $13.6
million compared to a net loss of $26.2 million in 2001. The decrease in net
loss for the year ended December 31, 2002 can be attributed to the significant
reductions in our operating expenses partially offset by the decrease in sales
of our excimer laser systems and the gain generated by the sale of the Blum
Patent in March 2001.
Loss Per Share. The loss per basic and diluted share was $0.51 for the
year ended December 31, 2002 and $1.04 for in 2001. Since the beginning of 2001,
the weighted average shares of common stock outstanding increased primarily due
to the conversion of preferred stock during May and October 2002 and the
issuance of common stock related to our July 2001 financing.
Liquidity and Capital Resources
On September 5, 2003 the company filed for Chapter 11 bankruptcy
protection and reorganization. Under Chapter 11, certain claims against the
Company in existence prior to the filing of the petitions for relief are stayed
while the Company continues business operations as Debtor-in-possession. The
Company operated in this manner from September 5, 2003 through June 10, 2004,
when a final bankruptcy release was obtained. As a result of the bankruptcy
re-structuring, the Company expects to record credits for debt forgiveness of
approximately $15.6 during the three months ended June 30, 2004. Additionally,
the Company recognized re-structuring charges of approximately $7.6 million
during 2003 for patent impairments and inventory write offs. The Company
cancelled all of its outstanding common and preferred stock, including warrants
and options, and issued 9,997,195 new common shares on June 30, 2004. The
Company emerged from bankruptcy on June 30,2004 with approximately $0.7 million
in unsecured liabilities, $2.1 million in secured debt to GE, approximately $5.4
million in deferred revenue and approximately $1.0 million of DIP financing
provided by NIIC. NIIC converted $1.0 million of the DIP financing for
additional equity.
With the new revenues being generated from NIIC and projected sales to
other customers, management expects that LaserSight's cash and cash equivalent
balances and funds from operations (which are principally the result of sales
and collection of accounts receivable) will be sufficient to meet its
anticipated operating cash requirements for the next several months. This
expectation is based upon assumptions regarding cash flows and results of
operations over the next several months and is subject to substantial
uncertainty and risks beyond our control. If these assumptions prove incorrect,
the duration of the time period during which LaserSight could continue
operations could be materially shorter. We continue to face liquidity and
capital resource issues relative to the timing of the successful completion of
new sales compared to our ongoing payment obligations. To continue our
operations, we will need to generate increased revenues, collect them and reduce
our expenditures relative to our recent history. While we are working to achieve
these improved results, we cannot assure you that we will be able to generate
increased revenues and collections to offset required cash expenditures.
The risks and uncertainties regarding management's expectations are
also described under the heading "Risk Factors and Uncertainties--Financial and
Liquidity Risks."
Our expectations regarding future working capital requirements and our
ability to continue operations are based on various factors and assumptions that
are subject to substantial uncertainty and risks beyond our control, and no
assurances can be given that these expectations will prove correct. The
occurrence of adverse developments related to these risks and uncertainties or
others could result in LaserSight incurring unforeseen expenses, being unable to
-39-
generate additional sales, to collect new and outstanding accounts receivable,
to control expected expenses and overhead, or to negotiate payment terms with
creditors, and we would likely be unable to continue operations.
We have actively sought additional funds through the possible sale of
certain Company assets which would provide temporary relief from our current
liquidity pressures.
On March 12, 2001, the Company established a $3.0 million term loan and
$10.0 million revolving credit facility with GE. We borrowed $3.0 million under
the term loan at an annual rate equal to two and one-half percent (2.5%) above
the prime rate. Interest is payable monthly and the loan was required to be
repaid on March 12, 2003. As of December 31, 2003, the outstanding principal on
our term loan is approximately $1.8 million. Under our credit facility, we had
the option to borrow amounts at an annual rate equal to one and one-quarter
percent (1.25%) above the prime rate for short-term working capital needs or
such other purposes as approved by GE. Borrowings were limited to 85% of
eligible accounts receivable related to U.S. sales. Eligible accounts receivable
were to be primarily based on future U.S. sales, which did not increase as a
result of our decision to not actively market our laser in the U.S. until we
receive additional FDA approvals. See "Industry and Competitive Risks--We do not
intend to continue actively marketing our LaserScan LSX laser system in the U.S.
until we receive additional FDA approvals."
Borrowings under the loans are collateralized by substantially all of
the Company's assets. The term loan and credit facility require us to meet
certain covenants, including the maintenance of a minimum net worth. The terms
of the loans originally extended to March 12, 2003. In addition to the costs and
fees associated with the transaction, we issued to GE a warrant to purchase
243,750 shares of common stock at an exercise price of $3.15 per share. The
warrant was to expire on March 12, 2004. On August 15, 2002, GE provided a
waiver of our prior defaults under our loan agreement pending the funding of the
equity portion of the NIMD transaction. Upon receipt of the equity investment in
October 2002, revised covenants became effective that decreased the required
minimum level of net worth to $2.1 million, decreased minimum tangible net worth
to negative $2.8 million and decreased required minimum quarterly revenues
during the last two quarters of 2002 and the first quarter of 2003. In exchange
for the waiver and revised covenants, the Company paid $150,000 in principal to
GE upon the receipt of the equity investment in October 2002 and agreed to
increase other monthly principal payments to $60,000 in October 2002 and to
$40,000 during each of November and December 2002 and January 2003, with the
remaining principal due on March 12, 2003.
On March 12, 2003, our loan agreement with GE was extended by 30 days
from March 12, 2003 to April 11, 2003. On March 31, 2003, our loan agreement
with GE was amended again. In addition to the amendment, GE waived our failure
to comply with the net revenue covenant for the fourth quarter of 2002. In
exchange for the amendment and waiver, we paid approximately $9,250 in fees to
GE and agreed to increase our monthly principal payments to $45,000 beginning in
April 2003. Revised covenants became effective on March 31, 2003 that decreased
the minimum level of net worth to $1.0 million, minimum tangible net worth to
negative $4.0 million and minimum quarterly net revenue during 2003 to $2.0
million. We agreed to work in good faith with GE to adjust these covenants by
May 31, 2003 based on our first quarter 2003 financial results and our ongoing
efforts to obtain additional cash infusion. As discussed above, On June 20, 2003
LSI announced that it had been advised by GE that its loans to the Company were
in default due to an adverse material change in the financial condition and
business operations of the Company. The Company continued to negotiate with GE
during the June and July of 2003, until a new agreement was executed on August
28, 2003 providing for an extension of the loans through January 2005.
-40-
On August 30, 2004 the Company signed a three-year note expiring on
June 30, 2007. The note bears interest of 9%. Certain covenants were modified as
follows: net worth $750,000, tangible net worth $1,000,000 and minimum quarterly
revenues of $1,000,000. GE was issued a warrant to purchase 100,000 shares of
common stock at $0.25 per share, or $0.40 per share if NIIC converts their DIP
loan to equity. The warrant expires June 30, 2008.
There can be no assurance as to the correctness of the other
assumptions underlying our business plan or our expectations regarding our
working capital requirements or our ability to continue operations.
Our ability to continue operations is based on factors including the
success of our sales efforts in China and in other foreign countries where our
efforts will initially be primarily focused, increases in accounts receivable
and inventory purchases when sales increase, the uncertain impact of the market
introduction of our AstraMax diagnostic workstations, and the absence of
unanticipated product development and marketing costs. See "Risk Factors and
Uncertainties--Industry and Competitive Risks--"
Effect of Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities." This statement nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits Restructuring." Statement
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred rather than the date of an
entity's commitment to an exit plan. The Company will be required to implement
Statement No. 146 on January 1, 2003. The adoption of Statement No. 146 did not
have a material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." Statement No. 148 amends Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-base
employee compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to these consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No.
00-21 did not have a material impact on our financial position or results of
operations.
In December 2003, the FASB revised Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
which it had originally issued in January 2003. As revised, FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. As revised, application of
-41-
FIN 46 is required for interests in special-purpose entities for periods ending
after December 15, 2003. Application for all other types of entities covered by
FIN 46 is required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 as revised, is not expected to have a material
impact on our financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity". SFAS 150 requires that certain
financial instruments, which under previous guidance were accounted for as
equity, must now be accounted for as liabilities. The financial instruments
affected include mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares in exchange for
cash or other assets and certain obligations that can be settled with shares of
stock. SFAS 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, although certain aspects
have been delayed pending further clarifications. We do not expect the adoption
of SFAS 150 to have a material impact on our financial position or results of
operations.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
104 "Revenue Recognition" which codifies, revises and rescinds certain sections
of SAB No. 101, "Revenue Recognition", in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on our financial position or results of operations.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities
under agreements with third parties, and exclude contingent liabilities which
we cannot reasonably predict future payment. The following chart represents our
contractual obligations, aggregated by type, as of December 31, 2003:
Contractual obligations Payments due by period
Less that 1 Over
Total year 2-3 years 3-5 years 5 years
GE Debt Obligations 1,843,313 1,843,313 - - -
DIP Financing Obligation 750,000 750,000 - - -
Operating Lease Obligations 636,000 367,000 269,000 - -
------------------------------------------------------------------
3,229,313 2,960,313 269,000 0 0
==================================================================
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Off-Balance Sheet Arrangements
We have no other long-term debt commitments and no off-balance sheet
financing vehicles.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.
Certain of our accounting policies require higher degrees of judgment
than others in their application. These include revenue recognition, estimating
product warranty reserves, the allowance for doubtful accounts, inventory
obsolescence reserves and impairment of long-lived assets. In addition, Note 2
to the Consolidated Financial Statements includes further discussion of our
significant accounting policies.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Revenue Recognition
We derive our revenue from primarily two sources: (i) product revenue
and (ii) royalty revenue. The Company recognizes revenue on its products upon
shipment, provided that the persuasive evidence of an arrangement is in place,
the price is fixed or determinable, collectibility is reasonably assured, and
title and risk of ownership have been transferred. Transfer of title and risk of
ownership occurs when the product is shipped to the customer, as there are no
customer acceptance provisions in our sales agreements. Should management
determine that customer acceptance provisions are modified for certain future
transactions, revenue recognition in future reporting periods could be affected.
Royalty revenue from the license of patents owned is recognized in the period
earned. When we issue paid-up licenses, the revenue is recognized over the
remaining life of the patent licensed on a straight-line basis. Revenues in
multiple element arrangements are allocated to each element based upon the
relative fair values of each element, based upon published list prices in
accordance with Emerging Issues Task Force (EITF) 00-21, "Revenue Arrangements
with Multiple Deliverables." We recognize revenue from sales of our topography
software in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" as amended by SOP 98-9, "Modification of SOP 97-2 with
Respect to Certain Transactions." In addition to the criteria listed above,
revenue is recognized when the arrangement does not require significant
customization or modification of the software.
Product Warranty Reserves
We provide for the estimated costs of product warranties at the time
revenue is recognized. Our estimate of costs to service the warranty obligations
is based on historical experience, including the types of service/parts required
to repair our products, the frequency of warranty calls, and the component cost
-43-
of the raw materials and overhead. Management believes that the warranty reserve
is appropriate; however, to the extent we experience increased warranty claim
activity or increased costs associated with servicing those claims, revisions to
the estimated warranty liability would be required. All pre-petition warranty
obligations were nullified in bankruptcy.
Allowance for Doubtful Accounts
We must make estimates of the uncollectibility of our accounts and
notes receivable balances. We estimate losses based on the overall economic
climate in the countries where our customers reside, customer credit-worthiness,
and an analysis of the circumstances associated with specific accounts which are
past due. Our accounts and notes receivable balance was $8.5 million, net of
allowance for doubtful accounts of $8.4 million, as of December 31, 2003. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We continually evaluate the adequacy of our allowance for doubtful
accounts.
We sold 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 our
products. We monitor our exposure for credit losses and maintain allowances for
anticipated losses.
The increases in the provision for bad debts relates to establishing
allowances for uncollectible receivables from prior period sales. The increases
are the result of events and circumstances that could not realistically be
foreseen at the time sales were completed. In addition, during our recent period
of declining revenues, the relationship between the bad debts that resulted from
these events compared to lower revenues is magnified. Such events and
circumstances include FDA approvals on our laser system that took longer than
anticipated, economic downturns in certain countries or regions of the world and
the terrorist attacks that affected personal spending decisions, the business
levels of many of our customers and our filing of Chapter 11 in September 2003.
Some of these items are always possible, and have been disclosed by the Company
in times past as risk factors. Others could not be foreseen without the benefit
of hindsight.
We anticipate collection at the time of shipment of each of our
products for two main reasons. First, our laser system is a revenue-producing
product for our customers; the more it's used, the more revenue physicians can
generate. Second, our laser system provides for periodic passwords to customers
who have payment plans. Therefore, if a customer owes us money and wants to use
his system, the customer will need to pay the amount owed in order to use the
laser system beyond a designated period of time. This control has been
successfully used in many cases to ensure payment. However, in some cases,
magnified by the economic other factors facing us and some of our customers over
the last couple of years, the inability to use the laser was not enough
incentive to force payment.
In response, we have implemented certain changes over the course of the
last year in response to the world events and in an effort to improve the
collectibility of our sales, which are primarily in international markets. The
changes generally involve significantly higher down payments prior to shipping
and shorter payment terms for the balance of the sales price of laser systems.
Therefore, the Company expects its bad debt levels to be reduced in the future
while revenues are anticipated to increase. The increased revenues are resulting
from the NIMD transaction. The payment for these sales was covered under
irrevocable letters of credit, providing for payment upon the presentation of
shipping documents.
-44-
Inventory Obsolescence Reserves
We maintain reserves for our estimated obsolete inventory. The reserves
are equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions.
If actual market conditions are less favorable than those projected by us,
additional inventory write-downs may be required.
Impairment of Long-Lived Assets
We review long-lived assets and certain intangible assets 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 exceeds 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. Management believes that
the estimates of future cash flows and fair value are reasonable; however,
changes in estimates of such cash flows and fair value could affect the
evaluations.
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.
Sales to the NIMD group are secured by letters of credit and payable
upon shipment of products and presentation of shipping documents. 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.
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:
Financial and Liquidity Risks
We have experienced significant losses and operating cash flow deficits
and we expect that operating cash flow deficits will continue.
We continue to be challenged by our significant liquidity and capital
resource issues relative to the timing of our accounts receivable collection and
the successful completion of new sales compared to our ongoing payment
obligations. Although the Chapter 11 re-organization in September of 2003 and
resultant re-structuring will relieve the Company of substantial debt, we need
to increase sales to NIMD and to other customers, and/or decrease expenses
further, before we will reach profitability or positive cash flow. Our future
working capital requirements and our ability to continue operations are based on
various factors and assumptions, which are subject to substantial uncertainty
-45-
and risks beyond our control, and no assurances can be given that these
expectations will prove correct. The occurrence of adverse developments related
to these risks and uncertainties or others could result in LaserSight being
unable to generate additional sales or collect new and outstanding accounts
receivable. Any such adverse developments may also result in the incurrence of
unforeseen expenses or LaserSight being unable to control expected expenses and
overhead. If we fail to generate additional sales and collect new and
outstanding accounts receivable or incur unforeseen expenses or fail to control
our expected expenses and overhead, we will be unable to continue operations in
the absence of obtaining additional sources of capital.
The timing of the conversion of our current assets into cash is not
totally in our control. For example, we cannot dictate the timing of the
collection of our accounts receivable with our customers, and converting our
inventory into cash is dependent on our ability to generate new sales with our
products and collect the sales price in a timely manner. While to date we have
been able to negotiate limited payment terms with our suppliers and other
creditors, there is no assurance that we can continue to do so.
We experienced significant net losses and deficits in cash flow from
operations for the years ended December 31, 2003, 2002 and 2001, 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,
2001 2002 2003
---- ---- ----
Net loss $26.2 million $13.6 million $23.5 million
Deficit in cash flow from
operations $17.7 million $2.7 million $1.0 million
In the longer term, our expectations are based on additional factors
including: the success of our sales efforts in China, where our efforts will
initially be primarily focused, increases in accounts receivable and inventory
purchases when sales increase, AstraMax diagnostic workstations and AstroPro
diagnostic software, and the absence of unanticipated product development and
marketing costs. These factors and assumptions are subject to substantial
uncertainty and risks beyond our control, and no assurances can be given that
these expectations will prove correct. These risks and uncertainties include:
o the willingness of trade creditors to continue to extend credit to
LaserSight;
o reductions and cancellations in orders;
o our ability to fulfill orders in light of our current financial
condition;
o our ability to sell products and collect accounts receivables at or
above the level of management's expectations;
o the occurrence of unforeseen expenses and our ability to control
expected expenses and overhead;
o the occurrence of property and casualty losses which are uninsured
or that generate insurance proceeds that cannot be collected in a
short time frame;
o our ability to improve pricing and terms of international sales;
o the loss of, or failure to obtain additional, customers; and
o changes in pricing by our competitors.
With respect to management's expectations regarding LaserSight's
ability to continue operations for the future period and the risks and
uncertainties relating to those expectations, readers are encouraged to review
the discussions under the captions "--If our uncollectible receivables exceed
-46-
our reserves we will incur additional unanticipated expenses, and we may
experience difficulty collecting restructured receivables with extended payment
terms," "--Industry and Competitive Risks--" "--Additional Company and Business
Risks--Required per procedure fees payable to VISX under our license agreement
may exceed per procedure fees collected by us," and "--Our supply of certain
critical components and systems may be interrupted because of our reliance on a
limited number of suppliers." These risks and uncertainties can affect
LaserSight's ability to continue operations for the future period in the absence
of obtaining additional capital resources
If we fail to meet the financial covenants in our loan with GE, we will
not have enough available cash to pay the amount owed.
Under the original terms of our term loan with GE, we were required to
pay GE approximately $2.1 million in March 2003. On March 12, 2003, the due date
was extended 30 days to April 11, 2003. On March 31, 2003, our loan agreement
with GE was amended again. In addition to the amendment, GE waived our failure
to comply with the net revenue covenant for the fourth quarter of 2002. In
exchange for the amendment and waiver, we paid approximately $9,250 in fees to
GE, and we had agreed to increase our monthly principal payments to $45,000
beginning in April 2003. Revised covenants became effective that decreased the
minimum level of net worth to $1.0 million, minimum tangible net worth to
negative $4.0 million and minimum quarterly net revenue during 2003 to $2.0
million. On June 20, 2003, the Company had been advised by GE that its loans to
the Company were in default due to an adverse material change in the financial
condition and business operations of the Company. The Company executed a new
agreement with GE on August 28, 2003 providing for an extension of its loans
through January 2005. On August 30, 2004 the Company signed a three-year note
expiring on June 30, 2007. The note bears annual interest of 9%. Certain
covenants were modified as follows: net worth $750,000, tangible net worth
$1,000,000 and minimum quarterly revenues of $1,000,000. GE was issued a warrant
to purchase 100,000 shares of common stock at $0.25 per share, or $0.40 per
share if NIIC converts their DIP loan to equity. The warrant expires June 30,
2008.
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 $8.4 million at December 31, 2003,
will be sufficient to cover the amount of our actual write-offs over time. At
December 31, 2003, our net trade accounts and notes receivable totaled
approximately $8.5 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 customers' ongoing financial condition, their ability to generate revenues
from our laser systems, and our ability to obtain and enforce legal judgments
against delinquent customers. As a result of the Chapter 11 filing on September
5, 2003, the Company lost the ability to vigorously collect on these accounts
receivable and accordingly further increased the reserves for estimated losses
as part of the re-structuring costs recorded in the second quarter. The portion
of the re-structuring costs attributable to our reserves for estimated losses
was approximately $3.5 million. Additionally, as a result of the Chapter 11
petition and resultant re-structuring, a significant portion of the
approximately $1.6 million of accrued commissions was eliminated. The Company
hired a collection agency in 2004 with no success.
-47-
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. Since the September 5, 2003 bankruptcy petition, we have
been unable to resolve some customer's issues and were unable to collect our
receivable, either on the original schedule or under restructured terms. We
evaluate our legal and other alternatives based on existing facts and
circumstances. In most cases, we have concluded that the account should be
written off as uncollectible based on the economic condition in the region and
our understanding of the customer's business and related items. The reserves and
write-offs are generally the result of events and circumstances that could not
realistically be foreseen at the time sales were completed. In addition, during
our recent period of declining revenues, the relationship between the bad debts
that resulted from these events compared to lower revenues is magnified. Events
and circumstances that impact our bad debt expense include FDA approvals on our
laser system that took and are taking longer than anticipated, economic
downturns in certain countries or regions of the world, including the U.S. and
South and Central America, and the terrorist attacks that affected personal
spending decisions of consumers, and thus the business levels of many of our
customers. Accounts written off during the year ended December 31, 2003 and 2002
totaled approximately 92% and 22%, respectively, of ending receivables for each
period. International revenues represented 96% and 83% of total revenues during
the year ended December 31, 2003 and 2002.
.
Industry and Competitive Risks
The following Industry and Competitive Risks relate primarily to the
longer term.
We do not intend to continue actively marketing our LaserScan LSX laser
system in the U.S. until we receive additional FDA approvals.
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. To date, our
LaserScan LSX laser system and per procedure fee business model have not
achieved a level of market acceptance sufficient to provide our cash flows from
operations to fund our business. Our excimer laser system has not been approved
by the FDA for use in the U.S. for as wide a range of treatments as have many of
our competitors' lasers. Because of the limited treatment ranges many physicians
have resisted purchasing our excimer laser. As a result of our current liquidity
and capital resource issues, we have decided to focus on international markets,
primarily China, with our LaserScan LSX laser system and other select
international markets with a custom ablation product line, and not to continue
actively marketing our laser system in the U.S.
The current level of per procedure fees payable to us by existing
refractive surgeon customers in the U.S. may not continue to be accepted by the
marketplace or may exceed those charged by our competitors. 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. We are not aware of the existence
-48-
of a current trend toward reducing or eliminating per procedure fees. In the
spring of 2000 industry leader VISX reduced the per-procedure fees it was
charging the users of its laser system, and shortly thereafter, Alcon announced
that it too would be reducing its licensing fee. Since that time, to our
knowledge there has been no trend to further reduce or eliminate per procedure
fees. See also "--Additional Company and Business Risks--Required per procedure
fees payable to VISX under our license agreement may exceed per procedure fees
collected by us."
We have discontinued our keratome products marketing.
Keratomes are surgical devices used to create a corneal flap needed to
perform a laser vision correction procedure called Laser In-Situ Keratomileusis,
or LASIK. Once the corneal flapped is created, it is then flipped back, the
excimer laser beam is directed to the exposed corneal surface, and the flap is
placed back and re-adhered to the surface of the eye.
In light of our lack of successful commercially introducing or
achieving broad market acceptance of our UltraShaper durable keratome or our
other keratome products, the Company elected to discontinue this product line in
September of 2003 as part of the re-focus of the business to core products. As a
result the Company will record substantial additions to its inventory reserves
as part of its re-structuring costs. As of June 30, 2003 the Company added an
additional amount of approximately $3.6 million to such inventory reserves,
which are classified as cost of revenues. See also "--Additional 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 are encountering 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, 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. from 1999 through 2003. Similarly,
Bausch & Lomb sold a significant majority of the keratomes used by refractive
surgeons in the U.S. from 1999 through 2003. Alcon, one of the largest
ophthalmic companies in the world, and its narrow beam laser technology platform
also competes directly with our precision beam, scanning microspot LaserScan LSX
excimer laser system. In addition, Alcon, as a result of its acquisition of
Summit Autonomous Inc., is able to sell its 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. Alcon
also has the ability to leverage the sale of its laser systems with its other
ophthalmic products, and has placed a significant number of its lasers systems
in the U.S. Competitors are using our weak financial condition to dissuade
potential customers from purchasing our laser.
Many of our competitors received earlier regulatory approvals 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.
-49-
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 prior to our approval
and has substantial experience manufacturing, marketing and servicing laser
systems in the U.S. In addition to VISX and Alcon, Nidek, WaveLight 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 for refractive errors such as nearsightedness,
farsightedness or astigmatism. A laser that has been approved for a wider range
of treatments is more attractive because it enlarges the pool of laser
correction candidates to whom laser correction procedures can be marketed.
Our LaserScan LSX is currently approved in the U.S. for the LASIK
treatment of nearsightedness with and without astigmatism for a range of
treatment of refractive errors up to -6.0 diopters MRSE with or without a
refractive astigmatism up to 4.5 diopters and for the Photorefractive
Keratectomy, or PRK, treatment of low to moderate nearsightedness (up to -6.0
diopters) without astigmatism. Additionally, we have received FDA approval to
operate our laser systems at a repetition rate of 300 pulses per second, three
times the originally approved rate. We do not intend to sell our laser systems
in the U.S. until future cash flows permit us to file FDA supplements.
Competitors' earlier receipt of LASIK and farsightedness-specific FDA
regulatory approvals have given them a significant competitive advantages that
have impeded our ability to successfully sell our LaserScan LSX system in the
U.S.
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
-50-
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.
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 China, the U.S. and in other countries. We believe that
if we achieve profitability and growth as a result of our focus in China, we can
increase our level of activity 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 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.
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 that is not typically covered by insurance
and involves more significant immediate expense than eyeglasses or contact
lenses, adverse changes in 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 the number of laser
systems sold and our revenues from per procedure fees.
The failure of laser vision correction to achieve continued market
acceptance would limit our ability to market our products which in turn would
limit our ability to generate revenues from the sale of our products. If we are
unable to generate revenue from the sale of our products, we may not be able to
continue our business operations, even if laser vision correction achieves and
sustains market acceptance.
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
intraocular lenses, intracorneal inlays, 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 and corneal
-51-
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 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 renders laser
vision correction procedures obsolete, our ability to generate revenues form the
sale of our products would be limited. If we are unable to generate revenue from
the sale of our products, we may not be able to continue our business
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 and AstraScan XL
laser systems 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.
Additional Company and Business Risks
The following Additional Company and Business Risks relate primarily to
the longer term.
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. A
loss of one or more such officers or key employees would result in a diversion
of financial and human resources in connection with recruiting and retaining a
replacement for such officers or key employees. Such a diversion of resources
could prevent us from successfully executing our business plan, and our business
will suffer. We do not carry "key person" life insurance on any officer or key
employee.
During 2001 we reduced our staff by 59 positions representing
approximately $2.5 million in annual salaries and wages. During 2002, we further
reduced our staff by an additional 46 positions representing approximately $2.5
million in annual salaries and wages. During the summer of 2003 the Company
further reduced our staff to 23 personnel. The resultant departures are
consistent with its overall reductions in positions and are not material to its
present operations. Our staff reductions may have a negative impact on our
ability to attract and retain personnel. If we fail to attract and retain
qualified individuals for necessary positions, we could be prevented from
successfully executing our business plan, and our business will suffer.
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We have moved all international manufacturing operations from Costa
Rica to the U.S. and must continue to comply with stringent regulation of our
manufacturing operations.
We moved the manufacturing location of our laser systems for sale in
international markets to our U.S. location from our manufacturing facility in
Costa Rica in 2002. We cannot 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 impair our ability to
generate revenues form the sale of our products. If we are unable to generate
revenues from the sale of our products we may not be able to continue our
business operations.
Required per procedure fees payable to VISX under our license agreement
may exceed per procedure fees collected by us.
In addition to the risk that our refractive lasers will not be accepted
in the marketplace, we are required to pay VISX a royalty for each procedure
performed in the U.S. using our refractive lasers. The required per procedure
fees we are required to pay to VISX may exceed the per procedure fees we are
able to charge and/or collect from refractive surgeons. If the per procedure
fees we are required to pay to VISX exceed the per procedure fees we are able to
charge and/or collect from refractive surgeons, we would have to pay the VISX
per procedure fees out of our limited available cash reserves. During each of
the years 2002 and 2003, the per procedure fees we are required to pay VISX did
not exceed per procedure fees collected by us.
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, diagnostic and custom ablation 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, which could substantially decrease our future revenues.
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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, which 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 prevent us from generating revenues from
the sale of our products, and if we are unable to generate revenues from the
sale of our products we may not be able to continue our business operations.
Accordingly, the Company has re-focused its marketing effort to the
international market, primarily China.
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 microspot 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
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 "--Patent infringement allegations may
impair our ability to manufacture and market our products".
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
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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. If we are prevented from
selling the infringing products we may not be able to continue our business
operations.
Litigation involving patents is common in our industry. While we do not
believe our laser systems infringe on any valid and enforceable patents that we
do not own or have a license to, 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.
In February of 2003, an Italian court issued an order restraining our
LaserSight Technologies subsidiary from marketing our AstraPro software at a
trade show in Italy. This restraining order was issued in favor of Ligi
Tecnologie Medicali S.p.a. (LIGI), a distributor of our products, and alleged
that our AstraPro software product infringes certain European patents owned by
LIGI. We retained Italian legal counsel to defend us in this litigation, and the
Italian court revoked the restraining order and ruled that LIGI must pay our
attorney's fees in connection with our defense of the restraining order. Our
Italian legal counsel informed us that LIGI had filed a motion for a permanent
injunction. We believe that our AstraPro software does not infringe the European
Patents owned by LIGI. Since the Chapter 11 filing does not apply to foreign
courts, this action is still pending.
We are subject to certain risks associated with our international
sales.
Our international sales accounted for 96% and 83% of our total revenues
during the years ended December 31, 2003 and 2002, respectively. In the future,
we expect that international sales, especially to China, will represent a higher
percentage of our total sales. We are presently focusing our sales efforts on
international sales in China.
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 health concerns in China and other areas;
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
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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 from a limited number of
suppliers, and certain key components are provided by a single vendor. We do not
have 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 our excimer laser
systems. 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
not provide required products on commercially reasonable terms, our ability to
manufacture, sell and generate revenues from our products would be impaired.
Unlawful tampering of our system configurations could result in reduced
revenues and additional expenses.
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 us being required to
pay per procedure fees to VISX that we were not able to collect from users. If
we are unable to prevent such tampering, our license agreement with VISX could
be terminated after all applicable notice and cure periods have expired.
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 limits in the event of a successful product liability
claim, may exceed the amount of our operating reserves. Further, product
liability insurance may not continue to be available, either at existing or
increased levels of coverage, on commercially reasonable terms.
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Our auditors' reports for the year ended December 31, 2002 and 2003
include an explanatory paragraph regarding our ability to continue as a going
concern.
Our auditors' reports included an explanatory paragraph regarding our
ability to continue as a going concern because we have incurred significant
losses and negative cash flows from operations for several years and our ability
to raise or generate enough cash to survive is questionable. The going concern
opinion has been used by competitors in an attempt to negatively impact our
sales and has resulted in shorter payment terms to meet the demands of some of
our vendors.
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 or stock price
to fluctuate include:
o our significant liquidity and capital resource issues;
o the addition or loss of significant customers;
o reductions, cancellations or fulfillment of major orders;
o changes in pricing by us or our competitors;
o timing of regulatory approvals and the introduction or delays in
shipment of new products;
o the relative mix 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. As a result of the Chapter 11 petition,
the Company cancelled all outstanding common and preferred stock, including
options and warrants. New common stock of 9,997,195 shares was issued on June
30, 2004. The stock is presently trading on the "Pink Sheets" under the symbol
LRST.
We are no longer listed on the NASDAQ Small Cap Market - now traded on
the "Pink Sheets"; 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
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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.
Because of the lengthy period during which our common stock traded
below $1.00 per share, it no longer met the listing requirements for the NASDAQ
National Market and on August 15, 2002, NASDAQ approved our application to
transfer our listing to the NASDAQ Small Cap Market via an exception from the
minimum bid price requirement. While we failed to meet this requirement as of
February 10, 2003, we were granted a temporary exception from this standard
subject to meeting certain conditions. The exception required that on or before
April 15, 2003, we were to file a definitive proxy statement with the Securities
and Exchange Commission and NASDAQ evidencing our intent to seek shareholder
approval for the implementation of a reverse stock split. Other requirements
included that, on or before May 30, 2003, we demonstrate a closing bid price of
at least $1.00 per share and, immediately thereafter, a closing bid of at least
$1.00 per share for a minimum of ten consecutive trading days. NASDAQ could
require a minimum closing bid price of at least $1.00 for more than 10 days. In
addition, we must have been able to demonstrate compliance with the following
maintenance requirements for continued listing on the NASDAQ Small Cap Market:
o stockholders' equity of $2.5 million
o at least 500,000 shares of common stock publicly held
o market value of publicly held shares of at least $1.0 million
o shareholders (round lot holders) of at least 300, and
o at least two registered and active market makers
We asked for an extension to May 1, 2003 to file the definitive proxy.
On April 25, 2003, we again asked for a further extension. But because we did
not timely meet the requirements, our request for an extension was denied. As a
result, NASDAQ's Listing Qualification Panel determined that our securities
would be delisted from NASDAQ's Small Cap Market effective April 30, 2003. Our
common stock was then listed in the OTC Bulletin Board. The Company failed to
file its second quarter SEC Form 10-Q due on August 14, 2003. The Company did
file a Form 12b-25 on August 14, 2003 advising that the Company would not file
the quarterly report timely.
LSI traded on NASDAQ through April 29, 2003 as LASE and LASEC (March 5,
2003 - April 29, 2003). On April 30, 2003 it commenced trading on OTC Bulletin
Board as LASE. The OTCBB symbol was changed on August 27, 2003 to LASEE due to
the late filing status of the company. The Company was dropped from the OTC
Bulletin Board and commenced trading on the "Pink Sheets" on Sep 27, 2003 with
the symbol LASEQ. (Q indicates bankruptcy) This is a conditional listing due to
the bankruptcy filing by the company. As mentioned above, the existing common
and preferred shares, including options and warrants, we cancelled pursuant to
the Company's re-organization plan. New common shares of 9,997,195 were issued
on June 30, 2004 and commenced trading via the "Pink Sheets" under the symbol
LRST.
The delisting of our common stock from the NASDAQ Small Cap Stock
Market will result in decreased liquidity of our outstanding shares of common
stock (and a resulting inability of our stockholders to sell our common stock or
obtain accurate quotations as to their market value), and, consequently, will
reduce the price at which our shares trade. The delisting of our common stock
may also deter broker-dealers from making a market in or otherwise generating
interest in our common stock and may adversely affect our ability to attract
investors in our common stock. Furthermore, our ability to raise additional
capital may be severely impaired. As a result of these factors, the value of our
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common stock may decline significantly, and our stockholders may lose some or
all of their investment in 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 27,841,941 shares of common stock
outstanding at December 31, 2003 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
Securities Act or subject only to the satisfaction of a prospectus delivery
requirement. An additional 9,280,647 shares of preferred stock, convertible into
18,561,294 shares of common stock, were issued in October 2002 upon the funding
of the equity investment portion of the China Transaction. We had agreed to
register the shares of common stock under the Securities Act of 1933, and, once
registered, the shares would be available for sale.
Other shares of common stock that we may issue in the future in
connection with financings or pursuant to outstanding warrants or agreements
would 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.
As mentioned previously, as part of the Chapter 11 re-structuring, all
of the above mentioned common and preferred shares, including options and
warrants, were cancelled pursuant to the Company's re-organization. On June 30,
2004 the company issued 9,997,195 new common shares.
The terms of the NIIC transaction will in all probability prevent or
discourage an acquisition or change of control of LaserSight.
As a result of the Chapter 11 petition, and subsequent re-structuring,
NIIC will initially control 7,210,000 or 72% of the newly issued 9,997,195
common shares. Under certain circumstances their control could increase to
approximately 74%.
Risks Relating to Intangibles
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, 2003, approximately $0.5 million,
or 15%, were intangible assets. Any reduction in net income or increase in net
loss resulting from the amortization of 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 FASB Statement No. 144, 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. Accordingly, the Company
believes the Chapter 11 petition has caused and impairment of the carrying
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values of some of our intangibles. In that regard, during the second quarter of
2003, the Company recorded approximately $4.1 million of re-structuring losses
attributable to impairment of intangibles.
Other Risks
The following relates to risks on both a short and longer-term basis:
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 further
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 - generally cash and cash 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 15 of Part IV of this Report, are attached to
this Report and incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On May 12, 2004, the Board of Directors authorized the engagement of Moore
Stephens Lovelace, P.A. to serve as independent public accountants for the
fiscal year ended December 31, 2003. KPMG LLP (KPMG) had been engaged as
independent public accountants for the Company for the most recent fiscal year
until their resignation on March 16, 2004. That determination was a decision of
KPMG LLP and was not recommended or approved by the audit committee of the board
of directors of the Registrant.
KPMG LLP's most recent audit report was on the consolidated financial statements
of the Registrant as of and for the year ended December 31, 2002. The audit
reports of KPMG LLP on the consolidated financial statements of the Registrant
as of and for the years ended December 31, 2002 and 2001 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles, except as follows:
KPMG LLP's reports on the consolidated financial statements of the registrant as
of and for the years ended December 31, 2002 and 2001, contained a separate
paragraph stating, "The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a significant accumulated
deficit that raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty."
During the Registrant's two fiscal years ended December 31, 2002 and 2001, and
during the subsequent period preceding the date of KPMG LLP's resignation, there
were no disagreements with KPMG LLP on any matter of accounting principles or
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practices, financial statement disclosure, or auditing scope or procedure, which
if not resolved to their satisfaction, would have caused them to make reference
in connection with their report to the subject matter of the disagreement. No
other event has occurred with respect to the Registrant and KPMG LLP for which
disclosure would be required pursuant to paragraph (a)(1)(v) of Item 304 of
Regulation S-K.
KPMG LLP did not issue an audit report on the financial statements of the
Registrant as of and for the year ended December 31, 2003, or for any subsequent
period preceding the date of KPMG LLP's resignation, as the Registrant has not
filed any financial statement subsequent to March 31, 2003. KPMG LLP did review
the Registrant's financial statements included in its Form 10-Q for the
quarterly period ended March 31, 2003.
Item 9A. Controls and Procedures
Based on their evaluation within 90 days prior to the filing date of
this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended, are effective for gathering, analyzing, and disclosing the
information we are required to disclose in our reports filed under the Act.
There were no significant changes in our internal controls or in other
factors that could significantly affect those controls since the date of last
evaluation of those internal controls.
PART III
Item 10. Directors and Executive Officers
The Company's executive officers and directors are set forth below. The
terms of all incumbent directors expire at the next scheduled Annual Meeting of
the Company's stockholders (the "Annual Meeting") or at such later time as their
successors have been duly elected and qualified.
Name Age Title Director Since
- ---- --- ----- --------------
Danghui ("David") Liu 42 President and Chief Executive Officer N/A
Guy W. Numann 72 Director 2000
Xian Ding Weng 42 Chairman of the Board 2002
Stephen Shi 48 Director 2002
Ying Zhi Gu 55 Director 2002
Dorothy M. Cipolla 48 Chief Financial Officer N/A
Mr. Liu has served as President and Chief Executive Officer of
LaserSight since August 2003. He was previously the Vice President of Technical
Marketing from September 2002 until 2003. He was Director R&D for Diagnostic
products from March 2000 until January 2002.
Mr. Numann is retired from Harris Corporation where he served as
president of the company's Communication Sector from 1989 until his retirement
in 1997. From 1984 to 1989 Mr. Numann served as senior vice president and group
executive for the Communication Sector. Mr. Numann currently serves as a member
of Rensselaer Polytechnic Institute's School of Engineering Advisory Board.
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Mr. Weng founded New Industries Investment Co., Ltd., (NIIC) in
Shenzhen, China in 1993. He has been President and Chief Executive Officer of
NIIC for nine years. Mr. Weng has also been the Chairman of the Board of Venture
Capital Ltd., Medical Development Ltd. and Consultant Ltd., subsidiaries of
NIIC.
Mr. Shi has served as a professional manager of New Industries
Investment Co., Ltd. since 1997. In NII group, Mr. Shi currently is Chief
Operating Officer of Venture Capital Ltd. Mr. Shi has also been Chief Executive
Officer of Shenzhen New Industries Medical Development Co., Ltd. since March
2002.
Ms. Gu has been President of Y.F.K. Import and Export Corporation, a
privately held medical equipment distributor/consulting firm specializing in
ophthalmology and dermatology, since 1986. She has also been the Vice President
of Finance in NBM Publishing, Inc., a privately held publishing company, since
1989.
Ms. Cipolla has served as Chief Financial Officer and Secretary of
LaserSight since March 2004. Prior to joining LaserSight, she has served in
various financial management positions. From 1994 to 1999, she was Chief
Financial Officer and Treasurer of Network Six, Inc., a NASDAQ listed
professional services firm. From 1999 to 2002, Mrs. Cipolla was Vice President
of Finance with Goliath Networks, Inc., a privately held network consulting
company. From 2002 to 2003, Ms. Cipolla was Department Controller of Alliant
Energy Corporation, a regulated utility.
Code of Ethics for Chief Executive Officer and Senior Financial
Officers
The Company is developing a code of ethics for the CEO and Senior
Financial Officers (Code of Ethics) which is required to be signed by each such
officers, and is maintained on file by the Company.
Audit Committee and Audit Committee Financial Expert
Two members of the Company's Board of Directors, Guy Numann and Ying
Gu, currently serve as the audit committee. The Audit Committee does not
currently have a member designated as the financial expert.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires LaserSight's officers and directors, and persons who own more
than 10% of the outstanding common stock, to file reports of ownership and
changes in ownership of such securities with the SEC. Officers, directors and
over-10% beneficial owners are required to furnish LaserSight with copies of all
Section 16(a) forms they file. Based solely upon a review of the copies of the
forms furnished to LaserSight, and/or written representations from certain
reporting persons that no other reports were required, LaserSight believes that
all Section 16(a) filing requirements applicable to its officers, directors and
over-10% beneficial owners during or with respect to the year ended December 31,
2003 were met.
Item 11. Executive Compensation
The following table sets forth summary information concerning the
compensation paid or earned for services rendered to LaserSight in all
capacities during 2001, 2002 and 2003 for LaserSight's Chief Executive Officer,
each of LaserSight's other executive officers serving at December 31, 2003 whose
total annual salary and bonus for 2003 exceeded $100,000 and former executive
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officers for which disclosure is required. No restricted stock or stock
appreciation rights were granted and no payouts under any long-term incentive
plan were made to any of the named executive officers in 2001, 2002 or 2003. We
use the term "named executive officers" to refer collectively to these
individuals later in this Form 10-K.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------- ------
Other Annual Securities
Compen- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) sation Options/SARs (#) Compensation
- --------------------------- ---- ---------- --------- ------- ---------------- ------------
Michael R. Farris 2003 $216,814 -- -- -- 15,000 (6)
Former President and CEO 2002 262,765 -- $25,000 (1) 100,000 (3) --
2001 278,553 -- -- 200,000 (3) --
Jack T. Holladay, M.D. Former 2003 83,333 -- -- -- --
Medical Director 2002 200,000 -- -- 75,000 (4) --
2001 200,000 -- -- 25,000 (4) --
Gregory L. Wilson Former 2003 134,127 -- -- -- --
Chief Financial Officer 2002 192,400 -- 7,215 (2) 50,000 (5) --
2001 185,185 -- -- 130,000 (5) --
Danghui Liu 2003 153,958 25,800 -- -- --
Interim President and CEO, 2002 105,540 -- -- -- 6,184 (7)
COO 2001 110,040 166 -- -- --
Richard K. Davis 2003 127,917 -- -- -- --
Vice President, Engineering 2002 130,000 -- -- -- --
2001 130,000 -- -- -- --
(1) Consists of a one-time award approved by the board of directors in
October 2002.
(2) Consists of retroactive pay during 2002 to compensate for a
voluntary pay reduction taken during 2001.
(3) Mr. Farris resigned on August 22, 2003. All options were expired
after 30 days.
(4) Dr. Holladay resigned on September 4, 2003. All options expired
after 30 days.
(5) Mr. Wilson resigned on April 5, 2003. All options expired after 30
days.
(6) Forgiveness of $15,000 in personal debt on corporate credit card.
(7) Consists of relocation reimbursement and travel allowance paid.
-63-
No Options / SARs were granted during 2003. On June 30, 2004, all
Outstanding Options were cancelled per the Company's re-organization plan.
The following table sets forth certain information relating to options
held by the named executive officers at December 31, 2003:
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of Securities
Underlying Unexercised
Options/SARs at Value of Unexercised
Year-End (#)(1) In-the-Money Options/
---------------
SARs at Year-End ($)(1)(2)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($)(1) Unexercisable Unexercisable
- ---- ------------ --------------- ------------- -------------
Michael R. Farris -- -- -- (3) --
Jack T. Holladay, M.D. -- -- -- (4) --
Gregory L. Wilson -- -- -- (5) --
Danghui Liu -- -- 35,000 / 0 0 / 0
Richard K. Davis -- -- 170,000 / 10,000 0 / 0
(1) No Options / SARs have been issued by LaserSight in 2003.
(2) Based on the $0.01 closing price of the common stock on The NASDAQ
Stock Market on December 31, 2003 when such price exceeds the
exercise price for an option.
(3) Mr. Farris resigned on August 22, 2003. All options expired after
30 days.
(4) Dr. Holladay resigned on September 4, 2003. All options expired
after 30 days.
(5) Mr. Wilson resigned on April 5, 2003. All options expired after 30
days.
Compensation of Directors
Each non-employee director receives a fee of $500 for each board or
committee meeting attended. Effective October 25, 2002, members of the Audit
Committee receive $1,000 per meeting and the chairman of the Audit Committee
receives $1,500 per meeting. In addition, during 2002, each non-employee
director was granted an option under LaserSight's Non-Employee Directors Stock
Option Plan to purchase 15,000 shares of common stock and each committee
chairman and the Chairman of Board was granted an additional option to purchase
5,000 shares. Directors who are also full-time employees of LaserSight received
no additional cash compensation for services as directors.
Employment Agreements
When the Company filed for Chapter 11 protection on September 5, 2003
all employment agreements in effect prior to that time were canceled. At
-64-
December 31, 2003 there were no employment contracts in effect.
Relocation Agreements
When the Company filed for Chapter 11 protection on September 5, 2003
all relocation agreements in effect prior to that time were canceled. At
December 31, 2003 there were no relocation agreements in effect.
Compensation Committee Interlocks and Insider Participation
During 2003, the role of the Compensation Committee was performed by
the board of directors as a whole.
-65-
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding ownership
of LaserSight's voting securities, as of December 31, 2003:
o each person known to LaserSight to own beneficially more than 5% of
LaserSight's outstanding voting securities; o each of LaserSight's directors; o
each of LaserSight's executive officers named in the summary compensation table;
and o all of LaserSight's directors and executive officers as a group.
The beneficial ownership of LaserSight's voting securities set forth in
this table is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and investment power as
to all shares beneficially owned, subject to community property laws where
applicable.
Common
Stock Series H
Name and Address of Beneficial Owner Ownership Preferred
------------------------------------ --------- ---------
(1)
Directors and Executive Officers:
David Liu 44,998(2)
Dorothy M. Cipolla *
Stephen Shi 172,300(4)
Richard K. Davis 170,000(2)
Guy W. Numann 170,000(2)
Ying Zhi Gu 97,660
Xian Ding Weng *
Michael R. Farris 276,000(3)
Jack T. Holladay, M.D.
2,000
Gregory L. Wilson 15,000
TLC Laser Eye Centers Inc. 3,221,883(5)
5280 Solar Drive 11.5%
Suite 300
Mississauga, Ontario
Canada L4W 5M8
New Industries Investment Consultants (H.K.) 9,280,647 (6)
Shenzhen, People's Republic of China 100%
* Less than 1%.
-66-
(1) Each number of shares of common stock shown as owned in this column
assumes the exercise of all currently-exercisable options and warrants
and all options and warrants that will become exercisable within 60
days of March 28, 2004. Each percentage shown in this column assumes
the exercise of all such options and warrants by the applicable person
or group, but assumes that no options or warrants held by any other
persons are exercised or converted. The exercise price of each of the
options and warrants are significantly above the current trading price
of common stock.
(2) Includes options (and 67,500 warrants in the case of Mr. Numann) to
acquire shares of common stock which are now exercisable or will become
exercisable within 60 days of March 28, 2004, as follows: Mr. Liu
(35,000), Mr. Numann (102,500), Mr. Davis (170,000); and all directors
and executive officers as a group (307,500).
(3) SunTrust Bank, was the holder of 412,200 shares of common stock pledged
by Mr. Farris to secure a personal borrowing, gave given notice of its
intention to sell those shares in compliance with Rule 144 (k) under
the Securities Act of 1933 and to apply the net proceeds of the sales
first to expenses and then to reduction of Mr. Farris' borrowing, with
any excess to be remitted to Mr. Farris. Counsel to LaserSight has
delivered its opinion that the shares may be sold in compliance with
Rule 144 (k) and counsel for the bank has been authorized to, and has
undertaken to, provide notice of any sale in sufficient time to permit
Mr. Farris to file a Form 4 in time to comply with the current two day
filing requirement of the Securities and Exchange Commission. As of
March 28, 2004, 140,000 shares had been sold.
(4) Includes 172,300 shares of common stock owned by Mr. Shi's spouse.
(5) Represents (a) 3,171,833 shares of common stock presently owned by TLC
(based on information supplied to LaserSight as of March 6, 2003), and
(b) 50,000 shares of common stock issuable to TLC upon exercise of all
of its 50,000 warrants at a price of $5.125 per share.
(6) The holders of each share of series H preferred stock shall be entitled
to the number of votes equal to the number of shares of series H
preferred stock held by such stockholder at the Record Date.
Item 13. Certain Relations and Related Transactions
Indebtedness of Management. In accordance with an arrangement that has
been in place since Mr. Farris first became employed by LaserSight, Mr. Farris
utilized a company credit card for both business and non-business expenses and
then reimbursed LaserSight for the non-business expenses, historically at a rate
of $1,000 per month. Since the beginning of 2003 the aggregate amount of these
non-business expenses has not exceeded $67,000. Mr. Farris continued to
reimburse approximately $1,000 per month until he resigned in August of 2003. As
part of his severance agreement, the board agreed to bonus Mr. Farris the
$15,000 balance. Mr. Farris was not charged interest in connection with these
loans.
NIMD transaction. Through December 31, 2003, approximately $3.6 million
worth of products were sold to Shenzhen New Industries Medical Development Co.
Ltd. As a result of the Chapter 11 re-structuring, NIMD's affiliate, NIIC loaned
$2.0 million to the Company. $1 million was converted for 6,850,000 shares of
the 9,997,195 newly issued common stock. NIIC's preferred stock was converted
into 360,000 common shares. In addition, NIIC can convert the remaining $1.0
million of that loan, subject to certain restrictions, to 2,500,000 shares of
the Company's common stock and result in the purchaser holding approximately 76%
of the Company's common stock.
-67-
Item 14. Principal Accounting Fees and Services
During 2003 and 2002 the Company was billed by KPMG for the
following services:
2003 2002
---- ----
(a) Audit fees: 106,156 121,030
(b) Audit-related fees 110,733 104,178
(c) Tax fees 1,250 31,500
(d) All other fees 37,375 9,050
255,514 265,758
All KPMG related work was approved in advance by the Audit Committee
Chairman, David Perioni. Subsequent to Mr. Perioni's resignation in 2003, all
work performed by auditors was approved by the remaining two members of the
audit committee, Ms. Gu and Mr. Numann.
On March 23, 2004, the Company announced the resignation of KPMG. On
May 20, 2004 the Company announced the appointment of Moore Stephens Lovelace,
P.A., a Winter Park, Florida based CPA firm qualified to do SEC audit
engagements.
-68-
PART IV
Item 15. 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, 2003 and 2002.
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
None
(3) Exhibits required by Item 601 of Regulation S-K.
The Exhibit Index set forth on page 79 of this Form 10-K is
hereby incorporated herein by this reference.
b) Reports on Form 8-K
On November 13, 2003, we filed a Current Report on Form 8-K
describing our press release dated November 13, 2003 announcing that
the Company would not timely file its third quarter Form 10-Q due on
November 14, 2003. The Company did file a Form 12b-25 on November
13, 2003 advising that the Company no longer had the financial
resources or staff to file the quarterly reports on a timely basis.
[As a late filer, the Company's securities are now traded in the
over-the-counter (OTC) market via the "Pink Sheets."]
On January 6, 2004, we filed a Current Report on Form 8-K describing
our press release dated January 6, 2004 announcing the Company's
receipt of the settlement proceeds from a shareholder derivative
suit which had been pending in the United States District Court,
Southern District of New York. The original action, in which
LaserSight was a nominal defendant, was filed pursuant to Section 16
of the Securities Exchange Act of 1934. The Company received, net of
court ordered fees and costs, approximately $250,000 of the $400,000
settlement. The report also disclosed that on January 5, 2004, the
-69-
Company filed its Reorganization Plan ("Plan") with the U.S.
Bankruptcy Court. The Plan was a result of negotiations with the
various parties involved and provides in part for Debtor in
Possession ("DIP") financing to be provided by New Industries
Investment Consultants (H.K.) LTD ("NII"). NII is the Hong Kong
based affiliate of Shenzhen New Industries Medical Development Co.
("Shenzhen New Industries"), Shenzhen, and the People's Republic of
China. The Company had already received the first two transfers of
funds from NII as part of the $2.0 million of DIP loans.
On March 5, 2004, we filed a Current Report on Form 8-K announcing
that the Company had filed its monthly operating reports for the
period September 5, 2003, through January 31, 2004 (the "Operating
Reports"). The Operating Reports were filed with the U.S. Bankruptcy
Court for the Middle District of Florida - Orlando Division. Copies
of the Operating Reports were attached as an exhibit to this filing.
On March 15, 2004, we filed a Current Report on Form 8-K announced
that the Company had employed Dorothy M. Cipolla, CPA, as Chief
Financial Officer and Corporate Secretary.
On March 16, 2004, we filed a Current Report on Form 8-K announcing
that KPMG had resigned as the auditor of the Registrant as of that
date. That determination was a decision of KPMG LLP and was not
recommended or approved by the audit committee of the board of
directors of the Registrant.
On March 23, 2004, we filed a Current Report on Form 8-K announcing
that the Company had filed its monthly operating report for the
period February 1, 2004, through February 29, 2004 (the "Operating
Report"). The Operating Report was filed with the U.S. Bankruptcy
Court for the Middle District of Florida - Orlando Division. A copy
of the Operating Report was attached as an exhibit to this filing.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ ------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to
the Company's Form 10-Q filed on November 14, 2002*).
3.2 Bylaws, as amended (filed as Exhibit 3.2 to the Company's Form
10-Q/A filed on November 21, 2002*).
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
-70-
Rights Agreement (incorporated by reference to Exhibit 99.1 to
the Form 8-K filed by the Company on July 8, 1998*).
10.1 Incorporated (filed as Exhibit 10.39 to the Company's Form
10-K filed on March 31, 1999
10.2 Registration Rights Agreement dated March 12, 2001 among
LaserSight Incorporated and Heller Healthcare Finance, Inc.
(filed as Exhibit 10.60 to the Company's Form 10-K filed on
March 30, 2001*).
10.3 Product Purchase Agreement dated August 15, 2002 between
LaserSight Technologies, Inc. and Shenzhen New Industries
Medical Development Co., Ltd. The Company undertakes to
provide to the Commission upon its request the schedules
omitted from this exhibit (filed as Exhibit 99.4 to the
Company's Form 8-K filed on August 30, 2002*)**.
10.4 Distribution Agreement dated August 15, 2002 LaserSight
Technologies, Inc. and Shenzhen New Industries Medical
Development Co., Ltd. (filed as Exhibit 99.5 to the Company's
Form 8-K filed on August 30, 2002*)**.
10.5 Chief Executive Officer and Chief Financial Officer
certifications pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed under Item 9 to the Company's Form 8-K filed on August
14, 2002*).
10.6 Amendment No. 2 to Loan and Security Agreement dated as of
August 15, 2002 among LaserSight Incorporated and subsidiaries
and Heller Healthcare Finance, Inc. (filed as Exhibit 10.1 to
the Company's Form 10-Q filed on November 14, 2002*).
10.7 Extension to Loan and Security Agreement dated as of March 12,
2003 among LaserSight Incorporated and subsidiaries and Heller
Healthcare Finance, Inc. (filed as Exhibit 10.40 to
the Company's Form 10-K filed on March 31, 2003*).
10.8 Amendment No. 3 to Loan and Security Agreement dated as of
March 31, 2003 among LaserSight Incorporated and subsidiaries
and Heller Healthcare Finance, Inc. (filed as Exhibit 10.41 to
the Company's Form 10-K filed on March 31, 2003*).
Exhibit 11 Statement of Computation of Loss Per Share(Included in
Financial Statements in Item 1 hereof)
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of KPMG LLP
Consent of Moore Stephens Lovelace, P.A.
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)
32 Certifications of CEO and CFO Pursuant to Section 1350
- ----------------------
*Incorporated herein by reference. File No. 0-19671.
-71-
**Confidential treatment has been granted for portions of this document. The
redacted material has been filed separately with the commission.
-72-
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 22, 2005 LASERSIGHT INCORPORATED
By: /s/ Danghui ("David") Liu
--------------------------------
Danghui ("David"), 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/ Danghui ("David") Liu Dated: March 22, 2005
- -------------------------------------------
Danghui ("David") Liu, President,
Chief Executive Officer and Director
/s/ Xing Ding Weng. Dated:: March 22, 2005
- -------------------------------------------
Xingding Weng,
Chairman of the Board, Director
/s/ Guy W. Numann Dated:: March 22, 2005
- -------------------------------------------
Guy W. Numann, Director
/s/ Ying Gu Dated:: March 22, 2005
- -------------------------------------------
Ying Gu, Director
/s/ Dorothy M. Cipolla Dated:: March 22, 2005
- -------------------------------------------
Dorothy M. Cipolla, Chief Financial Officer
(Principal accounting officer)
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
LaserSight Incorporated:
We have audited the accompanying consolidated balance sheet of LaserSight
Incorporated and Subsidiaries (the Company) as of December 31, 2003, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year ended December 31, 2003. 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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides 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, 2003, and the results of their
operations and their cash flows for the year ended December 31, 2003, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a significant accumulated deficit that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Moore Stephens Lovelace, P.A.
Orlando, Florida
November 30, 2004
F-1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
LaserSight Incorporated:
We have audited the accompanying consolidated balance sheet of LaserSight
Incorporated and Subsidiaries (the Company) as of December 31, 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 2002.
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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2002, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2002, in conformity with U.S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a significant accumulated deficit that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
St. Louis, Missouri
March 21, 2003
F-2
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS 2003 2002
------------- -------------
Current assets:
Cash and cash equivalents ................................................. $ 564,973 $ 1,065,778
Accounts receivable - trade, net .......................................... 7,626 3,811,065
Notes receivable - current portion, net ................................... 72,765 1,763,106
Inventories ............................................................... 3,361,985 8,928,099
Deferred tax assets ....................................................... - 28,850
Other current assets ...................................................... 235,335 593,842
------------- -------------
Total Current Assets .................. 4,242,684 16,190,740
Notes receivable, less current portion, net ................................. - 1,020,731
Property and equipment, net ................................................. 65,529 444,049
Other assets, net ........................................................... 666,667 5,452,101
------------- -------------
$ 4,974,880 $ 23,107,621
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities not subject to compromise(2003) :
Note payable, net of unamortized discount of zero and $12,246 at .......... $ 1,843,313 $ 2,077,754
December 31, 2003 and 2002, respectively
Accounts payable .......................................................... 33,995 2,755,358
Accrued expenses .......................................................... 385,295 1,993,993
Accrued license fees ...................................................... 9,853 1,504,400
Accrued Warranty .......................................................... 76,000 1,667,656
Accrued commissions ....................................................... - 1,594,634
Deferred revenue .......................................................... 1,039,240 1,657,352
------------- -------------
Total Current Liabilities ............. 3,387,696 13,251,147
Liabilities subject to compromise (a) ....................................... 15,616,134 -
Accrued expenses, less current portion ...................................... - 187,449
Note Payable Related party .................................................. 750,000 -
Deferred royalty revenue .................................................... 4,802,700 5,741,941
Deferred income taxes ....................................................... - 28,850
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, par value $.001 per share; authorized 10,000,000
shares: Series H - 9,280,647 issued and outstanding at December 31, 2003 and
2002......................................................................... 9,281 9,281
Common stock - par value $.001 per share; authorized 100,000,000 shares;
27,987,141 shares issued at December 31, 2003 and 2002....................... 27,987 27,987
Additional paid-in capital .................................................. 103,801,064 103,796,812
Stock subscription receivable ............................................... - (32,336)
Accumulated deficit ......................................................... (122,877,335) (99,360,863)
Less treasury stock, at cost; 145,200 common shares at December 31, 2003
and 2002 .................................................................... (542,647) (542,647)
------------- -------------
Total Stockholders Equity Deficit ..... (19,581,650) 3,898,234
------------- -------------
$ 4,974,880 $ 23,107,621
============= =============
(a) Liabilities subject to compromise consist of the following:
Accounts Payable ....................................................... 2,905,814
Accrued expenses ....................................................... 5,864,191
Accrued Warranty ....................................................... 6,125,730
Other liabilities ...................................................... 720,399
-------------
15,616,314
=============
See accompanying notes to consolidated financial statements
F-3
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Revenues, net:
Products .............................................................. 5,497,937 9,400,316 13,076,039
Royalties ............................................................. 939,240 1,101,819 392,000
Gain on sale of patent ................................................ - - 3,950,836
----------- ----------- -----------
6,437,177 10,502,135 17,418,875
Cost of revenues:
Product cost .......................................................... 7,152,206 5,748,989 7,385,303
----------- ----------- -----------
Gross profit (Loss) ................................................... (715,029) 4,753,146 10,033,572
Research, development, and regulatory expenses ........................ 351,779 1,318,808 3,271,724
Other general and administrative expenses ............................. 8,919,075 12,812,954 23,753,773
Selling related expenses .............................................. 4,558,538 3,279,523 4,674,752
Allowed warranty claims ............................................... 4,640,319 - -
Amortization of intangibles ........................................... 246,690 460,236 503,094
Impairment of Patents ................................................. 4,098,607 - -
Litigation settlement expense ......................................... - 140,000 591,289
----------- ----------- -----------
22,463,229 16,692,713 29,522,908
----------- ----------- -----------
Loss from operations .................................................. (23,530,037) (13,258,375) (22,761,060)
Other income and expenses:
Interest and other income ............................................. 305,977 276,316 578,734
Interest expense ...................................................... (350,120) (586,748) (480,411)
----------- ----------- -----------
Loss from continuing operations before income tax expense ............. (23,574,180) (13,568,807) (22,662,737)
Income tax benefit .................................................... (57,708) - -
----------- ----------- -----------
Loss from continuing operations ...................................... (23,516,472) (13,568,807) (22,662,737)
Discontinued operations:
Loss from the operation of discontinued health care services business
- - (3,371,423)
Loss on disposal of health care services business, including
provision of $110,000 for operating losses during phase-out period ... - - (155,532)
----------- ----------- -----------
- - (3,526,955)
----------- ----------- -----------
Net loss ............................................................. (23,516,472) (13,568,807) (26,189,692)
Conversion discount on preferred stock ............................... (1,581,587) (353,773) -
----------- ----------- -----------
Loss attributable to common shareholders ............................. (25,098,059) (13,922,580) (26,189,692)
=========== =========== ===========
Loss per common share - basic and diluted ............................ (0.90) (0.51) (1.04)
=========== =========== ===========
Weighted average number of shares outstanding
- basic and diluted .................................................. 27,842,000 27,299,000 25,131,000
See accompanying notes to consolidated financial statements
F-4
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2003, 2002 and 2001
Preferred Stock Common Stock Additional
--------------- ------------ Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balances at December 31, 2000 ............. 2,000,000 $ 2,000 22,920,278 $ 22,920 $ 98,594,665
Issuance of shares from ESPP ............. - - 56,327 56 66,669
Issuance of shares in conjunction
with license agreement ................... - - 730,552 731 1,117,927
Issuance of shares in conjunction
with professional services ............... - - 50,000 50 60,419
Issuance of warrants in conjunctio
with debt financing ...................... - - - - 122,557
Issuance of options in conjunction
with consulting agreement ................ - - - - 33,715
Issuance of shares from financing,
net of financing costs ................... 1,276,596 1,277 838,905 839 2,922,884
Conversion of preferred stock ............(2,000,000) (2,000) 2,000,000 2,000 -
Net loss ................................. - - - - -
---------- ----- ---------- ------ -----------
Balances at December 31, 2001 ............. 1,276,596 1,277 26,596,062 26,596 102,918,836
Issuance of shares from ESPP ............. - - 11,177 11 1,129
Issuance of shares in conjunction
with professional services ............... - - 103,306 103 54,774
Settlement of stock subscription
receivable ............................... - - - - (993,646)
Issuance of shares from financing,
net of financing costs ................... 9,280,647 9,281 - - 1,815,719
Conversion of preferred stock ............(1,276,596) (1,277) 1,276,596 1,277 -
Net loss ................................. - - - - -
---------- ----- ---------- ------ -----------
Balances at December 31, 2002 ............. 9,280,647 9,281 27,987,141 27,987 103,796,812
Settlement of stock subscription
receivable ............................... - - - - -
Issuance of options to consultant ........ - - - - 4,252
Net loss ................................. - - - - -
---------- ----- ---------- ------ -----------
Balances at December 31, 2003 ............. 9,280,647 9,281 27,987,141 27,987 103,801,064
========== ===== ========== ====== ===========
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2003, 2002 and 2001
Subscription Accumulated Treasury Stockholders'
Receivable Deficit Stock Equity (Deficit)
---------- ------- ------ ---------------
Balances at December 31, 2000 ........... (1,140,000) (59,602,364) (542,647) 37,334,574
Issuance of shares from ESPP ........... - - - 66,725
Issuance of shares in conjunction
with license agreement ................. - - - 1,118,658
Issuance of shares in conjunction
with professional services ............. - - - 60,469
Issuance of warrants in conjunctio
with debt financing .................... - - - 122,557
Issuance of options in conjunction
with consulting agreement .............. - - - 33,715
Issuance of shares from financing,
net of financing costs ................. - - - 2,925,000
Conversion of preferred stock .......... - - - -
Net loss ............................... - (26,189,692) - (26,189,692)
---------- ----------- -------- -----------
Balances at December 31, 2001 ........... (1,140,000) (85,792,056) (542,647) 15,472,006
Issuance of shares from ESPP ........... - - - 1,140
Issuance of shares in conjunction
with professional services ............. - - - 54,877
Settlement of stock subscription
receivable ............................. 1,107,664 - - 114,018
Issuance of shares from financing,
net of financing costs ................. - - - 1,825,000
Conversion of preferred stock .......... - - - --
Net loss ............................... - (13,568,807) - (13,568,807)
---------- ------------ -------- -----------
Balances at December 31, 2002 ........... (32,336) (99,360,863) (542,647) 3,898,234
Settlement of stock subscription
receivable ............................. 32,336 - - 32,336
Issuance of options to consultant ...... - - - 4,252
Net loss ............................... - (23,516,472) - (23,516,472)
---------- ----------- -------- -----------
Balances at December 31, 2003 ........... 0 (122,877,335) (542,647) (19,581,651)
========== ============ ======== ===========
See accompanying notes to consolidated financial statements.
F-4
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities
Net loss ........................................................ $(23,516,472) $(13,568,807) $(26,189,692)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of patent .......................................... - - (3,950,836)
Depreciation and amortization ................................... 628,627 1,600,826 2,275,974
Loss on disposal of fixed assets ................................ 22,725 - -
Imparement on discontinued operation ............................ - - 2,984,493
Write off of inventory .......................................... 3,588,040 - -
Impairment of Patents ........................................... 4,098,607 - -
Provision for uncollectable accounts ............................ 3,028,304 1,413,947 2,258,252
Stock, options and warrants issued in conjunction with consulting
agreements, settlement and services ............................. 4,251 54,877 94,184
Changes in assets and liabilities:
Accounts and notes receivable, net ........................... 3,486,207 4,991,085 737,533
Inventories .................................................. 1,978,074 3,142,847 118,769
Accounts payable ............................................. 184,451 (1,091,548) (23,885)
Accrued expenses and commissions ............................. 5,615,224 (1,016,597) (1,035,092)
Deferred revenue ............................................. (939,240) 1,339,701 4,910,177
Other, net ................................................... 798,644 429,762 151,396
------------ ------------ ------------
Net cash used in operating activities ........................... (1,022,557) (2,703,907) (17,668,727)
Cash flows from investing activities
Purchases of property and equipment, net ........................ (13,897) (22,535) (296,592)
Net proceeds from sale of patent ................................ - - 6,365,000
------------ ------------ ------------
Net cash provided by (used in) investing activities ............. (13,897) (22,535) 6,068,408
Cash flows from financing activities
Payments on debt financing ...................................... (246,687) (910,000) -
Proceeds from DIP Financing ..................................... 750,000
Proceeds from debt financing .................................... - - 2,776,798
Proceeds from issuance of preferred stock, net .................. - 1,825,000 2,925,000
Proceeds from exercise of stock options, warrants and ESPP ...... - 1,140 66,725
Proceeds from stock subscription receivable ..................... 32,336 114,018 -
------------ ------------ ------------
Net cash provided by financing activities ....................... 535,649 1,030,158 5,768,523
------------ ------------ ------------
Decrease in cash and cash equivalents ........................... (500,805) (1,696,284) (5,831,796)
Cash and cash equivalents, beginning of period .................. 1,065,778 2,762,062 8,593,858
------------ ------------ ------------
Cash and cash equivalents, end of period ........................ $ 564,973 $ 1,065,778 $ 2,762,062
============ ============ ============
Non-cash investing and financing activity:
Royalities prepaid by offset to existing accounts receivable .. $ - $ 450,000 $ -
Issuance of common stock as prepayment of keratome license .... $ - $ - $ 1,118,658
Issuance of warrants in conjunction with debt financing ....... $ - $ - $ 122,557
See accompanying notes to the consolidated financial statements.
F-5
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1 -- BUSINESS AND LIQUIDITY
LaserSight Incorporated (the Company) is the parent company of the following
major wholly-owned operating subsidiaries: LaserSight Technologies, Inc., which
develops, manufactures and sells ophthalmic lasers and related products
primarily for use in laser vision correction, including laser in-situ
keratomileusis (LASIK) and photorefractive keratectomy (PRK) procedures and
currently licenses patents related to refractive surgical equipment; and
LaserSight Patents, Inc., which currently licenses patents related to refractive
surgical procedures. During 2001, the wholly owned subsidiary, MRF, Inc. d/b/a
The Farris Group, a consulting firm servicing health care providers, ceased
operations and is presented as a discontinued operation in the consolidated
statements of operations for the years ended December 31, 2001.
On September 5, 2003 the Company and two of its subsidiaries ("the Debtors")
filed a voluntary petition for relief in the United States Bankruptcy Court,
Middle District of Florida, Orlando Division,("the Bankruptcy Court") under
Chapter 11 of Title 11 of the U.S. Bankruptcy Code ("the Bankruptcy Code or
Chapter 11"). The Debtors continued to operate their businesses as
debtors-in-possession ("DIP") through the close of business June 9, 2004. The
Company filed a plan of reorganization (the Plan) with the Bankruptcy Court on
April 28, 2004, the Bankruptcy Court confirmed the Plan. The Company emerged
from Chapter 11 on June 10, 2004.
The Company has incurred significant losses and negative cash flows from
operations in each of the years in the three-year period ended December 31, 2003
and has an accumulated deficit of approximately $108.3 million and $122.9
million at June 30, 2004 and December 31, 2003, respectively. The substantial
portion of the losses is attributable to delays in Food and Drug Administration
(FDA) approvals for the treatment of various procedures on the Company's excimer
laser system in the U.S. (a key approval for the treatment of nearsightedness
with or without astigmatism was received in late September 2001) and the
continued development efforts to expand clinical approvals of the Company's
excimer laser and other products.
The Company had significant liquidity and capital resource issues relative to
the timing of accounts receivable collection and the successful completion of
new sales compared to ongoing payment obligations. In July 2002, the Company
announced it had entered a letter of intent with affiliated companies based in
the People's Republic of (hereafter referred to as the China Group or the China
Transaction). Definitive agreements relating to the transaction were executed in
August 2002 that included the China Group's commitment to purchase $10.0 million
of lasers and other products over a 12-month period ending in August 2003 and an
equity investment in the Company of $2.0 million. The Company started shipping
products under those agreements in August 2002 and received the equity
investment in October 2002. The China Group provided $2.0 million of
debtor-in-possession financing, with $750,000 received as of year-end 2003. A
new agreement was signed with the China Group in February 2004 and the previous
agreement was cancelled, under the new agreement the China Group agreed to
purchase $12 million of lasers and products over the next twelve months. The new
agreement allows for two one-year extensions. As a result of the conversion of
$1 million of DIP financing, the China Group became the controlling shareholder
of the Company in June of 2004.
Management of the Company continues undertaking steps as part of a plan to
attempt to continue to improve liquidity and operating results with the goal of
sustaining Company operations. These steps include seeking (a) to increase
sales; and (b) to control overhead costs and operating expenses.
There can be no assurance the Company can successfully accomplish these steps.
Accordingly, the Company's ability to continue as a going concern is uncertain
and dependent upon continuing to achieve improved operating results and cash
flows or obtaining additional equity capital and/or debt financing. These
consolidated financial statements do not include any adjustments to the amounts
and classification of assets and liabilities that might be necessary should the
Company be unable to continue in business.
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 inter-company balances and transactions have
been eliminated in consolidation.
As discussed in note 3, the Company's health care services business has been
accounted for as discontinued operations. Unless otherwise noted, disclosures
herein pertain to the Company's continuing operations.
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
F-6
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
CREDIT RISK AND CONCENTRATIONS
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable.
During 2003, the Company received the vast majority of its revenue (
approximately $ 4.2 million) from one customer, the China Group.There were no
receivables due from the China Group as of December 31, 2003. The loss of this
customer would have a significant adverse effect on the company's ability to
continue as a going concern. The Company formerly sold products to customers
extending credit for such sales. Exposure to losses on receivables was
principally dependent on each customer's financial condition and their ability
to generate revenue from the Company's products. The Company monitored its
exposure for credit losses and maintained allowances for anticipated losses. In
2003 a substantial portion of its accounts and notes receivable were reserved as
bad debt. Management believes the bankruptcy filing, the change in the Company's
management and the elimination of warranty obligations made collections on these
accounts highly unlikely.
The company currently has two sole source providers for certain inventory
components. The loss of either of these two providers could have an adverse
effect on the company's operations.
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.
INVENTORIES
Inventories, which consist primarily of laser systems parts and components, are
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. In 2003, with the bankruptcy filing and the re-focus of the Company on
the China market, an inventory obsolescence reserve of $3.5 million was
recorded. See note 18.
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).
GOODWILL AND ACQUIRED TECHNOLOGY
Goodwill represented the excess of cost over the fair value of net assets
acquired and was amortized on a straight-line basis over estimated useful lives
up to 20 years. Management evaluated the carrying value of goodwill using
projected future undiscounted operating cash flows of the acquired businesses.
During 2001, impairment losses were recorded for the unamortized value of
goodwill related to certain acquisitions. See Note 8.
Acquired technology is 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 assessed the
potential market for its acquired technology and elected to write off $4.1
million in 2003 which has been classified as reorganization expense.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (Statement) No. 142, "Goodwill and Other Intangible Assets." Under
Statement No. 142, intangible assets with definite lives are required to be
amortized to expense over the estimated useful life, and tested for impairment
at least annually, or on an interim basis when a triggering event occurs, in
accordance with Statement No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets." During the first quarter of 2002, the Company performed an
evaluation of its intangibles and determined that the fair value of its
intangibles was in excess of the book value. During the second quarter of 2003,
the Company performed an evaluation of its intangibles and determined that the
fair value of its intangibles was impaired and booked a $4.1 million adjustment.
See note 8.
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, 2003, 2001 and 2000 were, approximately $3,000, $851,000 and
$2,287,000, respectively.
F-7
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. In 2003, all approved claims
received in bankruptcy, which were greater than the accrued warranty balance,
were recorded at $4.6 million. These warranty claims would typically not have
been recognized but future warranty reserves would have been adjusted based on
actual warranty costs.
The activity related to the Company's warranty reserve as of December 31, 2003
and 2002 is as follows:
Balance, December 31, 2001 $ 2,521,924
Warranty expense 482,000
Costs incurred (1,336,268)
-----------
Balance, December 31, 2002 1,667,656
Warranty expense 5,554,745
Costs incurred (1,020,671)
-----------
Balance, December 31, 2003 $ 6,201,730
===========
In June of 2004, as of the effective date of the reorganization plan, $6.1
million of the warranty reserves were relieved. The expense is included in
selling related expenses on the consolidated statement of operations.
EXTENDED SERVICE CONTRACTS
The Company sold product service contracts covering periods beyond the initial
warranty period. Revenues from the sale of such contracts were deferred and
amortized on a straight-line basis over the term of the contracts. Service
contract costs were charged to operations as incurred. All open service
contracts obligations were released in bankruptcy.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products in the period that
the products are shipped to the customers. The Company recognizes revenue from
the sale of authorized procedure passwords at the time non-refundable payment is
received and a password is provided to perform procedures.
Royalty revenues from the license of patents owned are recognized in the period
earned. When the Company issues paid-up licenses, the revenue is recognized over
the remaining life of the patent licensed on a straight-line basis.
The Company recognizes revenue from sales of its topography software in
accordance with Statement of Position (SOP) 97-2, "Software Revenue Recognition"
as amended by SOP 98-9, "Modification of SOP 97-2 with Respect to Certain
Transactions." Revenue is recognized when persuasive evidence of an arrangement
exits and delivery has occurred, provided the fee is fixed or determinable,
collectibility is probable and the arrangement does not require significant
customization or modification of the software.
Revenues in multiple element arrangements are allocated to each element based
upon the relative fair values of each element, based upon published list prices
in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables."
COST OF REVENUES
Cost of revenues consist of product cost. Product cost relates to the cost from
the sale of the Company's products in the period that the products are shipped
to the customers.
LOSS PER SHARE
Basic loss per common share is computed using the weighted average number of
common shares outstanding. Diluted loss per common share is computed using the
weighted average number of common 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, 2003,
2002 and 2001 is the same as basic loss per share.
Pursuant to EITF Nos. 98-5 and 00-27, the value of the conversion discount on
the Series H Convertible Participating Preferred Stock (Series H Preferred
Stock) issued in October 2002 was reflected as an increase to the loss
attributable to common stockholders through the period ending October 25, 2003.
The total conversion discount of $2,000,000 was limited by the proceeds from the
Series H Preferred Stock. Of this total, $1,935,350 was accreted to the
Company's loss attributable to common stockholders ratably over the twelve-month
period ending October 25, 2003 or earlier, should the Company have fulfilled the
purchase order and received payment prior to October 25, 2003. The remaining
$64,650 would have increased the Company's loss attributable to common
stockholders during the period that an effective registration statement was in
place for the Series H Preferred Stock. During 2003 and 2002, approximately $1.6
million and $400,000, respectively, of such conversion discount were included in
the Company's loss attributable to common stockholders. On June 30, 2004 the
preferred stock was converted into common stock in bankruptcy pursuant to the
Company's re-organization plan. See note 19.
F-8
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31, 2003, 2002
and 2001:
2003 2002 2001
------------- ----------- -----------
Numerator, basic and diluted:
Net loss ...................$ (23,516,472) (13,568,807) (26,189,692)
Conversion discount on
preferred stock .......... (1,581,587) (353,773) --
------------- ----------- -----------
Loss attributable to
common
stockholders .............$ (25,098,059) (13,922,580) (26,189,692)
============= =========== ===========
Denominator, basic and diluted:
Weighted average shares
outstanding ............ 27,842,000 27,299,000 25,131,000
============= =========== ===========
Basic and diluted loss per share:
Loss from continuing
operations ...............$ (0.84) (0.50) (0.90)
Loss from
discontinued
operations ............... -- -- (0.13)
Loss from disposal
of discontinued
operations ............... -- -- (0.01)
------------- ----------- -----------
Net loss ................... (0.84) (0.50) (1.04)
Conversion discount on
Preferred stock ......... (0.06) (.01) --
------------- ----------- -----------
Loss attributable to
common stockholders$ (0.90) (0.51) (1.04)
============= =========== ===========
Common share equivalents, including contingently issuable shares, options, and
warrants and convertible preferred stock, are not included in the computation of
diluted loss per share because they had an antidilutive effect.
As a result of the September 5, 2003 Chapter 11 filing, all common and preferred
shares outstanding at and prior to June 30, 2004, including options and
warrants, were canceled as required by the approved bankruptcy plan, effective
June 30, 2004, the Company issued 9,997,195 new common shares (see Note 18). The
following unaudited table presents earnings per share figures as if the
reorganization of the capital structure had taken place as of the beginning of
the first period presented.
2003 2002 2003
---- ---- ----
Net income (loss) from continuing operations
per common share basic and diluted (unaudited)... ($2.35) ($1.36) ($2.62)
Weighted average number of
common shares outstanding - basic
and diluted (unaudited)....................... 9,997,195 9,997,195 9,997,195
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Statement No. 144 provides a single accounting model for long-lived assets to be
disposed of. Statement No. 144 also changes the criteria for classifying an
asset as held for sale; and broadens the scope of businesses to be disposed of
that qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted Statement No. 144 on
January 1, 2002. The adoption of Statement No. 144 did not affect the Company's
consolidated financial statements.
In accordance with Statement No. 144, 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. Prior to the adoption of Statement No. 144, the Company accounted
for long-lived assets in accordance with Statement No. 121, "Accounting for
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of."
SHIPPING AND HANDLING COSTS
The Company includes shipping and handling fees billed to customers in product
revenues. Shipping and handling costs associated with outbound freight are
included in selling related expenses and totaled $58,000, $179,000 and $187,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
ISSUANCES OF EQUITY INSTRUMENTS TO NON-EMPLOYEES
The Company periodically issues common stock, stock options or warrants to
non-employees in exchange for services provided. The fair value of such
issuances are determined when the performance commitment by the non-employee is
reached using the Black Scholes option-pricing model. The fair value is recorded
as operating expense in the period over which the service is provided.
STOCK OPTION ACCOUNTING
The Company applies the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation," an
interpretation of APB Opinion No. 25, issued in March 2000, to account for its
fixed plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement No. 123, "Accounting for Stock Based
Compensation," established accounting and disclosure requirements using a fair
value based method of accounting for stock based employee compensation plans. As
allowed by Statement No. 123, the Company has elected to continue to apply the
intrinsic value based method of accounting described above, and has adopted only
the disclosure requirements of Statement No. 123. The following table
illustrates the effect on net income if the fair value based method had been
applied to all outstanding and unvested awards in each period:
F-9
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2003 2002 2001
---- ---- ----
Net loss as reported: .. $(25,098,059) (13,568,808) (26,189,692)
Less: Total compensation
expense determined under
fair value method,
net of tax ............. (762,108) (2,011,405) (2,508,780)
Pro forma net loss ..... $(25,860,167) (15,580,213) (28,698,472)
Basic and diluted EPS:
As reported ....... $ (0.90) (0.50) (1.04)
Pro forma ......... (0.93) (0.57) (1.14)
The per share weighted-average fair value of stock options granted during the
years ended December 31, 2003, 2002 and 2001, was $0.03, $0.10 and $0.35,
respectively, on the dates of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
2003 2002 2001
---- ---- ----
Expected dividend yield 0% 0% 0%
Volatility 50% 50% 50%
Risk-free interest rate 4.5% 4.12-5.32% 4.39-5.27%
Expected life (years) 1.69 3-10 5-10
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This
statement nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits Restructuring." Statement No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company has implemented Statement No. 146 on January 1, 2003.
The adoption of Statement No. 146 did not have a material effect on the
Company's consolidated financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." Statement No. 148 amends Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-base employee
compensation. In addition, Statement No. 148 amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have
a material impact on our financial position or results of operations.
In December 2003, the FASB revised Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
which it had originally issued in January 2003. As revised, FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. As revised, application of
FIN 46 is required for interests in special-purpose entities for periods ending
after December 15, 2003. Application for all other types of entities covered by
FIN 46 is required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 as revised, is not expected to have a material
impact on our financial position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
(SFAS 150), "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS 150 requires that certain financial
instruments, which under previous guidance were accounted for as equity, must
now be accounted for as liabilities. The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. SFAS
150 is effective for all financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, although certain aspects have been delayed
pending further clarifications. We do not expect the adoption of SFAS 150 to
have a material impact on our financial position or results of operations.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104
"Revenue Recognition" which codifies, revises and rescinds certain sections of
SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The changes noted in SAB No. 104 did not have a material
effect on our financial position or results of operations.
F-10
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RECLASSIFICATIONS
Certain reclassifications were made to prior year financial data to conform to
current year presentation
NOTE 3 -- DISCONTINUED OPERATIONS
In November 2001, the Company decided to discontinue the operations of its
health care services business as a result of its increased focus on refractive
product development and commercialization. The health care services business
continued its operations through the end of 2001 and phased out its remaining
client projects in early 2002.
Results from discontinued operations for the years ended December 31, 2001 were
as follows:
2001
----
Net revenues ............. $ 897,457
Operating loss:
Loss from discontinued
operations ............ (3,371,423)
Loss from disposal of
discontinued operations (155,532)
-----------
Loss from discontinued
operations ............. $(3,526,955)
===========
Losses from discontinued operations included the results of operations from the
business disposed of through December 31, 2001. Losses related to the business
subsequent to 2001 were estimated and provided for in the loss on the
disposition of the business.
The 2001 loss from discontinued operations, $3,371,423, included an impairment
loss of approximately $2,984,000 related to the goodwill of the Company's health
care services subsidiary. The Company's increased focus on refractive product
development and commercialization resulted in management's decision in late 2001
to phase out the health care services 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 future net cash flows.
The loss from the disposal recorded in 2001 totaled $155,532. The losses
associated with the disposition of the business were based on an estimate of
results of operations for the business from the date the decision was made to
dispose of the business through the phase-out period. Through the year ended
December 31, 2003, actual losses subsequent to 2001 approximated the losses
estimated.
NOTE 4 -- ACQUISITIONS
INTELLECTUAL PROPERTY
In March 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. These assets
were adjusted by $4.1 million, to their estimated net realizable value in 2003
due to the re-focus of the Company in its re-organization plan in bankruptcy.
The remaining cost is included in other assets, net and is being amortized over
the life of the patents, 17 years.
PHOTOMED, INC.
In July 1997, the Company acquired from Photomed, Inc. the rights to a
Pre-Market Approval (PMA) application filed with the 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 was
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, 2001, the unamortized carrying value of the
keratome patent was included in other assets. In December 2000, an impairment
loss was taken for the unamortized value of the PMA application. See note 8. In
2003 an additional impairment loss was taken on the keratome patent. Revenues
attributable to these patents were minimal. See note 19.
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 was
F-11
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
being amortized over approximately 8 years prior to its sale in March 2001.
Under the agreement, IBM transferred to the Company all of IBM's rights under
its patent license agreements with certain licensees. Amortized royalties from
such assigned patent licenses totaled approximately $288,000, $288,000 and
$392,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
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.
On March 1, 2001, the Company completed the sale of the IBM Patents for a cash
payment of $6.5 million. The Company retained a non-exclusive royalty free
license under the patent. The Company's net gain on the sale of the patent was
approximately $4.0 million. As of December 31, 2003, the unamortized carrying
value of the IBM patents was zero.
KERATOME LICENSE
In September 1997, the Company acquired worldwide distribution rights to the
Ruiz-Lenchig keratome for the LASIK procedure and entered into a limited
exclusive license agreement for intellectual property related to the keratome
products. The agreement called for the Company to share the product's gross
profit with the licensors with defined minimum quarterly royalties. 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 prepayment for royalties during the term of the license. The
term was extended until July 31, 2005.
In June 2002, the agreement was further amended to revise the payment schedule
and provide that the number of notice and cure periods relating to delinquent
payments would be limited to three. After the last notice and cure period is
used, if the Company fails to make a timely payment under the agreement, the
licensors have the right to immediately declare the Company in default and
accelerate the balance of the remaining unpaid payments.
See notes 17 and 19. The royalty rate was reduced from 50% to 10% of gross
profits. The value of the Common Stock issued and the minimum royalty payments
was being expensed on a straight-line basis through July 31, 2005 at a rate of
approximately $1.6 million annually, and was included in selling related
expenses. As of December 31, 2002, the prepaid royalties under the keratome
license were included in other current assets. In May 2003 the Company received
a default notice and the remaining balance of $3,471,613 was expensed to selling
related expenses.
NOTE 5 -- ACCOUNTS AND NOTES
RECEIVABLE
Accounts and notes receivable at December 31, 2003 and 2002 were net of
allowance for uncollectibles of approximately $8,410,192 and $5,464,000
respectively. During 2003 and 2002, approximately $1,156,000 and $1,471,000,
respectively, in accounts and notes receivable, net of associated commissions
and bad debt recoveries, were written off as uncollectible. The Company wrote
off $8.4 million of gross accounts and notes receivable in 2004. See note 18.
The Company formerly provided 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. Maturity
dates of long-term notes receivable balances, less an allowance for
uncollectibles, at December 31, 2003 are as follows:
Due in 2004 $ 72,765
NOTE 6 -- INVENTORIES
The components of inventories, net of reserves, at December 31, 2003 and 2002
are summarized as follows:
2003 2002
---- ----
Raw materials .............. $2,750,137 5,994,564
Work in process ............ 611,997 245,195
Finished goods ............. - 2,057,672
Test equipment-clinical
trials ................. - 630,668
---------- ----------
$3,361,985 8,928,099
========== ==========
F-12
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As of December 31, 2003 and 2002, the Company had zero and one laser systems,
respectively, being used under arrangements for clinical trials
NOTE 7 -- PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 are as follows:
2003 2002
---------- ----------
Leasehold improvement ............$ 305,014 646,431
Furniture and equipment .......... 822,605 1,312,293
Laboratory equipment ............. 1,711,695 2,333,352
---------- ----------
2,839,314 4,292,076
Less accumulated
Depreciation and ............ 2,773,785 3,848,027
amortization ---------- ----------
$ 65,529 444,049
========== ==========
Obsolete assets, which were fully depreciated, were written off in 2003
NOTE 8 -- OTHER ASSETS
Patents, acquired intangibles and other assets at December 31, 2003 and 2002 are
as follows:
2003 2002
---------- ----------
Acquired technology, net
of accumulated amorti-
zation $0 in 2003
and $1,085,628 in 2002 ................ $ - 666,372
Diagnostic patents, net of
accumulated amortization
of $16,572 since impairment in 2003 and
$665,445 in 2002 ..................... 483,428 3,448,220
Keratome patents and license,
net of accumulated
amortization of $0
in 2003 and $380,667
in 2002 ............................... - 714,133
Deposits ................................... 183,239 584,744
Deferred financing costs, net .............. - 38,632
---------- ----------
$ 666,667 5,452,101
========== ==========
During 2003, the Company recorded an impairment loss of approximately $4.1
million related to Keratome, acquired technology and diagnostic patents.
Management decided to write-off the assets due to a lack of a potential market
for its acquired technology. The $4.1 million has been classified as
impairment of patents in the consolidated statement of operations. See note 18.
In late 2001, the Company recorded an impairment loss of approximately $3.0
million related to goodwill of its MRF, Inc. subsidiary. Management decided to
discontinue the operations of its health care services business as a result of
its increased focus on refractive product development and commercialization. See
note 3.
ACQUIRED INTANGIBLE ASSETS
As of December 31, 2003 and 2002, acquired intangible assets were comprised of
the following:
GROSS
DECEMBER 31, 2003 CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------ ------------
Diagnostic Patents $ 500,000 (16,572)
Aggregate amortization expense for
the year ended December 31, 2003 $ 246,690
=========
Estimated amortization expense for
the five years subsequent to
December 31,
2004 33,144
2005 33,144
2006 33,144
2007 33,144
2008 33,144
GROSS
DECEMBER 31, 2002 CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------ ------------
Acquired technology 1,752,000 (1,085,628)
Diagnostic patents 4,113,665 (665,445)
Keratome patent 1,094,800 (380,667)
----------- ----------
Totals $ 6,960,465 (2,131,740)
=========== ==========
Aggregate amortization expense for
the year ended December 31, 2002 $ 460,236
=========
NOTE 9 -- 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, 2003, 2002 and 2001, expense incurred related to the 401(k) plan,
including employer-matching contributions, if any, was approximately $6,000,
$9,000 and $9,000 respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has a qualified Employee Stock Purchase Plan (ESPP), the terms of
which allow for qualified employees (as defined) to participate in the purchase
F-13
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 0, 11,177 and 56,327 shares of Common Stock
during 2003, 2002 and 2001, respectively, pursuant to this plan at an average
price per share of $0.0, $0.10 and $1.18, respectively.
NOTE 10 -- NOTES PAYABLE
On March 12, 2001, the Company entered into a loan agreement with GE, for a $3.0
million term loan at an annual interest rate of prime plus 2.5% (6.62% at
December 31, 2003) 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% (5.37% at December 31, 2003). Including
amortization of financing costs, discount on note payable and other fees, the
effective interest rate on the term loan was 13%, 23% and 19% during 2003, 2002
and 2001, respectively. In connection with the loans, the Company paid an
origination fee of $130,000 and issued warrants to purchase 243,750 shares of
Common Stock. The warrants were recorded as a discount to note payable based on
their fair value on the date of issuance, approximately $123,000, determined
using the Black Scholes option-pricing model, and are amortized to interest
expense over the original term of the loan. At the termination of the loan, an
additional fee of $148,125 will be payable to GE. This was amortized over the
life of the note. The warrants were exercisable at any time from March 12, 2001
through March 12, 2004 at an exercise price per share of $3.15. Borrowings under
the loan agreement are collateralized by substantially all of the Company's
assets. The original loan agreement required the Company to meet certain
covenants, including the maintenance of a minimum level of net worth.
Effective February 15, 2002, the Company's covenants on the term note payable to
GE were amended to decrease the required minimum level of net worth and
establish a minimum level of tangible net worth and minimum quarterly revenues
during 2002. In addition, monthly principal payments of $10,000 began in
February 2002, increasing to $20,000 monthly in June 2002 and $30,000 monthly in
October 2002.
On August 15, 2002, the Company's loan agreement with GE was amended a second
time. GE provided a waiver of the Company's failure to comply with certain
financial covenants under the loan agreement pending the funding of the equity
portion of the China Transaction (see note 12). Upon receipt of the equity
investment in October 2002, revised covenants became effective that decreased
the required minimum level of net worth to $2.1 million, decreased minimum
tangible net worth to negative $2.8 million and decreased minimum quarterly
revenues during the third quarter of 2002 to $2.5 million, the fourth quarter of
2002 to $4.2 million and the first quarter of 2003 to $5.3 million. In exchange
for the waiver and revised covenants, the Company paid $150,000 in principal to
GE upon the receipt of the equity investment in October 2002 and agreed to
increase other monthly principal payments to $60,000 in October 2002 and $40,000
during each of November and December 2002 and January 2003. The remaining
principal balance was originally due on March 12, 2003. See note 18. The Company
was never able to borrow under its revolving credit facility due to eligible
receivables related to U.S. sales. The term loan was in default at December
31,2003.
On August 30, 2004 the Company signed a three-year amended note expiring on June
30, 2007. The note bears interest of 9%. Certain covenants were modified as
follows: net worth $750,000, tangible net worth $1,000,000 and quarterly
revenues of $1,000,000. GE was issued a warrant to purchase 100,000 shares of
common stock at $0.25 per share, or $0.40 per share if the China Group converts
their DIP loan to equity. The warrant expires June 30, 2008.
The China Group provided $2 million of DIP financing, of which $750,000 was
funded at December 31, 2003. On June 30, 2004, $1 million of the total was
converted to 6,850,000 common shares. The remaining $1 million note bears
interest of 9%, with interest only payments due monthly. It is a three year
balloon note. The China Group has the option to convert the note to an
additional 2,500,000 common shares. This note is subject to any GE liens on
Company assets.
Interest paid during 2003, 2002 and 2001 approximated $350,000, $335,000 and
$525,000, respectively.
NOTE 11 -- DEFERRED REVENUE
Deferred revenue at December 31, 2003 and 2002 is as follows:
2003 2002
---- ----
Service contracts and
deposits ............. 820,399 718,112
Deferred royalty revenue 5,021,541 6,681,181
---------- ---------
5,841,940 7,399,293
Less long-term portion . 4,802,700 5,741,941
---------- ---------
$1,039,240 1,657,352
========== =========
During 2001, the Company received a total of $6.5 million in cash from two third
parties for a non-exclusive license agreement to its U.S. Patent No. RE 37,504
(`504 Scanning Patent) and another patent. Of the total, $0.8 million was
recorded as a payable to TLC Laser Eye Centers Inc. under a license sharing
agreement. This obligation was settled in bankruptcy. In May 2002, the Company
F-14
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
received a total of $2.6 million in cash from two third parties for
non-exclusive license agreements to its `504 Scanning Patent. These receipts
were recorded as deferred revenue and revenue is being amortized over the life
of the patent, approximately 10 years.
NOTE 12 -- STOCKHOLDERS' EQUITY
On August 15, 2002, the Company executed definitive agreements with the China
Group that specializes in advanced medical treatment services, medical device
distribution and medical project investment. The transaction established a
strategic relationship that includes the commitment to purchase at least $10.0
million worth of Company products during the 12-month period following the
signing of the definitive agreements, distribution of Company products in
mainland China, Hong Kong, Macao and Taiwan, and a $2.0 million investment in
the Company. Under the terms of the agreements, the products purchased are being
paid by irrevocable letters of credit, confirmed by a U.S. bank and payable upon
presentation of shipping documents. See note 16. In October 2002, the investment
called for under the agreements with the China Group was completed. In exchange
for its $2.0 million investment, the Company issued the China Group 9,280,647
shares of Series H Convertible Preferred Stock that, subject to certain
restrictions, could be converted into 18,561,294 shares of the Company's Common
Stock and result in the purchaser holding approximately 40% of the Company's
Common Stock. Of the 9,280,647 shares of Series H Preferred Stock that were
issued, 8,980,647 shares may not be converted until the first to occur of (i)
the one-year anniversary of the date the Series H Preferred Stock was issued,
(ii) the Company's failure to deliver products in accordance with the delivery
schedule set forth under the terms of the agreements with the China Group, or
(iii) the Company has received payment for at least $10.0 million worth of its
products to be sold pursuant to the terms of the agreements with the China
Group. The remaining 300,000 shares were held by Benchmark Capital & Finance,
Inc. and were purchased by the China Group in 2003. After October 25, 2004, each
share of Series H Preferred Stock then outstanding would have automatically
converted into two shares of common stock. A conversion discount on the Series H
Preferred Stock of $2.0 million was accreted to the Company's loss over a period
of one year from the October 25, 2002 issuance date. See note 2. These shares
were cancelled in bankruptcy, see note 19.
In April 2002, the Company settled litigation related to its stock subscription
receivable and, during 2002, received approximately $82,000 with a commitment
for an additional total of approximately $64,000 to be paid in four quarterly
installments beginning in July 2002. Two installments were received in July and
October 2002. The remaining installments were received in January and April
2003.
On July 6, 2001, the Company closed a transaction for the sale of 1,276,596
shares of Series F Preferred Stock to a total of two investors in exchange for
the Company receiving $3.0 million in cash. The Series F Preferred Stock was
convertible into Common Stock on a share for share basis. All Series F Preferred
Stock was converted into Common Stock during 2002. In addition, the investors
received a total of 838,905 shares of Common Stock under price protection
provisions of the Company's September 2000 private placement.
During the years ended December 31, 2003, 2002 and 2001, LaserSight received
approximately $0, $1,000 and $67,000, respectively, in cash from the exercise of
warrants, stock options and the Employee Stock Purchase Plan, resulting in the
issuance of 0, 11,177 and 56,327 shares respectively, of Common Stock.
Stock warrant activity during the periods indicated is as follows:
Weighted
Shares Average
Under Exercise
Warrants Price
-------- -----
Balance at December 31, 2000 1,647,428 $ 3.56
Granted .................. 243,750 3.15
Anti-dilution issuances .. 21,590 --
---------
Balance at December 31, 2001 1,912,768 3.43
Terminated ............ (821,518) 2.88
Balance at December 31, 2002 1,091,250 3.84
Terminated ............... (600,000) 3.60
---------
Balance at December 31, 2003 491,250 4.13
=========
In June 2004 all outstanding warrants were cancelled pursuant to the Company's
re-organization plan. See note 19.
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 $9.0
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, 2002, 180,000 such warrants were outstanding.
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
F-15
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 (except as otherwise
permitted by the Board of Directors) 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.
NOTE 13 -- STOCK OPTION PLANS
Options are currently issuable by the Board of Directors 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 July 2001 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, as amended, 5,250,000 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.
Stock option activity for all plans during the periods is as follows:
Shares Wtd. Avg.
Under Exercise
Option Price
Balance at December 31, 2000 3,508,544 $ 7.76
Granted .................. 2,057,500 1.64
Terminated ............... (707,361) 6.90
----------
Balance at December 31, 2001 4,858,683 5.30
Granted ............... 1,152,500 0.27
Terminated ............... (1,293,099) 4.74
----------
Balance at December 31, 2002 4,718,084 4.22
Granted .............. 150,000 0.10
Terminated ............... (3,789,196) 4.46
----------
Balance at December 31, 2003 1,078,888 2.82
==========
All outstanding options were cancelled June 30, 2004 pursuant to the Company's
re-organization plan. See note 18. The following table summarizes the
information about stock options outstanding and exercisable at December 31,
2003:
Range of Exercise Prices
------------------------
$0.10-$3.03 $3.75-$8.13 $9.72-$16.63
----------- ----------- ------------
Options outstanding:
Number outstanding at
December 31, 2003 788,667 168,221 122,000
Weighted average
remaining contractual
life 5.05 years 2.56 years 2.03 years
Weighted average
exercise price $ 0.79 4.96 13.53
Options exercisable:
Number exercisable at
December 31, 2003 764,668 169,221 124,000
Weighted average
exercise price $ 0.81 4.93 13.31
F-16
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 14 -- INCOME TAXES
There was no federal or state income tax expense for each of the years ended
December 31, 2003, 2002 and 2001. In 2003 a federal tax refund from tax year
1995 was received of $57,708.
Deferred tax assets and liabilities consist of the following components as of
December 31, 2003 and 2002:
2003 2002
---- ----
Deferred tax liabilities:
Acquired technology ........ -- 239,656
------------ ------------
-- 239,656
Deferred tax assets:
Acquired technology .......... 1,265,000 --
Inventory .................... 2,825,000 1,445,596
Receivable allowance ......... 3,165,000 2,072,216
License fees ................. 3,466,000 2,454,944
Commissions .................. -- 68,877
Warranty accruals ............ 2,304,000 583,394
Property and equipment ....... 214,000 388,759
NOL carry forward ............ 33,644,000 30,974,149
Other tax credits ............ 397,000 256,173
Other ........................ 89,000 69,722
------------ ------------
47,369,000 38,313,830
Valuation allowance .............. (47,369,000) (38,074,174)
------------ ------------
Net deferred tax asset (liability) $ -- --
============ ============
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is a
significant risk that these deferred tax assets may expire unused and,
accordingly, has established a valuation allowance against them.
There were no payments for income taxes during the years ended December 31,
2003, 2002 or 2001.
At December 31, 2003, the Company has net operating loss carry forwards for
federal income tax purposes of approximately $90 million which maybe available
to offset future federal taxable income and begin to expire in the year 2018.
The utilization of the Company's net operating losses and credit carry forwards
are severely limited under Section 382 of the Internal Revenue Code due to
changes in the ownership of the company. In addition, the Company has other tax
credit carry forwards of approximately $256,000 that begin to expire in the year
2007.
For the years ended December 31, 2003, 2002 and 2001, 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 loss before
provision for income taxes, is reconciled below:
2003 2002 2001
---- ---- ----
"Expected" tax
benefit
$(7,995,601) (4,613,364) (8,904,440)
State income taxes,
net of federal income
tax benefit (646,703) (370,809) (669,053)
Intangible amortization -- -- (433,325)
Nondeductible
expenses 13,168 28,808 115,244
Tax deduction from
exercise of options
and warrants -- -- --
Valuation allowance 8,629,136 4,955,355 9,877,607
----------- ---------- ----------
Other items, net -- -- 13,697
----------- ---------- ----------
Income tax expense $ -- -- --
=========== ========== ==========
At December 31, 2003, of the approximately $90 million net operating loss carry
forward, approximately $19.5 million is associated with the exercise of
nonqualified stock options, disqualifying dispositions of incentive stock
options and warrants. This tax benefit would have been recorded as an increase
to additional paid-in capital if recognized. However, all of the stock options
and warrants were cancelled in 2004 pursuant to the Company's re-organization
plan in bankruptcy. See note 19.
NOTE 15 -- SEGMENT INFORMATION
At December 31, 2003, the Company's continuing operations principally include
refractive products and patents. Refractive product operations primarily involve
the development, manufacture, and sale of ophthalmic lasers and related devices
for use in vision correction procedures. Patent services involve the revenues
and expenses generated from the ownership of certain refractive laser procedure
patents. Health care services provided health and vision care consulting
services to hospitals, managed care companies and physicians, and is reflected
as a discontinued operation. See note 3.
Operating profit is total revenue less operating expenses. In determining
operating profit for operating segments, the following items have not been
considered: general corporate expenses; discontinued operations; expenses
attributable to Centers, a developmental stage company; non-operating income and
expense; and income tax expense. Identifiable assets by operating segment are
F-17
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
those that are used by or applicable to each operating segment. General
corporate assets consist primarily of cash, marketable equity securities and
income tax accounts.
Segment information is as follows:
2003 2002 2001
---- ---- ----
Operating revenues:
Refractive products$ 5,497,937 9,400,316 13,076,039
Patent services 939,240 1,101,819 392,000
Gain on sale of patent -- -- 3,950,836
------------ ----------- -----------
Total revenues $6,437,177 10,502,135 17,418,875
============ =========== ===========
Operating profit (loss):
Refractive products $(22,988,210) (12,631,473) (25,605,689)
Patent services 939,240 1,101,819 4,342,836
General corporate (1,481,067) (1,728,723) (1,498,207)
------------ ----------- -----------
Loss from operations $(23,530,037) (13,258,375) (22,761,060)
============ =========== ===========
Impairment and inventory reserve costs of $8.0 million are included in operating
loss of refractive products in 2003.
2003 2002 2001
---- ---- ----
Identifiable assets:
Refractive products $4,557,092 21,811,526 33,212,199
Patent services -- -- --
Discontinued operations -- -- 66,145
General corporate assets 417,788 1,307,459 3,031,573
---------- ---------- ----------
Total assets $4,974,880 23,118,985 36,309,917
========== ========== ==========
Depreciation and amortization:
Refractive products 627,786 1,343,542 1,737,698
Patent services -- -- --
Discontinued operations -- -- 325,378
General corporate 841 2,836 9,340
---------- ---------- ----------
Total depreciation
and amortization $ 628,627 1,346,378 2,072,416
========== ========== ==========
Amortization of deferred financing costs and accretion of discount on note
payable of $12,246 and $52,383 for the years ended December 31, 2003 and 2002,
respectively, is included as interest expense in the table below.
2003 2002 2001
---- ---- ----
Capital expenditures:
Refractive products $ 13,897 22,535 249,048
Discontinued operations -- -- 47,544
General corporate -- -- --
--------- ------- -------
Total capital expenditures $ 13,897 22,535 296,592
========= ======= =======
Interest & other income:
Refractive products $ 280,424 263,254 300,522
General corporate 255,553 13,062 278,212
--------- ------- -------
Total interest income $ 305,977 276,316 578,734
========= ======= =======
Interest expense:
General corporate $ 350,120 586,748 480,411
========= ======= =======
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, 2003. 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.
2003 2002 2001
---- ---- ----
Geographic area:
China $ 4,373,545 4,673,304 1,726,798
Mexico * * 1,508,960
Netherlands * 1,107,950 *
United States * * 3,481,045
Africa 744,678 * *
Other 379,714 3,619,062 6,359,236
----------- --------- ----------
Total refractive
products revenues $ 5,497,937 9,400,316 13,076,039
=========== ========= ==========
* Less than 10% of annual segment revenues.
Export sales are as follows:
2003 2002 2001
---- ---- ----
North and
Central America$ 352,087 646,931 1,649,461
South America 27,627 393,750 2,679,420
Asia 4,373,545 5,291,489 2,811,797
Europe -- 2,125,991 2,243,868
Africa 744,678 215,140 210,448
----------- --------- ---------
$ 5,497,937 8,673,301 9,594,994
=========== ========= =========
The geographic areas above include significant sales to the following countries:
North and Central America -Mexico; South America - Brazil; Asia - China and
Malaysia; Europe - Spain, Italy, Israel and Africa. 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, 2001, the Company had approximately $19,000 in assets located
at a manufacturing facility in Costa Rica and $12,000 in assets located at an
administrative office in Europe. As of December 31, 2002, both of these
facilities were closed and 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
approximately $4.2 million in 2003 or 66% and $2.7 million in 2002, or 26% of
the Company's consolidated revenues. See notes 16 and 18. This customer is a
related party who owned 40% of the Company's stock, as of June 30, 2004 this
customer owns 72% of the Company's stock.
NOTE 16 --RELATED PARTY TRANSACTIONS
During 2000, the Company sold one laser system to a physician associated with a
director of the Company for $240,000. At the time of the sale, the Company
expected the physician to obtain third party financing for the system and to be
F-18
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
paid in full. Since that time, the physician financed and paid the Company
$100,000 and began making monthly payments towards the balance. As of December
31, 2003, $107,848 is included in notes receivable and the Company is receiving
approximately $4,000 per month. During the year ended December 31, 2003, the
Company additionally recognized procedure fee revenues of approximately $13,550
related to this laser.
As of December 31, 2002, TLC Laser Eye Centers Inc. owned approximately 14% of
the Company's Common Stock.
On August 15, 2002, the Company executed definitive agreements with the China
Group. The China Group specializes in advanced medical treatment services,
medical device distribution and medical project investment. The transaction
established a strategic relationship that includes the commitment to purchase at
least $10.0 million worth of Company products during the 12-month period
following the signing of the definitive agreements, distribution of Company
products in mainland China, Hong Kong, Macao and Taiwan, and a $2.0 million
investment in the Company. Under the terms of the agreements, the products
purchased are being paid by irrevocable letters of credit, confirmed by a U.S.
bank and payable upon presentation of shipping documents. Through December 31,
2003, approximately $4.2 million worth of products were sold under these
agreements. In October 2002, the investment called for under the agreements with
the China Group was completed. In exchange for its $2.0 million investment, the
Company issued the China Group 9,280,647 shares of Series H Convertible
Preferred Stock that, subject to certain restrictions, could be converted into
18,561,294 shares of the Company's Common Stock and result in the purchaser
holding approximately 40% of the Company's Common Stock. In 2003 and 2004 the
China Group provided $2.0 million of debtor-in-possession financing, with
$750,000 received as of year-end 2003. The DIP financing was an interest only
note, at 9%. The note matured when the Company's re-organization was conformed
by the bankruptcy court or April 30, 2004, which ever occured first. The
re-organization plan as confirmed included a provision for $1 million to be
converted to 6,850,000 new common shares, The remaining $1 million was converted
into a three year interest only note. The note bears an interest rate of 9% and
has a balloon payment due June 30, 2007. The China Group has the option to
convert the remaining $1 million for an additional 2,500,000 common shares.
A new purchase agreement was signed with the China Group in February 2004, where
they agreed to purchase $12 million of lasers and products over the next twelve
months and the previous agreement was cancelled. The new agreement allows for
two one-year extensions. See notes 12 and 18
NOTE 17--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 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. In May 2001, the
Company settled this litigation in exchange for payments and related costs of
approximately $591,000.
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
named the Company's then chief executive officer as the sole defendant and
alleged 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 former chief executive officer was
the president and chief executive officer of the Subsidiary. The Company's Board
of Directors 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 had 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. During 2002, the Company agreed to the terms of a settlement with
the plaintiff. The terms of the settlement required three payments totaling
$140,000. The first payment of $50,000 was paid in October 2002. The second
payment of $45,000 was due in September 2003, and the third payment of $45,000
was due in March 2004. All of the payments are to be made without interest
unless there were to be a default in payment in which event interest would
accrue at 9%. During 2002, the Company recorded expense of $140,000 related to
this settlement. This creditor did not file a proof of claim in the bankruptcy
case and accordingly the claim was discharged in bankruptcy.
See note 18.
F-19
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
approximately $1.9 million in damages, plus interest, costs and attorney's fees.
The Company has since successfully argued for a change in venue to Orange
County, Florida. After no activity for over a year, the plaintiff filed a motion
in July 2002 to have the court set a trial date, which they set for December
2002. Subsequently, the plaintiff filed a motion for continuance of the trial to
allow the parties an opportunity to settle the dispute. In October 2002, the
court entered an order continuing the trial and will reschedule only upon the
filing of a new notice for trial by either party. The Company believes that the
allegations made by the plaintiff are without merit. Management believed that
the Company has satisfied its obligations under the agreement and that this
action would not have a material adverse effect on the Company's financial
condition or results of operations. This action was eliminated in bankruptcy.
See note 18.
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 $1.6 million, plus interest, costs and attorney's fees. The parties
have agreed to postpone discovery and attempt to agree on the final form of a
settlement with the plaintiffs. The terms of the settlement agreement, as
currently contemplated, would not require the Company to make any cash payments.
The Company believed that the allegations made by the plaintiff were without
merit. Management believed that the Company had satisfied its obligations under
the agreement and that this action would not have a material adverse effect on
the Company's financial condition or results of operations. This action was
eliminated in bankruptcy. See note 18.
FORMER U.S. DISTRIBUTORS
- ------------------------
In October 2001, three entities that previously served as distributors for
LaserSight's excimer laser system in the United States, Balance, Inc. d/b/a
Bal-Tech Medical, Sun Medical, Inc. and Surgical Lasers, Inc., filed a lawsuit
in the Circuit Court of the Ninth Judicial Circuit, Orange County, Florida. The
lawsuit names the Company, its then chief executive officer and then vice
president of sales, as defendants. The lawsuit alleges various claims related to
the Company's termination of the distribution arrangements with the plaintiffs
including breach of contract, breach of the covenant of good faith and fair
dealing, tortuous interference with business relationships, fraudulent
misrepresentation, conversion and unjust enrichment. Plaintiffs requested actual
damages in excess of $5.0 million, punitive damages, prejudgment interest,
attorneys' fees and costs and other equitable relief. The Company filed a motion
for summary judgment that was denied. The Company then filed an answer and
counterclaim. The plaintiffs have answered the counterclaim and have moved to
strike some of the Company's affirmative defenses and the Company has moved to
strike portions of the plaintiff's answer. To date, limited discovery has
occurred. In March 2003, one of the three entities agreed to dismiss all of
their claims with prejudice. Management believed that LaserSight Technologies
had satisfied its obligations under the distribution agreements, and that the
allegations against LaserSight Technologies, Mr. Farris and Mr. Spivey were
without merit. As a result of the September 2003 Chapter 11 petition, and
subsequent re-structuring, claims such as these have been resolved with the
issuance of a portion of the 9,997,195 new common shares. See note 18.
JARSTAD
- -------
In January 2002, a customer filed a lawsuit in the Superior Court of the State
of Washington in and for the County of King. The lawsuit was subsequently
remanded to federal court. The lawsuit names the Company and an unaffiliated
finance company as defendants. The lawsuit alleges various claims related to the
Company's sale of a laser system to the plaintiff including breach of contract,
breach of express warranty, breach of implied warranty, fraudulent inducement,
negligent misrepresentation, unjust enrichment, violation of the consumer
protection act and product liability. Plaintiffs requested damages to be
determined at trial, reimbursement for leasing fees, prejudgment and post
judgment interest, attorneys' fees and costs and other equitable relief. In this
matter, a settlement agreement has been signed by the parties. The terms of the
settlement do not require the Company to make any cash payments. The Company
agreed to service and calibrate the plaintiff's laser as well as provide certain
software and equipment upgrades at either no cost to plaintiff or at prices that
were negotiated in connection with the settlement, if and when such upgrades are
available in the U.S.
F-20
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ITALIAN DISTRIBUTOR
- -------------------
In February 2003, an Italian court issued an order restraining the Company from
marketing its AstraPro software at a trade show in Italy. This restraining order
was issued in favor of LIGI Tecnologie Medicali S.p.a. (LIGI), a distributor of
the Company's products, and alleges that its AstraPro software product infringes
certain European patents owned by LIGI. The Company retained Italian legal
counsel to defend the Company in this litigation, and the Company was informed
that the Italian court has revoked the restraining order and had ruled that LIGI
must pay the Company's attorney's fees in connection with its defense of the
restraining order. In addition, the Company's Italian legal counsel informed the
Company that LIGI had filed a motion for a permanent injunction. The Company
believes that its AstraPro software does not infringe the European Patents owned
by LIGI, but due to cash flow constraints the Company has not been able to
continue to defend its rights to distribute the AstraPro software in the
European markets. Management believes that the outcome of this litigation will
not have a material adverse impact on the Company's financial condition or
results of operations. Since the Chapter 11 petition does not apply to foreign
courts, this action is still pending.
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, 2003 are approximately
as follows:
2004 367,000
2005 192,000
2006 77,000
Rent expense during 2003, 2002 and 2001 was approx-imately $397,000, $634,000
and $1,168,000, respectively.
OTHER COMMITMENTS
The Company owes royalties to third parties on certain products sold, primarily
international laser sales, generally at a rate of 6% of the sales price after
certain adjustments. Such royalties are expensed at the time of sale and paid
quarterly based on cash collections in accordance with the license agreement.
NOTE 18 - VOLUNTARY REORGANIZATION UNDER CHAPTER 11
BANKRUPTCY PROCEEDINGS
On September 5, 2003, the Company and two of its subsidiaries filed a voluntary
petition for relief in the Bankruptcy Court under Chapter 11. The Debtors
continued to operate their businesses as debtors-in-possession through the close
of business June 9, 2004. The Company filed a plan of reorganization (the Plan)
with the Bankruptcy Court on April 28, 2004 the Bankruptcy Court confirmed the
Plan. The Company emerged from Chapter 11 on June 10, 2004.
Under Chapter 11, certain claims against the Company in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are stayed
while the Company continues business operations as debtor-in-possession. These
claims are reflected in the December 31, 2003 balance sheet as "liabilities
subject to compromise." The majority of secured claims are held by Heller
Healthcare Finance, Inc and GE Healthcare Financial Services, Inc., as
successor-in-interest to Heller (collectively "GE").
RESTRUCTURING CHARGE
Additionally, the company recognized reorganization charges of approximately
$7.6 million during 2003. In applying Statement of Position 90-7, Financial
Reporting by Entities in Reorganization under the Bankruptcy Code, the Company
recognized the following expenses in 2003:
Write off patents $ 4,098,607
Inventory obsolescence 3,588,039
Other (54,373)
-----------
7,632,273
Bad debt reserve 2,578,304
Accrued commissions/licenses (2,210,174)
-----------
Net bad debt expense 368,130
The inventory obsolescence was classified as part of cost of revenues.
F-21
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Additional expenses recognized per approved bankruptcy claims:
Warranty reserve 4,640,319
Salaries/severance 791,307
General & administrative 68,253
------------
5,499,879
The China Group owned 40% of the Company before bankruptcy and they own 72% of
the Company after bankruptcy. The fresh start provisions of SOP 90-7 are
followed if the pre-petition shareholders do not control more than 50% of the
post-petition entity. The Company determined that since this was not the case,
that fresh start reporting could not be adopted.
All professional expenses related to the bankruptcy have been expensed as
occurred. $110,000 of professional fees for bankruptcy legal services were paid
for in 2003. As a result of the September 2003 Chapter 11 petition, and
subsequent re-structuring, all legal claims, except for the LIGI claim, have
been resolved with the issuance of a portion of the 9,997,195 new common shares.
Since the Chapter 11 petition does not apply to foreign courts, the LIGI action
is still pending.
NOTE 19 - SUBSEQUENT EVENT
BANKRUPTCY/CONFIRMATION
On April 28, 2004, the Plan was confirmed by the Bankruptcy Court. The effective
date of the Plan was June 30, 2004.
On June 30, 2004, the Company cancelled all outstanding stock, options and
warrants and issued 9,997,195 new shares of common stock. The shares were
distributed as follows:
Creditors of LSI 1,116,000
Creditors of LST 1,134,000 (1)
Old Preferred Stockholders 360,000
Old common stockholders 539,997 (2)
Cancel treasury stock (2,802)
Conversion of $1 million DIP
Financing 6,850,000
---------
9,997,195
(1) These shares will be issued upon the resolution of a creditor objection to
claim.
(2) The old common stock was converted at a 51.828 to 1 ratio. Due to
rounding on conversion only 539,997 shares were issued
On August 30, 2004, the Company signed a three year amended note with GE for
$2,149,249. The note was effective June 30, 2004 and bears 9% interest. In the
amendment, GE provided a waiver of the Company's failure to comply with all
covenants. In exchange for the amendment and waiver, the Company will pay a
$50,000 commitment fee, a $100,000 termination fee, attorney fees of $126,078
and an audit fee of $8,151. All fees were added to the principal balance.
Revised covenants became effective that adjusted the minimum level of net worth
to $750,000, minimum tangible net worth to $1.0 million and minimum quarterly
net revenue to $1.0 million. GE was issued warrants to purchase 100,000 common
shares, at $0.25 per share, or $0.40 per share if the China Group converts it's
remaining $1 million of DIP financing.
The China Group provided $2 million of DIP financing, of which $750,000 was
funded at December 31, 2003. On June 30, 2004, $1 million of the total was
converted to 6,850,000 common shares. The remaining $1 million note bears
interest of 9%, with interest only payments due monthly. It is a three year
balloon note. The China Group has the option to convert the note to an
additional 2,500,000 common shares. This note is subject to any GE liens on
Company assets.
In June of 2004, as of the effective date of the re-organization plan, the
following liabilities were relieved:
Accounts Payable 2,905,814
Accrued TLC license fee 825,500
Accrued salaried/severance 235,367
Accrued warranty 6,125,370
Accrued Ruiz license fees 3,471,613
Deposits/service contracts 720,399
Other accrued expenses 1,331,711
----------
15,616,134
In June 2004, $8.4 million of accounts and notes receivable were written off
against the allowance for doubtful accounts.
F-22
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
LIABILITIES SUBJECT TO COMPROMISE
- ---------------------------------
The company operated as a debtor-in-possession from September 5, 2003 through
June 10, 2004 when a final bankruptcy release was obtained. As a result of the
bankruptcy re-structuring, the company expects to record credits for debt
forgiveness of approximately $15.6 during the three months ended June 30, 2004.
F-23