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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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-19671
LASERSIGHT INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 65-0273162
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(State of incorporation) (I.R.S. Employer
Identification No.)
3300 University Blvd, Suite 140, Winter Park, Florida 32792
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 678-9900
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Preferred Share Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sale price on March 27, 2000 was
approximately $124,841,854. Shares of Common Stock held by each officer and
director and by each person who has voting power of 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of March 27, 2000:
19,803,663.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be included in Part III is incorporated
herein by reference to the Company's definitive proxy materials to be filed with
the Securities and Exchange Commission on or before April 29, 2000.
LASERSIGHT INCORPORATED
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relations and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
2
The information in this Annual Report on Form 10-K contains forward
looking-statements, as indicated by words such as "anticipates," "expects,"
"believes," "estimates," "intends," "projects," and "likely," by statements of
the Company's plans, intentions and objectives, or by any statements as to
future economic performance. Forward-looking statements involve risks and
uncertainties that could cause the Company's actual results to differ materially
from those described in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in Item 7 under the caption "Risk Factors and Uncertainties" as well
as those discussed elsewhere in this Report. All references to "LaserSight"
"we," "our" and "us" in this Report refer to LaserSight Incorporated and its
subsidiaries unless the context otherwise requires.
PART I
Item 1. Business
OVERVIEW
We develop, manufacture and market quality product technologies for
laser refractive surgery and other areas of vision correction. Our products
include narrow beam scanning excimer laser systems used to perform procedures
that correct common refractive vision disorders such as nearsightedness
(myopia), farsightedness (hyperopia) and astigmatism, as well as keratome
systems, keratome blades and other products used in refractive vision correction
procedures. We believe that our narrow beam scanning lasers have significant
technological advantages and produce smoother and more precise ablation areas
than the older, broad-beam laser systems offered by many of our competitors. We
also believe that the breadth of our product offering provides us with a
competitive advantage relative to many other excimer laser system manufacturers
because it provides us with a platform to become a single-source supplier of
refractive vision correction products to refractive surgeons. Moreover, our
broad product offering affords us the opportunity to participate in the
anticipated growth in refractive laser vision correction procedure volume by
collecting per procedure fees and by selling our single-use keratome products
and keratome blades.
We have over five years of experience in the manufacture, sale and
service of narrow beam scanning laser systems for refractive vision correction
procedures. Since 1994, we have sold our scanning laser systems commercially in
over 30 countries worldwide. As a result, we believe that our installed base of
over 250 scanning laser systems, including approximately 80 of our most advanced
laser system, the LaserScan LSX, is among the largest installed bases of
scanning laser systems in the industry. In November 1999, the FDA approved our
LaserScan LSX scanning laser system for commercial sale in the U.S. for the
treatment of nearsightedness of up to 6.0 diopters using a pulse repetition rate
of 100 Hz. Our approval will also allow refractive surgeons in the U.S. to use
our laser system to treat patients for nearsightedness up to 10.0 diopters at
the discretion of the physician. We currently have pending with the FDA a
supplemental PMA application seeking approval of the use of our laser system for
the treatment of nearsightedness with astigmatism, and expect to file PMA
supplements in the near future which would permit our laser systems sold to
customers in the U.S. to operate at a 200 Hz pulse rate, the pulse rate
currently used in international versions of our LaserScan LSX system and the
fastest pulse rate currently available in our industry, and to operate with our
advanced eye tracking system. We are currently in litigation with one of our
major competitors regarding intellectual property claims. We have a broad
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intellectual property portfolio, and believe that we own or license all
intellectual property necessary for commercialization of our products. See Item
3 ("Legal Proceedings") below.
Our MicroShape(TM) family of keratome products includes our
UniShaper(TM) single-use keratome, UltraShaper(TM) durable keratome, a control
console which may be used interchangeably with our single-use and durable
keratomes, and our UltraEdge(TM) keratome blades. Our MicroShape family of
keratome products work with the LaserScan LSX and also with other laser systems
used to perform LASIK. We began commercial shipment of keratome blades in July
1999 and of our single-use keratomes and control consoles in December 1999. We
anticipate that sales of our UniShaper single-use keratome and our UltraEdge
keratome blades will provide us with the opportunity to participate in the
expected growth in refractive laser vision correction procedure volume by
generating recurring revenue streams, regardless of which laser system a
refractive surgeon uses. We intend to aggressively develop and market other
refractive vision correction products in the future, including our UltraShaper
durable keratome product which recently received FDA 510(k) clearance, and which
we expect to commercially launch in the second quarter of 2000.
OPERATING SEGMENTS. LaserSight Incorporated and its subsidiaries
(collectively, "LaserSight"(TM)) operate in three major operating segments:
refractive products, patent services and health care services. Our principal
wholly-owned subsidiaries include: LaserSight Technologies, Inc.
("LaserSightTechnologies"), LaserSight Patents, Inc. ("LaserSight Patents"),
and MRF, Inc.("The Farris Group" or "TFG").
Our refractive products segment, which includes LaserSight
Technologies and LaserSight Centers Incorporated, develops, manufactures and
markets ophthalmic lasers with a galvanometric scanning system for use in
performing refractive surgery. The LaserScan LSX uses a one millimeter scanning
laser beam to ablate microscopic layers of corneal tissue to reshape the cornea
and to correct the eye's point of focus in persons with myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. Since August 29,
1997, our patent services segment has consisted of LaserSight Patents, which
licenses various patents related to the use of excimer lasers to ablate
biological tissue. Since December 31, 1997, the health care services segment has
consisted of TFG. TFG provides health care and vision care consulting services
to hospitals, managed care companies and physicians. Until that date, this
segment also included MEC Health Care, Inc. and LSI Acquisition, Inc. Under our
ownership, MEC was a vision managed care company that managed vision care
programs for health maintenance organizations (HMOs) and other insured
enrollees. LSIA was a physician practice management company that managed the
ophthalmic practice known as the "Northern New Jersey Eye Institute" under a
management services agreement. For information regarding our export sales and
operating revenues, operating profit (loss) and identifiable assets by industry
segment, see Note 14 of the Notes to Consolidated Financial Statements.
ORGANIZATION AND HISTORY. LaserSight was incorporated in Delaware in
1987, but was inactive until 1991. In April 1993, we acquired LaserSight Centers
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. In July 1996, our 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 which was effective as of December 1,
1997. Our principal offices and mailing address are 3300 University Boulevard,
Suite 140, Winter Park, Florida 32792, and our telephone number is (407)
678-9900.
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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 which
eliminate or significantly reduce a person's reliance on corrective eyewear. The
first laser vision correction procedure on human eyes was conducted in 1985 and
the first human eye was treated with the excimer laser in the U.S. in 1988.
There are currently two principal methods for performing laser vision
correction with excimer laser systems: photorefractive keratectomy, or PRK, and
laser in-situ keratomileusis, or LASIK. According to industry sources,
approximately 80% of the refractive vision correction procedures performed in
the U.S. in 1998 were LASIK procedures. In both PRK and LASIK procedures, a
refractive surgeon determines the exact refractive correction required to be
made to the cornea, typically using the same examination used to prescribe
eyeglasses and contact lenses. Required corrections are then programmed into the
excimer laser system's computer. During the procedure, the excimer laser system
emits laser pulses, each of which lasts several billionths of a second, to
remove submicron layers of corneal tissue. While the average laser treatment
lasts approximately 15 to 60 seconds, cumulative exposure to the laser light
during each procedure is less than one second. The entire procedure, including
patient preparation and post-operative dressing, generally lasts no longer than
thirty minutes.
PHOTOREFRACTIVE KERATECTOMY (PRK)
In PRK, the refractive surgeon prepares the eye by gently removing the
surface layer of the cornea called the epithelium. The surgeon then applies the
excimer laser beam, reshaping the curvature of the cornea. A bandage contact
lens is then placed on the eye to protect it. Following PRK, a patient typically
experiences blurred vision and discomfort until the epithelium heals. It
generally takes one month, but may take up to six months, for the full benefit
of PRK to be realized. PRK has been used commercially since 1988.
LASER IN-SITU KERATOMILEUSIS (LASIK)
LASIK was commercially adopted internationally in 1994 and in the U.S.
in 1996. Immediately prior to a LASIK procedure, the refractive surgeon uses a
surgical instrument called a keratome to create a thin, hinged flap of corneal
tissue. Patients do not feel or see the cutting of the corneal flap, which takes
only a few seconds. The flap is flipped back, the laser beam is directed to the
exposed corneal surface, the flap is placed back and the flap and interface are
rinsed. Once the procedure is completed, surgeons generally wait two to three
minutes to ensure the corneal flap has fully re-adhered. At this point, patients
can blink normally and the corneal flap remains secured in position by the
natural suction within the cornea. Since the surface layer of the cornea remains
intact during LASIK, no bandage contact lens is required and the patient
experiences virtually no discomfort. The LASIK procedure often results in a
higher degree of patient satisfaction due to an immediate improvement in visual
acuity and generally involves less post-operative discomfort than PRK.
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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., and a growing percentage of them regularly perform refractive laser
vision correction procedures.
Laser vision correction is a fast growing segment of the vision
correction market. Total laser refractive procedure volume in the U.S. has more
than doubled each year since 1996 to an estimated 980,000 procedures in 1999. A
procedure refers to laser treatment on a single eye, and most patients have
procedures performed on both eyes during a single visit to a refractive surgeon.
Laser vision correction's growth in the U.S. is also reflected in the expansion
of excimer laser installations and in the rise in average annual procedure
volume per laser. This growth also reflects patient and surgeon acceptance of
using excimer laser systems approved by the FDA for PRK to perform LASIK as part
of the practice of medicine.
Many, but not all, manufacturers of excimer laser systems seek to share
in the anticipated growth in procedure volume by receiving a fee for each
procedure performed by a refractive surgeon using laser systems manufactured by
them. The per procedure fees charged by these manufacturers vary and have been
significantly reduced in recent months due to competitive pressures and changing
market conditions. See "Business-Competition."
DEVELOPMENT OF EXCIMER LASER SYSTEM AND KERATOME TECHNOLOGY
EXCIMER LASER SYSTEMS
The excimer laser systems utilized for laser vision correction have
evolved over time with improvements in laser and beam delivery technology. Until
recently, broad beam laser systems, 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 currently represent over 90% of the
installed laser systems in the U.S. Broad beam laser systems are characterized
by the use of a relatively large, fixed laser beam of six to eight millimeters
in diameter to deliver relatively high amounts of laser energy (100 - 200 mj) at
low laser pulse repetition rates (generally 10 Hz) to the corneal surface.
Because of the relatively large diameter of the laser beam, these systems
require a number of mechanical elements to condition, size, shape and deliver
the beam profiles necessary to produce the required ablation. These mechanical
means of beam shaping have limited the flexibility of broad beam systems and
made it necessary to modify the mechanical means in order to adapt to a broader
range of treatment modalities and other expanded applications.
Broad beam laser systems operate by delivering a consistent laser beam
across the entire vision field of the cornea. In order to reduce the likelihood
of possible adverse effects resulting from constant exposure, the beam width is
reduced incrementally, or in steps, during the course of the procedure. The use
of broad beam laser systems can result in a corneal ablation profile
characterized by ridges on the corneal surface as a result of the stepping
action of the mechanical elements, and may also result in central islands, an
irregularity formed on the corneal bed resulting from the fixed nature of the
laser beam. Additionally, the relatively high laser energy of broad beam systems
can lead to damage from acoustic shock and the possibility of retinal
6
detachment. Glare, halo when looking at lights and other bright objects, and
reduction in night vision have also been associated with the use of broad beam
systems.
Improvements in excimer laser technology during the early 1990's have
made it possible to develop refractive excimer laser systems which have
significantly narrower laser beams (one millimeter in diameter) and that use
reduced amounts of laser energy (10 mj) at higher pulse repetition rates (up to
200 Hz). Developers of this new generation of narrow beam scanning excimer laser
systems incorporated scanning mirrors and computer control to shape the ablation
profile, making it unnecessary to utilize mechanical elements to size and shape
the laser beam to attain the desired results. Techniques incorporated into
scanning laser technology such as purposeful overlapping of laser pulses and
random scanning patterns can lead to overall improved clinical results as
evidenced by the elimination of ridges and central islands, and the reduction in
the incidence of glare, halos, and loss or reduction of night vision and by
smoother ablation profiles. 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 topography through software and minor hardware upgrades.
KERATOMES
Keratomes used to cut the thin corneal flap during the LASIK procedure
are similar in design to those used to perform earlier non-laser surgical
refractive techniques such as automated lamellar keratoplasty (ALK). The
Automated Corneal Shaper (ACS), developed by Luis A. Ruiz, M.D. and Sergio
Lenchig, is an example of an ALK keratome that is utilized extensively in
association with LASIK procedures without modification from its original design.
Prior to the commercial introduction of our UniShaper single-use
keratome in December 1999, most keratomes were durable keratomes. Durable
keratomes require some degree of disassembly, sterilization and blade
replacement between uses. This makes the durable keratome an instrument with
relatively high maintenance requiring a degree of skill to ensure proper
functioning. We believe that a large percentage of flap-related complications
associated with LASIK procedures are related to durable keratome performance or
maintenance.
The ACS durable keratome, manufactured and marketed by Bausch & Lomb
pursuant to a license agreement, was the leading keratome during the early and
mid-1990's at a time when many refractive surgeons learned to perform LASIK.
Since we licensed the rights to commercially market keratomes based on the same
technology in 1997, Bausch & Lomb has not aggressively marketed or serviced the
ACS, and has introduced an alternative durable keratome product which requires a
modified surgical technique. We believe that a significant number of refractive
surgeons prefer the surgical technique associated with the ACS.
The introduction of our MicroShape family of keratome products provides
refractive surgeons with the opportunity to utilize keratomes based on the
original design of the ACS, but which incorporate a number of significant
improvements to make the instruments safer and more adaptable for use prior to
LASIK procedures. Our single-use keratome provides the refractive surgeon with a
sterilized, fully assembled and tested keratome solution which eliminates the
cleaning and maintenance associated with durable keratomes. We believe our
UltraEdge blades offer refractive surgeons the ability to use the only blades
currently offered in the market made from surgical steel.
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LASERSIGHT RECENT DEVELOPMENTS
Our LaserScan LSX excimer laser system is based on narrow beam scanning
technology rather than broad beam technology, which until recently was the only
commercially available excimer laser vision correction technology in the U.S. We
believe we are well-positioned to become a leading provider of excimer laser
systems, disposable and durable keratomes and other related products as a result
of our technology and the following recent developments:
o COMMERCIAL LAUNCH OF OUR LASERSCAN LSX EXCIMER LASER SYSTEM IN THE
U.S. In November 1999, the FDA approved our LaserScan LSX narrow
beam scanning excimer laser system for use in the U.S. for the
treatment of nearsightedness using a pulse repetition rate of 100
Hz. We intend to aggressively enter the U.S. market, and begin
commercial shipment of our laser systems to customers in the U.S.
within the next week. We currently have a supplemental PMA
application pending with the FDA seeking approval of the use of our
laser system for the treatment of nearsightedness with astigmatism.
We expect to file a supplemental PMA in the near future which would
permit our laser systems sold to U.S. customers to operate at a 200
Hz pulse repetition rate, the fastest pulse rate currently available
in our industry and the pulse rate used in international versions of
our LaserScan LSX system. We are currently in litigation with Visx,
one of our major competitors, regarding intellectual property
claims. We have a broad intellectual property portfolio, and believe
that we own or license all intellectual property necessary for
commercialization of our products. See Item 3 ("Legal Proceedings-
Visx, Incorporated") below.
o COMMERCIAL LAUNCH OF OUR MICROSHAPE FAMILY OF KERATOME PRODUCTS.
We began commercial shipments of our UltraEdge keratome blades in
July 1999 and of our UniShaper single-use keratome and our control
console in December 1999. We believe that our UltraEdge keratome
blades, which are intended to be replaced after each procedure
when used in durable keratomes, and our UniShaper single-use
keratome provide us with an attractive opportunity to generate
recurring revenues on a per procedure basis.
o ALLIANCE WITH BECTON DICKINSON. In October 1999, we entered into a
marketing and distribution alliance with Becton Dickinson, the
manufacturer of our UltraEdge keratome blades and a leading
worldwide manufacturer of medical supplies, devices and diagnostic
systems. This alliance will enable us to leverage the extensive
U.S. and international marketing and distribution capabilities of
Becton Dickinson in connection with the marketing and distribution
of our MicroShape family of keratome products in the U.S., the
U.K., Ireland and Japan.
o INDIVIDUALIZED ABLATIONS. In March 2000, we purchased from Premier
Laser Systems, Inc. all intellectual property related to a
development project designed to provide front-to-back analysis and
total refractive measurement of the eye. The technology we acquired
includes the acquisition of two U.S. patents, six foreign patents,
and a pending patent application along with an exclusive license to
nine patents that are intended to be used to complete development of
an integrated refractive diagnostic work station. This diagnostic
tool is intended to be utilized with our Advanced Shape Technology
Refractive Algorithms (ASTRA(TM)) system, for personalized treatment
plans. Upon completion of development, the new work station will be
designed to integrate wavefront analysis and corneal topography into
a single instrument with additional diagnostic capabilities. We
believe ASTRA represents a new standard of eyecare that goes beyond
conventional laser vision correction by individualizing the laser
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treatment utilizing a patient-specific set of diagnostic criteria
intended to address and control both refractive error and optical
aberrations. We intend to launch international studies for ASTRA
during the second quarter of 2000.
PRODUCTS
EXCIMER LASERS
Our current and most advanced scanning excimer laser system, the
LaserScan LSX, has evolved from the patented optical scanning system
incorporated in the Compak-200 Mini-Excimer laser system, which we 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 narrow beam scanning excimer
laser systems in over 30 countries and believe our installed base of over 250
scanning laser systems, including approximately 80 of our most advanced laser
system, the LaserScan LSX, is among the largest installed bases of scanning
laser systems in the industry. Throughout the evolution of our scanning excimer
laser systems, the core concept of utilizing our proprietary scanning software
to ablate corneal tissue with a low energy, narrow laser beam at a rapid pulse
repetition rate has remained the underlying basis for our technology.
In November 1999, the LaserScan LSX was approved by the FDA for
commercialization in the U.S., and we expect to begin commercial shipments to
U.S. customers within the next week. We believe that the narrow-beam scanning
technology and other advanced features incorporated into our LaserScan LSX
excimer laser system offer refractive surgeons and patients significant
advantages over broad beam laser systems. The key benefits of the LaserSight LSX
include the following:
o NARROW BEAM SCANNING LASER. We believe that techniques like the
purposeful overlapping of laser pulses and random scanning patterns
used by our narrow beam scanning technology can lead to overall
improvements in clinical results with smoother ablations, the
elimination of surgical anomalies associated with broad beam laser
systems such as rings, ridges and central islands, and reductions
in the incidence of glare, halos and loss of night vision. The
LaserScan LSX uses a patented scanning system to deliver a high
resolution, one millimeter low-energy "flying spot," the highest
resolution currently available, in a proprietary, randomized
pattern. The LaserScan LSX is a true scanning software-controlled
laser which uses a pair of galvanometer controlled mirrors to
reflect and scan the laser beam directly onto the corneal surface,
without the mechanical elements used by some broad beam excimer
laser systems.
o HIGHER PULSE REPETITION RATE. Operating at higher pulse repetition
rates can result in a number of benefits relative to laser systems
which operate at lower pulse repetition rates, including reduced
average procedure times and elimination or reduction of
dehydration problems associated with longer exposure of the
corneal tissue to ambient conditions. The LaserScan LSX operates
at pulse repetition rates of 100 Hz (200 Hz in international
models), and we intend in the near future to apply for FDA
approval to operate the laser system at a 200 Hz pulse repetition
rate in the U.S. Many competitive laser systems currently operate
at lower pulse repetitions, often 50 Hz or less.
o EYE TRACKING. Proper alignment of the refractive correction is
important in all laser vision correction procedures, and is
essential in order to perform custom ablations. Our AccuTrack eye
tracking system maintains alignment of the refractive correction
relative to the visual axis of the eye, and can be turned on or off
9
based on the refractive surgeon's clinical preference. The
LaserSight AccuTrack eye tracker is an "Active + Passive" system
that is capable of following even small, involuntary eye movements.
The tracking system eliminates most errors normally introduced by
eye movements during untracked laser refractive surgery, and does
not require dilation of the pupil or any apparatus to be in contact
with the eye. Our AccuTrack eye tracking system is currently
available only on international versions of the LaserScan LSX, and
we are pursuing FDA approval for use of this system in the U.S.
o SOFTWARE DRIVEN FLEXIBLE PLATFORM. Individualized ablations have
resulted in increased patient satisfaction in international studies
and we believe the ability to perform individualized ablations will
generally result in improved, more predictable results and less
post-operative regression relative to other refractive surgery
techniques. We also believe that individualized ablation will also
be the technique most preferred by refractive surgeons for
correction of irregular astigmatism. In our LaserScan LSX scanning
laser, ablation profiles and spot location are determined by system
software, not mechanical elements. It is the ability to move the
"flying spot" beam to many areas across the cornea using software
which provides the ability to perform individualized ablation.
Software upgrades can be used to readily update U.S. models upon
receipt of FDA approvals to include features currently available
only on international models, including the ability to operate at a
200 Hz pulse repetition rate and the ability to treat farsightedness
or astigmatism, with or without our AccuTrack eye tracking system.
o ADVANCED DESIGN AND ERGONOMICS. The LaserScan LSX's relatively
light weight and compact design allows it to fit into small
spaces, and its wheels enable it to be easily moved around in a
multi-surgeon practice. This allows for higher utilization of the
laser system. The efficient design also enables users to implement
a mobile strategy, since the laser is readily transportable to
other locations.
o IMPROVED RELIABILITY AND LOWER MAINTENANCE REQUIREMENTS. Our
LaserScan LSX laser system uses a lower energy laser, fewer
optical elements, and a smaller laser head compared to broad beam
laser systems. This design requires less frequent replacement of
expensive optical elements and a lower volume of laser gas.
Savings achieved from less frequent replacement of optical
elements and reduced laser gas usage translate directly into lower
maintenance requirements and costs.
CLINICAL EXPERIENCE AND OUTCOME QUALITY
We believe that there are several measures to evaluate with regard to
the safety and clinical effectiveness of a laser vision correction system,
including the incidence of adverse side effects such as double vision, night
driving problems or haze, the post-operative best visual acuity that can be
obtained using corrective eyewear such as glasses or contact lenses, or the
BSCVA, and the post-operative uncorrected visual acuity, or UCVA (such as 20/20
or 20/40).
We believe that the degree to which negative, and sometimes permanent,
side effects occur as a result of refractive procedures performed using a laser
system is a key measure of a laser system's performance. In some cases, the
BSCVA deteriorates following a laser vision correction procedure. In addition,
the incidence of side effects such as double vision or haze can substantially
reduce patient satisfaction even if a high level of post-operative visual acuity
is achieved. The data from FDA clinical trials shows that with respect to
symptoms such as corneal haze and night vision problems the LaserSight LSX
compares favorably to the data for the Visx and/or Summit broad beam laser
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systems. We believe these qualitative improvements are a result of the
technological features of the LaserScan LSX, including larger treatment zones
and a small scanning spot resulting in smoother ablation surfaces.
CLINICAL RESULTS
FDA clinical trials for the LaserScan LSX laser were conducted in the
U.S. on patients with nearsightedness with required levels of correction of 6
diopters and less. We believe that the average pre-operative level of required
correction is a significant factor which must be taken into account in
evaluating the clinical results of an excimer laser system. The average
pre-operative level of required correction in our FDA clinical trials was 4.8
diopters. Six months following the procedure, approximately 88% of patients
could see 20/40 or better, which is the refractive condition required to drive
in most states without corrective lenses.
.
We expect the post-procedure UCVA of patients treated with our
LaserScan LSX laser system following FDA approval to exceed the results obtained
in our FDA clinical trials as refractive surgeons gain experience using our
laser system and are not subject to the strict clinical controls of FDA trials
which can limit the refractive surgeon's ability to tailor the treatment to the
patient's specific needs and the procedure environment.
We intend to continue to develop and improve our technology and to
aggressively continue the process of gaining regulatory approvals for our laser
products in order to expand our access to the U.S. market for refractive
procedures. We currently have a supplemental PMA application pending with the
FDA to expand the use of our laser systems for the treatment of nearsightedness
with astigmatism using PRK, and we anticipate filing PMA supplements in the near
future to operate the LaserScan LSX at a 200 Hz pulse repetition rate using PRK
and to utilize our advanced eye tracking system. We also are planning to seek
FDA approval of the LaserScan LSX to perform LASIK procedures to treat
nearsightedness, with and without astigmatism, and farsightedness, with and
without astigmatism, in each case with and without use of our AccuTrack eye
tracking system.
OVERVIEW OF COMPETITIVE LASER SYSTEMS
The table below summarizes the product features and approved treatment
ranges with PRK as of March 20, 2000 for all excimer laser systems currently
approved by the FDA and which are currently or are expected to be commercialized
in the U.S. Although most of the excimer lasers currently on the market have not
been approved for LASIK, many refractive surgeons use these to perform LASIK
procedures as part of the practice of medicine.
11
LaserSight Bausch & Lomb Nidek Summit Visx
---------- ------------- ----- ------ ----
Model Name LaserScan LSX 217 EC-5000 Ladarvision Apex Plus Star S2
Weight(lbs.) 570 1,496 1,430 799 1,399 1,597
Beam Size Narrow Narrow Broad Narrow Broad Broad
(1 mm) (2 mm) (7x2 mm) (1 mm) (6.5 mm) (6.5 mm)
Pulse Rate 100-200 Hz(1) 50 Hz 50 Hz 60 Hz 10 Hz 10 Hz
Eye Tracking Active or Active or Active or Active None None
passive (2) passive passive
FDA Approval Status (diopters):
Nearsightedness To -10 (3) To -7 To -13 To -10 To -14 To -12
Nearsightedness Not Approved To -3 To -4 To -4 (4) To -5 To -4
with (PMA supplement
astigmatism pending)
Farsightedness Not Approved Not Approved Not Approved Not Approved To +4 To +6
(5)
Farsightedness Not Approved Not Approved Not Approved Not Approved Not Approved Not Approved
with (5)
astigmatism
LASIK Not Approved Not Approved Not Approved Not Approved Approved Not Approved
(5)
(1) 200 Hz pulse rate currently available only on systems sold in
international markets. Systems sold to customers in the U.S. currently
use a pulse rate of 100 Hz. We intend to file a PMA supplement in the
near future to enable operation of the system at 200 Hz in the U.S.
(2) Active eye tracking currently available only on systems sold in
international markets. PMA supplement anticipated for use of eye
tracking system in models sold in the U.S.
(3) The LaserScan LSX has been approved by the FDA for treatment of
nearsightedness of up to -6 diopters, and may be used to treat
nearsightedness of up to -10 diopters at the discretion of the
refractive surgeon.
(4) With combined spherical equivalent of up to -10 diopters.
(5) The FDA Ophthalmic Advisory Panel recommended approval on March 20,
2000 for farsightedness of up to +6 diopters and an astigmatism
range of up to -6 diopters.
12
KERATOME PRODUCTS
Our MicroShape family of keratome products includes our UniShaper
single-use keratome, UltraShaper durable keratome, a control console which may
be used interchangeably with our single-use and durable keratomes, and our
UltraEdge keratome blades. We began commercial shipment of keratome blades in
July 1999 and of our single-use keratomes and control consoles in December 1999.
The following is an overview of our MicroShape family of keratome products:
FDA Status Product Features/Benefits
---------- -------------------------
UniShaper single-use 510(k) o Preassembled (including
Keratome clearance blade), sterile and ready
received to use
o Built-in stopper provides
consistent stopping point
for flaps
o Covered gears reduces
possible eyelash or eyelid
entrapment or injury
o Automated dual-drive
mechanism with 7,500
RPM blade speed can create
flap size of 8.5 millimeters
or larger
UltraShaper durable 510(k) o Easy-to-use blade insertion
Keratome clearance eliminates manual handling of
received blades
o Built-in stopper provides
consistent stopping point
for flaps
o Integrated components provide
reduced assembly time
o Design reduces possible eyelash
or eyelid entrapment or injury
o Automated drive mechanism
with 7,500 RPM blade speed can
create flap size of 7.2
Control console 510(k) o Interchangeable for use with the
clearance UniShaper single-use keratome
received and the UltraShaper durable
keratome
o Continuous suction monitoring
features including visual and
auditory cautionary alarms
and indicated total time elapsed
at high suction
o Low suction setting for surgeons
using suction ring for globe
fixation
UltraEdge keratome No 510(k) o Manufactured to precise
Blades notification specifications for dimensional
required accuracy and consistency
o Proprietary finishing processes
applied to every blade
o Manufactured with surgical grade
steel
o Extensive testing and
verification
13
We acquired the right to manufacture and sell the UniShaper single-use
disposable keratome, formerly known as the Automated Disposable Keratome
(A*D*K(TM)), in September 1997 from inventors Ruiz and Lenchig, who had invented
the ACS distributed by another company. The UniShaper single-use keratome and
the UltraShaper durable keratome each incorporate the market proven features
found in the ACS with new enhancements and features, including pre-assembly,
transparent components for improved visibility while cutting the flap, and a
dual drive mechanism with covered gears. See "Risk Factors - Company and
Business Risks -- Required Minimum Payments Under Our UniShaper License
Agreement may Exceed Our Gross Profits From Sales of Our UniShaper Product."
Product Upgrades and Other Products. We also offer a number of
ancillary products which either complement our core laser system and keratome
product portfolio or leverage our laser technology and generally are offered as
a convenience to our customers. We offer various upgrades and modules to
purchasers of prior models of our excimer laser systems, including the AccuTrack
eye tracking system for international customers, a video display system for
observation or recording of refractive procedures, and the latest version of our
proprietary software, version 9.0, which provides international users with
features including expanded treatment options and patient databases. In
addition, we offer aesthetic and scientific lasers and related equipment for
medical, medical research, and scientific research applications. Our primary
focus in this area has been our erbium laser, the Crystalase, which is used to
perform dermatological procedures. Our revenue from sales of our ancillary and
other products generally is included in refractive product net revenue and
represents, in the aggregate, less than 5% of our total refractive product net
revenue.
GROWTH STRATEGY
Our goal is to become a leading worldwide provider of excimer laser
systems, single-use and durable keratomes and other products for the refractive
vision correction industry. We believe that our over five 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 and keratome products provide us with a strong platform for future
growth as we enter the U.S. market for excimer laser systems and the U.S. and
international markets for our MicroShape family of keratome products. We believe
that our ability to successfully expand and leverage our strategic alliance with
Becton Dickinson, a leading worldwide provider of medical supplies, devices and
diagnostic systems, will be instrumental in our ability to achieve this goal.
The following are the key elements of our growth strategy:
o PENETRATE U.S. EXCIMER LASER MARKET. We believe that our LaserScan
LSX scanning excimer laser system represents a significant
technological advancement over the broad beam laser systems
currently being marketed in the U.S., as narrow beam scanning
lasers can provide more precise corneal ablation, reduced visual
side effects, enhanced visual acuity and shorter procedure times.
o PENETRATE WORLDWIDE KERATOME AND KERATOME BLADE MARKETS. We believe
that a key competitive strength of our MicroShape family of keratome
products is that the compatibility of the keratome control console
offers refractive surgeons the option to utilize either a single-use
or durable keratome based on their clinical preference. Commercial
shipments of our UniShaper single-use keratome product began in
December 1999 and the commercial launch of our UltraShaper durable
keratome is expected to occur in the second quarter of 2000. In
addition to the keratome blades we make for use in our keratome
14
products, in July 1999 we also began distributing our UltraEdge
keratome blades for use in the keratomes of other manufacturers. We
also believe that our distribution alliance with Becton Dickinson
will assist us in penetrating the U.S. and international keratome
and keratome blade markets.
o PROVIDE COMPREHENSIVE PRODUCT SOLUTIONS FOR REFRACTIVE VISION
CORRECTION. We believe that most excimer laser system manufacturers
currently approved to sell their laser systems in the U.S. do not
offer the breadth of refractive vision correction equipment and
products that we do. As the market for refractive vision correction
continues to evolve, we believe refractive surgeons will
increasingly seek a comprehensive equipment and product solution
from a single supplier. In addition to our laser systems, keratomes
and keratome blades currently available, we plan to develop and
market additional ophthalmic products, including cannulas and custom
kits, to provide a full product offering to refractive surgeons.
o GENERATE RECURRING REVENUE STREAMS. We have positioned our business
to benefit from the anticipated future growth in refractive vision
correction procedure volume. In addition to receiving the purchase
price for each laser system sold in the U.S., we believe we will
generate recurring revenue streams by participating in per procedure
fees resulting from the use of our systems. We also believe that
our UniShaper single-use keratome and our UltraEdge keratome blades,
which are intended to be replaced after each procedure when used in
durable keratomes, provide additional sources of recurring revenue
for us. In addition, we also plan to continue to develop or acquire
additional single-use ophthalmic products in order to complement our
line of products for refractive vision correction.
o PROPRIETARY TECHNOLOGY LEADERSHIP. We believe that technological
advances in the refractive vision correction market will continue to
evolve through the advancement of existing technologies and the
introduction of new treatment modalities. Accordingly, we intend to
strategically develop and/or acquire complementary products and
other refractive vision correction modalities. For example, in
October 1999 we acquired the rights to a development stage
technology that uses infrared light to correct farsightedness and in
March 2000, we acquired the intellectual property relating to a
technology development project under design to provide an integrated
refractive diagnostic work station that includes front-to-back
analysis of aberrations within the total eye.
STRATEGIC RELATIONSHIP
MARKETING AND DISTRIBUTION ALLIANCE WITH BECTON DICKINSON. In October
1999, we entered into a marketing and distribution alliance with Becton
Dickinson, the manufacturer of our UltraEdge keratome blades and a leading
worldwide manufacturer of medical supplies, devices and diagnostic systems.
Becton Dickinson is, subject to limited exceptions, the exclusive distributor of
our MicroShape family of keratome products in the U.S., the U.K., Ireland and
Japan, and has a non-exclusive right to distribute kits including keratome
products in other countries. Becton Dickinson utilizes its approximately
28-person sales force to promote, market and sell our MicroShape family of
keratome products in these markets. We have retained the right to sell directly
to TLC Laser Eye Centers Inc. and to market and sell our keratome products in
markets other than the U.S., U.K., Ireland and Japan. This agreement has a term
of five years and specifies minimum product sales for two years of the agreement
beginning in July 2000. If Becton Dickinson does not sell the required number of
15
products or if the parties are unable to agree on purchase minimums for future
years of the agreement, this agreement may be terminated.
SALES AND MARKETING
We sell our excimer laser systems, keratomes and related products
through a direct sales force, independent sales representatives and
distributors, and through the sales and marketing capabilities of our strategic
allies. Since 1994, we have marketed our laser systems commercially in over 30
countries worldwide and currently have an installed base of over 250 scanning
lasers outside the U.S., including over 80 of our LaserScan LSX laser systems.
EXCIMER LASER SYSTEMS
Following receipt of FDA approval of the LaserScan LSX in November
1999, we began to commercially market our excimer laser systems in the U.S. We
employ two territorial managers and three independent distributors in the U.S.
in connection with our launch in the U.S. market. These territorial managers and
independent distributors are responsible for sales within their respective
territories.
Laser system sales in international markets are generally to hospitals,
corporate centers or established and licensed ophthalmologists. We market our
excimer laser systems in Canada, Europe, Russia, the Pacific Rim, Asia, South
and Central America, and the Middle East. We are also exploring potential
clinical trial advisors and distribution agents in Japan. As of December 31,
1999, we employed three territorial managers who are responsible for sales in
international markets, both directly and through our approximately 36
independent distributors and representatives within their respective
territories.
All of our distributors and representatives have been selected based on
their experience and knowledge of the ophthalmic equipment market. In addition,
the selection of international distributors and representatives is also based on
their ability to offer technical support. Distributor and representative
agreements provide for either exclusive territories, with continuing exclusivity
dependent upon achievement of mutually-agreed levels of annual sales, or
non-exclusive agreements without sales minimums. Currently, separate distributor
and representative agreements are in place for all major market areas. During
1999, approximately 83% of our product sales resulted from distributors and
representatives with the balance from sales made by employees of LaserSight.
Other than TLC, no single customer or distributor was responsible for generating
sales in excess of 10% of our consolidated revenues in 1999. TLC represented
approximately 14% of our consolidated revenues in 1999.
In conjunction with our sales activities, we participate in a number of
foreign and domestic ophthalmology meetings, exhibits and seminars.
Historically, two large U.S. meetings, the American Academy of Ophthalmology and
the American Society of Cataract and Refractive Surgery, have yielded
substantial interest in our products.
We believe that educating our customers and informing them about system
developments is an important way to ensure customer satisfaction and desirable
clinical results. After installation, one of our clinical specialists will
typically travel to a customer site to train the refractive surgeon on how to
safely operate our excimer laser system. We have also developed an extensive set
of written materials to inform refractive surgeons about how our laser system
works.
16
KERATOME PRODUCTS
In October 1999, we entered into a marketing and distribution alliance
with Becton Dickinson, the manufacturer of our UltraEdge keratome blades and a
leading worldwide manufacturer of medical supplies, devices and diagnostic
systems. Becton Dickinson is, subject to limited exceptions, the exclusive
distributor of our keratomes and keratome related products in the U.S., the
U.K., Ireland and Japan, and has a non-exclusive right to distribute kits
including keratome products in other countries. Becton Dickinson utilizes its
approximately 28-person sales force to promote, market and sell our MicroShape
family of keratome products in these markets. We have retained the right to sell
directly to TLC and to market and sell our keratome products in markets other
than the U.S., U.K., Ireland and Japan. In these markets, our keratome products
are marketed both through our existing distributor network for excimer laser
system sales and through direct sales efforts.
MANUFACTURING
EXCIMER LASER SYSTEMS
MANUFACTURING FACILITIES. Our manufacturing operations primarily
consist of assembly, inspection and testing of parts and system components to
assure performance and quality. We acquire components of our laser system and
assemble them into a complete unit from components which include both
"off-the-shelf" materials and assemblies and key components which are produced
by others to our design and specifications. We conduct a series of final
integration and acceptance tests prior to shipping a completed system. The
proprietary computer software which operates the scanning system in our laser
systems was developed and is maintained internally.
We have excimer laser system manufacturing operations in Winter Park,
Florida and San Jose, Costa Rica. Generally, LaserScan LSX excimer laser systems
assembled in our Florida facility are shipped to U.S. customers and systems
assembled in our Costa Rica facility are shipped to our international customers.
In August 1999, our Florida facility was inspected by the FDA in conjunction
with our then pending PMA application for our LaserScan LSX excimer laser
system. This QSR/GMP inspection was required for the commercial sale of our
LaserScan LSX excimer laser system in the U.S. We intend to move our U.S.
manufacturing operations to another leased location in Winter Park during the
second quarter of 2000. In October 1996, we received certification under ISO
9002, an international system of quality assurance, for our manufacturing and
quality assurance activities in our Florida and Costa Rica facilities. Since
that time we have maintained our ISO 9002 certification through a series of
periodic surveillance audits and have also been certified to ISO 9001 quality
system standards.
We opened our Cost Rica facility in late 1995 in a free trade zone to
manufacture our lasers for international sales, and for delivery to U.S.
investigational sites under our investigational device exemption, or IDE,
protocols. From 1996 until we received FDA clearance to market our LaserScan LSX
in the U.S., all of our lasers sold commercially were manufactured at this
facility. The establishment of an offshore manufacturing facility permitted us
to sell products to any international customer prior to receipt of FDA approval.
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
17
event a supplier is unable or unwilling to perform. Since we need an
uninterrupted supply of components to produce our laser systems, we are
dependent upon these suppliers to provide us with a continuous supply of
integral components and sub-assemblies.
We contracted with TUI Lasertechnik und Laserintegration GmbH, Munich,
Germany, in 1996 to develop an improved performance laser head based on their
innovative technology and our performance specification and laser lifetime
requirements. We began to incorporate this new laser head into our products,
notably the LaserScan LSX, in the fourth quarter of 1997. Currently, TUI is a
single source for the laser heads used in the LaserScan LSX. Currently,
SensoMotoric Instruments GmbH, Teltow, Germany, is a single source for the eye
tracker boards used in the LaserScan LSX. We continue to evaluate joint ventures
with critical suppliers as well as other potential supplier relationships.
KERATOME PRODUCTS
Our UltraEdge keratome blades are manufactured by Becton Dickinson
pursuant to our manufacturing agreement with them. Becton Dickinson has agreed
to manufacture keratome blades exclusively for us, and we have agreed to
purchase keratome blades exclusively from them. We generally are required to
purchase one million keratome blades over a five-year period. The consummation
of this agreement resulted in the cessation of internal blade manufacturing
operations by LaserSight.
The UniShaper single-use keratome is manufactured for us under an
exclusive agreement with Frantz Medical Development Ltd., an ISO 9001 certified
company experienced in the manufacture of disposable medical devices from
engineering-grade polymer. This agreement has a 30-month term which expires in
May 2002, and we are obligated to purchase 50,000 units during each year of the
contract following receipt of final product approval, which occurred in October
1999.
The UltraShaper durable keratome is expected to be manufactured
exclusively for us by Owens Industries, Inc. Owens is experienced in the
machining and assembly of precision instruments. The control console for our
keratomes is manufactured for us by Humphrey Instruments, a division of Carl
Zeiss, Inc., located in San Leandro, California.
COMPETITION
The vision correction industry is subject to intense, increasing
competition. We operate in this highly competitive environment which has
numerous well-established U.S. and foreign companies with substantial market
shares, as well as smaller companies. Many of our competitors are substantially
larger, better financed, better known, and have existing products and
distribution systems in the U.S. marketplace. FDA approval requirements are a
significant barrier to entry into the U.S. market for commercial sales of
medical devices. Two of our competitors, Visx and Summit, received FDA approval
of their broad beam laser systems more than three years ago, and have
manufactured and sold laser systems which currently account for more than 90% of
the installed excimer laser systems in the U.S. Summit currently manufactures
the only laser system specifically approved by the FDA for use in LASIK
procedures. In the market for keratome products, Bausch & Lomb sold a
significant majority of the keratomes and keratome blades used by refractive
surgeons in the U.S. in 1998 and 1999.
We believe competition in the excimer laser system market is primarily
based on safety and effectiveness, technology, price, regulatory approvals, per
procedure fee payments, royalty payments, dependability, warranty coverage and
customer service capabilities. We believe that safety and effectiveness,
18
technology, price, dependability, warranty coverage and customer service
capabilities are among the most significant competitive factors, and we believe
that we compete favorably with respect to these factors.
Currently, five manufacturers, Visx, Summit, Nidek, Bausch & Lomb and
LaserSight, have excimer laser systems with the required FDA approval to
commercially sell the systems in the U.S. Some of the approvals are for broader
labeled indications, a key competitive element in the industry. A laser system
with broader labeling approvals is attractive because it enlarges the pool of
laser vision correction candidates to whom the procedure can be marketed. At
present, the laser systems manufactured by most of our competitors in the U.S.
market have FDA approval to perform a wider range of treatments than our laser
system, including higher degrees of nearsightedness, astigmatism, and in the
case of Visx and Summit, farsightedness. These approvals have given Visx a
competitive advantage, with laser systems sold by Visx having performed a
significant majority of the laser vision correction procedures performed in the
U.S. in 1998 and 1999. Our LaserScan LSX excimer laser system is not presently
approved to treat farsightedness, astigmatism or more than 10 diopters of
nearsightedness in the U.S. Our PMA supplement for treatment of nearsightedness
with astigmatism is presently pending. While regulatory approvals play a
significant role with respect to the U.S. market, competition from new entrants
may be prevalent in other countries where regulatory barriers are lower.
In February 2000, Visx announced that it was reducing the fee it
charges to customers from $250 to $100 for each laser vision correction
procedure performed on an excimer laser manufactured by Visx. Shortly after this
announcement, Summit announced it would also reduce its licensing fee to $100,
plus an additional $25 for astigmatism and hyperopia correction and $150 for its
Ladarvision systems. Bausch & Lomb has indicated it will charge a fee of $100
for each laser vision correction procedure performed on an excimer laser
manufactured by Bausch & Lomb. We currently intend to charge a per procedure
fee of up to $130. Nidek has indicated that it does not intend to charge per
procedure fees. The per procedure fees received by us as well as our competitors
who currently receive such fees are subject to change based on competitive
factors and changing market conditions, and there can be no assurance that such
fees will not be reduced or eliminated in the future.
In addition to conventional vision correction treatments such as
eyeglasses and contact lenses, we also compete against other surgical
alternatives for correcting refractive vision disorders such as surgically
implantable rings which recently received FDA approval, as well as implantable
intraocular lenses and a holmium laser system developed for the treatment of
farsightedness, neither of which have been approved by the FDA, though the
holmium laser system recently received a recommendation for the approval of
temporary reduction of hyperopia by FDA's Ophthalmic Advisory Panel.
We believe competition in the market for keratome products is primarily
on the basis of performance, design, automation, price, availability, regulatory
approvals, royalty payments, warranty coverage and customer service
capabilities. We believe that performance, design, automation, and price are
among the most significant, and believe that we compete favorably with respect
to these factors. In addition to Bausch & Lomb, who manufactured a significant
majority of the keratomes and keratome blades used by refractive surgeons in the
U.S. in 1998 and 1999, our principal competitors in the keratome and keratome
blade business include Moria and Innovative Optics.
INTELLECTUAL PROPERTY
There are a number of U.S. and foreign patents or patent rights
relating to the broad categories of laser devices, use of laser devices in
refractive surgical procedures, delivery systems for using laser devices in
19
refractive surgical procedures and keratomes. We maintain a portfolio of
strategically important patents, patent applications, and licenses. Our patents,
patent applications and licenses generally relate to the following areas:
UV-wavelength laser ablation, our laser scanning method, infrared technology,
frequency conversion techniques, solid-state technology, calibration technology,
glaucoma and retinal treatments, corneal topography developments, treatment
techniques for nearsightedness and farsightedness, treatment techniques to
optimize clinical outcomes, and keratome design and usage. 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.
A number of our competitors, including Visx and Summit, have asserted
broad intellectual property rights in technology related to excimer laser
systems and related products, and intellectual property lawsuits are sometimes a
competitive factor in our industry. In November 1999, Visx asserted that the
Company's technology infringed one of Visx's U.S. patents for equipment used in
ophthalmic surgery. See "Legal Proceedings--Visx, Incorporated" in Item 3 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors and Uncertainties - We are subject to risks and
uncertainties relating to our patent litigation with Visx" in Item 7. We believe
that we own or have a license to all intellectual property necessary for
commercialization of our products.
PATENT SEGMENT. We generate royalty income pursuant to license
agreements with respect to certain of our intellectual property rights,
including most significantly two key patents and related license agreements we
acquired from IBM in August 1997. These patents (the "IBM Patents"), U.S. Patent
No. 4,784,135 (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.
Under the license agreements with Visx and Summit we acquired from IBM, Visx and
Summit are 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 believe a license to the Blum Patent is required for
all companies desiring to enter the laser vision correction market in the U.S.
We have licensed or sold certain of the vascular and cardiovascular
patent rights and international patent rights covered by the IBM Patents. In
September 1997, we received a one-time lump sum payment of $4 million from a
third party in exchange for an exclusive, worldwide, royalty-free license to the
vascular and cardiovascular rights covered by the IBM Patents. 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 transferred to Nidek ownership of the
foreign counterparts to those patents, including those in Australia, Austria,
Belgium, Brazil, Canada, France, Germany, Italy, Japan, Spain, Sweden,
Switzerland, and the U.K. 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.
We also believe that our other intellectual property rights are
valuable assets of our business. For example, we entered into an agreement with
a subsidiary of TLC in October 1998 that grants us an exclusive license under
U.S. Patent No. 5,630,810 (TLC Patent) relating to a treatment method for
preventing formation of central islands during laser surgery. Central islands is
a problem generally associated with laser refractive surgery performed with
broad beam laser systems used to ablate corneal tissue. We recently filed a
lawsuit against Visx, our competitor, asserting that they infringe this patent.
We have agreed to pay TLC for the term of the exclusive license 20% of the
aggregate net royalties we receive in the future from licensing the TLC patent
and other patents currently owned by us. The TLC Patent is currently in reissue
20
at the U.S. Patent and Trademark Office. We may negotiate additional license
agreements relating to the IBM Patents and our other patents in the future.
However, we cannot provide any assurance as to whether, when or on what terms we
may be able to do so.
OTHER INTELLECTUAL PROPERTY. Among the more significant of our
intellectual property rights are our scanning and solid-state laser-related
patents, including a patent we were granted in May 1996 (U.S. Patent No.
5,520,679) relating to an ophthalmic surgery method utilizing a non-contact
scanning laser. U.S. Patent No. 5,520,679 is currently in reissue at the U.S.
Patent and Trademark Office. Another of our patents (U.S. Patent No. 5,144,630)
covers the apparatus and use of the solid-state (ultraviolet and infrared)
LaserHarmonic System. The extent of protection that may be afforded to
LaserSight, or whether any claim embodied in these patents will be challenged or
found to be invalid or unenforceable, cannot be determined at this time. These
patents and other pending applications may not afford a significant advantage or
product protection to us.
REGULATION
MEDICAL DEVICE REGULATION
The FDA regulates the manufacture, use, distribution and production of
medical devices in the U.S. Our products are regulated as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act. In order to sell such
medical devices in the U.S., a company must file a 510(k) premarket notice or
obtain premarket approval after filing a PMA application. Noncompliance with
applicable FDA regulatory requirements can result in one or more of the
following:
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products;
o total or partial suspension of production;
o denial or withdrawal of premarket clearance or approval of devices;
o exclusion from government contracts; and
o criminal prosecution.
The FDA also has authority to request repair, replacement or refund of the cost
of any device manufactured or distributed by a company.
Medical devices are classified by the FDA as Class I, Class II or Class
III based upon the level of risk presented by the device and whether the device
is substantially equivalent to an already legally marketed Class I or II device.
Class III devices are subject to the most stringent regulatory review and cannot
be marketed in the U.S. until the FDA approves a PMA for the device.
CLASS III DEVICES. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a Class III device for which the FDA requires PMAs. The
process of obtaining approval of a PMA application is lengthy, expensive and
uncertain. It requires the submission of extensive clinical data and supporting
information to the FDA. Human clinical studies may be conducted only under an
FDA-approved and must be conducted in accordance with FDA regulations. In
addition to the results of clinical trials, the PMA application includes other
21
information relevant to the safety and efficacy of the device, a description of
the facilities and controls used in the manufacturing of the device, and
proposed labeling. After the FDA accepts a PMA application for filing and
reviews the application, a public meeting may be held before an FDA advisory
panel comprised of experts in the field.
After the PMA is reviewed and discussed, the panel issues a favorable
or unfavorable recommendation to the FDA and may recommend conditions. Although
the FDA is not bound by the panel's recommendations, it historically has given
them significant weight. If the FDA's evaluation of the PMA application is
favorable, the FDA typically issues an "approvable letter" requiring the
applicant's agreement to comply with specific conditions (such as specific
labeling language) or to supply specific additional data (such as post-approval
patient follow-up data) or other information in order to secure final approval.
Once the approvable letter is satisfied, the FDA will issue approval for certain
indications which 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
which they are intended to perform. The FDA may grant a PMA with respect to a
particular procedure only when it is satisfied that the use of the device for
that particular procedure is safe and effective. In granting a PMA, the FDA may
restrict the types of patients who may be treated.
FDA regulations authorize any interested person to petition for
administrative review of the FDA's decision to approve a PMA application.
Challenges to an FDA approval have been rare. We are not aware that any
challenge has been asserted against us and do not believe any PMA application
has ever been revoked by the agency based on such a challenge.
During 1994, we began the clinical studies required for approval and
commercialization of our laser scanning system in the U.S. In April 1998, we
filed a PMA application for PRK treatment of nearsightedness using our scanning
laser system. We received notification from the FDA that our laser system had
received PMA approval for low to moderate nearsightedness in November 1999. The
QSR/GMP regulations impose certain procedural and documentation requirements
upon us with respect to our manufacturing and quality assurance activities. Our
facilities will be subject to ongoing inspections by the FDA, and compliance
with QSR/GMP regulations is required for us to continue marketing our laser
products in the U.S. In addition, our suppliers of significant components or
sub-assemblies must meet quality requirements established and monitored by
LaserSight, and some may also be subject to FDA regulation.
22
The following table summarizes the FDA regulatory status of the
LaserScan LSX excimer laser system. The labeling for each device contains a more
detailed description of the ranges summarized below.
Condition Regulatory Status
--------- -----------------
Low to Moderate Nearsightedness.....Approved (to -6 diopters) (PRK) (1)
-- with astigmatism.............Supplemental PMA filed (PRK)
Higher Degrees of Nearsightedness...Clinical trials underway (LASIK)
-- with astigmatism.............Clinical trials underway (LASIK)
Low to Moderate Farsightedness......Clinical trials underway (LASIK)
-- with astigmatism.............Clinical trials underway (LASIK)
200 Hz pulse rate...................Supplemental PMA to be filed in the
near future
AccuTrack eye tracking system.......Clinical trials underway (LASIK)
(1) The LaserScan LSX has been approved by the FDA for treatment of
nearsightedness of up to -6 diopters, and may be used to treat
nearsightedness of up to -10 diopters at the discretion of the
refractive surgeon.
During 1998, we submitted and received approval to begin U.S. clinical
trials of our scanning laser for treatment of nearsightedness and
farsightedness, with and without astigmatism, utilizing the LASIK procedure. We
also began a clinical trial of our scanning laser system for LASIK treatment of
nearsightedness and nearsightedness astigmatism in Canada in late 1998 and
received Device License Approval from Canadian Medical Devices Bureau in
mid-1999. During 1996, we began clinical trials for photo-astigmatic refractive
keratectomy, or PARK, in the U.S.
In July 1997, we acquired from Photomed the rights to a PMA application
filed with the FDA by Dr. Kremer for an excimer laser system for LASIK
treatment. In July 1998, the FDA approved the PMA application for the laser to
perform LASIK for correction of nearsightedness and nearsightedness with
astigmatism. This approval, however, is for the treatment of nearsightedness and
nearsightedness with astigmatism, specifically using LASIK at a single-site
only. The commercial sale of the Photomed laser in the U.S. would require
additional FDA approvals and compliance with QSR/GMP. The FDA's approval of this
PMA is unrelated to the PMA for our LaserScan LSX scanning laser system.
Summit's Apex Plus Excimer Laser Workstation recently received FDA approval for
the LASIK treatment of myopia (nearsightedness) with or without astigmatism. The
approval is for the correction of myopia in the range of 0 D to -14.0D with or
without astigmatism in the range of -0.5D to -5.0D. The Summit laser system is
currently the only laser system commercially available in the U.S. with FDA
approval for use in LASIK. Laser systems manufactured by other companies
approved by FDA for PRK, including Visx, Nidek, and LaserSight, are routinely
used off-label to perform LASIK. A physician may decide, as part of the practice
of medicine, to use a medical device outside of its FDA-approved indications for
an unapproved or "off-label" use. Prior to Summit's approval, all LASIK
procedures performed in the U.S. with commercially available lasers were
performed in accordance with the practice of medicine. See "Products--Overview
of Competitive Laser Systems" above.
CLASS I OR II DEVICES. Devices deemed to pose relatively less risk are
placed in either Class I or II, which requires the manufacturer to submit a
510(k) premarket notification, unless an exemption applies. The premarket
notification must demonstrate that the proposed device is "substantially
equivalent" to a "predicate device" that is either in Class I or II, or is a
"pre-amendment" Class III device that was in commercial distribution before May
28, 1976, for which the FDA does not require PMA approval. The FDA issued
23
determinations of equivalency for our UniShaper single-use keratome in January
1998 and for our UltraShaper durable keratome in January 2000. Our UltraEdge
keratome blades are exempt from the 501(k) requirement.
After the FDA has issued a determination of equivalency for a device,
any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k)
notice. The FDA requires each manufacturer to make this determination in the
first instance, but the FDA can review any such decision. If the FDA disagrees
with a manufacturer's decision not to submit a new 510(k), the agency may
retroactively require the manufacturer to submit a premarket notification. The
FDA also can require the manufacturer to cease marketing and/or recall the
modified device until 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 recent litigation. The only materials
related to unapproved devices that may be disseminated by companies are peer
reviewed articles. Our lasers are also subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health of the FDA. The law requires laser manufacturers to file new product and
annual reports and to maintain quality control, product testing and sales
records. In addition, laser manufacturers must incorporate specified design and
operating features in lasers sold to end users and comply with labeling and
certification requirements. Various warning labels must be affixed to the laser
depending on the class of the product under the performance standard. The
manufacture, sale and use of our products is also subject to numerous federal,
state and local government laws and regulations relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
INTERNATIONAL REGULATORY REQUIREMENTS. The manufacture, sale and use of
our products is also subject to regulation in countries other than the U.S.
During November 1996 we completed all requirements necessary to obtain authority
to apply the CE Mark to our LaserScan 2000 System, an earlier generation of
excimer laser system we sold in international markets. In September 1998, we
received similar certification to apply the CE Mark to our LaserScan LSX excimer
laser system. The CE Mark, certifying that the LaserScan Models 2000 and
LaserScan LSX meet all requirements of the European Community's medical
directives, provides our products with marketing access in all member countries
of the EU. All countries in the EU require the CE Mark certification of
compliance with the EU Medical Directives as the standard for regulatory
approval for sale of excimer laser systems.
The EU Medical Directives include all the requirements under EU laws
regarding the placement of various categories of medical devices on the EU
market. This includes a "directive" that an approved "Notified Body" will review
technical and medical requirements for a particular device. All clinical testing
of medical devices in the EU must be done under the Declaration of Helsinki,
which means that companies must have ethics committee approval prior to
commencement of testing, must obtain informed consent from each patient tested,
and the studies must be monitored and audited. Patient records must be
maintained for 15 years. Companies must also comply with the Medical Device
Vigilance reporting requirements. In obtaining the CE Mark for our excimer laser
system, we demonstrated that we satisfied all engineering and electro-mechanical
requirements of the EU by having our manufacturing processes and controls
evaluated by a Notified Body (Semko) for compliance with ISO 9002 and ISO 9001
24
requirements, and conducted a clinical study in France to confirm the safety and
efficacy of the excimer laser system on patients.
RESEARCH AND DEVELOPMENT
We continue to research and develop new laser products, laser systems,
product upgrades, keratome products, and ancillary product lines. In March 2000,
we acquired the intellectual property relating to a technology development
project under design to provide an integrated refractive diagnostic work station
that includes front-to-back analysis of aberrations within the total eye. We
believe this project will assist us in developing our ASTRA individualized
ablation capabilities.
Other research and development efforts include the continued
development of a new solid-state laser, enhancements for our advanced
eye-tracking system that is standard on the international model of LaserScan LSX
and the development of a mobile platform for an excimer laser system. The
solid-state is the first true non-gas laser capable of delivering a laser beam
in the ultraviolet spectrum (common to all excimer lasers used for refractive
surgery). In addition, the solid-state laser could be capable of generating
multiple wavelengths, thus permitting its use for other ophthalmic procedures
which now require separate lasers.
The solid-state research and development effort has already resulted in
the identification of many features that have been subsequently incorporated
into our excimer laser system. Further efforts will continue to be directed at
an appropriate level towards production of a clinical design for this product to
ensure that a commercial version is available to meet the market's demand for
such a system.
Upon completion of a clinical design for the solid-state system,
pre-clinical trials and formal clinical trials are anticipated. Once sufficient
clinical and safety data have been gathered, we intend to initially market the
solid-state system for medical uses outside of the U.S. We continue to assess
numerous issues related to manufacturing and marketing of the solid-state
system. As is the case with many new technology products, the commercialization
of the solid-state laser is subject to potential delays.
Our research and development activities continue to include efforts to
develop completely new designs for solid-state laser heads that are not
currently available or produced anywhere in the world. While the risk of failure
of these specific activities may be significant, we believe that if developed,
these products could provide us with a leading edge technology that would
further differentiate our products from other companies in the industry. There
is no assurance that any of these research and development efforts will be
successful.
HEALTH CARE CONSULTING SERVICES
We also provide health care and vision care consulting services to
hospitals, managed care companies and physicians through our TFG subsidiary. The
core business of TFG is two-fold: developing and maintaining physician databases
for clients' needs and providing customized strategic plans. Services included
are physician recruitment tools, competitive intelligence, demand studies,
community health analyses and distribution channel mapping. TFG clients include
multi-hospital health systems, community hospitals, academic medical centers,
specialty health care providers and manufacturers and distributors of health
care products. In 1998, as a result of losses incurred in previous years, TFG
reduced staffing substantially, tightened it business focus and began
outsourcing certain services such as teleresearch and physician recruiting. In
1999, two senior consultants joined who are expected to develop new business and
help lead TFG towards significant financial improvement during 2000.
25
The senior consulting staff of TFG includes seven individuals with
significant experience in health care. We believe that new business will
increase as a result of existing business relationships and previously-developed
leads for new business. In addition to working with former clients, sales
efforts are in development to generate new clients in the hospital, academic
medical center, hospital system and other health care provider categories. TFG
served approximately 13 clients in 1999.
Industry projections indicate continued turbulence in the health care
industry as prices paid by government and managed care organizations continue to
decrease. Consolidation, diversification, divestiture and downsizing are among
the actions many health care providers are being forced to consider in order to
solidify a position in the fast changing market place. TFG believes it is
positioned to assist health care managers in understanding the range of
available options and selecting an appropriate course of action. See
"Management's Discussion and Analysis -- Results of Operations -- Revenues."
Clients are generally asked to pay a certain amount at the commencement
of the engagement and at the point where predefined milestones are reached, but
no less than monthly. Certain clients pay a monthly retainer. Projects may be
priced on an hourly rate or at a fixed project price, exclusive of out of pocket
expenses.
We believe that the key competitive factors in the health care
consulting services segment is the experience of consultants, contacts within
the industry, pricing of services and satisfaction of clients. Primary
competitors are national consulting firms and small health care consulting
firms.
EMPLOYEES
As of December 31, 1999, we had 129 full-time and two part-time
employees. None of our employees is a member of a labor union or subject to a
collective bargaining agreement. LaserSight generally considers its employee
relations to be good.
ITEM 2. PROPERTIES
Our principal offices, including executive offices and administrative,
marketing and U.S. manufacturing facilities, are located in approximately 22,700
square feet of space that we have leased in Winter Park, Florida. This lease
expires on June 14, 2002. We have leased approximately 15,600 square feet of
additional space in Winter Park, Florida for administrative office space and to
provide capacity for an increase in U.S. manufacturing. The lease of this
additional space in Winter Park expires January 31, 2004. We lease approximately
3,900 square feet of office space in St. Louis, Missouri, which lease expires
July 31, 2001. We lease approximately 6,400 square feet of space near San Jose,
Costa Rica, which we use as a manufacturing facility. The lease of the San Jose
manufacturing facility expires November 30, 2000. We lease approximately 5,500
square feet of space in Munich, Germany, which we will use as our European base
of operations. The Munich lease expires in February 2004. In our opinion, the
various properties used in our operations are generally in good condition and
are adequate for the purposes for which we utilize them.
ITEM 3. LEGAL PROCEEDINGS
VISX, INCORPORATED. On November 15, 1999, we were served with a
complaint filed by Visx asserting that the Company's technology infringed one of
26
Visx's U.S. patents for equipment used in ophthalmic surgery. On November 16,
1999, LaserSight and Visx reached agreement to stay the patent litigation and to
continue negotiations toward a U.S. license agreement in our effort to
facilitate commercialization of its laser systems in the U.S. During the stay,
we could commence manufacturing its laser systems in the U.S. but could not
sell, offer to sell, ship or use commercially its systems in the United States
until the parties entered into a license agreement or the stay was otherwise
lifted. This stay did and does not affect our ability to manufacture or sell its
laser systems outside the U.S. On February 1, 2000, we announced that we
withdrew from the licensing negotiations and allowed the litigation to proceed.
The stay was lifted effective February 16, 2000. In addition, on February 1,
2000, we filed suit against Visx claiming non-infringement and invalidity of the
Visx patent and asserting that Visx infringes U.S. Patent No. 5,630,810.
Management believes that LaserSight does not infringe Visx's patent and that
this action will not have material adverse effect on our business, financial
condition or results from operations. However, the outcome of patent litigation,
particularly in jury trials, is inherently uncertain, and an unfavorable outcome
in the Visx litigation could have a material adverse effect on our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors and
Uncertainties - We are subject to risks and uncertainties relating to our patent
litigation with Visx" in Item 7.
Separately, in May 1998, Visx asserted that we were underpaying
royalties due under an international license agreement (the "License Agreement")
and submitted the dispute for binding arbitration. Prior to the arbitration, the
dispute was resolved in November 1999. The resolution did not result in a
material adverse effect on our financial condition or results of operations.
FORMER NNJEI OWNERS. On March 22, 1999, we received notice of an action
filed on March 15, 1999 by the former owners of Northern New Jersey Eye
Institute, or NNJEI, and related assets and entities against LaserSight in U.S.
District Court for the District of New Jersey. The complaint alleges breach of
contract in connection with a provision in our July 1996 acquisition agreements
related to the assets of NNJEI and related assets and entities. Such provision
provided for additional issuance of LaserSight common stock if our stock price
was not at certain levels in July 1998. We issued the additional common stock in
July 1998 in accordance with the provisions of the agreements. The plaintiffs
allege that, based on the price of LaserSight common stock in July 1998,
additional payments are required of approximately $540,000. Cross motions for
summary judgment have been filed and are awaiting action by the court.
Management disagrees with the plaintiffs' interpretation of the NNJEI agreements
and believes that its obligations under the agreements will not have a material
adverse effect on our financial condition or results of operations.
J.T. LIN. On June 24, 1999, Jui-Teng Lin, a former president, chief
executive officer and director of LaserSight, filed an action in the Circuit
Court of the Ninth Judicial Circuit in Orange County, Florida, against
LaserSight. This action asserts that LaserSight is currently in default on a
promissory note executed in June 1991, and payable to Mr. Lin in the principal
amount of $1,180,000. LaserSight believes that the allegations made by the
plaintiff against LaserSight are without merit and it intends to vigorously
defend the action. Management believes that LaserSight has satisfied its
obligations under the promissory note and that this action will not have a
material adverse effect on our financial condition or results of operations.
FORMER MRF, INC. SHAREHOLDER. On November 12, 1999 a lawsuit was filed
in the U.S. District Court for the Eastern District of Missouri on behalf of a
former shareholder of MRF, Inc. (the "Subsidiary"), a wholly-owned subsidiary of
LaserSight. The lawsuit names Michael R. Farris, the Company's Chief Executive
Officer, as the sole defendant and alleges fraud and breach of fiduciary duty by
27
Mr. Farris 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 LaserSight's acquisition of the Subsidiary,
Mr. Farris was the President and Chief Executive Officer of the Subsidiary.
LaserSight's Board of Directors has authorized LaserSight to retain and, to the
fullest extent permitted by the Delaware General Corporation Law, pay the fees
of counsel to defend Mr. Farris, the Subsidiary and LaserSight in the litigation
so long as a court has not determined that Mr. Farris failed to act in good
faith and in a manner Mr. Farris reasonably believed to be in the best interest
of the Subsidiary at the time of the redemption. Management has reviewed the
lawsuit and believes that the allegations set forth therein are without merit,
and that our obligations with respect to Mr. Farris' legal defense will not have
a material adverse effect on our financial condition or results from operations.
LAMBDA PHYSIK, INC. On January 20, 2000 a lawsuit was filed in the
Circuit Court of Broward County, Florida on behalf of Lambda Physik, Inc.
("Lambda") against LaserSight. The action alleges that LaserSight is in breach
of an agreement it entered into with Lambda for the purchase of lasers from
Lambda. Lambda has requested $1,852,813 in damages, plus interest, costs and
attorney's fees. LaserSight believes that the allegations made by the plaintiff
are without merit, and intends to vigorously defend the action. Management
believes that LaserSight has satisfied its obligations under the agreement and
that this action will not have material adverse effect on tour financial
condition or results from operations.
ROUTINE MATTERS. In addition, we are involved from time to time in
routine litigation and other legal proceedings incidental to our business.
Although no assurance can be given as to the outcome or expense associated with
any of these proceedings, we believe that none of such proceedings, either
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.
28
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Our common stock trades on The Nasdaq Stock Market(R) under the
symbol LASE. The following table sets forth, for the fiscal quarters indicated,
the high and low sale prices for our common stock on The Nasdaq Stock Market.
1997: High Low
---- ---- ---
First Quarter $6.63 $5.19
Second Quarter 7.31 3.38
Third Quarter 6.94 4.19
Fourth Quarter 5.25 2.56
1998:
----
First Quarter $3.38 $1.56
Second Quarter 5.38 2.25
Third Quarter 8.03 3.38
Fourth Quarter 6.00 2.75
1999:
----
First Quarter $5.94 $3.88
Second Quarter 20.38 5.22
Third Quarter 17.63 12.13
Fourth Quarter 18.31 7.19
On March 27, 2000, the closing sale price for our common stock on the
Nasdaq National Market was $7.38 per share. As of March 27, 2000, LaserSight had
19,803,663 shares of common stock outstanding held by approximately 200
stockholders of record and, to our knowledge, approximately 6,185 total
stockholders, including stockholders of record and stockholders in "street
name."
We have never declared or paid any cash dividends on our common stock
and do not anticipate paying cash dividends on our common stock in the
foreseeable future. Our current policy is to retain all available funds and any
future earnings to provide funds for the operation and expansion of our
business. Any determination in the future to pay dividends will depend upon our
financial condition, capital requirements, results of operations and other
factors deemed relevant by our board of directors, including any contractual or
statutory restrictions on our ability to pay dividends.
POSSIBLE DILUTIVE ISSUANCES OF COMMON STOCK
Each of the following issuances of Common Stock may depress the market
price of the Common Stock. See "Management's Discussion and Analysis - Risk
Factors and Uncertainties - Common Stock Risks--The Significant Number of Shares
Eligible for Future Sale and Dilutive Stock Issuances may Adversely Affect Our
Stock Price."
LASERSIGHT CENTERS AND FLORIDA LASER PARTNERS. Based on
previously-reported agreements entered into in 1993 in connection with our
acquisition of LaserSight Centers (our development-stage subsidiary) and
modified in July 1995 and March 1997, we may be obligated as follows:
29
o To issue up to 600,000 unregistered shares of Common Stock
("Centers Contingent Shares") to the former stockholders and
option holders of LaserSight Centers (including two trusts related
to our Chairman of the Board and certain of our former officers and
directors). The Centers Contingent Shares will be issued only if
we achieve certain pre-tax operating income levels through March
2002. Such income levels must be related to our use of a fixed or
mobile excimer laser to perform PRK, the arranging for the
delivery of PRK or receipt of license or royalty fees associated
with patents held by LaserSight Centers. The Centers Contingent
Shares are issuable at the rate of one share per $4.00 of such
operating income.
o To pay to a partnership whose partners include our Chairman of
the Board and certain of our former officers and directors a
royalty of up to $43 (payable in cash or in shares of Common
Stock ("Royalty Shares")), for each eye on which PRK is performed
on a fixed or mobile excimer laser system owned or operated by
LaserSight Centers or its affiliates.
o Royalties do not begin to accrue until the earlier of March 2002 or
the delivery of all of the 600,000 Centers Contingent Shares.
As of March 27, 2000, we have not accrued any obligation to issue
Centers Contingent Shares or Royalty Shares. We cannot assure you that any
issuance of Centers Contingent Shares or Royalty Shares will be accompanied by
an increase in our per share operating results. We are not obligated to pursue
strategies that may result in the issuance of Centers Contingent Shares or
Royalty Shares. It may be in the interest of our Chairman of the Board for us to
pursue business strategies that maximize the issuance of Centers Contingent
Shares and Royalty Shares.
PHOTOMED. If, within specified time frames, the FDA approves (for
general commercial use) a LaserSight-manufactured laser system in the treatment
of farsightedness that uses part or all of the know-how of the laser technology
we acquired from Photomed, we would be required to issue additional shares of
Common Stock with a market value of up to $1.0 million (based on the average
closing price of the Common Stock during the preceding 10-day period) to the
former Photomed stockholders. Because such approval was not received by June 1,
1999, this obligation decreases by approximately $2,740 per day each day
thereafter, and the obligation will be eliminated entirely on June 1, 2000. As
of March 27, 2000, the number of additional shares issuable would have been
approximately 20,000. Depending on whether and when such FDA approval is
received and on the market price of the Common Stock at the time of any such
approval, the actual number of additional shares of Common Stock issuable could
be more (but not more than permitted under the listing rules of The Nasdaq Stock
Market) or less than this number.
FOOTHILL WARRANT. In April 1997, we issued to Foothill a warrant to
purchase 500,000 shares of Common Stock (the "Foothill Warrant") at a price of
$6.067 per share. We are required to make anti-dilution adjustments to both the
number of warrant shares and the warrant exercise price if we sell Common Stock
or Common Stock-equivalents (such as convertible securities or warrants) at a
price per share that is (or could be) less than the fair market value of the
Common Stock at the time of such sale (a "Below-Market issuance"). To date, such
anti-dilution adjustments have resulted in (1) an increase in the number of
Foothill Warrant shares to 594,562, and (2) a reduction to the exercise price of
the Foothill Warrant shares to $5.10 per share. Additional anti-dilution
adjustments to the Foothill Warrant could also result from any future
Below-Market Issuance. The Foothill warrants may be exercised at any time
through March 31, 2002. As of March 27, 2000, warrants for 97,562 shares of our
common stock remain outstanding.
30
SERIES B WARRANT. In connection with our issuance of the Series B
Preferred Stock in August 1997, we issued to the former holders of the Series B
Preferred Stock warrants to purchase 750,000 shares of Common Stock (the "Series
B Warrant") at a price of $5.91 per share at any time before August 29, 2002. In
connection with a March 1998 agreement whereby we obtained the option to
repurchase the Series B Preferred Stock and a lock-up on conversions, the
exercise price of the Series B Warrant shares was reduced to $2.753 per share.
We are required to make anti-dilution adjustments to both the number of warrant
shares and the warrant exercise price in the event we make a Below-Market
Issuance. To date, these anti-dilution adjustments and other agreements among
the former holders of the Series B Preferred Stock and us have resulted in (1)
an increase in the number of Series B Warrant shares to 787,998, and (2) a
reduction to the exercise price of Series B Warrant shares to $2.60 per share.
Additional anti-dilution adjustments to the Series B Warrants could also result
from any future Below-Market Issuance. As of March 27, 2000, 140,625 of such
warrants had been exercised.
SHORELINE WARRANT. In connection with our sale of the Series B
Preferred Stock in August 1997, we issued to four individuals associated with
our placement agent warrants to purchase 40,000 shares of Common Stock (the
"Shoreline Warrant") at a price of $5.91 per share at any time before August 29,
2002. We are required to make anti-dilution adjustments to both the number of
warrant shares and the warrant exercise price in the event we make a
Below-Market Issuance. To date, these anti-dilution adjustments have resulted in
(1) an increase in the number of Shoreline Warrant shares to 42,254, and (2) a
reduction to the exercise price of Shoreline Warrant shares to $5.58 per share.
Additional anti-dilution adjustments to the Shoreline Warrants could also result
from any future Below-Market Issuance of Common Stock. As of March 27, 2000,
8,589 of such warrants had been exercised.
SERIES D PREFERRED STOCK. In accordance with the terms of our
Certificate of Designation, Preferences and Rights of the Series D Preferred
Stock, the holders of the Series D Preferred Stock are entitled to certain
anti-dilution adjustments if we issue Common Stock or Common Stock-equivalents
(such as convertible securities or warrants) at a price per share (or having a
conversion or exercise price per share) less than $4.00 per share. To date, no
anti-dilution adjustments have been made.
MARCH 1999 PRIVATE PLACEMENT WARRANTS. In connection with our sale of
Common Stock in March 1999, we issued the purchasers warrants to purchase a
total of 225,000 shares of Common Stock at an exercise price of $5.125 per
share, the closing price of the Company's Common Stock on March 22, 1999. The
warrants have a term of five years. As of March 27, 2000, 45,000 of such
warrants had been exercised.
CONSULTING WARRANTS. On February 22, 1999, in connection with a
consulting services agreement that we entered into with Guy Numann, we issued
warrants to purchase a total of 67,500 shares of our common stock at a price of
$5.00 per share. One-third of the warrants become vested on each annual
anniversary of the grant until all the warrants are vested. To the extent
vested, the warrants are exercisable at any time prior to February 22, 2004. As
of March 27, 2000, 22,500 of such warrants had vested and all such warrants
remained outstanding.
31
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, 1999 is
derived from our consolidated financial statements for such years.
(In thousands, except for per share amounts)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $21,728 $17,756 $24,389 $21,504 $25,988
Gross profit 11,951 11,410 11,687 11,381 18,895
Income (loss) from operations (15,102) (11,461) (9,262) (4,960) 4,552
Gain on sale of subsidiaries -- 364 4,129 -- --
Net income (loss) (14,424) (11,882) (7,253) (4,074) 4,592
Conversion discount
on preferred stock -- (859) (42) (1,011) --
Dividends and accretion
on preferred stock -- (2,752) (298) (359) --
Income (loss) attributable
to common stockholders (14,424) (15,493) (7,593) (5,444) 4,592
Basic earnings
(loss) per common share (0.89) (1.26) (0.80) (0.69) 0.68
Diluted earnings
(loss) per share (0.89) (1.26) (0.80) (0.69) 0.64
Working capital 21,648 14,875 12,730 10,021 7,272
Total assets 49,379 43,873 50,461 34,250 29,102
Long-term obligations 100 560 500 642 --
Redeemable convertible
preferred stock -- -- 11,477 -- --
Stockholders' equity 39,578 34,015 27,040 26,769 20,420
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of LaserSight's consolidated
results of operations and consolidated financial position should be read in
conjunction with the Selected Consolidated Financial Data and LaserSight's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this report.
All references to years are to LaserSight's fiscal years ended December
31, 1999, 1998 and 1997, unless otherwise indicated.
OVERVIEW
LaserSight's net loss and loss attributable to common shareholders for
1999 was $14,423,980, or $0.89 per basic and diluted common share, on net sales
of $21,728,452, while the net loss for 1998 was $11,882,389 and its loss
attributable to common stockholders that year was $15,493,214, or $1.26 per
basic and diluted common share, on net sales of $17,756,116. The net losses are
primarily attributable to the expenses generated by our technology segment. The
difference between the net loss and the loss attributable to common stockholders
in 1998 resulted from preferred stock dividends, accretion, premiums on
repurchases and the conversion discount on preferred stock.
LaserSight is principally engaged in the manufacture and supply of
narrow beam scanning excimer laser systems, keratomes, keratome blades and other
related products used to perform procedures that correct common refractive
vision disorders such as nearsightedness, farsightedness and astigmatism. Since
1994, we have marketed our laser systems commercially in over 30 countries
worldwide and currently have an installed base of over 250 scanning laser
systems outside the U.S., including approximately 80 of our LaserScan LSX laser
systems