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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, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19671
LASERSIGHT INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 65-0273162
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(State of incorporation) (I.R.S. Employer
Identification No.)
3300 University Blvd, Suite 140, Winter Park, Florida 32792
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 678-9900
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
Preferred Share Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sale price on March 29, 2002 was
approximately $13,904,258. Shares of common stock held by each officer and
director and by each person who has voting power of 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of common stock outstanding as of March 29, 2002:
26,554,168.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be included in Part III is incorporated
herein by reference to the Company's definitive proxy materials to be filed with
the Securities and Exchange Commission on or before April 30, 2002.
LASERSIGHT INCORPORATED
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relations and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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The information in this Annual Report on Form 10-K contains forward
looking-statements, as indicated by words such as "anticipates," "expects,"
"believes," "estimates," "intends," "projects," and "likely," by statements of
the Company's plans, intentions and objectives, or by any statements as to
future economic performance. Forward-looking statements involve risks and
uncertainties that could cause the Company's actual results to differ materially
from those described in such forward-looking statements. See "Risk Factors and
Uncertainties-We have experienced significant losses and operating cash flow
deficits and we expect that operating cash flow deficits will continue and
absent further financing or significant improvement in sales, potentially result
in our inability to continue operations." Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in Item 7
under the caption "Risk Factors and Uncertainties" as well as those discussed
elsewhere in this Report. All references to "LaserSight(R)" "we," "our" and "us"
in this Report refer to LaserSight Incorporated and its subsidiaries unless the
context otherwise requires.
PART I
ITEM 1. BUSINESS
OVERVIEW
We develop, manufacture and market quality product technologies for
laser refractive surgery and other areas of vision correction. Our products
include precision microspot scanning excimer laser systems used to perform
procedures that correct common refractive vision disorders such as
nearsightedness (myopia), farsightedness (hyperopia) and astigmatism, software
for custom ablation planning and programming, diagnostic products for precision
measurements of the eye, as well as keratome systems, keratome blades, and other
products for use in refractive vision correction procedures. We believe that our
precision microspot scanning lasers have significant technological advantages
and produce smoother and more precise ablation areas than older, broad-beam
laser systems and other scanning systems offered by many of our competitors. We
also believe that the breadth of our product offering may provide 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, due to
the anticipated growth in refractive laser vision correction procedure volume,
our broad product offering affords us the opportunity to generate recurring
revenues by collecting per procedure fees and by selling our keratome blades.
We have significant liquidity and capital resource issues. See
"--LaserSight Recent Developments" for an important discussion of our
significant liquidity and capital resource issues relative to the timing of our
accounts receivable collection and the completion of new sales compared to our
ongoing payment obligations. Management expects LaserSight's cash and cash
equivalent balances and funds from operations (which are principally the result
of sales and collection of accounts receivable) will be sufficient to meet its
anticipated operating cash requirements for only the next two to four weeks in
the absence of LaserSight obtaining an additional source of capital or a
significant improvement in our cash flows from operations. Our expectations
regarding future working capital requirements and our ability to continue
operations are based on various factors and assumptions which are subject to
substantial uncertainty and risks beyond our control and no assurances can be
given that these expectations will prove correct. The occurrence of adverse
developments related to these risks and uncertainties or others could result in
LaserSight being unable to generate additional sales and collect new and
outstanding accounts receivable and the incurrence of unforeseen expenses or
LaserSight being unable to control expected expenses and overhead. If we fail to
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generate additional sales and collect new and outstanding accounts receivable or
incur unforeseen expenses or fail to control our expected expenses and overhead,
we will likely be unable to continue operations for the expected two to four
week period in the absence of obtaining additional sources of capital. We are
actively seeking investors to invest in the range of $1.5 million to $3.0
million, as well as distribution agreements for certain products, which would
provide temporary relief from our current liquidity pressures. If we are able to
enter transactions to meet our liquidity needs, it could be on terms that
seriously dilute our present stockholders or significantly restrict the
flexibility of our business.
We have over eight years of experience in the manufacture, sale and
service of precision microspot scanning laser systems for refractive vision
correction procedures. Since 1994, we have sold our scanning laser systems
commercially in over 30 countries worldwide. As a result, we believe that our
installed base of approximately 400 scanning laser systems, including over 220
of our most advanced laser system, the LaserScan LSX(R), is among the largest
installed bases of scanning laser systems in the industry. In November 1999, the
Food and Drug Administration (FDA) approved our LaserScan LSX scanning laser
system for commercial sale in the U.S. for the treatment of nearsightedness of
up to -6.0 diopters. In September 2001, the FDA approved our LaserScan LSX
precision microspot scanning system for the laser in-situ keratomileusis (LASIK)
treatment of myopia with and without astigmatism up to a manifest refraction
spherical equivalent (MRSE) of -6.0 diopters with maximum refractive astigmatism
approved for up to 4.5 diopters. Currently, all of our laser systems delivered
into the U.S. and international markets operate at a pulse repetition rate of
200 Hz, which we believe is the fastest pulse repetition rate available in our
industry. We currently have pending with the FDA Pre-Market Approval (PMA)
Supplement applications seeking approval for the use of our laser system for the
LASIK treatment of farsightedness, farsightedness with astigmatism and mixed
astigmatism. Our AstraScan features incorporate the same precision microspot
scanning features along with an advanced eye tracking system, improved lighting
and a redesigned "delivery arm" on the laser to make the microscope and joystick
more functional and allow for keratome placement. Available now as an upgrade in
many international markets, the AstraScan features will need FDA approval before
they can be sold in the U.S. In the U.S. market we are currently pursuing FDA
approval through a combination of a real time PMA Supplement and other
regulatory pathways.
Our family of products for custom refractive treatments (often referred
to as custom ablations) includes the AstraMax(TM) diagnostic workstation
designed to provide precise diagnostic measurements of the eye for many
refractive purposes, including generating data needed to plan custom ablation
procedures, and our Corneal Interactive Programmed Topographic Ablation (CIPTA)
and AstraPro(TM) custom ablation planning software that utilize advanced levels
of diagnostic measurements from our AstraMax diagnostic workstation to complete
the planning of custom ablation treatments. The AstraMax integrated diagnostic
workstation was first shown in October 2000 at the Annual Meeting of the
American Academy of Ophthalmology and is expected to be commercially launched
during the second quarter of 2002. LaserSight distributes the CIPTA custom
ablation planning and programming software outside the U.S. under a November
2001 distribution agreement with Ligi Technologie Medicali, Taranto, Italy. The
CIPTA software was developed to operate specifically with our precision
microspot scanning excimer laser system. The CIPTA custom ablation software was
introduced in January 1996 and has received CE Mark certification. We are
internally developing the AstraPro custom ablation planning software and
international clinical testing of the AstraPro software has begun. We plan to
begin our U.S. Investigational Device Exemption (IDE) clinical trials for the
AstraPro software during 2002.
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Our MicroShape(R) family of keratome products includes our
UltraShaper(R) durable keratome, a control console used with our durable
keratomes, and our UltraEdge(R) keratome blades. Our MicroShape family of
keratome products can be used with the LaserScan LSX and other laser systems
used to perform LASIK. We began commercial shipment of our UltraShaper durable
keratome and control consoles in November 2001. We anticipate that sales of 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 believe the UltraShaper compares favorably to
existing keratome products in the marketplace due to its relative ease of
assembly and consistency of performance. We have also developed the
UniShaper(TM), a single use keratome, however, we believe that to be
commercially viable the UniShaper will need to be reengineered, if possible, to
include most or all of the design features included in our UltraShaper durable
keratome.
OPERATING SEGMENTS. We have operated in the following operating
segments: refractive products, patent services and health care services. In late
2001, we decided to discontinue the health care services operations. Our
principal wholly-owned subsidiaries during 2001 included: LaserSight
Technologies, Inc. (LaserSight Technologies), LaserSight Patents, Inc.
(LaserSight Patents), and MRF, Inc. (The Farris Group or TFG).
Our refractive products segment, primarily including our laser vision
correction products and services of LaserSight Technologies, develops,
manufactures and markets ophthalmic lasers with a galvanometric scanning system
for use in performing refractive surgery. We recently introduced an upgrade to
our laser system, our AstraScan, that uses a 0.6 millimeter precision microspot
scanning laser beam to ablate microscopic layers of corneal tissue to reshape
the cornea and to correct the eye's point of focus in persons with myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. Our patent
services segment, consisting primarily of patents licensed by us, included a
patent related to the use of excimer lasers to ablate biological tissue until
the patent was sold in March 2001 and a license to a patent related to the use
of scanning lasers. The health care services segment consisted of TFG until we
decided in late 2001 to discontinue its operations. TFG's financial results are
accounted for as a discontinued operation for the year ended December 31, 2001.
TFG provided health care and vision care consulting services to hospitals,
managed care companies and physicians. For information regarding our export
sales and operating revenues, operating profit (loss) and identifiable assets by
industry segment, see Note 14 of the Notes to Consolidated Financial Statements.
ORGANIZATION AND HISTORY. LaserSight was incorporated in Delaware in
1987, but was inactive until 1991. In April 1993, we acquired LaserSight Centers
Incorporated in a stock-for-stock exchange with additional shares issued in
March 1997 pursuant to an amended purchase agreement. In February 1994, we
acquired TFG. In July 1994, LaserSight was reorganized as a holding company. In
October 1995, we acquired MEC Health Care, Inc. (MEC). In July 1996, our LSI
Acquisition, Inc. (LSIA) subsidiary acquired the assets of the Northern New
Jersey Eye Institute, P.A. On December 30, 1997, we sold MEC and LSIA in
connection with a transaction that was effective as of December 1, 1997. Late in
2000, we abandoned the LaserSight Centers mobile laser strategy due to industry
conditions and our increased focus on development and commercialization of our
refractive products. In December 2001, we decided to discontinue the operations
of TFG as described in Note 3 of the Notes to Consolidated Financial Statements.
Our principal offices and mailing address are 3300 University Boulevard, Suite
140, Winter Park, Florida 32792, our telephone number is (407) 678-9900 and our
address on the World Wide Web is www.lase.com.
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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 that
eliminate or significantly reduce a person's reliance on corrective eyewear. The
first laser vision correction procedure on a human eye was conducted in 1985 and
the first human eye was treated with the excimer laser in the U.S. in 1988.
There are currently two principal methods for performing laser vision
correction with excimer laser systems: photorefractive keratectomy, or PRK, and
LASIK. According to Market Scope, approximately 92% of the refractive vision
correction procedures performed in the U.S. in 2000 were LASIK procedures. The
Company believes that this trend has continued through 2001. In both PRK and
LASIK procedures, a refractive surgeon determines the exact refractive
correction required to be made to the cornea, typically using the same
examination used to prescribe eyeglasses and contact lenses. Required
corrections are then programmed into the excimer laser system's computer. During
the procedure, the excimer laser system emits laser pulses, each of which lasts
several billionths of a second, to remove submicron layers of corneal tissue.
While the length of laser treatments range from 15 to 60 seconds, cumulative
exposure to the laser light during each procedure is less than one second. The
entire procedure, including patient preparation and post-operative dressing,
generally lasts no longer than thirty minutes.
PHOTOREFRACTIVE KERATECTOMY (PRK)
In PRK, the refractive surgeon prepares the eye by gently removing the
surface layer of the cornea called the epithelium. The surgeon then applies the
excimer laser beam, reshaping the curvature of the cornea. 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 with buffered saline solution. Once the procedure is completed, surgeons
generally wait two to three minutes to ensure the corneal flap has fully
re-adhered. At this point, patients can blink normally and the corneal flap
remains secured in position by the natural suction within the cornea. Since the
surface layer of the cornea remains intact during LASIK, the patient experiences
virtually no discomfort. The LASIK procedure often results in a higher degree of
patient satisfaction due to an immediate improvement in visual acuity and
generally involves less post-operative discomfort than PRK.
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LASER EPITHELIAL KERATOMILEUSIS (LASEK)
Laser refractive surgical procedures have undergone a transition from
PRK to the LASIK procedure that has become the procedure of choice for most
patients and surgeons. With the anticipated transition to custom ablations,
refractive surgeons have expressed concern over the possibility of induced
refractive error related to the LASIK flap. A newly developed technique, LASEK
is now being considered as an alternative to LASIK when performing custom
ablations. During the LASEK procedure a thin epithelial flap is formed using
alcohol, the flap is lifted up and repositioned after photorefractive ablation.
The LASEK procedure is said to result in less pain and discomfort than the PRK
procedure. Healing and recovery of vision is slower than LASIK, but not as long
as PRK.
CUSTOM ABLATION
Most laser system manufacturers are attempting to offer a custom
ablation solution. Custom ablation is believed to offer higher quality clinical
outcomes for patients due to the fact that a specific ablation profile is
planned for each eye. Higher quality outcomes are expected to be a significant
selling point with surgeons. Custom procedures typically involve gathering
diagnostic data from the surfaces of the eye, converting the data into an
individualized laser ablation plan based on the specific diagnostic data of each
eye, and performing the refractive surgery based on the ablation plan. We
believe small spot, high repetition rate scanning lasers are the best suited to
perform custom ablation procedures. Custom ablation procedures are not yet
commercially available in the U.S., though some manufacturers have commenced
clinical trials in anticipation of seeking FDA approval.
REFRACTIVE VISION CORRECTION MARKET
The worldwide market for products and services to correct common
refractive vision disorders such as nearsightedness, farsightedness and
astigmatism is large and growing. Industry sources estimate that 50% of the U.S.
population, or approximately 140 million people, presently wear eyeglasses or
contact lenses. There are approximately 14,000 practicing ophthalmologists in
the U.S., of whom approximately 4,000 reportedly perform refractive laser vision
correction procedures on a regular basis.
Laser vision correction was a fast growing segment of the vision
correction market through 2000. According to Market Scope, total laser
refractive procedure volume in the U.S. has increased rapidly each year since
1996 to an estimated 1,400,000 procedures in 2000. During 2001 refractive
procedures in the U.S. declined 7% to 1,300,000 due to the combined effects of
an economic recession and the terrorist attacks of September 2001. An estimated
267,000 procedures were performed in the U.S. during the fourth quarter 2001,
compared to 279,000 procedures during the third quarter 2001 and 363,000
procedures during the fourth quarter 2000. Similarly, laser systems sold in the
U.S. were reported to have dropped from 490 in 2000 to 261 in 2001. According to
Banc of America Securities, the number of U.S. procedures for 2002 are projected
to grow 15% to 1,500,000 with a 15% increase to 1,725,000 procedures projected
for 2003. A procedure refers to laser treatment on a single eye, and most
patients have procedures performed on both eyes during a single visit to a
refractive surgeon. Laser vision correction's growth in the U.S. is also
reflected in the expansion of excimer laser installations and in the rise in
average annual procedure volume per laser.
Many, but not all, manufacturers of excimer laser systems seek to share
in the anticipated growth in procedure volume by receiving a fee for each
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procedure performed by a refractive surgeon using laser systems manufactured by
them. The per procedure fees charged by these manufacturers vary and were
significantly reduced during 2000 due to competitive pressures and changing
market conditions. See "Business-Competition."
DEVELOPMENT OF EXCIMER LASER SYSTEM, DIAGNOSTIC AND KERATOME TECHNOLOGY
EXCIMER LASER SYSTEMS
The excimer laser systems utilized for laser vision correction have
evolved over time with improvements in laser and beam delivery technology. Until
recently, broad beam laser systems, that were initially developed during the
late 1980's, were the only systems approved by the FDA for commercial use in the
U.S. As a result, broad beam laser systems are reported to currently represent
about 65% of the installed laser systems in the U.S., down from over 90% at the
end of 1999. This downward trend appears to be continuing as the newer scanning
laser systems obtain the broader range of treatment approvals originally held by
the older broad beam systems. Certain broad beam laser systems have undergone
technical changes designed to modify their beam delivery to achieve
pseudo-scanning on the cornea. These changes have been accomplished through the
use of various optical elements with the effect of reducing beam size and
simulating a scanning pattern. These modified broad beam laser systems are still
characterized by their use of relatively large laser beams of six to eight
millimeters in diameter that 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 fundamental
laser beam, these systems still require a number of mechanical elements and
optics to condition, size, shape and deliver the beam profiles necessary to
produce an ablation. These mechanical and optical means of beam shaping and
pseudo-scanning still limit the flexibility of broad beam systems and may
require additional hardware modifications in order to adapt to more complex
applications such as custom ablation.
Glare and halos when looking at lights or other bright objects and
reduction in night vision and contrast sensitivity have also been associated
with the use of broad beam systems.
Improvements in excimer laser technology during the early 1990's have
made it possible to develop refractive excimer laser systems that have
significantly narrower laser beams (less than one millimeter in diameter) that
use reduced amounts of laser energy (10 mj) at higher pulse repetition rates (up
to 200 Hz) to achieve corneal ablations. LaserSight was the leader in the
development of precision microspot scanning technology and the first company to
commercialize it. This new generation of narrow beam scanning excimer laser
systems incorporated scanning mirrors and computer control to shape the ablation
profile, making it unnecessary to utilize mechanical elements to size and shape
the laser beam to attain the desired results. Techniques incorporated into
scanning laser technology such as purposeful overlapping of laser pulses and
random scanning patterns can lead to overall improved clinical results as
evidenced by smoother ablations, the elimination of corneal ridges and central
islands, and the reduction in the incidence of glare, halos, loss or reduction
of night vision and contrast sensitivity. Narrow beam scanning excimer laser
systems are currently the most flexible laser vision correction platforms
available as they can be adapted to expansions in treatment modalities and the
incorporation of new technologies such as higher laser pulse repetition rate,
active eye tracking and custom ablation through software and minor hardware
upgrades.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
One of the most important tools ophthalmologists have at their disposal
is corneal topography. With a corneal topographer the ophthalmologist can
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literally see the refractive problems that might be present in the cornea.
Corneal topography is used not only for screening all patients before refractive
surgery like LASIK, but also for fitting contacts, adjusting post surgical
corneal transplants, and diagnosing refractive disorders and diseases.
Fundamentally, a corneal topographer can be described as a computer linked to a
lighted bowl with a pattern of concentric rings inside it. Patients are seated
at the bowl with their forehead braced against a bar. A technician has only to
line the patient up properly and snap an image. The procedure is painless and
very fast. The computer then uses the captured image to produce a printout of
the corneal shape and elevation using colors to identify different steepnesses,
much like a topographic map of the earth describes changes in the land surface.
Elevation topography of the anterior cornea enables clinicians to more
accurately visualize the shape of abnormal corneas, which leads to more accurate
diagnoses and more consistent surgical results.
Of currently available technology, corneal topography provides the most
detailed information about the curvature of the cornea. This information is
useful to evaluate and correct astigmatism, monitor corneal disease, and detect
irregularities in the corneal shape. This diagnostic procedure is essential for
patients being considered for refractive vision correction procedures (such as
LASIK) and may even be necessary in the follow-up of some patients who have
undergone refractive surgical procedures.
Topography instruments have undergone significant changes in technology
and functionality since they were first introduced. The technology has
progressed from stationary placido-based topography in early generation
topographers to scanning slit technology and now to the stereo-based technology
in our AstraMax.
The placido-based method of image analysis involves multiple concentric
light rings projected on the cornea. The reflected image is captured by a video
camera. Computer software analyzes the data and displays the results in a
variety of formats that resemble topographic maps. Elevation is not measured
directly by placido-based topographers, but certain assumptions allow the
mathematical approximation of the corneal surface and the construction of
estimated elevation maps.
The introduction of slit-scan imaging advanced the technology and
effectiveness of corneal topography. A corneal topography system manufactured by
Bausch & Lomb uses a scanning optical slit design that is fundamentally
different from the corneal topographer that analyzes the reflected images from
the anterior corneal surface. A high-resolution video camera captures individual
light slits projected at a 45(degree) angle through the cornea similar to what's
seen during an ophthalmic slit lamp examination. Using a combination of
reflective corneal topography and information from the scanning slit, the
instrument's software analyzes the data points and calculates the anterior and
posterior surfaces of the cornea and the corneal thickness. The data points
generate a higher quality elevation map than is possible with the placido-based
method.
We believe our AstraMax diagnostic workstation is the next-generation
topography instrument. The AstraMax uses a unique, patented three-video camera
imaging system and stereo ray tracing to achieve high-precision elevation
measurements of the cornea. In other words, the multiple cameras generate
geometrical calculations based on the known distances and angles of the three
cameras. Utilizing a patented checkered polar grid and other proprietary
features the AstraMax obtains, in a single examination, a series of critical
measurements of the cornea and eye including posterior and anterior corneal
topography (elevation), thickness of the cornea (pachymetry) and the diameter of
the pupil under conditions of both low lighting (scotopic) and normal lighting
(photopic). The precision elevation measurements result in elevation maps of the
highest available quality.
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Since CIPTA was introduced into international clinical use, 22
refractive surgery centers performing over 15,000 procedures per year have been
licensed to perform custom ablations using the CIPTA software and our excimer
laser systems. These CIPTA custom treatments using our excimer laser system
demonstrate efficacy, safety, predictability and stability and such results have
been published in peer-reviewed journals and presented at major ophthalmology
venues throughout the world. With over 220 of our LaserScan LSX excimer laser
systems installed worldwide, significant opportunity exists to upgrade those
systems to our AstraScan model to perform CustomEyes procedures with the CIPTA
custom ablation planning software. Also, our AstraPro software is under
development by our software engineers and we plan to begin our U.S. IDE clinical
trials during 2002.
KERATOMES
Keratomes used to cut the thin corneal flap during the LASIK procedure
are similar in design to those used to perform earlier non-laser surgical
refractive techniques such as automated lamellar keratoplasty (ALK). The
Automated Corneal Shaper (ACS), developed by Luis A. Ruiz, M.D. and Sergio
Lenchig, is an example of an ALK keratome that is utilized extensively in
association with LASIK procedures without modification from its original design.
The ACS durable keratome, manufactured and marketed by Bausch & Lomb
pursuant to a license agreement, was the leading keratome during the early and
mid-1990's at a time when many refractive surgeons learned to perform LASIK.
After we licensed the rights to commercially market keratomes based on the same
technology in 1997, Bausch & Lomb discontinued the ACS, and has introduced an
alternative durable keratome product that requires a modified surgical
technique. Over the last few years there have been numerous entrants into the
keratome market, including most excimer laser manufacturing companies.
LASERSIGHT RECENT DEVELOPMENTS
LIQUIDITY AND FINANCING ISSUES
We have significant liquidity and capital resource issues relative to
the timing of our accounts receivable collection and the successful completion
of new sales compared to our ongoing payment obligations. We believe we will
need to generate increased revenues, collect them and reduce our expenditures
relative to our recent history. While we believe these improved results are
possible, we cannot assure you that we will be able to generate increased
revenues and collections to offset required cash expenditures.
Our working capital remains positive (approximately $8.0 million as of
the end of March 2002), though the timing of the conversion of our current
assets into cash is not totally in our control. For example, we cannot dictate
the timing of the collection of our accounts receivable with our customers and
converting our inventory is dependent on our ability to generate new sales with
our products and collect the sales price in a timely manner.
Management expects LaserSight's cash and cash equivalent balances and
funds from operations (which are principally the result of sales and collection
of accounts receivable) will be sufficient to meet its anticipated operating
cash requirements for only the next two to four weeks in the absence of
LaserSight obtaining an additional source of capital or a significant
improvement in our cash flows from operations. Our expectations regarding future
working capital requirements and our ability to continue operations are based on
various factors and assumptions which are subject to substantial uncertainty and
10
risks beyond our control and no assurances can be given that these expectations
will prove correct. The occurrence of adverse developments related to these
risks and uncertainties or others could result in LaserSight being unable to
generate additional sales and collect new and outstanding accounts receivable
and the incurrence of unforeseen expenses or LaserSight being unable to control
expected expenses and overhead. If we fail to generate additional sales and
collect new and outstanding accounts receivable or incur unforeseen expenses or
fail to control our expected expenses and overhead, we will likely be unable to
continue operations for the expected two to four week period in the absence of
obtaining additional sources of capital.
We are actively seeking investors to invest in the range of $1.5
million to $3.0 million in equity and/or debt, as well as distribution
agreements for certain products, which would provide temporary relief from our
current liquidity pressures. However, even if we succeed in completing a
financing transaction to address our current liquidity concerns, we cannot
assure you that we will be able to generate increased revenues and collections
to offset required cash expenditures in a timely manner. Additionally, if we are
able to enter into transactions to meet our liquidity needs, it could be on
terms that seriously dilute our present stockholders or significantly restrict
the flexibility of our business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,"
"Risk Factors and Uncertainties--Industry and Competitive Risks--We cannot
assure you that we have the liquidity to survive long enough to achieve market
acceptance with our products in the U.S." and "--Financial and Liquidity
Risks--We have experienced significant losses and operating cash flow deficits
and we expect that operating cash flow deficits will continue and absent further
financing or significant improvement in sales, potentially result in our
inability to continue operations."
PRODUCT-RELATED DEVELOPMENTS
Our LaserScan LSX and our recently introduced AstraScan excimer laser
systems are based on patented precision microspot scanning technology rather
than broad beam technology, that until recently was the only commercially
available excimer laser vision correction technology in the U.S. Subject to
satisfactorily addressing our serious liquidity and financing needs, we believe
we are well-positioned to become a significant provider of excimer laser
systems, diagnostic products, keratomes and blades and other related products as
a result of our technology and the following recent developments:
o REISSUANCE OF SCANNING PATENT. In January 2002, the U.S. Patent
and Trademark Office reissued LaserSight's scanning patent U.S.
Patent No. 5,520,679, the ('679 Scanning Patent) as U.S. Patent
No. RE 37,504 ('504 Scanning Patent), thereby completing the
reissue process. After a more than 3 1/2 year review of the
reissue application, including detailed analysis of a number of
public protests filed by a third party, the U.S. Patent and
Trademark Office has confirmed our broad patent rights to
precision microspot scanning laser refractive surgery and issued
LaserSight 68 additional patent claims. Prior to the reissue, the
original `679 Scanning Patent included one independent claim and
23 total claims, whereas the `504 Scanning Patent reissue has
added nine new independent claims, and a total of 68 additional
claims to better encompass the breadth of technology to which we
are entitled. The 23 original claims remain essentially unchanged.
The reissue should allow us to protect the uniqueness of our
precision microspot scanning technology since the fundamental
teachings of the original `679 Scanning Patent encompass a
refractive laser system utilizing an excimer laser with a low
fluence and high repetition rate that ablates corneal tissue using
small pulses delivered to the corneal surface in an overlapping
pattern. We believe that many of the other laser manufacturers
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will have to respect the intellectual property rights granted to
us through the `504 Scanning Patent reissue.
o LICENSE OF SCANNING PATENT. In September and December 2001, we
received a total of $5.0 million in cash for a non-exclusive
license agreement with Bausch & Lomb for our `679 Scanning Patent.
See "Reissuance of Scanning Patent" above.
o COMMERCIAL LAUNCH OF OUR ULTRASHAPER KERATOME PRODUCT. We
commercially launched our UltraShaper durable keratome during the
fourth quarter of 2001. We believe that the combination of our
UltraShaper durable keratome and our UltraEdge keratome blades,
that are intended to be replaced after each procedure when used in
durable keratomes, provide us with an attractive opportunity to
generate recurring revenues on a per procedure basis.
o CUSTOM ABLATION. 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
included the acquisition of two U.S. patents, six foreign patents,
and a pending patent application along with an exclusive license
to nine patents that were intended to be used to complete
development of an integrated refractive diagnostic workstation.
This technology acquisition led to the development of our AstraMax
integrated diagnostic workstation. The AstraMax can be utilized as
a stand-alone diagnostic unit or as part of our CustomEyes
approach to custom ablation plans. We believe that the AstraMax
integrated diagnostic workstation is the first product to
integrate precision diagnostic measurements such as anterior and
posterior corneal elevation, corneal thickness, anterior chamber
depth and measurements of photopic and scotopic pupil size into a
single instrument. The underlying technology for the AstraMax is
the subject of 14 U.S. patents that have either been issued to us
or for which we have a license. We plan to add wavefront analysis
to the AstraMax's capabilities at a later time. The precision
measurements from the AstraMax integrated workstation will be
utilized in our CIPTA and AstraPro software for planning custom
ablations. CIPTA is a custom ablation planning software to which
LaserSight has had distribution rights on a worldwide basis since
November 2001. International clinical testing of our internally
developed AstraPro planning software has begun and we plan to
begin our U.S. IDE clinical trials during 2002. Any custom
ablation software will require clinical trials and FDA approval
prior to sale in the U.S. We believe our CustomEyes approach to
custom ablation represents a new standard of eye care that goes
beyond conventional laser vision correction by individualizing the
laser treatment utilizing a patient-specific set of diagnostic
criteria intended to address and control both refractive error and
optical aberration that has either been induced by prior
refractive surgery or is naturally occurring.
PRODUCTS
EXCIMER LASERS
LaserSight was the first company to develop an advanced precision
microspot scanning excimer laser system. The LaserScan LSX and recently
announced AstraScan (for international use) excimer laser systems have evolved
from the patented optical scanning system incorporated in the Compak-200
Mini-Excimer laser system, introduced internationally in 1994. Since the
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introduction of the Compak-200 laser system we have offered several generations
of our scanning laser, each incorporating enhancements and new features. We have
sold our precision microspot scanning excimer laser systems in over 30 countries
and believe our installed base of approximately 400 scanning laser systems,
including over 220 of our advanced laser system, the LaserScan LSX, is among the
largest installed bases of scanning laser systems in the industry. The AstraScan
model incorporates the same precision microspot scanning features along with an
advanced eye tracking system, improved lighting and a redesigned "delivery arm"
on the laser to make the microscope and joystick more functional and allow for
keratome placement. The AstraScan features will need FDA approval before they
can be sold in the U.S. Throughout the evolution of our precision microspot
scanning excimer laser systems, the core concept of utilizing our proprietary
precision microspot scanning software to ablate corneal tissue with a low
energy, microspot laser beam at a rapid pulse repetition rate has remained the
underlying basis for our technology platform.
In November 1999, the LaserScan LSX was approved by the FDA for sale in
the U.S., and we began commercial shipments to U.S. customers in March 2000. In
September 2001, our PMA Supplement for the LASIK treatment of myopia and myopia
with astigmatism was approved by the FDA, thereby increasing the range of
indications that can be treated in the U.S. using the LaserScan LSX. We believe
that the patented precision microspot scanning technology and other advanced
features incorporated into our LaserScan LSX excimer laser system offer
refractive surgeons and patients significant advantages over broad beam and
other scanning laser systems. We believe that the "SFR" technology incorporated
into our LaserScan LSX offers advantages over competitive scanning laser
systems. We believe that the incorporation of the smallest spot size (S), the
lowest laser fluence (F) and highest repetition rate (R), together with
techniques like the patented purposeful overlapping of laser pulses and random
scanning patterns used by our patented precision microspot scanning technology,
can lead to 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. We also believe that our patented SFR
technology is capable of providing the highest resolution and accuracy in
corneal ablations needed for custom ablation treatments. The key benefits of our
laser systems include the following:
o PRECISION MICROSPOT SCANNING LASER. The LSX and AstraScan use
patented precision microspot scanning to deliver a high
resolution, 0.6 millimeter low-energy "flying spot," in a
proprietary, randomized pattern. They are true precision scanning
software-controlled lasers that use a pair of galvanometer
controlled mirrors to reflect and scan the laser beam directly
onto the corneal surface, without the mechanical elements used by
broad beam excimer laser systems.
o LOWER FLUENCE. The accuracy and resolution of ablations produced
by a refractive laser system is directly related to its laser
fluence. Laser fluence is a measurement of the amount of energy in
a laser pulse per unit area of the pulse. Lasers with lower
fluence remove less corneal tissue with each laser pulse than
lasers with higher fluence. When low laser fluence is delivered in
a smaller laser spot, the ability of a laser system to accurately
produce a predetermined laser ablation pattern is increased. Our
lasers operate with a fluence of 89 mj/cm2 and have a beam size of
0.6 to 0.8 mm. Many competitive laser systems operate with
fluences up to 200 mj/ cm2 and have larger laser spots.
o HIGHER PULSE REPETITION RATE. Operating at higher pulse repetition
rates can result in a number of benefits, including reduced
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average procedure times and elimination or reduction of
dehydration problems associated with longer exposure of the
corneal tissue to ambient conditions. Our lasers operate at a
pulse repetition rate of 200 Hz. Many competitive laser systems
currently operate at lower pulse repetitions, often 50 Hz or less.
o EYE TRACKING. Proper alignment of the refractive correction is
important in all laser vision correction procedures, and is
essential in order to perform custom ablations. Our advanced
adaptive eye tracking system maintains alignment of the refractive
correction relative to the visual axis of the eye, and can be
turned on or off based on the refractive surgeon's clinical
preference. The LaserSight advanced adaptive eye tracker is a high
speed, synchronous, "active" system that is capable of following
even small, involuntary eye movements. The tracking system
eliminates most errors normally introduced by eye movements during
untracked laser refractive surgery, and does not require dilation
of the pupil or any apparatus to be in contact with the eye. Our
advanced adaptive eye tracking system is currently available only
on international versions of the AstraScan, and we are currently
pursuing a "real time" PMA Supplement that seeks approval for use
of this feature in the U.S., which could result in FDA approval in
as few as 30 days.
o SOFTWARE DRIVEN FLEXIBLE PLATFORM. Custom ablations have resulted
in increased patient satisfaction in international clinical use
and we believe the ability to perform custom ablations will
generally result in improved visual quality, more predictable
results and less post-operative regression relative to other
refractive surgery techniques. We also believe that custom
ablation will be the technique most preferred by refractive
surgeons for correction of irregular astigmatism, decentered
ablations and other surgically induced corneal irregularities. In
our scanning laser, ablation profiles and spot location are
determined by system software, not mechanical elements. When
programmed by custom ablation software tools, our laser is able to
perform custom ablations because its software has the ability to
move the "flying spot" beam to the precise predetermined areas on
the cornea requiring treatment. Upon receipt of FDA approvals,
software upgrades can be used to readily update U.S. models to
include features currently available only on international models,
including the ability to treat farsightedness, astigmatism and
mixed astigmatism.
o ADVANCED DESIGN AND ERGONOMICS. Our laser's relatively light
weight and compact design allows it to fit into small spaces, and
its wheels enable it to be easily moved around in a multi-surgeon
practice. This allows for higher utilization of the laser system.
The efficient design also enables users to transport the laser to
other locations.
o IMPROVED RELIABILITY AND LOWER MAINTENANCE REQUIREMENTS. Our laser
system uses a smaller lower energy laser and fewer optical
elements compared to broad beam laser systems and other scanning
systems on the U.S. market. This design requires less frequent
replacement of expensive optical elements and a lower volume of
laser gas. Savings achieved from less frequent replacement of
optical elements and reduced laser gas usage translate directly
into reduced down time and maintenance costs.
o ASTRASCAN IMPROVEMENTS AND UPGRADES--CUSTOM ABLATION READY. Our
AstraScan model was first introduced in November 2001 and is a
custom ablation ready excimer laser system that incorporates
performance improvement and features needed to produce the precise
custom ablations planned with CIPTA and AstraPro software. The
AstraScan incorporates the latest in technology for adaptive
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active eye tracking, improvements to lighting systems for surgeon
viewing and eye tracking and increased working distance for the
surgeon. The system also has the ability to link directly with
CIPTA and AstraPro software. The AstraScan system is currently
available in the international market as an upgrade to an existing
LaserScan LSX system. In the U.S. market we are currently pursuing
FDA approval through a combination of a real time PMA Supplement
and other regulatory pathways.
CLINICAL EXPERIENCE AND OUTCOME QUALITY
We believe that there are several measures that should be evaluated
with regard to the safety and clinical effectiveness of laser vision correction
systems. These measurements include the incidence of adverse effects such as
double vision, night driving problems like glare, halos or haze, the
post-operative best visual acuity that can be obtained using corrective eyewear
such as glasses or contact lenses, BSCVA, and the post-operative uncorrected
visual acuity, or UCVA (such as whether the patient is seeing 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, or visual quality, 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 compared favorably to the data for the Visx and/or
Summit broad beam laser systems. We believe these qualitative improvements are a
result of the technological features of the LaserScan LSX, including larger
treatment zones and a small scanning microspot that provides a smoother corneal
ablation.
CLINICAL RESULTS
FDA clinical trials for the treatment of PRK with the LaserScan LSX
laser were conducted in the U.S. on patients with nearsightedness with required
levels of correction of 6 diopters and less. We believe that the average
pre-operative level of required correction is a significant factor that must be
taken into account in evaluating the clinical results of an excimer laser
system. The average pre-operative level of required correction in our FDA
clinical trials was 4.8 diopters. Six months following the procedure,
approximately 85% of patients could see 20/40 or better, the refractive
condition required to drive in most states without corrective lenses.
In December 2000, we submitted to the FDA a PMA supplement for the
treatment of myopia with and without astigmatism using LASIK. The prospective
clinical study was performed at 10 U.S. sites by 23 surgeons. The approval
received in September 2001 was for the reduction or elimination of myopia
ranging from -0.5 to less than -6 diopters manifest spherical refractive error
with astigmatism less than or equal to -4.5 diopters. At three months following
the surgery, 90% of patients could see 20/40 or better and at six months 93%
could see 20/40 or better.
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.
Subject to satisfactorily addressing our serious liquidity and
financing needs, 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
15
procedures. We currently have a PMA supplement pending with the FDA to expand
the use of our laser systems for the LASIK treatment of farsightedness with and
without astigmatism and mixed astigmatism.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
Our CustomEyes family of diagnostic instruments and custom ablation
planning tools includes the AstraMax integrated diagnostic workstation and CIPTA
and AstraPro custom ablation planning software.
ASTRAMAX. The AstraMax is an integrated diagnostic workstation that
obtains precision diagnostic measurements such as anterior and posterior corneal
elevation, corneal thickness, anterior chamber depth and measurements of
photopic and scotopic pupil size. Prior to the AstraMax these measurements would
have to be taken utilizing two or more instruments. In addition to its value as
a stand-alone system, the precision diagnostic measurements provided by the
AstraMax integrated workstation will be utilized in both the CIPTA software and
our upcoming AstraPro software for planning custom ablations.
We believe the primary benefits of the AstraMax system include:
o MULTIPLE CAMERAS - The AstraMax has three stereo cameras allowing
for the truest rendering of corneal data to date. Three stereo
cameras capture corneal depth with greater precision and accuracy.
In laser vision correction, height and depth data are essential to
perform an accurate laser surgery with reliable accurate results.
The Orbscan is a one-camera system.
o SCOTOPIC AND PHOTOPIC PUPILOMETRY - The AstraMax is the only
topographer that offers a full range of measurements including
scotopic and photopic pupil size. We believe the quality of the
patients vision is partly dependent on the size of the ablation
zone equaling or exceeding the size of the scotopic pupil,
something no other topographer measures.
o POLAR GRID - Instead of the conventional concentric rings offered
in most topography systems, the AstraMax contains a patented polar
grid allowing the surgeon to obtain both radial and tangential
information that adds to the accuracy of the data.
The technology incorporated into our AstraMax integrated workstation is
covered by a six U.S. patents assigned to LaserSight, licenses to related
technologies and a number of patent applications currently undergoing
examination in the U.S. and internationally.
CIPTA AND ASTRAPRO. CIPTA was introduced to clinical use during 1996.
Since that time 23 refractive surgery centers in Europe have been licensed to
perform custom ablations using the CIPTA software. CIPTA is currently available
in the international market. We believe our CustomEyes approach to custom
ablations will represent a new standard of eye care that goes beyond
conventional laser vision correction by individualizing the laser treatment
utilizing a patient-specific set of diagnostic criteria intended to correct both
refractive error and optical aberrations.
For custom ablation treatments, the diagnostic data from the AstraMax
will be exported to our CIPTA or AstraPro custom ablation planning software
16
where the data will be used initially to plan custom ablation profiles intended
to correct visual anomalies that may have been induced by prior refractive
procedures and improve the overall quality of a patient's vision. LaserSight's
approach to custom ablation is somewhat different from other competitors in that
our focus has been on developing diagnostic and planning tools and techniques
that improve the qualitative aspect of visual performance. Because wavefront
devices have tended to focus on detecting and correcting for spherical
aberrations that may be present in a patient's eye, correction of such visual
defects addresses only visual acuity, or the quantitative aspect, of visual
performance. Such treatments do not address the qualitative aspect of visual
performance, or how well a patient is seeing under a variety of conditions.
Our approach to custom ablation treatment uses precise measurements of
corneal elevation, corneal thickness and pupil size to plan a custom ablation
intended to improve visual performance by post-operatively retaining the natural
prolate shape of the patient's cornea.
KERATOME PRODUCTS
Our MicroShape family of keratome products includes our UltraShaper
durable keratome, a control console and our UltraEdge keratome blades. We
commercially launched our UltraShaper durable keratome during the fourth quarter
of 2001.
The introduction of our MicroShape family of keratome products provides
refractive surgeons with the opportunity to not only utilize keratomes based on
the original design of the ACS, but to also take advantage of a number of
significant improvements intended to make the performance of the instruments
safer and more consistent. Working with refractive surgeons we were able to
develop an advanced design for our UltraShaper durable keratome incorporating
advancements that address a number of the issues encountered with current
keratome designs. Ease of assembly after cleaning has been improved by utilizing
a three-piece construction. Drive gears have been recessed to minimize the
possibility of lid or lash entrapment, a constant speed drive motor is utilized
and the applanation plate has been integrated into the keratome head. The blade
angle is 25 degrees for a more predictable flap thickness and cut. The open
design of the keratome head allows the surgeon to observe the creation of the
flap. The unique blade handling and insertion system allows the surgeon to
inspect the blade and insert it into the keratome head without the blade ever
being touched by hands or instruments. This handling system also ensures a more
positive blade location and alignment. In addition, the UltraShaper can
accommodate a surgeon's preference by creating nasal and temporal flaps.
The MicroShape control console utilized with the UltraShaper
incorporates operating and safety features not available with prior generation
systems. A high and low suction level have been incorporated into the console,
allowing use of a lower suction setting during fixation of the keratome on to
the globe of the eye. A "low suction" warning prevents the keratome from
advancing when the console detects suction below a preset limit.
We believe that future design activities may bring the performance of
the UniShaper single use keratome up to the standards demonstrated by the
UltraShaper and could provide the refractive surgeon with a sterilized, fully
assembled and tested keratome solution that eliminates the cleaning and
maintenance associated with durable keratomes.
We acquired the right to manufacture and sell our keratomes in
September 1997 from inventors Ruiz and Lenchig, who had invented the ACS (that
had been manufactured and sold by Bausch & Lomb). The UniShaper single-use
keratome and the UltraShaper durable keratome each incorporate the market proven
17
features found in the ACS with new enhancements and features, including
pre-assembly, transparent components for improved visibility while cutting the
flap, and a dual drive mechanism with covered gears. We launched our UltraShaper
durable keratome during the fourth quarter of 2001 after we completed the
quality evaluation phase of our product release requirements. We believe that
the UltraShaper has undergone a more rigorous clinical evaluation than any other
keratome currently on the market. See "Risk Factors - Company and Business Risks
- - Required minimum payments under our keratome license agreement may exceed our
gross profits from sales of our keratome products."
PRODUCT UPGRADES AND OTHER PRODUCTS
As a convenience to our customers, we also offer a number of ancillary
products that either complement our core laser system, diagnostic products and
keratome product portfolio or leverage our laser technology. We offer various
upgrades and modules to purchasers of prior models of our excimer laser systems,
including the AstraScan upgrade to international customers for existing
LaserScan LSX systems, AccuTrack eye tracking system for international
customers, a video display system for observation or recording of refractive
procedures, and the latest version of our proprietary software, version 9.0,
that provides international users with features including expanded treatment
options and patient databases. In addition, we offer certain scientific
lasers and related equipment for medical research and scientific research
applications. 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, subject to our ability to obtain adequate financing, is to
become a significant worldwide provider of excimer laser systems, diagnostic and
custom ablation products, single-use and durable keratomes and other products
for the refractive vision correction industry. We believe that our more than
eight years of experience in the manufacture, sales and service of excimer laser
systems, our significant penetration of international markets and the advanced
technology of our laser systems diagnostic instruments, ablation planning
software and keratome products provide us with a strong platform for future
growth as we continue to penetrate the U.S. and international markets for
refractive surgical lasers and instruments.
The following are the key elements of our growth strategy:
o EXPAND MARKET SHARE IN U.S. EXCIMER LASER MARKET. We believe that
our LaserScan LSX and AstraScan precision microspot scanning
excimer laser systems represent a significant technological
advancement over the broad beam and other scanning laser systems
currently being marketed in the U.S., as our precision microspot
scanning lasers can provide more precise corneal ablations,
reduced visual side effects, enhanced visual acuity and shorter
procedure times. We also believe that our precision microspot
scanning technology can provide the precision and accuracy needed
for custom ablations when custom treatments are approved in the
U.S. market.
o EXPAND MARKET SHARE IN INTERNATIONAL EXCIMER LASER MARKET. We
believe that our LaserScan LSX and AstraScan precision microspot
scanning excimer laser systems represent a significant
technological advancement over the other scanning laser systems
currently being marketed internationally, as our precision
microspot scanning lasers can provide more precise corneal
ablations, reduced visual side effects, enhanced visual acuity and
shorter procedure times. We also believe that the availability of
18
CIPTA and our AstraMax during 2002 will provide a custom ablation
solution internationally that will improve our sales
opportunities.
o PENETRATE WORLDWIDE DIAGNOSTIC INSTRUMENT MARKET. We believe that
our AstraMax integrated diagnostic workstation also represents a
significant technological advancement over existing corneal
topographers since it is a single instrument that more precisely
obtains a wide variety of diagnostic information not provided by
current topographers. In addition, the AstraMax's precise
measurements are over the total area of the cornea thus providing
the necessary information for planning custom ablations.
o ESTABLISH STRONG POSITION IN CUSTOM ABLATION MARKET. By combining
the capabilities of our laser system with the AstraMax and CIPTA,
we believe we will be in a position to benefit from a viable
custom ablation package in the international market during 2002.
We believe that success in the international market will translate
into customer awareness in the U.S. market, improving our custom
ablation opportunities domestically in the future.
o PENETRATE WORLDWIDE KERATOME AND KERATOME BLADE MARKETS. We
believe that a key competitive strength of our MicroShape family
of keratome products is the relative simplicity and ease of use of
our UltraShaper durable keratome and fact that the flexibility of
the keratome control console offers refractive surgeons the option
to utilize either a single-use or durable keratome based on their
clinical preference. Commercial shipments of our UltraShaper
durable keratome began in the fourth quarter of 2001.
o GENERATE RECURRING REVENUE STREAMS. We have positioned our
business to benefit from the anticipated future growth in
refractive vision correction procedure volume. In addition to
receiving the purchase price for each laser system sold in the
U.S., we believe we will generate recurring revenue streams by
participating in per procedure fees resulting from the use of our
laser systems. We also believe that the license fees related to
use of our CIPTA and AstraPro ablation planning software and our
UltraEdge keratome blades, that are intended to be replaced after
each procedure when used in durable keratomes, all provide
potential additional sources of recurring revenue for us. We are
also pursuing service contracts for customers with lasers no
longer under warranty.
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 believe
we have developed a strong intellectual property portfolio. For
example, in March 2000, we acquired the intellectual property that
we have developed into our AstraMax integrated diagnostic
workstation. In January 2002, we received notice of allowance of
the reissuance of our scanning patent, now known as the `504
Scanning Patent, covering methods for performing ophthalmic
surgery using a scanning laser with 68 additional claims.
SALES AND MARKETING
We sell our excimer laser systems, diagnostic products, keratomes and
related products through a direct sales force, independent sales representatives
and distributors. Since 1994, we have marketed our laser systems commercially in
over 30 countries worldwide and currently have an installed base of
approximately 400 scanning lasers, including over 220 of our LaserScan LSX laser
systems.
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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 four sales professionals targeting key refractive markets within the U.S.
These territorial managers are responsible for sales within their respective
territories. We are currently considering the use of one or more distributors to
expand our market capabilities in the U.S.
Laser system sales in international markets are generally to hospitals,
corporate centers or established and licensed ophthalmologists. Internationally
we market our excimer laser systems in Canada, Europe, Asia, South and Central
America, and the Middle East. We currently employ four territorial managers who
are responsible for sales in international markets, both directly and through
our approximately 35 independent distributors and representatives within their
respective territories.
All of our distributors and representatives have been selected based on
their experience and knowledge of their respective ophthalmic equipment market.
In addition, the selection of international distributors and representatives is
also based on their ability to offer technical support. Distributor and
representative agreements provide for either exclusive territories, with
continuing exclusivity dependent upon achievement of mutually-agreed levels of
annual sales, or non-exclusive agreements without sales minimums. Currently,
separate distributor and representative agreements are in place for all major
market areas. During 2001, approximately 67% of our product sales resulted from
distributors and representatives with the balance from sales made by employees
of LaserSight. Our distributors in Mexico and China were each responsible for
generating sales of 11% of our consolidated revenues in 2001. No single
distributor was responsible for generating sales in excess of 10% of our
consolidated revenues in 2000.
In conjunction with our sales activities, we participate in a number of
foreign and domestic ophthalmology meetings, exhibits and seminars.
Historically, two large U.S. meetings, the American Academy of Ophthalmology and
the American Society of Cataract and Refractive Surgery, have yielded
substantial interest in our products.
We believe that educating our customers and informing them about system
developments is an important way to ensure customer satisfaction and desirable
clinical results. Our clinical specialists are available to travel to a customer
site to train the refractive surgeon on how to safely operate our excimer laser
system and keratome products and achieve optimum clinical results. We have also
developed an extensive set of written materials to inform refractive surgeons
about how our laser system and keratomes work and a series of marketing related
materials to assist the surgeon in marketing his refractive practice to his
patient base.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
We currently employ two people responsible for the sales of our
AstraMax products, in addition to our laser system sales force and distributors,
who will offer bundled packages including, for example, a laser system with an
AstraMax. In addition, we are in discussions with third parties to distribute
our AstraMax product. It is not clear whether we will be able to formalize an
AstraMax distribution agreement on terms acceptable to us.
20
CIPTA is primarily sold by the same employees or distributors who are
responsible for the sales of laser systems. Any custom ablation software will
require clinical trials and FDA approval prior to sale in the U.S.
KERATOME PRODUCTS
In 2001, all marketing and manufacturing arrangements with Becton
Dickinson were ended. See "Risk Factors and Uncertainties--Industry and
Competitive Risks--We cannot assure you that our keratome products will achieve
market acceptance." We have an employee responsible for marketing and
distributing our keratome products in the U.S. in addition to our laser system
sales force and distributors internationally, who will offer bundled packages
including, for example, a laser system with an UltraShaper. We are currently in
discussions with a managed network of independent sales representatives to
distribute our keratome related products. It is not clear whether we will be
able to formalize a distribution agreement on terms acceptable to us.
MANUFACTURING
EXCIMER LASER SYSTEMS
MANUFACTURING FACILITIES. Our manufacturing operations primarily
consist of assembly, inspection and testing of parts and system components to
assure performance and quality. We acquire components of our laser system and
assemble them into a complete unit from components that include both
"off-the-shelf" materials and assemblies and key components that are produced by
others to our design and specifications. We conduct a series of final system
integration and acceptance tests prior to shipping a completed system. The
proprietary computer software that operates the scanning system in our laser
systems was developed and is maintained internally.
We have excimer laser system manufacturing operations in Winter Park,
Florida and San Jose, Costa Rica. LaserScan LSX excimer laser systems assembled
in our Florida facility are shipped to U.S. customers and systems assembled in
our Costa Rica facility are shipped to our international customers. In October
1996, we received certification under ISO 9002, an international system of
quality assurance, for our manufacturing and quality assurance activities in our
Florida and Costa Rica facilities. Since that time we have maintained our ISO
9002 certification through a series of periodic surveillance audits and have
also been certified at our Winter Park facility to ISO 9001 quality system
standards.
AVAILABILITY OF COMPONENTS. We purchase the vast majority of components
for our laser systems from commercial suppliers. These include both standard,
"off-the-shelf" items, as well as components produced to our designs and
specifications. While most components are acquired from single sources, we
believe that in many cases there are multiple sources available to us in the
event a supplier is unable or unwilling to perform. Since we need an
uninterrupted supply of components to produce our laser systems, we are
dependent upon these suppliers to provide us with a continuous supply of
integral components and sub-assemblies.
We contracted with TUI Lasertechnik und Laserintegration GmbH, Munich,
Germany, in 1996 to develop an improved performance laser head based on their
innovative technology and our performance specification and laser lifetime
requirements. We began to incorporate this new laser head into our products,
notably the LaserScan LSX, in the fourth quarter of 1997. Currently, TUI is a
single source for the laser heads used in the LaserScan LSX. Currently,
SensoMotoric Instruments GmbH, Teltow, Germany, is a single source for the eye
21
tracker boards used in the both the LaserScan LSX and the AstraScan. We continue
to evaluate joint ventures with critical suppliers as well as other potential
supplier relationships.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
Our AstraMax integrated diagnostic workstation is being manufactured in
our Winter Park manufacturing facility. These manufacturing operations also
primarily consist of assembly, inspection and testing of parts and system
components to assure performance and quality. We acquire components of the
AstraMax and assemble them into a complete unit from components that include
both "off-the-shelf" materials and assemblies and components that are produced
by others to our design and specifications. We conduct a series of final system
integration and acceptance tests prior to shipping a completed system. The
proprietary computer software that operates the diagnostic workstation was
developed and is maintained internally.
The AstraPro software is under development by LaserSight's software
engineers and will be distributed from Winter Park when it has been released for
commercial shipment. The CIPTA software that is being distributed under an
agreement with Ligi Technologie Medicali, Taranto, Italy, was developed by that
company. Any custom ablation software will require clinical trials and FDA
approval prior to sale in the U.S.
KERATOME PRODUCTS
The components of the UltraShaper durable keratome are being
manufactured exclusively for us by Owens Industries, Inc. Owens is experienced
in the machining and assembly of precision instruments. The components are then
assembled and tested in our Winter Park manufacturing facility. The control
console for our keratomes is manufactured for us by Humphrey Instruments, a
division of Carl Zeiss, Inc., located in San Leandro, California.
The UniShaper single-use keratome has been 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 had a 30-month term, expiring in May
2002, that obligated us to purchase 50,000 units during each year of the
contract following receipt of final product approval. This agreement has been
suspended indefinitely until it is determined that design changes can be
incorporated into the UniShaper to make it clinically viable.
Our UltraEdge keratome blades have historically been manufactured by
Becton Dickinson pursuant to our manufacturing agreement with them. That
agreement was terminated during 2001. See "Risk Factors and
Uncertainties--Industry and Competitive Risks--We cannot assure you that our
keratome products will achieve market acceptance." We are currently in
discussions with another company to manufacture our keratome blades. It is not
clear whether we will be able to formalize a keratome blade manufacturing
agreement on terms acceptable to us. We currently have in inventory enough
keratome blades to satisfy anticipated demand through 2002.
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COMPETITION
EXCIMER LASER SYSTEMS
The vision correction industry is subject to intense, increasing
competition. We operate in this highly competitive environment that has numerous
well-established U.S. and foreign companies with substantial market shares, as
well as smaller companies. Many of our competitors are substantially larger,
better financed, better known, and have existing products and distribution
systems in the U.S. marketplace. FDA approval requirements are a significant
barrier to entry into the U.S. market for commercial sales of medical devices.
Two of our competitors, Visx and Alcon (Summit), received FDA approval of their
broad beam laser systems several years ago, and have manufactured and sold laser
systems that currently account for about 60% of the installed excimer laser
systems in the U.S.
We believe competition in the excimer laser system market is primarily
based on safety and effectiveness, technology, price, regulatory approvals, per
procedure fee payments, royalty payments, dependability, warranty coverage and
customer service capabilities. We believe that safety and effectiveness,
technology, price, dependability, warranty coverage and customer service
capabilities are among the most significant competitive factors, and we believe
that we compete favorably with respect to these factors.
Currently, five manufacturers, Visx, Alcon, Nidek, Bausch & Lomb and
LaserSight, have excimer laser systems with the required FDA approval to
commercially sell the systems in the U.S. Some of the approvals are for broader
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 our competitors in the U.S. market
have FDA approval to perform a wider range of treatments than our laser system,
including higher degrees of nearsightedness and in the case of Visx and Alcon,
farsightedness. These approvals have given Visx a competitive advantage, with
laser systems sold by Visx having performed nearly 60% of the laser vision
correction procedures performed in the U.S. in 2001. Our LaserScan LSX excimer
laser system is not presently approved to treat farsightedness or more than -6
diopters of nearsightedness in the U.S. with our PRK approval or up to a
spherical equivalent of -6 diopters of nearsightedness and astigmatism with our
LASIK approval. Our PMA supplements for treatment of farsightedness with
astigmatism and mixed astigmatism are presently pending. While regulatory
approvals play a significant role with respect to the U.S. market, competition
from new entrants may be prevalent in other countries where regulatory barriers
are lower.
In February 2000, Visx announced that it was reducing the fee it
charges to customers from $250 to $100 for each laser vision correction
procedure performed on an excimer laser manufactured by Visx. Shortly after this
announcement, Alcon announced it would also reduce its licensing fee to $100,
plus an additional $25 for astigmatism and hyperopia correction and $150 for its
Ladarvision systems. Bausch & Lomb has indicated it will charge a fee of up to
$130 for each laser vision correction procedure performed on an excimer laser
manufactured by Bausch & Lomb. We are currently charging a per procedure fee of
up to $130. Nidek has not charged 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
23
alternatives for correcting refractive vision disorders such as surgically
implantable rings that recently received FDA approval, as well as implantable
intraocular lenses and a holmium laser system developed for the treatment of
farsightedness, that have also been approved by the FDA.
DIAGNOSTIC AND CUSTOM ABLATION PRODUCTS
The topography market is segmented into higher priced (Bausch & Lomb's
Orbscan) and lower priced markets (manufactured by Humphrey, Tomey and others).
We expect to primarily compete against the Orbscan. Our AstraMax instrument will
also be competing against another class of instruments based on wavefront
technology for use in planning custom ablation treatments. The target market for
higher-priced topographers is refractive surgeons, general ophthalmologists and
optometrists. Sales for the AstraMax will initially be targeted mostly to
refractive surgeons. The market has shown acceptance of new technology, and is
being fueled by the need to obtain more accurate corneal height data in an
effort to provide consistent and accurate results in LASIK surgery as well as
screen out poor candidates for the procedure.
We believe the Orbscan system has the highest market share of
topographers in the market today. We believe, subject to satisfactorily
addressing our serious liquidity and financing needs, the AstraMax will compete
well against the features offered by the Orbscan as well as provide the
additional benefits described earlier that should position the AstraMax as the
next generation in corneal topography.
KERATOME PRODUCTS
In the market for keratome products, Bausch & Lomb sold a majority of
the keratomes and keratome blades used by refractive surgeons in the U.S. in
2000 and 2001. We believe competition in the market for keratome products is
primarily on the basis of performance, ease of use, design, automation, price,
availability, regulatory approvals, royalty payments, warranty coverage and
customer service capabilities. We believe that performance, ease of use, design,
automation, and price are among the most significant, and believe that we
compete favorably with respect to these factors. In addition to Bausch & Lomb,
our principal competitors in the keratome and keratome blade business include
Moria and Innovative Optics.
INTELLECTUAL PROPERTY
There are a number of U.S. and foreign patents or patent rights
relating to the broad categories of laser devices, use of laser devices in
refractive surgical procedures, delivery systems for using laser devices in
refractive surgical procedures, keratometers, and keratomes. We maintain a
portfolio of what we believe to be strategically important patents, patent
applications, and licenses. Our patents, patent applications and licenses
generally relate to the following areas of technology: UV and
infrared-wavelength laser ablation for refractive surgery, our precision
microspot laser scanning system, harmonic conversion techniques for solid state
lasers, calibration of refractive lasers, eye tracking, treatment of glaucoma
and other retinal abnormalities, keratometer design, enhanced techniques for
corneal topography, techniques for treatment of nearsightedness and
farsightedness, techniques to optimize clinical outcomes of refractive
procedures, and keratome design. We monitor intellectual property rights in our
industry on an ongoing basis and take action, as we deem appropriate, including
protecting our intellectual property rights and securing additional patent or
license rights.
Among the more significant of our intellectual properties are our `504
Scanning Patent, solid-state laser-related, and keratometer patents. In May
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1996, we were granted the original '679 Scanning Patent relating to an
ophthalmic surgery method utilizing a non-contact scanning laser. In 1998 we
petitioned the U.S. Patent and Trademark Office for reissue of this patent, and
in January 2002 the U.S. Patent and Trademark Office reissued the `679 Scanning
Patent as the `504 Scanning Patent. Prior to reissue, the original '679 Scanning
Patent included one independent claim and 23 total claims. The reissue
application added nine new independent claims, and a total of 67 additional
claims to better encompass the breadth of technology to which we are entitled.
The 23 original claims remain essentially unchanged. The fundamental teachings
of the original '679 Scanning Patent cover a refractive laser system using an
excimer laser with low energy and a high laser pulse repetition rate to ablate
corneal tissue with small pulses delivered to the corneal surface in an
overlapping pattern. Through the reissue process, we were able to broaden
several elements of the `679 Scanning Patent's original claims by removing
certain restrictive elements. In September 2001, we received $3.0 million in
cash for a non-exclusive license agreement with Bausch & Lomb for what is now
our `504 Scanning Patent. In December 2001, Bausch & Lomb exercised an option to
license additional intellectual property owned by us for an additional payment
of $2.0 million. Of this total, approximately $0.8 million was due to TLC Laser
Eye Centers Inc. (TLC) under a separate license agreement. See "-Other
Intellectual Property."
Our U.S. Patent No. 5,144,630 relates to a solid-state laser operating
at multi-wavelengths using harmonic frequency conversion techniques. This is the
technology incorporated into our developmental solid-state system that can
produce both infrared and ultraviolet wavelengths.
Two of our U.S. patents, Nos. 5,847,804 and No. 5,953,100, cover a
multi-camera corneal analysis system that is the underlying technology for our
AstraMax diagnostic workstation. This state-of-the-art multi camera (stereo)
technology provides the precise corneal height measurements that will be
critical for the planning of custom ablation treatments when these treatments
are commercially available.
A number of our competitors, including Visx and Alcon, have asserted
broad intellectual property rights in technology related to excimer laser
systems and related products, and intellectual property lawsuits are sometimes a
competitive factor in our industry. We believe that we own or have a license to
all intellectual property necessary for commercialization of our products.
PATENT SEGMENT. Prior to 2001, we generated royalty income pursuant to
license agreements with respect to certain of our intellectual property rights,
primarily the Blum Patent and related license agreements we acquired from
International Business Machines Corporation (IBM) in August 1997. These
patents (IBM Patents), the Blum Patent and U.S. Patent No. 4,925,523 (Braren
Patent) relate to the use of ultraviolet light for the removal of organic
tissue and may be used in laser vision correction, as well as for non-ophthalmic
applications, and is the fundamental blocking patent that underlies the
technology of ultraviolet laser refractive surgery. Under the license agreements
with Visx and Alcon we acquired from IBM, Visx and Alcon were each obligated to
pay a royalty to us on all excimer laser systems they manufacture, sell or lease
in the U.S., excluding those systems manufactured in the U.S. and sold into a
country where a foreign counterpart to the IBM Patents exists.
We purchased the Blum and Braren patents from IBM in August 1997 for
$14.9 million. Shortly thereafter, we granted an exclusive paid up license in
the cardiovascular field in exchange for a payment of $4 million. In February
1998, we entered into an agreement with Nidek pursuant to which we retained all
of the IBM Patent rights within the U.S. and sold to Nidek, for $7.5 million,
the foreign counterparts to those patents. We also granted Nidek a non-exclusive
license to utilize the IBM Patents in the U.S. In addition, Nidek granted us an
exclusive license to the foreign counterparts to the IBM Patents in the
25
non-ophthalmic, non-vascular and non-cardiovascular fields. Since our 1997
purchase of the IBM Patents we have realized over $5 million in royalty revenues
from licenses to the patent.
In March 2001, we entered into a business arrangement with Alcon
regarding the Blum Patent. As part of the arrangement, we sold the Blum Patent
to Alcon for $6.5 million and assigned to Alcon certain licenses to the Blum
Patent. We retained a non-exclusive royalty free license under the Blum Patent
and at the time retained the license to the Blum Patent that was granted to
Visx. LaserSight and Alcon will share in royalties received from any future
licenses to the Blum Patent and we will also receive a portion of any recovery
from parties found to be infringing the Blum Patent. Including the transaction
with Alcon, we will have received a total of approximately $24 million from the
Blum Patent and will continue to enjoy a royalty free license in the U.S.
In May 2001 as part of our Settlement and License Agreement with Visx
we sold them a fully paid up license to the Blum Patent.
OTHER INTELLECTUAL PROPERTY. We believe that our other intellectual
property rights are valuable assets of our business. For example, our U.S.
Patent No. 6,213,605 covers the checkered polar grid utilized in our AstraMax
diagnostic workstation and our U.S. Patent No. 6,234,631 covers the combination
of advanced corneal topography and wavefront aberration measurement into a
single instrument and relates to future plans for our AstraMax diagnostic
workstation. We entered into an agreement with a subsidiary of TLC in October
1998 that grants us an exclusive license under U.S. Patent No. 5,630,810 (TLC
Patent) relating to a treatment method for preventing the formation of central
islands during laser surgery. Central islands are a problem generally associated
with laser refractive surgery performed with broad beam laser systems used to
ablate corneal tissue. We have agreed to pay TLC for the term of the exclusive
license 20% of the aggregate net royalties we receive in the future from
licensing the TLC patent and other patents currently owned by us. We owe TLC 20%
of the net proceeds of this license, or approximately $0.8 million.
Approximately half of this amount will be offset against a laser receivable owed
to us by TLC. The TLC Patent is currently in reissue at the U.S. Patent and
Trademark Office.
The extent of protection that may be afforded to us by our patents, or
whether any claim embodied in our patents will be challenged or found to be
invalid or unenforceable, cannot be determined at this time. Our patents and
other pending applications may not afford a significant advantage or product
protection to us.
We maintain an internal program that encourages development of
patentable ideas. As of March 29, 2002, we have approximately 30 U.S. patent
applications undergoing prosecution at the U.S. Patent and Trademark Office and
a number of counterparts to these applications filed internationally. Our patent
applications generally relate to the use of laser devices in refractive surgical
procedures, delivery systems and other technology related to the use of laser
devices in refractive surgical procedures, diagnostic devices for eye
measurements, and keratomes.
In the U.S., our trademarks include LaserSight(R), LaserSight
Technologies, Inc.(R), LSX(R), LaserScan LSX(R), MicroShape(R), UltraShaper(R),
UltraEdge(R), UniShaper(R) and AccuTrack(R). We have also applied for
registration of eight additional trademarks.
26
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.
Medical devices are classified by the FDA as Class I, Class II or Class
III based upon the level of risk presented by the device and whether the device
is substantially equivalent to an already legally marketed Class I or II device.
Class III devices are subject to the most stringent regulatory review and cannot
be marketed in the U.S. until the FDA approves a PMA for the device.
CLASS III DEVICES. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a Class III device for which the FDA requires PMAs. The
process of obtaining approval of a PMA application is lengthy, expensive and
uncertain. It may require the submission of extensive clinical data and
supporting information to the FDA. Human clinical studies may be conducted only
under an FDA-approved protocol and must be conducted in accordance with FDA
regulations. In addition to the results of clinical trials, the PMA application
includes other information relevant to the safety and efficacy of the device, a
description of the facilities and controls used in the manufacturing of the
device, and proposed labeling. After the FDA accepts a PMA application for
filing and reviews the application, a public meeting may be held before an FDA
advisory panel comprised of experts in the field.
After the PMA is reviewed and discussed, the panel issues a favorable
or unfavorable recommendation to the FDA. Although the FDA is not bound by the
panel's recommendations, it historically has given them significant weight. If
the FDA's evaluation of the PMA application is favorable, the FDA typically
issues an "approvable letter" requiring the applicant's agreement to comply with
specific conditions (such as specific labeling language) or to supply specific
additional data (such as post-approval patient follow-up data) or other
information in order to secure final approval. Once the approvable letter is
satisfied, the FDA will issue approval for certain indications that may be more
limited than those originally sought by the manufacturer. The PMA approval can
include post-approval conditions that the FDA believes necessary to ensure the
safety and effectiveness of the device including, among other things,
restrictions on labeling, promotion, sale and distribution. Failure to comply
with the conditions of approval can result in enforcement action, including
withdrawal of the approval. Products manufactured and distributed pursuant to a
PMA will be subject to extensive, ongoing regulation by the FDA. The FDA review
27
of a PMA application generally takes one to two years from the date such
application is accepted for filing but may take significantly longer. The review
time is often significantly extended by FDA requests for additional information,
including additional clinical trials or clarification of information previously
provided.
Modifications to a device subject to a PMA generally require approval
by the FDA of PMA supplements or new PMAs. We believe that our excimer laser
systems require a PMA or a PMA supplement for each of the surgical procedures
that they are intended to perform. The FDA may grant a PMA with respect to a
particular procedure only when it is satisfied that the use of the device for
that particular procedure is safe and effective. In granting a PMA, the FDA may
restrict the types of patients who may be treated and the ranges of treatment.
FDA regulations authorize any interested person to petition for
administrative review of the FDA's decision to approve a PMA application.
Challenges to an FDA approval have been rare. We are not aware that any
challenge has been asserted against us and do not believe any PMA application
has ever been revoked by the agency based on such a challenge.
The QSR/GMP 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.
During 1994, we began the clinical studies required for approval and
commercialization of our laser scanning system in the U.S. In April 1998, we
filed a PMA application for PRK treatment of nearsightedness using our scanning
laser system. We received notification from the FDA that our laser system had
received PMA approval for PRK treatment of low to moderate nearsightedness in
November 1999.
We also began a clinical trial of our scanning laser system for LASIK
treatment of nearsightedness and nearsightedness astigmatism in Canada in late
1998 and received Device License Approval from Canadian Medical Devices Bureau
in mid-1999.
In September 2001, we received notification from the FDA that the PMA
approval our laser system was expanded to the LASIK treatment of myopia and
myopic astigmatism for correction of manifest spherical refractive error of up
to -6 diopters with up to -4.5 diopters of astigmatism. We then received FDA
approval to increase our laser pulse rate to 200 Hz.
In November 2001, we submitted a PMA supplement seeking approval for
the treatment of farsightedness, with and without astigmatism, and mixed
astigmatism utilizing the LASIK procedure. The PMA supplement reflecting this
data is currently pending with the FDA.
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
28
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 received 501(k) clearance in May 2000.
After the FDA has issued a determination of equivalency for a device,
any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k)
notice. The FDA requires each manufacturer to make this determination in the
first instance, but the FDA can review any such decision. If the FDA disagrees
with a manufacturer's decision not to submit a new 510(k), the agency may
retroactively require the manufacturer to submit a premarket notification. The
FDA also can require the manufacturer to cease marketing and/or recall the
modified device until receipt of the necessary 510(k).
In January 2001, we received notification from the FDA that the Company
may begin commercial distribution of its AstraMax diagnostic workstation.
OTHER REGULATORY REQUIREMENTS. Labeling and promotional activities are
subject to scrutiny by the FDA and by the Federal Trade Commission. Current FDA
enforcement policy prohibits manufacturers from marketing and advertising their
approved medical devices for unapproved or off label uses. The scope of this
prohibition has been the subject of recent litigation. The only materials
related to unapproved devices that may be disseminated by companies are peer
reviewed articles. Our lasers are also subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health of the FDA. The law requires laser manufacturers to file new product and
annual reports and to maintain quality control, product testing and sales
records. In addition, laser manufacturers must incorporate specified design and
operating features in lasers sold to end users and comply with labeling and
certification requirements. Various warning labels must be affixed to the laser
depending on the class of the product under the performance standard. The
manufacture, sale and use of our products is also subject to numerous federal,
state and local government laws and regulations relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
INTERNATIONAL REGULATORY REQUIREMENTS. The manufacture, sale and use of
our products is also subject to regulation in countries other than the U.S.
During November 1996 we completed all requirements necessary to obtain authority
to apply the CE Mark to our LaserScan 2000 System, an earlier generation of
excimer laser system we sold in international markets. In September 1998, we
received similar certification to apply the CE Mark to our LaserScan LSX excimer
laser system. The CE Mark, certifying that the LaserScan Models 2000 and
LaserScan LSX meet all requirements of the European Community's medical
directives, provides our products with marketing access in all member countries
of the EU. All countries in the EU require the CE Mark certification of
compliance with the EU Medical Directives as the standard for regulatory
approval for sale of excimer laser systems.
The EU Medical Directives include requirements under EU laws regarding
the placement of various categories of medical devices on the EU market. This
includes a "directive" that an approved "Notified Body" will review technical
and medical requirements for a particular device. All clinical testing of
medical devices in the EU must be done under the Declaration of Helsinki, which
means that companies must have ethics committee approval prior to commencement
of testing, must obtain informed consent from each patient tested, and the
studies must be monitored and audited. Patient records must be maintained for 15
years. Companies must also comply with the Medical Device Vigilance reporting
requirements. In obtaining the CE Mark for our excimer laser system, we
demonstrated that we satisfied all engineering and electro-mechanical
29
requirements of the EU by having our manufacturing processes and controls
evaluated by a Notified Body (Semko) for compliance with EN46001, ISO 9002 and
ISO 9001 requirements, and conducted a clinical study in France to confirm the
safety and efficacy of the excimer laser system on patients.
RESEARCH AND DEVELOPMENT
We continue to research and develop new laser products, laser systems,
product upgrades enhancements, keratome products, including alternate ring size
and flap thickness for our UltraShaper durable keratome, and ancillary product
lines. In March 2000, we acquired the intellectual property that we have
developed into the AstraMax that we expect to be commercialized during the
second quarter of 2002. We believe the AstraMax will assist us in developing our
custom ablation treatment plan capabilities.
Other research and development projects include the development of a
solid-state laser and enhancements for our advanced eye-tracking system that is
standard on the international model of LaserScan LSX. The solid-state laser is
the first true non-gas laser capable of delivering a laser beam in the
ultraviolet spectrum (common to all excimer lasers used for refractive surgery).
In addition, the solid-state laser could be capable of generating multiple
wavelengths, thus permitting its use for other ophthalmic procedures that now
require separate lasers.
Our historical solid-state research and development efforts have
resulted in the identification of many features that have been subsequently
incorporated into our excimer laser system. We intend to continue to direct
efforts at an appropriate level towards the development of this system as
resources allow. As is the case with many new technology products, the
commercialization of the solid-state laser is subject to potential delays.
While the risk of failure of these specific activities may be
significant, we believe that if developed, these products could provide us with
a leading edge technology that would further differentiate our products from
other companies in the industry. There is no assurance that any of these
research and development efforts will be successful.
HEALTH CARE CONSULTING SERVICES
Our health care services segment has historically provided health care
and vision care consulting services to hospitals, managed care companies and
physicians through our TFG subsidiary. The core business of TFG was two-fold:
developing and maintaining physician databases for clients' needs and providing
customized strategic plans. Services included physician recruitment tools,
competitive intelligence, demand studies, community health analyses and
distribution channel mapping. TFG clients included multi-hospital health
systems, community hospitals, academic medical centers, specialty health care
providers and manufacturers and distributors of health care products.
This subsidiary's financial results had been improving. However, due to
our increased focus on refractive product development and commercialization,
management decided, with board affirmation, to wind down the subsidiary within a
reasonably short timeframe. Therefore, since this subsidiary has been accounted
for as a separate segment, the remaining goodwill associated with TFG has been
expensed in 2001 and its results are accounted for as a discontinued operation
as of December 31, 2001.
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EMPLOYEES
As of December 31, 2001, we had 115 full-time employees and one
part-time employee. 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 laboratory facilities, are located in approximately 17,100 square
feet of space that we have leased in Winter Park, Florida. This lease expires on
June 14, 2002, however, we have the option to extend the lease through January
15, 2003. We have leased approximately 15,600 square feet of additional space in
Winter Park, Florida for administrative office space and manufacturing. The
lease of this additional space in Winter Park expires January 31, 2004. We lease
approximately 5,000 square feet of office space in St. Louis, Missouri, which
lease expires July 31, 2006. We are actively looking to sublease this space. We
lease approximately 6,400 square feet of space near San Jose, Costa Rica, that
we use as a manufacturing facility. The lease of the San Jose manufacturing
facility expires November 30, 2003. 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
JARSTAD. In January 2002, a customer filed a lawsuit in the Superior
Court of the State of Washington in and for the County of King. The lawsuit was
subsequently remanded to federal court. The lawsuit names LaserSight
Technologies and an unaffiliated finance company as defendants. The lawsuit
alleges various claims related to LaserSight Technologies' sale of a laser
system to the plaintiff including breach of contract, breach of express
warranty, breach of implied warranty, fraudulent inducement, negligent
misrepresentation, unjust enrichment, violation of the consumer protection act
and product liability. Plaintiffs request damages to be determined at trial,
reimbursement for leasing fees, prejudgment and postjudgment interest,
attorneys' fees and costs and other equitable relief. Management believes that
LaserSight Technologies has satisfied its obligations under the sale agreement,
and that the allegations against it are without merit and intend to vigorously
defend this lawsuit. Management believes that the outcome of this litigation
will not have a material adverse impact on LaserSight's business, financial
condition or results from operations. However, the outcome of litigation is
inherently uncertain, and an unfavorable outcome in this litigation could have a
material adverse effect on LaserSight's business, financial condition and
results from operations.
DISTRIBUTORS. In October 2001, three entities that previously served as
distributors for LaserSight's excimer laser system in the United States,
Balance, Inc. d/b/a Bal-Tech Medical, Sun Medical, Inc. and Surgical Lasers,
Inc., filed a lawsuit in the Circuit Court of the Ninth Judicial Circuit, Orange
County, Florida. The lawsuit names LaserSight Technologies, Mr. Farris and James
Spivey, LaserSight Technologies' Vice President of Sales, as defendants. The
lawsuit alleges various claims related to LaserSight Technologies' termination
of the distribution arrangements with the plaintiffs including breach of
contract, breach of the covenant of good faith and fair dealing, tortious
interference with business relationships, fraudulent misrepresentation,
conversion and unjust enrichment. Plaintiffs request actual damages in excess of
$5,000,000, punitive damages, prejudgment interest, attorneys' fees and costs
and other equitable relief. Management believes that LaserSight Technologies has
satisfied its obligations under the distribution agreements, and that the
allegations against LaserSight Technologies, Mr. Farris and Mr. Spivey are
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without merit and intend to vigorously defend this lawsuit. Management believes
that the outcome of this litigation will not have a material adverse impact on
LaserSight's business, financial condition or results from operations. However,
the outcome of litigation is inherently uncertain, and an unfavorable outcome in
this litigation could have a material adverse effect on LaserSight's business,
financial condition and results from operations.
VISX, INCORPORATED. On May 25, 2001 LaserSight settled the patent
infringement action filed by Visx against LaserSight in November 1999 in the
United States District Court for the District of Delaware. In connection with
the resolution of this litigation LaserSight and Visx entered into a Settlement
and License Agreement pursuant to which LaserSight received a license to patents
held by Visx that relate to refractive excimer lasers, including United States
Patents Nos. 4,718,418 and B1 5,108,388 and has agreed to pay a royalty for each
procedure performed in the United States using a LaserSight refractive laser. As
part of the agreement, Visx purchased a fully paid up license to U.S. Patent No.
4,784,135 (the Blum Patent). Under the Settlement and License Agreement, all
economic terms and conditions are confidential. The parties filed a stipulated
order dismissing the patent infringement action on June 1, 2001.
FORMER SHAREHOLDER OF TFG. On May 14, 2001, a motion for summary
judgment was granted in