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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, 1997
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.)
12249 Science Drive, Suite 160, Orlando, Florida 32836
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 382-2700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sale price on March 27, 1998 was
approximately $29,521,498.
Number of shares of Common Stock outstanding as of March 27, 1998:
11,996,647.
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, 1998.
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 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
The information in this Annual Report on Form 10-K contains forward
looking-statements, as indicated by words such as "anticipates," "expects,"
"believes," "estimates," "intends," "projects," and "likely," by statements of
the Company's plans, intentions and objectives, or by any statements as to
future economic performance. Forward-looking statements involve risks and
uncertainties that could cause the Company's actual results to differ materially
from those described in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis--Risk
Factors and Uncertainties" as well as those discussed elsewhere in this Report.
PART I
Item 1. Business
OVERVIEW
LaserSight Incorporated and its subsidiaries (collectively, "LaserSight"
or the "Company") operate in two major operating segments: technology and health
care services. The Company's principal wholly-owned subsidiaries include:
LaserSight Technologies, Inc. ("LaserSight Technologies"), LaserSight Patents,
Inc. ("LaserSight Patents"), and MRF, Inc. ("The Farris Group" or "TFG").
Technology Segment. The Company's technology segment includes LaserSight
Technologies, LaserSight Patents and LaserSight Centers Incorporated
("LaserSight Centers"). LaserSight Technologies develops, manufactures and
markets ophthalmic lasers with a galvanometric scanning system primarily for use
in performing PRK (photorefractive keratectomy) which uses a one millimeter
scanning laser beam to ablate microscopic layers of corneal tissue to reshape
the cornea and to correct the eye's point of focus in persons with myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. LaserSight
Patents and LaserSight Technologies license various patents related to the use
of excimer lasers to ablate biological tissue and related to keratome design and
usage. LaserSight Centers is a developmental-stage company through which the
Company may in the future provide PRK, LASIK (Laser In-Situ Keratomileusis) and
other eyecare surgical services.
In 1994, the Company shifted its emphasis from research and development of
its laser systems to the manufacturing and international sales of its lasers.
The Company's Compak-200 Mini-Excimer laser ("Compak-200") was introduced
internationally in 1994. The LaserScan 2000 Excimer Laser PhotoPolishing System
("LaserScan 2000") was introduced in late 1995 to replace the Compak-200. The
LaserScan 2000 incorporates improvements that were developed and implemented as
the result of the Company's worldwide clinical experience with the Compak-200.
In 1997, the Company developed the LSX excimer laser system with a new laser
head, an active eye-tracking system, and advanced engineering.
The next-generation excimer laser is under development and improvement and
is currently being marketed commercially in over 30 countries around the world.
The Company enjoys the largest installed base of scanning lasers in the
industry. The Company intends to continue to develop and improve upon its
technology and to aggressively continue the process of gaining regulatory
approval in order to access the domestic market, with approval presently
anticipated during 1998. The Company's patent portfolio covers scanning
technology, infrared technology, solid-state technology, calibration technology,
and glaucoma treatment. The Company currently is pursuing domestic regulatory
approval to market its excimer laser for glaucoma treatment. With glaucoma
affecting over six million people in the United States ("U.S."), the Company
believes that its laser will provide a real therapeutic use by treating this
leading cause of blindness. Therefore, the Company intends to continue to build
upon its leadership position internationally, moving into the domestic market
for refractive surgery, while expanding the applicability of its technology to
the therapeutic treatment of glaucoma.
Health Care Services Segment. Since December 31, 1997, the health care
services segment has consisted of The Farris Group. TFG provides health care and
vision care consulting services to hospitals, managed care companies and
physicians. Until that date, this segment had also included MEC Health Care,
Inc. ("MEC") and LSI Acquisition, Inc. ("LSIA"). Under the Company's ownership,
MEC was a vision managed care company that managed vision care programs for
health maintenance organizations (HMOs) and other insured enrollees. LSIA was a
physician practice management company that managed the ophthalmic practice known
as the "Northern New Jersey Eye Institute" under a management services
agreement.
TFG works with marketers of health care manufacturers and the chief
executive officers and planners of hospitals, integrated delivery systems and
medical groups. The core business of TFG is two-fold: developing and maintaining
physician databases in addition to providing customized strategic plans.
Services included are physician recruitment tools, competitive intelligence,
demand studies, community health analyses and distribution channel mapping.
General. For information regarding the Company's export sales and
operating revenues, operating profit (loss) and identifiable assets by industry
segment, see Note 14 of the Notes to Consolidated Financial Statements.
As of December 31, 1997, the Company had 93 full-time and 4 part-time
employees. The Company considers its employee relations to be good.
The Company was incorporated in Delaware in 1987, but was inactive until
1991. In April 1993, the Company acquired LaserSight Centers in a
stock-for-stock exchange with additional shares issued in March 1997 pursuant to
an amended purchase agreement. In February 1994, the Company acquired The Farris
Group. In July 1994, the Company was reorganized as a holding company. In
October 1995, the Company acquired MEC. In July 1996, the Company's LSIA
subsidiary acquired the assets of the Northern New Jersey Eye Institute, P.A.
("NNJEI"). On December 30, 1997, the Company sold MEC and LSIA, effective as of
December 1, 1997. See "Recent Developments--Liquidation of Vision 21 Shares."
The Company's principal offices and mailing address are 12249 Science
Drive, Suite 160, Orlando, Florida 32836, and its telephone number at that
location is (407) 382-2700. Effective on or about May 1, 1998, such address is
expected to be 3300 University Boulevard, Suite 140, Winter Park, Florida 32792.
LASERSIGHT TECHNOLOGIES
LSX Excimer Laser System
The LSX laser system was introduced at the American Society of Cataract
and Refractive Surgeons meeting in April 1997. LSX is designed to be the
Company's premium excimer laser product, and incorporates improvements developed
and implemented as the result of the Company's worldwide clinical experience.
The LSX integrates the Company's new surgeon-intuitive version 9.0 software, the
new high-reliability CeraLase ultraviolet laser source and AccuTrack eye
tracking, with an ergonomic console design, to supply the complete refractive
surgical workstation.
Version 9.0 software incorporates an easy to use graphical user interface
with expanded treatment capabilities for myopia, hyperopia and astigmatism, true
spherical ablation profiles and a patient record database. The CeraLase
ultraviolet-laser source was developed to satisfy the demanding requirements of
refractive surgical systems and features 200 pulse per second operation, long
reliable life, ease of day to day operation and simplified maintenance. The
Company's AccuTrack eye-tracking technology was incorporated as standard feature
in LSX that includes enhancements in lighting and image contrast to improve
surgical centration accuracy. This fully integrated ophthalmic surgical
workstation is designed for use by ophthalmologists to perform PRK and LASIK
refractive laser procedures. These procedures are recognized by most
ophthalmologists to be clinically predictable.
A LSX was first shipped in December 1997 and regular commercial shipments
are expected to begin at the end of March 1998. The LSX is expected to be the
Company's primary excimer laser product by June 1998.
LaserScan 2000Plus Excimer Laser System
The LaserScan 2000Plus laser system was introduced in March 1998 as an
enhanced version of the LaserScan 2000. The LaserScan 2000Plus was designed to
replace the LS 300 as a lower-cost alternative excimer laser product. Its
improvements include the Company's new surgeon-intuitive version 9.0 software,
energy stabilization, and new patient alignment/fixation system. This surgical
workstation is also designed for use by ophthalmologists to perform PRK and
LASIK refractive laser procedures.
LaserScan 2000 Excimer Laser System
The LaserScan 2000 laser system was introduced at the Annual Meeting of
the American Academy of Ophthalmology in October 1995. The LaserScan 2000 was
designed to replace the Company's first excimer laser product, the Compak-200
laser system, and incorporates improvements developed and implemented as the
result of the Company's worldwide clinical experience with the Compak-200.
The LaserScan 2000 is a fully integrated ophthalmic surgical work station
for use by ophthalmologists. It has been designed to perform PRK and LASIK
refractive laser procedures currently recognized by most ophthalmologists as
being clinically predictable. This compact, new-generation, ArF (193nm) excimer
laser weighs less than 450 pounds, with low gas maintenance costs.
All of the Company's excimer laser systems incorporate a scanning device
utilizing a pair of galvanometer controlled mirrors that reflect and scan the
laser beam directly on the corneal surface without the use of discs, masks, or
diaphragms used by other excimer laser systems. The advantages of this scanning
system include: (i) a smaller laser beam diameter that dramatically increases
power density thereby permitting more compact systems; (ii) greater scanning
pattern flexibility for refractive procedures, including the correction of
myopia, hyperopia, and astigmatism; (iii) smoother surface quality without
transition zones; and (iv) an ability to scan much larger optical zones (up to
9mm). The actual corneal ablation profile is computer-controlled to adjust the
beam overlap and diameters of the scanning system. The source code of the
scanning software is proprietary technology of the Company (patent applied for)
and has been developed and tested by a series of experiments on both PMMA
(plastic) and human cadaver eye tissue and at international and domestic
clinical trial sites.
LS 300 Excimer Laser System
In June 1996, LaserSight Technologies introduced the LS 300 Excimer Laser
System at the Annual Meeting of the American Society of Cataract and Refractive
Surgeons. The LS 300 was introduced to offer a lower-cost alternative to the
LaserScan 2000. As a modified version of the Compak-200, it allowed the Company
to utilize its remaining Compak-200 inventory. The modifications to the original
system included upgraded optics and illumination and automatic gas exchange. The
Compak-200 laser system established the industry's standard for small diameter
beam, galvanometer controlled scanning lasers. That system was improved upon
with the introduction of the LaserScan 2000 and LS 300 systems. Production of
the LS 300 was phased out during 1997 in favor of the LaserScan 2000 and
LaserScan 2000Plus systems.
Automated Disposable Keratome
The Company acquired rights to the Automated Disposable Keratome
("A*D*K"), a device utilized in connection with the LASIK procedure, in
September 1997 from inventors Luis A. Ruiz, M.D. ("Ruiz"), and engineer Sergio
Lenchig ("Lenchig") of Bogota, Colombia. Ruiz and Lenchig invented the Automated
Corneal Shaper ("ACS") distributed by another company. The A*D*K incorporates
the market proven features found in the ACS with new enhancements: preassembled,
factory inspected, single use, transparent components, and dual gear drive with
covered gears. The enhanced device was designed in response to feedback received
on the market leader device. Early A*D*K prototypes were shown at the American
Academy of Ophthalmology conference held in San Francisco in October 1997.
Section 510(k) clearance from the U.S. Food and Drug Administration ("FDA") was
applied for in October 1997 and received in January 1998, thereby allowing it to
be sold and used on a commercial basis in the U.S. Manufacturing validation
began in late 1997. Clinical testing began during the first quarter of 1998.
The A*D*K will be manufactured exclusively for LaserSight by Frantz
Medical Development Ltd. ("Frantz Medical"), Cleveland, Ohio, which is an ISO
9001 company experienced in the manufacture of engineering-grade medical
devices. Franz Medical was chosen for its experience with OEM manufacturing for
other large medical companies and its reputation for consistent delivery of
quality products. The A*D*K is currently in the process of final manufacturing
and clinical validation. The Company had originally expected to begin commercial
sales of the A*D*K in February 1998, but now expects such sales to begin during
the second quarter of 1998 due to unanticipated complexities in the
manufacturing validation process.
The Company has developed a feature-enhanced control console to power the
A*D*K. The new console adds suction monitoring functions with visual and
auditory alarms to indicate a caution state; an ergonomic design, including
quiet operating performance; a digital display in either inches or millimeters
of mercury; an elapsed time indicator to show the amount of time the eye has
been exposed to high suction; and a new low suction setting to allow the surgeon
the option to use the suction ring as a globe fixation device.
The A*D*K and related products are being marketed both through the
Company's existing international distributor network and through direct sales.
The U.S. market is being addressed through: (i) direct contact (telephone, mail,
fax and internet) to refractive surgeons; (ii) a direct marketing effort
targeting laser center national accounts; (iii) educational wet lab seminars
which introduce the product in key metropolitan areas; and (iv) the CRS study (a
multi-center LASIK study actively involving more than 250 refractive surgeons).
The Company expects to benefit from favorable payment terms: direct sales
with payment in cash or by credit card, at shipment of product or through
distributor orders with letters of credit, prepayment, or up to 30-day terms.
Relatively low product price and the prospect of repeat orders necessitates such
payment terms, rather than extended terms often offered for higher cost capital
equipment.
The keratome market is developing globally with the perceived emergence of
LASIK rather than PRK as the procedure of choice for laser refractive surgery.
This trend was first evident in markets which were among the first to embrace
laser refractive surgery, and appears to be spreading to other global markets,
including the U.S. where LASIK appears to be capturing a majority of refractive
surgery cases for the first time in 1998. The Company believes there are five
main competitors in the keratome business, but the Company has the only FDA
510(k)-cleared disposable keratome. The Company does not believe certain of the
keratome products currently being marketed by competitors are currently
available in large supply. Others are manual devices, rather than automated.
While the Company believes that its A*D*K has significant advantages over the
keratomes manufactured by its principal competitors, some of these competitors
are larger, more established, and presently have greater financial strength than
the Company.
The Company believes that the major competitive factors for this product
will be quality, safety, availability, automation, simplicity and price.
Ancillary Products
The majority of ancillary revenues are part of the same class of products
and services as excimer laser system sales and, in total, such revenues are less
than 5% of Technology revenues.
Certain ancillary products (such as the video display camera) are offered
as a convenience to customers and are not manufactured by the Company. The more
significant ancillary products are listed below.
AccuTrack Eye Tracking System. The Company continues to offer an active
eye tracking system as an option to the LaserScan 2000Plus. The system is
integrated into the laser system and automatically detects slight saccadic
movements of the patient's eye, automatically adjusting the position of the
laser beam to ensure that the eye remains centered during the laser procedure.
During 1997, the Company continued its engineering and development of the system
to optimize the eye tracking system's functions, and to extend the capability of
the tracking system hardware and software.
Video Display Camera. The Company offers, as an option, a video display
system for observation or recording of procedures. This camera can be installed
on the LaserScan 2000Plus, either at the manufacturing facility or as an upgrade
on site. The video display system includes a beam splitter, video adapter, and a
single chip video camera.
Intellectual Property
Numerous patents have been applied for by, or have been issued to, other
companies related to the broad technologies of lasers and laser devices,
refractive surgical procedures using laser devices, and delivery systems for
using laser devices in refractive surgical procedures.
The Company maintains a portfolio of strategically important patents, and
patent applications, covering its scanning method, solid-state technology,
glaucoma and retinal treatments, corneal topography development, calibration
methods, treatment for myopia and hyperopia, and keratomes.
The Company continues to take actions to secure patent rights in its
field. See "Management's Discussion and Analysis--Risk Factors and
Uncertainties."
Purchase of Certain Patents from IBM
In 1992, LaserSight Technologies signed a License Agreement with
International Business Machines Corporation ("IBM") for IBM's patents relating
to ultraviolet light ophthalmic products and procedures for ultraviolet
ablation. Under this license, LaserSight Technologies paid a royalty fee of 2%
of the sales of its ultraviolet lasers in those countries in which IBM had such
a patent. Sales of excimer lasers in other countries were not subject to such
royalty payments.
In August 1997, the Company purchased from IBM, two patents related to
ultraviolet light ophthalmic products and procedures for ultraviolet ablation.
These patents (the "IBM Patents"), U.S. Patent No. 4,787,135 (Blum Patent) and
U.S. Patent No. 4,925,523 (Braren Patent) relate to the use of ultraviolet light
for laser vision correction, as well as all non-ophthalmic applications. With
the purchase of these patents the Company also acquired related patent license
agreements, and all royalties accrued after January 1, 1997 under license
agreements with Summit Technologies, Inc. and Visx, Incorporated. A license to
the IBM Patents is necessary for companies desiring to enter the laser vision
correction market in the U.S. and certain other countries. In addition to the
royalties from licenses acquired and potential new licenses with other excimer
laser manufacturers and users, the Company also has the right to pursue claims
for all past infringement of the IBM Patents.
Sale of Patent Rights and Licenses
In September 1997, the Company received a one-time lump sum payment of $4
million from a third party in exchange for an exclusive worldwide, royalty-free
license covering the vascular and cardiovascular rights covered in the IBM
Patents.
In February 1998, the Company entered into an agreement with Nidek Co.,
Ltd. ("Nidek") under the terms of which the Company retained all patent
ownership rights within the U.S. to the IBM Patents, and transferred to Nidek
ownership of the non-U.S. counterparts related to those patents, in exchange for
$7.5 million in cash. The foreign counterpart rights to the IBM Patents include
Australia, Austria, Belgium, Brazil, Canada, France, Germany, Italy, Japan,
Spain, Sweden, Switzerland, and the United Kingdom. The Company also granted
Nidek a non-exclusive license to utilize the U.S. patents on terms comparable
with existing licensees. The agreement with Nidek does not affect any
outstanding license agreements related to non-U.S. patents that have been
previously granted to the Company or any other companies. The agreement with
Nidek also provides for the Company to continue to have exclusive right to use
and sublicense the non-U.S. patents in all fields other than ophthalmic,
cardiovascular and vascular.
The Company intends to negotiate additional license agreements relating to
the IBM Patents with other companies. However, there can be no assurance as to
whether, when or on what terms the Company may be able to do so. As of the date
of this Annual Report, the Company had not entered into any other agreements
relating to the IBM Patents other than those described herein.
Scanning and Solid-State Laser-Related Patents for Refractive Surgery
In May 1996, a patent (U.S. Patent No. 5,520,679) for an "Ophthalmic
Surgery Method Utilizing Non-Contact Scanning Laser" was granted to the Company
by the U.S. Patent Office. This patent includes claims that cover ultraviolet
and infrared wavelengths wherein the purposeful overlapping of sequential
small-diameter laser pulses achieves a "photopolishing" of the corneal surface.
Another patent (U.S. Patent No. 5,144,630) has been granted covering the
apparatus and use of the solid-state (ultraviolet and infrared) LaserHarmonic
System. The extent of protection that may be afforded to the Company, or whether
any claim embodied in these patents will be challenged or found to be invalid,
cannot be determined at this time. These patents and other pending applications
may not afford a significant advantage or product protection to LaserSight
Technologies.
In July 1995, the Company exercised its option to acquire technology of a
solid-state UV-laser operating at 213 nm and 200 Hz developed by Dr. J.T. Lin
pursuant to Dr. Lin's Research and Development Agreement with the Company. Dr.
Lin is a former president and chief executive officer of the Company. This laser
system employs harmonic wavelength mixing schemes different from those described
in the Company's 1992 solid-state patent (U.S. Patent No. 5,144,630), Dr. Lin's
patent application, which has been assigned to the Company, has been filed
covering this new technology. During 1997, efforts on this project continued,
but at a priority level lower than excimer-related activities within the
company's engineering and research and development departments.
In November 1995, the Company obtained an exclusive license for
patent-pending technology developed by Dr. Peter McDonnell, Professor of
Ophthalmology, Doheny Eye Institute, University of Southern California. This
technology for epithelial boundary determination may allow for full automation
(Auto-PRK) of the PRK procedure using the Company's patented delivery system. In
February 1998, the Company ended this licensing arrangement with the University
of Southern California based on its perception that the LASIK procedure has
become the dominant refractive surgical technique.
In October 1995, Francis E. O'Donnell, Jr., M.D., Chairman of the Board of
the Company was granted a patent (U.S. Patent No. 5,460,627) for a method and
apparatus for calibration of PRK lasers. Dr. O'Donnell licensed this patent to
LaserSight Centers in exchange for a 6% royalty on the net sales or uses of the
patented technology. In January 1996, the Company announced a joint venture with
PAR Vision Systems, as the Ex-Caliper. It uses a rastersterographic topography
system to measure the effects of a simulated PRK on a single-use, disposable
target. Under the terms of the agreement, the joint venture partners share in
software licensing income and in the sale of disposable targets for the
Ex-Calipar system.
Keratome Patents and Licenses
In July 1997, the Company completed an agreement under which it purchased
U.S. Patent No. 5,586,980 from Dr. Frederic B. Kremer. The Kremer patent covers
a pivoting head in a keratome, the instrument required to create the corneal
"flap" in the LASIK procedure.
In September 1997, the Company entered into a limited exclusive license
agreement with Ruiz and Lenchig for U.S. Patent No. 5,133,726/RE35421 and its
foreign counterparts. The limited license agreement includes worldwide
distribution rights to the A*D*K.
Treatment of Glaucoma and Other Ophthalmic Indications
Dr. O'Donnell was independently granted two patents (U.S. Patent No.
5,370,641) for the Laser Trabeculodissection for treatment of glaucoma, and
(U.S. Patent No. 5,217,452) for Transscleral Laser Treatment of Subretinal
Neovascularization for macular degeneration. These patents were assigned by Dr.
O'Donnell to LaserSight Centers in January 1995 for $6,121 as reimbursement for
attorney's fees and costs to prosecute the patent applications.
Trade and Service Marks
The Company has independently developed the trademarks "A*D*K", "LSX",
"AccuTrack", and "ScanLink" and intends to enforce its prior appropriation of
these trademarks and to seek registration thereof. "LaserSight" is a service
mark developed by the Company.
Manufacturing
In late 1995, the Company opened a new manufacturing facility in San Jose,
Costa Rica to manufacture its lasers for international sales, and for delivery
to U.S. investigational sites under its Investigational Device Exemption ("IDE")
protocols. Beginning in 1996, all lasers sold to international customers were
manufactured at this facility, as well as laser systems delivered to U.S.
clinical investigators. This facility, located in a free trade zone, is expected
to produce all laser units sold internationally during 1998.
As exports of laser products not approved for sale in the U.S. are closely
regulated by the FDA, the Company's establishment of an offshore manufacturing
facility permits it to sell products to any international customer without prior
FDA approval. Many countries have their own regulatory requirements, however.
The manufacturing process is mainly an assembly operation in which
LaserSight Technologies acquires components of its system and assembles them
into a complete unit. Components include both "off-the-shelf" materials and
assemblies, as well as various key components which are produced by others to
the Company's design and specifications. In general, the cost of the Company's
lasers predominantly relate to hardware; the labor component of cost is
relatively small. The proprietary computer software operating the scanning
system has been developed internally.
A number of key components necessary to produce the Company's laser
products are obtained from single vendors. Should these suppliers become unable
or unwilling to supply these components, the Company would be required to seek
other qualified suppliers. See "Management's Discussion and Analysis--Risk
Factors and Uncertainties--Availability of Components."
During 1996 the Company completed implementation of an international
system of quality assurance under ISO 9002, that was initiated during 1995. In
October 1996 the Company received certification under ISO 9002 for its
manufacturing and quality assurance activities in Orlando, Florida and San Jose,
Costa Rica. During November 1996 the Company completed all requirements
necessary to obtain authority to apply the CE Mark to its LaserScan 2000 System.
The CE Mark, certifying that the LaserScan 2000 meets all requirements of the
European Community's medical directives, gives the Company access to market its
products into all member countries of the European Economic Union ("EU"). While
at this time only certain member countries of the EU require compliance with the
EU Medical Directives (including France and Germany), starting in 1998 all
countries in the EU will require CE Mark certification of compliance with the EU
Medical Directives as the standard for regulatory approval for sale of laser
systems.
The EU Medical Directives include all the requirements under EU laws
regarding the placement of various categories of medical devices on the EU
market. This includes a "directive" that an approved "Notified Body" will review
technical and medical requirements for a particular device. All clinical testing
of medical devices in the EU must be done under the Declaration of Helsinki,
which means that companies must have ethics committee approval prior to
starting, they 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 obey the Medical Device Vigilance reporting
requirements. In obtaining the CE Mark for its excimer laser system, the Company
had its manufacturing and controls evaluated by a Notified Body (Sernko) for
maintenance of ISO 9002 conditions, satisfied all required engineering and
electro-mechanical requirements of the EU and conducted a clinical study in
France to confirm the efficacy and safety of the excimer laser system on
patients.
Availability of Components
LaserSight Technologies purchases the vast majority of its components for
its lasers from commercial suppliers. These include both standard,
"off-the-shelf" items, as well as components produced to the Company's unique
designs and specifications. While most are acquired from single sources, the
Company believes that in many cases there are multiple sources available to it
in the event a supplier is unable or unwilling to perform. As the Company is
dependent upon an uninterrupted supply of components to produce its lasers, it
is dependent upon these suppliers to provide a continuous supply of integral
components and sub-assemblies.
The Company presently has an exclusive supply arrangement from a single
source, MPB Technologies Inc., Dorval, Quebec, Canada, for the laser head used
in the LaserScan 2000. Under this exclusive arrangement, the supplier of the
laser head is restricted from providing this relatively low energy, high
repetition rate laser head to any company that would use the laser head in an
excimer laser system for corneal refractive surgery. The Company historically
experienced higher than anticipated warranty service costs associated with this
component, and accordingly, during 1995 the Company began certain measures to
address this issue that continued into 1997. These measures include 100%
incoming inspection of all laser heads at time of receipt from the supplier,
modification and upgrading of certain critical components, development and
testing of new techniques for handling the laser heads, and a search for
alternative components and suppliers.
During 1996, the Company contracted with a potential new supplier of the
laser head component to develop an improved performance laser head based on this
supplier's innovative technology and the Company's performance specification and
laser lifetime requirements. In 1997, the Company began engineering evaluation
and testing and determined that with some modifications the new laser head
satisfied all engineering requirements. The Company began to incorporate this
new laser head into its products, notably the LSX, in the fourth quarter of
1997. Further development on new variations of this technology continue and the
Company has a limited exclusive license to this technology in the field of
ophthalmic surgery as long as minimum purchase requirements are satisfied, i.e.,
45 lasers during the first year of the license. The current supply arrangement
for this laser is from a single source, TUI Lasertechnik und Laserintegration
GmbH, Munich, Germany.
The Company continues to evaluate potential supplier relationships with
other laser manufacturers.
Marketing
The use of LaserSight Technologies' medical laser systems in the U.S.
requires FDA approval. LaserSight Technologies has been marketing these systems
in the international market where approval is not required or has been obtained.
These international sales require LaserSight to comply with the regulatory
requirements of the importing nation and export requirements of the U.S.
During 1997, LaserSight Technologies continued to market the LaserScan
2000 and, toward the end of the year, commenced the marketing of the LSX laser
system in Europe, the Pacific Rim, Asia, South and Central America, and the
Middle East. The Company sells its excimer laser systems and accessories using a
multi-tiered marketing strategy directed toward ophthalmologists throughout the
world. A combination of directly-employed sales representatives and independent
international distributors and representatives is used to market directly to
individual ophthalmologists, ophthalmic clinics, and hospitals.
The Company directly employs two territorial managers who are responsible
for sales, both direct and through distributors and representatives, within
their respective territories. The Company's distributors and representatives
have been selected based on their experience in the market for ophthalmic
equipment and their capability for technical support. Distributor and
representative agreements either provide for exclusive territories, with
continuing exclusivity dependent upon mutually-agreed levels of annual sales, or
nonexclusive agreements without sales minimums. Currently, separate distributor
and representative agreements are in place for all major market areas. During
1997, approximately 89% of sales of LaserSight Technologies' products resulted
from distributors and representatives with the balance from direct sales.
During 1997, LaserSight Technologies continued to expand and negotiate
with distributors and representatives for agreements to represent LaserSight
Technologies' products into areas that will ensure complete worldwide sales
coverage. In conjunction with its expanded sales activities, LaserSight
Technologies continues to participate in a number of ophthalmology meetings,
exhibits and seminars, both domestic and foreign. 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 the
Company's laser products.
During 1995, the Company entered into an agreement for the Japanese market
with Noda Medical Consulting, Inc. ("Noda Medical"). Under this agreement, the
Company and Noda Medical formed a new business entity, LS Japan Company, Limited
("LS Japan") during 1996. In December 1997, the Company terminated its
agreements with Noda Medical and started the dissolution of its LS Japan
subsidiary. The Company is negotiating an exclusive distribution agreement with
another firm in Japan.
In certain countries, clinical trials of lasers are required before
commercial sales can take place. As a result, LaserSight Technologies has
historically placed approximately five lasers with clinical investigators at no
cost to the physician. At the conclusion of these clinical trials, the lasers
are to be returned to the Company.
While the focus of LaserSight Technologies' sales activities is on the
international market, the Company has sold lasers in the U.S. to
ophthalmologists participating in LaserSight Technologies' FDA clinical trials.
Pricing of these units has generally been lower than for those sold in foreign
markets as the FDA requires that these sales be based on specific manufacturing
costs, which can include an allocation of research, development and other
expenses. If LaserSight Technologies continues to establish additional clinical
sites in the U.S. during 1998, these sites could represent an additional source
of revenue for the Company as well as additional regulatory costs. Approximately
200 LaserSight excimer laser systems are now in place worldwide.
Meetings and Trade Shows
LaserSight Technologies' strategy is to encourage its clinical
investigators and clinical users to present clinical papers at, and for Company
personnel to attend, international meetings and exhibits to promote sales of the
Company's laser systems. All distributor and representative agreements contain
provisions for the agent to participate in national and regional meetings and
exhibits.
Attendance at meetings and exhibits held in the U.S. is limited to those
meetings where a large attendance of foreign ophthalmologists is anticipated.
These meetings include the Annual Meeting of the American Academy of
Ophthalmology and the American Society of Cataract and Refractive Surgery.
LaserSight Technologies limits its activities at these meetings to the
distribution of technical information without making any offer to sell.
Seasonality
Based on historical activity, the Company does not believe seasonal
fluctuations have a material impact on its financial performance.
Payment Terms; Receivables
LaserSight Technologies, which implemented more stringent sales criteria
during 1996, may from time to time reassess its credit policy and the terms it
will make available to individual customers. As a result of a growing presence
in a number of countries and continued acceptance of the Company's laser
systems, the Company's internally-financed sales with repayment periods
exceeding 18 months (measured from the installation date) decreased from 28
systems in 1995 to 13 systems in each of 1996 and 1997. There can be no
assurance as to the terms or amount of third-party financing, if any, that the
Company's customers may obtain in the future. Since 1996, the Company has been
placing greater emphasis on the terms and collection timing of future sales.
Laser sales are generally to hospitals or established and licensed
ophthalmologists. Unless a letter of credit or other acceptable security has
been obtained, a significant down payment or deposit is generally required at or
before installation, and LaserSight Technologies maintains regular contact with
customers as routine maintenance work must be provided by LaserSight personnel.
Maintenance services can be withheld should payment terms not be met. LaserSight
Technologies' agreements with its customers typically provide that the contracts
are governed by Florida law. LaserSight Technologies has not determined whether
or to what extent courts or administrative agencies located in foreign countries
would enforce its right to collect such receivables or to recover laser systems
from customers in the event of a customer's payment default.
At December 31, 1997 the Company was the payee on letters of credit with
foreign financial institutions aggregating approximately $0.2 million (compared
to $2.1 million at December 31, 1996). On occasion, it is necessary to meet a
competitor's more liberal terms of payment. In those and other cases, the
Company may provide term financing. See "Management's Discussion and
Analysis--Risk Factors Uncertainties--Uncollectible Receivables Could Exceed
Reserves."
Backlog
To date, the Company has been able to ship laser units as orders are
received, therefore order backlog is not a meaningful factor in its business.
Competition
Competition in the medical and laser industries is intense, and
technological developments are expected to continue at a rapid pace. The Company
competes against both alternative and traditional medical technologies and other
laser manufacturers. Many of the Company's competitors are substantially larger,
better financed, and better known, with existing products and distribution
systems in the marketplace. A number of lasers manufactured by other companies
have either already received, or are much farther advanced in the process of
receiving, FDA approval for specific procedures, and, accordingly, may have a
higher level of acceptance in some markets than the Company's lasers.
PRK and LASIK techniques for treatment of refractive vision disorders
compete with eye glasses, contact lenses, and RK (radial keratotomy). In
addition, medical companies, academic and research institutions and others could
develop new therapies, including new medical devices or surgical procedures
(such as corneal implants and surgery utilizing other types of lasers), for the
conditions targeted by the Company, which therapies could be more medically
effective and less expensive than PRK and LASIK, and could potentially render
PRK and LASIK obsolete. Any such development could have a material adverse
effect on the business, financial condition, and results of operations of the
Company.
In addition to general laser applications, LaserSight Technologies is
targeting the LSX and the LaserScan 2000 for the PRK and LASIK UV-wavelength
market. The Company believes that the worldwide UV-wavelength market includes
six major competitors, including two major U.S. companies. For refractive
surgery, LaserSight Technologies believes that its scanning laser systems,
software-based flexibility and eye tracking technology have significant
advantages over the excimer lasers manufactured by its principal competitors,
but many of these competitors are larger, more established, and presently have
greater financial strength than the Company.
Competitive factors such as performance, price, warranty, and royalty
issues play an important role in the customer's decision to purchase an excimer
laser system. Regulatory issues also play a significant role in determining the
markets accessible to the Company. As the Company must obtain approval from the
FDA for marketing in the U.S., the Company must presently focus its marketing
efforts on international markets. Both U.S. and foreign competitors may enter
the excimer laser business or acquire existing companies. Such competitors may
be able to offer their products at a lower cost or may develop procedures that
involve lower per procedure costs. Competition from new entrants may be
prevalent in those countries where significant regulatory approval is not
required.
Food and Drug Administration
During 1994, the Company began the clinical studies required for approval
of its laser systems in the U.S. During 1995, it completed the clinical
activities required by the FDA for its Phase 2a myopia study and submitted the
results of this phase of the trial to the FDA. In 1996, the Company filed a
request to proceed with Phase 2b of its myopia study, as well as a request that
its new laser model, the LaserScan 2000, be recognized as comparable in method
and performance to the Compak-200 used in the earlier trials. Both of the
Company's requests were approved by the FDA, and Phase 2b myopia clinical trials
were started during the later part of 1996. As both models of the Company's
excimer lasers will be utilized in future clinical activities, the Compak-200
systems utilized in the Phase 2a myopia trials have been upgraded with new Leica
microscopes and other features that have brought these systems closer to the
Company's LS 300 system configuration. During 1997, the Company completed the
clinical activities required for its Phase 2b myopia study and submitted the
results of the study to the FDA. The Company filed a request to proceed with
Phase 3 of its myopia study, and such request was granted. In March 1998, the
Company filed its Pre-Market Approval ("PMA") application for PRK treatment of
myopia with its scanning laser system, and continues to enroll patients into a
Phase 3 PRK study for the purpose of post-market surveillance. There can be no
assurance as to whether or when the FDA will approve this PMA.
During 1996, the Company submitted an additional protocol request to the
FDA, and received its approval to proceed with clinical trials for PARK
(photo-astigmatic refractive keratectomy). This Phase 2a trial is being
conducted by four domestic investigators, and one international investigator and
has continued through 1997 and into 1998.
The Company is preparing to submit during 1998 additional protocol
requests for hyperopia and LASIK (in which the stroma beneath the cornea is
ablated rather than the surface of the cornea). The Company expects that these
trials will be conducted by both domestic and foreign investigators. There is no
assurance that these protocols will be approved by the FDA. If such approvals
are received, the Company anticipates that it will establish up to an additional
four domestic clinical trial sites, and one additional international site. The
FDA currently limits to 20 the maximum number of clinical sites a manufacturer
can establish.
In July 1997, the Company acquired the rights to a PMA application filed
with the FDA for a laser to perform LASIK, a refractive surgery alternative to
surface PRK from Photomed. On February 13, 1998, the Ophthalmic Devices Panel of
the FDA determined that the PMA presented by Dr. Frederic Kremer, a former
shareholder of Photomed, was not approvable due to specific deficiencies which
the FDA subsequently identified in letter to Dr. Kremer dated March 13, 1998.
Dr. Kremer's PMA is for a single-site usage (rather than general commercial
usage) and encompasses the treatment of myopia and myopic astigmatism,
specifically using LASIK. The commercial sale of the Photomed laser in the
United States would require, in addition to the approval of Dr. Kremer's PMA,
certain additional FDA approvals, including GMP (Good Manufacturing Practice)
clearance, the development and validation of a manufacturing process for the
Photomed laser, and a payment by the Company of $1.75 million if the FDA
approves such commercial sale before July 29, 1998. The FDA's action is
unrelated to the PMA for the Company's scanning laser systems which the Company
recently submitted to the FDA.
In March 1998, the Company filed a PMA for its principle scanning laser
platform for PRK treatment of myopia. The Company continues to enroll patients
into a Phase 3 PRK study for the purpose of post-market surveillance. The
Company is also conducting a Phase 2 clinical trial for PARK. The Company also
has an IDE approved by the FDA for the treatment of glaucoma by laser
trabeculodissection. The Company has completed a Phase 1 study in blind eyes and
expects to submit the results to the FDA in April 1998, to request an expansion
to study sighted glaucoma patients.
Research and Development
During 1997, the Company continued its research and development activities
related to new laser products, laser systems, product upgrades and ancillary
product lines. Excluding regulatory expenses, research and development expense
was $1,723,695 in 1997 compared to $948,520 in 1996, an increase of 82%. In
1995, these expenses were $983,130. Considerable research and development effort
was directed to the development of the LSX laser system and continued
improvement of the LaserScan 2000 and 2000Plus systems, including completion of
subsystems for automatic gas fill, power stabilization, operating software and
other key components. Many of the subsystems developed were designed to be
retrofitted to Compak-200 and LS 300 lasers already in use.
Other research and development efforts have been focused on the
development of the new solid-state LaserHarmonic laser and have resulted in an
operational prototype. The LaserHarmonic 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). The Company expects to direct additional
efforts during 1998 toward the production of a commercial design for this
product. In addition, the LaserHarmonic could be capable of generating multiple
wave lengths, thus permitting its use for other ophthalmic procedures which now
require separate lasers.
The LaserHarmonic research and development effort resulted in the
identification of many features which have been subsequently incorporated into
the Company's excimer laser systems. Further efforts will continue to be
directed at an appropriate level towards production of a clinical design for
this product to ensure that a commercial version is available to meet the
market's demand for such a system. There are no assurances that these activities
will be successful.
Upon completion of a clinical design for the LaserHarmonic system,
pre-clinical trials and formal clinical trials are anticipated. Once sufficient
clinical and safety data have been gathered, the Company intends to initially
market the LaserHarmonic system for medical uses outside of the U.S. The Company
continues to assess numerous issues related to manufacturing and marketing of
the LaserHarmonic system. Prior to commercialization the LaserHarmonic will
likely be renamed. As is the case with many new technology products, the
commercialization of the LaserHarmonic is subject to potential delays.
During 1997, the Company continued development of its advanced
eye-tracking system which is standard on the LSX and offered as an option to
LaserScan 2000 purchasers. The LaserSight eye tracker (AccuTrack) is an "Active
+ Passive" system that is capable of following even fine saccadic eye movements.
The tracking system requires no dilation and no on-eye apparatus to eliminate
most error normally introduced by gross and fine eye movements to untracked
laser refractive surgery. Additionally, a larger margin of safety may be seen
for patients with poor compliance.
The Company's research and development activities also include efforts to
develop completely new types of solid-state laser heads not currently available
or produced anywhere in the world marketplace. While the risk of failure of
these specific activities may be significant, the Company believes that if
developed, these products could provide it with a leading edge technology that
would differentiate its products from other companies in the industry. There is
no assurance these efforts will be successful.
In conjunction with the University of Southern California, the Company
entered into agreements for the development of an epithelial boundary
determination device and for a method of preventing keratocyte loss. Such
agreements have not resulted in material revenues or expenses to date. In
February 1998, the Company terminated its license to the method of preventing
keratocyte loss.
HEALTH CARE CONSULTING SERVICES (TFG)
Introduction
TFG has historically been a national provider of consulting services in
strategic analysis, planning and implementation, and decision support for
hospitals, health systems, HMOs and other organizations engaged in health care
related services. During 1996 and 1997, as a result of losses incurred beginning
the last half of 1996, TFG substantially reduced its staffing and more narrowly
focused its resources on its business of developing decision support
information, strategic planning and physician recruiting. TFG's clients include
community hospitals, hospital systems, physician practices, specialty health
care providers and manufacturers and distributors of products and services to
health care providers.
The senior consulting staff of TFG includes seasoned professionals with
health care experience ranging from 10 years to more than 20 years of
experience. These individuals represent expertise obtained from hospital
settings in senior administrative roles in both non-profit and proprietary
sectors. The consulting staff has significant experience in the health care
industry in such areas as market research, hospital operations, strategic
planning, turnaround management, finance, and medical practice operations.
Principal Services
Decision Support Information. Decision support information is developed by
TFG from published data bases, demographic data, health services demand
information, manpower projections, hospital utilization and community migration
and emigration data, with which TFG performs patient service and primary market
research including its proprietary Secret Shopper methodology. TFG adds value by
obtaining primary information, understanding the various sources and
characteristics of the available information, enhancing the commercially
available information through interviews and teleresearch and managing large
amounts of data for decision-making purposes.
TFG provides client specific decision support information for planning and
marketing activities of client organizations. Clients include hospitals, health
care systems, integrated delivery systems, individual physicians and group
practices and organizations marketing to health care providers.
The Secret Shopper methodology is a versatile tool for gaining competitive
intelligence. With certain embellishments, TFG is able to expand the results of
Secret Shopper studies into a proprietary product called Distribution Channel
Mapping, which examines all of the health care providers in a market along with
the flow of referrals and other resources. Distribution Channel Mapping aids
clients, particularly hospitals, in planning competitive growth strategies,
acquisition targets, mergers and divestitures. Industry projections reflect that
growth in health care services will be in areas other than in hospital services.
Therefore, hospitals, to continue their growth, must either increase market
share or diversify. TFG believes that it is well positioned to help hospital
clients grow beyond the traditional inpatient and outpatient services because of
its access to critical information and the experience of the consulting staff.
Strategic Planning. TFG created a strategic planning model, which may be
tailored in terms of amount of detail, sequence and confidence level of
information utilized in the planning process. In addition, TFG provides various
segments of the strategic planning process as may be required by the client.
Securing decision support information to meet the needs of in-house planners,
conducting planning retreats and assistance in defining the vision or mission
determining functions are examples of strategic planning components which may be
provided separately to clients. Senior consultants at TFG also provide general
advisory services to senior managers of health care organizations.
Physician Recruitment. TFG continues to assist clients in filling specific
physician needs. The services include the traditional retained search program,
contingency searches and providing source information for in-house recruiters.
The Physician Recruitment service also provides candidate screening,
coordinating on-site visits and pre-employment negotiations. The Recruitment
consultants also assist physicians and potential purchasers of physician
practices in valuations and contracting.
Marketing
Most of TFG's business comes from new projects for existing clients and
through favorable referrals from such clients. Recently, TFG introduced the
Distribution Channel Mapping product and increased the sales activities to
hospitals located in competitive environments. New brochures have been created
describing the services and the professional staff. Presentations to health care
executives concerning the use of Distribution Channel Mapping for strategic
decisions are given at scheduled conferences. Utilizing their extensive
knowledge of hospitals and physicians in the U.S., TFG consultants have expanded
their service offerings to companies selling to the health care provider market.
TFG is introducing direct mail advertising followed by telephone follow-up
for certain of its services. The success of such activities will be evaluated on
an ongoing basis.
TFG serviced approximately 30 clients in both 1997 and in 1996.
Payment Terms
Clients are generally billed monthly for services rendered with the amount
due upon receipt of the invoice. The monthly billing may be either a retainer or
based on actual time and materials incurred. Certain projects are capped as to a
maximum billable fees.
Competition
The Company believes that key competitive factors relating to its health
care services segment include the experience of consultants, contacts within the
industry and pricing of services. Primary competitors are large national
consulting firms and small health care consulting firms. The Company believes it
holds advantages over many of these firms based upon (i) its commitment to be a
turn-key provider, capable developer of strategic business plans, experienced
and skilled executor of the plans, and implementers of critical follow-through
required; (ii) its consultants' hands-on experience in numerous settings vital
to the successful implementation of these services within this
politically-charged, changing industry; and (iii) TFG's significant experience
in the development of comprehensive, in-house data bases and research functions,
both vital areas in delivering the set of turn-key consulting services demanded
by the market.
Item 2. Properties
The table below describes the Company's present facilities. All such
facilities are leased from independent third parties.
Square Monthly Expiration
Location Description Footage Payment Date
-------- ----------- ------- ------- ----
Orlando, Florida (1) Principal offices of Company and 7,600 $12,449 5/31/00
LaserSight Technologies
Orlando, Florida (1) LaserSight Technologies-- 1,535 $1,763 5/31/98
additional space
St. Louis, Missouri (2) The Farris Group office 7,900 $10,204 7/20/98
Near San Jose, Costa Rica Manufacturing facility for 6,400 $4,198 11/30/00
international sales
(1) The Company is seeking to consolidate its Orlando facilities and to
approximately double the existing space. The Company expects to enter into
a lease for approximately 22,600 square feet at a cost of $23,334 per
month, with an expiration date of June 14, 2002. The Company believes that
such new facility will be adequate for the foreseeable future and that its
existing space can be subleased.
(2) The Company is seeking smaller office space for TFG.
Item 3. Legal Proceedings
Euro Pacific Securities Service. In June 1996, the Company filed a lawsuit
in a Florida state court against Euro Pacific Securities Service and Mr. Wolf
Wiese (collectively, the "Wiese Defendants") to collect the $1,140,000 balance
due on a promissory note executed by the Wiese Defendants in 1995 relating to a
stock subscription receivable. In September 1996, the Wiese Defendants removed
the lawsuit to the U.S. District Court for the Middle District of
Florida-Orlando Division. In July 1997, after missing the deadline for filing
counterclaims against the Company, and without having obtained permission from
the Court to do so, the Wiese Defendants filed a separate lawsuit in the same
U.S. District Court against the Company and its LaserSight Technologies
subsidiary. In their lawsuit, the Wiese Defendants alleged against the Company
breach of contract, coercion to enter into a contract, misrepresentation,
together with other charges and sought an unspecified amount of monetary
damages. On October 20, 1997, the Company filed a motion to dismiss the Wiese
Defendants' lawsuit. On February 10, 1998, the Court dismissed the Wiese
Defendants' lawsuit without prejudice.
The Company's lawsuit against the Wiese Defendants was tried on December
15 and 16, 1997 and resulted in the issuance on December 29, 1997 of a final
judgment in favor of the Company in the amount of $1,140,000, together with
interest in the amount of $526,809 and costs and attorneys' fees in an amount
yet to be determined. The Wiese Defendants have appealed the judgment to the
U.S. Court of Appeals for the Eleventh Circuit, Atlanta, Georgia. To date,
appellate briefs have not been filed with the court. The Company is taking steps
to collect on the judgment, but there can be no assurance as to whether, when or
in what amount it will be able to do so. Any recovery on the portion of the
judgment representing the $1,140,000 amount due on the Wiese Defendants'
promissory note will be credited to stockholders' equity, but will have no
effect on the Company's results of operations.
Northern New Jersey Eye Institute. In October 1997, the Company received a
written request for mediation and, if necessary, arbitration from the physicians
at NNJEI. The request related to the services agreement (the "Services
Agreement") between LSIA and NNJEI that was entered into as part of LSIA's
acquisition of NNJEI's assets in July 1996. The request alleged breach of
contract and fraud by LSIA in connection with the Services Agreement and
requested termination of the Services Agreement, "several hundred thousand
dollars in lost income damages" and punitive damages in an amount to be
determined.
The Company has denied NNJEI's allegations. The Company and NNJEI
discussed a possible restructuring of the relationship between LSIA and NNJEI at
a mediation session held on November 16, 1997 and in subsequent correspondence,
but did not reach an agreement. Thereafter, the Company sold LSIA to Vision
Twenty-One, Inc. ("Vision 21") on December 30, 1997 in a transaction which was
effective as of December 1, 1997. In connection with the LSIA sale, the Company
agreed to indemnify Vision 21 from certain claims related to the Services
Agreement arising before December 30, 1997. Management believes, based in part
on the advice of outside counsel, that the Company's indemnification obligations
under the Services Agreement should not have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "LASE." The table below sets forth the high and low sales prices for the
Common Stock during 1996 and 1997, as reported by The Nasdaq Stock Market. As of
March 1, 1998 there were approximately 217 holders of record of the Common Stock
and, as far as the Company can determine, approximately 3,700 total
shareholders, including shareholders of record and shareholders in "street
name."
High Low High Low
---- --- ---- ---
Fiscal 1996 Fiscal 1997
First Quarter $13.38 $9.50 First Quarter $6.63 $5.19
Second Quarter 13.12 8.88 Second Quarter 7.31 3.38
Third Quarter 11.00 6.06 Third Quarter 6.94 4.19
Fourth Quarter 7.00 5.31 Fourth Quarter 5.25 2.56
On March 27, 1998, the last sale price of the Common Stock on The Nasdaq Stock
Market was $2.625.
The Company has not paid any cash dividends on the Common Stock since its
inception. The Company currently does not anticipate paying cash dividends on
Common Stock in the foreseeable future. The Company's loan agreement with its
secured lender, Foothill Capital Corporation ("Foothill"), provides that the
Company shall not pay any cash dividends.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The summary financial information as of
and for each of the years in the five-year period ended December 31, 1997 is
derived from the Company's consolidated financial statements for such years.
(In thousands, except for per share amounts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net sales $24,389 $21,504 $25,988 $9,594 $365
Gross profit 11,687 11,381 18,895 6,484 62
Income (loss) from operations (9,262) (4,960) 4,552 1,140 (1,657)
Gain on sale of subsidiaries 4,129 --- --- --- ---
Net income (loss) (7,253) (4,074) 4,592 1,018 (4,753)
Conversion discount
on preferred stock (42) (1,011) --- --- ---
Dividends and accretion
on preferred stock (298) (359) --- --- ---
Income (loss) attributable
to common stockholders (7,593) (5,444) 4,592 1,018 (4,753)
Basic earnings
(loss) per common share (0.80) (0.69) 0.68 0.18 (0.92)
Diluted earnings
(loss) per share (0.80) (0.69) 0.64 0.16 (0.92)
Working capital 12,730 10,021 7,272 3,570 3,063
Total assets 50,461 34,250 29,102 8,641 4,511
Long-term obligations 500 642 --- --- ---
Redeemable convertible
preferred stock 11,477 --- --- --- ---
Stockholders' equity 27,040 26,769 20,420 6,118 3,532
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All yearly references are to the Company's fiscal years ended December 31,
1997, 1996 and 1995, unless otherwise indicated.
Adoption of New Accounting Standard
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" which established new standards for computing and presenting earnings per
share. The historical measures of earnings per share (primary and fully diluted)
are replaced with two new computations of earnings per share (basic and
diluted). The Company adopted SFAS 128 as of December 31, 1997.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." They are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated.
SFAS No. 130 requires companies to classify items defined as "other
comprehensive income" by their nature in a financial statement, and to display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The adoption of SFAS No. 130 is not expected to have a material impact on
the Company's consolidated financial statements.
SFAS No. 131 requires companies to report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate and their
major customers. The Company is currently reviewing the impact of this statement
on its current level of disclosure.
Overview
The Company's net loss for 1997 was $7,253,084 and its loss attributable
to common stockholders was $7,592,926, or $0.80 per basic and diluted common
share, on net sales of $24,388,833. The net loss is primarily attributable to
increased expenses generated by the Company's technology segment. The difference
between the net loss and the loss attributable to common stockholders resulted
from preferred stock dividends and accretion and the conversion discount on
preferred stock.
On December 30, 1997, the Company sold its MEC and LSIA subsidiaries to
Vision 21 in a transaction which was effective as of December 1, 1997. Under the
Company's ownership, MEC was a vision managed care company which managed vision
care programs for health maintenance organizations (HMOs) and other insured
enrollees and LSIA was a physician practice management company which managed the
ophthalmic practice known as NNJEI under a management services agreement. The
Company received $6.5 million in cash paid at the closing and 820,085
unregistered shares of Vision 21 common stock ("Vision 21 Shares"), subject to
certain post-closing adjustments. See "Recent Developments--Liquidation of
Vision 21 Shares." Although the amount of post-closing adjustments could be as
much as $770,000, the Company estimates, as of March 27, 1998, that the amount
of such adjustments will be approximately $150,000. This estimate is subject to
change and reflects the anticipated effect of the following: The Company is
required to reimburse Vision 21 for operating profits for the month of December
1997 generated by MEC and LSIA, negative working capital as of November 30, 1997
of MEC and LSIA less than negative $180,000, if any, and negative net worth as
of November 30, 1997 for MEC and LSIA, if any. In addition, if prior to December
31, 1998 Vision 21 does not enter into certain practice management agreements
with NNJEI and an affiliated physician, or absent such agreements, if the
benefits Vision 21 derives from existing practice management agreements for the
period ending December 31, 1998 is less than $133,000, then the Company is
required to reimburse Vision 21 for such shortfall on a dollar-for-dollar basis
up to a maximum of $500,000. In an amendment to Form 8-K filed with the
Securities and Exchange Commission (the "SEC") on March 17, 1998, Vision 21
disclosed that the physicians currently employed by NNJEI have threatened to
discontinue providing professional services effective March 31, 1998.
Results of Operations
Net sales. The following table presents the Company's net sales by major
operating segments: technology products and services and health care services
for the previous three years.
1997 1996 1995
Net Sales % of Total Net Sales % of Total Net Sales % of Total
--------- ---------- --------- ---------- --------- ----------
Technology $12,170,018 50% $10,634,663 50% $19,899,584 77%
Health care services 12,218,815 50% 11,263,399 52% 6,088,481 23%
Intercompany revenues -- -- (394,072) (2%) -- --
----------- ----- ----------- ---- ----------- -----
Total net sales $24,388,833 100% $21,503,990 100% $25,988,065 100%
Change from
prior year 13% (17)%
Net sales and revenues increased by $2,884,843 between 1996 and 1997. Net
sales and revenues decreased by $4,484,075 between 1995 and 1996.
1997 vs. 1996. The increase in health care services revenue was primarily
attributable to increased revenues generated by MEC (an increase of $1,806,392)
and LSIA (an increase of $1,317,780), offset by a substantial reduction in
revenues generated by TFG. Of the total net sales and revenues for 1997, MEC,
LSIA and TFG accounted for revenues of $7,985,811 (33% of total revenues),
$3,021,304 (12%) and $1,211,700 (5%), respectively. Net sales for TFG for the
year ended 1997 decreased by $2,168,756 from the same period in 1996. This
decrease was due primarily to a reduction in consulting services provided and
was accompanied by a total expense reduction, including costs of services, of
$2,055,959 for the year ended 1997. Such revenue decrease is primarily a result
of that subsidiary's primary revenue producer, Michael R. Farris, being named as
president of the Company in late 1995, eliminating his day-to-day participation
in the consulting business. Other consultants employed were unable to maintain
revenues at historical levels. The increase in revenues generated by MEC
resulted from new contracts entered into during 1997 and increased enrollments
in existing contracts. The increase in revenues generated by LSIA in 1997 is
primarily a result of LSIA being acquired in July 1996. The increase in revenues
generated by the Company's technology subsidiary is primarily attributable to
the phasing out of the LS 300 laser system which had a lower selling price than
the LaserScan 2000 and LSX. Forty-six laser systems were sold during 1997
compared to 46 systems, net of returns, sold 1996. The Company's ability to sell
the new LSX into certain European countries is limited until the system receives
CE Mark certification, which is anticipated sometime in mid-1998. Technology
revenues include the impact of 12 sales returns in 1996 (see the next paragraph)
and one system return in 1997. Based upon the expected timing of increased
availability of the LSX, the Company expects laser system sales to remain at
1997 levels for the first quarter of 1998, with moderately increased sales
levels thereafter.
1996 vs. 1995. The increase in health care services revenue was primarily
attributable to revenues generated by the Company's acquisitions of MEC on
October 5, 1995 and of the assets of NNJEI on July 3, 1996, partially offset by
a reduction in TFG's revenues of 31% relative to 1995. This decrease was due
primarily to a reduction in consulting services provided. During the third
quarter of 1996, the Company reduced the number of TFG's personnel in
anticipation that 1997 revenues would continue below historical levels. Of the
total net sales and revenues for 1996, MEC, TFG and LSIA accounted for revenues
of $6,179,419 (29% of total revenues), $3,380,456 (16%) and $1,703,524 (8%),
respectively. Of TFG's total revenues, $394,072 (2%) were intercompany revenues
which have been eliminated in the Company's consolidated financial statements.
LSIA's 1996 revenues reflect a six-month period.
The higher revenues generated from health care services were offset
primarily by a decrease in revenues of technology products and services during
1996. The decrease in revenues generated by the Company's technology subsidiary
was primarily attributable to (i) a decrease in the number of laser systems sold
in overseas markets in 1996; (ii) a higher allowance for sales returns,
reflecting differences between actual experience and previously-estimated
amounts; and (iii) a lower average system selling price in 1996. Although a
total of 58 laser systems were sold in 1996 compared to 65 systems sold in 1995,
12 laser systems were returned in 1996 compared to one system returned in 1995.
Through the first quarter of 1996, certain of the Company's sales contracts
included provisions for returns over periods ranging from one to 12 months. Such
provisions did not result in any material laser system returns through the end
of 1995. In the second quarter of 1996, the Company ceased sales of systems with
return rights. Based on the passage of time, the Company does not believe it
faces significant exposure for future returns of systems. The decrease in laser
system sales from 1995 levels was also the result of the Company's revised
credit policy, which established more stringent criteria for acceptable sales
terms. In addition, due to competitive pressures in certain markets and the
Company's introduction of the lower priced LS 300 laser system in June 1996, the
average sales price, net of commissions, declined by approximately 20% from 1995
average levels. Included in the first quarter of 1995 were non-recurring
revenues from the sale of revenue rights from procedure fees at six surgical
centers located in China in the amount of $600,000.
The financial impact of systems sold in 1995 and returned in 1996 in
excess of previously estimated amounts was approximately $1.8 million, broken
down as follows: Net revenues were decreased by $2.7 million, offset by
reductions in corresponding cost of sales ($0.6 million) and commissions and
warranty-related costs ($0.3 million).
Cost of revenues; gross profits. The following table presents a three-year
comparative analysis of cost of revenues, gross profit and gross profit margins.
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
Product cost $4,127,908 21% $3,415,276 (30%) $4,859,039
Cost of services 8,573,932 28% 6,707,308 200% 2,234,131
Gross profit 11,686,993 11,381,406 18,984,895
Gross profit percentage 48% 53% 73%
Products only:
Gross profit 8,042,110 7,219,387 15,040,545
Gross profit percentage 66% 68% 76%
Gross profit margins were 48% of net sales in 1997 compared to 53% in 1996
and 73% in 1995. Gross profit increased $305,587 in 1997 from 1996 and decreased
$7,513,489 in 1996 from 1995.
1997 vs. 1996. The gross profit margin decrease was attributable to (i) a
significant increase in MEC revenues with a corresponding increase in provider
payments, which historically have ranged from approximately 68 to 72% of MEC
revenues, and (ii) a general increase in the operating costs of the Company's
Costa Rican manufacturing facility due to the doubling of leased space and
higher than average compensation increases paid to Costa Rican employees due to
the competitive environment for engineers in that area, the costs of which are
allocated entirely to cost of goods sold. The gross profit margin decrease was
mitigated in part due to a substantial increase in revenues generated by LSIA.
Costa Rican operating expenses are not expected to increase materially without a
significant increase in the level of systems sold.
1996 vs. 1995. The gross profit margin decrease was attributable to (i) a
full year's activity of MEC which, in 1996, operated at a gross profit
percentage of 32% (which the Company believes is above average for the managed
care industry); (ii) a lower average sales price for laser systems sold in 1996;
(iii) the additional allowance for sales returns; and (iv) the sale of the
Company's future revenue rights for six laser systems in China for $600,000 in
1995. After removing revenues from the sale of revenue rights in 1995 and all
health care services revenues from 1996 and 1995 consolidated sales and
revenues, the gross profit margins and gross profit margin were $7,219,387 and
68%, respectively, in 1996 and $14,440,545 and 75%, respectively, in 1995.
Research, development and regulatory expenses. The following table
presents a three-year comparative analysis of research, development and
regulatory expenses.
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
Research, development
and regulatory $2,807,579 63% $1,720,246 18% $1,460,842
As a percent of technology
net sales 23% 16% 7%
Research, development and regulatory expenses increased by $1,087,333
between 1996 and 1997. Such expenses increased by $259,404 between 1995 and
1996.
1997 vs. 1996. The increase can primarily be attributed to ongoing
research and development of new scanning refractive laser systems, including
development of the LSX and add-on features for the LaserScan 2000, and continued
software development for the laser systems. Additionally, the Company has
incurred increased costs related to the FDA regulatory process, both for its own
scanning laser system (the PMA application for which was filed in March 1998),
and the LASIK laser system (for which the Company purchased the rights to
manufacture and commercialize if FDA approval is received). Additional costs
have been incurred in the clinical and manufacturing validation of the A*D*K.
Increased commercial production and shipment of the LSX is anticipated during
the second quarter of 1998. Since the initial announcement of the development of
the LSX, the Company has solicited and received input from clinical users and
prospective customers. This has resulted in modifications to the system,
necessitating additional development and testing for clinical validation. As a
result of a continuation of the efforts described, the Company expects research,
development and regulatory expenses during the first two quarters of 1998 to
remain at levels consistent with those incurred in the latter part of 1997. The
Company does not anticipate 1998 expenses overall to exceed 1997 levels.
Regulatory expenses may increase as a result of the Company's continuation of
current FDA clinical trials, protocols added during 1997 related to the
potential use of the Company's laser systems for treatment of glaucoma, the
possible development of additional future protocols for submission to the FDA
and the LASIK PMA acquired in July 1997.
1996 vs. 1995. The increase can primarily be attributed to ongoing
research and development of new refractive laser systems, including refinements
to and accessories for the LaserScan 2000, and continued software development
for the excimer lasers. Regulatory expenses increased as a result of the
Company's approval from the FDA to proceed with Phase 2b clinical trials for
myopia and Phase 2a clinical trials for PARK and the development of additional
protocols for possible future submission to the FDA.
Selling, general and administrative expenses. The following table presents
a three-year comparative analysis of selling, general and administrative
expenses.
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
Selling, general and
administrative $18,141,568 24 % $14,621,509 14 % $12,881,909
As a % of net sales 74 % 68 % 50 %
Selling, general and administrative expenses increased by $3,520,059 in
1997 from 1996. Such expenses increased by $1,739,600 in 1996 from 1995.
1997 vs. 1996. The primary reasons for these increases include the
continued growth of MEC ($376,126), increased amortization costs resulting from
acquired patents, license agreements and other intangibles ($1,074,365),
additional provisions for uncollectible accounts ($1,902,432), and a general
increase in personnel costs necessary to fund the strategic initiatives of the
Company and the development of its products and services. Such strategic efforts
include enhancements to field service, engineering and software development
departments, the pursuit during 1997 of vision managed care contracts with HMOs,
insurers and employer groups, the IBM patents and the A*D*K license.
Additionally, LSIA began operations in July 1996, resulting in six months of
expenses being included in 1996 operations and representing increased expenses
of $269,069 during 1997. These increases were partially offset by the
substantial reduction in the operating costs of TFG ($1,456,999). Legal and
accounting expenditures continue to be incurred as a result of ongoing
regulatory filings, general corporate issues, litigation and patent issues.
1996 vs. 1995. The primary reasons for these increases include increased
employment and other operating costs as a result of the acquisition of MEC in
October 1995 and its subsequent growth, the acquisition of the assets of NNJEI
in July 1996, and a general increase in personnel and costs necessary to fund
the strategic initiatives of the Company and the development of its products and
services. The relationship of such expenses to revenues suffered during 1996 as
a result of the lower average selling price for laser systems, the additional
allowance for sales returns, and the decrease in TFG revenues. Without the
impact of sales returns, total selling, general and administrative expenses
would have totaled approximately $14.9 million and represented 62% of net sales.
Additionally, in 1996, the Company spent approximately $400,000 and significant
internal resources on the expansion of its ophthalmic practice management and
vision managed care strategies. Expenses in 1996 included severance costs of
approximately $330,000, and the costs attributable to the work required to
achieve ISO 9002 certification and CE Mark designation on the LaserScan 2000.
During 1996, the Company increased its net reserve for uncollectible accounts by
$425,000. Legal and consulting expenditures continue to be incurred as a result
of ongoing regulatory filings, general corporate issues, litigation and patent
issues.
Income (Loss) from Operations. The Company recognized a loss from
operations of $9,262,154 in 1997 compared to a loss from operations of
$4,960,349 in 1996 and an income from operations of $4,552,144 in 1995.
1997 vs. 1996. The decrease in operating results can be attributed
primarily to the increases in research, development, regulatory and general and
administrative expenses partially offset by increased revenues. Effective
December 1, 1997, the Company sold two of its subsidiaries. See "Recent
Developments-Liquidation of Vision 21 Shares".
1996 vs. 1995. The decrease in operating results can be attributed
primarily to the decrease in net sales of the Company's laser systems, the
higher-than-estimated level of laser system returns, and the loss incurred by
TFG. Additional contributing factors included an overall increase in expenses,
including research and development, regulatory and selling, general and
administrative expenses, including resources devoted to the development of the
Company's business strategies.
Other Income and Expenses. Interest and dividend income of $383,611 was
earned in 1997 from the investment of cash and cash equivalents and the
collection of long-term receivables related to laser system sales. This
represents an increase of $69,324 from 1996. Investment earnings in 1996 were
$314,287, an increase of $124,739 from 1995, and consisted of the investment of
cash and cash equivalents and a note receivable. Interest expense incurred
during 1997 was $1,343,198 and related primarily to the credit facility
established with Foothill on April 1, 1997 and the note payable to the former
owners of MEC which was repaid on April 1, 1997. In addition to interest paid on
the outstanding note payable balance, interest expense includes the amortization
of deferred financing costs, the accretion of the discount on the note payable,
and fees associated with amendments to the original loan agreement. Interest
expense for 1996 was $151,634 and related primarily to the notes payable to the
former owners of MEC and a capital lease on most of the NNJEI assets acquired.
Included in other expense in 1997 and 1996 are costs of $280,400 and
$415,681, respectively, related to the settlement of patent and other filed and
threatened litigation. There were no such expenses in 1995. Included in other
income is a $4,129,057 gain recognized from the sale of two of the Company's
subsidiaries. See "Recent Developments--Liquidation of Vision 21 Shares."
During 1995, the Company received payment of $350,000 from the Company's
former president in settlement of securities trading losses incurred during 1993
and the first half of 1994, and recognized a non-recurring gain. In addition,
the Company also received aggregate payments of $980,125 in settlement of its
litigation claims against Residue Recovery Corp., and recognized a non-recurring
gain. Without these gains, net income for 1995, after the estimated income tax
effect of these gains, would have been approximately $3,528,000 or $0.52 per
basic share.
Income taxes. The Company recorded an income tax provision of $880,000 in
1997 compared to an income tax benefit of $1,139,008 in 1996 and an income tax
provision of $1,397,800 in 1995. The 1997 provision for income taxes primarily
results from the gain on the sale of two of the Company's subsidiaries after
utilization of net operating loss and capital loss carryforwards. The 1996
benefit reflects an effective income tax rate of approximately 22% resulting
from a limitation of available net operating loss carrybacks and the
establishment of a valuation allowance on deferred tax assets. The 1995
provision for income taxes reflected an effective income tax rate of
approximately 23% resulting from utilization of net operating loss
carryforwards, a reduction of the deferred tax asset valuation allowance and
income tax credits.
Net Income (Loss). The Company incurred a net loss of $7,253,084 in 1997
compared to a net loss of $4,074,369 in 1996 and net income of $4,591,871 in
1995. The 1997 results are primarily attributable to a combination of increased
revenues from technology products and MEC services, losses generated from TFG
and higher operating expenses as previously described. The loss in 1996 was
primarily attributable to the decrease in net sales of the Company's laser
systems combined with the higher than estimated level of laser system returns,
TFG's loss, an overall increase in expenses as previously described, and
settlement expenses. The improved operating results in 1995 were primarily the
result of increased sales of the Company's laser systems, the profitability of
the health care services companies, and non-recurring gains.
Earnings (loss) per share. Earnings (loss) per basic and diluted common
share decreased to ($0.80) in 1997 from ($0.69) in 1996. The decreases in 1997
are attributable to the larger net loss incurred and accretion and dividend
requirements on the redemption in October 1997 of, the Company's Series B
Convertible Participating Preferred Stock, $.001 par value (the "Series B
Preferred Stock") issued in August 1997. Of the basic and diluted losses per
share in 1997, $0.04 and $0.04, respectively, were a result of the value of
conversion discount on preferred stock in accordance with EITF Topic D-60 and
accretion and dividend requirements on the Series B Preferred Stock. Weighted
average shares outstanding increased in 1997 as a result of the conversion of
eight shares of Series A Preferred Stock into Common Stock, the 1997 amendment
to the purchase agreement related to LaserSight Centers, the issuance of shares
under the earnout provisions of the 1994 acquisition of TFG, the issuance of
shares in conjunction with the 1997 acquisition of rights to a PMA and keratome
patent, and the exercise of options.
The decreases in 1996 were attributable to the net loss incurred and
dividends on the Series A Preferred Stock issued in January 1996. Of the basic
and diluted losses per share in 1996, $0.13 and $0.13, respectively, were a
result of the value of conversion discount on preferred stock in accordance with
EITF Topic D-60, and $0.05 and $0.05, respectively, were a result of dividends
on the Series A Preferred Stock.
In 1995, earnings per share grew at a slower rate than net income,
primarily because of a significant increase in weighted average shares
outstanding -- 19% on a basic basis and 12% on a diluted basis. The increases
were largely the result of a placement of Common Stock in early 1995, exercises
of outstanding stock options and grants of additional stock options, shares
issuable pursuant to the TFG acquisition agreements and shares issued in
connection with the MEC acquisition in the fourth quarter. For purposes of
computing basic and diluted earnings per share, 406,700 shares of Common Stock
that were issuable pursuant to an earnout based on the pre-tax performance of
TFG have been included in weighted average shares outstanding for both 1996 and
1995.
Liquidity and Capital Resources
Working Capital. Working capital increased $2,708,899 from $10,020,801 in
1996 to $12,729,700 in 1997. This increase resulted primarily from an increase
in cash and cash equivalents and marketable equity securities resulting from the
sale of two of the Company's subsidiaries. See "Recent Developments--Liquidation
of Vision 21 Shares."
Sources and uses of funds. Operating activities used net cash of
$4,352,779 in 1997, compared to $4,172,458 used in 1996. This increase is
primarily attributable to higher 1997 net loss compared to the net loss in 1996
and the sale of two of the Company's subsidiaries. These items were partially
offset by an increase in amortization and depreciation costs and increases in
accounts payable, accrued expenses and income tax accounts. Net cash used in
investing activities was $5,779,075 in 1997 compared to $20,197 of net cash
provided by investing activities during 1996 and net cash used of $293,574 in
1995. Net cash used in investing activities during 1997 can be primarily
attributed to the acquisition of certain patents and license agreements from IBM
and others, the purchase of office and computer equipment, and the purchase of a
vision managed care contract, partially offset by the proceeds from the sale of
two of the Company's subsidiaries and proceeds from the exclusive licensure of
such patents. Net cash provided by investing activities in 1996 can be primarily
attributed to the proceeds from the sale-leaseback transaction offset by the
acquisition of the assets of NNJEI and the purchase of office and computer
equipment and leasehold improvements. Net cash provided from financing
activities during 1997 was $11,986,753 and consisted of net proceeds from the
issuance of the Series B Preferred Stock to finance the acquisition of the IBM
patents, the credit facility with Foothill and the exercise of stock options,
offset by the redemption of Series B Preferred Stock, the repayment of a note
payable to former owners of MEC and repayment of a capital lease obligation. Net
cash provided from financing activities during 1996 was $4,557,423, consisting
of net proceeds from the issuance of Series A Preferred Stock totaling
$5,342,152, less a payment of $1,373,518 in debt relating to the Company's
acquisitions of TFG in February 1994 and MEC in October 1995 and repayment of a
capital lease obligation. The exercise of stock options and warrants generated
cash of $588,789. Net cash provided from financing activities during 1995 was
$1,928,132, consisting of net stock proceeds totaling $1,323,333 and receipt of
$1,108,061 from the exercise of stock options, reduced by $503,262 in payments
on Company debt.
Financing. On April 1, 1997, the Company entered into a loan agreement
with Foothill for a loan of up to $8 million, consisting of a term loan in the
amount of $4 million and a revolving loan in an amount of 80% of the eligible
receivables of LaserSight Technologies, but not in excess of $4 million. The
original terms of the term loan provided for interest at an annual rate of
12.50% and required repayment of principal in monthly installments of $1.33
million beginning on May 1, 1998. The revolving loan bears interest at a
variable annual rate of 1.50% above the base rate of Norwest Bank Minnesota. The
original terms of the revolving loan provided that the $4 million maximum amount
of the revolving loan was to decline by $1.33 million per month beginning on
August 1, 1998. In connection with the loan, the Company paid an origination fee
of $150,000 and issued warrants to purchase 500,000 shares of Common Stock. The
warrants are exercisable at any time from April 1, 1998 through April 1, 2002 at
an exercise price initially equal to $6.0667 per share. Subject to certain
conditions based on the market price of the Common Stock, up to half of the
warrants are eligible for repurchase by the Company. Any warrants that remain
outstanding and unexercised on April 1, 2002 are subject to mandatory repurchase
by the Company at a price of $1.50 per warrant. Based on an agreement between
Foothill and the Company and certain anti-dilution features of the Foothill
warrants, the issuance of the Series B Preferred Stock resulted in (i) an
increase in number of Foothill warrant shares by approximately 50,000 (ii) a
reduction in the warrant exercise price to approximately $5.52 per share, and
(iii) a reduction in the repurchase price of the warrants to approximately $1.36
per warrant. The Foothill loan is secured by a pledge of substantially all of
the Company's accounts receivable and other assets. The Company used a portion
of the net proceeds of the term loan to pay in full the balance due under its
note to the former owners of MEC.
On December 30, 1997, the Company used $2.0 million of proceeds from the
sale of MEC and LSIA to reduce the principal balance of its term loan with
Foothill, from $4.0 million to $2.0 million. The Company also used approximately
$1.5 million of proceeds from the sale to repay the balance under its revolving
loan facility with Foothill as of December 30, 1997.
Effective as of December 30, 1997, the Company restructured its agreements
with Foothill as follows: The maximum amount available under its revolving loan
facility has been reduced to $2.0 million. In addition, the Company pledged its
Vision 21 Shares to Foothill as collateral. After the Company has received
aggregate gross proceeds of $2.5 million from the liquidation of the Vision 21
Shares, it must apply any additional proceeds to repay its term loan with
Foothill, and apply any remaining proceeds to retire any then-outstanding
advances under its revolving loan with Foothill. In any event, the Company's
term and revolving loans are to be paid in full by June 15, 1998. Until June 16,
1998, Foothill has waived the Company's compliance with the financial covenants
contained in the loan agreements.
Redemption and Repurchase of Series B Preferred Stock. The Company
voluntarily redeemed 305 shares of the Series B Preferred Stock (approximately
19% of the 1,600 shares originally issued) in October 1997. The Company paid the
redemption price of $3,172,000 (including a 4% redemption premium) with funds
held in a blocked account which serves as collateral for the Company's
contingent obligation to redeem Series B Preferred Stock. As required by its
agreement with the preferred shareholders, the Company had established the $3.2
million blocked account to hold 80% of the $4 million the Company had received
in September 1997 as a payment for an exclusive, worldwide, royalty-free license
to a third party covering the use in the vascular and cardiovascular fields of
the IBM Patents. The Company believes that its continued holding of the
restricted funds in the blocked account (instead of redeeming the 305 preferred
shares) would not have meaningfully enhanced the Company's liquidity and would,
under the terms of the Series B Preferred Stock, have resulted in an increase in
the redemption premium (to as much as 14%) or the expiration in January 1998 of
the Company's option to redeem such 305 shares. In addition, the Company
believes that the redemption reduced the dilutive effect of the Series B
Preferred Stock on the Company's common shareholders.
In addition, the Company repurchased 351 shares of Series B Preferred
Stock (approximately 22% of the shares originally issued) in February and March
1998. In exchange for the consent of the holders of Series B Preferred Stock to
the sale of the international patent rights to the IBM Patents (see "Recent
Developments--Nidek Patent Transaction" and "--Agreements with Preferred
Shareholders"), the Company agreed to deposit $4.2 million of the sale
transaction proceeds into the blocked account. The Company used such funds to
pay the repurchase price of $4,212,000 (including a 20% premium). The Company
believes that without the consent of the preferred shareholders, the transaction
would not have been completed. In addition, the Company believes that the
repurchase reduced the dilutive effect of the Series B Preferred Stock on the
Company's common shareholders.
Working capital requirements. The Company experienced a significant
negative cash flow from operations in 1997, largely resulting from the level of
laser system sales and the increase in research, development and regulatory
expenses resulting from the development of the LSX and other efforts as
previously described. The Company expects cash flow from operations to begin to
show improvement in the second and third quarters of 1998 as a result of the
expected shipment of the LSX and A*D*K's as previously discussed. However, the
Company expects to incur a loss and a deficit in cash flow from operations for
the first quarter of 1998. There can be no assurance that the Company can regain
or sustain profitability or positive operative cash flow in any subsequent
fiscal period. Based on these factors, the Company believes that its balances of
cash and cash equivalents along with expected operating cash flows, the
anticipated liquidation of the Vision 21 Shares and the availability of the
Foothill revolver through June 15, 1998, will be sufficient to fund its
anticipated working capital requirements for the next 12 months based on modest
growth and anticipated collection of receivables. A failure to collect timely a
material portion of current receivables, unexpected delays in the shipment of
the LSX or A*D*K products, or a delay in the anticipated liquidation of the
Vision 21 Shares could have a material adverse effect on the Company's
liquidity. The Company may from time to time reassess its credit policy and the
terms it will make available to individual customers. With the anticipated sales
of the new LSX laser system during 1998, the Company intends to internally
finance a proportionately smaller number of sales over periods exceeding 18
months than in preceding years. There can be no assurance as to the terms or
amount of third-party financing, if any, that the Company's customers may obtain
in the future. The Company is placing greater emphasis on the terms and
collection timing of future sales.
The Company expects to increase the level of manufacturing and
distribution of its laser systems and to continue a variety of research and
development activities on its excimer and solid-state laser systems over the
next twelve months and it is anticipated that such research and development as
well as regulatory efforts in the U.S. will be the most significant technology
related expenses in the foreseeable future.
Possible joint ventures. The Company is receptive to joint venture
discussions with compatible companies for the development and operation in
international markets of surgical centers that will utilize the Company's
products. The Company has no present commitments for joint venture
relationships, and no assurance can be given that any such relationships will be
secured on terms satisfactory to the Company.
In October 1996, the Company announced an agreement with Laser Vision
Centers, Inc. ("Laser Vision") to create a joint venture to make excimer laser
technology available to the participating physicians of LaserSight Centers. If
finalized, such an agreement would have provided for Laser Vision to provide the
excimer laser and necessary technical personnel to locations serviced by the
approximately 100 ophthalmologists currently under non-exclusive contract with
LaserSight for excimer laser services. No written agreement has been executed
and no further negotiations are under way at this time.
Stock subscription receivable. The Company is owed $1,140,000 on a
promissory note from the Company's former placement agent in connection with a
placement of Common Stock in January 1995. The Company's lawsuit to collect on
the note resulted in the issuance in December 1997 of a final judgment in favor
of the Company in the amount of $1,140,000, together with interest in the amount
of $526,809 and costs and attorneys' fees in an amount yet to be determined.
Despite the fact that the defendants have appealed the judgment, the Company is
currently pursuing efforts to collect the judgment.
Risk Factors and Uncertainties
The business, results of operations and financial condition of the Company
and the market price of the Common Stock may be adversely affected by a variety
of factors, including the ones noted below:
Potentially Unlimited Number of Series B Conversion Shares Issuable. There
is no limit on the number of shares of Common Stock potentially issuable in
connection with conversions of Series B Preferred Stock. As illustrated in the
table below, the number of shares of Common Stock issuable upon such conversions
(the "Series B Conversion Shares") depends on the market price of the Common
Stock at the time of conversions:
Assumed Number of As % of Common Shares
Conversion Series B Conversion Assumed Outstanding
Price (1) Shares Issuable (2)(3) After Conversion (4)
--------- ---------------------- --------------------
$0.50 11,880,000 49.8%
$1.00 5,940,000 33.1%
$1.739583 (5) 3,414,611 22.2%
$2.00 2,970,000 19.8%
$3.00 1,980,000 14.2%
$4.00 1,485,000 11.0%
$5.00 1,188,000 9.0%
$6.00 990,000 7.6%
$6.68 (6) 889,221 6.9%
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(1) Equals the lesser of (A) $6.68 or (B) the average of the three lowest
closing bid prices of the Common Stock during the 30 trading days
immediately preceding the applicable conversion date.
(2) Excludes an aggregate of 2,011,975 Series B Conversion Shares that have
been issued in connection with conversions through March 27, 1998.
(3) Based on an agreement between the Company and the holders of the Series
B Preferred Stock, no more than 390,659 additional Series B Conversion
Shares may be issued before June 12, 1998 or, subject to certain
shareholder approval requirements, September 14, 1998. This agreement
can be terminated by the preferred shareholders under certain
circumstances. See "Recent Developments--Agreement With Preferred
Shareholders--Proposed Revision of Terms."
(4) Equals the 11,996,647 shares of Common Stock outstanding on March 27,
1998 plus the number of Series B Conversion Shares issuable upon the
conversion (at a conversion price indicated in the table) of all 594
shares of Series B Preferred Stock outstanding as of such date.
(5) Equals the conversion price in effect as of March 30, 1998.
(6) Under the terms of the Series B Preferred Stock, the conversion price
cannot exceed $6.68, regardless of the market price of the Common
Stock. The Company has agreed, subject to the approval of its
stockholders, to amend the terms of the Series B Preferred Stock to
adjust this maximum conversion price to equal the lesser of $6.68 or
110% of the average closing bid prices of the Common Stock during the
20-trading day period ending on September 14, 1998. Failure to receive
such approval on or before June 12, 1998 will require the Company to
issue to the holders of the Series B Preferred Stock warrants to
purchase up to 750,000 shares of Common Stock at a price of $2.724 per
share. See "Recent Developments--Agreement With Preferred
Shareholders--Proposed Revision of Terms."
Potential Obligations to Redeem Preferred Stock. Any holder of Series B
Preferred Stock could require the redemption of all or a portion of its shares
for cash at a premium of at least 25% under any of the followin