SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
-----------
(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, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-19671
LASERSIGHT INCORPORATED
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0273162
- -------- ----------
(State of incorporation) (I.R.S. Employer
Identification No.)
12161 Lackland Road, St. Louis, Missouri 63146
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 469-3220
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing sale price on March 21, 1997, was
approximately $50,362,979.
Number of shares of Common Stock outstanding as of March 21, 1997:
8,914,557.
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, 1997.
<PAGE>
EXPLANATORY NOTE
This filing amends certain previously-filed information contained in Items 1, 6,
7 and 14. No other items have been amended.
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
<PAGE>
Except for the historical information contained herein, the discussion in
this Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. 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--Uncertainties and Other Issues" 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"), MRF, Inc. ("MRF" or
"The Farris Group"), MEC Health Care, Inc. ("MEC"), and LSI Acquisition, Inc.
("NNJEI").
The technology segment of the Company's operations includes LaserSight
Technologies and related subsidiaries. These entities develop, manufacture and
market ophthalmic lasers with a galvanometric scanning system primarily for use
in performing photorefractive keratectomy ("PRK") which utilizes a one
millimeter scanning laser beam to ablate microscopic layers of corneal tissue in
order to reshape the cornea and to correct the eye's point of focus in persons
with myopia (nearsightedness), hyperopia (farsightedness) and astigmatism.
The health care services segment includes MEC, NNJEI and MRF. MEC is a
total vision care managed care company which manages complete vision care
programs for health maintenance organizations ("HMOs") and other insured
enrollees. NNJEI is a physician practice management company which currently
manages the ophthalmic practice known as "Northern New Jersey Eye Institute"
under a service agreement. MRF is a consulting firm that develops and implements
vertical integration strategies for hospitals and managed care companies,
including the identification, negotiation and acquisition of physician practices
and the development of physician networks.
On November 13, 1996, the Company announced that it had engaged the
investment banking firm of A.G. Edwards & Sons to explore and evaluate strategic
business opportunities. Such exploration and evaluation process is continuing.
As of the date of the filing of this Annual Report on Form 10-K, the Company has
not entered into any agreement or negotiations for a transaction resulting from
such process. In addition, the Company is working with A.G. Edwards & Sons
regarding potential financing alternatives. There can be no assurance as to the
completion of any such transaction or financing or the terms thereof.
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(TM)") was introduced
internationally in 1994. The LaserScan 2000 Excimer Laser PhotoPolishing System
("LaserScan 2000(TM)") 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 world-wide clinical experience with the
Compak-200. In 1996, the Company added certain upgraded features to the original
Compak-200 and marketed the resulting LS 300 model as a lower-cost alternative.
The Company's business strategy is to focus exclusively on vision care, a
$30 billion industry.
Technology segment. The next-generation excimer laser is under development
and improvement and is currently being marketed commercially in 29 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, 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. Managed vision care is the key driver for
developing this division. The Company continues to develop networks of
ophthalmologists and optometrists and enter into contracts with managed care
companies which provide for LaserSight, through its managed care subsidiary, to
administer the benefits and assume actuarial risk for delivering vision care to
its insured subscribers. The Company intends to grow its managed care business
by adding managed care contracts around the country. In addition, the Company
intends to market, directly, its own routine benefit for frames and lens during
1997. The Company believes that the resources of its consulting group, coupled
with the managed care expertise, should allow the Company to expand
aggressively. Networks of ophthalmologists and optometrists contract with the
Company as part of the provider delivery system and rely on the Company to
administer the benefits, adjudicate the claims, and report back to the HMO
concerning the cost and quality of the services provided. The Company
anticipates that these networks of providers may also find PRK to be an added
value to their patients; the Company intends to offer such services as an
insured benefit.
For relatively new services such as PRK, patients need to be attracted
through marketing efforts or by referrals, including referrals from their
existing eye care professional. The Company believes that referrals will provide
a better, more-qualified candidate base for PRK services.
The Company is working to develop optometric and ophthalmic networks in
select markets and to negotiate with HMOs and insurers in those markets to
administer and to provide total vision care services. The optometrists and
ophthalmologists will not be employed by the Company, but will be incentivised
to participate by having access to managed care patients. The Company's strategy
is to gain access to the patients through contracts with insurers, to be in a
position to direct the provision of eye care in a cost-effective manner through
provider networks, and to support the managed care business and participate in
the provision of vision care services with select ophthalmic practices.
These provider networks are expected to be a source of referrals for PRK
as the procedure gains acceptance over time in the United States. The Company
has developed a strategy of contracting with selected PRK centers to provide
access to the same provider network used to provide routine vision care. The
Company's first PRK center contract is with the Greater Baltimore Vision Laser
Center. There the Company will credential the providers who refer patients to
the center and administer the claims for PRK services provided.
For information regarding the Company's export sales and operating
revenues, operating profit (loss) and identifiable assets by industry segment,
see Note 13 of the Notes to Consolidated Financial Statements.
As of December 31, 1996, the Company had 125 full-time and 3 part-time
employees. The Company considers its employee relations to be good.
The Company was incorporated in Delaware in September 1987, but was
inactive until June 1991. In July 1994, the Company was reorganized as a holding
company.
The Company's principal offices and mailing address are 12161 Lackland
Road, St. Louis, Missouri 63146, and its telephone number at that location is
(314) 469-3220.
LASERSIGHT TECHNOLOGIES
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 world-wide 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 Laser In
Situ Keratomileusis ("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.
The LaserScan 2000 incorporates 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, most recently, 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 as part of a strategy 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 systems established the
industry's standard for a small diameter beam, galvanometer controlled scanning
systems. That system has been improved upon with the introduction of the
LaserScan 2000 and LS 300 systems.
Ancillary Products
Corneal Topography Systems. During 1996, the Company continued its efforts
to distribute Corneal Topography Systems as options to purchasers of its
LaserScan 2000 and LS 300 laser systems. Corneal topography is a corneal mapping
system for patient diagnosis and future customization of systems. These systems
generally include an image projection and data acquisition system, computer,
software modules, and color monitor. The corneal topography system is not a
Company product, but the customer can select the manufacturer and the features
to be added to the system.
Microkeratome Systems. During 1996, the Company continued to offer a
microkeratome as an option to purchasers of LaserScan 2000 and LS 300 laser
systems. The microkeratome is an instrument used to cut the corneal flap during
a LASIK procedure. The microkeratome is not a Company product, but the customer
can select the manufacturer.
Eye Tracking System. The Company has developed an active eye tracking
system that first became available as an option during 1995. 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 1996, 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 to interface with other laser system
functions.
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 2000 and LS 300 laser systems, 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.
Lensometer. Since 1993, the Company has offered the Topcon Model LM-S1
lensometer.
Ex-calipar(TM). In October 1995, the Company was notified by the U.S.
Patent Office that a patent was issued covering the use of the first patented,
disposable, calibration system (the "Ex-calipar") for PRK and LASIK procedures
performed with excimer lasers. This system provides a quantitative simulation of
the proposed laser treatment pattern before each eye is treated. It is the only
system that gives the surgeon detailed information on the proposed ablation
size, shape, homogeneity, depth, and concentration as a single integrated
system. Use of the Ex-calipar system is not limited to the LaserScan 2000 laser
system, but can be utilized in conjunction with any excimer laser system for PRK
and LASIK procedures.
Intellectual Property
Numerous patents have been applied for by, or are issued to, other
companies which relate to broad technology concerning lasers and laser devices,
refractive surgical procedures utilizing laser devices, and delivery systems for
using laser devices in refractive surgical procedures. In 1992, LaserSight
Technologies signed a License Agreement with International Business Machines
Corporation ("IBM") for IBM's patents for ultraviolet light ophthalmic
products/procedures. Under this license, LaserSight Technologies pays a royalty
fee of 2% of the sales of its ultraviolet lasers in those countries in which IBM
has such a patent. Sales of excimer lasers in other countries are not subject to
such royalty payments. LaserSight continues to take actions to secure patent
rights in its field. See "Management's Discussion and Analysis--Uncertainties
and Other Issues--Technology-Related Uncertainties."
The Company maintains a portfolio of strategically important patents
covering its scanning method, solid state technology, glaucoma and retinal
treatments, corneal topography development, calibration methods, and
myopia/hyperopia (pending).
A 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. In May 1996, another patent (U.S. patent No. 5,520,679) for a scanning
method and apparatus for PRK 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 "photo-polishing" of the corneal surface. The extent of
protection which may be afforded to LaserSight Technologies, 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 213nm 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 LaserSight, has been filed
covering this new technology. During 1996, the Company postponed further tests
of this new system due to excimer-related priorities within the Company's
engineering and research and development departments.
Francis E. O'Donnell, Jr., Chairman of the Board of the Company, was
independently granted two patents (U.S. patent no. 5,370,641) for 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 attorneys' fees and costs to
prosecute the patent applications. In October, 1995, Dr. O'Donnell was granted
another 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, Inc. as the Ex-calipar. 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.
In November 1995, LaserSight 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 LaserSight's patented delivery system. The
Company believes that Auto-PRK could provide improved reproducibility of results
by eliminating the surgeon variable.
The Company has independently developed the trademarks "LaserHarmonic,"
"Compak-200," "LaserScan 2000," "LS 300," "Ex-calipar" and "Auto-PRK" and
intends to enforce its prior appropriation of these trademarks and to seek
registration thereof. "LaserSight" is a service mark developed by LaserSight.
Manufacturing
The Company historically had produced the substantial majority of its
laser products from its office and manufacturing facility in Orlando, Florida.
During the fourth quarter of 1995, the Company opened a new manufacturing
facility in San Jose, Costa Rica to manufacture its lasers for international
sales, and for delivery to United States investigational sites under its IDE
protocols. During 1996, the Company successfully employed and trained qualified
personnel to staff and operate the Costa Rican manufacturing facility. During
1996, all LaserScan 2000 lasers sold to international customers were
manufactured at this facility, as well as LaserScan 2000 laser systems delivered
to United States clinical investigators. This facility, located in a free trade
zone, is expected to account for the manufacturing and shipping of all laser
units to be sold internationally during 1997.
During 1996, personnel at the Orlando facility assisted in the transition
of manufacturing operations and materials to Costa Rica, performed certain
training and quality control functions, and assisted the Costa Rica facility in
achieving their quarterly production schedule.
As exports of laser products not approved for sale in the United States
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 driving 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--Uncertainties and Other Issues--Company-Related
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 EC 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 (Semko) for maintenance
of ISO 9002 conditions, met 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 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 unique laser head
it uses. 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 utilize the laser head in an excimer laser system
for corneal refractive surgery. The Company continued to experience higher than
acceptable warranty service costs associated with this component, and
accordingly, during 1995 the Company began certain measures to address this
issue that have continued into 1996. 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. The first prototypes have been built and the
Company anticipates receiving additional prototypes of this new laser head
design during the first quarter of 1997 and will immediately begin engineering
evaluation and testing at that time. Should the Company determine that the
initial prototypes of this new laser head design and configuration meet its
requirements, the Company intends to incorporate this new laser head into its
products during the second or third quarter of 1997. The Company has negotiated
a limited exclusive license to this new laser head technology in the field of
ophthalmic surgery.
Marketing
The use of LaserSight Technologies' medical laser systems in the United
States requires FDA approval. LaserSight Technologies has been marketing these
systems in the international market where similar approval is not required or is
easier to obtain. These international sales require LaserSight to comply with
the regulatory requirements of the importing nation and export requirements of
the United States.
During 1996, LaserSight Technologies marketed the LS 300 and LaserScan
2000 laser systems in Europe, the Pacific Rim, Asia, South and Central America,
and the Middle East. The Company sells its excimer laser systems and accessories
utilizing a multi-tiered marketing strategy directed towards ophthalmologists
throughout the world. A combination of directly-employed sales representatives
and independent international distributors and representatives is utilized 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
1996, approximately 82% of sales of LaserSight Technologies' products resulted
from distributors and representatives with the balance from direct sales.
During 1996, 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 committed to participate in a number of ophthalmology meetings,
exhibits, and seminars, both domestic and foreign, during 1996. Historically,
attendance at two large United States meetings, the American Academy of
Ophthalmology and the American Society of Cataract and Refractive Surgery, has
yielded substantial interest in the Company's laser products.
During 1995, the Company entered into an agreement for the Japanese market
with the International Medical Data Center ("IMDC") located in Tokyo, Japan.
Under this agreement, the Company and IMDC incorporated a new business entity,
LS Japan Company, Limited ("LS Japan"), during January 1996.
During 1996, the IMDC continued efforts related to clinical trials and
approval for the Company's laser system by the Japanese Ministry of Health and
Welfare. The IMDC changed its name during 1996 and continued its activities
under the name of Noda Medical Consulting, Inc. ("Noda Medical"). In December
1996, the Company and Noda Medical redefined their strategy for regulatory
approval and future direct sales into the Japanese market. In addition, the
Company is nearing completion of negotiations for an exclusive distribution
agreement with Noda Medical. The Company believes that its appointment of Noda
Medical as its exclusive distributor for Japan should result in a more effective
pursuit of Ministry approval. The Company has no plans, at this time, to utilize
LS Japan as an active operating entity.
In certain countries, clinical trials of lasers are required before
commercial sales can take place. As a result, LaserSight Technologies has placed
several lasers with clinical investigators at no cost to the physician, and
anticipates establishing several additional clinical sites during 1997. 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 United States to
ophthalmologists participating in LaserSight Technologies' FDA clinical trials.
Pricing of these units has 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
United States during 1997, these sites could represent an additional source of
revenue for the Company as well as additional regulatory costs. Approximately
145 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 United States 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
Due to seasonal vacation and holiday customs in the Company's markets, the
Company believes that sales during the first quarter may be somewhat lower than
in other quarters. These seasonal factors include the Lunar New Year, celebrated
in Asian and Southeast Asian countries and the summer vacation period in South
America.
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 intends to internally finance a proportionately-smaller
number of sales over periods exceeding 18 months than it did before 1996. 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.
Since 1996, the Company has issued more sales agreements with payment
terms requiring a letter of credit. At December 31, 1996 the Company was the
payee on letters of credit with foreign financial institutions aggregating
approximately $2.1 million. On occasion it is necessary to meet a competitor's
more liberal terms of payment. In those cases, the Company may provide term
financing. See "Management's Discussion and Analysis--Uncertainties and Other
Issues--Company-Related Uncertainties--Receivables."
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 radial keratotomy ("RK"). 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 LaserScan 2000 for the PRK and LASIK UV-wavelength market for
which it believes it has at present two major competitors in the United States
and a total of six major competitors worldwide. For refractive surgery,
LaserSight Technologies believes that its LaserScan 2000 systems 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 United States, the Company must presently focus its
marketing efforts on international markets. Both United States 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 United States. 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. The Company
anticipates that during 1997 further upgrades will be made to the modified
Compak-200 systems utilized for United States clinical trials.
During 1996, the Company submitted an additional protocol request to the
FDA, and received its approval to proceed with clinical trials for PARK (a
combination of myopia and astigmatism). This trial is being conducted by
domestic investigators, and during 1997 the Company anticipates expanding the
trials by including one or more international investigators.
For its Phase 2a and 2b myopia trials the Company established five
clinical sites in the United States, and for supporting data opened one
additional international site monitored under the same protocol as its United
States sites. At the end of 1996, the Company had a total of six domestic sites
for its clinical trials, as well as the one international site.
Based on recent discussions with the FDA, the Company believes that the
approval process could be expedited somewhat depending on the amount of clinical
data that is acceptable to the FDA. While there is no assurance that the
approval process will be expedited, the Company believes that it has completed
as much as 90% of the treatments required for an expedited approval and
anticipates that the remaining treatments required will be completed by May
1997. After required follow-up periods of at least six months, the Company could
then submit a PMA application to the FDA for its review. There is no assurance
that the FDA would approve this PMA.
The Company is preparing to submit during 1997 additional protocol
requests for hyperopia, and, if appropriate, 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.
Research and Development
During 1996, 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 $948,520 in 1996 compared to $983,130 in 1995, a decrease of 4%. In 1994
these expenses were $262,882. Considerable research and development effort was
directed to the continued improvement of the LaserScan 2000 system, including
completion of subsystems for automatic gas fill, power stabilization, operating
software and other key components. Many of the subsystems developed have been
designed so that they can 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. The Company expects to
direct additional efforts during 1997 toward the production of a commercial
design for this product.
The concept for the original LaserHarmonic System was introduced by the
Company's founder in 1991. The system was recognized as the first solid-state
(non-gas) laser capable of operating in the ultraviolet spectrum (common to all
excimer lasers used for refractive surgery). 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.
In late 1992, however, the Company deferred development of this laser in
favor of the Compak-200. This allowed the Company to get to market more quickly
for sales and delivery of the Compak-200 laser system. The LaserHarmonic
research and development effort identified many novel features, including a
unique scanning delivery system, a software intensive product with flexible
computer controlled ablation, and a relatively lightweight product with a small
footprint.
The international market acceptance of the Compak-200, LS 300 and
LaserScan 2000 Excimer Laser Systems during 1995 and 1996 further delayed
development of the LaserHarmonic system. The Company has completed its second
prototype of this device and continues development of the LaserHarmonic System
as the first solid-state (non-gas) laser capable of generating multiple wave
lengths for use in a number of non-refractive ophthalmic procedures which now
require separate lasers. The LaserHarmonic was recognized as the first solid
state (non-gas) laser capable of operating in the ultraviolet spectrum.
Additional research and development efforts will continue on the
development of the new solid state LaserHarmonic System. Further efforts will
continue to be directed at an appropriate level towards production of a clinical
design for this product to ensure that a commercial version is available to meet
the market's demand for such a system. There are no assurances that these
activities will be successful.
Upon completion of a clinical design for the LaserHarmonic System,
pre-clinical trials will begin, followed by other formal clinical trials. Once
sufficient clinical and safety data have been gathered, the Company would plan
to initially market the LaserHarmonic system for medical uses outside of the
United States. 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 1996, the Company continued development of its advanced
eye-tracking system which is offered as an option to LaserScan 2000 purchasers.
The LaserSight eye tracker 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 has
entered into agreements for the development of an epithelial boundary
determination device and for a method of preventing keratocyte loss. Both of
these projects are in the early stages of development, and there can be no
assurance that these efforts will be successful.
HEALTH CARE SERVICES
Introduction
The Company has developed Health Care Services as a strategic business unit
which consists of the three main subsidiary companies engaged in the provision
of health services: MEC Health Care, Inc. ("MEC"), LSI Acquisition, Inc.
("NNJEI") and MRF, Inc. d/b/a The Farris Group ("MRF"). At December 31, 1996,
Health Care Services had 70 employees, including 69 full-time.
MEC, in operation since 1991 and acquired by the Company in 1995,
administers the complete vision care program for HMO and self insured health
plans by developing, contracting with and managing vision care provider networks
and entering into contracts with managed care organizations for the provision of
vision care services ("vision care carve outs") to their enrollees. NNJEI,
acquired in July 1996, is a physician practice management company which
currently manages a three physician ophthalmology practice with an Ambulatory
Surgery Center ("ASC"). MRF is a national provider of consulting services to the
health care industry which recently added to its array of services the building
of vision care networks and consulting with vision care providers to enhance
their practice income or develop strategies as an alternative to the sale of
their practice to a physician practice management company.
MANAGED VISION CARE (MEC)
MEC administers three general benefit programs, consisting of: 1) a
discount program for vision examinations along with prescription lenses and
frames; 2) an insured benefit for periodic vision examinations along with
prescription lenses and frames; and, most commonly, to date, 3) an insured
benefit which includes medical and surgical services for vision problems other
than those which are correctable by refractive services such as contact or
external lenses. Examples of medical and surgical services include cataract
removal, glaucoma treatment and retina reattachment.
MEC performs certain administrative functions as they relate to the vision
care providers, consisting of general ophthalmologists, optometrists, ambulatory
surgery centers as well as ophthalmologic specialists and the facilities they
use, including hospitals. The administrative functions include credentialing
providers, payment of claims, utilization review, quality assurance, grievance
management and patient surveys. In this regard, MEC is similar to a
single-specialty HMO. MEC follows all applicable guidelines to participate in
health plan audits by the National Committee for Quality Assurance ("NCQA").
As compensation for performing such services and bearing certain risks
related to the volume and types of services covered by an enrolled health plan
population, MEC receives from the payer (generally an HMO) a negotiated fee per
member per month ("PMPM"). MEC determines the range of fees it is willing to
accept by analyzing the demographic characteristics of each insured group to
estimate the utilization of the vision care services. To lower risk, MEC may
sub-capitate certain ophthalmic specialty services for portions of its enrolled
population. In turn, MEC's profitability depends on the extent to which the
negotiated fees it receives from insurers and HMOs exceed the benefit claims and
administrative expenses MEC incurs. MEC's ability to manage utilization and
quality are important factors in its historical profitability.
Payment Terms
MEC's services are generally provided to managed care entities on a
capitated basis. The contract pricing is based upon the benefit program being
administered, MEC's actuarial experience and its profitable operating history
with the same management team over the past eight years. During 1996, revenues
per member per month generally ranged from $0.80 to $1.23. MEC arranges for the
provision of necessary and covered medical services through contracted
optometrists and ophthalmologists. MEC utilizes sub-capitation agreements with
its surgeons to reduce the risk that MEC is obligated for. Such an arrangement
requires a large volume of patients to be capitated to single ophthalmologists.
In the instances where MEC cannot sub-capitate, MEC utilizes a reduced fee for
service arrangement. MEC ensures cost savings with its providers utilizing
management techniques to review the medical necessity for procedures, as well as
utilizing its proprietary software to prevent over utilization by providers in
the fee for service model. MEC utilizes the Medicare fee schedule for procedures
as a starting point for development of the appropriate fees it pays its
providers. To the extent MEC is successful managing patient utilization in
relation to the capitated fees received, MEC's profit can be maximized.
Conversely, if patient utilization is not properly managed or increases for any
unforeseen reason, negative financial results could result as capitated revenues
cannot be adjusted in the short term. MEC's operating profit has historically
ranged between 15-20% of revenues of a pre-tax basis during its eight year
history. MEC's success in providing for quality care as well as a lower cost of
care for its clients has enabled it to grow at the rate of 15-30% per year by
having a 95% historical retention of its existing clients.
Client managed care organizations provide a list of covered enrollees each
month and pay the negotiated fee for each enrolled beneficiary during the month
of coverage.
On a monthly basis, MEC estimates claims incurred but not reported based
upon historical experience. Such accrual is included in accounts payable in the
Company's consolidated financial statements.
Sales and Marketing
At the end of 1996, MEC, based in Baltimore, Maryland, generally held
contracts in the Mid-Atlantic region, including Carefirst Health Plan,
MediCarefirst Health Plan, Freestate Health Plan & Medicaid, Freestate Medical
Assistance Health Plan, Potomac Health Plan, Delmarva Health Plan, HealthKeepers
Health Plan of Northern Virginia, Kaiser Permanente Health Plan of the
Mid-Atlantic States, Mass Transit Authority Health Plan of Maryland and Health
Plan South East (in Tallahassee, Florida). The majority of these plans are
subsidiaries of Blue Cross and Blue Shield of Maryland. The contracts vary in
length with the majority extending through December 1997 with provisions for
automatic annual renewal. During 1996, the revenues in the amount of $4,828,926
from Blue Cross and Blue Shield of Maryland contracts represented 22.5% of the
Company's consolidated revenues and 44.4% of the revenues of the Company's
health care services segment. The majority of the contracts can only be canceled
for cause and are on an exclusive basis. Blue Cross and Blue Shield of Maryland
has selected MEC as its exclusive vision care administrator for its managed care
entities. During 1996, MEC added Medicare and Medicaid programs to its existing
benefit programs.
MEC's 1996 growth of 24% in covered enrollment resulted from new contracts
with managed care organizations and internal growth of existing contracts.
Several contracts covering Medicare and Medicaid beneficiaries accounted for
part of the internal growth over the past year. It is expected that the number
of Medicare and Medicaid enrollees will continue to increase in 1997, to
approximately 10% of total enrollment. Medicare enrollees generate revenue per
member per month of approximately five times that of a commercial HMO enrollee.
Management of the Company believes that the gross profit margin should be
comparable to that of other enrollees, but the Company's historical experience
with Medicare enrollees is limited.
The Company has increased the number of people and other resources devoted
to marketing the vision care programs to managed care organizations in markets
other than in the Mid-Atlantic region. While there is no assurance that the
increased marketing efforts will be successful, the Company is currently in
discussions with senior management of several health plans throughout the United
States regarding its vision care carve out services.
The Company's MRF subsidiary has started to focus selected resources on
building and managing vision care provider networks. Management believes this
effort can contribute to the number of managed eye care enrollees and increase
the Company's consulting revenues.
An increasing percentage of patients are covered by managed care entities.
MEC believes that by using its experience and carefully credentialed
ophthalmologists and/or optometrists (depending on the applicable benefit
design) as the entry point to the vision care system, it can provide routine
vision care conveniently and at a lower cost than the managed care entity has
historically done on its own. The Company has been successful in performing its
services at a lower PMPM cost than its clients' health plans have historically
experienced, but there can be no assurance that this favorable experience will
continue.
Competition
In the Mid-Atlantic region as well as Tallahassee, Florida, MEC has one
known competitor for its main benefit program, the fully integrated vision carve
out. The Company has become aware of several small boutique-type companies that
exist throughout the United States with varying numbers of covered lives and
benefit designs. The Company believes there are consolidation opportunities with
selected companies depending on their contracts, size, capitalization and
management expertise, among other factors.
Other companies bear certain risks by contracting with managed care
organizations and employers to provide a "primary" (evaluation of the eye for
visual impairment and disease) eye examination and the "materials" (lenses and
frames) necessary to correct vision problems. In addition to the vision care
management companies, some HMOs will elect to retain the vision care risk and
not subcontract to vision care "carve out" specialty companies such as MEC.
Success in marketing the vision care carve out services depends upon the
ability of MEC to lower the cost of vision care services to the host managed
care organization, provide services which are satisfactory to the enrolled
membership and the various providers, while managing the risk of adverse
utilization.
Strategy
MEC stresses a strong relationship with the individual vision care
providers, the network in which the providers are members, and the patient. The
strength of such relationships can differentiate MEC from competitors.
Subspecialty referral physicians, such as corneal transplant surgeons, pediatric
ophthalmologists, neuro-ophthalmolologic and retina surgeons, are carefully
selected by MEC to further the quality aspects of the differentiation strategy.
The Company believes that high quality and satisfied providers and patients are
the key to retaining contracts with managed care companies and their enrolled
members.
By subcontracting with MEC, the host managed care organization will be
able to predict their vision care costs because MEC typically provides vision
care services for a capitated fee. MEC's network providers are credentialed in
accordance with NCQA standards.
MEC will build provider networks in new markets in response to obtaining
contracts with managed care organizations. Networks are developed with an eye
toward providing convenient geographical access to optometrists,
ophthalmologists, ASCs and ophthalmic subspecialists for all of the covered
members. MEC manages the entry point into the vision care system as well as the
referral process within the system to the various specialties and ancillary
services. See "Management's Discussion and Analysis--Uncertainties and Other
Issues--Health Care Services-Related Uncertainties."
Management Information System
MEC has developed a proprietary management information system tailored to
vision care management which automates the routine authorization process for
costly medical procedures and maintains an extensive database enabling
management to regularly monitor quality, utilization and cost. In addition, the
system aides in the payment of providers and maintains regularly updated
enrollment lists. Management believes the management information system as
presently configured can accommodate a significant increase in enrollment.
Other
In connection with its acquisition of MEC in October 1995, all of the
shares of MEC were deposited in escrow pending payment by the Company of its
promissory note in the original amount of $1,799,100 (the "MEC Note") as part of
the consideration for the acquisition. The current balance of $1,000,000 is due
on demand after April 1, 1997. If the Company defaults under the MEC Note, the
former shareholders of MEC will be entitled to obtain all of such shares. The
Company believes that it will be able to pay the MEC Note in full when due or
negotiate another extension.
On March 4, 1997, the Company announced that it had reached an agreement
for the purchase of Intermountain Managed Eyecare, L.L.C. ("IME"), with a
closing scheduled for March 15, 1997, pending completion of due diligence by the
Company. The announcement was based on an agreement between the Company and Todd
E. Kimball, O.D., who is the president of IME and one of the seven members of
IME. IME, based in Salt Lake City, Utah, currently manages a vision care
carveout covering approximately 150,000 lives on a basis generally similar to
MEC. The definitive acquisition agreement between the Company and all of the
members of IME is expected to be executed shortly although certain aspects of
the acquisition remain under discussion. The closing of the acquisition has been
postponed to April 16, 1997. The purchase price is expected to consist of 80,000
shares of Common Stock, subject to possible adjustment two years after the
closing. See "Management's Discussion and Analysis--Uncertainties and Other
Issues--Company-Related Uncertainties--Contingent Commitments to Issue
Additional Shares."
CONSULTING SERVICES (MRF)
MRF is a national provider of consulting services in strategic analysis,
planning and implementation, including negotiation of business transactions for
hospitals, health systems, HMOs and other organizations engaged in health
care-related services. MRF's experience in dealing with physicians and health
care organizations in general has resulted in a focus toward the development of
optometric and comprehensive vision care networks.
The consulting staff has significant experience in the health care
industry in such areas as finance, accounting, medical practice operations,
market research, health policy research, turnaround management, hospital
operations and strategic planning.
Principal Services
Provider Network Development and Mergers and Acquisitions. MRF has
assisted health care companies in provider network development and merger and
acquisitions work including services to community-based hospitals, large
academic teaching hospitals, solo physician practices, large multi-specialty
practices, and managed care providers.
Provider networks have typically been established based upon an
independent physicians' association ("IPA") model which not only provide
leverage to the network in negotiating numerous contractual and business
relationships, but also are an excellent source for securing referrals for
various specialty services. To this end, MRF is well-positioned to establish
optometric networks, and the Company intends to integrate cross-referral
opportunities between MRF and MEC. MRF consultants believe that their prior
experience can be readily transferred to individual and groups of
ophthalmologists as they seek alternate ways to maintain or grow their own
practice and strengthen their position in their market.
Managed Care Business Development and Implementation. Many managed care
organizations have begun to position themselves as proactive catalysts in the
search for innovative solutions to health care reform. To assist in this
process, MRF is engaged in providing network development services for
optometrists who, depending on the benefit design, can act as the entry point to
the vision care system administered by MEC for other managed care organizations.
In addition, MRF consults with ophthalmologists to develop and implement
strategies intended to increase their patient volume including increasing
patients from managed care contracts.
Physician Recruitment. MRF continues to provide physician recruiting
services, including packaging and marketing the recruiting opportunity, sourcing
and screening candidates, conducting preliminary qualifying interviews,
coordinating on-site visits, providing candidate and client follow-up and
providing pre-employment negotiations.
Post-Acute Care. MRF works with organizations which provide care for
patients after the acute or hospital phase of an illness. Nursing homes, skilled
nursing facilities, home care programs, assisted living facilities and companies
which provide products and services to the foregoing organizations are among the
clients served. Services include providing strategic planning and positioning
for growth and profit maximization.
Payment Terms
Clients are generally billed monthly for services rendered with the amount
due upon receipt of the invoice. Certain projects are capped as to maximum
billable fees.
Competition
Primary competitors are large national accounting firms and small health
care consulting firms. MRF believes it is differentiated by the fact that it
assists in implementing the strategies it recommends and provides follow-up
after implementation.
NNJEI
NNJEI is an ophthalmic practice management company currently managing the
ophthalmic practice known as the Northern New Jersey Eye Institute, which is
comprised of three ophthalmologists, two of which are trained to perform
photorefractive keratectomy ("PRK"), and an ASC. The principal offices and ASC
are in South Orange, New Jersey with satellites in Elizabeth, West Caldwell and
Vernon, New Jersey.
Payment Terms
The Company is paid by the NNJEI practice for the expenses incurred in
operating the practice, excluding physician compensation, plus a management fee.
A minimum fee is guaranteed by the selling physicians for the first three years.
The management contract between LSIA, the Company's wholly-owned
subsidiary, and the ophthalmic practice known as NNJEI is for 25 years
commencing on July 3, 1996 and arranges for LSIA to provide all non-medical
management. A LSIA Policy Board which is composed of two NNJEI personnel and two
Company selected personnel (with tie votes to be decided by the Company's
president) makes budget, capital expenditure, and major non- medical policy
decisions. LSIA employs all non-medical personnel and arranges for the provision
of all services and products needed to conduct the business of NNJEI. Such
expenses are generally reimbursed in full by NNJEI. LSIA receives a fee of 5% of
NNJEI's collectible revenues. In addition, NNJEI's profit after the expenses
reimbursed and 5% fee described above, but prior to physician-related expenses,
is then allocated with 40% to LSIA. LSIA management, within budget guidelines,
makes adjustments to applicable revenue and expense variables in an effort to
achieve established goals. LSIA management is made up of the same personnel who
profitably managed the practice for several years prior to its management
contract with the Company.
Competition
Most ophthalmology practices in the service area of NNJEI are
independently owned by the practicing ophthalmologist(s) and some have developed
referral arrangements that may compete with the NNJEI. NNJEI, however, has
entered into managed care contracts in an effort to continue to serve the
current patient base and increase the number of patients it is eligible to
serve.
NNJEI also operates an ASC which competes with hospitals for eye surgery
services, but typically operates at a lower cost.
Business Strategy and Marketing
The Company's business strategy relating to owning the assets of and
managing ophthalmology practices has changed during 1996 in that it intends to
utilize practice management opportunities only as a means to complement or
anchor a provider network in markets where it has managed vision care contracts
or intends to have such contracts. NNJEI is positioned to anchor MEC's efforts
to enter the Northern New Jersey market. NNJEI has a number of managed care
contracts and a network of referring optometrists. The Company believes that
this base of providers affiliated with NNJEI will be attractive to managed care
companies and offer an incentive for them to subcontract with MEC. The Company
will continue to evaluate the role NNJEI plays in the overall strategy of the
Company.
Because NNJEI operates an ASC, the Company believes that the cost of
providing the surgical component of vision care services as a subcontractor to
managed care organizations can be contained, in comparison to hospital-based and
other providers.
Item 2. Properties
The principal offices of the Company and The Farris Group are located at
12161 Lackland Road, St. Louis, Missouri 63146, and are leased from an
independent third party. The lease covers approximately 10,000 square feet,
provides for payments of $12,917 per month and expires on March 31, 1998.
The offices of LaserSight Technologies are located at 12249 Science Drive,
Suite 160, Orlando, Florida 32836, and are leased from an independent third
party. The lease covers approximately 7,600 square feet, provides for payments
of $11,734 per month, and expires on May 31, 2000.
The Company's manufacturing facilities for international sales are located
at the Metro Free Zone, outside of San Jose, Costa Rica and are leased from an
independent third party. The lease covers approximately 3,200 square feet,
provides for payments of $1,959 per month, and expires on November 30, 2000.
The offices of MEC are located at 100 Park Avenue, Baltimore, Maryland
21201, and are leased from the former owners of MEC. The lease covers
approximately 5,600 square feet, provides for payments of $6,600 per month, and
expires on July 31, 1998.
The principal office of NNJEI is located at 71 2nd Street, South Orange,
New Jersey 07079, and is leased from the former owners of the assets acquired.
The lease covers approximately 5,400 square feet, provides for payments of
$10,908 per month, and expires on December 31, 2004. In addition, several
satellite locations are leased, totaling approximately 4,600 square feet,
providing for payments totaling $7,642 per month, and expiration dates ranging
from September 1997 to December 2004.
Item 3. Legal Proceedings
Pillar Point Partners. On March 31, 1995, the Company was served with a
complaint in the United States District Court for the District of Delaware by
Pillar Point Partners alleging infringement by the Company's ultraviolet laser
corneal surgery systems of certain patent rights allegedly held by Pillar Point
Partners under exclusive licenses from Summit Technology, Inc. ("Summit") and
VISX, Incorporated ("VISX"), both of whom joined the suit as co-plaintiffs.
Pillar Point is a partnership formed by Summit and VISX. On July 26, 1995, the
Company filed an answer denying the allegation of patent infringement. In
addition, the Company asserted several defenses which alleged the VISX patent to
be invalid and unenforceable. The Company filed a counterclaim for a declaratory
judgment that the VISX patent has not been infringed and is invalid and
unenforceable. The Company alleged that the patent is unenforceable based on
inequitable conduct by the plaintiffs before the U.S. Patent and Trademark
Office due to the nondisclosure of material information regarding prior art and
patent misuse. The Company charged patent misuse on the basis of price fixing
due to the per-procedure royalties established by Pillar Point Partners,
improper settlement of interference claims, and unlawful pooling of patents, all
of which eliminate competition.
On March 25, 1997, the parties entered into an agreement to resolve the
litigation. Under the agreement, Pillar Point, VISX and Summit granted a release
from liability under any of their patents for certain of the Company's
ultraviolet laser corneal surgery systems and any service or procedure performed
with such systems before the effective date of the agreement. The Company will
make a nominal payment and agreed to notify Pillar Point, Summit and VISX before
LaserSight begins manufacturing or selling in the United States in the future.
In the agreement, the parties agreed to resolve the litigation by entry of a
Dismissal Without Prejudice.
VISX. On September 5, 1995, a complaint was filed in the Federal Court
of Canada by VISX, alleging infringement by the Company and Dr. Hugo Sutton of
certain patent rights allegedly held by VISX in Canada. The Company sold two
lasers in Canada, both of which were subsequently returned to the Company. The
Company has agreed to indemnify Dr. Sutton. The Company denies the allegation of
patent infringement and intends to vigorously defend itself. Discovery has not
started, but the parties have engaged in settlement discussions.
Public Company Publishing, Inc. In May 1996, the Company received from
counsel to Public Company Publishing, Inc. ("PCP") a complaint alleging that the
Company breached a written agreement between PCP and the Company dated October
30, 1992 (the "Agreement") pursuant to which PCP was to receive certain options
to purchase Common Stock in exchange for rendering certain financial consulting
services to the Company. PCP alleged that PCP is entitled to monetary damages in
an unspecified amount as well as specific performance. Earlier correspondence
alleged monetary damages in excess of $1,500,000. On December 17, 1996, the
action was settled on the basis of the Company's agreement to make payments
totaling $100,000 and to issue to Mr. Samuel Duffey, PCP's sole shareholder,
75,000 shares of Common Stock in the event that such shareholder does not
receive 75,000 shares of Common Stock from the former holders of LaserSight
Centers (a group that includes Mr. Duffey). Such monetary payment has been made
by the Company and the 75,000 shares have been delivered by the former
LaserSight Centers holders.
Rural Health Partners, Inc. On May 9, 1996, Rural Health Partners, Inc.
("RHP") brought an action in the District Court, City and County of Denver,
Colorado against MRF, Inc., d/b/a The Farris Group ("TFG") alleging that TFG
breached an agreement with RHP to provide joint consulting services to certain
health care providers. RHP's complaint also alleged fraud, negligent
misrepresentation, breach of fiduciary duty and trade defamation by TFG and
sought monetary damages in an unspecified amount. In January 1997, the action
was settled for approximately $16,000.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
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 bid prices for the
Common Stock during the period from January 1, 1995 through June 9, 1995 (after
which the Company's Common Stock began trading on The Nasdaq Stock Market) and
the high and low sales prices from that date through December 31, 1996, as
reported by The Nasdaq Stock Market. As of March 21, 1997 there were
approximately 237 holders of record of the Common Stock and, as far as the
Company can determine, approximately 4,400 total shareholders, including
shareholders of record and shareholders in "street name."
<TABLE>
<CAPTION>
High Low High Low
---- --- ---- ---
Fiscal 1995 Fiscal 1996
<S> <C> <C> <C> <C> <C>
First Quarter $14.38 $8.50 First Quarter $13.38 $9.50
Second Quarter 15.75 7.88 Second Quarter 13.12 8.88
Third Quarter 18.00 13.38 Third Quarter 11.00 6.06
Fourth Quarter 15.63 12.38 Fourth Quarter 7.00 5.31
</TABLE>
On March 25, 1997 the last sale price of the Common Stock on The Nasdaq
Stock Market was $5.6875 per share.
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.
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 five years ended December 31, 1996, is derived from the
Company's consolidated financial statements for such years.
<TABLE>
<CAPTION>
(In thousands, except for per share amounts)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $21,504 $25,988 $ 9,594 $ 365 $ 658
Gross profit 13,867 20,353 7,528 62 180
Income (loss) from operations (4,960) 4,552 1,140 (1,657) (1,220)
Net income (loss) (4,074) 4,592 1,018 (4,753) (1,333)
Conversion discount on
preferred stock (1,011) -- -- -- --
Dividends on preferred stock (359) -- -- -- --
Net income (loss) applicable
to common shareholders (5.444) 4,592 1,018 (4,753) (1,333)
Primary earnings
(loss) per common share (0.69) 0.64 0.17 (0.92) (0.32)
Fully diluted earnings
(loss) per share (0.61) 0.64 0.16 (0.92) (0.32)
Working capital 10,021 7,272 3,570 3,063 5,641
Total assets 34,250 29,102 8,641 4,511 6,191
Stockholders' equity 26,769 20,420 6,118 3,532 5,901
</TABLE>
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,
1996, 1995 and 1994, unless otherwise indicated.
Adoption of New Accounting Standard
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and as of January 1, 1996 has adopted
the disclosure-only provisions of SFAS 123. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
Overview
The Company's net loss for 1996 was $4,074,369 and its loss attributable
to common stockholders was $5,443,544 or $0.69 per primary common share and
$0.61 per fully diluted common share on net sales of $21,503,990. The net loss
is primarily attributable to a decrease in revenues generated by the Company's
technology division as a result of a net decline in laser systems sold in
overseas markets and a decline in the performance of the Company's health care
consulting services subsidiary, MRF. The difference between the net loss and the
loss attributable to common stockholders resulted from preferred stock dividends
and the conversion discount on preferred stock.
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.
<TABLE>
<CAPTION>
1996 1995 1994
Net Sales % of Total Net Sales % of Total Net Sales % of Total
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Technology $10,634,663 50% $ 19,899,584 77% $ 6,113,016 64%
Health care services 11,263,399 52% 6,088,481 23% 3,481,452 36%
Intercompany revenues (394,072) (2%) -- -- -- --
----------- ----- ------------ ----- ------------ ------
Total net sales $21,503,990 100% $ 25,988,065 100% $ 9,594,468 100%
Change from
prior year (17%) 171%
</TABLE>
Net sales and revenues decreased by $4,484,075 between 1995 and 1996. Net
sales and revenues increased by $16,393,597 between 1994 and 1995.
1996 vs. 1995. The increase in health care services revenue was primarily
attributable to revenues generated by the Company's most recent acquisitions,
MEC, acquired on October 5, 1995, and the assets of NNJEI, acquired on July 3,
1996 in conjunction with the signing of a service agreement with the ophthalmic
practice operating under that name, partially offset by a reduction in MRF'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 MRF's personnel in anticipation that 1997 revenues will
continue below historical levels. Of the total net sales and revenues for 1996,
MEC, MRF and NNJEI accounted for revenues of $6,179,419 (29% of total revenues),
$3,380,456 (16%) and $1,703,524 (8%), respectively. Of MRF's total revenues,
$394,072 (2%) were intercompany revenues which have been eliminated in the
Company's consolidated financial statements. NNJEI'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
are 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 is 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).
1995 vs. 1994. Revenue increases were primarily attributable to (i)
increased sales of the Company's laser systems in overseas markets (64 net units
in 1995 compared to 30 in 1994); (ii) increased revenues generated by MRF, which
increased 41% over 1994 revenues; and (iii) revenues generated by the Company's
MEC subsidiary, acquired in October 1995. Of the total net sales and revenues
for 1995, MRF and MEC generated revenues of $4,898,781 (19% of total revenues)
and $1,189,700 (5%), respectively. MEC's 1995 revenues reflect a three-month
period.
Cost of goods sold; gross profits. The following table presents a
three-year comparative analysis of cost of goods sold, gross profit and gross
profit margins.
<TABLE>
<CAPTION>
1996 % Change 1995 % Change 1994
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Cost of goods sold $ 3,415,276 (30%) $ 4,859,039 135% $ 2,066,220
Provider payments 4,221,599 444% 776,089 n/a --
Gross profit 13,867,115 20,352,937 7,528,248
Gross profit percentage 64% 78% 78%
Technology only:
Gross profit 7,219,387 15,040,545 4,046,795
Gross profit percentage 68% 76% 66%
</TABLE>
Gross profit margins were 64% of net sales in 1996 compared to 78% in 1995
and 1994. Gross profit decreased $6,485,822 in 1996 from 1995 and increased
$12,824,689 in 1995 from 1994.
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; (iv) a reduction in revenues
generated by MRF, which has no associated cost of sales; and (v) the sale of the
Company's future revenue rights for six laser systems in China for $600,000 in
1995. The reductions in gross profit margins were partially offset by revenues
generated by NNJEI, which has no associated cost of sales, and lower unit costs
related to laser systems sold. 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.
1995 vs. 1994. Overall gross margins were consistent between years
resulting from improved margins on laser system sales, primarily from higher
average revenues per unit and the sale of future revenue rights in China, offset
by the addition of MEC during 1995, with its lower gross profit percentage.
Research, development and regulatory expenses. The following table
presents a three-year comparative analysis of research, development and
regulatory expenditures.
<TABLE>
<CAPTION>
1996 % Change 1995 % Change 1994
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Research, development
and regulatory $ 1,720,246 18% $ 1,460,842 304% $ 361,946
As a percent of technology
net sales 16.2 % 7.3 % 5.9 %
</TABLE>
Research, development and regulatory expenses increased by $259,404 between
1995 and 1996. Such expenses increased by $1,098,896 between 1994 and 1995.
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 have 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 (myopic astigmatism) and the
development of additional protocols for possible future submission to the FDA.
Future research, development and regulatory costs are expected to increase
moderately from 1996 levels due to continued refinements of the LaserScan 2000,
the planned introduction of an advanced excimer laser system, continued
development of the LaserHarmonic solid state laser and increased expenditures
relating to the expected progression of the Company's laser system through the
FDA's evaluation process.
1995 vs. 1994. Expenses in 1995 were incurred to develop the LaserScan
2000, software improvements, the LaserHarmonic solid-state laser, and to proceed
with Phase 2a of FDA clinical trials. 1994 expenses were lower than previous
years as the Compak-200 had been developed and the Company focused more on
marketing the product during that period.
Selling, general and administrative expenses. The following table presents
a three-year comparative analysis of selling, general and administrative
expenses.
<TABLE>
<CAPTION>
1996 % Change 1995 % Change 1994
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Selling, general and
administrative $ 17,107,218 19 % $ 14,339,951 138 % $ 6,025,989
As a % of net sales 80 % 55 % 63 %
</TABLE>
Selling, general and administrative expenses increased by $2,767,267 in
1996 from 1995. Such expenses increased by $8,313,962 in 1995 from 1994.
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 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 MRF revenues. Without the impact of sales
returns, total selling, general and administrative expenses would have totaled
approximately $17.4 million and represented 72% 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. 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.
1995 vs. 1994. The primary reasons for expense increases were higher
selling expenses from the increased sale of laser systems in international
markets, including warranty-related costs (generally covering a one-year
period), increased operating expenses resulting from the acquisition of MEC in
October 1995, and a general increase in technology-related personnel and costs
necessary to sustain the growth of the Company. As a result of increased selling
activities for laser systems in international markets, beginning in March 1995,
the Company significantly increased its in-house marketing staff. This resulted
in a significant increase in marketing and related expenses during the year
ended December 31, 1995. Such expenses include salaries and benefits,
commissions on laser sales, training, consulting, communication and
travel-related costs. During 1995, the Company established a reserve for
uncollectible accounts totaling $925,000.
Income (Loss) from Operations. The Company recognized a loss from
operations of $4,960,349 in 1996 compared to an income from operations of
$4,552,144 and $1,140,313 in 1995 and 1994, respectively.
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
MRF. 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.
1995 vs. 1994. The improved operating results were primarily the result of
increased sales of the Company's laser systems and the profitability of the
health care services companies.
Other Income and Expenses. Interest and dividend income of $314,287 was
earned in 1996 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 $124,739 from 1995. Investment earnings in 1995 were
$189,548, an increase of $106,406 from 1994, and consisted of the investment of
cash and cash equivalents and a note receivable. Interest expense incurred
during 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.
Interest expense for 1995 was $81,077 and related primarily to the notes payable
to the former owners of MRF and MEC.
During 1996, other expenses include $407,000 of settlements related to
filed and threatened litigation. There were no such expenses in 1995 and $75,000
in 1994.
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 $0.49 per
share.
Income taxes. The Company recorded an income tax benefit of $1,139,008 in
1996 compared to a provision for income taxes of $1,397,800 and $45,000 in 1995
and 1994, respectively. 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. In 1994, the provision for income taxes was minimal due to
the availability of net operating loss carryforwards.
Net Income (Loss). The Company incurred a net loss of $4,074,369 in 1996
compared to net income of $4,591,871 and $1,018,431 in 1995 and 1994,
respectively. The loss is 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, MRF'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 primary common share
decreased to ($0.69) in 1996 from $0.64 in 1995, while earnings (loss) per fully
diluted common share decreased to ($0.61) in 1996 from $0.64 in 1995. Primary
earnings per share for 1994 was $0.17 and fully diluted earnings per share was
$0.16. The decreases in 1996 are attributable to the net loss incurred and
dividends on Preferred Stock issued in January 1996. Of the primary and fully
diluted losses per share in 1996, $0.13 and $0.12, respectively, were a result
of the value of conversion discount on preferred stock in accordance with EITF
Topic D-60, and $0.05 and $0.01, respectively, were a result of dividends on
Preferred Stock. Weighted average shares outstanding increased largely from the
conversion into Common Stock during the year of 108 of the 116 shares of
convertible Preferred Stock issued in January 1996.
In 1995, earnings per share grew at a slower rate than net income,
primarily because of a significant increase in weighted average shares
outstanding -- 17% on a primary basis and 11% on a fully-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 MRF acquisition agreements and shares issued in
connection with the MEC acquisition in the fourth quarter. For purposes of
computing primary and fully-diluted earnings per share, 406,700, 406,700 and
158,000 shares, respectively, of Common Stock that were issuable pursuant to an
earnout based on the pre-tax performance of MRF have been included in weighted
average shares outstanding for 1996, 1995 and 1994, respectively.
Liquidity and Capital Resources
Working Capital. Working capital increased $2,748,946 from $7,271,855 in
1995 to $10,020,801 in 1996. This increase resulted primarily from the issuance
of the Preferred Stock, an increase in inventories and an increase in income
taxes recoverable resulting from the net loss incurred in 1996. The Preferred
Stock proceeds were used primarily for repayment of debt and funding general
operations.
Sources and uses of funds. Operating activities used net cash of
$4,172,458 in 1996, compared to $1,918,747 used in 1995. This increase is
primarily attributable to the net loss of $4,074,369 in 1996 compared to a net
income of $4,591,871 in 1995. Other factors resulting in this increase include
growth in inventories and an increase in income tax related accounts, including
income taxes recoverable of $803,154 at December 31, 1996 compared to income
taxes payable of $314,205 at December 31, 1995. These items were partially
offset by a decrease in net receivables of $1,933,010. Net cash provided by
investing activities was $20,197 in 1996 compared to net cash used of $293,574
in 1995. Net cash provided by investing activities 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 1996
was $4,557,423, consisting of net proceeds from the sale of preferred stock
totaling $5,342,152, less a repayment of $1,373,518 in debt relating to the
Company's acquisitions of MRF in February 1994 and MEC in October 1995 and
payments of capital lease obligations. 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.
Proposed Financing. The Company has received a commitment letter dated
March 13, 1997 (the "Commitment Letter") from Foothill Capital Corporation
("Foothill") for a loan (the "Foothill 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 term loan would bear interest at an annual rate of 12.50% and would
require repayment of principal in monthly installments of $1.33 million
beginning on the first day of the thirteenth month after the closing date of the
financing (the "Foothill Closing"). The revolving loan would bear interest at a
variable annual rate of 1.50% above the base rate of Norwest Bank Minnesota. The
$4 million maximum amount of the revolving loan would decline by $1.33 million
per month beginning on the first day of the sixteenth month after the Foothill
Closing. In connection with the Foothill Loan, the Company expects to pay an
origination fee of $150,000 and to issue warrants to purchase 500,000 shares of
Common Stock (approximately 5.6% of the outstanding shares). The warrants would
be exercisable at any time from the first through the fifth anniversary of the
Foothill Closing at an exercise price per share of Common Stock equal to the
lesser of (i) $6.1875 or (ii) the average price of the Common Stock computed
over the 15-day period preceding the Foothill Closing. Subject to certain
conditions based on the market price of the Common Stock, up to half of the
warrants would be eligible for repurchase by the Company. Any warrants that
remain outstanding and unexercised on the fifth anniversary of the Foothill
Closing would be subject to mandatory repurchase by the Company at a price of
$1.50 per warrant. The Commitment Letter provides that the Foothill Loan is
subject to, among other things, the negotiation and execution of definitive loan
documentation and the pledge of substantially all of the Company's accounts
receivable and other assets. There can be no assurance as to whether or when the
Foothill Loan can be completed. See "Management's Discussion and
Analysis--Uncertainties and Other Issues--Company-Related
Uncertainties--Possible Financing."
Working capital requirements. The Company believes that its balances of
cash and cash equivalents along with operating cash flows and the proceeds of
the Foothill Loan will be sufficient to fund its anticipated working capital
requirements for the next 12-month period based on modest growth, anticipated
collection of receivables, and satisfactory arrangements for the refinancing or
extension of the MEC Note. A failure to collect timely a material portion of
current receivables could have a material adverse effect on the Company's
liquidity. The Company, 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 intends to internally finance a proportionately smaller number of sales
over periods exceeding 18 months. 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.
Future expenditures. The Company expects to increase the level of
manufacturing and distribution of its medical lasers for international sales and
to continue research and development activities on its excimer and solid-state
laser systems during 1997. The Company anticipates that such research and
development, manufacturing and selling-related expenditures will be the most
significant technology-related expenses in the foreseeable future. In addition,
the Company expects to aggressively pursue vision managed care contracts with
insurers, HMOs and employer groups during 1997. The Company anticipates that
such efforts will be the most significant health care service-related expenses
in the foreseeable future.
Possible future 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 or provide synergies to the development of managed networks. In
addition to cash contributions that may be available from joint venture
partners, the Company is also seeking complementary strengths and other
synergies that may provide strategic advantages. 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 in principle 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, the agreement would call for Laser Vision to provide the
excimer laser and necessary technical personnel to locations serviced by the
approximately 134 ophthalmologists currently under contract with LaserSight for
excimer laser services. A written agreement has not yet been executed and the
Company and Laser Vision continue to negotiate pricing and other terms. There
can no assurance that such negotiations will be successful.
Stock subscription receivable. The Company is owed $1,140,000 on a
promissory note from the Company's placement agent in connection with a
placement of Common Stock in January 1995. The original balance of the note was
$1,500,000. During 1995, the Company received principal payments on the note of
$360,000, together with interest in the amount of $75,000 (based on the original
terms of the note). The note was modified in August 1995 to extend the payment
terms through April 30, 1996 and eliminate interest. As of December 31, 1996,
the aggregate amount of $1,140,000 was overdue on the note. Although collection
cannot be assured, the Company's suit to collect on the note is pending in the
United States District Court, Middle District of Florida. The defendants have
claimed certain defenses and setoff rights. Discovery by both parties is
underway.
Uncertainties and Other Issues
The Company's business, results of operations and financial conditions may
also be affected by a variety of factors, including the ones noted below:
Company-Related Uncertainties
-----------------------------
Operating Results. The Company incurred a loss of $4,074,369 for 1996.
Although the Company achieved profitability in 1995 and 1994, the Company
incurred losses in the three prior years. As of December 31, 1996, the Company
had an accumulated deficit of $4,612,830. There can be no assurance that the
Company can regain or sustain profitability.
Receivables. At December 31, 1996, the Company's trade accounts and notes
receivable aggregated approximately $11,238,000, net of total allowances for
collection losses and returns of approximately $1,507,000. Accrued commissions,
the payment of which generally depends on the collection of such net trade
accounts and notes receivable, aggregated approximately $1,524,000 at December
31, 1996. At December 31, 1996 laser customer accounts representing 14.5% of
Technologies' gross receivables, or approximately $1,785,000, had been
restructured resulting in new payment terms that were extended for periods
ranging from 12 to 60 months. Exposure to collection losses on
technology-related receivables is principally dependent on its customers ongoing
financial condition and their ability to generate revenues from the Company's
laser systems. The Company's ability to evaluate the financial condition of
prospective customers located outside of the United States is generally more
limited than for customers located in the United States. The Company monitors
the status of its receivables and maintains a reserve for estimated losses. The
Company's operating history has been relatively short. There can be no assurance
that the current reserves for estimated losses ($1,350,000 at December 31, 1996)
will be sufficient to cover actual write-offs over time. Actual write-offs that
materially exceed amounts reserved could have a material adverse effect on the
Company's financial condition and results of operations.
Possible Issuance of Stock--LaserSight Centers. The Company has agreed,
based on a previously-reported acquisition agreement (the "Centers Agreement")
entered into in 1993 and modified in July 1995 and March 1997, to issue to the
former shareholders and option holders (including two trusts related to the
Chairman of the Board of the Company and certain former officers and directors
of the Company) of LaserSight Centers, the Company's development-stage
subsidiary, up to 600,000 unregistered shares of Common Stock (the "Centers
Earnout Shares") based on the Company's future pre-tax operating income through
March 2002 from performing PRK, PTK or other refractive laser surgical
procedures. The Centers Earnout Shares are to be issued at the rate of one share
per $4.00 of such operating income. There can be no assurance that the issuance
of Centers Earnout Shares will be accompanied by an increase in the Company's
per share operating results. The Company is not obligated to pursue strategies
that may result in the issuance of Centers Earnout Shares. It may be in the
interest of the Chairman of the Board for the Company to pursue business
strategies that maximize the issuance of Centers Earnout Shares.
Possible Issuance of Stock--Florida Laser Partners. Based on a
previously-reported royalty agreement entered into in 1993 and modified in July
1995 and March 1997, the Company is obligated to pay to a partnership whose
partners include the Chairman of the Board of the Company and certain former
officers and directors of the Company a royalty of up to $43 (payable in cash or
shares of Common Stock based on its then-current market value (the "Royalty
Shares")), for each eye on which laser refractive optical surgical procedure is
conducted on an excimer laser system owned or operated by LaserSight Centers or
its affiliates. This payment obligation does not arise until the earlier of
March 2002 or the delivery of the remaining Centers Earnout Shares. There can be
no assurance that the issuance of Royalty Shares will be accompanied by an
increase in the Company's per share operating results. It may be in the interest
of the Chairman of the Board for the Company to pursue business strategies that
maximize the issuance of Royalty Shares.
Possible Issuance of Stock--The Farris Group. To the extent that an
earnout provision relating to the Company's acquisition of The Farris Group in
1994 is satisfied based on certain pre-tax income targets through December 31,
1998, the Company would be required to issue to the former owner of such company
(Mr. Michael R. Farris, the President and Chief Executive Officer of the
Company) an aggregate of up to 750,000 shares of Common Stock (collectively, the
"Farris Earnout Shares"). To date, none of the Farris Earnout Shares have been
issued, but the 406,700 shares that were issuable as of January 31, 1997 have
been reflected in calculations of the Company's per share operating results. As
a result of the loss incurred by The Farris Group during 1996, no Farris Earnout
Shares became issuable for such year. If additional Farris Earnout Shares become
issuable, goodwill and the resulting amortization expense will increase.
Contingent Commitments to Issue Additional Shares. The Company has agreed
in connection with its acquisition of the assets of the Northern New Jersey Eye
Institute in July 1996 to issue up to 102,798 additional shares of Common Stock
if the fair market value of the Common Stock in July 1998 is less than $15 per
share. In connection with its proposed acquisition of Intermountain Managed
Eyecare, L.L.C., the Company expects to issue up to 78,750 additional shares of
Common Stock or pay up to $157,500 in cash if the fair market value on the
second anniversary of the closing date of the 80,000 shares of Common Stock
expected to be issued in connection with the acquisition is less than $5.94 per
share. The Company may from time to time in the future include similar
provisions in other acquisitions. Investors who benefit from such provisions
effectively receive limited protection from declines in the market price of the
Common Stock, but other investors can expect to incur dilution of their
ownership interest in the event of a decline in the price of the Common Stock.
Possible additional capital. The Company is seeking alternative sources of
capital to fund its product development activities, to consummate future
strategic acquisitions, and to accelerate its implementation of managed care
strategies. Except for the commitment letter from Foothill Capital described
under "Management's Discussion and Analysis--Liquidity and Capital
Resources--Proposed Financing" above, the Company has no present commitments to
obtain such capital, and no assurance can be given that the Company will be able
to obtain additional capital on terms satisfactory to the Company. To the extent
that future financing requirements are satisfied through the sale of equity
securities, holders of Common Stock may experience significant dilution in
earnings per share and in net book value per share. The proposed Foothill
Capital financing or other debt financing could result in a substantial portion
of the Company's cash flow from operations being dedicated to the payment of
principal and interest on such indebtedness and may render the Company more
vulnerable to competitive pressures and economic downturns.
Dependence on Key Personnel. The Company is dependent on its executive
officers and other key employees, especially Michael R. Farris, its President
and Chief Executive Officer. A loss of one or more such officers or key
employees, especially of Mr. Farris, could have a material adverse effect on the
Company's business. The Company does not currently carry "key man" insurance on
Mr. Farris or any other officers or key employees.
Health Care Services-Related Uncertainties
------------------------------------------
Risks Associated with Managed Care Contracts. As an increasing percentage
of optometric and ophthalmologic patients are coming under the control of
managed care entities, the Company believes that its success will, in part,
depend on the Company's ability to negotiate contracts with HMOs, employer
groups and other private third-party payors pursuant to which services will be
provided on a risk-sharing or capitated basis. Under some of such agreements,
the eye care provider accepts a predetermined amount per month per patient in
exchange for providing all necessary covered services to the enrolled patients.
Such contracts pass much of the risk of providing care from the payor to the
provider. The proliferation of such contracts in markets served by the Company
could result in greater predictability of revenues, but greater unpredictability
of expenses. There can, however, be no assurance that the Company will be able
to negotiate satisfactory arrangements on a risk-sharing or capitated basis. In
addition, to the extent that patients or enrollees covered by such contracts
require more frequent or extensive care than anticipated, operating margins may
be reduced or, in the worst case, the revenues derived from such contracts may
be insufficient to cover the costs of the services provided. As a result, the
Company may incur additional costs, which would reduce or eliminate anticipated
earnings under such contracts and could have a material adverse affect on the
Company's results of operations.
Health Care Regulation. The health care industry is subject to
"anti-referral" and "anti-kickback" laws governing patient referrals, and other
laws concerning fee splitting with non-physicians. Although LaserSight believes
that its operations are in substantial compliance with existing applicable laws,
LaserSight's business operations have not been the subject of judicial or
regulatory review. There can be no assurance that such a review of LaserSight's
business would not result in determinations that could adversely affect the
operations of LaserSight or that the health care regulatory environment will not
change so as to restrict LaserSight's existing operations or their expansion.
Aspects of certain health care reforms as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, if adopted, could adversely affect LaserSight.
Insurance Regulation. Federal and State laws regulate insurance companies,
HMOs and other managed care organizations. Many states also regulate the
establishment and operation of networks of health care providers. Generally,
these laws do not apply to the hiring and contracting of physicians by other
health care providers. There can be no assurance that regulators in the states
in which the Company operates would not apply these laws to require licensure of
the Company's health care operations as an HMO, an insurer or a provider
network. The Company believes that it is in compliance with these laws in the
states in which it presently does business, but there can be no assurance that
interpretations of these laws by the regulatory authorities in these states or
in the states in which the Company may expand its managed care operations will
not require licensing or a restructuring of some or all of the Company's managed
care operations, or that if licensing is required, that the Company could
complete such licensing in a timely manner. In addition, there can be no
assurance that the Company's strategy to expand its managed vision care business
will not subject it to regulation in other states.
MEC Shares Held in Escrow. All of the shares of Common Stock of MEC owned
by the Company are being held in escrow pending the Company's payment in full of
a promissory note in the original principal amount of $1,799,100 and a current
principal amount of $1,000,000 (the "MEC Note") issued by the Company as part of
the consideration for its acquisition of MEC in October 1995. The MEC Note was
originally due on demand on or after April 1, 1996, but has been extended to be
due on demand on or after April 1, 1997. If the Company were to default under
the MEC Note, the former shareholders of MEC would be entitled to regain
ownership of all of such shares. Management believes that the Company can obtain
new financing to repay the MEC Note on or before April 1, or alternatively, that
the Company can obtain another extension of the April 1 due date for the MEC
Note, but there can be no assurance as to either point.
Technology-Related Uncertainties
--------------------------------
Government Regulation. The Company's laser products are subject to strict
governmental regulations which materially affect the Company's ability to
manufacture and market these products and directly impact the Company's overall
prospects. All laser devices to be marketed in interstate commerce are subject
to the laser regulations required by the Radiation Control for Health and Safety
Act, as administered by the U.S. Food and Drug Administration (the "FDA"). Such
Act imposes design and performance standards, labeling and reporting
requirements, and submission conditions in advance of marketing for all medical
laser products. The Company's laser systems produced for medical use will
require pre-market approval by the FDA if marketed in the United States. Each
separate medical device requires a separate FDA submission, and specific
protocols have to be submitted to the FDA for each claim made for each medical
device. In addition, laser products marketed in foreign countries are often
subject to local laws governing health product development processes which may
impose additional costs for overseas product development. The Company cannot
determine the costs or time it will take to complete the approval process and
the related clinical testing for its medical laser products. Future legislative
or administrative requirements in the United States, or elsewhere, may adversely
affect the Company's ability to obtain or retain regulatory approval for its
laser products. The failure to obtain required approvals on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Purchase of Patent Rights from IBM. On February 11, 1997 the Company
executed an agreement with IBM for the purchase of certain IBM patents relating
to ultraviolet light ophthalmic products and procedures for ultraviolet ablation
and IBM's patent license agreements with Summit Technology, Inc. and VISX, Inc.
The purchase price is $14.9 million, payable in cash on July 1, 1997. LaserSight
is exploring various alternatives to enable it to fund the purchase price. There
can be no assurance that such funding will be available. If the transaction does
not close on or before July 1, 1997, IBM may terminate the agreement. In such
event, LaserSight would be obligated to deliver to IBM shares of Common Stock
and/or cash with an aggregate value of $1 million as of July 1, 1997.
Uncertainty Concerning Patents. Should LaserSight Technologies' lasers be
found to infringe upon any valid and enforceable patents held by VISX or Summit
Technologies in certain international markets, or by Pillar Point Partners in
the U.S., then LaserSight Technologies may be required to license such
technology from them. Should such licenses not be obtained, LaserSight
Technologies might be prohibited from manufacturing or marketing its PRK-UV
lasers in these countries where patents are in effect.
Competition. The vision correction industry is subject to intense,
increasing competition. The Company competes against both alternative and
traditional medical technologies (such as eyeglasses, contact lenses and radial
keratotomy ("RK")) and other laser manufacturers. Many of the Company's
competitors have existing products and distribution systems in the marketplace
and are substantially larger, better financed, and better known. A number of
lasers manufactured by other companies have either received, or are much further
advanced in the process of receiving, FDA approval for specific procedures, and,
accordingly, may have or develop a higher level of acceptance in some markets
than the Company's lasers. The entry of new competitors into the markets for the
Company's products could cause downward pressure on the prices of such products
and a material adverse effect on Company's business, financial condition and
results of operations.
Technological Change. Technological developments in the medical and laser
industries are expected to continue at a rapid pace. Newer technologies and
surgical techniques could be developed which may offer better performance than
the Company's laser systems. The success of any competing alternatives to PRK
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Market Acceptance. The Company believes that its
achievement of profitability and growth will depend in part upon broad
acceptance of PRK or LASIK in the United States and other countries. There can
be no assurance that PRK or LASIK will be accepted by either the
ophthalmologists or the public as an alternative to existing methods of treating
refractive vision disorders. The acceptance of PRK and LASIK may be affected
adversely by their cost, possible concerns relating to safety and efficacy,
general resistance to surgery, the effectiveness and lower cost of alternative
methods of correcting refractive vision disorders, the lack of long-term
follow-up data, the possibility of unknown side effects, the current lack of
third-party reimbursement for the procedures, any future unfavorable publicity
involving patient outcomes from use of PRK or LASIK systems, and the possible
shortages of ophthalmologists trained in the procedures. The failure of PRK or
LASIK to achieve broad market acceptance could have a material adverse effect on
the Company's business, financial condition and results of operations.
International Sales. International sales may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and coordinating communications among and managing international operations.
Additionally, the Company's business, financial condition and international
results of operations may be adversely affected by increases in duty rates,
difficulties in obtaining export licenses, ability to maintain or increase
prices, and competition. To date, all sales made by the Company have been
denominated in U.S. dollars. Due to its export sales, however, the Company is
subject to currency exchange rate fluctuations in the U.S. dollar, which could
increase the price in local currencies of the Company's products. This could in
turn result in longer payment cycles and greater difficulty in collection of
receivables. See "--Receivables" above. Although the Company has not experienced
any material adverse effect on its operations as a result of such regulatory,
political and other factors, there can be no assurance that such factors will
not have a material adverse effect on the Company's operations in the future or
require the Company to modify its current business practices.
Potential Product Liability Claims; Limited Insurance. As a producer of
medical devices, the Company may face liability for damages to users of such
devices in the event of product failure. The testing and use of human care
products entails an inherent risk of negligence or other action. An award of
damages in excess of the Company's insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company maintains product liability insurance, there can
be no assurance that any such liability of the Company will be included within
its insurance coverage or that damages will not exceed the limits of its
coverage. The Company's current insurance coverage limitation is $1,000,000.
Manufacturing Risks. The Company contracts with third parties for certain
components used in its lasers. Several of these components are currently
provided by a single vendor. If any of these sole-source suppliers were to cease
providing components to the Company, the Company would have to locate and
contract with a substitute supplier, and there can be no assurances that such
substitute supplier could be located and qualified in a timely manner or could
provide required components on commercially reasonable terms. An interruption in
the supply of laser components, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Backlog; Concentration of Sales at End of Quarter. The Company has
historically operated with little or no backlog because its products are
generally shipped as orders are received. Historically, the Company has received
and shipped a significant portion of its orders for a particular quarter near
the end of the quarter. As a result, the Company's operating results for any
quarter often depend on orders received and laser systems shipped late in that
quarter. Any delay in such orders or shipments may cause a significant
fluctuation in period-to-period operating results.
Item 8. Financial Statements and Supplemental Data
Consolidated financial statements prepared in accordance with Regulation
S-X are listed in Item 14 of Part IV of this Report, are attached to this Report
and incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers
Information with respect to the Company's directors and executive officers
is incorporated herein by reference to the definitive form of the Company's
proxy materials to be filed with the Commission on or before April 30, 1997.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein
by reference to the definitive form of the Company's proxy materials to be filed
with the Commission on or before April 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the security ownership of certain beneficial
owners and management is incorporated herein by reference to the definitive form
of the Company's proxy materials to be filed with the Commission on or before
April 30, 1997.
Item 13. Certain Relations and Related Transactions
Information with respect to certain relations and related transactions is
incorporated herein by reference to the definitive form of the Company's proxy
materials to be filed with the Commission on or before April 30, 1997.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Schedules.
(a) (1) The following financial statements and related items commence on page
F-1:
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedules not filed:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
(3) Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation, as amended (filed as Exhibit 1 to the
Company's Form 8-A/A filed on January 17, 1996*).
3.2 By-laws, as amended (filed as Exhibit 3 to the Company's Form 10-K for
the year ended December 31, 1992*).
4.1 See Exhibits 3.1 and 3.2.
10.1 Agreement dated April 1, 1992 between International Business Machines
Corporation and LaserSight Incorporated (filed as Exhibit 10.1 on Form
10-K for the year ended December 31, 1995*).
10.2 Covenant Not to Compete entered into between LaserSight Incorporated and
Dr. J.T. Lin (filed as Exhibit 10(c) to the Company's Registration
Statement on Form S-18 (File No. 33-42734 and incorporated herein by
reference).
10.3 Agreement for Purchase and Sale of Stock by and among LaserSight Centers
Incorporated, its stockholders and LaserSight Incorporated dated January
15, 1993 (filed as Exhibit 2 to the Company's Form 8-K/A filed on January
25, 1993*).
10.4 Amendment to Agreement for Purchase and Sale of Stock by and among
LaserSight Centers Incorporated, its stockholders, and LaserSight
Incorporated dated April 5, 1993 (filed as Exhibit 2 to the Company's
Form 8-K/A filed on April 19, 1993*).
10.5 Royalty Agreement by and between LaserSight Centers Incorporated and
LaserSight Partners dated January 15, 1993 (filed as Exhibit 10.5 to the
Company's Form 10-K for the year ended December 31, 1995*).
10.6 Exchange Agreement dated January 25, 1993 between LaserSight Centers
Incorporated and Laser Partners (filed as Exhibit 10.6 to the Company's
Form 10-K for the year ended December 31, 1995*).
10.7 Stipulation and Agreement of Compromise, Settlement and Release dated
April 18, 1995 among James Gossin, Francis E. O'Donnell, Jr., J.T. Lin,
Wen S. Dai, Emanuela Dobrin-Charlton, C.H. Huang, W. Douglas Hajjar, and
LaserSight Incorporated (filed as Exhibit 10.7 to the Company's Form 10-K
for the year ended December 31, 1995*).
10.8 Agreement for Purchase and Sale of Stock dated December 31, 1993, among
LaserSight Incorporated, MRF, Inc., and Michael R. Farris (filed as
Exhibit 2 to the Company's Form 8-K filed on December 31, 1993*).
10.9 First Amendment to Agreement for Purchase and Sale of Stock by and among
MRF, Inc., Michael R. Farris and LaserSight Incorporated dated December
28, 1995 (filed as Exhibit 10.9 to the Company's Form 10-K for the year
ended December 31, 1995*).
10.10 Contribution Agreement dated July 7, 1994, between LaserSight
Incorporated and LaserSight Technologies, Inc. (filed as Exhibit 2.6 to
the Company's Form 10-K for the year ended December 31, 1994*).
10.11 Research and Development Consulting Agreement dated March 31, 1995
between LaserSight Technologies, Inc. and J.T. Lin, Ph.D. (filed as
Exhibit 10.3 to the Company's Form 10-Q for the quarter ended September
30, 1995*).
10.12 Technology Transfer Agreement dated July 25, 1995 between LaserSight
Technologies, Inc., J.T. Lin, Ph.D. and Photon Data, Inc. (filed as
Exhibit 10.4 to the Company's Form 10-Q for the quarter ended September
30, 1995*).
10.13 LaserSight Incorporated 1995 Stock Option Plan (filed as Exhibit 10.5 to
the Company's Form 10-Q for the quarter ended September 30, 1995*).
10.14 Consulting Agreement dated November 1, 1996 by and between LaserSight
Technologies, Inc. and Emanuela Dobrin-Charlton.
10.15 Consulting Agreement dated June 7, 1995 by and between LaserSight
Incorporated and Richard C. Lutzy (filed as Exhibit 10.15 to the
Company's Form 10-K for the year ended December 31, 1995*).
10.16 Modified Promissory Note between LaserSight Incorporated, EuroPacific
Securities Services, GmbH and Co. KG and Wolf Wiese (filed as Exhibit
10.6 to the Company's Form 10-Q for the quarter ended September 30,
1995*).
10.17 Employment Agreement by and between LaserSight Incorporated and Michael
R. Farris dated December 28, 1995 (filed as Exhibit 10.17 to the
Company's Form 10-K for the year ended December 31, 1995*).
10.18 Employment Agreement dated December, 1995 by and between LaserSight
Incorporated and David Pieroni (filed as Exhibit 10.18 to the Company's
Form 10-K for the year ended December 31, 1995*).
10.19 Agreement and Plan of Merger by and among LaserSight Incorporated, MEC
Health Care, Inc., Dr. Mark B. Gordon, O.D. and Dr. Howard M. Levin,
O.D., dated August 28, 1995 as amended as of October 5, 1995 (filed as
Exhibit 2 to the Company's Form 8-K filed on October 19, 1995*).
10.20 Manufacturer's Representative Agreement by and between LaserSight
Technologies, Inc. and Natural Vision of Malta dated September 1, 1995
(filed as Exhibit 10.20 to the Company's Form 10-K for the year ended
December 31, 1995*).
10.21 Patent License Agreement dated December 21, 1995 by and between Francis
E. O'Donnell, Jr. and LaserSight Centers, Inc. (filed as Exhibit 10.21 to
the Company's Form 10-K for the year ended December 31, 1995*).
10.22 Agreement dated April 4, 1996 to amend Agreement and Plan of Merger by
and among LaserSight Incorporated, Mark B. Gordon, O.D. and Howard M.
Levin, O.D. (filed as Exhibit 10.22 to the Company's Form 10-Q for the
2nd quarter ended June 30, 1996*).
10.23 Agreement dated June 27, 1996 to amend Agreement and Plan of Merger by
and among LaserSight Incorporated, Mark B. Gordon, O.D. and Howard M.
Levin, O.D. (filed as Exhibit 10.23 to the Company's Form 10-Q for the
2nd quarter ended June 30, 1996*).
10.24 LaserSight Incorporated 1996 Equity Incentive Plan (filed as Exhibit A to
the Company's definitive proxy statement dated April 30, 1996*).
10.25 LaserSight Incorporated Non-Employee Directors Stock Option Plan (filed
as Exhibit B to the Company's definitive proxy statement dated April 30,
1996*).
10.26 Agreement and Plan of Merger dated April 18, 1996 among LaserSight
Incorporated, Eye Diagnostics & Surgery, P.A., LSI Acquisition, Inc.,
John W. Norris, M.D. and Bernard Spier, M.D. (filed as Exhibit 2 (i) to
the Company's Form 8-K dated July 18, 1996*).
10.27 Amendment to the Agreement and Plan of Merger dated June 17, 1996 (filed
as Exhibit 2 (ii) to the Company's Form 8-K dated July 18, 1996*).
10.28 Second Amendment to the Agreement and Plan of Merger dated July 3, 1996
(filed as Exhibit 2 (iii) to the Company's Form 8-K dated July 18,
1996*).
10.29 Agreement and Plan of Merger dated June 17, 1996 among LaserSight
Incorporated, LaserSight Acquisition, Inc., Cataract Hotline, Inc. and
Michael R. Norris (filed as Exhibit 2 (iv) to the Company's Form 8-K
dated July 18, 1996*).
10.30 Asset Purchase Agreement dated April 18, 1996 between LaserSight
Incorporated and John W. Norris, M.D. (filed as Exhibit 2 (vi) to the
Company's Form 8-K dated July 18, 1996*).
10.31 Amendment to Asset Purchase Agreement dated June 17, 1996 (filed as
Exhibit 2 (vii) to the Company's Form 8-K dated July 18, 1996*).
10.32 Agreement dated August 12, 1996 to amend Agreement and Plan of Merger by
and among LaserSight Incorporated, Mark B. Gordon, O.D. and Howard M.
Levin, O.D. (filed as Exhibit 10.32 to the Company's Form 10-K filed
March 28, 1997*).
10.33 Agreement dated October 30, 1996 to amend Agreement and Plan of Merger by
and among LaserSight Incorporated, Mark B. Gordon, O.D. and Howard M.
Levin, O.D. (filed as Exhibit 10.33 to the Company's Form 10-K filed
March 28, 1997*).
10.34 Agreement dated January 8, 1997 to amend Agreement and Plan of Merger by
and among LaserSight Incorporated, Mark B. Gordon, O.D. and Howard M.
Levin, O.D. (filed as Exhibit 10.34 to the Company's Form 10-K filed
March 28, 1997*).
10.35 Agreement dated September 18, 1996 between David T. Pieroni and
LaserSight Incorporated (filed as Exhibit 10.35 to the Company's Form
10-K filed March 28, 1997*).
10.36 Agreement dated December 17, 1996 between Public Company Publishing,
Inc., Samuel S. Duffey and LaserSight Incorporated (filed as Exhibit
10.36 to the Company's Form 10-K filed March 28, 1997*).
10.37 Agreement dated January 1, 1997, between International Business Machines
Corporation and LaserSight Incorporated (filed as Exhibit 10.37 to the
Company's Form 10-K filed March 28, 1997*).
10.38 Addendum dated March 7, 1997 to Agreement between International Business
Machines Corporation and LaserSight Incorporated (filed as Exhibit 10.38
to the Company's Form 10-K filed March 28, 1997*).
10.39 Second Amendment to Agreement for Purchase and Sale of Stock by and among
LaserSight Centers Incorporated, its stockholders and LaserSight
Incorporated dated March 14, 1997 (filed as Exhibit 99.1 to the Company's
Form 8-K filed on March 27, 1997*).
10.40 Amendment to Royalty Agreement by and between LaserSight Centers
Incorporated, Laser Partners and LaserSight Incorporated dated March 14,
1997 (filed as Exhibit 99.2 to the Company's Form 8-K filed on March 27,
1997*).
11 Statement of Computation of Earnings (Loss) Per Share.
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Lovelace, Roby & Company, P.A.
27 Financial Data Schedule (filed as Exhibit 27 to the Company's Form 10-K
filed March 28, 1997*).
- ---------------------------------------------------------
* Incorporated herein by reference (File No. 0-19671).
(b) Reports on Form 8-K.
No reports were filed in the fourth quarter of 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LASERSIGHT INCORPORATED
Dated: December 11, 1997 By: /s/ Michael R. Farris
-------------------------
Michael R. Farris, President and
Chief Executive Officer
Dated: December 11, 1997 By: /s/ Gregory L. Wilson
-------------------------
Gregory L. Wilson, Chief Financial Officer
(Principal accounting officer)
<PAGE>
Independent Auditors' Reports
-----------------------------
The Board of Directors and Stockholders
LaserSight Incorporated:
We have audited the accompanying consolidated balance sheets of LaserSight
Incorporated and subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the two-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LaserSight
Incorporated and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
February 21, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors and Stockholders
LaserSight, Incorporated
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of LaserSight Incorporated and Subsidiaries
for the year ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
LaserSight Incorporated and Subsidiaries for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
/s/ Lovelace, Roby & Company, P.A.
LOVELACE, ROBY & COMPANY, P.A.
Certified Public Accountants
Orlando, Florida
March 6, 1995
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,003,501 1,598,339
Accounts receivable-trade, net 5,458,153 8,821,123
Notes receivable-current portion, net 3,159,575 1,524,170
Inventories 3,328,903 1,836,750
Deferred tax assets 667,998 221,000
Income taxes recoverable 803,154 --
Other current assets 221,922 378,905
--------------- ------------
Total current assets 15,643,206 14,380,287
Notes receivable, less current portion, net 2,620,375 2,825,820
Property and equipment, net 1,936,220 1,045,481
Other assets, net 14,050,412 10,850,905
--------------- -------------
$ 34,250,213 29,102,493
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,216,792 2,088,736
Notes payable-related parties 1,000,000 2,264,100
Current portion of capital lease obligations 206,139 --
Accrued expenses 764,084 492,641
Accrued commissions 1,214,235 1,777,007
Income taxes payable -- 314,205
Other current liabilities 221,155 171,743
--------------- ------------
Total current liabilities 5,622,405 7,108,432
--------------- ------------
Refundable deposits 240,000 425,000
Accrued commissions, less current portion 309,656 518,920
Deferred income taxes 667,998 630,000
Capital lease obligations 641,623 --
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock-par value $0.001 per share;
authorized 10,000,000 shares; eight shares issued and
outstanding in 1996, none in 1995 -- --
Common stock-par value $0.001 per share; authorized 20,000,000
shares; 8,454,266 and 7,186,032 shares issued and
outstanding in 1996 and 1995, respectively 8,454 7,186
Additional paid-in capital 30,080,560 21,944,000
Obligation to issue common stock 3,065,056 780,125
Stock subscription receivable (1,140,000) (1,140,000)
Accumulated deficit (4,612,830) (538,461)
Less treasury stock, at cost; 170,200 common shares (632,709) (632,709)
---------------- ------------
Total stockholders' equity 26,768,531 20,420,141
---------------- ------------
$ 34,250,213 29,102,493
================ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
---- ---- ----
(Restated)
<S> <C> <C> <C>
Revenues $ 21,503,990 25,988,065 9,594,468
Cost of sales 3,415,276 4,859,039 2,066,220
Provider payments 4,221,599 776,089 --
-------------- ------------- ------------
Gross profit 13,867,115 20,352,937 7,528,248
Research, development, and regulatory expenses 1,720,246 1,460,842 361,946
Selling, general and administrative expenses 17,107,218 14,339,951 6,025,989
--------------- ------------- ------------
Income (loss) from operations (4,960,349) 4,552,144 1,140,313
Other income and expenses:
Interest and dividend income 314,287 189,548 83,142
Loss on sale of short-term investments -- (1,069) (173,623)
Interest expense (151,634) (81,077) (82,811)
Other, net (415,681) 1,330,125 96,410
--------------- -------------- -------------
Income (loss) before income tax
expense (benefit) (5,213,377) 5,989,671 1,063,431
Income tax expense (benefit) (1,139,008) 1,397,800 45,000
--------------- -------------- --------------
Net income (loss) (4,074,369) 4,591,871 1,018,431
Conversion discount on preferred stock (1,010,557) -- --
Preferred stock dividend requirements (358,618) -- --
--------------- -------------- --------------
(Loss) income attributable to common stockholders $ (5,443,544) 4.591.871 1,018,431
=============== ============== ==============
Earnings (loss) per common share:
Primary $ (0.69) 0.64 0.17
Assuming full dilution (0.61) 0.64 0.16
=============== ============== ==============
Weighted average number of shares outstanding:
Primary 7,893,000 7,225,000 6,166,000
Assuming full dilution 8,424,000 7,230,000 6,542,000
=============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995, and 1994
<CAPTION>
Obligation
Additional to issue Stock Total
Common stock Preferred Stock paid-in common subscription Accumulated Treasury stockholders'
Shares Amount Shares Amount capital stock receivable deficit stock equity
------ ------ ------ ------ ------- ----- ---------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1993 5,469,028 $5,469 -- $ -- 10,331,794 -- -- (6,148,763) (656,964) 3,531,536
Issuance of shares in
conjunction with
private placement
offerings 451,000 451 -- -- 1,476,303 -- -- -- -- 1,476,754
Issuance of shares
from exercise of
stock options 16,000 16 -- -- 44,104 -- -- -- -- 44,120
Sale of 6,000 shares
of treasury stock -- -- -- -- 22,891 -- -- -- 24,255 47,146
Net income -- -- -- -- -- -- -- 1,018,431 -- 1,018,431
---------- ------ ----- ---- ----------- ------- ---------- ------------ -------- ----------
Balances at December
31, 1994 5,936,028 5,936 -- -- 11,875,092 -- -- (5,130,332) (632,709) 6,117,987
Issuance of shares in
conjunction with
private placement
offering 289,000 289 -- -- 2,463,044 -- (1,500,000) -- -- 963,333
Obligation to issue
common stock
related to 1994
acquisition -- -- -- -- -- 780,125 -- -- -- 780,125
Issuance of shares
from exercise of
stock options 414,540 415 -- -- 1,107,646 -- -- -- -- 1,108,061
Issuance of options
to purchase
common stock in
conjunction with
acquire technology -- -- -- -- 1,752,000 -- -- -- -- 1,752,000
Stock subscriptions
received -- -- -- -- -- -- 360,000 -- -- 360,000
Issuance of shares in
conjunction with
consulting agreement 3,000 3 -- -- 14,060 -- -- -- -- 14,063
Issuance of shares in
conjunction with
acquisition 543,464 543 -- -- 4,732,158 -- -- -- -- 4,732,701
Net income -- -- -- -- -- -- -- 4,591,871 -- 4,591,871
--------- ----- ---- ---- ----------- ------- ----------- ---------- --------- -----------
Balances at December
31, 1995 7,186,032 7,186 -- -- 21,944,000 780,125 (1,140,000) (538,461) (632,709) 20,420,141
Issuance of shares
from exercise of
stock options and
warrants 189,000 190 -- -- 588,599 -- -- -- -- 588,789
Tax benefit of stock
options and warrants
exercised -- -- -- -- 199,798 -- -- -- -- 199,798
Proceeds from issuance
of preferred stock
net of issuance costs -- -- 116 -- 5,342,152 -- -- -- -- 5,342,152
Conversion of, and
settlements of
dividends on,
preferred stock 872,736 873 (108) -- 318,635 -- -- -- -- 319,508
Dividends on
preferred stock -- -- -- -- (358,618) -- -- -- -- (358,618)
Obligation to issue
common stock related
to 1994 acquisition -- -- -- -- -- 2,284,931 -- -- -- 2,284,931
Issuance of shares in
conjunction with
acquisition 205,598 205 -- -- 2,045,994 -- -- -- -- 2,046,195
Net loss -- -- -- -- -- -- -- (4,074,369) -- (4,074,369)
--------- ------- ----- ------ ---------- --------- ---------- ----------- -------- -----------
Balances at December
31, 1996 8,454,266 $ 8,454 8 $ 30,080,560 3,065,056 (1,140,000) (4,612,830) (632,709) 26,768,531
========= ======= ==== ====== ========== ========= =========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,074,369) 4,591,871 1,018,431
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,004,275 480,557 149,325
Provision for uncollectible accounts 502,000 930,734 57,334
Decrease (increase) in accounts receivable, net 3,663,542 (7,826,693) (1,178,930)
Increase in notes receivable, net (1,832,532) (3,722,696) (627,294)
Increase in inventories (1,492,153) (406,594) (401,465)
Increase (decrease) in accounts payable (70,201) 1,146,918 223,217
Increase (decrease) in accrued liabilities (529,449) 2,404,448 290,753
Increase (decrease) in income taxes (1,446,053) 678,205 45,000
Decrease in investments -- 91,245 1,593,496
Other, net 102,482 (286,742) (160,032)
------------- ----------- -----------
Net cash provided by (used in)
operating activities (4,172,458) (1,918,747) 1,009,835
Cash flows from investing activities:
Purchases of property and equipment (296,520) (403,063) (364,890)
Repayment of loans and advances--related parties -- -- 519,000
Proceeds from sale leaseback transaction 957,180 -- --
Purchase of businesses, net of cash acquired (640,463) 109,489 (571,652)
------------- ----------- -----------
Net cash provided by (used in) investing
activities 20,197 (293,574) (417,542)
Cash flows from financing activities:
Proceeds from issuance of common stock -- 1,323,333 1,476,754
Proceeds from issuance of preferred stock, net 5,342,152 -- --
Proceeds from exercise of stock options and warrants 588,789 1,108,061 44,120
Repayments of notes payable - officer (465,000) (500,000) (405,000)
Repayments on notes payable (799,100) (3,262) (155,000)
Proceeds from sale of treasury stock -- -- 47,146
Repayment of capital lease obligation (109,418) -- --
------------- ----------- ----------
Net cash provided by financing activities 4,557,423 1,928,132 1,008,020
------------- ----------- ----------
Increase (decrease) in cash and cash
equivalents 405,162 (284,189) 1,600,313
Cash and cash equivalents:
Beginning of year 1,598,339 1,882,528 282,215
------------- ----------- ----------
End of year $ 2,003,501 1,598,339 1,882,528
============= =========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTE 1 - BUSINESS
- -----------------
LaserSight Incorporated (the Company) is the parent company of four major wholly
owned operating subsidiaries: LaserSight Technologies, Inc., which develops and
manufactures ophthalmic lasers primarily for use in photorefractive keratectomy
(PRK) procedures; MEC Health Care, Inc., a managed care intermediary that
contracts with various health maintenance organizations (HMOs) and eye care
providers to provide comprehensive vision services to the HMO subscribers; LSI
Acquisition, Inc., which acquires and manages ophthalmic practices and
ambulatory surgery centers; and MRF, Inc. d/b/a The Farris Group, a consulting
firm servicing health care providers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For financial reporting purposes, the Company considers short-term, highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Credit Risk
- -----------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable.
The Company sells products to customers and at times extends credit for such
sales. Exposure to losses on receivables is principally dependent on each
customer's financial condition and their ability to generate revenue from the
Company's products. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses. To mitigate a portion of the
Company's exposure on certain sales, the Company has obtained letters of credit
to be drawn on foreign financial institutions in the event a customer should
default. At December 31, 1996 and 1995, the Company was the payee on letters of
credit with foreign financial institutions aggregating approximately $2.1
million and $2.2 million, respectively.
Income Taxes
- ------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Inventory
- ---------
Inventory, which consists primarily of laser systems parts and components, is
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Furniture and equipment are
depreciated using the straight-line method over the estimated lives (three to
seven years) of the assets. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset. Capital leases are amortized on a straight-line basis over the
term of the leases (four years).
<PAGE>
Patents
- -------
Costs associated with obtaining patents are capitalized as incurred and are
amortized over their estimated useful lives (generally 17 years).
Goodwill and Acquired Technology
- --------------------------------
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
not to exceed 25 years. Management evaluates the carrying value of goodwill
using future undiscounted operating cash flows of the acquired businesses.
Acquired technology was recorded as an intangible asset to be amortized over a
period of 12 years.
Product Warranty Costs
- ----------------------
Estimated costs to fulfill future warranty obligations for products sold during
the year are accrued at the time of sale.
Revenue Recognition
- -------------------
The Company recognizes revenue from the sale of its products in the period that
the products are shipped to the customers.
Service revenues from consulting clients are recognized in the period that the
services are provided.
The Company recognizes premiums from HMOs and other payors as income in the
period to which vision care coverage relates. Substantially all premiums are
collected on a monthly basis and relate to vision care coverage during that
month. Capitation revenue for the years ended December 31, 1996 and 1995 was
$6,095,000 and $1,189,700, respectively.
Revenue from managing an ophthalmic practice and an ambulatory surgery center
are recognized when earned in accordance with the practice service agreement.
Provider Payments
- -----------------
Provider payments consist of benefit claims and capitation payments made to
providers. Benefit claims include estimates of payments covering paid and
pending claims for which services have been performed, and estimates of claims
for services performed during the fiscal year which have not, as of the balance
sheet date, been reported to the Company. The cost of claims incurred but not
reported is estimated based on current membership statistics, current
utilization, and historical data. The Company sub-capitates the services of
certain ophthalmic specialties, and does not carry reinsurance to indemnify
against certain other health care costs incurred by members.
Earnings (Loss) Per Share
- -------------------------
Net earnings (loss) per common share is computed using the weighted average
number of common shares, commitments to issue common shares and common share
equivalents outstanding during each period. Common share equivalents include
options and warrants to purchase common stock and are included in the
computation using the treasury stock method if they would have a dilutive
effect. Fully diluted earnings (loss) per share for the year ended December 31,
1996 was anti-dilutive and is the same as primary earnings (loss) per share
except for the inclusion of the impact of preferred stock converted to common
stock during the period (see Note 10).
Accounting Change - Earnings (Loss) Per Share
Pursuant to Emerging Issues Task Force (EITF) Announcement No. D-60, the value
of the conversion discount on the Series A Convertible Preferred Stock has been
reflected as an increase to the loss attributable to common shareholders for the
year ended December 31, 1996. The value of the conversion discount,
approximately $1.0 million, and per share effect, ($0.13) primary and ($0.12)
fully diluted, has been reflected in the consolidated statement of operations.
Primary loss per share and fully diluted loss per share, as originally reported
in the Company's annual report, were ($0.56) and ($0.49), respectively, for the
year ended December 31, 1996. This change did not affect any of the reported
amounts in the consolidated balance sheet as of December 31, 1996 or the net
loss for the year ended December 31, 1996.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
- -----------------------------------------------------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the Company's consolidated financial position, results of
operations, or liquidity.
Stock Option Plans
- ------------------
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. On January 1,
1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure pursuant to the provisions
of SFAS No. 123.
Reclassifications
- -----------------
Certain reclassifications have been made to prior years' financial statements to
conform to the 1996 financial statement presentation.
NOTE 3 - BUSINESS COMBINATIONS
- ------------------------------
Northern New Jersey Eye Institute
- ---------------------------------
In July 1996, the Company acquired the assets of the Northern New Jersey Eye
Institute (NNJEI) and contracted with the practice to provide ongoing management
services.
The acquisition was accounted for using the purchase method. Accordingly, the
Company's results of operations resulting from the service agreement with NNJEI
are included in the Company's consolidated financial statements subsequent to
the acquisition date. The total purchase cost, including acquisition costs, of
$2,576,882, was comprised of a 5.05% promissory note in the amount of $340,000
and 205,598 unregistered shares of the Company's common stock. Up to 102,798
additional shares may be issuable on July 3, 1998 if the Company's quoted stock
price is lower than $15.00 per share at that date. The promissory note was
repaid in September 1996. Goodwill recognized as a result of the acquisition,
totaling $1,606,774, will be amortized over 25 years.
The unaudited pro forma revenues, net income, and earnings per share for the
years ended December 31, 1996 and 1995, assuming that the acquisition and
service agreement had occurred as of the beginning of the respective periods, is
presented below. The pro forma amounts are not necessarily indicative of results
that would have occurred had the acquisition been consummated as of the
beginning of the periods presented or that might be attained in the future.
1996 1995
---- ----
Revenues $23,096,390 29,160,301
Net income (loss) (4,048,058) 4,913,606
Earnings (loss) per
common share:
Primary $ (0.68) 0.66
Fully diluted (0.60) 0.66
MEC Health Care, Inc.
- ---------------------
In October 1995 the Company acquired all of the issued and outstanding shares of
common stock of MEC Health Care, Inc. (MEC). The acquisition was accounted for
using the purchase method. Accordingly, MEC's results of operations are included
in the Company's consolidated financial statements subsequent to the acquisition
date. The total purchase cost, including acquisition costs, of $6,579,087 was
comprised of an 8.75% promissory note in the total amount of $1,799,100 (see
note 9) and 543,464 unregistered shares of the Company's common stock. Goodwill
recognized as a result of the acquisition, totaling $6,667,918, will be
amortized over 20 years.
The Farris Group
- ----------------
In February 1994, the Company acquired MRF, Inc. d/b/a The Farris Group. The
acquisition was accounted for using the purchase method. Accordingly, The Farris
Group's results of operations are included in the Company's consolidated
financial statements subsequent to the acquisition date. The terms of the
acquisition provided, among other things, for the Company to pay $2,000,000 and
up to 750,000 unregistered shares of the Company's common stock issuable if The
Farris Group achieves certain future performance objectives. The Company
delivered $635,000 to the seller at closing, along with its promissory note for
$1,365,000 (see notes 9 and 10). At the acquisition date, The Farris Group had
approximately $558,000 of net assets, resulting in goodwill of approximately
$1,442,000, which will be amortized over 20 years.
LaserSight Centers Incorporated
- -------------------------------
In April 1993, the Company acquired all of the outstanding stock of LaserSight
Centers Incorporated (Centers), a privately held corporation. Centers is a
development stage corporation which intends to provide services for ophthalmic
laser surgical centers using excimer and other lasers. The terms for the closing
of this transaction provided for the issuance of 500,000 unregistered shares of
the Company's common stock and the agreement of the Company to issue up to an
additional 1,265,333 unregistered shares of its common stock based on the
outcome of certain future events and whether Centers achieves certain
performance objectives (see note 15). This agreement was amended in March 1997
(see note 16).
NOTE 4 - ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------
Accounts and notes receivable at December 31, 1996 and 1995 were net of
allowance for uncollectible accounts of $1,350,000 and $925,000, respectively.
Accounts and notes receivable write-offs have not been significant for the years
ended December 31, 1996, 1995, and 1994.
Notes receivable at December 31, 1996 and 1995 primarily represent unpaid
balances due on laser equipment sales. Notes receivable balances, discounted at
8%, and less an allowance for uncollectible notes, consisted of the following at
December 31, 1996 and 1995, respectively:
1996 1995
---- ----
Notes receivable $ 6,967,120 5,183,369
Less: Discount 476,170 525,000
Allowance for
uncollectible
notes 711,000 308,379
---------- ---------
5,779,950 4,349,990
Less current portion 3,159,575 1,524,170
---------- ---------
$2,620,375 2,825,820
========== =========
NOTE 5 - INVENTORIES
- --------------------
The components of inventories at December 31, 1996 and 1995 are summarized as
follows:
1996 1995
---- ----
Raw materials $2,008,610 839,984
Work in process 448,906 431,766
Finished goods 664,646 280,000
Test equipment -
clinical trials 206,741 285,000
------- -------
$3,328,903 1,836,750
========== =========
As of December 31, 1996, the Company had four laser systems being used under
arrangements for clinical trials in various countries. At December 31, 1995,
five laser systems were in use under similar arrangements.
NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment at December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Leasehold improvements $ 118,087 92,950
Furniture and equipment 962,014 740,142
Assets under capital lease 957,180 -
Laboratory equipment 717,055 647,046
------- -------
2,754,336 1,480,138
Less accumulated
depreciation and
amortization 818,116 434,657
------- -------
$1,936,220 1,045,481
========== =========
Accumulated amortization of assets under capital leases at December 31, 1996 was
$119,646.
NOTE 7 - OTHER ASSETS
- ---------------------
Other assets at December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Restricted cash $ 240,000 425,000
Goodwill, net of accumu-
lated amortization of
$715,962 in 1996 and
$249,251 in 1995 12,099,032 8,640,645
Acquired technology, net
of accumulated amorti-
zation of $209,604 in
1996 and $63,600 in 1995 1,542,396 1,688,400
Deposits 74,038 51,486
Deferred patent costs, net
of accumulated amorti-
zation of $32,076 in
1996 and $23,976 in 1995 94,946 45,374
------------ ----------
$ 14,050,412 10,850,905
============ ==========
Restricted cash represents deposits in connection with service contracts with
approximately 134 ophthalmologists granting them exclusive market areas to
perform specific services as set forth in the Center's service contracts.
On July 25, 1995, based on successful demonstrations, the Company accepted the
transfer of all rights, title, and interests in a 200 Hz solid-state laser
together with an assignment of a patent pending with respect to such technology
in exchange for options to purchase 240,000 shares of unregistered common stock.
The value of such options was determined by management (in consultation with an
independent investment banker) to be $1,752,000, and was recorded as an
intangible asset.
NOTE 8 - EMPLOYEE BENEFIT PLAN
- ------------------------------
Effective January 1, 1996, the Company adopted a 401(k) plan for the benefit of
substantially all of its full-time employees. The plan provides, among other
things, for employer-matching contributions to be made at the discretion of the
Board of Directors. For the year ended December 31, 1996, the employee-matching
contribution was $41,923. Employer-matching contributions vest over a seven-year
period. Administrative expenses of the plan are paid by the Company.
NOTE 9 - NOTES PAYABLE
- ----------------------
At December 31, 1996 and 1995, the Company owed $1,000,000 and $1,799,100
respectively to the former owners of MEC. The note payable is secured by stock
of MEC, and bears interest at 8.75%. In January 1996, the Company repaid
$799,100. The note was originally due on demand on or after April 1, 1996, and
has been extended to be due on demand on or after April 1, 1997.
As of December 31, 1995, the Company owed $465,000 to the former owner of The
Farris Group (currently the Chief Executive Officer of the Company). In January
1996, the Company repaid the remaining balance of this note.
Interest paid during the years ended December 31, 1996 and 1995 approximated
$172,000 and $50,000, respectively.
The Company entered into an agreement for the sale and leaseback of certain
assets acquired. The lease, with a four-year term, is classified as a capital
lease. The fair market value of the assets financed was approximately $957,000
and payments under the lease approximate $300,000 annually and commenced in July
1996 (see note 15).
NOTE 10 - STOCKHOLDERS' EQUITY
- ------------------------------
In January 1996, the Company completed a private placement of 116 shares of
Series A Convertible Preferred Stock (Preferred Stock), yielding net proceeds,
after costs of financing, of $5.34 million. The Company also issued warrants to
purchase 17,509 shares of common stock at $13.25 per share to the placement
agent. The Preferred Stock is convertible into the Company's common stock at the
option of the holders at any time through January 10, 1998, on which date all
preferred stock remaining outstanding will automatically be converted into
common stock. The conversion price equals the lesser of $14.18 per share or 85%
of the average closing price of the common stock during the five trading days
preceding the conversion date, subject to a minimum conversion price. At
December 31, 1996, eight shares of preferred stock were outstanding. The
conversion of 108 shares of preferred stock through December 31, 1996 resulted
in the issuance of 872,736 shares of common stock, including the issuance of
common stock in settlement of preferred dividends accrued through the respective
conversion dates.
The Company has the right to redeem the preferred stock for cash, or subject to
certain conditions, cause it to be converted to common stock. Dividends on the
preferred stock are cumulative and accrue at an annual rate of 10%, and are
payable in common stock at the time of conversion or redemption of the preferred
stock.
In February 1994, the Company sold 140,000 shares of its common stock. Net
proceeds from the private placements after deductions of the related issuance
costs amounted to approximately $675,500.
In December 1993, the Company entered into two stock distribution agreements,
which provided for the Company to offer up to 600,000 shares of its common
stock. Under the agreements, the common shares were delivered to the distributor
in exchange for a promissory note (stock subscription receivable). During the
year ended December 31, 1994, approximately 311,000 shares were sold for net
proceeds to the Company, after deductions of related issuance costs, of
approximately $801,000. In January 1995, the remaining 289,000 shares were sold
under a separate purchase agreement for net proceeds to the Company of
approximately $2,463,000, including a note receivable totaling $1,500,000 with
interest at 10% per annum.
A modified promissory note was executed in August 1995 with an adjusted balance
of $1,250,000 with monthly payments of varying amounts through April 30, 1996.
The balance due at December 31, 1996 and 1995 was $1,140,000 and was classified
as a stock subscription receivable and reduction of stockholders' equity.
In July 1995, in consideration for the acquisition of certain technology (see
note 7) the transferor of such technology received options to purchase 240,000
unregistered shares of the Company's common stock at the greater of $1.13 per
share or $12.00 less than the market value on the date of exercise. The options
were exercised in September 1995.
Pursuant to the agreements related to the acquisition of The Farris Group, up to
750,000 unregistered shares of the Company's stock are contingently issuable to
the seller based upon The Farris Group's pre-tax profits, as defined in the
agreement, over the five years subsequent to the acquisition. The number of
issuable shares is determined annually and, based on terms of the acquisition
agreement, amended as of December 28, 1995, will be issued beginning in 1997 for
the three-year period ending December 31, 1996. Based on The Farris Group's
pre-tax profits for each of the years ended December 31, 1996, 1995, and 1994,
approximately 406,700 shares are issuable as of January 31, 1997. For purposes
of computing earnings per share, issuable shares attributable to historical
performance levels of The Farris Group are included in weighted average shares
outstanding on a primary and fully diluted basis.
NOTE 11 - STOCK OPTION PLANS
- ----------------------------
The Company has options outstanding at December 31, 1996 related to five stock
based compensation plans (the Plans). Options are currently issuable by the
Board of Directors only under the 1996 Equity Incentive Employee Plan (1996
Incentive Plan) and the Lasersight Incorporated Nonemployee Directors Stock
Option Plan (Directors Plan), both of which were ratified in June 1996.
Under the 1996 Incentive Plan, all employees of the Company are eligible to
receive options, although no employee may receive greater than 250,000 shares of
common stock during any one year. Pursuant to terms of the 1996 Incentive Plan,
750,000 shares of common stock may be issued at exercise prices of no less than
100% of the fair market value at date of grant, and options become exercisable
in four annual installments on the anniversary dates of the grant.
The Directors Plan provides for the issuance of up to 200,000 shares of common
stock to directors of the Company who are not officers or employees. Grants to
individual directors are based on a fixed formula that establishes the timing,
size, and exercise price of each option grant. At the date of the annual
stockholders' meeting, 10,000 options will be granted to each outside director
at an exercise price of 100% of the fair market value as of that date, with the
options becoming fully exercisable on the first anniversary date of the grant.
The options will expire in ten years or three years after an outside director
ceases to be a director of the Company.
The per share weighted-average fair value of stock options granted during the
years ended December 31, 1996 and 1995 was $4.60 and $4.28 on the dates of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions:
1996 1995
---- ----
Expected dividend yield 0% 0%
Volatility 44% 44%
Risk-free interest rate 6.04%-6.33% 5.66%-6.20%
Expected life (years) 3-5 3-5
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its Plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the company's stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net income (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated below.
1996 1995
---- ----
Net income (loss)
As reported $(4,074,369) 4,591,871
Pro forma (4,653,040) 3,571,890
Primary EPS
As reported $ (0.69) 0.64
Pro forma (0.76) 0.49
Fully diluted EPS
As reported $ (0.61) 0.64
Pro forma (0.68) 0.49
In accordance with SFAS No. 123, the pro forma net income reflects only options
granted in 1996 and 1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compenstation cost does not reflect
options granted prior to January 1, 1995, that vested in 1996 and 1995.
Stock option activity for all plans during the periods indicated is as follows:
Weighted
Shares Average
Under Exercise
Option Price
------ -----
Balance at January 1, 1994 753,500 $ 4.79
Granted 254,750 4.96
Exercised (16,000) 2.76
Terminated (620,450) 5.38
--------
Balance at December 31, 1994 371,800 3.93
Granted 327,400 11.94
Exercised (174,540) 4.29
Terminated (28,400) 5.58
-------
Balance at December 31, 1995 96,260 9.12
Granted 574,000 9.83
Exercised (9,900) 4.93
Terminated (180,510) 11.00
--------
Balance at December 31, 1996 879,850 9.29
======= ========
The following table summarizes the information about stock options outstanding
and exercisable at December 31, 1996.
Range of Exercise Prices
------------------------
$1.58-$5.14 $6.81-$7.03 $9.50-$12.81
----------- ----------- ------------
Options Outstanding:
Number outstanding at
December 31, 1996 142,250 191,000 546,600
Weighted average
remaining contractual
life 1.4 years 4.7 years 3.6 years
Weighted average
exercise price $3.47 $6.92 $11.63
Options Exercisable:
Number exercisable at
December 31, 1996 142,250 20,000 404,600
Weighted average
exercise price $3.47 $6.81 $11.77
In addition, the underwriter of the Company's 1991 initial public offering
received warrants to purchase up to 180,000 shares of the Company's common stock
at an exercise price of $3.00 per share through November 13, 1996. During 1996,
all of the underwriter's warrants were exercised.
NOTE 12 -- INCOME TAXES
- -----------------------
The components of the income tax expense (benefit) for the years ended December
31, 1996, 1995, and 1994 were as follows:
1996 1995 1994
---- ---- ----
Current:
Federal $(707,130) 858,800 19,000
State (22,878) 130,000 26,000
------------ --------- ------
(730,008) 988,800 45,000
------------ --------- ------
Deferred:
Federal (351,677) 344,000 --
State (57,323) 65,000 --
------------ --------- ------
(409,000) 409,000 --
------------ --------- ------
Total income tax
expense (benefit) $(1,139,008) 1,397,800 45,000
============ ========= ======
Deferred tax assets and liabilities consist of the following components as of
December 31, 1996 and 1995:
1996 1995
---- ----
Deferred tax liabilities:
Acquired technology $ 611,338 666,918
Change in tax status of
subsidiaries 273,639 482,744
Property and equipment 166,254 65,843
------- ------
1,051,231 1,215,505
Deferred tax assets:
Inventory 237,446 37,869
Receivable allowance 596,026 424,625
Limitation on capital loss 155,042 178,852
Warranty accruals 61,562 165,159
NOL carry forward 462,081 -
Other 67,101 -
------ -------
1,579,257 806,505
Valuation allowance (528,026) -
-------- -------
1,051,231 806,505
--------- -------
Net deferred tax liability $ - 409,000
=========== =======
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is a
risk that certain of these deferred tax assets may expire unused and,
accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable earnings or alternative tax strategies. However, the net deferred tax
assets could be reduced in the near term if management's estimates of the
taxable income during the carryforward period are significantly reduced or
alternative tax strategies are no longer viable.
Payments for income taxes during the years ended December 31, 1996, 1995, and
1994 were $307,360, $719,595 and $-0-, respectively.
For the years ended December 31, 1996, 1995 and 1994, the difference between the
Company's effective income tax provision and the "expected" tax provision,
computed by applying the federal statutory income tax rate to income before
provision for income taxes, is reconciled below:
1996 1995 1994
---- ---- ----
"Expected" tax provision
(benefit) $(1,772,548) 2,036,000 362,000
State income taxes, net
of federal income tax
benefit (29,462) 85,000 17,000
Utilization of net operating
loss carry forwards - (426,000) (366,000)
Foreign sales corporation
tax benefit - (216,000) -
Valuation allowance 528,026 - -
Research and development - (151,000) -
Goodwill amortization 162,321 75,000 -
Nondeductible expenses 18,920 55,000 -
Alternative minimum tax - - 16,000
Other items, net (46,265) (60,200) 16,000
------------ ---------- ------
Income tax
expense (benefit) $(1,139,008) 1,397,800 45,000
============ ========== ======
NOTE 13 - SEGMENT INFORMATION
- -----------------------------
1996 1995 1994
---- ---- ----
Operating revenues:
Technology related $10,634,663 19,899,584 6,113,016
Health care services 10,869,327 6,088,481 3,481,452
---------- --------- ---------
Consolidated $21,503,990 25,988,065 9,594,468
=========== ========== =========
Operating profit (loss):
Technology related $(2,148,280) 4,692,757 1,448,086
Health care services (895,181) 1,072,407 620,994
General corporate
expenses (1,828,285) (1,006,462) (724,230)
Developmental stage
company expenses -
LaserSight Centers
Incorporated (88,603) (206,558) (204,537)
------- -------- --------
Income (loss)
from operations $ (4,960,349) 4,552,144 1,140,313
============ ========= =========
Identifiable assets:
Technology related $16,569,845 17,079,879
Health care services 15,244,579 10,864,302
Corporate assets 2,145,663 685,783
Developmental stage
company assets -
LaserSight Centers
Incorporated 290,126 472,529
------- -------
Total assets $34,250,213 29,102,493
=========== ==========
The Company operates principally in two industries: Technology related (laser
equipment) products and health care services. Laser equipment operations involve
the development, manufacture, and sale of ophthalmic lasers primarily for use in
photorefractive keratectomy procedures. Such operations generally relate to the
LaserSight Technologies, Inc. subsidiary. Health care services generally relate
to MEC, The Farris Group and the ophthalmic practice management (OPM)
subsidiary. MEC contracts with various HMOs and eye care providers to provide
comprehensive vision services to the HMO subscribers. The Farris Group
subsidiary performs consulting services, which involve generating data and
developing strategies by which health care providers may improve their
competitive position. The OPM subsidiary provides management services to
ophthalmic practices. Total revenue by industry includes sales to unaffiliated
customers.
Operating profit is total revenue less operating expenses. In determining
operating profit for industry segments, the following items have not been
considered: general corporate expenses; expenses attributable to Centers, a
developmental stage company; nonoperating income; and the income tax expense
(benefit). Identifiable assets by industry segment are those that are used by or
applicable to each industry segment. General corporate assets consist primarily
of cash and income tax accounts.
Export sales are as follows:
1996 1995 1994
---- ---- ----
North and
Central America $ - 2,511,469 200,000
South America 3,600,637 4,904,565 1,025,000
Asia 2,844,752 8,631,066 3,663,000
Europe 3,378,000 1,683,555 284,000
Africa 295,000 195,000 -
---------- --------- ---------
$10,118,389 17,925,655 5,172,000
=========== ========== =========
NOTE 14 - RELATED PARTY TRANSACTIONS
- -----------------------------------
During January 1993, Centers entered into a royalty agreement with Florida Laser
Partners, a Florida general partnership, in which two of the Company's former
presidents and the Company's chairman are partners. The royalty agreement
provides, among other things, for a perpetual royalty payment to Florida Laser
Partners of a number of shares of Centers' common stock, as determined by a
formula defined in the royalty agreement (see note 15). Also during January
1993, the Company entered into an exchange agreement with Florida Laser
Partners, which provides among other things, that Laser Partners shall exchange,
from time to time, shares of Centers' common stock that it acquires pursuant to
the royalty agreement for shares of the Company's stock. This agreement was
amended in March 1997 (see note 16).
In November 1996, the Company renewed a consulting agreement, in effect since
July 1, 1994, with a director of the Company. The consulting agreement provides
for compensation for consulting services related to the Company's ongoing
regulatory issues and affairs. Additionally, the agreement provides for options
to purchase 5,000 shares of the Company's common stock for each protocol
submitted to, and each protocol approved by, the FDA. During 1996, 1995 and
1994, consulting expense under the agreement approximated $74,000, $60,000 and
$28,000, respectively. The consulting agreement was renewed for a two-year term.
Effective June 1, 1995, the Company entered into a consulting agreement with a
director of the Company. The agreement, which ended in May 1996, provided for
compensation for consulting services related to the Company's financing issues.
During 1996 and 1995, consulting expense under the agreement was $25,000 and
$27,500, respectively.
In December 1995, the Company sold one laser system for $235,000 to a company
owned by a director of the Company. At December 31, 1996 and 1995, the sale is
included in accounts receivable. The Company received full payment on the
account in January 1997.
During 1995, the Company entered into an agreement with the spouse of a director
of the Company to be its exclusive laser system sales representative for certain
middle eastern countries. In 1995, one laser system was sold under this
agreement with a total commission expense of $38,750. At December 31, 1996 and
1995, $20,750 and $26,250, respectively, of this total is reflected in accrued
commissions.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
LaserSight Centers Incorporated
- -------------------------------
In April 1993, a stockholders' derivative action was filed against all five
members of the Company's Board of Directors alleging breaches of fiduciary duty
in connection with the Company's acquisition of Centers. In 1995, the action was
settled by reducing the contingently issuable shares, a reduction of royalty
payments per procedure, and payment of the plaintiff's legal costs totaling
$275,000. Other expenses in 1994 includes $75,000 of these costs. The balance
was expensed in prior years.
Pillar Point Partners
- ---------------------
On March 31, 1995, the Company was served with a complaint by Pillar Point
Partners, alleging infringement by the Company of certain patent rights
allegedly held by Pillar Point Partners under exclusive licenses from Summit
Technology, Inc. and VISX Incorporated, both of whom subsequently joined the
suit.
The Company has categorically denied the allegation of patent infringement. In
addition, the Company asserted several defenses which alleged the patent to be
invalid and unenforceable. The Company believes it has meritorious defenses to
this action.
In March 1997, this litigation was resolved. See note 16.
Public Company Publishing, Inc.
- -------------------------------
In May 1996, the Company received a complaint alleging that the Company had
breached a written agreement entered into during 1992 that provided for the
rendering of consulting services to the Company. The complaint sought monetary
damages in an unspecified amount as well as specific performance. In December
1996, the action was settled for payments totaling $100,000, which are reflected
in other expenses in 1996. Of this amount, $50,000 was paid during 1996 and
$50,000 was paid in February 1997.
Obligations Under Capital and Operating Leases
- ----------------------------------------------
The Company leases office space and certain equipment under operating lease
arrangements. Future minimum payments under these leases as of December 31, 1996
are as follows:
Operating Capital
--------- -------
1997 $635,059 $ 299,807
1998 511,600 299,807
1999 409,577 299,807
2000 310,472 149,903
2001 171,188 -
After 2001 490,460 -
---------
1,049,324
Less interest 201,562
-------
$ 847,762
=========
Rent expense for the years ended 1996, 1995, and 1994 was approximately
$781,000, $311,000, and $229,000, respectively.
Other Matters
- -------------
In 1995, the Company received $980,125 in settlement of its claims against the
obligor of promissory notes held by the Company. The notes had previously been
reserved and the receipt is reflected in other income. Also in 1995, the Company
received a settlement of $350,000 from the Company's former president related to
matters in connection with his prior employment.
NOTE 16 -- SUBSEQUENT EVENTS (UNAUDITED)
- ----------------------------------------
Patent Agreement
- ----------------
In February 1997, the Company entered into an agreement with International
Business Machines Corporation (IBM) which provides for LaserSight to acquire
certain IBM patents relating to ultraviolet light ophthalmic products and
procedures for ultraviolet ablation for $14,900,000.
The agreement provides for IBM to transfer to the Company all of IBM's rights
under its patent license agreements with certain licensees. Subject to the
closing of the transaction by July 1, 1997, the Company will be entitled to
receive all royalties accrued on or after January 1, 1997, under such patent
license agreements.
An escrow agreement between IBM and the Company was negotiated and executed in
March 1997, providing for the Company to place a $1 million deposit of its
common stock into escrow. If the transaction does not close by July 1, 1997, IBM
may terminate the agreement. In such event, the Company's sole obligation is to
deliver from the escrow or otherwise its common stock and/or cash with a value
of $1 million on July 1, 1997. Among other things, the transaction is subject to
the Company's arrangements for payment of the purchase price and regulatory
clearances, if any.
LaserSight Centers Incorporated
- -------------------------------
In March 1997, the Company amended the purchase and royalty agreements related
to the 1993 acquisition of Centers. The amended purchase agreement provides for
the Company to issue 625,000 unregistered shares currently with 600,000
additional shares contingently issuable based upon future operating profits.
This replaces the provision calling for 1,265,333 contingently issuable shares
based on cumulative revenues or other future events and the uncertainties
associated therewith. The amended royalty agreement reduces the royalty from $86
to $43 per refractive procedure and delays the obligation to pay such royalties
until the sooner of five years or the issuance of all contingently issuable
shares as described above.
Pillar Point Partners
- ---------------------
In March 1997, the Company entered into an agreement with Pillar Point Partners
and each co-plaintiff to resolve the litigation. Under the agreement, Pillar
Point Partners and each co-plaintiff granted a release from liability under any
of their patents for certain of the Company's ultraviolet laser corneal surgery
systems and any service or procedure performed with such systems before the
effective date of the agreement. The Company will make a nominal payment and
agreed to notify Pillar Point Partners and the co-plaintiffs before LaserSight
begins manufacturing or selling in the United States in the future. In the
agreement, the parties agreed to resolve the litigation by entry of a Dismissal
Without Prejudice.
Financing
- ---------
The Company received a commitment letter in March 1997 from a commercial finance
company for a loan of up to $8 million, subject to the negotiation and execution
of definitive loan documentation. The loan would be secured by substantially all
of the Company's presently unencumbered accounts receivable and other assets. In
connection with the loan, the Company expects to issue warrants to purchase
500,000 shares of common stock.
<TABLE>
EXHIBIT 11
LASERSIGHT INCORPORATED
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
1996 1995 1994
---- ---- ----
(Restated)
<S> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 7,486,300 6,325,567 5,492,170
Issuable shares, acquisition of The Farris Group 406,700 406,700 158,000
Net effect of dilutive stock options and warrants - 492,733 515,830
-------------- ------------- -------------
7,893,000 7,225,000 6,166,000
============== ============= =============
Net income (loss) $ (4,074,369) $ 4,591,871 $ 1,018,431
============= =============
Conversion discount on preferred stock (1,010,557)
Dividends on preferred stock (358,618)
--------------
Loss attributable to common shareholders $ (5,443,544)
==============
Primary earning (loss) per share $ (0.69) $ 0.64 $ 0.17
============== ============= =============
Additional primary calculation:
Loss attributable to common shareholders, above $ (5,443,544)
==============
Additional adjustment to weighted average number of
shares:
Weighted average number of shares as adjusted per
above 7,893,000
Dilutive effect of contingently issuable shares
and stock options 255,000
--------------
Weighted average number of shares, as adjusted 8,148,000
==============
Primary loss per share, as adjusted $ (0.67) (A)
==============
<PAGE>
FULLY DILUTED
Weighted average shares outstanding 7,486,300 6,325,567 5,492,170
Effect of preferred stock conversions from issuance
date to date of conversion 530,000 - -
Issuable shares, acquisition of The Farris Group 406,700 406,700 158,000
Net effect of dilutive stock options - 497,733 580,250
Net effect of dilutive stock options, contingently
issuable - - 311,580
-------------- ------------- -------------
8,423,000 7,230,000 6,542,000
============== ============= =============
Net income (loss) $ (4,074,369) $ 4,591,871 $ 1,018,431
============= =============
Conversion discount on preferred stock (1,010,557)
Dividends on preferred stock (358,618)
Less dividends on preferred stock converted
during year 319,508
--------------
Loss attributable to common shareholders $ (5,124,036)
==============
Fully diluted earnings (loss) per share $ (0.61) $ 0.64 $ 0.16
============== ============= =============
Additional fully diluted calculation:
Loss attributable to common shareholders, above $ (5,124,036)
==============
Additional adjustment to weighted average number of
shares:
Weighted average number of shares as adjusted per
above 8,423,000
Dilutive effect of contingently issuable shares,
stock options and convertible preferred stock 331,000
--------------
Weighted average number of shares, as adjusted 8,754,000
==============
Fully diluted loss per share, as adjusted $ (0.59) (A)
==============
</TABLE>
(A) - This calculation is submited in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because
it produces an anti-dilutive result.
