SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Transition period from
to .
------------------------------ ----------------------------------
Commission File Number: 0-19671
LASERSIGHT INCORPORATED
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 65-0273162
-------------------- ------------------------------
(State of Incorporation) (IRS Employer Identification No.)
12161 Lackland Road, St. Louis, Missouri 63146
(Address of principal executive offices) (Zip Code)
(314) 469-3220
(Registrant's telephone number, including area code)
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
----- -----
The Number of shares of the registrant's Common Stock outstanding as of
November 13, 1997 is 9,984,672.
<PAGE>
EXPLANATORY NOTE
This filing amends certain previously-filed information contained in Part I.,
Items 1 and 2 and Part II., Item 1. No other items have been amended.
LASERSIGHT INCORPORATED AND SUBSIDIARIES
Except for the historical information contained herein, the discussion in this
Report contains forward-looking statements (within the meaning of Section 21E of
the Exchange Act) 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 sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Uncertainties and Other Issues"
in this report and in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1996.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996
Condensed Consolidated Statements of Operations for the Three
Month Periods and Nine Month Periods Ended September 30, 1997
and 1996
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of FinancialCondition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1997 1996
---------------- --------------
<S> <C> <C>
CURRENT ASSETS ASSETS (Unaudited)
Cash and cash equivalents $1,164,158 $2,003,501
Accounts receivable - trade, net 3,840,332 5,458,153
Notes receivable - current portion, net 3,711,675 3,159,575
Inventories 3,991,541 3,328,903
Deferred tax assets 570,296 667,998
Income taxes recoverable 22,404 803,154
Other current assets 577,019 221,922
---------------- --------------
TOTAL CURRENT ASSETS 13,877,425 15,643,206
Restricted cash 3,200,000 -
Notes receivable, less current portion, net 3,538,268 2,620,375
Property and equipment, net 2,214,293 1,936,220
Deferred financing costs, net 392,043 -
Goodwill, net 14,783,566 12,099,032
Patents, net 11,462,339 94,946
Pre-market approval application, net 2,666,708 -
License agreement, net 800,000 -
Other assets, net 1,860,807 1,856,434
---------------- --------------
$54,795,449 $34,250,213
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $2,525,677 $2,216,792
Note payable, less discount of $322,222 3,677,778 -
Note payable - related party - 1,000,000
Current portion of capital lease obligation 224,549 206,139
Accrued expenses 1,748,266 764,084
Accrued commissions 1,110,529 1,214,235
Dividends payable - 39,000
Other current liabilities 63,998 182,155
---------------- --------------
TOTAL CURRENT LIABILITIES 9,350,797 5,622,405
Refundable deposits 203,000 240,000
Accrued expenses, less current portion 590,369 309,656
Deferred income taxes 570,296 667,998
Long-term obligations 971,018 641,623
Commitments and contingencies
Redeemable convertible preferred stock:
Series B - par value $.001 per share; authorized 10,000,000 shares;
1,600 and 0 issued at September 30, 1997 and December 31, 1996 14,374,027 -
Stockholders' equity:
Convertible preferred stock, Series A - par value $.001 per share; authorized
10,000,000 shares; 0 and 8 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively - -
Common stock - par value $.001 per share; authorized 20,000,000 shares;
10,149,872 and 8,454,266 shares issued at September 30, 1997 and
December 31, 1996, respectively 10,150 8,454
Additional paid-in capital 40,018,241 30,080,560
Paid-in capital - warrants 592,500 -
Obligation to issue common stock - 3,065,056
Stock subscription receivable (1,140,000) (1,140,000)
Accumulated deficit (10,112,240) (4,612,830)
Less treasury stock, at cost; 170,200 shares (632,709)
(632,709)
----------------- ---------------
28,735.942 26,768,531
----------------- --------------
$54,795,449 $34,250,213
================= ===============
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
1997 1996 1997 1996
----------------- --------------- --------------- ----------------
(Restated)
<S> <C> <C> <C> <C>
REVENUES, Net $6,156,359 $4,494,232 $18,083,073 $15,070,482
COST OF SALES 1,068,498 794,982 2,934,001 2,259,527
PROVIDER PAYMENTS 1,630,616 1,069,184 4,450,855 2,998,680
----------------- --------------- --------------- ----------------
GROSS PROFIT 3,457,245 2,630,066 10,698,217 9,812,275
RESEARCH, DEVELOPMENT AND REGULATORY
EXPENSES 816,522 325,925 1,729,153 1,373,547
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,660,208 4,504,162 13,568,380 12,598,430
----------------- --------------- --------------- ----------------
LOSS FROM OPERATIONS (2,019,485) (2,200,021) (4,599,316) (4,159,702)
OTHER INCOME AND EXPENSES
Interest and dividend income 94,401 42,195 292,272 132,109
Interest expense (483,794) (54,480) (911,966) (102,068)
Other - (300,107) (280,400) (300,107)
------------------ --------------- ---------------- ----------------
NET LOSS BEFORE INCOME TAXES (2,408,878) (2,512,413) (5,499,410) (4,429,768)
INCOME TAX BENEFIT - (458,727) - (1,119,378)
------------------ --------------- ---------------- ----------------
NET LOSS (2,408,878) (2,053,686) (5,499,410) (3,310,390)
CONVERSION DISCOUNT ON PREFERRED STOCK (41,573) - (41,573) (1,010,557)
PREFERRED STOCK DIVIDEND REQUIREMENTS - (77,674) (13,350) (345,694)
----------------- --------------- --------------- ----------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(2,450,451) $(2,131,360) $(5,554,333) $(4,666,641)
================= =============== =============== ================
LOSS PER COMMON SHARE
Primary: $(0.25) $(0.28) $(0.59) $(0.64)
================= =============== =============== ================
Assuming full dilution: $(0.25) $(0.27) $(0.59) $(0.59)
================= =============== =============== ================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Primary: 9,812,000 7,639,000 9,342,000 7,238,000
================= =============== =============== ================
Assuming full dilution: 9,812,000 8,017,000 9,390,000 7,848,000
================= =============== =============== ================
See accompanying notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(5,499,410) $(3,310,390)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,814,587 711,528
Decrease in accounts and notes receivable 292,828 1,714,377
Increase in inventories (879,348) (1,430,642)
Increase (decrease) in accounts payable 308,885 (300,472)
Increase (decrease) in accrued liabilities 724,447 (36,682)
Decrease (increase) in income taxes 780,750 (1,404,967)
Other (498,467) 440,532
------------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (2,955,728) (3,616,716)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment, net (517,206) (250,862)
Acquisition of other intangible assets (15,379,988) -
Proceeds from exclusive license of patents 4,000,000 -
Transfer to restricted cash account (3,200,000) -
Purchase of managed care contract (150,000) -
Purchase of businesses, net of cash acquired - (179,607)
Proceeds from sale and leaseback transaction - 957,180
------------------ ------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (15,247,194) 526,711
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable, net 3,414,142 -
Proceeds from exercise of stock options and warrants 98,363 260,289
Repayments of capital lease obligation (152,195) (61,735)
Repayments of notes payable - acquisition related (1,000,000) (1,139,100)
Repayments of notes payable - officer - (465,000)
Proceeds from issuance of preferred stock, net 15,003,269 5,342,151
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,363,579 3,936,605
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (839,343) 846,600
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,003,501 1,598,339
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,164,158 $2,444,939
================== ==================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Month Periods Ended September 30, 1997 and 1996
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
of LaserSight Incorporated and subsidiaries (the Company) as of
September 30, 1997, and for the three month periods and nine month
periods ended September 30, 1997 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and note disclosures required by generally accepted
accounting principles for complete financial statements. These
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K/A for the
year ended December 31, 1996. In the opinion of management, the
condensed consolidated financial statements include all adjustments
necessary for a fair presentation of consolidated financial position
and the results of operations and cash flows for the periods presented.
The results of operations for the three and nine month periods ended
September 30, 1997 are not necessarily indicative of the operating
results for the full year.
NOTE 2 PER SHARE INFORMATION
Net loss per common share is computed using the weighted average number
of common shares and common share equivalents outstanding during each
period. Common share equivalents include options 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 loss per share for the three and nine month periods ended
September 30, 1997 were anti-dilutive and therefore, except for the
impact of Preferred Stock converted to Common Stock during the period,
are the same as primary loss per share.
Accounting Change - 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 nine months ended September
30, 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 condensed consolidated statement of
operations. Primary loss per share and fully diluted loss per share, as
originally reported in the Company's quarterly report, were ($0.51) and
($0.47), respectively, for the nine month period ended September 30,
1996. This change did not affect any of the reported amounts in the
condensed consolidated balance sheet as of September 30, 1996 or the
net loss for the nine month period ended September 30, 1996.
In February 1997, Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," was issued establishing new standards
for computing and presenting earnings per share. The historical
measures of earnings per share (primary and fully diluted) are replaced
with two new computations of earnings per share (basic and diluted).
The Company will adopt SFAS 128 as of December 31, 1997. Loss per
share, on a pro forma basis, for the three and nine month periods ended
September 30, 1997 and 1996, computed pursuant to the provisions of
SFAS 128, would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(Restated)
Basic loss per share $(0.25) $(0.26) $(0.59) $(0.61)
Diluted loss per share $(0.25) ($0.25) $(0.59) $(0.53)
NOTE 3 INVENTORIES
Inventories, which consist primarily of laser systems, parts and
components, are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. The components of
inventories at September 30, 1997 and December 31, 1996 are summarized
as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
Raw materials $2,772,585 $2,008,610
Work-in-process 107,110 448,906
Finished goods 821,447 664,646
Test equipment-clinical trials 290,399 206,741
------------------ -----------------
$3,991,541 $3,328,903
================== =================
NOTE 4 BUSINESS COMBINATIONS
LaserSight Centers Incorporated (Centers)
-----------------------------------------
In March 1997, the Company amended the purchase and royalty agreements
related to the 1993 acquisition of Centers. The amended purchase
agreement provided for the Company to issue 625,000 unregistered common
shares (valued at $3,320,321) 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.
NOTE 5 COMMITMENTS AND CONTINGENCIES
Shareholder vote
Shareholder approval is required in connection with the private
placement of 1,600 shares of Series B Convertible Participating
Preferred Stock (Series B Preferred Stock) (see Note 6). If for any
reason the Company's shareholders do not approve, by December 26, 1997,
the possible issuance of an indefinite number of shares issued upon
conversion, the Company may be obligated to redeem, at the Special
Redemption Price (as defined below), a sufficient number of shares of
Series B Preferred Stock which will permit conversion of 200% of the
remaining shares of Series B Preferred Stock without breaching any
obligation of the Company under the Company's listing agreement with
the Nasdaq National Market. The "Special Redemption Price" means a cash
payment equal to the greater of (i) the liquidation preference of
$10,000 multiplied by 125% or (ii) the current value of the Common
Stock, using the price per share of Common Stock, which the holders of
such shares of Series B Preferred Stock would otherwise be entitled to
receive upon conversion. Such redemption must be completed within five
business days of the event which required such redemption. Any delay in
payment will cause such redemption amount to accrue interest at the
rate of 1% per month during the first 30 days, pro rated daily (2%
monthly, pro rated daily, thereafter).
FDA approval
In conjunction with acquisitions from Photomed, Inc. (as described in
Note 7), several contingent payments included in the transaction are
subject to FDA approval. If the FDA approves the acquired Pre-Market
Approval (PMA) application by July 29, 1998, the Company will be
obligated to pay $1.75 million. If the FDA approves the use of any
Company laser for the treatment of hyperopia, the Company will be
obligated to pay unregistered Common Stock valued at $1 million. If the
Company's scanning laser is approved by the FDA for commercial sale in
the U.S. on or before April 1, 1998, the Company will be obligated to
pay $1 million. Approval after such date will result in a
correspondingly smaller obligation until January 1, 1999, when no
payment will be required.
NOTE 6 FINANCING
Foothill Capital Corporation
On April 1, 1997, the Company entered into a loan agreement with
Foothill Capital Corporation (FCC) for a loan, currently 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 $3.2 million. The term loan bears interest at an
annual rate of 12.50% and requires repayment of principal in monthly
installments of $1.33 million beginning on May 1, 1998. The revolving
loan bears interest at a variable annual rate of 1.50% above the base
rate of Norwest Bank Minnesota. The $3.2 million maximum amount of the
revolving loan declines by $1.33 million per month beginning on August
1, 1998. In connection with the loan, the Company paid an origination
fee of $150,000 and issued warrants to purchase 500,000 shares of
Common Stock. The warrants are exercisable at any time from April 1,
1998 through April 1, 2002 at an exercise price per share of $6.0667.
Subject to certain conditions based on the market price of the Common
Stock, up to half of the warrants are eligible for repurchase by the
Company. Any warrants that remain outstanding and unexercised on April
1, 2002 are subject to mandatory repurchase by the Company at an
original price of $1.50 per warrant. The warrants have certain
anti-dilution features which provide for approximately 50,000
additional shares pursuant to the issuance of the Series B Preferred
Stock and a corresponding reduction in the exercise price to $5.52 per
share and repurchase price to $1.36 per warrant. The warrants were
valued at $500,000 and are classified as long-term obligations at
September 30, 1997. The recorded amount of the obligation will change
with the value of the warrants. The loan is secured by a pledge of
substantially all of the Company's accounts receivable and other
assets. The terms of the financing agreement contain financial
covenants with respect to, among other things, current ratio, laser
system sales, revenue, earnings before interest, taxes, depreciation
and amortization (EBITDA), and capital expenditures. Due to the
operating results of the quarter ended June 30, 1997, certain financial
covenants were waived by FCC for the three months ended June 30, 1997.
The Company revised the covenants effective July 1, 1997. These
covenants were met for the three months ended September 30, 1997.
The Company used a portion of the net proceeds of the term loan to pay
in full the balance due under its note to the former owners of MEC
Health Care, Inc., a wholly owned subsidiary of the Company acquired in
October 1995.
Private Placement
On August 29, 1997, the Company completed a private placement of 1,600
shares of Series B Preferred Stock, yielding net proceeds after related
costs of approximately $15 million. The proceeds were used to purchase
certain patents from International Business Machines Corporation (IBM)
(see Note 7). The Company also issued to the investors and placement
agent warrants to purchase 790,000 shares of the Company's Common Stock
at a price of $5.91 per share at any time during the next five years.
The Series B Preferred Stock is convertible into Common Stock at any
time at a conversion price equal to the lower of $6.68 per share or the
average of the three lowest closing bid prices during a 20- or
30-trading day period preceding the conversion date. Prior to
shareholder approval of the transaction, the number of shares issued
upon conversion will be limited by Nasdaq rule and contract terms and
contract terms to approximately 1,995,500. Any Series B Preferred Stock
remaining unconverted on the third anniversary of the closing will
automatically be converted into Common Stock on that date. Up to 70
percent of the Series B Preferred Stock is redeemable by the Company at
a premium over its face amount. All of the Series B Preferred Stock is
redeemable at a 25 percent premium over its face amount at the option
of the holders but only in certain events of default by the Company,
including if the Company does not receive shareholder approval of the
transaction within 120 days (see Note 5). At September 30, 1997, 1,600
shares of Series B Preferred Stock were outstanding. However, the
Company redeemed 305 shares of Series B Preferred Stock on October 28,
1997 (see Note 8). The Series B Preferred Stock is recorded at the
amount of gross proceeds less the costs of the financing and the fair
value of the warrants and classified as mezzanine financing above the
stockholders' equity section on the balance sheet. A redemption is at
the option of the holder upon the occurrence of an event of redemption,
some of which are outside the Company's control. The financing costs
and warrants will be accreted against APIC - common stock if an event
of redemption is assessed as probable at a balance sheet date. The
calculated conversion price on August 29, 1997, the first available
conversion date, was approximately $4.98. In accordance with EITF Topic
D-60, the difference between this conversion price and the market price
of $5.00 is reflected as incremental yield to preferred stockholders on
the Company's loss per share calculation for the quarter ended
September 30, 1997.
NOTE 7 ACQUISITIONS
Photomed, Inc.
In July 1997, the Company acquired the rights to a PMA application
filed with the Food and Drug Administration (FDA) for a laser to
perform Laser In-Situ Keratomileusis (LASIK), a refractive surgery
alternative to surface Photorefractive Keratectomy (PRK) from Photomed,
Inc. In addition, the Company purchased from a shareholder of Photomed,
Inc. U.S. patent number 5,586,980 for a keratome, the instrument
necessary to create the corneal "flap" in the LASIK procedure. The
Company issued a combination of 535,515 unregistered shares of Common
Stock (valued at $3,416,700) and $333,300 as consideration for the PMA
application and the keratome patent. Of the total consideration paid
including acquisition-related costs, $2,758,375 was allocated to the
PMA and $1,047,097 to the patent. The seller will also receive a
percentage of any licensing fees or sale proceeds related to the
patent. Such licensing fees will be expensed as incurred. The total
value was capitalized as the cost of PMA application and patents and is
being amortized over 5 and 15 years, respectively, based on the
estimated useful life of the equipment covered by the PMA and the
remaining life of the patent. If the FDA approves the PMA so as to
allow the Company to commercialize a laser to perform LASIK in the
U.S., the Company will pay an additional $1.75 million to the sellers.
If such FDA approval is not obtained by July 29, 1998, the Company has
the option to unwind the PMA transaction and receive from the sellers
of Photomed, Inc. 274,285 shares of the Company's Common Stock. If the
transaction is unwound, the Company's investment will be reduced by
that portion of the PMA value applicable to the proportionate ratio of
shares returned. The remaining unamortized portion of the PMA value, or
approximately 16% of the original value, will be assessed as to
impairment, which could result in a write down of the remaining value.
Additionally, if the FDA approves the use of the laser for the
treatment of hyperopia (farsightedness), the Company will pay
unregistered Common Stock valued at $1 million to the sellers. If the
Company's scanning laser is approved by the FDA for commercial sale in
the United States on or before April 1, 1998, the Company will pay
$1,000,000 to the sellers. Approval after such date will result in
lesser payments until January 1, 1999, when no payment will be
required. Additional consideration paid based on the contingent
obligations described above will be recorded as additional purchase
price and amortized over the remaining useful life of the PMA. Costs
incurred during the approval process will be expensed as incurred.
Patents
On August 29, 1997, the Company finalized an agreement with IBM, in
which the Company acquired certain patents relating to ultraviolet
light ophthalmic products and procedures for ultraviolet ablation for
$14,900,000. Under the agreement, IBM transferred to the Company all of
IBM's rights under its patent license agreements with certain
licensees. The Company received all royalties accrued on or after
January 1, 1997, under such patent license agreements. The acquisition
was financed through the private placement of Preferred Stock (see Note
6).
On September 23, 1997, the Company sold an exclusive worldwide
royalty-free patent license covering the vascular and cardiovascular
rights included in the patents acquired from IBM for $4 million,
reducing the Company's basis in the patents acquired. No gain or loss
was recognized as a result of this sale. Approximately $3.2 million of
these funds were placed in a restricted cash account in accordance with
the private placement agreements and were subsequently used to
voluntarily redeem a portion of the Preferred Stock issued to finance
the purchase of the IBM patents (see Note 8).
Keratome License
In September 1997, the Company acquired worldwide distribution rights
to the Ruiz disposable keratome for the refractive surgery LASIK
procedure in addition to entering into a limited exclusive license
agreement for intellectual property for the keratome products known as
Automated Disposable Keratomes (ADK). In exchange, the Company paid
$400,000 at closing and agreed to supply to the sellers one excimer
laser. The Company's cost of such laser and related accessories was
capitalized as part of the cost of the license agreement. Six months
after the first shipment of the disposable keratome product, the
Company will pay an additional $150,000 to the sellers with another
installment of $150,000 due twelve months after the initial shipment
date. The Company will also share equally the product's gross profit
with the sellers with minimum quarterly royalties of $400,000 beginning
six months after the initial shipment date. Under the arrangement,
gross profit is defined as the selling price less certain costs of
goods and costs of sales. Such royalties will be expensed in the period
incurred.
NOTE 8 SUBSEQUENT EVENT
On October 28, 1997, the Company voluntarily redeemed 305 shares of the
Preferred Stock (approximately 19 percent of the original 1,600 shares
issued). The Company paid a total of $3,172,000 including a four
percent redemption premium. The redemption premium will be reflected in
the fourth quarter of 1997 and recorded as an increase in the loss
attributable to common shareholders in the computation of earnings
(loss) per share.
NOTE 9 NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Baord (FASB)
issued SFAS No. 128, "Earnings per Share." See Note 2.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." They are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated.
SFAS No. 130 requires companies to classify items defined as "other
comprehensive income" by their nature in a financial statement, and to
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The adoption of SFAS No. 130 is
not expected to have a material impact on the Company's consolidated
financial statements.
SFAS No. 131 requires companies to report financial and descriptive
information about its reportable operating segments. Operating segments
are components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. This statement also requires that public
companies report certain information about their products and services,
the geographic areas in which they operate and their major customers.
The Company is currently reviewing the impact of this statement on its
current level of disclosure.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Sales. The following tables present the Company's net sales by major
operating segments: technology products and services and health care services
for the three and nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Net Sales % of Total Net Sales % of Total
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Technology $2,677,831 43% $1,783,577 40%
Health care services 3,478,528 57% 2,810,613 62%
Intercompany revenues -- -- (99,958) (2%)
---------- ----- ---------- -----
Total net sales $6,156,359 100% $4,494,232 100%
========== ===== ========== =====
For the Nine Month For the Nine Month
Period Ended Period Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Net Sales % of Total Net Sales % of Total
--------- ---------- --------- ----------
Technology $8,362,374 46% $7,246,984 48%
Health care services 9,720,699 54% 8,158,263 54%
Intercompany revenues -- -- (334,765) (2%)
---------- ----- ---------- -----
Total net sales $18,083,073 100% $15,070,482 100%
=========== ===== =========== =====
</TABLE>
Net sales in the third quarter of 1997 were $6,156,359, compared to $4,494,232
(for an increase of 37%) over the same period in 1996. Net sales for the nine
month period ended September 30, 1997, increased by $3,012,591 to $18,083,073
from the same period in 1996. The increase in health care service revenue for
the nine month period ended September 30, 1997, was attributable to increased
revenues generated by MEC Health Care, Inc. (MEC) and LSI Acquisition, Inc.
(LSIA), offset by a substantial reduction in revenues generated by MRF Inc.
d/b/a The Farris Group (The Farris Group). Net sales for The Farris Group for
the nine month period ended September 30, 1997 decreased by $1,879,931 to
$1,010,298 from the same period in 1996. This decrease was due primarily to a
reduction in consulting services provided and was accompanied by an expense
reduction of $1,837,739 for the nine month period ended September 30, 1997. Such
revenue decrease is primarily a result of that subsidiary's primary revenue
producer, Michael R. Farris, being named as president of the Company in late
1995, eliminating his day-to-day participation in the consulting business. Other
consultants employed were unable to maintain revenues at historical levels. The
decrease in revenues generated by The Farris Group was partially offset by
increased revenues generated by MEC in the amount of $1,821,030. The increase in
technology revenues in the third quarter of 1997 was attributed to a slight
increase in net sales of the Company's LaserScan 2000 excimer laser system in
overseas markets and improved pricing resulting from the Company's limited sales
of the LS 300 model, a lower priced system. Ten laser systems were sold in the
third quarter of 1997 compared to nine systems, net of return allowances, sold
over the same period in 1996. Thirty-three laser systems were sold during the
nine month period ended September 30, 1997, compared to twenty-nine systems, net
of return allowances, sold over the same period in 1996. The Company believes a
contributing factor to the lower than expected number of laser sales is the
anticipation, particularly in Europe, of the introduction of the LaserScan LSX
announced in April 1997. Technology revenues in 1996 included higher allowances
for sales returns, reflecting differences between actual experience and
previously estimated amounts. There were no system returns recognized during the
first three quarters of 1997. The financial impact of systems sold in 1995 and
returned in the nine months ended September 30, 1996 in excess of previously
estimated amounts was approximately $1.0 million, as follows: Net revenues were
decreased by $1.6 million, offset by reductions in corresponding cost of sales
($0.4 million) and commissions and warranty-related costs ($0.2 million). The
financial impact of systems sold in 1995 and returned in the three months ended
September 30, 1996 in excess of previously estimated amounts was approximately
$0.6 million, as follows: Net revenues were decreased by $1.0 million, offset by
reductions in corresponding cost of sales ($0.2 million) and commissions and
warranty-related costs ($0.2 million). Based on the expected timing of the
commercial introduction of its newest laser system, the LaserScan LSX, the
Company expects laser system sales to remain below 1996 levels for the remaining
quarter of 1997, although it expects such sales to exceed the levels attained on
average in the second and third quarters of 1997.
Cost of Goods Sold and Gross Profits. The following tables present a comparative
analysis of cost of goods sold, gross profit and gross profit margins for three
and nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
September 30, 1997 Percent Change September 30, 1996
------------------ -------------- ------------------
<S> <C> <C> <C>
Cost of goods sold $ 1,068,498 34% $ 794,982
Provider payments 1,630,616 53% 1,069,184
Gross profit 3,457,245 31% 2,630,066
Gross profit percentage 56% 59%
Technology related only 1,609,333 63% 988,595
60% 55%
For the Nine Month For the Nine Month
Period Ended Period Ended
September 30, 1997 Percent Change September 30, 1996
------------------ -------------- ------------------
Cost of goods sold $2,934,001 30% $2,259,527
Provider payments 4,450,855 48% 2,998,680
Gross profit 10,698,217 9% 9,812,275
Gross profit percentage 59% 65%
Technology related only 5,428,373 9% 4,987,457
65% 69%
</TABLE>
Gross profit margins were 56% of net sales in the third quarter of 1997 compared
to 59% for the same period in 1996. For the nine-month period ended September
30, 1997 and 1996, gross profit margins were 59% and 65%, respectively. For the
nine-month period ended September 30, 1997, the gross profit margin decrease was
attributable to (i) the decrease in revenues generated by The Farris Group,
which has no associated cost of sales as all expenses are reflected in selling,
general and administrative expenses, (ii) a significant increase in MEC revenues
with a corresponding increase in provider payments, which historically have
ranged from approximately 68 to 72% of MEC revenues, and (iii) a general
increase in the operating costs of the Company's Costa Rican manufacturing
facility, which were spread over fewer sales during the nine month period ended
September 30, 1997. The Farris Group revenues are not expected to continue to
decrease from current levels. MEC's revenues are expected to continue to
increase with a corresponding increase in provider payments. See Uncertainties
and Other Issues--Health Care Services-Related Uncertainties--Dependence on
Major Customer. Costa Rican operating expenses are not expected to increase
materially without a significant increase in systems sold.
Research, Development and Regulatory Expenses. The following tables present a
comparative analysis of research, development and regulatory expenses for the
three and nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
September 30, 1997 Percent Change September 30, 1996
------------------ -------------- ------------------
<S> <C> <C> <C>
Research, development
and regulatory $ 816,522 151% $ 325,925
As a percentage of technology
net sales 30% 18%
For the Nine Month For the Nine Month
Period Ended Period Ended
September 30, 1997 Percent Change September 30, 1996
------------------ -------------- ------------------
Research, development
and regulatory $ 1,729,153 26% $1,373,547
As a percentage of technology
net sales 21% 19%
</TABLE>
Research, development and regulatory expenses for the third quarter of 1997 were
$816,522, an increase of $490,597, or 151% from such expenditures during the
same period in 1996. Research, development and regulatory expenses for the nine
month period ended September 30, 1997 increased by $355,606 from $1,373,547 for
the same period in 1996 or 26%. The increase in research, development and
regulatory expenses during the third quarter of 1997 can primarily be attributed
to ongoing research and development of new refractive laser systems, including
development of the LaserScan LSX and added features for the LaserScan-2000, and
continued software development for the excimer lasers. Initial shipments of the
LaserScan LSX are anticipated during the later part of the fourth quarter of
1997. Since the initial announcement of the development of the LaserScan LSX,
the Company has solicited and received input from clinical users and prospective
customers. This has resulted in modifications to the system, necessitating
additional development and testing for clinical validation. As a result of
focusing its efforts on having the LaserScan LSX available for limited
commercial production and shipment in the later part of the fourth quarter of
1997, the Company expects research and development expenses to remain at levels
consistent with or higher than third quarter 1997 levels throughout the
remainder of 1997. Regulatory expenses for the three month period ended
September 30, 1997 have increased in comparison to the same period in the prior
year although for the nine month period ended September 30, 1997 there has been
a decrease in comparison to the same period in the prior year. Regulatory
expenses are expected to continue to increase for the remaining portion of 1997
and into 1998 as a result of the Company's continuation of current FDA clinical
trials, protocols added during 1997 related to the potential use of the
Company's laser systems for treatment of glaucoma, the possible development of
additional future protocols for submission to the FDA and the PMA acquired in
July 1997 (see Note 7).
Selling, General and Administrative Expenses. The following tables present a
comparative analysis of selling, general and administrative expenses for the
three and nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
September 30, 1997 Percent Change September 30, 1996
------------------ -------------- ------------------
<S> <C> <C> <C>
Selling, general and
administrative $4,660,208 3% $4,504,162
Percentage of net sales 76% 100%
For the Nine Month For the Nine Month
Period Ended Period Ended
September 30, 1997 Percent Change September 30, 1996
------------------ -------------- ------------------
Selling, general and
administrative $13,568,380 8% $12,598,430
Percentage of net sales 75% 84%
</TABLE>
Selling, general and administrative expenses increased by $156,046 and $969,950
for the third quarter of 1997 and the first nine months of 1997, respectively,
over comparable periods in 1996. The primary reasons for these increases for the
nine months ended September 30, 1997 include the continued growth of MEC
($136,381), increased amortization costs resulting from acquired patents,
license agreements and other intangibles ($492,985), 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 ($511,474). Such strategic
efforts include the pursuit during 1997 of vision managed care contracts with
HMOs, insurers and employer groups, the IBM patents and the automated disposable
keratome license. Technology expenses increased $308,669 generally related to
costs that correlate with increased revenues. Additionally, LSIA began
operations in July 1996. Only three months of its operations were included in
the Company's operations during the nine months ended September 30, 1996
compared to nine months in 1997, representing increased expenses of $1,297,243.
These increases in operating costs were partially offset by the substantial
reduction in the operating costs of The Farris Group as previously described.
Legal and accounting expenditures continue to be incurred as a result of ongoing
regulatory filings, general corporate issues, litigation and patent issues.
Loss From Operations. There was an operating loss of $2,019,485 in the third
quarter of 1997 compared to an operating loss of $2,200,021 for the same period
in 1996. The operating loss for the nine month period ended September 30, 1997
was $4,599,316 compared to an operating loss of $4,159,702 for the same period
in 1996. The improved operating results during the third quarter of 1997
compared to 1996 resulted from increased revenues and gross profit, partially
offset by increases primarily in research, development and regulatory expenses.
The decline in operating results for the nine month period ended September 30,
1997 compared to the same period in 1996 can be attributed primarily to the
combination of improved overall revenues and gross profit, offset by increases
in operating expenses.
Other Income and Expenses. Interest and dividend income was $94,401 in the third
quarter of 1997 compared to $42,195 for the same period in 1996. Interest and
dividend income for the nine month period ended September 30, 1997 was $292,272
compared to $132,109 for the same period in 1996. Interest and dividend income
was earned from the Company's cash deposits and short-term investments and the
collection of long-term receivables related to laser system sales. Interest
expense incurred was $483,794 in the third quarter of 1997 compared to interest
expense of $54,480 for the same period in 1996. Interest expense for the nine
month period ended September 30, 1997 was $911,966 compared to interest expense
of $102,068 for the same period in 1996. Interest expense incurred by the
Company during the second and third quarters of 1997 related primarily to the
credit facility established with FCC on April 1, 1997. In addition to interest
paid on the outstanding note payable balance, included in interest expense is
the amortization of deferred financing costs, the accretion of the discount on
the note payable and, in the third quarter of 1997, fees associated with
amendments to the original loan agreement. Included in other expense in 1997 and
1996 are costs related to settling patent and other filed and threatened
litigation.
Income Taxes. For the three and nine months ended September 30, 1997, the
Company recorded no income tax benefit or expense compared to an income tax
benefit of $1,119,378 for the nine month period ended September 30, 1996. The
lack of income tax benefit for the first three quarters of 1997 has been based
on the lack of availability of loss carrybacks.
Net Loss. Net loss for the third quarter of 1997 was $2,408,878 compared to a
net loss of $2,053,686 for the same period in 1996. Net loss for the nine month
period ended September 30, 1997 was $5,499,410 compared to a net loss of
$3,310,390 for the same period in 1996. The loss is attributed to a combination
of increased revenues from technology products and MEC services, losses
generated from The Farris Group and higher operating expenses as previously
described for the first three quarters of 1997.
Loss Per Common Share. Loss per primary and fully diluted share decreased to
$0.25 during the third quarter of 1997 compared to $0.28 and $0.27,
respectively, for the same period in 1996. Loss per primary and fully diluted
share were $0.59 for the nine month period ended September 30, 1997 compared to
$0.64 and $0.59, respectively, for the same period in 1996. Weighted average
shares outstanding increased in 1997 as a result of the conversion into Common
Stock of 18 shares of Series A Preferred Stock issued in January 1996, the
exercise of options and warrants, the 1997 amendment to the purchase agreement
related to LaserSight Centers, the issuance of shares under the earnout
provisions of the 1994 acquisition of The Farris Group and the issuance of
shares in conjunction with the 1997 acquisition of rights to a PMA and keratome
patent. In 1996, the lower number of shares was offset by dividends on the
Series A Preferred Stock and the value of the conversion discount on the Series
A Preferred Stock for the nine month period ended September 30, 1996.
Liquidity and Capital Resources.
- --------------------------------
Working capital decreased $5,494,173 from $10,020,801 at December 31, 1996 to
$4,526,628 as of September 30, 1997. This decrease in working capital resulted
primarily from the net loss previously mentioned, purchases of furniture and
equipment and investments in PMA rights, a keratome patent and license agreement
and a vision managed care contract.
Operating activities used net cash of $2,955,728 during the first nine months of
1997, compared to $3,616,716 of net cash used during the same period in 1996.
This decrease in cash used is primarily attributable to a substantial decrease
in income tax assets during the first nine months of 1997. Other factors
resulting in this decrease include an increase in amortization and depreciation
costs, a decrease in net receivables and an increase in accrued expenses,
partially offset by an increase in the net loss for the first nine months of
1997. The Company used $15,247,194 in cash related to investing activities
during the first nine months of 1997 compared to $526,711 of cash being provided
by investing activities over the same period in 1996. Net cash used in investing
activities during the first three quarters of 1997 can be primarily attributed
to the acquisition of certain patents and license agreements from IBM and
others, the purchase of office and computer equipment, and the purchase of a
vision managed care contract, partially offset by the proceeds from the
exclusive licensure of such patents. Net cash provided by financing activities
during the first nine months of 1997 was $17,363,579 and consisted of net
proceeds from the issuance of Preferred Stock to finance the acquisition of the
IBM patents, the credit facility with FCC and the exercise of stock options,
offset by the repayment of a note payable to former owners of MEC and cost
related to the repayment of a capital lease obligation. That compares to cash
provided by financing activities in the first nine months of 1996 of $3,936,605,
consisting of net proceeds from the sale of common and preferred stock totaling
$5,602,440 net of a repayment of $1,665,835 in notes payable and capital lease
obligations.
The Company experienced a significant increase in negative cash flow from
operations in the third quarter of 1997, largely resulting from the level of
laser system sales and the increase in research, development and regulatory
expenses resulting from the development of the LaserScan LSX and other efforts
as previously described. The Company expects cash flow from operations to show
improvement in the fourth quarter of 1997 and first quarter of 1998 as a result
of the expected shipment of the LaserScan LSX and ADKs as previously discussed.
However, the Company expects to incur a loss and a deficit in cash flow from
operations for the fourth quarter of 1997. There can be no assurance that the
Company can regain or sustain profitability or positive operating cash flow in
any subsequent fiscal period. Based on these factors, the Company believes that
its balances of cash and cash equivalents along with expected operating cash
flows and the availability of the FCC revolver will be sufficient to fund its
anticipated working capital requirements for the next twelve month period based
on modest growth and anticipated collection of receivables. A failure to collect
timely a material portion of current receivables or unexpected delays in the
shipment of the LaserScan LSX or ADK products 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 eighteen months
than in 1996 and preceding years. There can be no assurance as to the terms or
amount of third-party financing, if any, that the Company's customers may obtain
in the future. The Company is placing greater emphasis on the terms and
collection timing of future sales.
The Company voluntarily redeemed 305 shares of the Series B Preferred Stock
(approximately 19 percent of the 1,600 shares originally issued) on October 28,
1997. The Company paid the redemption price of $3,172,000 (including a 4%
redemption premium) with funds held in blocked account which serves as
collateral for the Company's contingent obligation to redeem Series B Preferred
Stock. See "Uncertainties and Other Issues--Company-Related
Uncertainties--Redemption Consequences if Stockholer Approval is Not Obtained"
below. As required by its agreement with the preferred shareholders, the Company
had established the $3.2 million blocked account to hold 80% of the $4 million
the Company had received in September 1997 as a lump-sum payment for an
exclusive, world-wide royalty-free license to a third party covering the use in
the vascular and cardiovascular fields of the laser patents the Company had
acquired from IBM in August 1997. The Company believes that its continued
holding of the restricted funds in the blocked account (in lieu of redeeming the
305 preferred shares) would not have meaningfully enhanced the Company's
liquidity and would, under the terms of the Series B Preferred Stock, have
resulted in an increase in the redemption premium (to as much as 14%) or the
expiration in January 1998 of the Company's option to redeem such 305 shares. In
addition, the Company believes that the redemption of such 305 shares reduced
the potential dilutive effect of the Series B Preferred Stock on the Company's
common shareholders.
During the third quarter of 1997, the Company and FCC modified the financial
covenants related to the FCC credit facility. The Company has complied with such
covenants for the quarter ended September 30, 1997. Some covenants are
cumulative in nature and meeting them will require continuous improvement in the
Company's operating performance. Should such operating levels not be achieved,
the Company would be in default of its agreement and FCC would have the right to
accelerate the Company's repayment obligation. In addition, such default would
entitle the holders of Series B Preferred Stock to have the right to redeem at a
premium over the face amount.
The Company expects to continue a variety of research and development activities
on its excimer and solid-state laser systems over the next twelve months and it
is anticipated that such research and development as well as regulatory efforts
in the United States 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 HMOs, insurers and employer groups during the
next 12 months. The Company anticipates that such efforts will be the most
significant health care services-related expenses in the foreseeable future.
On November 13, 1996, the Company announced that it had engaged the investment
banking firm of A.G. Edwards & Sons, Inc. ("A.G. Edwards") to explore and
evaluate strategic business opportunities. With the assistance of A.G. Edwards,
the Company solicited and evaluated proposals from third parties for such
strategic business opportunities during late 1996 and early 1997. Upon the
completion of this process in June 1997, the Company determined not to pursue
further such opportunities for the time being.
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. Although the Company and Laser Vision have to date not executed any
written agreement or resolved pricing and other issues, they occasionally
discuss various possible joint ventures involving the two companies. There can
be no assurance that such discussions will lead to a definitive agreement or as
to the terms of any such agreement.
On March 4, 1997, the Company announced a tentative agreement to acquire
Intermountain Managed Eyecare, of Salt Lake City, Utah, a third-party
administrator of managed vision care contracts with a business strategy similar
to the Company's MEC Health Care subsidiary. The Company originally anticipated
closing this transaction on March 15, 1997. The Company has determined not to
proceed with this transaction at this time.
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 relationship will be secured on terms satisfactory to the
Company.
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 and under
the same caption in the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996.
Company-Related Uncertainties
- -----------------------------
Potential Obligation to Redeem Preferred Stock if Stockholder Approval Not
Obtained. If for any reason the Company's shareholders do not approve, by
December 26, 1997, (or such later date as may be approved by all of the holders
of the Series B Preferred Stock) the possible issuance of an indefinite number
of shares of Common Stock upon the conversion of the Company's outstanding
Series B Preferred Stock, any holder of Series B Preferred Stock may elect to
require the Company to redeem a portion of such holder's Series B Preferred
Stock for cash in an amount equal to the Special Redemption Price. For this
purpose, the Special Redemption Price means a cash payment equal to the greater
of (i) the liquidation preference of $10,000 multiplied by 125% or (ii) the
current value of the Common Stock, using the price per share of Common Stock,
which the holders of such shares of Series B Preferred Stock would otherwise be
entitled to receive upon conversion. A holder could elect to require the Company
to redeem whatever portion of its Series B Preferred Stock is necessary to cause
the aggregate number of shares of Common Stock that would be issuable if such
holder were to convert all of its remaining Series B Preferred Stock and
exercise all of its 1997 Warrants to equal no more than 50% of such holder's
allocable portion of the 1,995,534 shares of Common Stock that a listing rule of
the NASDAQ National Market allows the Company to issue without prior shareholder
approval. The lower the price of the Company's Common Stock at the time of a
holder's conversion of its Series B Preferred Stock, the greater would be the
number of shares of Common Stock that would be issuable to such holder upon such
conversion and thus the greater the percentage of such holder's Series B
Preferred Stock that such holder could elect to require the Company to redeem.
Accordingly, the Company has requested that each of the four holders of Series B
Preferred Stock waive their right to require a redemption until February 28,
1998. To avoid such adverse consequences, such a waiver would need to be
unanimous. There can be no assurance as to whether, when or on what terms such a
unanimous waiver can be obtained.
If all of the holders of Series B Preferred Stock were to elect to require such
a redemption at a time when the average of three lowest daily closing bid prices
of the Common Stock during the 20-trading day period preceding the conversion
were to equal the average of such prices computed as of December 10, 1997
($3.40625), the Company estimates that the aggregate amount of its redemption
obligation would equal at least $15,312,500, including a premium of 25% or
approximately $3,062,500. These amounts would be greater to the extent that (A)
the highest closing bid price of the Common Stock during the period beginning 10
trading days before the redemption event and ending five business days after
such event exceeds the Conversion Price that would have been applicable if the
preferred shares had been converted instead of redeemed or to the extent that
the required redemption were to occur more than five business days after the
Company's receipt of a conversion request. The Company does not have sufficient
cash or marketable securities to satisfy this contingent obligation if it were
to arise, and there can be no assurance that the Company will have sufficient
cash or other resources to satisfy any such future redemption obligation. Such
redemption would result in a default in the Company's credit facility with
Foothill Capital Corporation and would have a material adverse effect on the
Company's financial position and liquidity.
Potentially Unlimited Number of Common Shares Issuable Upon Conversion of
Preferred Stock. The number of shares of Common Stock issuable upon each
conversion of the Series B Preferred Stock will depend on the average of the
three lowest closing bid prices of the Common Stock during the period
immediately preceding such conversion and will increase as the market price of
the Common Stock declines below $6.68 per share (the maximum conversion price of
the Series B Preferred Stock). There is no limit on the number of shares of
Common Stock issuable in connection with the conversions of Series B Preferred
Stock, except that the issuance of more than 1,995,534 shares of Common Stock in
connection with such conversions is subject to the approval of the Company's
shareholders at a special meeting of shareholders scheduled for January 1998.
The following table illustrates how changes in the market price of the Common
Stock could effect the number of shares issuable upon such conversions:
Assumed Number of As % of Common Shares
Conversion Conversion Assumed Outstanding
Price(1) Shares Issuable After Conversion(2)
$1.00 12,950,000 56.5%
$2.00 6,475,000 39.3%
$3.00 4,316,667 30.2%
$3.40625 (3) 3,801,835 27.6%
$4.00 3,237,500 24.5%
$5.00 2,590,000 20.6%
$6.00 2,158,333 17.8%
$6.68 1,938,622 16.3%
(maximum conversion price)
(1) Such Conversion Price is based on the lesser of $6.68 per share or the
Variable Conversion Price. For this purpose, "Variable Conversion Price"
means the average of the three lowest closing bid prices per share of the
Common during the Lookback Period (as defined) (subject to equitable
adjustment for any stock splits, stock dividends, reclassifications or
similar events during the Lookback Period). For this purpose, "Lookback
Period" means the 20 consecutive trading days (or, under certain
circumstances, 30 trading days) immediately preceding the applicable
conversion date.
(2) Assumes that the aggregate number of shares outstanding at the time of
conversion equals the 9,984,672 shares of Common Stock outstanding on
December 9, 1997 plus the number of shares issuable in connection with such
conversion. Also assumes that all shares of Preferred Stock are converted
at the conversion price indicated.
(3) Equals the Conversion Price that would have been applicable if all of the
Series B Preferred Stock had been converted as of December 10, 1997.
In addition, in the event of a liquidation of the Company, the holders of the
Series B Preferred Stock would be entitled to receive distributions in
preference to the holders of the Common Stock.
Uncollectible Receivables Could Exceed Reserves. At September 30, 1997, the
Company's trade accounts and notes receivable aggregated approximately
$11,090,000 net of total allowances for collection losses and returns of
approximately $1,650,500. Approximately 87 percent of net receivables at
September 30, 1997 relate to international accounts. Accrued commissions, the
payment of which generally depends on the collection of such net trade accounts
and notes receivable, aggregated approximately $1,551,000 at September 30, 1997.
Exposure to collection losses on technology-related receivables is principally
dependent on the Company's 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 and revenue generating ability 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 Company's reserves for estimated losses ($1,393,000 at September 30,
1997) 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 consolidated financial condition and results of operations.
Uncertainty Regarding Availability or Terms of Capital to Satisfy Possible
Additional Needs. The Company may need additional capital including to fund
the following:
(i) any future negative cash flow from operations,
(ii) the amounts payable to the holders of the Series B Preferred Stock
as a result the failure of the Company to cause the registration of the
Conversion Shares and the Warrant Shares by November 27, 1997 (based on
the amount of Series B Preferred Stock outstanding as of the date of
this Prospectus, the aggregate amount of such payments is $129,500
during the first month (or $4,317 per day) and $259,000 per month
($8,633 per day) thereafter),
(iii) the introduction of its laser systems into the United States
market after receiving FDA approval (the Company believes the earliest
these expenses might occur is the latter half of 1998), and
(iv) to satisfy certain cash payment obligations under its PMA
acquisition agreement of July 1997. (Such cash payment obligations
under the PMA acquisition agreement include $1.75 million payable in
the event the FDA approves the PMA before July 29, 1998 and $1.0
million payable in the event that the FDA approves the Company's
scanning laser for commercial sale in the U.S. before April 1, 1998.)
In addition, the Company may seek 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 up to
$3.2 million of additional borrowing available under its credit facility with
FCC (subject to the reduction of such availability amount in monthly
installments of $1.333 million commencing in August 1998 and to the Company's
continued compliance with financial and other covenants), 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. The $4 million outstanding principal amount of the FCC term loan is
payable in monthly installments of $1.333 million between May and July 1998. 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 FCC 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.
Possible Dilutive Issuance of Common 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 annual 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 406,700 Farris Earnout
Shares have been issued based on the operating results of the Farris Group
through December 31, 1995. 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. There can be no assurance that the issuance
of Farris Earnout Shares will be accompanied by an increase in the Company's per
share operating results.
Acquisition- and Financing-Related Contingent Commitments to Issue Additional
Common 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. The Company may from time to time
include similar provisions in future acquisitions and financings. The factors to
be considered by the Company in including such provisions may include the
Company's cash resources, the trading history of the Company's common stock, the
negotiating position of the selling party or the investors as applicable, and
the extent to which the Company determines that the expected benefit from the
acquisition or financing exceeds the potential dilutive effect of the
price-protection provision. Persons who are the beneficiaries of such provisions
effectively receive limited protection from declines in the market price of the
Common Stock, but other shareholders of the Company can expect to incur
additional dilution of their ownership interest in the event of a decline in the
price of the Common Stock.
Risks Associated with Past and Possible Future Acquisitions. The Company has
made several significant corporate acquisitions in the last four years,
including MRF in 1994, MEC in 1995, the assets of NNJEI in 1996, Photomed in
1997, and the IBM laser patents in 1997. These prior acquisitions, as well as
any future acquisition, may not achieve adequate levels of revenue,
profitability or productivity or may not otherwise perform as expected.
Acquisitions involve special risks, including risks associated with
unanticipated liabilities and contingencies, diversion of management attention
and possible adverse effects on earnings resulting from increased goodwill
amortization, increased interest costs, the issuance of additional securities
and difficulties related to the integration of the acquired business. Although
the Company is currently focusing on its existing operations, the future ability
of the Company to achieve growth through acquisitions will depend on a number of
factors, including the availability of attractive acquisition opportunities, the
availability of funds needed to complete acquisitions, the availability of
working capital needed to fund the operations of acquired businesses and the
effect of existing and emerging competition on operations. Should additional
acquisitions be sought, there can be no assurance that the Company will be able
to successfully identify additional suitable acquisition candidates, complete
additional acquisitions or integrate acquired businesses into its operations.
Amortization of Significant Intangible Assets. Of the Company's total assets at
September 30, 1997, approximately $31.1 million (57%) represents intangible
assets, of which approximately $14.8 million reflects goodwill which is being
amortized using an estimated life ranging from 12 to 25 years, approximately
$11.5 million reflects the cost of patents which are being amortized over a
period ranging from 8 to 17 years, and approximately $4.8 million reflects the
cost of licenses and technology acquired which is being amortized over a period
ranging from 31 months to 12 years. Goodwill is an intangible asset that
represents the difference between the total purchase price of the acquisitions
and the amount of such purchase price allocated to the fair value of the net
assets acquired. Goodwill and other intangibles are amortized over a period of
time, with the amount amortized in a particular period constituting a non-cash
expense that reduces the Company's net income in that period. A reduction in net
income resulting from the amortization of goodwill and other intangibles may
have an adverse impact upon the market price of the Company's Common Stock. In
addition, in the event of a sale or liquidation of the Company or its assets,
there can be no assurance that the value of such intangible assets would be
recovered.
In accordance with SFAS 121, the Company reviews intangible assets for
impairment whenever events or changes in circumstances, including a history of
operating or cash flow losses, indicate that the carrying amount of an asset may
not be recoverable. In such cases, the carrying amount of the asset is compared
to the estimated undiscounted future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
undiscounted future cash flows is less than the carrying amount of the asset, an
impairment loss will be computed and recognized in accordance with SFAS 121.
Expected cash flows are based on factors including historical results, current
operating budgets and projections, industry trends and expectations, and
competition.
Year 2000 Concerns. The Company believes that it has prepared its computer
systems and related applications to accommodate date-sensitive information
relating to the Year 2000. The Company expects that any additional costs related
to ensuring such systems to be Year 2000 compliant will not be material to the
financial condition or results of operations of the Company. Such costs will be
expensed as incurred. In addition, the Company is discussing with its vendors
and customers the possibility of any interface difficulties which may affect the
Company. To date, no significant concerns have been identified. However, there
can be no assurance that no Year 2000-related operating problems or expenses
will arise with the Company's computer systems and software or in their
interface with the computer systems and software of the Company's vendors and
customers.
Health Care Services-Related Uncertainties
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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 payer 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.
Ultimately, the success of the Company's MEC strategy will be dependent on its
ability to maintain and expand its managed care contract relationships with
HMOs, employee groups and other private third party payors. These managed care
contract relationships will depend largely on MEC's ability to recruit and
retain optometrists and ophthalmologists, who are committed to providing
quality, cost-effective care, to participate in MEC's contract provider network
as well as to market such provider network to third party payors. The inability
to effectively maintain MEC's provider network and third party payor contracts
could have a material adverse effect on the Company's results of operations,
financial condition and liquidity.
Reimbursement: Trends and Cost Containment. The Company's revenues derived from
LSIA are derived principally from management fees payable to LSIA from NNJEI.
Because the amount of management fees payable to LSIA is generally determined
with reference to the practice revenues of NNJEI, any reduction in the practice
revenues generated by NNJEI could adversely effect the Company. There can be no
assurance that NNJEI will continue to maintain a successful practice, that the
management agreement between LSIA and NNJEI will not be terminated, or that the
ophthalmologists will continue to be employed by NNJEI.
A substantial portion of the revenues of NNJEI are derived from government
sponsored health care programs (principally, the Medicare and Medicaid programs)
or private third party payors. The health care industry is experiencing a trend
toward cost containment as government and private third-party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with service providers. The Company believes that these trends will
continue to result in a reduction from historical levels in per-patient revenue
for such ophthalmic practices. Further reductions in payments to
ophthalmologists or other changes in reimbursement for health care services
would have an adverse effect on the Company's operations unless the Company is
otherwise able to offset such payment reductions through cost reductions,
increased volume, introduction of new procedures or otherwise.
Rates paid by private third-party payors are based on established physician, ASC
and hospital charges and are generally higher than Medicare reimbursement rates.
Any decrease in the relative number of patients covered by private insurance
could have a material adverse effect on NNJEI's results of operations. The
federal government has implemented, through the Medicare program, the
resource-based relative value scale ("RBRVS") payment methodology for physician
services. This methodology went into effect in 1992 and was implemented during a
transition period in annual increments through December 31, 1995. RBRVS is a fee
schedule that, except for certain geographical and other adjustments, pays
similarly situated physicians the same amount for the same services. The RBRVS
is adjusted each year, and is subject to increases or decreases at the
discretion of Congress. RBRVS-type of payment systems have also been adopted by
certain private third-party payors and may become a predominant payment
methodology. Wider-spread implementation of such programs would reduce payments
by private third-party payors and could reduce the NNJEI's practice revenues
and, in turn, reduce the amount of management fees paid by NNJEI to LSIA. There
can be no assurance that any or all of these reduced practice revenues could be
offset by the NNJEI through cost reductions, increased volume, introduction of
new procedures or otherwise.
Health Care Regulation--General. The Company is subject to extensive state,
federal and local regulations. The Company is also subject to laws and
regulations relating to business corporations in general. The Company believes
its operations are in substantial compliance with applicable law. However, there
can be no assurance that review of the Company's business, its affiliates, and
contractual arrangements by courts or health care, tax, labor, and other
regulatory authorities will not result in determinations that could adversely
affect the operations of the Company. Also, there can be no assurance that the
health care regulatory environment will not change and restrict the Company's
existing operations or limit the expansion of the Company's business. The health
care industry is presently experiencing sweeping and dynamic change. Much of
this change has been prompted by market forces. Numerous legislative proposals
and laws also have prompted other changes in the industry. In recent years a
number of governmental and other public initiatives have developed to reform the
health care system in the United States. If adopted, certain of these
initiatives could substantially alter the method of delivery and reimbursement
for medical care services in this country. There can be no assurance that
current or future legislative initiatives or governmental regulation will not
adversely affect the business of the Company.
More generally, in recent years there have been changes in statutes and
regulations regarding the provision of health care services and the Company
anticipates that such statutes and regulations will continue to be the subject
of future modification. The Company cannot predict what changes may be enacted,
and what effect changes in these regulations might have upon the Company and its
prospects. It is possible that federal or state legislation could contain
provisions resulting in governmental price ceilings (even on procedures for
which government health insurance is not available) which may adversely affect
the ophthalmic laser market or otherwise adversely affect the Company's business
in the United States. The uncertainty regarding additional health care statutes
or regulations, and the enactment of reform legislation, could have an adverse
affect on the development and growth of the company's business and might result
in additional volatility in the market price of the Company's securities.
Health Care Regulation--Referrals. 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 the Company believes
that its operations are in substantial compliance with existing applicable laws,
the Company's business operations have not been the subject of judicial or
regulatory review. There can be no assurance that the Company's business will
not be reviewed in the future, and if reviewed or challenged that the Company
would prevail. Any such review or challenge of the Company's business could
result in determinations that could adversely affect the operations of the
Company. There can be no assurance that the health care regulatory environment
will not change so as to restrict the Company'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, or facilities to
which they refer patients, if adopted, could adversely affect the Company.
Corporate Practice of Medicine. The laws of many states prohibit business
corporations or other non-professional corporations such as the Company from
practicing medicine and employing physicians to practice medicine. The Company
intends to perform only non-medical administrative services, does not intend to
represent to the public or patients or participating providers that it offers
medical services, and does not intend to exercise influence or control over the
practice of medicine by the participating providers with whom it affiliates
pursuant to contractual arrangements. Accordingly, the Company believes that its
intended operations will not be in violation of applicable state laws relating
to the practice of medicine. However, the laws in most states regarding the
corporate practice of medicine have been subjected to limited judicial and
regulatory interpretation and, therefore, no assurances can be given that the
Company's activities will be found to be in compliance, if challenged. The laws
of many states also prohibit non-professional corporations such as the Company
and other entities that are not owned entirely by physicians from employing
physicians, optometrists and other similar professionals having control over
clinical decision-making, or engaging in other activities that are deemed to
constitute the practice of medicine. Some states also prohibit non-professional
corporations from owning, maintaining or operating an office or facility for the
practice of medicine. Some states also prohibit non-professional corporations
from owning, maintaining or operating an office or facility for the practice of
medicine. These laws may be construed to permit arrangements under which the
physicians are not employed by or otherwise controlled as to clinical matters by
the party supplying such facilities and non-professional services but provide
services under contract with such an entity.
Professional Liability. Although the Company does not intend to engage in the
practice of medicine, there can be no assurance that the Company will not have
liability arising from the medical services, utilization review, peer review, or
other similar activities, of the participating providers. Under its contractual
arrangements, the Company requires all participating providers to carry
professional liability insurance and other insurance necessary to insure against
such risks, and, where possible, to add the Company as an additional insured
under such professional liability insurance policies and other applicable
policies of the participating provider. It is unlikely that such insurers will
add the Company as an additional insured. The Company carries general liability
and casualty insurance, but there can be no assurance that claims in excess of
any insurance coverage will not be asserted against the Company. The
availability and cost of such insurance is beyond the control of the Company,
and the cost of such insurance to the Company may have an adverse effect on the
Company's operations. Additionally, successful claims of liability asserted
against the Company that exceed applicable policy limits could have a material
adverse effect on the Company's results of operations and financial condition.
Competition. The Company will compete with other companies which seek to acquire
the business assets of, provide management and other services to, and affiliate
with existing provider practices. Other companies are actively engaged in
businesses similar to that of the Company, some of which have substantially
greater financial resources and longer operating histories than the Company and
are located in areas where the Company may seek to expand in the future. The
Company assumes that additional companies with similar objectives may enter the
Company's markets and compete with the Company and there can be no assurance
that the Company will be able to compete effectively with such companies.
Additionally, the market for vision care is becoming increasingly competitive.
The Company's participating providers may compete with many other providers.
Competition is based on many factors including marketing and financial strength,
public image and the strength of established relationships in the industry.
There can be no assurance that the Company's participating providers can
successfully compete in their respective markets.
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, 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.
Dependence on Major Customer. Blue Cross and Blue Shield of Maryland (BC/BS)
accounted for 44.4% and 49.1% of the revenues of the Company's health care
services segment during the year ended 1996 and the nine months ended September
30, 1997, respectively. Such revenues represented 22.5% and 26.4% of the
Company's consolidated revenues during such 1996 and 1997 periods, respectively.
A termination of or failure to renew the agreements between BC/BS and the
Company could have a material adverse effect on the Company's results of
operations and financial condition.
Technology-Related Uncertainties
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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 require
pre-market approval by the FDA before they can be 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.
The Company has completed clinical studies in Phase 2a and 2b for PRK. Such data
were presented to the FDA and on September 17, 1997 the Company was granted
permission to expand into Phase 3 Myopic PRK studies. The Phase 3 PRK clinical
investigation is now under way. The Company is also conducting a Phase 2 trial
for PARK (Photo-Astigmatic Refractive Keratectomy). The FDA has informed the
Company that it may combine the results from all its studies in its PMA
application. That application is being prepared for submission in late 1997 or
early 1998. The Company also has an Investigational Device Exemption approved by
the FDA for the treatment of glaucoma by laser trabeculodissection. The Company
has recently completed a Phase 1 study in blind eyes and will be submitting the
results to the FDA to request expansion into a small population of sighted
glaucoma patients.
Uncertainty Concerning Patents. Should LaserSight Technologies' lasers be found
to infringe upon any valid and enforceable patents in international markets, or
by Pillar Point Partners (a partnership of which the general partners are
subsidiaries of Visx and Summit Technologies) in the U.S., then LaserSight
Technologies may be required to license such technology from them. In connection
with its settlement of litigation with Pillar Point Partners, the Company agreed
to notify Pillar Point Partners before the Company begins manufacturing or
selling its laser systems in the United States. 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. The
Company's revenues from international sales for 1996 and the nine months ended
September 30, 1997 were 47% and 42%, respectively, of the total revenues.
New Products. There can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of its new LaserScan LSX excimer laser and other new
products and enhancements, or that its new products and enhancements will be
accepted in the marketplace, including the disposable keratome product licensed
in September 1997. As is typical in the case of new and rapidly evolving
industries, demand and market acceptance for recently introduced technology and
products are subject to a high level of uncertainty. In addition, announcements
of currently planned or other new product offerings may cause customers to defer
purchasing existing Company products.
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
insurance coverage is limited to $6,000,000, including up to $5,000,000 of
coverage under an excess liability policy.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Pillar Point Partners
On March 25, 1997, the Company entered into an agreement with Pillar
Point Partners and each co-plaintiff to resolve this 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 paid a nominal fee in April 1997 and agreed to
notify Pillar Point Partners and the co-plaintiffs before LaserSight
begins manufacturing or selling in the United States in the future. The
action was dismissed without prejudice in the United States District
Court for the District of Delaware on March 26, 1997.
VISX
On May 27, 1997, the Company entered into a License Agreement with
VISX, Incorporated to settle this litigation as well as any and all
potential claims related to patent infringement prior to May 1, 1997.
The agreement calls for an aggregate of $230,400 to be paid in eight
quarterly installments of $28,800 each.
Euro Pacific Securities Services
To collect a $1,140,000 stock subscription receivable, the Company
initiated a lawsuit that is presently pending before the United States
District Court for the Middle District of Florida-Orlando Division in
June 1996 against Euro Pacific Securities Services GMBH & Co., KG and
Wolf Wiese (the "defendants"). In July 1997, after failing to timely
file a counterclaim, the defendants filed a separate lawsuit in the
same court against the Company and its LaserSight Technologies, Inc.
subsidiary, without obtaining leave from the court, claiming breach of
contract, coercion to enter a contract, misrepresentation, and other
charges and seeking an unspecified amount of monetary damages. The
Company believes that the charges are without merit and procedurally
flawed. The trial for the lawsuit originally filed in June 1996 is
presently on the docket for December 1997.
Northern New Jersey Eye Institute
In October 1997, the Company received a request for
mediation/arbitration from Northern New Jersey Eye Institute, P.A.
(NNJEI) which relates to the services agreement between LSIA (a wholly
owned subsidiary of the Company) and NNJEI. This services agreement was
entered into as part of the Company's July 1996 acquisition of the
assets of NNJEI. The request for mediation alleges breach of contract
and fraud which the Company denies and intends to vigorously defend.
The mediation began in mid-November and is continuing. Under the terms
of the services agreement, it will be followed by binding arbitration
if a resolution cannot be reached. Based on the Company's legal
assessment of the contracts between the parties, the Company does not
expect the outcome of mediation or, if necessary, arbitration to have a
material impact on the Company's consolidated financial position or
results of operations.
ITEM 2 CHANGES IN SECURITIES
a) As previously reported, the Company completed a private placement
of its Series B Preferred Stock on August 29, 1997. Although the
holders of the Series B Preferred Stock have voting rights only
under the limited circumstances required by Delaware corporate law
and are not entitled to receive any dividends unless dividends are
concurrently paid on the Common Stock, there is no limit on the
number of shares which the holders of the Series B Preferred Stock
would be entitled to receive upon the conversions thereof, subject
to the approval of the Company's shareholders of the issuance of
more than 1,995,532 shares of Common Stock in connection with such
conversions. In addition, in the event of a liquidation of the
Company, the holders of the Series B Preferred Stock would be
entitled to receive distributions in preference to the holders of
the Common Stock. See Note 6 of Notes to Condensed Consolidated
Financial Statements.
b) Not applicable.
c) During the third quarter ended September 30, 1997, the Company has
sold or issued the following unregistered securities:
(1) In July 1997, the Company issued 535,515 shares of Common
Stock to Frederic B. Kremer as partial consideration for
acquisition of PMA application. For further information, see Note
7 of Notes to Condensed Consolidated Financial Statements.
(2) In August 1997, the Company granted investors and the
placement agent warrants to purchase 790,000 shares of Common
Stock. The warrants are exerciseable at a price of $5.91 per share
at any time during the next five years.
The issuance and sale of all such shares was intended to be exempt
from registration and prospectus delivery requirements under the
Securities Act of 1933, as amended (the "Securities Act") by
virtue of Section 4(2) thereof due to, among other thing, (i) the
limited number of persons to whom the shares were issued, (ii) the
distribution of disclosure documents to all investors, (iii) the
fact that each such person represented and warranted to the
Company, among other things, that such person was acquiring the
shares for investment only and not with a view to the resale or
distribution thereof, and (iv) the fact that certificates
representing the shares were issued with a legend to the effect
that such shares had not been registered under the Securities Act
or any state securities laws and could not be sold or transferred
in the absence of such registration or an exemption therefrom.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT INDEX
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Exhibit 2 - Plans of Acquisition, Reorganization
2.1 See Exhibits 10.1, 10.6, 10.13, 10.17, 10.20, 10.21, 10.26, 10.35 and
10.36.
Exhibit 3 - Articles of Incorporation and Bylaws
3.1 Certificate of Incorporation, as amended (filed as Exhibit 1 to the
Company's Form 8-A/A filed on September 29, 1997*).
3.2 Bylaws, as amended (filed as Exhibit 3 to the Company's Form 10-K for
the year ended December 31, 1992*).
Exhibit 4 - Instruments Defining the Rights of Security Holders
4.1 See Exhibits 3.1 and 3.2.
Exhibit 10 - Material Contracts
10.1 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*).
10.2 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*).
10.3 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*).
10.4 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*).
10.5 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*).
10.6 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*).
10.7 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*).
10.8 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*).
10.9 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*).
10.10 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*).
10.11 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*).
10.12 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*).
10.13 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*).
10.14 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*).
10.15 LaserSight Incorporated 1996 Equity Incentive Plan (filed as Exhibit A
to the Company's definitive proxy statement dated April 30, 1996*).
10.16 LaserSight Incorporated Amended and Restated Non-Employee Directors
Stock Option Plan (filed as Exhibit B to the Company's definitive proxy
statement dated May 19, 1997*).
10.17 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*).
10.18 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*).
10.19 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*).
10.20 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*).
10.21 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*).
10.22 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*).
10.23 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 for
the year ended December 31, 1996*).
10.24 Agreement dated September 18, 1996 between David T. Pieroni and
LaserSight Incorporated (filed as Exhibit 10.35 to the Company's Form
10-K for the year ended December 31, 1996*).
10.25 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 for the year ended December 31,
1996*).
10.26 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 for the year ended December 31,
1996*).
10.27 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 for the year ended December
31, 1996*).
10.28 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*).
10.29 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*).
10.30 Employment Agreement dated September 16, 1996 by and between LaserSight
Incorporated and Richard L. Stensrud (filed as Exhibit 10.41 to the
Company's Form 10-Q filed on May 9, 1997*).
10.31 Loan and Security Agreement dated March 31, 1997 by and between
LaserSight Incorporated and certain of its subsidiaries and Foothill
Capital Corporation (filed as Exhibit 10.42 to the Company's Form 10-Q
filed on August 14, 1997*).
10.32 Consent and Amendment Number One to Loan and Security Agreement dated
July 28, 1997 by and between LaserSight Incorporated and Foothill
Capital Corporation (filed as Exhibit 10.43 to the Company's Form 10-Q
filed on August 14, 1997*).
10.33 Warrant to purchase 500,000 shares of Common Stock dated March 31, 1997
by and between LaserSight Incorporated and Foothill Capital Corporation
(filed as Exhibit 10.44 to the Company's Form 10-Q filed on August 14,
1997*).
10.34 License Agreement dated May 20, 1997 by and between VISX, Incorporated
and LaserSight Incorporated (filed as Exhibit 10.45 to the Company's
Form 10-Q filed on August 14, 1997*).
10.35 Patent Purchase Agreement dated July 15, 1997 by and between LaserSight
Incorporated and Frederic B. Kremer, M.D. (filed as Exhibit 2.(i) to
the Company's Form 8-K filed on August 13, 1997*).
10.36 Agreement and Plan of Merger dated July 15, 1997 by and among
LaserSight Incorporated, Photomed Acquisition, Inc., Photomed, Inc.,
Frederic B. Kremer, M.D., Linda Kremer, Robert Sataloff, Trustee for
Alan Stewart Kremer and Robert Sataloff, Trustee for Mark Adam Kremer
(filed as Exhibit 2.(ii) to the Company's Form 8-K filed on August 13,
1997*).
10.37 Securities Purchase Agreement dated August 29, 1997 by and between
LaserSight Incorporated and purchasers of Series B Convertible
Participating Preferred Stock of LaserSight Incorporated (filed as
Exhibit 10.37 to the Company's Form 10-Q filed on November 14, 1997*).
10.38 Registration Rights Agreement dated August 29, 1997 by and between
LaserSight Incorporated and purchasers of Series B Convertible
Participating Preferred Stock of LaserSight Incorporated (filed as
Exhibit 10.38 to the Company's Form 10-Q filed on November 14, 1997*).
10.39 Warrant to purchase 750,000 shares of Common Stock dated August 29,
1997 by and between LaserSight Incorporated and purchasers of Series B
Convertible Participating Preferred Stock of LaserSight Incorporated
(filed as Exhibit 10.39 to the Company's Form 10-Q filed on November
14, 1997*).
10.40 Consent and Amendment Number Two to Loan and Security Agreement dated
August 29, 1997 by and between LaserSight Incorporated and Foothill
Capital Corporation (filed as Exhibit 10.40 to the Company's Form 10-Q
filed on November 14, 1997*).
10.41 Consent and Amendment Number Three to Loan and Security Agreement dated
September 10, 1997 by and between LaserSight Incorporated and Foothill
Capital Corporation (filed as Exhibit 10.41 to the Company's Form 10-Q
filed on November 14, 1997*).
10.42 Independent Contractor Agreement by and between Byron Santos, M.D. and
LaserSight Technologies, Inc. (filed as Exhibit 10.42 to the Company's
Form 10-Q filed on November 14, 1997*).
Exhibit 11 Statement of Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule (filed as Exhibit 27 to the Company's Form
10-Q filed on November 14, 1997*).
b) Reports on Form 8-K
On July 1, 1997, the Company filed with the Commission a Current Report
on Form 8-K regarding conversion of the last of the Series A
Convertible Preferred Stock and a press release issued by the Company
dated July 1, 1997, regarding an update on the patent purchase
agreement with IBM.
On July 31, 1997, the Company filed with the Commission a Current
Report on Form 8-K regarding the press release issued by the Company
dated July 31, 1997, regarding an update on the patent purchase
agreement with IBM.
On August 13, 1997, the Company filed with the Commission a Current
Report on Form 8-K regarding the acquisition of the rights to a
Pre-Market Approval application with the Food and Drug Administration
for a laser dedicated to perform LASIK and a keratome patent.
On September 2, 1997, the Company filed with the Commission a Current
Report on Form 8-K regarding the press release issued by the Company
dated September 2, 1997, announcing completion of the patent
acquisitions from IBM.
On September 11, 1997, the Company filed with the Commission a Current
Report on Form 8-K regarding the press release issued by the Company
dated September 9, 1997, announcing that LaserSight acquired a license
and the rights to a disposable keratome.
On September 15, 1997, the Company filed with the Commission a Current
Report on Form 8-K regarding the purchase of the patent portfolio from
IBM on August 29, 1997.
On September 24, 1997, the Company filed with the Commission a Current
Report on Form 8-K regarding the press release issued by the Company
dated September 23, 1997, announcing that LaserSight received $4
million for an exclusive license covering the vascular and
cardiovascular rights included in the patents purchased from IBM.
- ----------------------
*Incorporated herein by reference. File No. 0-19671.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the undersigned have 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,
Chief Executive Officer
Dated: December 11, 1997 By: /s/ Gregory L. Wilson
------------------------ -----------------------
Gregory L. Wilson,
Chief Financial Officer
<TABLE>
EXHIBIT 11
LASERSIGHT INCORPORATED
COMPUTATION OF PER SHARE EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------------------------- -----------------------------
Restated
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares outstanding 9,812,000 7,639,000 9,342,000 7,238,000
Net effect of dilutive stock options and warrants -- -- -- --
---------------------------- -----------------------------
9,812,000 7,639,000 9,342,000 7,238,000
============================ =============================
Net loss $(2,408,878) $(2,053,686) $(5,499,410) $(3,310,390)
Conversion discount on preferred stock (41,573) -- (41,573) (1,010,557)
Dividends on preferred stock -- (77,674) (13,350) (345,694)
---------------------------- -----------------------------
Loss attributable to common stockholders $(2,450,451) $(2,131,360) $(5,554,333) $(4,666,641)
============================ =============================
Primary loss per share $(0.25) $(0.28) $(0.59) $(0.64)
============================ =============================
Additional Primary Calculation:
Loss attributable to common stockholders, above $(2,450,451) $(2,131,360) $(5,554,333) $(4,666,641)
============================ =============================
Additional adjustment to weighted average # of shares:
Weighted average # of shares as adjusted per above 9,812,000 7,639,000 9,342,000 7,238,000
Dilutive effect of contingently issuable shares and
stock options and warrants 151,000 603,000 161,000 574,000
---------------------------- -----------------------------
Weighted average # of shares, as adjusted 9,963,000 8,242,000 9,503,000 7,812,000
============================ =============================
Primary loss per share, as adjusted $(0.25) $(0.26)(A) $(0.58) $(0.60)(A)
============================ =============================
FULLY DILUTED
Weighted average shares outstanding 9,812,000 7,639,000 9,342,000 7,238,000
Net effect of dilutive stock options and warrants -- -- -- --
Effect of converted preferred stock and dividends from
beginning of period -- 378,000 48,000 610,000
---------------------------- -----------------------------
9,812,000 8,017,000 9,390,000 7,848,000
============================ =============================
Net loss $(2,408,878) $(2,053,686) $(5,499,410) $(3,310,390)
Conversion discount on preferred stock (41,573) -- (41,573) (1,010,557)
Dividends on preferred stock, net of dividends
on preferred stock converted during period -- (77,674) -- (345,694)
---------------------------- -----------------------------
Loss attributable to common stockholders $(2,450,451) $(2,131,360) $(5,540,983) $(4,666,641)
============================ =============================
Fully diluted loss per share $(0.25) $(0.27) $(0.59) $(0.59)
============================ =============================
Additional Fully Diluted Calculation:
Loss attributable to common stockholders, above $(2,450,451) $(2,131,360) $(5,540,983) $(4,666,641)
============================ =============================
Additional adjustment to weighted average # of
shares:
Weighted average # of shares as adjusted per above 9,812,000 8,017,000 9,390,000 7,848,000
Dilutive effect of contingently issuable shares, stock
options and warrants and convertible preferred stock 867,000 766,000 403,000 730,000
---------------------------- -----------------------------
Weighted average # of shares, as adjusted 10,679,000 8,783,000 9,793,000 8,578,000
============================ =============================
Fully diluted loss per share, as adjusted $(0.23) $(0.24)(A) $(0.57) $(0.54)(A)
============================ =============================
(A) - This calculation is submitted 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.
</TABLE>
