SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30, 1998.
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.)
3300 University Blvd., Winter Park, Florida 32792
-------------------------------------------------
(Address of principal executive offices) Zip Code)
(407)382-2700
-------------
(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
August __, 1997 is ____________.
1
<PAGE>
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 for the year
ended December 31, 1997.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997
Condensed Consolidated Statements of Operations for the Three
Month Periods and Six Month Periods Ended June 30, 1998 and
1997
Condensed Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
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
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1998 1997
--------------- --------------
CURRENT ASSETS ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $12,444,856 $3,858,400
Marketable equity securities -- 7,475,000
Accounts receivable - trade, net 6,149,872 2,649,202
Notes receivable - current portion, net 4,788,872 3,762,341
Inventories 5,965,282 4,348,235
Deferred tax assets 512,813 571,009
Income taxes recoverable 65,000 --
Other current assets 216,108 219,723
--------------- --------------
TOTAL CURRENT ASSETS 30,142,803 22,883,910
Restructured cash 194,000 200,000
Notes receivable, less current portion, net 2,197,076 2,380,193
Property and equipment, net 1,463,042 1,354,168
Patents, net 4,745,424 11,275,289
Pre-market approval application, net 2,291,134 2,571,682
Goodwill, net 6,815,177 7,077,491
Other assets, net 2,123,763 2,718,340
--------------- --------------
$49,972,419 $50,461,073
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,714,398 $2,142,979
Note payable, less discount -- 1,758,333
Accrued expenses 2,744,825 2,782,521
Accrued commissions 1,358,914 1,230,474
Income tax payable -- 1,255,491
Deferred royalty revenue 400,000 -
Other current liabilities 993,756 984,412
--------------- --------------
TOTAL CURRENT LIABILITIES 7,211,893 10,154,210
Refundable deposits 194,000 200,000
Accrued expenses, less current portion 526,316 518,730
Preferred royalty revenue, less current portion 633,334 -
Deferred income taxes 512,813 571,009
Long-term obligations 500,000 500,000
Commitments and contingencies
Redeemable convertible preferred stock:
Series B - par value $.001 per share; authorized 1,600 shares: 0 and 1,295
Issued and outstanding at June 30, 1998 and December 31, 1997, - 11,477,184
respectively.
Stockholders' equity:
Convertible Preferred Stock:
Series C - par value $.001 per share; authorized 2,000,000 shares;
2,000,000 issued and 2,000 -
outstanding at June 30, 1998.
Series D - par value $.001 per share; authorized 2,000,000 shares;
2,000,000 issued and 2,000 -
outstanding at June 30, 1998.
Additional paid-in capital -- preferred stock 15,815,555 -
Common stock - par value $.001 per share; authorized 40,000,000 shares;
12,785,372 and 10,149,872 shares issued at June 30,1998 and December 12,786 10,150
31, 1997, respectively
Additional paid-in capital - common stock 42,057,824 40,045,564
Stock subscription receivable (1,140,000) (1,140,000)
Accumulated deficit (15,779,218) (11,865,914)
Accumulated other comprehensive income - unrealized gain - 604,500
Less treasury stock, at cost; 160,200 and 165,200 common shares at June 30,
1998 and December 31, 1997, respectively (576,884) (614,360)
--------------- --------------
40,394,063 27,039,940
--------------- --------------
$49,272,419 $50,461,073
=============== ==============
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ------------------------------------
1998 1997 1998 1997
--------------- ---------------- ---------------- ----------------
REVENUES:
<S> <C> <C> <C> <C>
PRODUCTS $4,924,236 $2,130,698 $8,968,919 $5,684,543
SERVICES 167,661 3,277,874 366,197 6,242,171
--------------- ---------------- ---------------- ----------------
5,091,897 5,408,572 9,335,116 11,926,714
COST OF REVENUE:
PRODUCT COST 1,794,551 821,705 2,970,871 1,865,503
COST OF SERVICES 73,771 2,129,318 161,127 4,303,705
--------------- ---------------- ---------------- ----------------
GROSS PROFIT 3,223,575 2,457,549 6,203,118 5,757,506
RESEARCH, DEVELOPMENT AND REGULATORY
EXPENSES 743,788 550,427 1,561,344 912,631
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,185,434 3,851,210 7,932,483 7,424,706
--------------- ---------------- ----------------
----------------
LOSS FROM OPERATIONS (1,705,647) (1,944,088) (3,290,709) (2,579,831)
OTHER INCOME AND EXPENSES
Interest and dividend income 111,442 100,507 226,298 197,871
Interest expense (324,020) (368,529) (720,541) (428,172)
Realized gain on sale of investments (186,924) (230,400) 27,452 (280,400)
--------------- ---------------- ---------------- ----------------
NET LOSS BEFORE INCOME TAXES (2,105,149) (2,442,510) (3,757,500) (3,090,532)
INCOME TAX BENEFIT (PROVISION) 155,352 -- (155,804) --
--------------- ---------------- ---------------- ----------------
NET LOSS (1,949,797) ($2,442,510) ($3,913,304) (3,090,532)
CONVERSION DISCOUNT ON
PREFERRED STOCK -- --
PREFERRED STOCK ACCRETION
AND DIVIDEND REQUIREMENTS (3,487) (13,350)
--------------- ---------------- ---------------- ----------------
LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (2,445,997) (3,103,882)
=============== ================ ================ ================
LOSS PER COMMON SHARE
Basic: ($0.26) ($0.34)
=============== ================ ================ ================
Diluted: ($0.26) ($0.34)
=============== ================ ================ ================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic: 9,381,000 9,103,000
=============== ================ ================ ================
Diluted: 9,424,000 9,176,000
=============== ================ ================ ================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<CAPTION>
1998 1997
----------------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (3,913,304) $ (3,090,532)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,881,290 966,793
Realized gain on sale of investments (27,452) --
Decrease (increase) in accounts and notes receivable (4,198,124) 683,501
Increase in inventories (390,366) (448,155)
Increase (decrease) in accounts payable (494,155) 288,911
Increase (decrease) in accrued expenses (201,462) 418,779
Income taxes (949,991) 742,036
Deferred royalties 1,033,334 --
Other 71,521 (336,414)
----------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (7,188,709) (775,081)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net (289,442) (350,593)
Net proceeds from exclusive and non-exclusive license of
patents 6,170,000 --
Proceeds from sale of investments 6,527,452 --
Transfer to restricted cash account (4,200,000) --
Proceeds from restricted cash account 4,228,000 --
Purchase of managed care contract -- (150,000)
----------------- ------------------
NET CASH PROVIDED BY (USED) IN INVESTING ACTIVITIES
12,436,010 (500,593)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 31,600 49,088
Repurchase of preferred stock (10,512,000) --
Proceeds from issuance of notes payable, net -- 3,414,142
Repayments of notes payable (2,000,000) (1,000,000)
Repayments of capital lease obligation -- (99,888)
Proceeds from issuance of preferred stock, net 15,819,555 --
----------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,339,515 2,363,342
----------------- ------------------
INCREASE IN CASH AND CASH EQUIVALENTS 8,586,456 1,087,668
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,858,400 2,003,501
----------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,444,856 $ 3,091,169
================= ==================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
5
<PAGE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Month Periods Ended June 30, 1998 and 1997
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
of LaserSight Incorporated and subsidiaries (the Company) as of June
30, 1998, and for the six month periods June 30, 1998 and 1997 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 for
the year ended December 31, 1997. 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 six month period ended June 30, 1998
are not necessarily indicative of the operating results for the full
year.
NOTE 2 PER SHARE INFORMATION
Basic loss per common share is computed using the weighted average
number of common shares and contingently issuable shares (to the extent
that all necessary contingencies have been satisfied), if dilutive.
Diluted loss per common share is computed using the weighted average
number of common shares, contingently issuable shares, and common share
equivalents outstanding during each period. Common share equivalents
include options, warrants to purchase Common Stock, and convertible
Preferred Stock and are included in the computation using the treasury
stock method if they would have a dilutive effect.
NOTE 3 ADOPTION OF NEW ACCOUNTING STANDARD
The Company adopted the provisions of the Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" on
January 1, 1998. 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. For the six months ended
June 30, 1998 and 1997, net loss equals comprehensive loss.
6
<PAGE>
NOTE 4 INVENTORIES
Inventories, which consist primarily of laser systems, erbium and
related 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 June 30, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials - laser system related $3,715,488 3,058,782
Raw materials - erbium related 716,114 -
Work-in-process - laser system related 160,579 263,353
Work-in-process - erbium related 459,424 -
Finished goods - laser system related 675,045 862,775
Finished goods - erbium related 99,000 -
Test equipment-clinical trials 187,497 263,325
Training/show units - erbium related 273,395 -
---------------- ---------------------
6,286,542 4,448,235
Less reserve for obsolescence 321,260 100,000
================ =====================
$5,965,282 4,348,235
================ =====================
</TABLE>
NOTE 5 MARKETABLE EQUITY SECURITIES
The Company received net proceeds of $6,527,452 in exchange for 820,085
shares of Vision Twenty-One, Inc. (Vision 21) common stock. This
represents the total shares received in connection with the December
1997 sale of MEC Health Care, Inc. (MEC) and LSI Acquisition, Inc.
(LSIA) to Vision 21. The Company realized a gain on the transaction of
$27,452.
NOTE 6 SALE OF INTERNATIONAL PATENT RIGHTS
On February 10, 1998, the Company closed a transaction for the sale of
certain rights in certain patents to Nidek Co., Ltd. (Nidek) in
exchange for $6.3 million in cash (of which $200,000 was withheld for
the payment of Japanese taxes). The Company transferred all rights in
those patents which have been issued in countries outside of the U.S.
In addition, the Company has granted a non-exclusive license to use
those patents issued in the U.S., which resulted in $1.2 million of
deferred royalties that will be amortized to income over three years.
The transaction did not result in any current gain or loss, but will
reduce the Company's amortization expense over the remaining useful
life (approximately 8 years) of the remaining patents.
NOTE 7 COMMITMENTS AND CONTINGENCIES
In conjunction with acquisitions from Photomed, Inc., several
contingent payments included in the transaction are subject to U.S.
Food and Drug Administration (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 to the sellers. If the
FDA approves the use of any Company laser for the treatment of
hyperopia, the Company will be obligated to issue to the sellers
unregistered Common Stock valued at $1 million. If the Company's
7
<PAGE>
scanning laser had been approved by the FDA for commercial sale in the
U.S. on or before April 1, 1998, the Company would have been obligated
to pay $1 million to the sellers. Approval after such date will result
in a correspondingly smaller obligation until January 1, 1999, when no
payment will be required. No such approvals have been received as of
August ___, 1998.
NOTE 8 STOCKHOLDERS' EQUITY
TLC Private Placement
On June 5, 1998, the Company entered into a Securities Purchase
Agreement with The Laser Center Inc. ("TLC"), pursuant to which the
Company issued to TLC 2,000,000 shares of the newly-created Series C
Convertible Preferred Stock (the "Series C Preferred Stock") of the
Company with a face value of $4.00 per share, resulting in an aggregate
offering price of $8 million (the "TLC Private Placement"). The Series
C Preferred Stock is convertible on a fixed, one-for-one basis (subject
to anti-dilution adjustments upon the occurrence of a stock split,
stock dividend or similar event) into 2,000,000 shares of the Company's
common stock, par value $.001 per share, at the option of TLC at any
time until June 5, 2001, on which date all shares of Series C Preferred
Stock then outstanding will automatically be converted into shares of
Common Stock.
The net proceeds to the Company from the TLC Private Placement, after
deduction of estimated expenses, was approximately $7.9 million. The
Company used the net proceeds from the TLC Private Placement to
repurchase all issued and outstanding shares of its Series B
Convertible Participating Preferred Stock on June 5, 1998 for
approximately $6.3 million (see below).
Pequot Private Placement
On June 12, 1998, the Company entered into a Securities Purchase
Agreement with Pequot Private Equity Fund, L.P., Pequot Scout Fund,
L.P., and Pequot Offshore Private Equity Fund, Inc. (collectively, the
"Pequot Funds"), whereby the Company issued, collectively, to the
Pequot Funds 2,000,000 shares of the newly-created Series D Preferred
Stock of the Company with a face value of $4.00 per share, resulting in
an aggregate offering price of $8 million. The Series D Preferred Stock
is convertible on a one-for-one basis into an equal number of shares of
Common Stock, subject to certain anti-dilution adjustments described
below, at the option of the Pequot Funds at any time until June 12,
2001, on which date all shares of Series D Preferred Stock then
outstanding will automatically be converted into shares of Common
Stock. The net proceeds to the Company was approximately $7.9 million.
Series B Preferred Stock Redemption
On June 5, 1998, the Company repurchased the remaining 525 shares of
Series B Preferred Stock (representing an aggregate face amount of
$5,250,000) with funds from the TLC Private Placement (see above) at a
20% premium. In February 1998, Series B Preferred shareholders had
exercised an option to sell 351 shares of Series B Preferred Stock also
at a 20% premium using proceeds from the sale of international patent
rights (see Note 6).
8
<PAGE>
The amount of the repurchase price in excess of the carrying value of
the Series B Preferred Stock repurchased and a pro rata portion of
Series B Preferred Stock-related financing costs increased the loss
attributable to common shareholders for the six months ended June 30,
1998.
Other
Prior to the repurchase of the remaining shares of Series B Preferred
Stock, the Series B Preferred Stockholders had converted 419 shares of
Series B Preferred Stock into 2,392,220 shares of Common Stock.
NOTE 9 ACQUISITION
On April 15, 1998, the Company and Schwartz Electro-Optics, Inc. (SEO)
completed an agreement whereby the Company purchased substantially all
of the assets, and assumed certain liabilities, of SEO's medical
products division (the Division) in exchange for 305,820 shares of the
Company's Common Stock. The Company is contingently obligated to issue
up to 223,280 additional shares on April 15, 1999 if its five day
average Common Stock price is not then valued at $5.00 or greater. The
value of the acquisition was $1,250,000. The Division develops, tests,
manufacturers, assembles, and sells lasers and their related equipment,
accessories, parts, and software for medical and medical research
applications. The Division's primary focus is erbium lasers, which are
primarily used to perform dermatology procedures.
The acquisition will be accounted for using the purchase method.
Accordingly, SEO's results of operations will be included in the
Company's consolidated financial statements subsequent to the
acquisition date. The fair value of the purchase consideration was
determined at the date of acquisition and was recorded at that time. If
and when the additional shares are issued in April 1999, the entry will
be to record the par value of shares issued in Common Stock with the
offset to additional paid-in capital.
NOTE 10 NOTES PAYABLE
On June 5, 1998, the Company repaid its note payable to Foothill
Capital Cororation (FCC) of $2,000,000 and also terminated the line of
credit arrangement with FCC. A warrant issued by the Company to
purchase 500,000 shares of Common Stock remains unexercised and is
valued at $500,000 and is recorded on the Company's balance sheet as a
long-term obligation as of June 30, 1998.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Revenue. The following tables present the Company's revenue by major operating
segments: technology products and services and health care services for the
three and six month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
June 30, 1998 June 30, 1997
------------- -------------
Revenue % of Total Revenue % of Total
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Technology $4,924,236 97% $2,130,698 39%
Health care services 167,661 3% 3,277,874 61%
---------- --- ---------- ---
Total revenue $5,091,897 100% $5,408,572 100%
========== ==== ========== ====
For the Six Month For the Six Month
Period Ended Period Ended
June 30, 1998 June 30, 1997
------------- -------------
Revenue % of Total Revenue % of Total
------- ---------- ------- ----------
Technology $8,968,919 96% $5,684,543 48%
Health care services 366,197 4% 6,242,171 52%
----------- ---- ---------- ---------
Total revenue $9,335,116 100% $11,926,714 100%
========== ==== =========== =====
</TABLE>
Revenue in the second quarter of 1998 were $5,091,897, compared to $5,408,572
(for a decrease of $316,675) over the same period in 1997. Revenue for the
six-month period ended June 30, 1998, decreased by $2,591,598 to $9,335,116 from
the same period in 1997. The decrease in health care services revenue was
substantially attributable to the sale of the Company's MEC and LSIA
subsidiaries to Vision 21 in a transaction effective as of December 1, 1997.
These two subsidiaries contributed $2,857,684 and $5,590,103 in revenues during
the quarter and six-month period ended June 30, 1997, respectively. All of the
Company's health care services revenue for the first six months of 1998 was
provided by The Farris Group (TFG). Net revenue for TFG in the second quarter of
1998 were $167,661 compared to $420,190 (for a decrease of $252,529) over the
same period in 1997. This decrease was accompanied by a $224,449 reduction in
expenses over the same three-month period in 1997. Net revenue for TFG during
the six-month period ended June 30, 1998, was $366,197 compared to $652,068 (for
a decrease of $285,871) over the same period in 1997. This decrease was
accompanied by a $370,578 reduction in expenses over the same six-month period
in 1997.
The increase in technology related revenue was attributable to (i) a higher
level of laser system sales during six-month period ended June 30, 1998 (ii) a
marked increase in the average selling price of laser systems resulting from the
increased sales of the Company's higher-priced LSX model and reduced sales of
the lower-priced LS-300 model; (iii) an increase in revenues generated from the
10
<PAGE>
sale of service contracts; and (iv) revenues generated from royalty payments
received on intellectual property agreements. Fifteen laser systems were sold in
the first quarter of 1998 and 1997, respectively. Twenty-nine laser systems were
sold during the six-month period ended June 30, 1998, compared to twenty-three
systems sold over the same period in 1997. No system returns were recognized
during the first two quarters of 1998 or 1997.
Cost of Revenue; Gross Profits. The following tables present a comparative
analysis of cost of revenue, gross profit and gross profit margins for three and
six-month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
June 30, 1998 Percent Change June 30, 1997
------------- -------------- -------------
<S> <C> <C> <C>
Product cost $ 1,794,551 118% $ 821,705
Cost of services 73,771 (97%) 2,129,318
Gross profit 3,223,575 31% 2,457,549
Gross profit percentage 63% 45%
Products only 3,129,685 139% 1,308,993
64% 61%
For the Six Month For the Six Month
Period Ended Period Ended
June 30, 1998 Percent Change June 30, 1997
------------- -------------- -------------
Product cost $2,970,871 50% $1,865,503
Cost of services 161,127 (94%) 4,303,705
Gross profit 6,203,118 (14%) 5,757,506
Gross profit percenetage 66% 48%
Products only 5,998,048 57% 3,819,040
67% 67%
</TABLE>
Gross profit margins were 63% of net sales in the second quarter of 1998
compared to 45% for the same period in 1997. For the six-month periods ended
June 30, 1998 and 1997, gross profit margins were 66% and 48%, respectively. The
gross margin increase was primarily attributable to the sale of the Company's
MEC and LSIA subsidiaries to Vision 21 in a transaction effective as of December
1, 1997. Those two subsidiaries operated at a gross margin for the three and six
months ended June 30, 1997 at 29% and 27%, respectively.
11
<PAGE>
Research, Development and Regulatory Expense. The following tables present a
comparative analysis of research, development and regulatory expenses for the
three and six-month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
June 30, 1998 Percent Change June 30, 1997
------------- -------------- -------------
<S> <C> <C> <C>
Research, development
and regulatory $ 743,789 35% $ 550,427
As a percentage of technology
revenues 15% 26%
For the Six Month For the Six Month
Period Ended Period Ended
June 30, 1998 Percent Change June 30, 1997
------------- -------------- -------------
Research, development
and regulatory $ 1,561,344 71% $ 912,631
As a percentage of technology
revenues 17% 16%
</TABLE>
Research, development and regulatory expenses for the second quarter of 1998
were $743,789, an increase of $193,362, or 35% from such expenditures during the
same period in 1997. Research, development and regulatory expenses for the
six-month period ended June 30, 1998 increased by $648,713 from $912,631 for the
same period in 1997 or 71%. The increase in research, development and regulatory
expenses during the second quarter of 1998 can primarily be attributed to
ongoing research and development of new scanning refractive laser systems,
including continued development of the LSX and add-on features for the LaserScan
2000, and continued software development for the laser systems. Additionally,
the Company has incurred increased costs related to the FDA regulatory process,
both for its own scanning laser system and the LASIK laser system (for which the
Company purchased the rights to manufacture and commercialize if FDA approval is
received). Additional costs have been incurred in the clinical and manufacturing
validation of the Automated Disposable Keratome (Ao Do K). Since the initial
announcement of the development of the LSX, the Company has solicited and
received input from clinical users and prospective customers. This has resulted
in modifications to the system, necessitating additional development and testing
for clinical validation. As a result of a continuation of the efforts described,
the Company expects research, development and regulatory expenses during the
remainder of 1998 to remain at levels consistent with those incurred during the
first six months of 1998. Regulatory expenses may increase as a result of the
Company's continuation of current FDA clinical trials, protocols added during
1997 related to the potential use of the Company's laser systems for treatment
of glaucoma, the possible development of additional future protocols for
submission to the FDA and the LASIK PMA acquired in July 1997.
12
<PAGE>
Selling, General and Administrative Expenses. The following tables present a
comparative analysis of selling, general and administrative expenses for the
three and six-month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
For the Three Month For the Three Month
Period Ended Period Ended
June 30, 1998 Percent Change June 30, 1997
------------- -------------- -------------
<S> <C> <C> <C>
Selling, general and
Administrative $4,185,433 9% $3,851,210
Percentage of revenues 85% 71%
For the Six Month For the Six Month
Period Ended Period Ended
June 30, 1998 Percent Change June 30, 1997
------------- -------------- -------------
Selling, general and
Administrative $7,932,483 7% $7,424,706
Percentage of revenues 85% 62%
</TABLE>
Selling, general and administrative expenses increased by $334,223 for the
second quarter of 1998 compared to the same period in 1997. The primary reasons
for this increase include increased amortization costs resulting from acquired
patents, license agreements and other intangibles ($410,000) and royalty fees
($200,000). In addition, other increases were necessary to fund the strategic
initiatives of the Company and the development of its products and services.
Such strategic efforts include enhancements to customer service and the
engineering and software development departments. These increases in operating
costs were partially offset by the sale of the Company's MEC and LSIA
subsidiaries ($613,000) and a reduction in the selling, general, and
administrative expenses of TFG ($193,000) and corporate offices ($51,000).
Selling, general and administrative expenses increased by $507,777 for the six
months ended June 30, 1998 compared to the same period in 1997. The primary
reasons for this increase include increased amortization costs resulting from
acquired patents, license agreements and other intangibles ($865,000), royalty
fees ($340,000) and a higher level of commissions and warranties incurred on the
sale of its laser systems ($189,000). In addition, other increases were
necessary to fund the strategic initiatives of the Company and the development
of its products and services. Such strategic efforts include enhancements to
customer service and the engineering and software development departments. These
increases in operating costs were partially offset by the sale of the Company's
MEC and LSIA subsidiaries ($1,216,000) and a reduction in the selling, general,
and administrative expenses of TFG ($319,000) and corporate offices ($109,000).
Loss From Operations. There was an operating loss of $1,705,647 in the second
quarter of 1998 compared to an operating loss of $1,944,088 for the same period
in 1997. Operating loss for the six month period ended June 30, 1998 was
$3,290,709 compared to an operating loss of $2,579,831 for the same period in
1997. The decrease in operating results for the six-month period ended June 30,
1998, can be attributed to the sale of the Company's MEC and LSIA subsidiaries
13
<PAGE>
which generated income from operations of $282,870 and increases in operating
expenses. These reductions were partially offset by an increase in technology
generated revenues.
Other Income and Expense. Interest and dividend income was $111,442 in the
second quarter of 1998 compared to interest and dividend income of $100,507 for
the same period in 1997. Interest and dividend income for the six month period
ended June 30, 1998 was $226,298 compared to interest and dividend income of
$197,871 for the same period in 1997. Interest and dividend income was earned
from the investment of cash and cash equivalents and the collection of long-term
receivables related to laser system sales. Interest expense incurred was
$324,020 in the second quarter of 1998 compared to interest expense of $368,529
for the same period in 1997. Interest expense for the six-month period ended
June 30, 1998 was $720,541 compared to interest expense of $428,172 for the same
period in 1997. Interest expense incurred by the Company during the first two
quarters of 1998 and 1997 related primarily to the credit facility established
with Foothill Capital Corporation on April 1, 1997. In addition to interest paid
on the outstanding note payable balance, interest expense includes the
amortization of deferred financing costs, the accretion of the discount on the
note payable, and fees associated with amendments to the original loan
agreement. {Realized gain on sale of investments.}
Income Taxes. For the three months ended June 30, 1998, the Company recorded an
income tax benefit of $155,352 compared to no income tax benefit or expense over
the same period in 1997. For the six months ended June 30, 1998, the Company
recorded income tax expense of $155,804 compared to no income tax benefit or
expense over the same period in 1997. During the first quarter of 1998, the
Company recorded income tax expense of $311,156, which resulted primarily from
the receipt of $1,200,000 in royalties for the non-exclusive license of certain
patents. The lack of income tax benefit for the first two quarters of 1998 has
been based on the lack of availability of loss carrybacks.
Net Loss. Net loss for the second quarter of 1998 was $1,949,797 compared to a
net loss of $2,442,510 for the same period in 1997. Net loss for the six-month
period ended June 30, 1998, was $3,913,304 compared to a net loss of $3,090,532
for the same period in 1997. The decrease in net loss for the second quarter
ended 1998 can be attributed to an increase in revenues generated at the
technologies division, partially offset by the sale of the Company's MEC and
LSIA subsidiaries. The increase in net loss for the six month period ended June
30, 1998, can be attributed the sale of the Company's MEC and LSIA subsidiaries,
increases in research, development, regulatory and general and administrative
expenses, and income tax expense. These reductions were partially offset by an
increase in revenues generated at the technologies division.
Loss Attributable to Common Shareholders. [Need share numbers.] For the six
months ended June 30, 1998, the Company's loss attributable to common
shareholders was impacted by the premium paid on the redemption of 351 shares of
Series B Preferred Stock ($702,000) and the accretion of the financing costs
related to such 351 shares ($396,121) resulting from the agreement providing the
holders of Series B Preferred Stock the right to redeem such shares. The Company
is negotiating terms of a potential financing that, if completed, would be used
in part to redeem the remaining Series B Preferred Stock at a 20% premium and
would result in an impact of $1,050,000 on the loss applicable to common
shareholders in the second quarter of 1998.
Loss Per Share. [Need share numbers.] Loss per basic and diluted share increased
to ($0.30) for the second quarter of 1998 compared to ($0.07) for the same
period in 1997. Loss per basic and diluted share increased to ($0.30) for the
six-month period ended June 30, 1998, compared to ($0.07) for the same period in
1997. The increase is attributable to the increase in the net loss for the
quarter ended June 30, 1998, accretion and dividend requirements on the
redemption of the Company's Series B Preferred Stock, and the value of
14
<PAGE>
conversion discount on the Series B Preferred Stock offset by the increases in
weighted average shares outstanding. The weighted average shares outstanding
increased primarily due to the conversion of Series B Preferred Stock.
Liquidity and Capital Resources.
- --------------------------------
Working capital increased $10,201,210 from $12,729,700 at December 31, 1997 to
$22,930,910 as of June 30, 1998. This increase in working capital resulted
primarily from the private placements of Series C and D Preferred Stock.
Operating activities used net cash of $7,188,709 during the first six months of
1998, compared to $775,081 of net cash used during the same period in 1997. This
increase is primarily attributable to a six month 1998 net loss of $3,913,304
compared to a net loss of $3,090,532 over the same period in 1997, an increase
in accounts receivable and notes receivable (primarily the result of slower
collections of outstanding receivable and increased payments due at installation
versus upon shipment on first and second quarter sales), significant decreases
in accounts payable, accrued liabilities, and income taxes payable, partially
offset by an increase in deferred royalty revenue and amortization and
depreciation costs. Net cash provided by investing activities during the first
six months of 1998 was $12,436,010 compared to $500,593 in net cash used in
investing activities over the same period in 1997. Net cash provided by
investing activities during the first six months of 1998 can be primarily
attributed to proceeds generated from the exclusive licensing of patents and
from the sale of investments, partially offset by the purchase of furniture,
equipment and leasehold improvements. Net cash provided from financing
activities was $3,339,155 during the first six months of 1998 compared to
$2,363,342 over the same period in 1997. Net cash provided from financing
activities during the first six months of 1997 can be primarily attributed to
net proceeds resulting from preferred stock financings, offset by the repurchase
of Series B Preferred Stock and the repayment of a note payable to Foothill. Net
cash provided by financing activities during the first six months of 1997
consisted of net proceeds from the credit facility with Foothill 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.
The Company believes that its balances of cash and cash equivalents along with
operating cash flows, 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 could have a material adverse effect on the
Company's liquidity. 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 expects to increase the level of manufacturing and distribution of
its laser systems and to continue a variety of research and development
activities on its excimer and solid-state laser systems over the next twelve
months and it is anticipated that such research and development as well as
regulatory efforts in the U.S. will be the most significant technology related
expenses in the foreseeable future.
The Company is receptive to joint venture discussions with compatible companies
for the development and operation in international markets of surgical centers
that will utilize the Company's products. The Company has no present commitments
for joint venture relationships, and no assurance can be given that any such
relationships will be secured on terms satisfactory to the Company.
Risk Factors and Uncertainties
The business, results or operations and financial condition of the Company and
the market price of the Common Stock may be adversely affected by a variety of
factors, including the ones listed under the caption "Risk Factors and
Uncertainties" in the Company's 1997 Annual Report on Form 10-K and the
additional or updated factors listed below:
15
<PAGE>
Shares Eligible For Future Sale. Except as provided below, substantially all of
the Company's outstanding Common Stock (12,815,510 shares as of July 16, 1998)
{update?} is freely tradeable without restriction or further registration under
the Securities Act, unless such shares are held by "affiliates" of the Company
as that term is defined in Rule 144 under the Securities Act. The shares of
Common Stock listed below are "restricted securities." Restricted securities may
be sold in the public market only if they have been registered under the
Securities Act or if their sales qualify for Rule 144 or another available
exemption from the registration requirements of the Securities Act.
o Any of the Shares offered for sale by this Prospectus are freely tradeable
if sold pursuant to this Prospectus.
o A warrant to purchase 40,673 shares of Common Stock (with an exercise
price of $5.81) has been issued to Shoreline Pacific Institutional Finance
in connection with the placement of the Company's Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") and shares
issuable under such warrant (the "Shoreline Shares") will be freely
saleable following such exercise, subject only to the satisfaction of a
prospectus delivery requirement.
o A warrant to purchase 762,616 shares of Common Stock (with an exercise
price of $2.71 per share) has been issued to the former holders of the
Series B Preferred Stock and shares issuable under such warrant (the
"Series B Shares") will be freely saleable following such exercise,
subject only to the satisfaction of a prospective delivery requirement.
o The 535,515 shares in an unregistered acquisition transaction in July 1997
(the "Photomed Shares") have become freely tradeable, subject only to a
prospectus delivery requirement.
o The 581,825 shares of Common Stock (the "Foothill Shares") issuable upon
the exercise of the warrants issued to Foothill Capital Corporation
("Foothill") are the subject of certain demand and piggy-back registration
rights.
o The 581,825 shares of Common Stock (the "Foothill Shares") issuable upon
the exercise of the warrants issued to Foothill Capital Corporation
("Foothill") are the subject of certain demand and piggy-back
registration.
o The 102,798 unregistered shares of Common Stock (the "NNJEI Additional
Shares") issued in connection with the acquisition of the assets of NNJEI
by LSIA in July 1996 are the subject of certain demand and piggy-back
registration rights.
o Other shares of Common Stock (the "Other Shares") which the Company may be
required to issue in the future may become eligible for resale pursuant to
Rule 144, the exercise of registration rights, or otherwise. See "Possible
Dilutive Issuance of common Stock--Lasersight Centers and Florida Laser
Partners; --TFG; --Foothill Warrant; --Series D Preferred Stock; --Series
B Warrant' -Shoreline Warrant."
o Other shares of Common Stock (the "Other Shares") which the Company may be
required to issue in the future may become eligible for resale pursuant to
Rule 144, the exercise of registration rights, or otherwise. See "Possible
Dilutive Issuance of Common Stock--LaserSight Centers and Florida Lasers
Partners; -- TFG; --Foothill Warrant; --Series D Preferred Stock; --Series
B Warrant' -Shoreline Warrant."
Sales, or the possibility of sales, of the Series B Shares, the Shoreline
Shares, Photomed Shares, Foothill Shares, NNJEI Additional Shares, or Other
Shares, whether pursuant to a prospectus, Rule 144 or otherwise, could depress
the market price of the Common Stock.
Past and Expected Future Losses and Operating Cash Flow Deficits; No Assurance
of Future Profits or Positive Operating Cash Flows. The Company incurred losses
of $3.9 million for the six months ended June 30, 1998 and $7.3 million and $4.1
million during 1997 and 1996, respectively. During such periods, the Company had
a deficit in cash flow from operations of $7.2 million, $4.4 million, and $4.2
16
<PAGE>
million, respectively. Although the Company achieved profitability during 1995
and 1994, it had a deficit in cash flow from operations of $1.9 million during
1995. In addition, the Company incurred losses in 1991 through 1993. As of June
30, 1998, the Company had an accumulated deficit of $15.8 million. As a result
of the Company's sale of MEC and LSIA in December 1997, the Company's losses and
deficits in cash flow from operations in future periods may be greater than if
the Company had not sold MEC and LSIA. There can be no assurance that the
Company can regain or sustain profitability or positive operating cash flow.
Uncollectible Receivables Could Exceed Reserves. At June 30, 1998, the
Company's trade accounts and notes receivable aggregated approximately
$13,135,820 net of allowances for collection losses and returns of approximately
$2,162,000. Accrued commissions, the payment of which generally depends on the
collection of such net trade accounts and notes receivable, aggregated
approximately $1,735,230 at June 30, 1998. Exposure to collection losses on
receivables is principally dependent on the Company's customer's ongoing
financial condition and their ability to generate revenues from the Company's
laser systems. In addition, approximately 98% and 90% of net receivables at June
30, 1998 and December 31, 1997, respectively, related to international accounts.
The Company's ability to evaluate the financial condition and revenue generating
ability of its prospective customers located outside of the United States
("U.S.") is generally more limited than for customers located in the U.S.
Although the Company monitors the status of its receivables and maintains a
reserve for estimated losses, there can be no assurance that the Company's
reserves for estimated losses ($1,962,000 at June 30, 1998) 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.
Restructuring of Receivables. At June 30, 1998, the Company had
restructured laser customer accounts in the aggregate amount of approximately
$860,450 (5.6% of the gross receivables as of such date), resulting in the
extension of the original payment terms by periods ranging from 12 to 60 months.
The Company's liquidity and operating cash flow will be adversely affected if
additional extensions become necessary in the future. In addition, it may be
more difficult to collect laser system receivables if the payment schedule
extends beyond the expected economic life of the laser system.
Potential Liquidity Problems. During the three months ended June 30, 1998,
the Company experienced a $7.2 million deficit in cash flow from operations
largely resulting from the loss incurred during the period, an increase in
accounts receivable and a decrease in liabilities. Of this amount, the Company
expects that any improvements in cash flow from operations will depend on, among
other things, the Company's ability to market, produce and sell its new LSX
laser systems and its A*D*K product on a commercial basis. Beginning in the
third quarter of 1998, the LSX laser system is expected to make a more
significant contribution to the Company's operating results. Based on the status
of clinical validation and refinement of the manufacturing processes, the
Company does not expect significant commercial shipments of the A*D*K until
September 1998. Subject to these factors, the Company believes that its balances
of cash and cash equivalents, will be sufficient to fund its anticipated working
capital requirements for a 12-month period based on anticipated collection of
receivables. However, if the Company does not collect a material portion of
current receivables in a timely manner, experiences significant further delays
in the shipment of its A*D*K product, experiences less market demand for such
products than it anticipates, the Company's liquidity could be materially
adversely affected. The Company's cash and cash equivalents balance at June 30,
1998 exceeded $12 million.
Uncertainty Regarding Availability or Terms of Capital to Satisfy Possible
Additional Needs. The Company may need additional capital, including to fund the
following:
17
<PAGE>
o Any future negative cash flow from operations.
o Certain cash payment obligations under the Company's LASIK PMA (Pre-Market
Approval) application acquisition agreement of July 1997 with Photomed,
Inc. Such cash payment obligations include (i) $1.75 million payable if
the U.S. Food and Drug Administration ("FDA") approves the LASIK PMA
application for commercial sale before July 29, 1998 and (ii) if the FDA
approves the Company's scanning laser for commercial sale in the U.S.
before January 1, 1999, $3,633 for each day (or approximately $110,000 for
each month) between the date of such approval and January 1, 1999, subject
to a maximum payment of $607,000 (calculated as of July 17, 1998).
Additional working capital may be necessary to develop a production line
for the LASIK laser system and to obtain the GMP (Good Manufacturing
Practice) clearance from the FDA that is required for the commercial sale
of the LASIK laser system.
o Additional working capital necessary to support the commercial
introduction of its laser systems into the U.S. market after receiving FDA
approval. (The Company believes the earliest these expenses might occur is
the second half of 1998.)
o Additional working capital necessary to more fully develop the mobile
refractive laser business plan and other possible business lines and
products.
In addition, the Company may seek alternative sources of capital to fund its
product development activities and to consummate future strategic acquisitions.
The Company has no commitments from third parties to supply additional capital,
and there can be no assurance as to whether or on what terms the Company could
obtain additional capital.
To the extent that the Company satisfies its future financing requirements
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. Such
dilution may be more significant if the Company sells Common Stock at a price
below current market prices or sells additional preferred stock with a
conversion price linked to the market price of the Common Stock at the time of
conversion. 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. If the Company needs but cannot
obtain additional capital on satisfactory terms, it may be required to sell
additional assets.
Possible Dilutive Issuance of Common Stock--LaserSight Centers and Florida
Laser Partners. Based on previously-reported agreements entered into in 1993 in
connection with the Company's acquisition of LaserSight Centers (the Company's
development-stage subsidiary) and modified in July 1995 and March 1997, the
Company is obligated as follows:
o To issue to the former stockholders and option holders (including two
trusts related to the Chairman of the Board of the Company and certain
former officers and directors of the Company) of LaserSight Centers, up to
600,000 unregistered shares of Common Stock (the "Centers Contingent
Shares") based on the Company's pre-tax operating income through March
2002 from utilizing a fixed or mobile excimer laser to perform PRK,
arranging for the delivery of PRK or receiving license or royalty fees
associated with patents held by LaserSight Centers. The Centers Contingent
Shares are issuable at the rate of one share per $4.00 of such operating
income.
18
<PAGE>
o To pay to a partnership whose partners include the Chairman of the Board
of the Company and certain former officers and directors of the Company a
royalty of up to $43 (payable in cash or shares of Common Stock (the
"Royalty Shares")), for each eye on which PRK is performed on a fixed or
mobile excimer laser system owned or operated by LaserSight Centers or its
affiliates. Royalties do not begin to accrue until the earlier of March
2002 or the delivery of all of the 600,000 Centers Contingent Shares.
As of July 17, 1998, the Company had not accrued any obligation to issue Centers
Contingent Shares or Royalty Shares. There can be no assurance that any issuance
of Centers Contingent Shares or Royalty Shares will be accompanied by an
increase in the Company's per share operating results. The Company is not
obligated to pursue strategies that may result in the issuance of Centers
Contingent Shares or Royalty Shares. It may be in the interest of the Chairman
of the Board for the Company to pursue business strategies that maximize the
issuance of Centers Contingent Shares and Royalty Shares.
Possible Dilutive Issuance of Common Stock--TFG. To the extent that the
Company's The Farris Group subsidiary achieves certain pre-tax income levels
during 1998, the earnout provisions of the Company's agreement for the
acquisition of The Farris Group in 1994 would require the Company to issue to
the former owner of such company (Mr. Michael R. Farris, the President and Chief
Executive Officer of the Company) up to approximately 343,000 shares of Common
Stock (the "Farris Contingent Shares"). There can be no assurance that any
issuance of the Farris Contingent Shares will be accompanied by an increase in
the Company's per share operating results.
Possible Dilutive Issuance of Common Stock--Photomed. If the FDA approves
a LaserSight-manufactured laser system for general commercial use in the
treatment of hyperopia (farsightedness) after having approved for commercial
sale the LASIK PMA application to which the Company acquired rights in August
1997, the Company would be required to issue additional shares of Common Stock
with a market value of $1.0 million (based on the average closing price of the
Common Stock during the preceding 10-day period) to the former Photomed
stockholders. If such market value had been computed as of July 17, 1998, the
number of additional shares issuable would have been approximately 182,000.
Depending on whether and when such FDA approval is received and on the market
price of the Common Stock at the time of any such approval, the actual number of
additional shares of Common Stock issuable could be more (but not more than
permitted under the listing rules of The NASDAQ Stock Market) or less than this
number.
Possible Dilutive Issuance of Common Stock--SEO Medical. In connection
with the acquisition of certain assets of SEO Medical in April 1998, the Company
agreed to issue up to 223,280 additional shares of Common Stock if the five day
average price of Common Stock on April 15, 1999 is less than $5.00 per share.
All 223,280 shares of Common Stock will be issuable unless such price is more
than $2.36 per share.
Possible Dilutive Issuance of Common Stock--Foothill Warrant. In April
1996, the Company issued to Foothill a warrant to purchase 500,000 shares of
Common Stock (the "Foothill Warrant") at a price of $6.067 per share. The
Company is required to make anti-dilution adjustments to both the number of
warrant shares and the warrant exercise price in the event the Company sells
Common Stock or Common Stock-equivalents (such as convertible securities or
warrants) at a price per share that is (or could be) less that the fair market
value of the Common Stock at the time of such sale. In connection with its sale
of Series B Preferred Stock in August 1997 and subsequent conversion of such
preferred shares into Common Stock, the sale of the Series C Preferred Stock and
the Series D Preferred Stock such anti-dilution adjustments have resulted in (i)
an increase in the number of Foothill Warrant shares to approximately 581,825,
and (ii) a reduction to the exercise price of the Foothill Warrant shares to
19
<PAGE>
approximately $5.21 per share. Additional anti-dilution adjustments to the
Foothill warrant could also result from any future below-market sales of Common
Stock by the Company.
Possible Dilutive Issuance of Common Stock--Series B Warrant. In
connection with its sale of the Series B Preferred Stock in August 1997, the
Company issued to the former holders of the Series B Preferred Stock warrants to
purchase 750,000 shares of Common Stock (the "Series B Warrant") at a price of
$5.91 per share at any time before August 29, 2002. In connection with a March
1998 agreement whereby the Company obtained the option to repurchase the Series
B Preferred Stock and a lock-up on conversions, the exercise price of the Series
B Warrant shares was reduced to $2.753 per share. The Company is required to
make anti-dilution adjustments to both the number of warrant shares and the
warrant exercise price in the event the Company sells Common Stock or Common
Stock-equivalents (such as convertible securities or warrants) at a price per
share that is (or could be) less that the fair market value of the Common Stock
at the time of such sale. As a result of the Company's sale of the Series C
Preferred Stock and the Series D Preferred Stock such anti-dilution adjustments
and other agreements among the former holders of the Series B Preferred Stock
and the Company have resulted in (i) an increase in the number of Series B
Warrant shares to approximately 762,616, and (ii) a reduction to the exercise
price of Series B Warrant shares to approximately $2.71 per share. Additional
anti-dilution adjustments to the Series B Warrants could also result from any
future below-market sales of Common Stock by the Company.
Possible Dilutive Issuance of Common Stock--Shoreline Warrant. In
connection with its sale of the Series B Preferred Stock in August 1997, the
Company issued to its placement agent warrants to purchase 40,000 shares of
Common Stock (the "Shoreline Warrant") at a price of $5.91 per share at any time
before August 29, 2002. The Company is required to make anti-dilution
adjustments to both the number of warrant shares and the warrant exercise price
in the event the Company sells Common Stock or Common Stock-equivalents (such as
convertible securities or warrants) at a price per share that is (or could be)
less that the fair market value of the Common Stock at the time of such sale. In
connection with the Company's sale of the Series C Preferred Stock and the
Series D Preferred Stock such anti-dilution adjustments have resulted in (i) an
increase in the number of Shoreline Warrant shares to approximately 40,673, and
(ii) a reduction to the exercise price of Shoreline Warrant shares to
approximately $5.81 per share. Additional anti-dilution adjustments to the
Shoreline Warrants could also result from any future below-market sales of
Common Stock by the Company.
Possible Dilutive Issuance of Common Stock--Series D Preferred Stock. In
accordance with the terms of the Company's Certificate of Designation,
Preferences and Rights of Series D Preferred Stock, the holders of the Series D
Preferred Stock are entitled to certain anti-dilution adjustments if the Company
issues its Common Stock or Common Stock equivalents at a price per share (or
having a conversion or exercise price per share) less than $4.00 per share. See
"Description of Securities--Series D Preferred Stock."
Acquisition- and Financing-Related Contingent Commitments to Issue
Additional Common Shares. The Company may from time to time include in future
acquisitions and financings provisions which would require the Company to issue
additional shares of its Common Stock at a future date based on the market price
of the Common Stock at such date. Persons who are the beneficiaries of such
provisions effectively receive some protection from declines in the market price
of the Common Stock, but other stockholders of the Company will incur additional
dilution of their ownership interest in the event of a decline in the price of
the Common Stock. Such dilution may be increased by provisions in the Foothill
Warrant, the Series B Warrant and the Shoreline Warrant that may increase the
number of shares issuable under each of such warrants and decrease the exercise
price of such warrants. The factors to be considered by the Company in including
such provisions may include the Company's cash resources, the trading history of
20
<PAGE>
Common Stock, the negotiating position of the selling party or the investors, as
applicable, and the extent to which the Company estimates that the expected
benefit from the acquisition or financing exceeds the expected dilutive effect
of the price-protection provision.
Dependence on Key Personnel. The Company is dependent on its executive
officers and other key employees, especially Michael R. Farris, its President
and Chief Executive Officer, and J. Richard Crowley, the President and Chief
Operating Officer of its LaserSight Technologies subsidiary. A loss of one or
more such officers or key employees, especially of Mr. Farris or Mr. Crowley,
could have a material adverse effect on the Company's business. The Company does
not carry "key man" insurance on Mr. Farris, Mr. Crowley or any other officers
or key employees.
As the Company continues the clinical development of its excimer lasers
and other products and prepares for regulatory approvals and other
commercialization activities, it will need to continue to implement and expand
its operational, financial and management resources and controls. The failure of
the Company to attract and retain experienced individuals for necessary
positions, as well as any inability of the Company to effectively manage growth
in its domestic and international operations could have a material adverse
effect on the Company's business, financial condition and results of operations.
Risks Associated with Past and Possible Future Acquisitions. The Company
has made several significant acquisitions since 1994, including TFG in 1994,
Photomed in 1997, the IBM Patents in August 1997 and its acquisition of SEO
Medical in April 1998. These 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
unanticipated liabilities and contingencies, diversion of management attention
and possible adverse effects on operating results resulting from increased
goodwill amortization, increased interest costs, the issuance of additional
securities and difficulties related to the integration of the acquired
businesses. 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 June 30, 1998, approximately $15.7 million (32%) were intangible
assets, of which approximately $6.8 million reflects goodwill (which is being
amortized using an estimated life ranging from 12 to 20 years), approximately
$4.7 million reflects the cost of patents (which is being amortized over a
period ranging from approximately 8 to 17 years), and approximately $4.2 million
reflects the cost of licenses and technology acquired (which is being amortized
over a period ranging from 31 months to 12 years). The 12-year life of acquired
technology was determined based on the Company's best judgment at the time of
the most likely life-span of a solid-state laser product and related patent. The
major factors involved in the Company's ongoing assessment are its judgment
whether there will be a market for solid-state as an improvement to existing
excimer laser technology and that there is an industry and marketplace interest
in such development that can be successfully pursued by the Company or others
that will result in revenue from the associated patent. 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 (or
increases the Company's net loss) in that period. A reduction in net income
21
<PAGE>
resulting from the amortization of goodwill and other intangibles may have an
adverse impact upon the market price of the 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.
The Company continues to assess the current results and future prospects
of its TFG subsidiary in view of the substantial reduction in its operating
results in 1996 and 1997. If TFG is unsuccessful in meeting its 1998 budget or
otherwise improving its financial performance, some or all of the carrying
amount of goodwill recorded ($3,852,000 at June 30, 1998) may be subject to an
impairment adjustment.
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
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.
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 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 PMA by the FDA before the Company can ship its
laser systems for use in the U.S. 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.
If and when the Company's laser systems receive PMA approval by the FDA,
the Company will be required to obtain GMP clearance with respect to its
manufacturing facilities. These regulations impose certain procedural and
documentation requirements upon the Company with respect to its manufacturing
and quality assurance activities. The Company's facilities will be subject to
inspections by the FDA, and if any noncompliance with GMP guidelines is noted
during facility inspections, the marketing of the Company's laser products may
be adversely affected. In addition, if any of the Company's suppliers of
significant components or sub-assemblies cannot meet the quality requirements of
the Company, the Company could be delayed in producing commercial systems for
the U.S. market.
Additionally, product and procedure labeling and all forms of promotional
activities are subject to examination by the FDA, and current FDA enforcement
22
<PAGE>
policy prohibits the marketing of approved medical devices for unapproved uses.
Noncompliance with these requirements may result in warning letters, fines,
injunctions, recall or seizure of products, suspension of manufacturing, denial
or withdrawal of PMAs, and criminal prosecution.
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. In particular, all member countries of
the European Economic Union ("EU") require CE Mark certification of compliance
with the EU medical directives as the standard for regulatory approval for sale
of laser systems in EU member countries. While the Company's LaserScan 2000
laser system has received CE Mark certification, the Company's LSX laser system
is currently undergoing the CE Mark certification process. Until the Company
receives its CE Mark certification with the respect to its LSX laser system, the
Company is prohibited from placing the LSX laser system for use in EU member
countries. A lengthy delay in CE Mark certification could have a material
adverse effect on the business, financial condition, and results of operations
of the Company. The Company expects to receive CE Mark certification for its LSX
laser system during 1998.
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 U.S., 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.
Uncertainty Concerning Patents--International. Should LaserSight
Technologies' lasers infringe upon any valid and enforceable patents in
international markets, then LaserSight Technologies may be required to obtain
licenses for such patents. Should such licenses not be obtained, LaserSight
Technologies might be prohibited from manufacturing or marketing its excimer
lasers in those countries where patents are in effect. The Company's
international sales accounted for 93% and 43%, of the Company's total revenues
during the six months ended June 30, 1998 and 1997, respectively. In the future,
the Company expects its percentage of international sales to be more comparable
to the sales percentages which were reported for the six months ended June 30,
1998.
Uncertainty Concerning Patents--U.S. Two of the Company's competitors,
Summit Technology, Inc. ("Summit") and VISX, Inc. ("VISX") formed a United
States partnership, Pillar Point Partners ("Pillar Point"), in 1992 to pool
certain of their respective patents related to corneal sculpting technologies.
On June 9, 1998, Summit and VISX announced that they had reached agreement on
the dissolution of Pillar Point to be effected as soon as possible. As a part of
this dissolution, Summit and VISX granted each other a worldwide, royalty free
cross-license whereby each party will have full rights to license all existing
patents owned by either company relating to laser vision correction for use with
their systems.
Should LaserSight Technologies' lasers infringe upon any valid and
enforceable patents held by VISX or Summit in the U.S., then LaserSight
Technologies may be required to obtain a license for such patents and pay
royalties and per procedure fees to VISX or Summit for all revenues generated in
the U.S. If such licenses are required but not obtained, LaserSight Technologies
might be prohibited from manufacturing or marketing its excimer lasers in the
U.S. In connection with its March 1996 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 U.S. As of this
date, the Company has not obtained a U.S. license from either of Summit or VISX,
and the actual per procedure fee and other terms of any license, if such license
is granted, have yet to be determined.
23
<PAGE>
In addition, there may be other U.S. and foreign patents for which the
Company will need to negotiate licenses in order to sell, lease or use the
excimer lasers in certain markets. There can be no assurance that the Company or
its customers will be successful in securing licenses, including any necessary
licenses from Summit or VISX, or that if the Company does obtain licenses, such
licenses will be on terms acceptable to the Company. The failure to either
obtain required licenses or to obtain licenses on terms favorable to the Company
could have a material adverse effect on the business of the Company.
Competition. The vision correction industry is subject to intense, increasing
competition. The Company competes against both alternative and traditional
medical technologies (such as eyeglasses, contact lenses and RK) and other laser
manufacturers. Many of the Company's competitors have existing products and
distribution systems in the marketplace and are substantially larger, better
financed, and better known. A number of lasers manufactured by other companies
have either received, or are much further advanced in the process of receiving,
FDA approval for specific procedures, and, accordingly, may have or develop a
higher level of acceptance in some markets than the Company's lasers. The entry
of new competitors into the markets for the Company's products could cause
downward pressure on the prices of such products and a material adverse effect
on Company's business, financial condition and results of operations.
Technological Change. Technological developments in the medical and laser
industries are expected to continue at a rapid pace. Newer technologies and
surgical techniques could be developed which may offer better performance than
the Company's laser systems. The success of any competing alternatives to PRK
and LASIK could have a material adverse effect on the Company's business,
financial condition and results of operations.
New Products. The Company may experience difficulties that could further
delay or prevent the successful development, introduction and marketing of its
recently-announced A*D*K, and other new products and enhancements, or that its
new products and enhancements will be accepted in the marketplace. 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 new products (whether for sale in the
near future or at some later date) may cause customers to defer purchasing
existing Company products.
Minimum Payments Under A*D*K License Agreement. In addition to the risks
relating to the introduction of any new product (see "--New Products") above,
the Company's A*D*K is subject to the risk that the Company is required to make
certain minimum payments to the licensors under its limited exclusive license
agreement relating to the A*D*K. Under that agreement, the Company is required
to pay a total of $300,000 in two installments due six and 12 months after the
date of the Company's receipt of completed limited production molds for the
A*D*K and provide an excimer laser. The Company expects to receive such molds
during the third quarter of 1998. In addition, commencing seven months after
such date, the Company's royalty payments (50% of its defined gross profits from
A*D*K sales) will become subject to a minimum of $400,000 per calendar quarter
for a period of eight quarters.
Uncertainty of Market Acceptance of Laser-Based Eye Treatment. The Company
believes that its achievement of profitability and growth will depend in part
upon broad acceptance of PRK or LASIK in the U.S. and other countries. There can
be no assurance that PRK or LASIK will be accepted by either the
ophthalmologists or the public as an alternative to existing methods of treating
refractive vision disorders. The acceptance of PRK and LASIK may be affected
adversely by their cost, possible concerns relating to safety and efficacy,
general resistance to surgery, the effectiveness and lower cost of alternative
methods of correcting refractive vision disorders, the lack of long-term
follow-up data, the possibility of unknown side effects, the lack of third-party
24
<PAGE>
reimbursement for the procedures, any future unfavorable publicity involving
patient outcomes from use of PRK or LASIK systems, and the possible shortages of
ophthalmologists trained in the procedures. The failure of PRK or LASIK to
achieve broad market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations.
International Sales. International sales may be limited or disrupted by
the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in staffing
and coordinating communications among and managing international operations.
Additionally, the Company's business, financial condition and international
results of operations may be adversely affected by increases in duty rates,
difficulties in obtaining export licenses, ability to maintain or increase
prices, and competition. To date, all sales made by the Company have been
denominated in U.S. dollars. Therefore, the Company does not have exposure to
typical foreign currency fluctuation risk. Due to its export sales, however, the
Company is subject to currency exchange rate fluctuations in the U.S. dollar,
which could increase the effective price in local currencies of the Company's
products. This could in turn result in reduced sales, longer payment cycles and
greater difficulty in collection of receivables. See "--Receivables" above.
Although the Company has not experienced any material adverse effect on its
operations as a result of such regulatory, political and other factors, such
factors may have a material adverse effect on the Company's operations in the
future or require the Company to modify its business practices.
Potential Product Liability Claims; Limited Insurance. As a producer of medical
devices, the Company may face liability for damages to users of such devices in
the event of product failure. The testing and use of human care products entails
an inherent risk of negligence or other action. An award of damages in excess of
the Company's insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company maintains product liability insurance, there can be no assurance that
any such liability of the Company will be included within its insurance coverage
or that damages will not exceed the limits of its coverage. The Company's
"claims made" product liability insurance coverage is limited to $10 million and
its general liability insurance coverage is limited to $6,000,000, including up
to $5,000,000 of coverage under an excess liability policy. The Company has in
the past agreed, and is likely to in the future agree, to indemnify certain
medical institutions and personnel thereof conducting and participating in the
Company's clinical studies.
Supplier Risks. The Company contracts with third parties for certain
components used in its lasers. Certain key components are provided by a single
vendor. If any of these sole-source suppliers were to cease providing components
to the Company, the Company would have to locate and contract with a substitute
supplier, and there can be no assurances that such substitute supplier could be
located and qualified in a timely manner or could provide required components on
commercially reasonable terms. An interruption in the supply of critical laser
components could have a material adverse effect on the Company's business,
financial condition and results of operations.
No Backlog; Concentration of Sales at End of Quarter. The Company has
historically operated with little or no backlog because its products are
generally shipped as orders are received. Historically, the Company has received
and shipped a significant portion of its orders for a particular quarter near
the end of the quarter. As a result, the Company's operating results for any
quarter often depend on orders received and laser systems shipped late in that
quarter. Any delay in such orders or shipments may cause a significant
fluctuation in period-to-period operating results.
Anti-takeover Measures; Potential Adverse Effect on Common Stock Price.
The Company's Articles authorize the Company's Board of Directors to issue
shares of the Company's Preferred Stock and to determine the rights,
preferences, privileges and restrictions of such shares without any vote or
25
<PAGE>
action by the stockholders. The issuance of Preferred Stock under such
circumstances could have the effect of delaying or preventing a change in
control of the Company. The rights of the holders of the Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be created and issued in the future. One of the effects
of the provisions described above may be to discourage a future attempt to
acquire control of the Company that is not presented to and approved by the
Board of Directors, but which a substantial number, and perhaps even a majority
of the Company's stockholders, might believe to be in their best interests or in
which stockholders might receive a substantial premium for their shares over the
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. See "Description of
Securities--Series E Preferred Stock;--Stockholder Rights Plan."
Recent Developments
Issuance of Series C Preferred Stock. On June 5, 1998, the Company entered into
a Securities Purchase Agreement with The Laser Center Inc. ("TLC"), pursuant to
which the Company issued to TLC 2,000,000 shares of the newly-created Series C
Convertible Preferred Stock (the "Series C Preferred Stock") of the Company with
a face value of $4.00 per share, resulting in an aggregate offering price of $8
million. The Series C Preferred Stock is convertible on a fixed, one-for-one
basis, subject to customary anti-dilution adjustments, into 2,000,000 shares of
Common Stock, at the option of TLC at any time until June 5, 2001, on which date
all shares of Series C Preferred Stock then outstanding will automatically be
converted into an equal number of shares of Common Stock. See "Description of
Securities--Series C Preferred Stock." A portion of the proceeds received by the
Company in connection with the issuance of the Series C Preferred Stock was used
to repurchase of the outstanding Series B Preferred Stock. The Company's
strategic business relationship with TLC will allow the Company to develop its
mobile refractive laser strategy.
Issuance of Series D Preferred Stock. On June 12, 1998, the Company entered into
a Securities Purchase Agreement with Pequot Private Equity Fund, L.P., Pequot
Scout Fund, L.P., and Pequot Offshore Private Equity Fund, Inc. (collectively,
the "Pequot Funds"), whereby the Company issued, collectively, to the Pequot
Funds 2,000,000 shares of the newly-created Series D Convertible Preferred Stock
(the "Series D Preferred Stock") of the Company with a face value of $4.00 per
share, resulting in an aggregate offering price of $8 million. The Series D
Preferred Stock is convertible on a one-for-one basis into an equal number of
shares of Common Stock, subject to certain anti-dilution adjustments, at the
option of the Pequot Funds at any time until June 12, 2001, on which date all
shares of Series D Preferred Stock then outstanding will automatically be
converted into an equal number of shares of Common Stock. See "Description of
Securities--Series D Preferred Stock."
26
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Certain legal proceedings against the Company are described in Item 3
(Legal Proceedings) of the Company's Form 10-K for the year ended
December 31, 1997.
ITEM 2 CHANGES IN SECURITIES
a) As previously reported, the Company completed private placements of
its Series C and D Preferred Stock in 1998.
The Series C Preferred Stock is convertible on a fixed, one-for-one
basis (subject to anti-dilution adjustments upon the occurrence of
a stock split, stock dividend or similar event) into 2,000,000
shares of the Company's common stock, par value $.001 per share
("Common Stock"), at the option of TLC at any time until June 5,
2001, on which date all shares of Series C Preferred Stock then
outstanding will automatically be converted into shares of Common
Stock.
The TLC Agreement provides that so long as TLC continues to be the
record holder of at least 5% of the Company's then outstanding
Common Stock or Series C Preferred Stock which is convertible into
at least 5% of the Company's then outstanding Common Stock, TLC
shall have the right to participate in any below-market equity
financing transaction so as to maintain its percentage ownership of
the outstanding Common Stock immediately prior to the closing of
such financing. The following issuances of the Company's
securities, however, do not constitute a below-market third party
financing for purposes of this provision: (i) the grant of options
or warrants, or the issuance of securities, under any employee or
director stock option, stock purchase or restricted stock plan of
the Company, (ii) the issuance of Common Stock pursuant to any
contingent obligation of the Company existing as of June 5, 1998,
(iii) the issuance of securities upon the exercise or conversion of
the Company's options, warrants or other convertible securities
outstanding as of June 5, 1998, (iv) the declaration of a rights
dividend to holders of Common Stock in connection with the adoption
of a stockholder rights plan, (v) the issuance of securities in
connection with a merger, acquisition, joint venture or similar
arrangement, or (vi) the issuance of the Company's Series D
Convertible Participating Preferred Stock (the "Series D Preferred
Stock").
The TLC Agreement also provides that TLC has the right to nominate
one candidate to stand for election as a member of the Company's
Board of Directors for as long as TLC owns at least 7.5% of the
Company's outstanding Common Stock or Series C Preferred Stock
which is convertible into 7.5% of the Company's outstanding Common
Stock.
The Series D Preferred Stock is convertible on a one-for-one basis
into an equal number of shares of Common Stock, subject to certain
anti-dilution adjustments described below, at the option of the
Pequot Funds at any time until June 12, 2001, on which date all
27
<PAGE>
shares of Series D Preferred Stock then outstanding will
automatically be converted into shares of Common Stock.
The Series C Preferred Stock and the Series D Preferred Stock
generally have similar rights and preferences. However, unlike the
holders of the Series C Preferred Stock, the holders of the Series
D Preferred Stock are entitled to certain anti-dilution adjustments
if the Company issues or sells any shares of Common Stock (or
Common Stock equivalents) before June 12, 2001 at a price per share
(or having a conversion or exercise price per share) less than the
$4.00 per share. In the event of such an issuance, subject to all
applicable listing rules of The Nasdaq Stock Market, the conversion
price of the Series D Preferred Stock will be adjusted in order to
allow the Series D Preferred Stock to convert into that number of
shares of Common Stock which will maintain the Series D Preferred
Stock holders' percentage level of ownership of the Company's
Common Stock outstanding (including Series C Preferred Stock and
Series D Preferred Stock which is convertible into Common Stock) as
such ownership exists immediately prior to such below-market
issuance. This anti-dilution adjustment only relates to the
conversion price of the Series D Preferred Stock and does not
result in adjustments to the number of shares of Common Stock held
by the holders of the Series D Preferred Stock. This anti-dilution
adjustment will not be triggered by the issuance of the Company's
securities under the following circumstances (collectively, the
"Excluded Securities"): (i) a public offering of the Company's
equity securities, (ii) the grant of options or warrants, or the
issuance of securities, under any employee or director stock
option, stock purchase or restricted stock plan of the Company,
(iii) the issuance of Common Stock pursuant to any contingent
obligation of the Company existing as of June 12, 1998, (iv)
securities issued upon the exercise or conversion of the Company's
options, warrants or other convertible securities outstanding as of
June 12, 1998, (v) declaration of a rights dividend to holders of
Common Stock in connection with the adoption of a stockholder
rights plan by the Company, and (vi) securities issued in
connection with a merger, acquisition, joint venture or similar
arrangement which is approved by a majority of the Company's Board
of Directors that are not then employees of the Company (the
"Outside Directors"), and (vii) securities issued in connection
with the establishment of a strategic relationship which is
approved by a majority of the Outside Directors.
The holders of the Series D Preferred Stock have, in addition to
the voting rights of the Series C Preferred Stock, the exclusive
right, voting separately as a single class to elect one director
(the "Series D Preferred Director") of the Company, with the
remaining directors to be elected by the other classes of stock
entitled to vote therefore at each meeting of stockholders held for
the purpose of electing directors. The right of the holders of
Series D Preferred Stock to vote for the election of directors may
be exercised at any annual meeting or at any special meeting called
for such purpose or at any adjournment thereof, or by the written
consent, delivered to the Secretary of the Company, of the holders
of a majority of all shares of Series D Preferred Stock outstanding
as of the record date of such written consent. The voting rights
with respect to the Series D Preferred Director will terminate and
thereafter be of no force or effect if on any date the Board of
Directors fixes the record date for a meeting of the Company's
stockholders at which directors will be elected (the "Determination
Date"), that number of full shares of Common Stock into which all
then outstanding shares of Series D Preferred Stock, if any, could
28
<PAGE>
be converted pursuant to the term of the Series D Preferred Stock
is less than 7.5% of all then outstanding shares of Common Stock on
the Determination Date.
Upon termination of the voting rights with respect to the Series D
Preferred Director pursuant to the terms of the Series D Preferred
Stock, the Series D Preferred Director then in office will serve
until the date of the Company's next meeting at which directors are
elected. Thereafter, so long as the holders of the Series D
Preferred Stock own in the aggregate at least 7.5% of the
outstanding Common Stock as of any Determination Date (for purposes
of this calculation all shares of Series D Preferred Stock shall be
deemed to be converted to shares of Common Stock pursuant to the
terms of the Series D Preferred Stock) then the holders of the
Series D Preferred Stock shall have the right to designate a
nominee (who is reasonably acceptable to the Company's Board of
Directors) to stand for election as a director at the next meeting
of the Company's stockholders at which directors will be elected.
If such nominee is elected but does not serve such nominee's
complete term on the Company's Board of Directors by reason of the
resignation, death, removal or inability to serve, then holders of
the Series D Preferred Stock shall be entitled to designate a
successor (who is reasonably acceptable to the Company's Board of
Directors) to fill such vacancy until the next meeting for the
election of directors. If such nominee is not elected to the Board,
the holders of the Series D Preferred Stock will, in addition to
those rights described in the following paragraph, be entitled to
appoint an additional Non-Voting Observer (as defined below). For
purposes of this provision the phrase "outstanding Common Stock"
shall mean the Common Stock shown as outstanding on the Company's
Quarterly Report on Form 10-Q for the most recent quarter and shall
not be determined on a dilutive basis.
b) Not applicable.
c) During the second quarter ended June 30, 1998, the Company issued
105,820 shares of Common Stock to purchase substantially all of the
assets, and assumed certain liabilities, of a medical products
company. For further information, see Note 9 of Notes to Condensed
Consolidated Financial Statements.
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 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
29
<PAGE>
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
On June 30, 1998, at the Company's annual meeting of shareholders, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
J. Richard Crowley 7,628,694 110,954
Michael R. Farris 7,631,439 108,209
Richard C. Lutzy 7,635,189 104,459
Francis E. O'Donnell, Jr., M.D. 7,635,189 104,459
Thomas Quinn 7,635,189 104,459
David T. Pieroni 7,630,639 109,009
Terry Fuller, Ph.D. 7,631,689 107,859
Amendment of conversion terms of the Company's former Series B
Convertible Participating Preferred stock and the reduction of the
exercise price of the warrants issued to the Series B Preferred
shareholders was ratified as follows:
Votes For 7,357,914
Votes Against 276,278
Abstain 105,456
Amendment of the 1996 Equity Incentive Plan was ratified as follows:
Votes for 7,268,785
Votes Against 386,765
Abstain 84,098
A proposal to appoint KPMG Peat Marwick LLP as auditors was ratified as
follows:
Votes for 7,613,149
Votes Against 73,049
Abstain 53,450
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
30
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 See Exhibits 10.1, 10.6, 10.25 and 10.32.
3.1 Certificate of Incorporation, as amended.
3.2 Bylaws, as amended (filed as Exhibit 3 to the Company's Form 10-K for
the year ended December 31, 1992*).
4.1 See Exhibits 3.1 and 3.2.
10.1 Agreement 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 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*).
31
<PAGE>
10.9 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*).
10.10 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*).
10.11 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*).
10.12 LaserSight Incorporated 1996 Equity Incentive Plan (filed as Exhibit A
to the Company's definitive proxy statement dated April 30, 1996*).
10.13 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*).
10.14 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*).
10.15 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*).
10.16 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*).
10.17 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*).
10.18 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*).
10.19 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*).
10.20 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*).
32
<PAGE>
10.21 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*).
10.22 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*).
10.23 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*).
10.24 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*).
10.25 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*).
10.26 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*).
10.27 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*).
10.28 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*).
10.29 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*).
10.30 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*).
10.31 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*).
33
<PAGE>
10.32 Stock Purchase Agreement, dated December 30, 1997, by and among
LaserSight Incorporated, LSI Acquisition, Inc., MEC Health Care, Inc.
and Vision Twenty-One, Inc. (filed as Exhibit 2.(i) to the Company's
Form 8-K filed on January 14, 1998*).
10.33 Stock Distribution Agreement, dated December 30, 1997, by and among
LaserSight Incorporated, LSI Acquisition, Inc., MEC Health Care, Inc.
and Vision Twenty-One, Inc. (filed as Exhibit 2.(ii) to the Company's
Form 8-K filed on January 14, 1998*).
10.34 Consent and Amendment Number Four to Loan and Security Agreement dated
September 10, 1997 by and between LaserSight Incorporated and Foothill
Capital Corporation (filed as Exhibit 2.(iii) to the Company's Form 8-K
filed on January 14, 1998*).
10.35 Agreement dated April 1, 1992 between International Business Machines
Corporation and LaserSight Incorporated (filed as Exhibit 10.1 on Form
10-K for the year ended December 31, 1995*).
10.36 Series B Preferred Stock Agreement, dated March 13, 1998, by and
between LaserSight Incorporated and CC Investments, LDC, Shepherd
Investments International, Ltd., Stark International, and Societe
Generale (filed as Exhibit 99 to the Company's Form 8-K filed on March
16, 1998*).
10.37 Securities Purchase Agreement, dated June 5, 1998, by and between
LaserSight Incorporated and TLC The Laser Center, Inc. (filed as
Exhibit 99.1 to the Company's Form 8-K filed on June 25, 1998*).
10.38 Securities Purchase Agreement, dated June 5, 1998, by and between
LaserSight Incorporated and Pequot Funds (filed as Exhibit 99.5 to the
Company's Form 8-K filed on June 25, 1998*).
Exhibit 11 Statement of Computation of Loss Per Share
Exhibit 27 Financial Data Schedule
- ----------------------
*Incorporated herein by reference. File No. 0-19671.
b) Reports on Form 8-K
On June 8, 1998, the Company filed with the Commission a Current Report
on Form 8-K regarding the press release issued by the Company dated
June 8, 1998 reporting the TLC investment and plans to launch mobile
excimer laser business.
On June 16, 1998 the Company filed with the Commission a Current Report
on Form 8-K regarding the press release issued by the Company dated
June 16, 1998 reporting the Dawson Samberg Capital Managemnt Funds
investment.
On June 25, 1998 the Company filed with the Commission a Current Report
on Form 8-K regarding the Securities Purchase Agreement and related
documents dated June 5, 1998 by and between LaserSight Incorporated and
TLC The laser Center, Inc. and the Securities Purchase Agreement and
related documents dated June 12, 1998 among LaserSight Incorporated and
Pequot Private Equity Fund, L.P., Pequot Scout Fund, L.P., Pequot
Offshore Private Equity Fund, Inc.
34
<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: August 14, 1998
--------------------- By: /s/Michael R. Farris
-----------------------
Michael R. Farris,
Chief Executive Officer
Dated: August 14, 1998 By: /s/ Gregory L. Wilson
---------------------- -----------------------
Gregory L. Wilson,
Chief Financial Officer
35
<TABLE>
EXHIBIT 11
LASERSIGHT INCORPORATED
COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
<CAPTION>
----------------------------------
BASIC
<S> <C> <C>
Weighted average shares outstanding 10,318,000 8,414,300
Issuable shares, acquisition of The Farris Group - 406,700
--------------------------------------
10,318,000 8,821,000
======================================
$(1,963,507) $(648,022)
(25,372) -
(1,098,121) (9,863)
--------------------------------------
$(3,087,000) $(657,885)
======================================
$(0.30) $(0.07)
======================================
10,318,000 8,414,300
- 406,700
--------------------------------------
10,318,000 8,821,000
======================================
$(1,963,507) $(648,022)
(25,372) -
(1,098,121) (9,863)
-------------------------------------
$(3,087,000) $(657,885)
======================================
$(0.30) $(0.07)
======================================
$(3,087,000) $(657,885)
======================================
10,318,000 8,821,000
3,474,000 160,000
--------------------------------------
13,792,000 8,981,000
======================================
$(0.22)(A) $(0.07)(A)
======================================
</TABLE>
(A) - This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 13-14 of SFAS 128 because
it produces an anti-dilutive result.
36
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,129,036
<SECURITIES> 5,941,294
<RECEIVABLES> 12,988,080
<ALLOWANCES> 2,139,055
<INVENTORY> 4,561,882
<CURRENT-ASSETS> 23,132,554
<PP&E> 2,510,675
<DEPRECIATION> 1,109,136
<TOTAL-ASSETS> 43,504,660
<CURRENT-LIABILITIES> 9,047,535
<BONDS> 0
5,169,584
0
<COMMON> 12,220
<OTHER-SE> 26,818,593
<TOTAL-LIABILITY-AND-EQUITY> 43,504,660
<SALES> 4,044,683
<TOTAL-REVENUES> 4,243,219
<CGS> 1,176,320
<TOTAL-COSTS> 1,263,676
<OTHER-EXPENSES> 4,450,550
<LOSS-PROVISION> 114,055
<INTEREST-EXPENSE> 396,521
<INCOME-PRETAX> (1,652,351)
<INCOME-TAX> 311,156
<INCOME-CONTINUING> (1,963,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,963,507)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
