SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-19671
LASERSIGHT INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 65-0273162
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(State of incorporation) (I.R.S. Employer
Identification No.)
12249 Science Drive, Suite 160, Orlando, Florida 32836
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 382-2700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sale price on March 27, 1998 was
approximately $29,521,498.
Number of shares of Common Stock outstanding as of March 27, 1998:
11,996,647.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be included in Part III is incorporated
herein by reference to the Company's definitive proxy materials to be filed with
the Securities and Exchange Commission on or before April 30, 1998.
<PAGE>
LASERSIGHT INCORPORATED
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relations and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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The information in this Annual Report on Form 10-K contains forward
looking-statements, as indicated by words such as "anticipates," "expects,"
"believes," "estimates," "intends," "projects," and "likely," by statements of
the Company's plans, intentions and objectives, or by any statements as to
future economic performance. Forward-looking statements involve risks and
uncertainties that could cause the Company's actual results to differ materially
from those described in such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis--Risk
Factors and Uncertainties" as well as those discussed elsewhere in this Report.
PART I
Item 1. Business
OVERVIEW
LaserSight Incorporated and its subsidiaries (collectively, "LaserSight"
or the "Company") operate in two major operating segments: technology and health
care services. The Company's principal wholly-owned subsidiaries include:
LaserSight Technologies, Inc. ("LaserSight Technologies"), LaserSight Patents,
Inc. ("LaserSight Patents"), and MRF, Inc. ("The Farris Group" or "TFG").
Technology Segment. The Company's technology segment includes LaserSight
Technologies, LaserSight Patents and LaserSight Centers Incorporated
("LaserSight Centers"). LaserSight Technologies develops, manufactures and
markets ophthalmic lasers with a galvanometric scanning system primarily for use
in performing PRK (photorefractive keratectomy) which uses a one millimeter
scanning laser beam to ablate microscopic layers of corneal tissue to reshape
the cornea and to correct the eye's point of focus in persons with myopia
(nearsightedness), hyperopia (farsightedness) and astigmatism. LaserSight
Patents and LaserSight Technologies license various patents related to the use
of excimer lasers to ablate biological tissue and related to keratome design and
usage. LaserSight Centers is a developmental-stage company through which the
Company may in the future provide PRK, LASIK (Laser In-Situ Keratomileusis) and
other eyecare surgical services.
In 1994, the Company shifted its emphasis from research and development of
its laser systems to the manufacturing and international sales of its lasers.
The Company's Compak-200 Mini-Excimer laser ("Compak-200") was introduced
internationally in 1994. The LaserScan 2000 Excimer Laser PhotoPolishing System
("LaserScan 2000") was introduced in late 1995 to replace the Compak-200. The
LaserScan 2000 incorporates improvements that were developed and implemented as
the result of the Company's worldwide clinical experience with the Compak-200.
In 1997, the Company developed the LSX excimer laser system with a new laser
head, an active eye-tracking system, and advanced engineering.
The next-generation excimer laser is under development and improvement and
is currently being marketed commercially in over 30 countries around the world.
The Company enjoys the largest installed base of scanning lasers in the
industry. The Company intends to continue to develop and improve upon its
technology and to aggressively continue the process of gaining regulatory
approval in order to access the domestic market, with approval presently
anticipated during 1998. The Company's patent portfolio covers scanning
<PAGE>
technology, infrared technology, solid-state technology, calibration technology,
and glaucoma treatment. The Company currently is pursuing domestic regulatory
approval to market its excimer laser for glaucoma treatment. With glaucoma
affecting over six million people in the United States ("U.S."), the Company
believes that its laser will provide a real therapeutic use by treating this
leading cause of blindness. Therefore, the Company intends to continue to build
upon its leadership position internationally, moving into the domestic market
for refractive surgery, while expanding the applicability of its technology to
the therapeutic treatment of glaucoma.
Health Care Services Segment. Since December 31, 1997, the health care
services segment has consisted of The Farris Group. TFG provides health care and
vision care consulting services to hospitals, managed care companies and
physicians. Until that date, this segment had also included MEC Health Care,
Inc. ("MEC") and LSI Acquisition, Inc. ("LSIA"). Under the Company's ownership,
MEC was a vision managed care company that managed vision care programs for
health maintenance organizations (HMOs) and other insured enrollees. LSIA was a
physician practice management company that managed the ophthalmic practice known
as the "Northern New Jersey Eye Institute" under a management services
agreement.
TFG works with marketers of health care manufacturers and the chief
executive officers and planners of hospitals, integrated delivery systems and
medical groups. The core business of TFG is two-fold: developing and maintaining
physician databases in addition to providing customized strategic plans.
Services included are physician recruitment tools, competitive intelligence,
demand studies, community health analyses and distribution channel mapping.
General. For information regarding the Company's export sales and
operating revenues, operating profit (loss) and identifiable assets by industry
segment, see Note 14 of the Notes to Consolidated Financial Statements.
As of December 31, 1997, the Company had 93 full-time and 4 part-time
employees. The Company considers its employee relations to be good.
The Company was incorporated in Delaware in 1987, but was inactive until
1991. In April 1993, the Company acquired LaserSight Centers in a
stock-for-stock exchange with additional shares issued in March 1997 pursuant to
an amended purchase agreement. In February 1994, the Company acquired The Farris
Group. In July 1994, the Company was reorganized as a holding company. In
October 1995, the Company acquired MEC. In July 1996, the Company's LSIA
subsidiary acquired the assets of the Northern New Jersey Eye Institute, P.A.
("NNJEI"). On December 30, 1997, the Company sold MEC and LSIA, effective as of
December 1, 1997. See "Recent Developments--Liquidation of Vision 21 Shares."
The Company's principal offices and mailing address are 12249 Science
Drive, Suite 160, Orlando, Florida 32836, and its telephone number at that
location is (407) 382-2700. Effective on or about May 1, 1998, such address is
expected to be 3300 University Boulevard, Suite 140, Winter Park, Florida 32792.
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LASERSIGHT TECHNOLOGIES
LSX Excimer Laser System
The LSX laser system was introduced at the American Society of Cataract
and Refractive Surgeons meeting in April 1997. LSX is designed to be the
Company's premium excimer laser product, and incorporates improvements developed
and implemented as the result of the Company's worldwide clinical experience.
The LSX integrates the Company's new surgeon-intuitive version 9.0 software, the
new high-reliability CeraLase ultraviolet laser source and AccuTrack eye
tracking, with an ergonomic console design, to supply the complete refractive
surgical workstation.
Version 9.0 software incorporates an easy to use graphical user interface
with expanded treatment capabilities for myopia, hyperopia and astigmatism, true
spherical ablation profiles and a patient record database. The CeraLase
ultraviolet-laser source was developed to satisfy the demanding requirements of
refractive surgical systems and features 200 pulse per second operation, long
reliable life, ease of day to day operation and simplified maintenance. The
Company's AccuTrack eye-tracking technology was incorporated as standard feature
in LSX that includes enhancements in lighting and image contrast to improve
surgical centration accuracy. This fully integrated ophthalmic surgical
workstation is designed for use by ophthalmologists to perform PRK and LASIK
refractive laser procedures. These procedures are recognized by most
ophthalmologists to be clinically predictable.
A LSX was first shipped in December 1997 and regular commercial shipments
are expected to begin at the end of March 1998. The LSX is expected to be the
Company's primary excimer laser product by June 1998.
LaserScan 2000Plus Excimer Laser System
The LaserScan 2000Plus laser system was introduced in March 1998 as an
enhanced version of the LaserScan 2000. The LaserScan 2000Plus was designed to
replace the LS 300 as a lower-cost alternative excimer laser product. Its
improvements include the Company's new surgeon-intuitive version 9.0 software,
energy stabilization, and new patient alignment/fixation system. This surgical
workstation is also designed for use by ophthalmologists to perform PRK and
LASIK refractive laser procedures.
LaserScan 2000 Excimer Laser System
The LaserScan 2000 laser system was introduced at the Annual Meeting of
the American Academy of Ophthalmology in October 1995. The LaserScan 2000 was
designed to replace the Company's first excimer laser product, the Compak-200
laser system, and incorporates improvements developed and implemented as the
result of the Company's worldwide clinical experience with the Compak-200.
The LaserScan 2000 is a fully integrated ophthalmic surgical work station
for use by ophthalmologists. It has been designed to perform PRK and LASIK
refractive laser procedures currently recognized by most ophthalmologists as
being clinically predictable. This compact, new-generation, ArF (193nm) excimer
laser weighs less than 450 pounds, with low gas maintenance costs.
<PAGE>
All of the Company's excimer laser systems incorporate a scanning device
utilizing a pair of galvanometer controlled mirrors that reflect and scan the
laser beam directly on the corneal surface without the use of discs, masks, or
diaphragms used by other excimer laser systems. The advantages of this scanning
system include: (i) a smaller laser beam diameter that dramatically increases
power density thereby permitting more compact systems; (ii) greater scanning
pattern flexibility for refractive procedures, including the correction of
myopia, hyperopia, and astigmatism; (iii) smoother surface quality without
transition zones; and (iv) an ability to scan much larger optical zones (up to
9mm). The actual corneal ablation profile is computer-controlled to adjust the
beam overlap and diameters of the scanning system. The source code of the
scanning software is proprietary technology of the Company (patent applied for)
and has been developed and tested by a series of experiments on both PMMA
(plastic) and human cadaver eye tissue and at international and domestic
clinical trial sites.
LS 300 Excimer Laser System
In June 1996, LaserSight Technologies introduced the LS 300 Excimer Laser
System at the Annual Meeting of the American Society of Cataract and Refractive
Surgeons. The LS 300 was introduced to offer a lower-cost alternative to the
LaserScan 2000. As a modified version of the Compak-200, it allowed the Company
to utilize its remaining Compak-200 inventory. The modifications to the original
system included upgraded optics and illumination and automatic gas exchange. The
Compak-200 laser system established the industry's standard for small diameter
beam, galvanometer controlled scanning lasers. That system was improved upon
with the introduction of the LaserScan 2000 and LS 300 systems. Production of
the LS 300 was phased out during 1997 in favor of the LaserScan 2000 and
LaserScan 2000Plus systems.
Automated Disposable Keratome
The Company acquired rights to the Automated Disposable Keratome
("A*D*K"), a device utilized in connection with the LASIK procedure, in
September 1997 from inventors Luis A. Ruiz, M.D. ("Ruiz"), and engineer Sergio
Lenchig ("Lenchig") of Bogota, Colombia. Ruiz and Lenchig invented the Automated
Corneal Shaper ("ACS") distributed by another company. The A*D*K incorporates
the market proven features found in the ACS with new enhancements: preassembled,
factory inspected, single use, transparent components, and dual gear drive with
covered gears. The enhanced device was designed in response to feedback received
on the market leader device. Early A*D*K prototypes were shown at the American
Academy of Ophthalmology conference held in San Francisco in October 1997.
Section 510(k) clearance from the U.S. Food and Drug Administration ("FDA") was
applied for in October 1997 and received in January 1998, thereby allowing it to
be sold and used on a commercial basis in the U.S. Manufacturing validation
began in late 1997. Clinical testing began during the first quarter of 1998.
The A*D*K will be manufactured exclusively for LaserSight by Frantz
Medical Development Ltd. ("Frantz Medical"), Cleveland, Ohio, which is an ISO
9001 company experienced in the manufacture of engineering-grade medical
devices. Franz Medical was chosen for its experience with OEM manufacturing for
other large medical companies and its reputation for consistent delivery of
quality products. The A*D*K is currently in the process of final manufacturing
and clinical validation. The Company had originally expected to begin commercial
sales of the A*D*K in February 1998, but now expects such sales to begin during
the second quarter of 1998 due to unanticipated complexities in the
manufacturing validation process.
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The Company has developed a feature-enhanced control console to power the
A*D*K. The new console adds suction monitoring functions with visual and
auditory alarms to indicate a caution state; an ergonomic design, including
quiet operating performance; a digital display in either inches or millimeters
of mercury; an elapsed time indicator to show the amount of time the eye has
been exposed to high suction; and a new low suction setting to allow the surgeon
the option to use the suction ring as a globe fixation device.
The A*D*K and related products are being marketed both through the
Company's existing international distributor network and through direct sales.
The U.S. market is being addressed through: (i) direct contact (telephone, mail,
fax and internet) to refractive surgeons; (ii) a direct marketing effort
targeting laser center national accounts; (iii) educational wet lab seminars
which introduce the product in key metropolitan areas; and (iv) the CRS study (a
multi-center LASIK study actively involving more than 250 refractive surgeons).
The Company expects to benefit from favorable payment terms: direct sales
with payment in cash or by credit card, at shipment of product or through
distributor orders with letters of credit, prepayment, or up to 30-day terms.
Relatively low product price and the prospect of repeat orders necessitates such
payment terms, rather than extended terms often offered for higher cost capital
equipment.
The keratome market is developing globally with the perceived emergence of
LASIK rather than PRK as the procedure of choice for laser refractive surgery.
This trend was first evident in markets which were among the first to embrace
laser refractive surgery, and appears to be spreading to other global markets,
including the U.S. where LASIK appears to be capturing a majority of refractive
surgery cases for the first time in 1998. The Company believes there are five
main competitors in the keratome business, but the Company has the only FDA
510(k)-cleared disposable keratome. The Company does not believe certain of the
keratome products currently being marketed by competitors are currently
available in large supply. Others are manual devices, rather than automated.
While the Company believes that its A*D*K has significant advantages over the
keratomes manufactured by its principal competitors, some of these competitors
are larger, more established, and presently have greater financial strength than
the Company.
The Company believes that the major competitive factors for this product
will be quality, safety, availability, automation, simplicity and price.
Ancillary Products
The majority of ancillary revenues are part of the same class of products
and services as excimer laser system sales and, in total, such revenues are less
than 5% of Technology revenues.
Certain ancillary products (such as the video display camera) are offered
as a convenience to customers and are not manufactured by the Company. The more
significant ancillary products are listed below.
AccuTrack Eye Tracking System. The Company continues to offer an active
eye tracking system as an option to the LaserScan 2000Plus. The system is
integrated into the laser system and automatically detects slight saccadic
<PAGE>
movements of the patient's eye, automatically adjusting the position of the
laser beam to ensure that the eye remains centered during the laser procedure.
During 1997, the Company continued its engineering and development of the system
to optimize the eye tracking system's functions, and to extend the capability of
the tracking system hardware and software.
Video Display Camera. The Company offers, as an option, a video display
system for observation or recording of procedures. This camera can be installed
on the LaserScan 2000Plus, either at the manufacturing facility or as an upgrade
on site. The video display system includes a beam splitter, video adapter, and a
single chip video camera.
Intellectual Property
Numerous patents have been applied for by, or have been issued to, other
companies related to the broad technologies of lasers and laser devices,
refractive surgical procedures using laser devices, and delivery systems for
using laser devices in refractive surgical procedures.
The Company maintains a portfolio of strategically important patents, and
patent applications, covering its scanning method, solid-state technology,
glaucoma and retinal treatments, corneal topography development, calibration
methods, treatment for myopia and hyperopia, and keratomes.
The Company continues to take actions to secure patent rights in its
field. See "Management's Discussion and Analysis--Risk Factors and
Uncertainties."
Purchase of Certain Patents from IBM
In 1992, LaserSight Technologies signed a License Agreement with
International Business Machines Corporation ("IBM") for IBM's patents relating
to ultraviolet light ophthalmic products and procedures for ultraviolet
ablation. Under this license, LaserSight Technologies paid a royalty fee of 2%
of the sales of its ultraviolet lasers in those countries in which IBM had such
a patent. Sales of excimer lasers in other countries were not subject to such
royalty payments.
In August 1997, the Company purchased from IBM, two patents related to
ultraviolet light ophthalmic products and procedures for ultraviolet ablation.
These patents (the "IBM Patents"), U.S. Patent No. 4,787,135 (Blum Patent) and
U.S. Patent No. 4,925,523 (Braren Patent) relate to the use of ultraviolet light
for laser vision correction, as well as all non-ophthalmic applications. With
the purchase of these patents the Company also acquired related patent license
agreements, and all royalties accrued after January 1, 1997 under license
agreements with Summit Technologies, Inc. and Visx, Incorporated. A license to
the IBM Patents is necessary for companies desiring to enter the laser vision
correction market in the U.S. and certain other countries. In addition to the
royalties from licenses acquired and potential new licenses with other excimer
laser manufacturers and users, the Company also has the right to pursue claims
for all past infringement of the IBM Patents.
Sale of Patent Rights and Licenses
In September 1997, the Company received a one-time lump sum payment of $4
million from a third party in exchange for an exclusive worldwide, royalty-free
license covering the vascular and cardiovascular rights covered in the IBM
Patents.
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In February 1998, the Company entered into an agreement with Nidek Co.,
Ltd. ("Nidek") under the terms of which the Company retained all patent
ownership rights within the U.S. to the IBM Patents, and transferred to Nidek
ownership of the non-U.S. counterparts related to those patents, in exchange for
$7.5 million in cash. The foreign counterpart rights to the IBM Patents include
Australia, Austria, Belgium, Brazil, Canada, France, Germany, Italy, Japan,
Spain, Sweden, Switzerland, and the United Kingdom. The Company also granted
Nidek a non-exclusive license to utilize the U.S. patents on terms comparable
with existing licensees. The agreement with Nidek does not affect any
outstanding license agreements related to non-U.S. patents that have been
previously granted to the Company or any other companies. The agreement with
Nidek also provides for the Company to continue to have exclusive right to use
and sublicense the non-U.S. patents in all fields other than ophthalmic,
cardiovascular and vascular.
The Company intends to negotiate additional license agreements relating to
the IBM Patents with other companies. However, there can be no assurance as to
whether, when or on what terms the Company may be able to do so. As of the date
of this Annual Report, the Company had not entered into any other agreements
relating to the IBM Patents other than those described herein.
Scanning and Solid-State Laser-Related Patents for Refractive Surgery
In May 1996, a patent (U.S. Patent No. 5,520,679) for an "Ophthalmic
Surgery Method Utilizing Non-Contact Scanning Laser" was granted to the Company
by the U.S. Patent Office. This patent includes claims that cover ultraviolet
and infrared wavelengths wherein the purposeful overlapping of sequential
small-diameter laser pulses achieves a "photopolishing" of the corneal surface.
Another patent (U.S. Patent No. 5,144,630) has been granted covering the
apparatus and use of the solid-state (ultraviolet and infrared) LaserHarmonic
System. The extent of protection that may be afforded to the Company, or whether
any claim embodied in these patents will be challenged or found to be invalid,
cannot be determined at this time. These patents and other pending applications
may not afford a significant advantage or product protection to LaserSight
Technologies.
In July 1995, the Company exercised its option to acquire technology of a
solid-state UV-laser operating at 213 nm and 200 Hz developed by Dr. J.T. Lin
pursuant to Dr. Lin's Research and Development Agreement with the Company. Dr.
Lin is a former president and chief executive officer of the Company. This laser
system employs harmonic wavelength mixing schemes different from those described
in the Company's 1992 solid-state patent (U.S. Patent No. 5,144,630), Dr. Lin's
patent application, which has been assigned to the Company, has been filed
covering this new technology. During 1997, efforts on this project continued,
but at a priority level lower than excimer-related activities within the
company's engineering and research and development departments.
In November 1995, the Company obtained an exclusive license for
patent-pending technology developed by Dr. Peter McDonnell, Professor of
Ophthalmology, Doheny Eye Institute, University of Southern California. This
technology for epithelial boundary determination may allow for full automation
(Auto-PRK) of the PRK procedure using the Company's patented delivery system. In
February 1998, the Company ended this licensing arrangement with the University
of Southern California based on its perception that the LASIK procedure has
become the dominant refractive surgical technique.
<PAGE>
In October 1995, Francis E. O'Donnell, Jr., M.D., Chairman of the Board of
the Company was granted a patent (U.S. Patent No. 5,460,627) for a method and
apparatus for calibration of PRK lasers. Dr. O'Donnell licensed this patent to
LaserSight Centers in exchange for a 6% royalty on the net sales or uses of the
patented technology. In January 1996, the Company announced a joint venture with
PAR Vision Systems, as the Ex-Caliper. It uses a rastersterographic topography
system to measure the effects of a simulated PRK on a single-use, disposable
target. Under the terms of the agreement, the joint venture partners share in
software licensing income and in the sale of disposable targets for the
Ex-Calipar system.
Keratome Patents and Licenses
In July 1997, the Company completed an agreement under which it purchased
U.S. Patent No. 5,586,980 from Dr. Frederic B. Kremer. The Kremer patent covers
a pivoting head in a keratome, the instrument required to create the corneal
"flap" in the LASIK procedure.
In September 1997, the Company entered into a limited exclusive license
agreement with Ruiz and Lenchig for U.S. Patent No. 5,133,726/RE35421 and its
foreign counterparts. The limited license agreement includes worldwide
distribution rights to the A*D*K.
Treatment of Glaucoma and Other Ophthalmic Indications
Dr. O'Donnell was independently granted two patents (U.S. Patent No.
5,370,641) for the Laser Trabeculodissection for treatment of glaucoma, and
(U.S. Patent No. 5,217,452) for Transscleral Laser Treatment of Subretinal
Neovascularization for macular degeneration. These patents were assigned by Dr.
O'Donnell to LaserSight Centers in January 1995 for $6,121 as reimbursement for
attorney's fees and costs to prosecute the patent applications.
Trade and Service Marks
The Company has independently developed the trademarks "A*D*K", "LSX",
"AccuTrack", and "ScanLink" and intends to enforce its prior appropriation of
these trademarks and to seek registration thereof. "LaserSight" is a service
mark developed by the Company.
Manufacturing
In late 1995, the Company opened a new manufacturing facility in San Jose,
Costa Rica to manufacture its lasers for international sales, and for delivery
to U.S. investigational sites under its Investigational Device Exemption ("IDE")
protocols. Beginning in 1996, all lasers sold to international customers were
manufactured at this facility, as well as laser systems delivered to U.S.
clinical investigators. This facility, located in a free trade zone, is expected
to produce all laser units sold internationally during 1998.
As exports of laser products not approved for sale in the U.S. are closely
regulated by the FDA, the Company's establishment of an offshore manufacturing
facility permits it to sell products to any international customer without prior
FDA approval. Many countries have their own regulatory requirements, however.
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The manufacturing process is mainly an assembly operation in which
LaserSight Technologies acquires components of its system and assembles them
into a complete unit. Components include both "off-the-shelf" materials and
assemblies, as well as various key components which are produced by others to
the Company's design and specifications. In general, the cost of the Company's
lasers predominantly relate to hardware; the labor component of cost is
relatively small. The proprietary computer software operating the scanning
system has been developed internally.
A number of key components necessary to produce the Company's laser
products are obtained from single vendors. Should these suppliers become unable
or unwilling to supply these components, the Company would be required to seek
other qualified suppliers. See "Management's Discussion and Analysis--Risk
Factors and Uncertainties--Availability of Components."
During 1996 the Company completed implementation of an international
system of quality assurance under ISO 9002, that was initiated during 1995. In
October 1996 the Company received certification under ISO 9002 for its
manufacturing and quality assurance activities in Orlando, Florida and San Jose,
Costa Rica. During November 1996 the Company completed all requirements
necessary to obtain authority to apply the CE Mark to its LaserScan 2000 System.
The CE Mark, certifying that the LaserScan 2000 meets all requirements of the
European Community's medical directives, gives the Company access to market its
products into all member countries of the European Economic Union ("EU"). While
at this time only certain member countries of the EU require compliance with the
EU Medical Directives (including France and Germany), starting in 1998 all
countries in the EU will require CE Mark certification of compliance with the EU
Medical Directives as the standard for regulatory approval for sale of laser
systems.
The EU Medical Directives include all the requirements under EU laws
regarding the placement of various categories of medical devices on the EU
market. This includes a "directive" that an approved "Notified Body" will review
technical and medical requirements for a particular device. All clinical testing
of medical devices in the EU must be done under the Declaration of Helsinki,
which means that companies must have ethics committee approval prior to
starting, they must obtain informed consent from each patient tested and the
studies must be monitored and audited. Patient records must be maintained for 15
years. Companies must also obey the Medical Device Vigilance reporting
requirements. In obtaining the CE Mark for its excimer laser system, the Company
had its manufacturing and controls evaluated by a Notified Body (Sernko) for
maintenance of ISO 9002 conditions, satisfied all required engineering and
electro-mechanical requirements of the EU and conducted a clinical study in
France to confirm the efficacy and safety of the excimer laser system on
patients.
Availability of Components
LaserSight Technologies purchases the vast majority of its components for
its lasers from commercial suppliers. These include both standard,
"off-the-shelf" items, as well as components produced to the Company's unique
designs and specifications. While most are acquired from single sources, the
Company believes that in many cases there are multiple sources available to it
in the event a supplier is unable or unwilling to perform. As the Company is
dependent upon an uninterrupted supply of components to produce its lasers, it
is dependent upon these suppliers to provide a continuous supply of integral
components and sub-assemblies.
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The Company presently has an exclusive supply arrangement from a single
source, MPB Technologies Inc., Dorval, Quebec, Canada, for the laser head used
in the LaserScan 2000. Under this exclusive arrangement, the supplier of the
laser head is restricted from providing this relatively low energy, high
repetition rate laser head to any company that would use the laser head in an
excimer laser system for corneal refractive surgery. The Company historically
experienced higher than anticipated warranty service costs associated with this
component, and accordingly, during 1995 the Company began certain measures to
address this issue that continued into 1997. These measures include 100%
incoming inspection of all laser heads at time of receipt from the supplier,
modification and upgrading of certain critical components, development and
testing of new techniques for handling the laser heads, and a search for
alternative components and suppliers.
During 1996, the Company contracted with a potential new supplier of the
laser head component to develop an improved performance laser head based on this
supplier's innovative technology and the Company's performance specification and
laser lifetime requirements. In 1997, the Company began engineering evaluation
and testing and determined that with some modifications the new laser head
satisfied all engineering requirements. The Company began to incorporate this
new laser head into its products, notably the LSX, in the fourth quarter of
1997. Further development on new variations of this technology continue and the
Company has a limited exclusive license to this technology in the field of
ophthalmic surgery as long as minimum purchase requirements are satisfied, i.e.,
45 lasers during the first year of the license. The current supply arrangement
for this laser is from a single source, TUI Lasertechnik und Laserintegration
GmbH, Munich, Germany.
The Company continues to evaluate potential supplier relationships with
other laser manufacturers.
Marketing
The use of LaserSight Technologies' medical laser systems in the U.S.
requires FDA approval. LaserSight Technologies has been marketing these systems
in the international market where approval is not required or has been obtained.
These international sales require LaserSight to comply with the regulatory
requirements of the importing nation and export requirements of the U.S.
During 1997, LaserSight Technologies continued to market the LaserScan
2000 and, toward the end of the year, commenced the marketing of the LSX laser
system in Europe, the Pacific Rim, Asia, South and Central America, and the
Middle East. The Company sells its excimer laser systems and accessories using a
multi-tiered marketing strategy directed toward ophthalmologists throughout the
world. A combination of directly-employed sales representatives and independent
international distributors and representatives is used to market directly to
individual ophthalmologists, ophthalmic clinics, and hospitals.
The Company directly employs two territorial managers who are responsible
for sales, both direct and through distributors and representatives, within
their respective territories. The Company's distributors and representatives
have been selected based on their experience in the market for ophthalmic
equipment and their capability for technical support. Distributor and
representative agreements either provide for exclusive territories, with
continuing exclusivity dependent upon mutually-agreed levels of annual sales, or
nonexclusive agreements without sales minimums. Currently, separate distributor
and representative agreements are in place for all major market areas. During
<PAGE>
1997, approximately 89% of sales of LaserSight Technologies' products resulted
from distributors and representatives with the balance from direct sales.
During 1997, LaserSight Technologies continued to expand and negotiate
with distributors and representatives for agreements to represent LaserSight
Technologies' products into areas that will ensure complete worldwide sales
coverage. In conjunction with its expanded sales activities, LaserSight
Technologies continues to participate in a number of ophthalmology meetings,
exhibits and seminars, both domestic and foreign. Historically, two large U.S.
meetings, the American Academy of Ophthalmology and the American Society of
Cataract and Refractive Surgery, have yielded substantial interest in the
Company's laser products.
During 1995, the Company entered into an agreement for the Japanese market
with Noda Medical Consulting, Inc. ("Noda Medical"). Under this agreement, the
Company and Noda Medical formed a new business entity, LS Japan Company, Limited
("LS Japan") during 1996. In December 1997, the Company terminated its
agreements with Noda Medical and started the dissolution of its LS Japan
subsidiary. The Company is negotiating an exclusive distribution agreement with
another firm in Japan.
In certain countries, clinical trials of lasers are required before
commercial sales can take place. As a result, LaserSight Technologies has
historically placed approximately five lasers with clinical investigators at no
cost to the physician. At the conclusion of these clinical trials, the lasers
are to be returned to the Company.
While the focus of LaserSight Technologies' sales activities is on the
international market, the Company has sold lasers in the U.S. to
ophthalmologists participating in LaserSight Technologies' FDA clinical trials.
Pricing of these units has generally been lower than for those sold in foreign
markets as the FDA requires that these sales be based on specific manufacturing
costs, which can include an allocation of research, development and other
expenses. If LaserSight Technologies continues to establish additional clinical
sites in the U.S. during 1998, these sites could represent an additional source
of revenue for the Company as well as additional regulatory costs. Approximately
200 LaserSight excimer laser systems are now in place worldwide.
Meetings and Trade Shows
LaserSight Technologies' strategy is to encourage its clinical
investigators and clinical users to present clinical papers at, and for Company
personnel to attend, international meetings and exhibits to promote sales of the
Company's laser systems. All distributor and representative agreements contain
provisions for the agent to participate in national and regional meetings and
exhibits.
Attendance at meetings and exhibits held in the U.S. is limited to those
meetings where a large attendance of foreign ophthalmologists is anticipated.
These meetings include the Annual Meeting of the American Academy of
Ophthalmology and the American Society of Cataract and Refractive Surgery.
LaserSight Technologies limits its activities at these meetings to the
distribution of technical information without making any offer to sell.
<PAGE>
Seasonality
Based on historical activity, the Company does not believe seasonal
fluctuations have a material impact on its financial performance.
Payment Terms; Receivables
LaserSight Technologies, which implemented more stringent sales criteria
during 1996, may from time to time reassess its credit policy and the terms it
will make available to individual customers. As a result of a growing presence
in a number of countries and continued acceptance of the Company's laser
systems, the Company's internally-financed sales with repayment periods
exceeding 18 months (measured from the installation date) decreased from 28
systems in 1995 to 13 systems in each of 1996 and 1997. There can be no
assurance as to the terms or amount of third-party financing, if any, that the
Company's customers may obtain in the future. Since 1996, the Company has been
placing greater emphasis on the terms and collection timing of future sales.
Laser sales are generally to hospitals or established and licensed
ophthalmologists. Unless a letter of credit or other acceptable security has
been obtained, a significant down payment or deposit is generally required at or
before installation, and LaserSight Technologies maintains regular contact with
customers as routine maintenance work must be provided by LaserSight personnel.
Maintenance services can be withheld should payment terms not be met. LaserSight
Technologies' agreements with its customers typically provide that the contracts
are governed by Florida law. LaserSight Technologies has not determined whether
or to what extent courts or administrative agencies located in foreign countries
would enforce its right to collect such receivables or to recover laser systems
from customers in the event of a customer's payment default.
At December 31, 1997 the Company was the payee on letters of credit with
foreign financial institutions aggregating approximately $0.2 million (compared
to $2.1 million at December 31, 1996). On occasion, it is necessary to meet a
competitor's more liberal terms of payment. In those and other cases, the
Company may provide term financing. See "Management's Discussion and
Analysis--Risk Factors Uncertainties--Uncollectible Receivables Could Exceed
Reserves."
Backlog
To date, the Company has been able to ship laser units as orders are
received, therefore order backlog is not a meaningful factor in its business.
Competition
Competition in the medical and laser industries is intense, and
technological developments are expected to continue at a rapid pace. The Company
competes against both alternative and traditional medical technologies and other
laser manufacturers. Many of the Company's competitors are substantially larger,
better financed, and better known, with existing products and distribution
systems in the marketplace. A number of lasers manufactured by other companies
have either already received, or are much farther advanced in the process of
receiving, FDA approval for specific procedures, and, accordingly, may have a
higher level of acceptance in some markets than the Company's lasers.
<PAGE>
PRK and LASIK techniques for treatment of refractive vision disorders
compete with eye glasses, contact lenses, and RK (radial keratotomy). In
addition, medical companies, academic and research institutions and others could
develop new therapies, including new medical devices or surgical procedures
(such as corneal implants and surgery utilizing other types of lasers), for the
conditions targeted by the Company, which therapies could be more medically
effective and less expensive than PRK and LASIK, and could potentially render
PRK and LASIK obsolete. Any such development could have a material adverse
effect on the business, financial condition, and results of operations of the
Company.
In addition to general laser applications, LaserSight Technologies is
targeting the LSX and the LaserScan 2000 for the PRK and LASIK UV-wavelength
market. The Company believes that the worldwide UV-wavelength market includes
six major competitors, including two major U.S. companies. For refractive
surgery, LaserSight Technologies believes that its scanning laser systems,
software-based flexibility and eye tracking technology have significant
advantages over the excimer lasers manufactured by its principal competitors,
but many of these competitors are larger, more established, and presently have
greater financial strength than the Company.
Competitive factors such as performance, price, warranty, and royalty
issues play an important role in the customer's decision to purchase an excimer
laser system. Regulatory issues also play a significant role in determining the
markets accessible to the Company. As the Company must obtain approval from the
FDA for marketing in the U.S., the Company must presently focus its marketing
efforts on international markets. Both U.S. and foreign competitors may enter
the excimer laser business or acquire existing companies. Such competitors may
be able to offer their products at a lower cost or may develop procedures that
involve lower per procedure costs. Competition from new entrants may be
prevalent in those countries where significant regulatory approval is not
required.
Food and Drug Administration
During 1994, the Company began the clinical studies required for approval
of its laser systems in the U.S. During 1995, it completed the clinical
activities required by the FDA for its Phase 2a myopia study and submitted the
results of this phase of the trial to the FDA. In 1996, the Company filed a
request to proceed with Phase 2b of its myopia study, as well as a request that
its new laser model, the LaserScan 2000, be recognized as comparable in method
and performance to the Compak-200 used in the earlier trials. Both of the
Company's requests were approved by the FDA, and Phase 2b myopia clinical trials
were started during the later part of 1996. As both models of the Company's
excimer lasers will be utilized in future clinical activities, the Compak-200
systems utilized in the Phase 2a myopia trials have been upgraded with new Leica
microscopes and other features that have brought these systems closer to the
Company's LS 300 system configuration. During 1997, the Company completed the
clinical activities required for its Phase 2b myopia study and submitted the
results of the study to the FDA. The Company filed a request to proceed with
Phase 3 of its myopia study, and such request was granted. In March 1998, the
Company filed its Pre-Market Approval ("PMA") application for PRK treatment of
myopia with its scanning laser system, and continues to enroll patients into a
Phase 3 PRK study for the purpose of post-market surveillance. There can be no
assurance as to whether or when the FDA will approve this PMA.
<PAGE>
During 1996, the Company submitted an additional protocol request to the
FDA, and received its approval to proceed with clinical trials for PARK
(photo-astigmatic refractive keratectomy). This Phase 2a trial is being
conducted by four domestic investigators, and one international investigator and
has continued through 1997 and into 1998.
The Company is preparing to submit during 1998 additional protocol
requests for hyperopia and LASIK (in which the stroma beneath the cornea is
ablated rather than the surface of the cornea). The Company expects that these
trials will be conducted by both domestic and foreign investigators. There is no
assurance that these protocols will be approved by the FDA. If such approvals
are received, the Company anticipates that it will establish up to an additional
four domestic clinical trial sites, and one additional international site. The
FDA currently limits to 20 the maximum number of clinical sites a manufacturer
can establish.
In July 1997, the Company acquired the rights to a PMA application filed
with the FDA for a laser to perform LASIK, a refractive surgery alternative to
surface PRK from Photomed. On February 13, 1998, the Ophthalmic Devices Panel of
the FDA determined that the PMA presented by Dr. Frederic Kremer, a former
shareholder of Photomed, was not approvable due to specific deficiencies which
the FDA subsequently identified in letter to Dr. Kremer dated March 13, 1998.
Dr. Kremer's PMA is for a single-site usage (rather than general commercial
usage) and encompasses the treatment of myopia and myopic astigmatism,
specifically using LASIK. The commercial sale of the Photomed laser in the
United States would require, in addition to the approval of Dr. Kremer's PMA,
certain additional FDA approvals, including GMP (Good Manufacturing Practice)
clearance, the development and validation of a manufacturing process for the
Photomed laser, and a payment by the Company of $1.75 million if the FDA
approves such commercial sale before July 29, 1998. The FDA's action is
unrelated to the PMA for the Company's scanning laser systems which the Company
recently submitted to the FDA.
In March 1998, the Company filed a PMA for its principle scanning laser
platform for PRK treatment of myopia. The Company continues to enroll patients
into a Phase 3 PRK study for the purpose of post-market surveillance. The
Company is also conducting a Phase 2 clinical trial for PARK. The Company also
has an IDE approved by the FDA for the treatment of glaucoma by laser
trabeculodissection. The Company has completed a Phase 1 study in blind eyes and
expects to submit the results to the FDA in April 1998, to request an expansion
to study sighted glaucoma patients.
Research and Development
During 1997, the Company continued its research and development activities
related to new laser products, laser systems, product upgrades and ancillary
product lines. Excluding regulatory expenses, research and development expense
was $1,723,695 in 1997 compared to $948,520 in 1996, an increase of 82%. In
1995, these expenses were $983,130. Considerable research and development effort
was directed to the development of the LSX laser system and continued
improvement of the LaserScan 2000 and 2000Plus systems, including completion of
subsystems for automatic gas fill, power stabilization, operating software and
other key components. Many of the subsystems developed were designed to be
retrofitted to Compak-200 and LS 300 lasers already in use.
Other research and development efforts have been focused on the
development of the new solid-state LaserHarmonic laser and have resulted in an
operational prototype. The LaserHarmonic is the first true non-gas laser capable
<PAGE>
of delivering a laser beam in the ultraviolet spectrum (common to all excimer
lasers used for refractive surgery). The Company expects to direct additional
efforts during 1998 toward the production of a commercial design for this
product. In addition, the LaserHarmonic could be capable of generating multiple
wave lengths, thus permitting its use for other ophthalmic procedures which now
require separate lasers.
The LaserHarmonic research and development effort resulted in the
identification of many features which have been subsequently incorporated into
the Company's excimer laser systems. Further efforts will continue to be
directed at an appropriate level towards production of a clinical design for
this product to ensure that a commercial version is available to meet the
market's demand for such a system. There are no assurances that these activities
will be successful.
Upon completion of a clinical design for the LaserHarmonic system,
pre-clinical trials and formal clinical trials are anticipated. Once sufficient
clinical and safety data have been gathered, the Company intends to initially
market the LaserHarmonic system for medical uses outside of the U.S. The Company
continues to assess numerous issues related to manufacturing and marketing of
the LaserHarmonic system. Prior to commercialization the LaserHarmonic will
likely be renamed. As is the case with many new technology products, the
commercialization of the LaserHarmonic is subject to potential delays.
During 1997, the Company continued development of its advanced
eye-tracking system which is standard on the LSX and offered as an option to
LaserScan 2000 purchasers. The LaserSight eye tracker (AccuTrack) is an "Active
+ Passive" system that is capable of following even fine saccadic eye movements.
The tracking system requires no dilation and no on-eye apparatus to eliminate
most error normally introduced by gross and fine eye movements to untracked
laser refractive surgery. Additionally, a larger margin of safety may be seen
for patients with poor compliance.
The Company's research and development activities also include efforts to
develop completely new types of solid-state laser heads not currently available
or produced anywhere in the world marketplace. While the risk of failure of
these specific activities may be significant, the Company believes that if
developed, these products could provide it with a leading edge technology that
would differentiate its products from other companies in the industry. There is
no assurance these efforts will be successful.
In conjunction with the University of Southern California, the Company
entered into agreements for the development of an epithelial boundary
determination device and for a method of preventing keratocyte loss. Such
agreements have not resulted in material revenues or expenses to date. In
February 1998, the Company terminated its license to the method of preventing
keratocyte loss.
HEALTH CARE CONSULTING SERVICES (TFG)
Introduction
TFG has historically been a national provider of consulting services in
strategic analysis, planning and implementation, and decision support for
hospitals, health systems, HMOs and other organizations engaged in health care
related services. During 1996 and 1997, as a result of losses incurred beginning
the last half of 1996, TFG substantially reduced its staffing and more narrowly
<PAGE>
focused its resources on its business of developing decision support
information, strategic planning and physician recruiting. TFG's clients include
community hospitals, hospital systems, physician practices, specialty health
care providers and manufacturers and distributors of products and services to
health care providers.
The senior consulting staff of TFG includes seasoned professionals with
health care experience ranging from 10 years to more than 20 years of
experience. These individuals represent expertise obtained from hospital
settings in senior administrative roles in both non-profit and proprietary
sectors. The consulting staff has significant experience in the health care
industry in such areas as market research, hospital operations, strategic
planning, turnaround management, finance, and medical practice operations.
Principal Services
Decision Support Information. Decision support information is developed by
TFG from published data bases, demographic data, health services demand
information, manpower projections, hospital utilization and community migration
and emigration data, with which TFG performs patient service and primary market
research including its proprietary Secret Shopper methodology. TFG adds value by
obtaining primary information, understanding the various sources and
characteristics of the available information, enhancing the commercially
available information through interviews and teleresearch and managing large
amounts of data for decision-making purposes.
TFG provides client specific decision support information for planning and
marketing activities of client organizations. Clients include hospitals, health
care systems, integrated delivery systems, individual physicians and group
practices and organizations marketing to health care providers.
The Secret Shopper methodology is a versatile tool for gaining competitive
intelligence. With certain embellishments, TFG is able to expand the results of
Secret Shopper studies into a proprietary product called Distribution Channel
Mapping, which examines all of the health care providers in a market along with
the flow of referrals and other resources. Distribution Channel Mapping aids
clients, particularly hospitals, in planning competitive growth strategies,
acquisition targets, mergers and divestitures. Industry projections reflect that
growth in health care services will be in areas other than in hospital services.
Therefore, hospitals, to continue their growth, must either increase market
share or diversify. TFG believes that it is well positioned to help hospital
clients grow beyond the traditional inpatient and outpatient services because of
its access to critical information and the experience of the consulting staff.
Strategic Planning. TFG created a strategic planning model, which may be
tailored in terms of amount of detail, sequence and confidence level of
information utilized in the planning process. In addition, TFG provides various
segments of the strategic planning process as may be required by the client.
Securing decision support information to meet the needs of in-house planners,
conducting planning retreats and assistance in defining the vision or mission
determining functions are examples of strategic planning components which may be
provided separately to clients. Senior consultants at TFG also provide general
advisory services to senior managers of health care organizations.
Physician Recruitment. TFG continues to assist clients in filling specific
physician needs. The services include the traditional retained search program,
contingency searches and providing source information for in-house recruiters.
The Physician Recruitment service also provides candidate screening,
<PAGE>
coordinating on-site visits and pre-employment negotiations. The Recruitment
consultants also assist physicians and potential purchasers of physician
practices in valuations and contracting.
Marketing
Most of TFG's business comes from new projects for existing clients and
through favorable referrals from such clients. Recently, TFG introduced the
Distribution Channel Mapping product and increased the sales activities to
hospitals located in competitive environments. New brochures have been created
describing the services and the professional staff. Presentations to health care
executives concerning the use of Distribution Channel Mapping for strategic
decisions are given at scheduled conferences. Utilizing their extensive
knowledge of hospitals and physicians in the U.S., TFG consultants have expanded
their service offerings to companies selling to the health care provider market.
TFG is introducing direct mail advertising followed by telephone follow-up
for certain of its services. The success of such activities will be evaluated on
an ongoing basis.
TFG serviced approximately 30 clients in both 1997 and in 1996.
Payment Terms
Clients are generally billed monthly for services rendered with the amount
due upon receipt of the invoice. The monthly billing may be either a retainer or
based on actual time and materials incurred. Certain projects are capped as to a
maximum billable fees.
Competition
The Company believes that key competitive factors relating to its health
care services segment include the experience of consultants, contacts within the
industry and pricing of services. Primary competitors are large national
consulting firms and small health care consulting firms. The Company believes it
holds advantages over many of these firms based upon (i) its commitment to be a
turn-key provider, capable developer of strategic business plans, experienced
and skilled executor of the plans, and implementers of critical follow-through
required; (ii) its consultants' hands-on experience in numerous settings vital
to the successful implementation of these services within this
politically-charged, changing industry; and (iii) TFG's significant experience
in the development of comprehensive, in-house data bases and research functions,
both vital areas in delivering the set of turn-key consulting services demanded
by the market.
Item 2. Properties
The table below describes the Company's present facilities. All such
facilities are leased from independent third parties.
<PAGE>
<TABLE>
<CAPTION>
Square Monthly Expiration
Location Description Footage Payment Date
-------- ----------- ------- ------- ----
<S> <C> <C> <C> <C>
Orlando, Florida (1) Principal offices of Company and 7,600 $12,449 5/31/00
LaserSight Technologies
Orlando, Florida (1) LaserSight Technologies-- 1,535 $1,763 5/31/98
additional space
St. Louis, Missouri (2) The Farris Group office 7,900 $10,204 7/20/98
Near San Jose, Costa Rica Manufacturing facility for 6,400 $4,198 11/30/00
international sales
<FN>
(1) The Company is seeking to consolidate its Orlando facilities and to
approximately double the existing space. The Company expects to enter into
a lease for approximately 22,600 square feet at a cost of $23,334 per
month, with an expiration date of June 14, 2002. The Company believes that
such new facility will be adequate for the foreseeable future and that its
existing space can be subleased.
(2) The Company is seeking smaller office space for TFG.
</FN>
</TABLE>
Item 3. Legal Proceedings
Euro Pacific Securities Service. In June 1996, the Company filed a lawsuit
in a Florida state court against Euro Pacific Securities Service and Mr. Wolf
Wiese (collectively, the "Wiese Defendants") to collect the $1,140,000 balance
due on a promissory note executed by the Wiese Defendants in 1995 relating to a
stock subscription receivable. In September 1996, the Wiese Defendants removed
the lawsuit to the U.S. District Court for the Middle District of
Florida-Orlando Division. In July 1997, after missing the deadline for filing
counterclaims against the Company, and without having obtained permission from
the Court to do so, the Wiese Defendants filed a separate lawsuit in the same
U.S. District Court against the Company and its LaserSight Technologies
subsidiary. In their lawsuit, the Wiese Defendants alleged against the Company
breach of contract, coercion to enter into a contract, misrepresentation,
together with other charges and sought an unspecified amount of monetary
damages. On October 20, 1997, the Company filed a motion to dismiss the Wiese
Defendants' lawsuit. On February 10, 1998, the Court dismissed the Wiese
Defendants' lawsuit without prejudice.
The Company's lawsuit against the Wiese Defendants was tried on December
15 and 16, 1997 and resulted in the issuance on December 29, 1997 of a final
judgment in favor of the Company in the amount of $1,140,000, together with
interest in the amount of $526,809 and costs and attorneys' fees in an amount
yet to be determined. The Wiese Defendants have appealed the judgment to the
U.S. Court of Appeals for the Eleventh Circuit, Atlanta, Georgia. To date,
appellate briefs have not been filed with the court. The Company is taking steps
to collect on the judgment, but there can be no assurance as to whether, when or
in what amount it will be able to do so. Any recovery on the portion of the
judgment representing the $1,140,000 amount due on the Wiese Defendants'
promissory note will be credited to stockholders' equity, but will have no
effect on the Company's results of operations.
<PAGE>
Northern New Jersey Eye Institute. In October 1997, the Company received a
written request for mediation and, if necessary, arbitration from the physicians
at NNJEI. The request related to the services agreement (the "Services
Agreement") between LSIA and NNJEI that was entered into as part of LSIA's
acquisition of NNJEI's assets in July 1996. The request alleged breach of
contract and fraud by LSIA in connection with the Services Agreement and
requested termination of the Services Agreement, "several hundred thousand
dollars in lost income damages" and punitive damages in an amount to be
determined.
The Company has denied NNJEI's allegations. The Company and NNJEI
discussed a possible restructuring of the relationship between LSIA and NNJEI at
a mediation session held on November 16, 1997 and in subsequent correspondence,
but did not reach an agreement. Thereafter, the Company sold LSIA to Vision
Twenty-One, Inc. ("Vision 21") on December 30, 1997 in a transaction which was
effective as of December 1, 1997. In connection with the LSIA sale, the Company
agreed to indemnify Vision 21 from certain claims related to the Services
Agreement arising before December 30, 1997. Management believes, based in part
on the advice of outside counsel, that the Company's indemnification obligations
under the Services Agreement should not have a material adverse effect on the
Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "LASE." The table below sets forth the high and low sales prices for the
Common Stock during 1996 and 1997, as reported by The Nasdaq Stock Market. As of
March 1, 1998 there were approximately 217 holders of record of the Common Stock
and, as far as the Company can determine, approximately 3,700 total
shareholders, including shareholders of record and shareholders in "street
name."
<TABLE>
<CAPTION>
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
Fiscal 1996 Fiscal 1997
First Quarter $13.38 $9.50 First Quarter $6.63 $5.19
Second Quarter 13.12 8.88 Second Quarter 7.31 3.38
Third Quarter 11.00 6.06 Third Quarter 6.94 4.19
Fourth Quarter 7.00 5.31 Fourth Quarter 5.25 2.56
</TABLE>
On March 27, 1998, the last sale price of the Common Stock on The Nasdaq Stock
Market was $2.625.
<PAGE>
The Company has not paid any cash dividends on the Common Stock since its
inception. The Company currently does not anticipate paying cash dividends on
Common Stock in the foreseeable future. The Company's loan agreement with its
secured lender, Foothill Capital Corporation ("Foothill"), provides that the
Company shall not pay any cash dividends.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The summary financial information as of
and for each of the years in the five-year period ended December 31, 1997 is
derived from the Company's consolidated financial statements for such years.
<TABLE>
<CAPTION>
(In thousands, except for per share amounts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $24,389 $21,504 $25,988 $9,594 $365
Gross profit 11,687 11,381 18,895 6,484 62
Income (loss) from operations (9,262) (4,960) 4,552 1,140 (1,657)
Gain on sale of subsidiaries 4,129 --- --- --- ---
Net income (loss) (7,253) (4,074) 4,592 1,018 (4,753)
Conversion discount
on preferred stock (42) (1,011) --- --- ---
Dividends and accretion
on preferred stock (298) (359) --- --- ---
Income (loss) attributable
to common stockholders (7,593) (5,444) 4,592 1,018 (4,753)
Basic earnings
(loss) per common share (0.80) (0.69) 0.68 0.18 (0.92)
Diluted earnings
(loss) per share (0.80) (0.69) 0.64 0.16 (0.92)
Working capital 12,730 10,021 7,272 3,570 3,063
Total assets 50,461 34,250 29,102 8,641 4,511
Long-term obligations 500 642 --- --- ---
Redeemable convertible
preferred stock 11,477 --- --- --- ---
Stockholders' equity 27,040 26,769 20,420 6,118 3,532
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All yearly references are to the Company's fiscal years ended December 31,
1997, 1996 and 1995, unless otherwise indicated.
<PAGE>
Adoption of New Accounting Standard
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" which established new standards for computing and presenting earnings per
share. The historical measures of earnings per share (primary and fully diluted)
are replaced with two new computations of earnings per share (basic and
diluted). The Company adopted SFAS 128 as of December 31, 1997.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." They are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated.
SFAS No. 130 requires companies to classify items defined as "other
comprehensive income" by their nature in a financial statement, and to display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The adoption of SFAS No. 130 is not expected to have a material impact on
the Company's consolidated financial statements.
SFAS No. 131 requires companies to report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
also requires that public companies report certain information about their
products and services, the geographic areas in which they operate and their
major customers. The Company is currently reviewing the impact of this statement
on its current level of disclosure.
Overview
The Company's net loss for 1997 was $7,253,084 and its loss attributable
to common stockholders was $7,592,926, or $0.80 per basic and diluted common
share, on net sales of $24,388,833. The net loss is primarily attributable to
increased expenses generated by the Company's technology segment. The difference
between the net loss and the loss attributable to common stockholders resulted
from preferred stock dividends and accretion and the conversion discount on
preferred stock.
On December 30, 1997, the Company sold its MEC and LSIA subsidiaries to
Vision 21 in a transaction which was effective as of December 1, 1997. Under the
Company's ownership, MEC was a vision managed care company which managed vision
care programs for health maintenance organizations (HMOs) and other insured
enrollees and LSIA was a physician practice management company which managed the
ophthalmic practice known as NNJEI under a management services agreement. The
Company received $6.5 million in cash paid at the closing and 820,085
unregistered shares of Vision 21 common stock ("Vision 21 Shares"), subject to
certain post-closing adjustments. See "Recent Developments--Liquidation of
Vision 21 Shares." Although the amount of post-closing adjustments could be as
much as $770,000, the Company estimates, as of March 27, 1998, that the amount
of such adjustments will be approximately $150,000. This estimate is subject to
change and reflects the anticipated effect of the following: The Company is
<PAGE>
required to reimburse Vision 21 for operating profits for the month of December
1997 generated by MEC and LSIA, negative working capital as of November 30, 1997
of MEC and LSIA less than negative $180,000, if any, and negative net worth as
of November 30, 1997 for MEC and LSIA, if any. In addition, if prior to December
31, 1998 Vision 21 does not enter into certain practice management agreements
with NNJEI and an affiliated physician, or absent such agreements, if the
benefits Vision 21 derives from existing practice management agreements for the
period ending December 31, 1998 is less than $133,000, then the Company is
required to reimburse Vision 21 for such shortfall on a dollar-for-dollar basis
up to a maximum of $500,000. In an amendment to Form 8-K filed with the
Securities and Exchange Commission (the "SEC") on March 17, 1998, Vision 21
disclosed that the physicians currently employed by NNJEI have threatened to
discontinue providing professional services effective March 31, 1998.
Results of Operations
Net sales. The following table presents the Company's net sales by major
operating segments: technology products and services and health care services
for the previous three years.
<TABLE>
<CAPTION>
1997 1996 1995
Net Sales % of Total Net Sales % of Total Net Sales % of Total
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Technology $12,170,018 50% $10,634,663 50% $19,899,584 77%
Health care services 12,218,815 50% 11,263,399 52% 6,088,481 23%
Intercompany revenues -- -- (394,072) (2%) -- --
----------- ----- ----------- ---- ----------- -----
Total net sales $24,388,833 100% $21,503,990 100% $25,988,065 100%
Change from
prior year 13% (17)%
</TABLE>
Net sales and revenues increased by $2,884,843 between 1996 and 1997. Net
sales and revenues decreased by $4,484,075 between 1995 and 1996.
1997 vs. 1996. The increase in health care services revenue was primarily
attributable to increased revenues generated by MEC (an increase of $1,806,392)
and LSIA (an increase of $1,317,780), offset by a substantial reduction in
revenues generated by TFG. Of the total net sales and revenues for 1997, MEC,
LSIA and TFG accounted for revenues of $7,985,811 (33% of total revenues),
$3,021,304 (12%) and $1,211,700 (5%), respectively. Net sales for TFG for the
year ended 1997 decreased by $2,168,756 from the same period in 1996. This
decrease was due primarily to a reduction in consulting services provided and
was accompanied by a total expense reduction, including costs of services, of
$2,055,959 for the year ended 1997. Such revenue decrease is primarily a result
of that subsidiary's primary revenue producer, Michael R. Farris, being named as
president of the Company in late 1995, eliminating his day-to-day participation
in the consulting business. Other consultants employed were unable to maintain
revenues at historical levels. The increase in revenues generated by MEC
resulted from new contracts entered into during 1997 and increased enrollments
in existing contracts. The increase in revenues generated by LSIA in 1997 is
primarily a result of LSIA being acquired in July 1996. The increase in revenues
generated by the Company's technology subsidiary is primarily attributable to
the phasing out of the LS 300 laser system which had a lower selling price than
the LaserScan 2000 and LSX. Forty-six laser systems were sold during 1997
compared to 46 systems, net of returns, sold 1996. The Company's ability to sell
<PAGE>
the new LSX into certain European countries is limited until the system receives
CE Mark certification, which is anticipated sometime in mid-1998. Technology
revenues include the impact of 12 sales returns in 1996 (see the next paragraph)
and one system return in 1997. Based upon the expected timing of increased
availability of the LSX, the Company expects laser system sales to remain at
1997 levels for the first quarter of 1998, with moderately increased sales
levels thereafter.
1996 vs. 1995. The increase in health care services revenue was primarily
attributable to revenues generated by the Company's acquisitions of MEC on
October 5, 1995 and of the assets of NNJEI on July 3, 1996, partially offset by
a reduction in TFG's revenues of 31% relative to 1995. This decrease was due
primarily to a reduction in consulting services provided. During the third
quarter of 1996, the Company reduced the number of TFG's personnel in
anticipation that 1997 revenues would continue below historical levels. Of the
total net sales and revenues for 1996, MEC, TFG and LSIA accounted for revenues
of $6,179,419 (29% of total revenues), $3,380,456 (16%) and $1,703,524 (8%),
respectively. Of TFG's total revenues, $394,072 (2%) were intercompany revenues
which have been eliminated in the Company's consolidated financial statements.
LSIA's 1996 revenues reflect a six-month period.
The higher revenues generated from health care services were offset
primarily by a decrease in revenues of technology products and services during
1996. The decrease in revenues generated by the Company's technology subsidiary
was primarily attributable to (i) a decrease in the number of laser systems sold
in overseas markets in 1996; (ii) a higher allowance for sales returns,
reflecting differences between actual experience and previously-estimated
amounts; and (iii) a lower average system selling price in 1996. Although a
total of 58 laser systems were sold in 1996 compared to 65 systems sold in 1995,
12 laser systems were returned in 1996 compared to one system returned in 1995.
Through the first quarter of 1996, certain of the Company's sales contracts
included provisions for returns over periods ranging from one to 12 months. Such
provisions did not result in any material laser system returns through the end
of 1995. In the second quarter of 1996, the Company ceased sales of systems with
return rights. Based on the passage of time, the Company does not believe it
faces significant exposure for future returns of systems. The decrease in laser
system sales from 1995 levels was also the result of the Company's revised
credit policy, which established more stringent criteria for acceptable sales
terms. In addition, due to competitive pressures in certain markets and the
Company's introduction of the lower priced LS 300 laser system in June 1996, the
average sales price, net of commissions, declined by approximately 20% from 1995
average levels. Included in the first quarter of 1995 were non-recurring
revenues from the sale of revenue rights from procedure fees at six surgical
centers located in China in the amount of $600,000.
The financial impact of systems sold in 1995 and returned in 1996 in
excess of previously estimated amounts was approximately $1.8 million, broken
down as follows: Net revenues were decreased by $2.7 million, offset by
reductions in corresponding cost of sales ($0.6 million) and commissions and
warranty-related costs ($0.3 million).
Cost of revenues; gross profits. The following table presents a three-year
comparative analysis of cost of revenues, gross profit and gross profit margins.
<PAGE>
<TABLE>
<CAPTION>
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Product cost $4,127,908 21% $3,415,276 (30%) $4,859,039
Cost of services 8,573,932 28% 6,707,308 200% 2,234,131
Gross profit 11,686,993 11,381,406 18,984,895
Gross profit percentage 48% 53% 73%
Products only:
Gross profit 8,042,110 7,219,387 15,040,545
Gross profit percentage 66% 68% 76%
</TABLE>
Gross profit margins were 48% of net sales in 1997 compared to 53% in 1996
and 73% in 1995. Gross profit increased $305,587 in 1997 from 1996 and decreased
$7,513,489 in 1996 from 1995.
1997 vs. 1996. The gross profit margin decrease was attributable to (i) a
significant increase in MEC revenues with a corresponding increase in provider
payments, which historically have ranged from approximately 68 to 72% of MEC
revenues, and (ii) a general increase in the operating costs of the Company's
Costa Rican manufacturing facility due to the doubling of leased space and
higher than average compensation increases paid to Costa Rican employees due to
the competitive environment for engineers in that area, the costs of which are
allocated entirely to cost of goods sold. The gross profit margin decrease was
mitigated in part due to a substantial increase in revenues generated by LSIA.
Costa Rican operating expenses are not expected to increase materially without a
significant increase in the level of systems sold.
1996 vs. 1995. The gross profit margin decrease was attributable to (i) a
full year's activity of MEC which, in 1996, operated at a gross profit
percentage of 32% (which the Company believes is above average for the managed
care industry); (ii) a lower average sales price for laser systems sold in 1996;
(iii) the additional allowance for sales returns; and (iv) the sale of the
Company's future revenue rights for six laser systems in China for $600,000 in
1995. After removing revenues from the sale of revenue rights in 1995 and all
health care services revenues from 1996 and 1995 consolidated sales and
revenues, the gross profit margins and gross profit margin were $7,219,387 and
68%, respectively, in 1996 and $14,440,545 and 75%, respectively, in 1995.
Research, development and regulatory expenses. The following table
presents a three-year comparative analysis of research, development and
regulatory expenses.
<TABLE>
<CAPTION>
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Research, development
and regulatory $2,807,579 63% $1,720,246 18% $1,460,842
As a percent of technology
net sales 23% 16% 7%
</TABLE>
Research, development and regulatory expenses increased by $1,087,333
between 1996 and 1997. Such expenses increased by $259,404 between 1995 and
1996.
<PAGE>
1997 vs. 1996. The increase can primarily be attributed to ongoing
research and development of new scanning refractive laser systems, including
development of the LSX and add-on features for the LaserScan 2000, and continued
software development for the laser systems. Additionally, the Company has
incurred increased costs related to the FDA regulatory process, both for its own
scanning laser system (the PMA application for which was filed in March 1998),
and the LASIK laser system (for which the Company purchased the rights to
manufacture and commercialize if FDA approval is received). Additional costs
have been incurred in the clinical and manufacturing validation of the A*D*K.
Increased commercial production and shipment of the LSX is anticipated during
the second quarter of 1998. Since the initial announcement of the development of
the LSX, the Company has solicited and received input from clinical users and
prospective customers. This has resulted in modifications to the system,
necessitating additional development and testing for clinical validation. As a
result of a continuation of the efforts described, the Company expects research,
development and regulatory expenses during the first two quarters of 1998 to
remain at levels consistent with those incurred in the latter part of 1997. The
Company does not anticipate 1998 expenses overall to exceed 1997 levels.
Regulatory expenses may increase as a result of the Company's continuation of
current FDA clinical trials, protocols added during 1997 related to the
potential use of the Company's laser systems for treatment of glaucoma, the
possible development of additional future protocols for submission to the FDA
and the LASIK PMA acquired in July 1997.
1996 vs. 1995. The increase can primarily be attributed to ongoing
research and development of new refractive laser systems, including refinements
to and accessories for the LaserScan 2000, and continued software development
for the excimer lasers. Regulatory expenses increased as a result of the
Company's approval from the FDA to proceed with Phase 2b clinical trials for
myopia and Phase 2a clinical trials for PARK and the development of additional
protocols for possible future submission to the FDA.
Selling, general and administrative expenses. The following table presents
a three-year comparative analysis of selling, general and administrative
expenses.
<TABLE>
<CAPTION>
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C>
Selling, general and
administrative $18,141,568 24 % $14,621,509 14 % $12,881,909
As a % of net sales 74 % 68 % 50 %
</TABLE>
Selling, general and administrative expenses increased by $3,520,059 in
1997 from 1996. Such expenses increased by $1,739,600 in 1996 from 1995.
1997 vs. 1996. The primary reasons for these increases include the
continued growth of MEC ($376,126), increased amortization costs resulting from
acquired patents, license agreements and other intangibles ($1,074,365),
additional provisions for uncollectible accounts ($1,902,432), and a general
increase in personnel costs necessary to fund the strategic initiatives of the
Company and the development of its products and services. Such strategic efforts
include enhancements to field service, engineering and software development
departments, the pursuit during 1997 of vision managed care contracts with HMOs,
insurers and employer groups, the IBM patents and the A*D*K license.
Additionally, LSIA began operations in July 1996, resulting in six months of
expenses being included in 1996 operations and representing increased expenses
of $269,069 during 1997. These increases were partially offset by the
<PAGE>
substantial reduction in the operating costs of TFG ($1,456,999). Legal and
accounting expenditures continue to be incurred as a result of ongoing
regulatory filings, general corporate issues, litigation and patent issues.
1996 vs. 1995. The primary reasons for these increases include increased
employment and other operating costs as a result of the acquisition of MEC in
October 1995 and its subsequent growth, the acquisition of the assets of NNJEI
in July 1996, and a general increase in personnel and costs necessary to fund
the strategic initiatives of the Company and the development of its products and
services. The relationship of such expenses to revenues suffered during 1996 as
a result of the lower average selling price for laser systems, the additional
allowance for sales returns, and the decrease in TFG revenues. Without the
impact of sales returns, total selling, general and administrative expenses
would have totaled approximately $14.9 million and represented 62% of net sales.
Additionally, in 1996, the Company spent approximately $400,000 and significant
internal resources on the expansion of its ophthalmic practice management and
vision managed care strategies. Expenses in 1996 included severance costs of
approximately $330,000, and the costs attributable to the work required to
achieve ISO 9002 certification and CE Mark designation on the LaserScan 2000.
During 1996, the Company increased its net reserve for uncollectible accounts by
$425,000. Legal and consulting expenditures continue to be incurred as a result
of ongoing regulatory filings, general corporate issues, litigation and patent
issues.
Income (Loss) from Operations. The Company recognized a loss from
operations of $9,262,154 in 1997 compared to a loss from operations of
$4,960,349 in 1996 and an income from operations of $4,552,144 in 1995.
1997 vs. 1996. The decrease in operating results can be attributed
primarily to the increases in research, development, regulatory and general and
administrative expenses partially offset by increased revenues. Effective
December 1, 1997, the Company sold two of its subsidiaries. See "Recent
Developments-Liquidation of Vision 21 Shares".
1996 vs. 1995. The decrease in operating results can be attributed
primarily to the decrease in net sales of the Company's laser systems, the
higher-than-estimated level of laser system returns, and the loss incurred by
TFG. Additional contributing factors included an overall increase in expenses,
including research and development, regulatory and selling, general and
administrative expenses, including resources devoted to the development of the
Company's business strategies.
Other Income and Expenses. Interest and dividend income of $383,611 was
earned in 1997 from the investment of cash and cash equivalents and the
collection of long-term receivables related to laser system sales. This
represents an increase of $69,324 from 1996. Investment earnings in 1996 were
$314,287, an increase of $124,739 from 1995, and consisted of the investment of
cash and cash equivalents and a note receivable. Interest expense incurred
during 1997 was $1,343,198 and related primarily to the credit facility
established with Foothill on April 1, 1997 and the note payable to the former
owners of MEC which was repaid on April 1, 1997. In addition to interest paid on
the outstanding note payable balance, interest expense includes the amortization
of deferred financing costs, the accretion of the discount on the note payable,
and fees associated with amendments to the original loan agreement. Interest
expense for 1996 was $151,634 and related primarily to the notes payable to the
former owners of MEC and a capital lease on most of the NNJEI assets acquired.
<PAGE>
Included in other expense in 1997 and 1996 are costs of $280,400 and
$415,681, respectively, related to the settlement of patent and other filed and
threatened litigation. There were no such expenses in 1995. Included in other
income is a $4,129,057 gain recognized from the sale of two of the Company's
subsidiaries. See "Recent Developments--Liquidation of Vision 21 Shares."
During 1995, the Company received payment of $350,000 from the Company's
former president in settlement of securities trading losses incurred during 1993
and the first half of 1994, and recognized a non-recurring gain. In addition,
the Company also received aggregate payments of $980,125 in settlement of its
litigation claims against Residue Recovery Corp., and recognized a non-recurring
gain. Without these gains, net income for 1995, after the estimated income tax
effect of these gains, would have been approximately $3,528,000 or $0.52 per
basic share.
Income taxes. The Company recorded an income tax provision of $880,000 in
1997 compared to an income tax benefit of $1,139,008 in 1996 and an income tax
provision of $1,397,800 in 1995. The 1997 provision for income taxes primarily
results from the gain on the sale of two of the Company's subsidiaries after
utilization of net operating loss and capital loss carryforwards. The 1996
benefit reflects an effective income tax rate of approximately 22% resulting
from a limitation of available net operating loss carrybacks and the
establishment of a valuation allowance on deferred tax assets. The 1995
provision for income taxes reflected an effective income tax rate of
approximately 23% resulting from utilization of net operating loss
carryforwards, a reduction of the deferred tax asset valuation allowance and
income tax credits.
Net Income (Loss). The Company incurred a net loss of $7,253,084 in 1997
compared to a net loss of $4,074,369 in 1996 and net income of $4,591,871 in
1995. The 1997 results are primarily attributable to a combination of increased
revenues from technology products and MEC services, losses generated from TFG
and higher operating expenses as previously described. The loss in 1996 was
primarily attributable to the decrease in net sales of the Company's laser
systems combined with the higher than estimated level of laser system returns,
TFG's loss, an overall increase in expenses as previously described, and
settlement expenses. The improved operating results in 1995 were primarily the
result of increased sales of the Company's laser systems, the profitability of
the health care services companies, and non-recurring gains.
Earnings (loss) per share. Earnings (loss) per basic and diluted common
share decreased to ($0.80) in 1997 from ($0.69) in 1996. The decreases in 1997
are attributable to the larger net loss incurred and accretion and dividend
requirements on the redemption in October 1997 of, the Company's Series B
Convertible Participating Preferred Stock, $.001 par value (the "Series B
Preferred Stock") issued in August 1997. Of the basic and diluted losses per
share in 1997, $0.04 and $0.04, respectively, were a result of the value of
conversion discount on preferred stock in accordance with EITF Topic D-60 and
accretion and dividend requirements on the Series B Preferred Stock. Weighted
average shares outstanding increased in 1997 as a result of the conversion of
eight shares of Series A Preferred Stock into Common Stock, the 1997 amendment
to the purchase agreement related to LaserSight Centers, the issuance of shares
under the earnout provisions of the 1994 acquisition of TFG, the issuance of
shares in conjunction with the 1997 acquisition of rights to a PMA and keratome
patent, and the exercise of options.
The decreases in 1996 were attributable to the net loss incurred and
dividends on the Series A Preferred Stock issued in January 1996. Of the basic
<PAGE>
and diluted losses per share in 1996, $0.13 and $0.13, respectively, were a
result of the value of conversion discount on preferred stock in accordance with
EITF Topic D-60, and $0.05 and $0.05, respectively, were a result of dividends
on the Series A Preferred Stock.
In 1995, earnings per share grew at a slower rate than net income,
primarily because of a significant increase in weighted average shares
outstanding -- 19% on a basic basis and 12% on a diluted basis. The increases
were largely the result of a placement of Common Stock in early 1995, exercises
of outstanding stock options and grants of additional stock options, shares
issuable pursuant to the TFG acquisition agreements and shares issued in
connection with the MEC acquisition in the fourth quarter. For purposes of
computing basic and diluted earnings per share, 406,700 shares of Common Stock
that were issuable pursuant to an earnout based on the pre-tax performance of
TFG have been included in weighted average shares outstanding for both 1996 and
1995.
Liquidity and Capital Resources
Working Capital. Working capital increased $2,708,899 from $10,020,801 in
1996 to $12,729,700 in 1997. This increase resulted primarily from an increase
in cash and cash equivalents and marketable equity securities resulting from the
sale of two of the Company's subsidiaries. See "Recent Developments--Liquidation
of Vision 21 Shares."
Sources and uses of funds. Operating activities used net cash of
$4,352,779 in 1997, compared to $4,172,458 used in 1996. This increase is
primarily attributable to higher 1997 net loss compared to the net loss in 1996
and the sale of two of the Company's subsidiaries. These items were partially
offset by an increase in amortization and depreciation costs and increases in
accounts payable, accrued expenses and income tax accounts. Net cash used in
investing activities was $5,779,075 in 1997 compared to $20,197 of net cash
provided by investing activities during 1996 and net cash used of $293,574 in
1995. Net cash used in investing activities during 1997 can be primarily
attributed to the acquisition of certain patents and license agreements from IBM
and others, the purchase of office and computer equipment, and the purchase of a
vision managed care contract, partially offset by the proceeds from the sale of
two of the Company's subsidiaries and proceeds from the exclusive licensure of
such patents. Net cash provided by investing activities in 1996 can be primarily
attributed to the proceeds from the sale-leaseback transaction offset by the
acquisition of the assets of NNJEI and the purchase of office and computer
equipment and leasehold improvements. Net cash provided from financing
activities during 1997 was $11,986,753 and consisted of net proceeds from the
issuance of the Series B Preferred Stock to finance the acquisition of the IBM
patents, the credit facility with Foothill and the exercise of stock options,
offset by the redemption of Series B Preferred Stock, the repayment of a note
payable to former owners of MEC and repayment of a capital lease obligation. Net
cash provided from financing activities during 1996 was $4,557,423, consisting
of net proceeds from the issuance of Series A Preferred Stock totaling
$5,342,152, less a payment of $1,373,518 in debt relating to the Company's
acquisitions of TFG in February 1994 and MEC in October 1995 and repayment of a
capital lease obligation. The exercise of stock options and warrants generated
cash of $588,789. Net cash provided from financing activities during 1995 was
$1,928,132, consisting of net stock proceeds totaling $1,323,333 and receipt of
$1,108,061 from the exercise of stock options, reduced by $503,262 in payments
on Company debt.
Financing. On April 1, 1997, the Company entered into a loan agreement
with Foothill for a loan of up to $8 million, consisting of a term loan in the
amount of $4 million and a revolving loan in an amount of 80% of the eligible
<PAGE>
receivables of LaserSight Technologies, but not in excess of $4 million. The
original terms of the term loan provided for interest at an annual rate of
12.50% and required repayment of principal in monthly installments of $1.33
million beginning on May 1, 1998. The revolving loan bears interest at a
variable annual rate of 1.50% above the base rate of Norwest Bank Minnesota. The
original terms of the revolving loan provided that the $4 million maximum amount
of the revolving loan was to decline by $1.33 million per month beginning on
August 1, 1998. In connection with the loan, the Company paid an origination fee
of $150,000 and issued warrants to purchase 500,000 shares of Common Stock. The
warrants are exercisable at any time from April 1, 1998 through April 1, 2002 at
an exercise price initially equal to $6.0667 per share. Subject to certain
conditions based on the market price of the Common Stock, up to half of the
warrants are eligible for repurchase by the Company. Any warrants that remain
outstanding and unexercised on April 1, 2002 are subject to mandatory repurchase
by the Company at a price of $1.50 per warrant. Based on an agreement between
Foothill and the Company and certain anti-dilution features of the Foothill
warrants, the issuance of the Series B Preferred Stock resulted in (i) an
increase in number of Foothill warrant shares by approximately 50,000 (ii) a
reduction in the warrant exercise price to approximately $5.52 per share, and
(iii) a reduction in the repurchase price of the warrants to approximately $1.36
per warrant. The Foothill loan is secured by a pledge of substantially all of
the Company's accounts receivable and other assets. The Company used a portion
of the net proceeds of the term loan to pay in full the balance due under its
note to the former owners of MEC.
On December 30, 1997, the Company used $2.0 million of proceeds from the
sale of MEC and LSIA to reduce the principal balance of its term loan with
Foothill, from $4.0 million to $2.0 million. The Company also used approximately
$1.5 million of proceeds from the sale to repay the balance under its revolving
loan facility with Foothill as of December 30, 1997.
Effective as of December 30, 1997, the Company restructured its agreements
with Foothill as follows: The maximum amount available under its revolving loan
facility has been reduced to $2.0 million. In addition, the Company pledged its
Vision 21 Shares to Foothill as collateral. After the Company has received
aggregate gross proceeds of $2.5 million from the liquidation of the Vision 21
Shares, it must apply any additional proceeds to repay its term loan with
Foothill, and apply any remaining proceeds to retire any then-outstanding
advances under its revolving loan with Foothill. In any event, the Company's
term and revolving loans are to be paid in full by June 15, 1998. Until June 16,
1998, Foothill has waived the Company's compliance with the financial covenants
contained in the loan agreements.
Redemption and Repurchase of Series B Preferred Stock. The Company
voluntarily redeemed 305 shares of the Series B Preferred Stock (approximately
19% of the 1,600 shares originally issued) in October 1997. The Company paid the
redemption price of $3,172,000 (including a 4% redemption premium) with funds
held in a blocked account which serves as collateral for the Company's
contingent obligation to redeem Series B Preferred Stock. As required by its
agreement with the preferred shareholders, the Company had established the $3.2
million blocked account to hold 80% of the $4 million the Company had received
in September 1997 as a payment for an exclusive, worldwide, royalty-free license
to a third party covering the use in the vascular and cardiovascular fields of
the IBM Patents. The Company believes that its continued holding of the
restricted funds in the blocked account (instead of redeeming the 305 preferred
shares) would not have meaningfully enhanced the Company's liquidity and would,
under the terms of the Series B Preferred Stock, have resulted in an increase in
the redemption premium (to as much as 14%) or the expiration in January 1998 of
<PAGE>
the Company's option to redeem such 305 shares. In addition, the Company
believes that the redemption reduced the dilutive effect of the Series B
Preferred Stock on the Company's common shareholders.
In addition, the Company repurchased 351 shares of Series B Preferred
Stock (approximately 22% of the shares originally issued) in February and March
1998. In exchange for the consent of the holders of Series B Preferred Stock to
the sale of the international patent rights to the IBM Patents (see "Recent
Developments--Nidek Patent Transaction" and "--Agreements with Preferred
Shareholders"), the Company agreed to deposit $4.2 million of the sale
transaction proceeds into the blocked account. The Company used such funds to
pay the repurchase price of $4,212,000 (including a 20% premium). The Company
believes that without the consent of the preferred shareholders, the transaction
would not have been completed. In addition, the Company believes that the
repurchase reduced the dilutive effect of the Series B Preferred Stock on the
Company's common shareholders.
Working capital requirements. The Company experienced a significant
negative cash flow from operations in 1997, largely resulting from the level of
laser system sales and the increase in research, development and regulatory
expenses resulting from the development of the LSX and other efforts as
previously described. The Company expects cash flow from operations to begin to
show improvement in the second and third quarters of 1998 as a result of the
expected shipment of the LSX and A*D*K's as previously discussed. However, the
Company expects to incur a loss and a deficit in cash flow from operations for
the first quarter of 1998. There can be no assurance that the Company can regain
or sustain profitability or positive operative cash flow in any subsequent
fiscal period. Based on these factors, the Company believes that its balances of
cash and cash equivalents along with expected operating cash flows, the
anticipated liquidation of the Vision 21 Shares and the availability of the
Foothill revolver through June 15, 1998, will be sufficient to fund its
anticipated working capital requirements for the next 12 months based on modest
growth and anticipated collection of receivables. A failure to collect timely a
material portion of current receivables, unexpected delays in the shipment of
the LSX or A*D*K products, or a delay in the anticipated liquidation of the
Vision 21 Shares could have a material adverse effect on the Company's
liquidity. The Company may from time to time reassess its credit policy and the
terms it will make available to individual customers. With the anticipated sales
of the new LSX laser system during 1998, the Company intends to internally
finance a proportionately smaller number of sales over periods exceeding 18
months than in preceding years. There can be no assurance as to the terms or
amount of third-party financing, if any, that the Company's customers may obtain
in the future. The Company is placing greater emphasis on the terms and
collection timing of future sales.
The Company expects to increase the level of manufacturing and
distribution of its laser systems and to continue a variety of research and
development activities on its excimer and solid-state laser systems over the
next twelve months and it is anticipated that such research and development as
well as regulatory efforts in the U.S. will be the most significant technology
related expenses in the foreseeable future.
Possible joint ventures. The Company is receptive to joint venture
discussions with compatible companies for the development and operation in
international markets of surgical centers that will utilize the Company's
products. The Company has no present commitments for joint venture
relationships, and no assurance can be given that any such relationships will be
secured on terms satisfactory to the Company.
<PAGE>
In October 1996, the Company announced an agreement with Laser Vision
Centers, Inc. ("Laser Vision") to create a joint venture to make excimer laser
technology available to the participating physicians of LaserSight Centers. If
finalized, such an agreement would have provided for Laser Vision to provide the
excimer laser and necessary technical personnel to locations serviced by the
approximately 100 ophthalmologists currently under non-exclusive contract with
LaserSight for excimer laser services. No written agreement has been executed
and no further negotiations are under way at this time.
Stock subscription receivable. The Company is owed $1,140,000 on a
promissory note from the Company's former placement agent in connection with a
placement of Common Stock in January 1995. The Company's lawsuit to collect on
the note resulted in the issuance in December 1997 of a final judgment in favor
of the Company in the amount of $1,140,000, together with interest in the amount
of $526,809 and costs and attorneys' fees in an amount yet to be determined.
Despite the fact that the defendants have appealed the judgment, the Company is
currently pursuing efforts to collect the judgment.
Risk Factors and Uncertainties
The business, results of operations and financial condition of the Company
and the market price of the Common Stock may be adversely affected by a variety
of factors, including the ones noted below:
Potentially Unlimited Number of Series B Conversion Shares Issuable. There
is no limit on the number of shares of Common Stock potentially issuable in
connection with conversions of Series B Preferred Stock. As illustrated in the
table below, the number of shares of Common Stock issuable upon such conversions
(the "Series B Conversion Shares") depends on the market price of the Common
Stock at the time of conversions:
Assumed Number of As % of Common Shares
Conversion Series B Conversion Assumed Outstanding
Price (1) Shares Issuable (2)(3) After Conversion (4)
--------- ---------------------- --------------------
$0.50 11,880,000 49.8%
$1.00 5,940,000 33.1%
$1.739583 (5) 3,414,611 22.2%
$2.00 2,970,000 19.8%
$3.00 1,980,000 14.2%
$4.00 1,485,000 11.0%
$5.00 1,188,000 9.0%
$6.00 990,000 7.6%
$6.68 (6) 889,221 6.9%
- --------------------------
(1) Equals the lesser of (A) $6.68 or (B) the average of the three lowest
closing bid prices of the Common Stock during the 30 trading days
immediately preceding the applicable conversion date.
(2) Excludes an aggregate of 2,011,975 Series B Conversion Shares that have
been issued in connection with conversions through March 27, 1998.
<PAGE>
(3) Based on an agreement between the Company and the holders of the Series
B Preferred Stock, no more than 390,659 additional Series B Conversion
Shares may be issued before June 12, 1998 or, subject to certain
shareholder approval requirements, September 14, 1998. This agreement
can be terminated by the preferred shareholders under certain
circumstances. See "Recent Developments--Agreement With Preferred
Shareholders--Proposed Revision of Terms."
(4) Equals the 11,996,647 shares of Common Stock outstanding on March 27,
1998 plus the number of Series B Conversion Shares issuable upon the
conversion (at a conversion price indicated in the table) of all 594
shares of Series B Preferred Stock outstanding as of such date.
(5) Equals the conversion price in effect as of March 30, 1998.
(6) Under the terms of the Series B Preferred Stock, the conversion price
cannot exceed $6.68, regardless of the market price of the Common
Stock. The Company has agreed, subject to the approval of its
stockholders, to amend the terms of the Series B Preferred Stock to
adjust this maximum conversion price to equal the lesser of $6.68 or
110% of the average closing bid prices of the Common Stock during the
20-trading day period ending on September 14, 1998. Failure to receive
such approval on or before June 12, 1998 will require the Company to
issue to the holders of the Series B Preferred Stock warrants to
purchase up to 750,000 shares of Common Stock at a price of $2.724 per
share. See "Recent Developments--Agreement With Preferred
Shareholders--Proposed Revision of Terms."
Potential Obligations to Redeem Preferred Stock. Any holder of Series B
Preferred Stock could require the redemption of all or a portion of its shares
for cash at a premium of at least 25% under any of the following circumstances:
o If the Company fails to maintain the effectiveness of its registration
statement under the Securities Act of 1933 (the "Securities Act")
relating to the resale of the Series B Conversion Shares and the Common
Stock issuable upon the exercise of warrants (such shares, the "Series
B Warrant Shares") issued in connection with the Company's private
placement of the Series B Preferred Stock in August 1997 by the holders
thereof.
o If the Company becomes required to register additional Series B
Conversion Shares under the Securities Act, but for any reason fails to
have a registration statement relating to such shares declared
effective by the SEC within 30 days after such requirement first
arises. Based on the number of shares of Series B Preferred Stock
outstanding as of March 27, 1998, and the number of Series B Conversion
Shares that have already been registered, the Company estimates that it
would be required to file such a registration statement if the
conversion price of the Series B Preferred Stock were to decline below
approximately $1.36.
o If the Company fails to take all necessary action (including obtaining
any necessary stockholder approvals) to authorize the issuance of
additional shares of Common Stock as may become required in connection
with the exercise of the Series B Preferred Stock and the exercise of
the Series B Warrants. Such authorization of additional Common Stock
would be required if the number of shares of Common Stock reserved for
such issuance becomes, for any period of three consecutive trading
days, less than 175% of the number of shares of Common Stock that would
then be issuable upon conversion of the outstanding Series B Preferred
Stock.
<PAGE>
Under any of these circumstances, the redemption price per share of Series B
Preferred Stock to be redeemed would equal the liquidation preference of $10,000
per share multiplied by the greater of (i) 1.25 or (ii) a fraction, the
numerator of which would equal the highest closing bid price of the Common Stock
during the period beginning 10 trading days before the redemption date and
ending five business days after such date, and the denominator of which would
equal the conversion price that would have been applicable if the preferred
shares had been converted as of the redemption date. The fraction described in
the preceding sentence will depend on market prices of the Common Stock and
could significantly exceed 1.25. There can be no assurance that the Company
would have the financial resources to pay any such redemption price. In
addition, any required redemption of preferred shares would cause a default
under the Company's credit facility with Foothill that would entitle Foothill to
accelerate the otherwise-applicable maturity date (June 15, 1998) of the
Company's Foothill debt.
Shares Eligible For Future Sale. Except as provided below, substantially
all of the Company's outstanding Common Stock (11,996,647 shares as of March 27,
1998) 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 All Series B Conversion Shares are freely saleable, subject only to the
satisfaction of a prospectus delivery requirement. If all outstanding
Series B Preferred Stock had been converted as of March 27, 1998, the
number of such freely-tradeable shares would have been approximately
3,414,611. (Subject to certain exceptions specified in an agreement
between the Company and its preferred shareholders, no more than
390,659 additional Conversion Shares may be issued before June 12, 1998
or, subject to certain shareholder approval requirements, September 14,
1998. See "Recent Developments--Agreement With Preferred
Shareholders--Proposed Revision of Terms"). The actual number of Series
B Conversion Shares will depend on future events, especially the market
prices of the Common Stock and the timing of the conversion decisions
of the holders of Series B Preferred Stock.
o The 790,000 shares of Common Stock issuable upon exercise of the Series
B Warrants (with an exercise price of $5.91 per share) will be freely
saleable following such exercise, subject only to the satisfaction of a
prospectus 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 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--NNJEI;
--LaserSight Centers and Florida Laser Partners; --TFG."
Sales, or the possibility of sales, of the Series B Conversion Shares, Series B
Warrant Shares, Photomed Shares, Centers Shares, or Other Shares, whether
pursuant to a prospectus, Rule 144 or otherwise, could depress the market price
of the Common Stock.
<PAGE>
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 $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 $4.4 million and $4.2 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 December 31, 1997, the Company had an accumulated
deficit of $11.9 million. The Company expects to incur a loss and a deficit in
cash flow from operations during the first quarter of 1998. As a result of the
Company's sale of its MEC and LSIA subsidiaries 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 December 31, 1997, the
Company's trade accounts and notes receivable aggregated approximately
$8,791,736, net of allowances for collection losses and returns of approximately
$2,025,000. Accrued commissions, the payment of which generally depends on the
collection of such net trade accounts and notes receivable, aggregated
approximately $1,600,000 at December 31, 1997. Exposure to collection losses on
receivables is principally dependent on the Company's customers ongoing
financial condition and their ability to generate revenues from the Company's
laser systems. In addition, approximately 90% and 87% of net receivables at
December 31, 1997 and 1996, respectively, related to international accounts. The
increase in this percentage between 1996 and 1997 resulted from the Company's
December 1997 sale of its MEC and LSIA subsidiaries (substantially all of whose
receivables related to U.S. accounts). The Company's ability to evaluate the
financial condition and revenue generating ability of its prospective customers
located outside of the 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 ($1,825,000 at December 31, 1997) will
be sufficient to cover actual write-offs over time. During 1997, the Company
wrote off approximately $1,892,000 of receivables. 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 December 31, 1997, the Company had
restructured laser customer accounts in the aggregate amount of approximately
$1,070,000 (9.8% 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 year ended December 31, 1997, the
Company experienced a $4.4 million deficit in cash flow from operations, largely
resulting from the loss incurred during 1997 and the increase in the Company's
research, development and regulatory expenses. Of this amount, approximately 82%
was incurred during the third and fourth quarters of the year. 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. See "--New Products"
and "--Minimum Payments Under A*D*K License Agreement" below. As of March 27,
1998, the LSX laser system had not made any significant contribution to the
<PAGE>
Company's operating cash flow. 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 mid-1998. Subject to these
factors, the Company believes that its balances of cash and cash equivalents,
together with expected operating cash flows, the anticipated liquidation of the
Vision 21 Shares, and the availability of up to $2.0 million under its revolving
credit facility with Foothill through June 15, 1998, 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
timely a material portion of current receivables, experiences significant
further delays in the shipment of its LSX or A*D*K, experiences less market
demand for such products than it anticipates, or experiences a delay in the
anticipated liquidation of the Vision 21 Shares the Company's liquidity could be
materially adversely affected.
Uncertainty Regarding Availability or Terms of Capital to Satisfy Possible
Additional Needs. The Company may need additional capital, including to fund the
following:
o Any future negative cash flow from operations or the repayment on or
before June 15, 1998 of any amounts borrowed under the Company's
revolving credit facility with Foothill to finance such negative cash
flow.
o Certain cash payment obligations under the Company's LASIK PMA
application acquisition agreement of July 1997 with Photomed, Inc.
("Photomed"). Such cash payment obligations include (i) $1.75 million
payable if the 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,
$3,663 for each day (or approximately $110,000 for each month) between
the date of such approval and January 1, 1999, subject to a maximum of
$1.0 million. (These obligations are in addition to the Company's
obligation to pay $1 million in Common Stock. See "--Possible Dilutive
Issuance of Common Stock--Photomed.")
o Additional working capital 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.)
In addition, the Company may seek alternative sources of capital to fund its
product development activities and to consummate future strategic acquisitions.
Except for additional borrowing available (as of March 27, 1998, up to $2.0
million) under its revolving credit facility with Foothill through June 15, 1998
and an aggregate of approximately $6.5 million to $7.45 million (subject to
certain post-closing adjustments) scheduled to be received in increasing monthly
installments from February through May of 1998 (approximately $1.6 million has
been received to date in 1998) from the sale or redemption of the Vision 21
Shares (see "Recent Developments--Liquidation of Vision 21 Shares"), the Company
<PAGE>
has no commitments or proposals 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 additional preferred stock
with a conversion price linked to the market price of the Common Stock at the
time of conversion (as is the case with the Series B Preferred Stock). The
Foothill financing or other debt financing could result in a substantial portion
of the Company's cash flow from operations being dedicated to the payment of
principal and interest on such indebtedness and may render the Company more
vulnerable to competitive pressures and economic downturns. If the Company
cannot obtain additional capital on satisfactory terms, it may be required to
sell additional assets.
Adverse Consequences if Company Cannot Receive Agreed-Upon Value of Its
Vision 21 Shares. As described in more detail below under "Recent
Developments--Liquidation of Vision 21 Shares," Vision 21 has agreed to pay to
the Company on May 29, 1998 an amount equal to the amount (the "Shortfall
Payment"), if any, by which the gross proceeds of sales of the Vision 21 Shares
fall short of $6.5 million (subject to certain post-closing adjustments). Both
the value of the Vision 21 Shares and the ability of Vision 21 to make the
Shortfall Payment (if any is required) is subject to risks, including without
limitation the risks disclosed in Vision 21's filings with the SEC. Copies of
such filings can be obtained, upon payment of prescribed fees, at the Public
Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 or
from the SEC's Web site containing information filed electronically with the
SEC. The address of such site is http://www.sec.gov. The Company takes no
responsibility for any information included in or omitted from any SEC filing by
Vision 21. Such filings are not part of this document and are not incorporated
by reference herein. To the extent that the liquidation of the Vision 21 Shares
does not occur according to the schedule specified in the Company's agreement
with Vision 21, or any required Shortfall Payment is not paid when due, the
Company's liquidity and financial condition may be materially adversely
affected.
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 shareholders and option holders (including two
trusts related to the Chairman of the Board of the Company and certain
former officers and directors of the Company) of LaserSight Centers, 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 performing PRK or other refractive laser surgical procedures.
The Centers Contingent Shares are issuable at the rate of one share per
$4.00 of such operating income.
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 a laser refractive
optical surgical procedure is conducted on an 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.
<PAGE>
As of December 31, 1997, 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). If such market value had been
computed as of March 27, 1998, the number of additional shares issuable would
have been approximately 409,000. 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 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--NNJEI. In connection with the
acquisition of the assets of NNJEI by the Company's LSIA subsidiary in July
1996, the Company agreed to issue up to 102,798 additional shares of Common
Stock if the average closing price of the Common Stock during the 10-day period
immediately preceding July 15, 1998 is less than $15 per share. All 102,798
shares will be issuable unless such average closing price is more than $10 per
share. The Company's sale of LSIA in December 1997 does not affect this
contingent obligation.
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 shareholders 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 warrant
issued to Foothill that may increase the number of shares issuable under the
Foothill warrant and decrease the exercise price of the Foothill warrant. The
factors to be considered by the Company in including such provisions may include
the Company's cash resources, the trading history of 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
<PAGE>
acquisition or financing exceeds the expected dilutive effect of the
price-protection provision. See "Recent Developments--Schwartz Electro-Optics,
Inc. Letter of Intent."
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.
Risks Associated with Past and Possible Future Acquisitions. The Company
has made several significant acquisitions since 1994, including TFG in 1994,
Photomed in 1997, and its acquisition of the IBM Patents in August 1997. 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.
See "Recent Developments--Schwarz Electro-Optics, Inc. Letter of Intent."
Amortization of Significant Intangible Assets. Of the Company's total
assets at December 31, 1997, approximately $23.1 million (46%) were intangible
assets, of which approximately $7.1 million reflects goodwill (which is being
amortized using an estimated life ranging from 12 to 20 years), approximately
$11.3 million reflects the cost of patents (which is being amortized over a
period ranging from approximately 9 to 17 years), and approximately $4.7 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. The Company's intangible
assets were decreased by approximately $6.0 million as a result of the February
1998 closing of the Company's patent agreement with Nidek. See "Recent
Developments--Nidek Patent Transactions." 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 resulting from the amortization
of goodwill and other intangibles may have an adverse impact upon the market
<PAGE>
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 ($3,976,000 at December 31, 1997) 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 they can be marketed 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. In addition, laser products marketed in foreign countries are
often subject to local laws governing health product development processes which
may impose additional costs for overseas product development. The Company cannot
determine the costs or time it will take to complete the approval process and
the related clinical testing for its medical laser products. Future legislative
or administrative requirements in the 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.
<PAGE>
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 PRK-UV
lasers in those countries where patents are in effect. The Company's
international sales accounted for 49% and 47%, of the Company's total revenues
during 1997 and 1996, respectively. The Company expects such percentages to
increase in future periods as a result of its sale of MEC and LSIA in December
1997.
Uncertainty Concerning Patents--U.S. Should LaserSight Technologies' lasers
infringe upon any valid and enforceable patents held by Pillar Point Partners (a
partnership of which the general partners are subsidiaries of Visx and Summit
Technologies) in the U.S., then LaserSight Technologies may be required to
obtain a license for such patents. 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. If such licenses are required but not obtained, LaserSight
Technologies might be prohibited from manufacturing or marketing its PRK-UV
lasers in the U.S.
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
new LSX excimer laser, 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
<PAGE>
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 second quarter of 1998. In addition, commencing seven months after
such date, the Company's royalty payments (50% of its gross profits from A*D*K
sales) will become subject to a minimum of $400,000 per quarter.
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
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 insurance coverage is limited to $6,000,000, including
up to $5,000,000 of coverage under an excess liability policy.
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
<PAGE>
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.
Recent Developments
Liquidation of Vision 21 Shares. In connection with the sale of its MEC and
LSIA subsidiaries to Vision 21 on December 30, 1998, Vision 21 agreed to
liquidate the Vision 21 Shares by a public sale pursuant to a registration
statement or a private placement, or by its repurchase of the Vision 21 Shares.
The Company is entitled to receive at least $6,500,000, but not more than
$7,475,000 from the liquidation of the Vision 21 Shares. If the Company has not
received the minimum amount (subject to the post-closing adjustments described
below) by May 29, 1998, then on such date Vision 21 is to pay the Company the
shortfall in cash.
The Vision 21 Shares are to be liquidated on a monthly schedule between
February and May 1998 approximately as follows (or sooner, at Vision 21's
option): February (21%), March (21%), April (28%), May (30%). The Company
received substantially all of the February installment on March 10, 1998. As of
March 27, 1998, the March, April and May installments remain outstanding. Vision
21 has advised the Company that Vision 21 intends to file a registration
statement to facilitate the liquidation of the remaining Vision 21 Shares. As of
March 27, 1998, Vision 21 has not filed such registration statement. The Company
cannot predict whether the remaining installments of the Vision 21 Shares will
be liquidated on a timely basis.
The remaining Vision 21 Shares represent approximately 5.3% of Vision 21's
outstanding common stock as of March 13, 1998 (based on information provided by
Vision 21 to the Company). Vision 21 common stock has traded on the Nasdaq Stock
Market since August 18, 1997, the date of Vision 21's initial public offering at
a price of $10.00 per share. The market price of Vision 21 common stock has
since ranged from a low of $7.00 (on December 29, 1997) to $15.00 (on September
25, 1997). On March 27, 1998, the closing price of Vision 21 common stock was
$11.625.
Nidek Patent Transaction. On February 10, 1998, the Company closed the
Nidek Transaction. The closing resulted in Nidek's payment of $7.5 million in
cash (of which $200,000 was withheld for the payment of Japanese taxes) in
exchange for the Company's grant to Nidek of certain rights in certain of the
IBM Patents. The Company has transferred to Nidek all rights in those IBM
Patents which have been issued in countries outside of the U.S. (the "Non-U.S.
Patents"). In addition, the Company has granted Nidek a non-exclusive license to
use the IBM Patents issued in the U.S. (the "U.S. Patents"). The Company
continues to hold the following rights relating to the IBM Patents:
o A nonexclusive license to use (subject to the payment of a per unit
royalty) the Non-U.S. Patents in the ophthalmic field in all countries
that issued them.
<PAGE>
o An exclusive license to use and sublicense the Non-U.S. Patents in all
fields other than the ophthalmic, cardiovascular and vascular areas
(subject to a 2% royalty in certain countries).
o The ownership of the U.S. Patents, subject to (A) non-exclusive
licenses granted to Nidek and five ophthalmic laser system producers
(including Visx, Summit Technology and Autonomous Technologies) and (B)
an exclusive license to use the IBM Patents in the vascular and
cardiovascular fields granted to a third party in September 1997.
o The right to receive royalties from Visx and Summit Technology equal to
2% of their U.S. revenue from the sale of laser systems that rely on
the IBM Patents.
The Nidek Transaction will not affect the rights of other companies to use the
IBM Patents in any country covered by existing license agreements. The Nidek
Transaction is not expected to result in any current gain or loss. It will,
however, reduce the Company's amortization expense over the remaining useful
life of the Non-U.S. Patents. The Nidek Transaction also will result in
approximately $1.2 million of prepaid royalties that will be amortized to income
over time.
Agreement With Preferred Shareholders--Put Option. In exchange for the
consent of the holders of its Series B Preferred Stock that the Company needed
to obtain to be able to complete the Nidek Transaction, the Company entered into
the following agreement with such preferred holders:
o The Company deposited $4.2 million of the Nidek Transaction proceeds
into a blocked account for the exclusive benefit of the preferred
holders. (The $3.1 million remainder of the $7.3 million of the Nidek
Transaction proceeds remained available for general corporate purposes
after payment of expenses estimated at $100,000.)
o The preferred holders received an option to sell to the Company (the
"Put Option") up to 351 shares of Series B Preferred Stock
(representing an aggregate face amount of $3,510,000) at a price equal
to 120% of such face amount. The Put Option has been fully exercised.
Agreement With Preferred Shareholders--Proposed Revision of Terms. On March
13, 1998, the Company entered into an agreement with all of the holders of its
Series B Preferred Stock as follows:
o Until June 12, 1998, the preferred holders will limit their conversions
of Series B Preferred Stock so that no more than 1,000,000 common
shares are issued during such period. (Immediately prior to this
conversion restriction becoming effective, the preferred holders
submitted to the Company notices for the conversion of 244 shares of
Preferred Stock into 1,402,634 shares of Common Stock.) This conversion
restriction will be extended to September 14, 1998 if the Company's
stockholders approve certain proposals described below at the Company's
annual meeting on June 12, 1998.
o The preferred holders granted the Company an option to purchase any or
all of the remaining Series B Preferred Stock at a 20% premium at any
time before June 12, 1998. (Because the Company's agreement with
Foothill prevents any redemptions of preferred stock so long as any of
the Foothill loans remain outstanding, such a repurchase would require
the Company to first obtain Foothill's approval. It would also require
<PAGE>
the Company to raise the funds necessary to finance such repurchase.
There can be no assurance as to whether or on what terms the Company
could obtain such Foothill consent or additional financing.)
o Subject to the approval of the Company's common stockholders and the
conversion restrictions being effective through September 14, 1998, the
fixed conversion price component of the Series B Preferred Stock will
equal the lower of (A) $6.68 (its current level) or (B) 110% of the
average closing bid prices of the Common Stock during the 20 trading
days ending on September 14, 1998.
o Subject to the approval of the Company's common stockholders, the
exercise price of the warrants issued to the preferred holders in
August 1997 (the "Existing Warrants") will be reduced from $5.91 per
share to $2.724 (115% of an average closing bid price of the Common
Stock during the five trading days following March 17, 1998). The
Existing Warrants would remain exercisable at any time through August
29, 2002 and their exercise would not be subject to the 1,000,000
common share limit on conversions of Preferred Stock.
o If for any reason the Company's common stockholders fail to approve the
change in the fixed conversion price component and the exercise price
of the Existing Warrants on or before June 12, 1998, the Company will
be required to issue to the preferred holders 750,000 additional
warrants (the "Additional Warrants") to purchase Common Stock at a
price equal to $2.724 per share (115% of an average closing bid price
of the Common Stock during the five trading days following March 17,
1998). The Additional Warrants would be exercisable at any time through
August 29, 2002 and would not be subject to the 1,000,000 common share
limit on conversions of Preferred Stock.
The restrictions on conversions and the Company's repurchase option may be
terminated by the preferred holders under any of the following circumstances:
o As of the end of any month, the Company's current ratio (current
assets divided by current liabilities) falls below 1.1 to 1.
o As of the end of the first or second quarter of 1998, the
Company's income or loss from operations for such quarter has not
improved relative to the Company's results for the prior quarter.
o At any time, the Company undergoes or announces a material adverse
change in its financial condition, operating results, assets,
liabilities, operations or business prospects which is material to
the Company and its subsidiaries taken as a whole. The agreement
does not specify any criteria for determining whether such a
change qualifies under this "material adverse" standard.
If the restrictions on conversions described above are terminated prior to June
12, 1998 due to the occurrence of one or more of these circumstances, then the
Company will be required to issue the Additional Warrants.
Schwartz Electro-Optics, Inc. Letter of Intent. Based on the Company's
desire to broaden its technology product line and offer expanded laser
applications in the medical field, on March 24, 1998, the Company and Schwartz
Electro-Optics, Inc. ("SEO") signed a letter of intent providing for the Company
to purchase substantially all of the assets, and assume certain liabilities, of
<PAGE>
SEO's medical products division (the "Division"). 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 purchase price would be calculated as of the closing date based on
the then current value of the assets to be purchased as reduced by certain of
the liabilities to be assumed. Currently the parties estimate the purchase price
to be approximately $1,260,000. The purchase price will be paid by the Company
issuing SEO shares of Common Stock; $250,000 of the purchase price will be paid
by issuing shares (the "Liquid Shares") based on a five day average of bid and
ask prices for Common Stock immediately prior to the closing date (the
"Valuation Price") and the balance of the purchase price will be paid by issuing
shares based on a $5.00 share price (the "Remaining Shares"). The Company will
be obligated to file a registration statement covering the Liquid Shares and may
be obligated to issue a limited number of additional shares of Common Stock
(such limited number will be calculated based on the difference between $5.00
per share and the Valuation Price) if the price of the Remaining Shares is less
than $5.00 on the first anniversary of the closing date.
The closing of the transaction contemplated by the letter of intent is
subject to the Company completing its due diligence review to its satisfaction
and receipt of board of director, lender and other approvals. The transaction is
anticipated to close in April 1998.
Redemptions and Conversions of Series B Preferred Stock. A portion of
the 1,600 shares of Series B Preferred Stock issued in August 1997 have been
redeemed, repurchased or converted as follows:
Number Balance
Month Transaction of Shares Outstanding
----- ----------- --------- -----------
10/97 Redemption (at a 4% premium) 305 1,295
2/98 Repurchases (at a 20% premium) 351 944
3/98 Conversions (at $1.739583 per share) 350 594
(to March 27)
All such redemptions and repurchases have been funded from a blocked account
established for the exclusive benefit of the holders of the Series B Preferred
Stock, as required by the agreements the Company entered into with such holders
in August 1997.
The amount of the redemption or repurchase prices that exceeds the
price at which the Company sold the Series B Preferred Stock in August 1997
($10,000 per share) has been and will be treated as equivalent to a dividend on
the Series B Preferred Stock for accounting purposes and will, therefore,
increase the loss (or decrease any income) available to holders of Common Stock
for the fiscal period in which the redemption or repurchase occurs.
<PAGE>
Item 8. Financial Statements and Supplemental Data
Consolidated financial statements prepared in accordance with
Regulation S-X are listed in Item 14 of Part IV of this Report, are attached to
this Report and incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
Information with respect to the Company's directors and executive
officers is incorporated herein by reference to the definitive form of the
Company's proxy materials to be filed with the Commission on or before April 30,
1998.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated
herein by reference to the definitive form of the Company's proxy materials to
be filed with the Commission on or before April 30, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the security ownership of certain
beneficial owners and management is incorporated herein by reference to the
definitive form of the Company's proxy materials to be filed with the Commission
on or before April 30, 1998.
Item 13. Certain Relations and Related Transactions
Information with respect to certain relations and related transactions
is incorporated herein by reference to the definitive form of the Company's
proxy materials to be filed with the Commission on or before April 30, 1998.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Schedules.
(a) (1) The following financial statements and related items are attached to
this report:
Independent Auditors' Reports
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedules not filed:
All schedules have been omitted as the required information is
inapplicable or the information is presented in the
consolidated financial statements or related notes.
(3) Exhibits required by Item 601 of Regulation S-K.
The Exhibit Index set forth in this Form 10-K is hereby
incorporated herein by this reference.
(b) Reports on Form 8-K
On November 7, 1997, the Company filed with the Commission a
Current Report on Form 8-K regarding a press release issued by the
Company dated November 5, 1997 announcing the Company's third
quarter operating results and reporting the events of the annual
meeting of the American Academy of Ophthalmology.
On December 29, 1997, the Company filed with the Commission a
Current Report on Form 8-K regarding a press released issued by
the Company dated December 24, 1997 announcing that the Company
had reached an agreement with the holders of the Company's Series
B Preferred Stock to extend the date by which the Company is
required to obtain the approval of its common stockholders of the
conversion and other terms of the preferred stock from December
26, 1997 to February 28, 1998.
<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*).
<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*).
<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*).
<PAGE>
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*).
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*).
Exhibit 11 Statement of Computation of Earnings (Loss) Per Share
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of KPMG Peat Marwick LLP
Exhibit 27 Financial Data Schedule
- ----------------------
*Incorporated herein by reference. File No. 0-19671.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1998 LASERSIGHT INCORPORATED
By: /s/ Michael R. Farris
--------------------------------
Michael R. Farris, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael R. Farris Dated: March 30, 1998
- ------------------------------------
Michael R. Farris, President,
Chief Executive Officer and Director
/s/ Francis E. O'Donnell, Jr., M.D. Dated: March 30, 1998
- -------------------------------------
Francis E. O'Donnell, Jr., M.D.,
Chairman of the Board, Director
/s/ J. Richard Crowley Dated: March 30, 1998
- --------------------------------------
J. Richard Crowley, Director
/s/ Terry A. Fuller Dated: March 30, 1998
- --------------------------------------
Terry A. Fuller, Ph.D., Director
/s/ Richard C. Lutzy Dated: March 30, 1998
- --------------------------------------
Richard C. Lutzy, Director
/s/ Thomas Quinn Dated: March 30, 1998
- --------------------------------------
Thomas Quinn, Director
/s/ David T. Pieroni Dated: March 30, 1998
- --------------------------------------
David T. Pieroni, Director
/s/ Gregory L. Wilson Dated: March 30, 1998
- --------------------------------------
Gregory L. Wilson, Chief Financial Officer
(Principal accounting officer)
<PAGE>
Independent Auditors' Reports
-----------------------------
The Board of Directors and Stockholders
LaserSight Incorporated:
We have audited the accompanying consolidated balance sheets of LaserSight
Incorporated and Subsidiaries (the Company) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LaserSight
Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
February 27, 1998
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,858,400 2,003,501
Marketable equity securities 7,475,000 --
Accounts receivable-trade, net 2,649,202 5,458,153
Notes receivable-current portion, net 3,762,341 3,159,575
Inventories 4,348,235 3,328,903
Deferred tax assets 571,009 667,998
Income taxes recoverable -- 803,154
Other current assets 219,723 221,922
------------ ----------
Total current assets 22,883,910 15,643,206
Notes receivable, less current portion, net 2,380,193 2,620,375
Property and equipment, net 1,354,168 1,936,220
Other assets, net 23,842,802 14,050,412
------------ ----------
$ 50,461,073 34,250,213
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,142,979 2,216,792
Notes payable-related parties -- 1,000,000
Note payable, less discount 1,758,333 --
Current portion of capital lease obligation -- 206,139
Accrued expenses 2,782,521 764,084
Accrued commissions 1,230,474 1,214,235
Income taxes payable 1,255,491 --
Other current liabilities 984,412 221,155
------------ ---------
Total current liabilities 10,154,210 5,622,405
Refundable deposits 200,000 240,000
Accrued expenses, less current portion 518,730 309,656
Deferred income taxes 571,009 667,998
Long-term obligations 500,000 641,623
Commitments and contingencies
Redeemable convertible preferred stock:
Series B-par value $.001 per share; authorized 10,000,000 shares;
1,295 and 0 issued and outstanding at December 31, 1997 and 1996,
respectively 11,477,184 --
Stockholders' equity:
Convertible preferred stock Series A-par value $0.001 per share;
authorized 10,000,000 shares; 0 and 8 shares issued and
outstanding at December 31, 1997 and 1996, respectively -- --
Common stock-par value $0.001 per share; authorized 20,000,000
shares, 10,149,872 and 8,454,266 shares issued and
outstanding at December 31, 1997 and 1996, respectively 10,150 8,454
Additional paid-in capital 39,453,064 30,080,560
Paid-in capital-warrants 592,500 --
Obligation to issue common stock -- 3,065,056
Stock subscription receivable (1,140,000) (1,140,000)
Unrealized gain on marketable securities, net of tax 604,500 --
Accumulated deficit (11,865,914) (4,612,830)
Less treasury stock, at cost; 165,200 and 170,200 common shares
at December 31, 1997 and 1996, respectively (614,360) (632,709)
------------ ----------
Total stockholders' equity 27,039,940 26,768,531
------------ ----------
$ 50,461,073 34,250,213
============ ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Products $ 12,170,018 10,634,663 19,899,584
Services 12,218,815 10,869,327 6,088,481
------------- ------------ -----------
24,388,833 21,503,990 25,988,065
Cost of revenues:
Product cost 4,127,908 3,415,276 4,859,039
Cost of services 8,573,932 6,707,308 2,234,131
------------- ------------ -----------
Gross profit 11,686,993 11,381,406 18,894,895
Research, development, and regulatory expenses 2,807,579 1,720,246 1,460,842
Selling, general and administrative expenses 18,141,568 14,621,509 12,881,909
------------- ------------ -----------
Income (loss) from operations (9,262,154) (4,960,349) 4,552,144
Other income and expenses:
Interest and dividend income 383,611 314,287 189,548
Interest expense (1,343,198) (151,634) (81,077)
Gain on sale of subsidiaries 4,129,057 -- --
Other, net (280,400) (415,681) 1,329,056
------------- ------------ -----------
Income (loss) before income tax
expense (benefit) (6,373,084) (5,213,377) 5,989,671
Income tax expense (benefit) 880,000 (1,139,008) 1,397,800
------------- ------------- -----------
Net income (loss) (7,253,084) (4,074,369) 4,591,871
Conversion discount on preferred stock (41,573) (1,010,557) --
Preferred stock accretion and dividend requirements (298,269) (358,618) --
------------- ------------- -----------
Income (loss) attributable to
common stockholders $ (7,592,926) (5,443,544) 4,591,871
============= ============= ===========
Earnings (loss) per common share:
Basic $ (0.80) (0.69) 0.68
Diluted (0.80) (0.69) 0.64
============= ============ ==========
Weighted average number of shares outstanding:
Basic 9,504,000 7,893,000 6,732,000
Diluted 9,504,000 7,893,000 7,225,000
============= ============ ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
<CAPTION>
Obligation Total
Common Stock Preferred Stock Additional Paid-in to Issue Stock Unreal- Accumu- Stock-
------------ --------------- Paid-in Capital- Common Subscription ized lated Treasury holders'
Shares Amount Shares Amount Capital Warrants Stock Receivable Gain Deficit Stock Equity
------ ------ ------ ------ ------- -------- ----- ---------- ---- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December
31, 1994 5,936,028 $ 5,936 -- $ -- $11,875,092 -- -- -- -- (5,130,332)(632,709) 6,117,987
Issuance of
shares in
conjunction
with private
placement
offering 289,000 289 -- -- 2,463,044 -- -- (1,500,000) -- -- -- 963,333
Obligation to
issue common
stock related
to 1994
acquisition -- -- -- -- -- -- 780,125 -- -- -- -- 780,125
Issuance of shares
from exercise
of stock
options 414,540 415 -- -- 1,107,646 -- -- -- -- -- -- 1,108,061
Issuance of
options to
purchase common
stock in
conjunction
with acquired
technology -- -- -- -- 1,752,000 -- -- -- -- -- -- 1,752,000
Stock subscriptions
received -- -- -- -- -- -- -- 360,000 -- -- -- 360,000
Issuance of shares
in conjunction
with consulting
agreement 3,000 3 -- -- 14,060 -- -- -- -- -- -- 14,063
Issuance of shares
in conjunction
with
acquisition 543,464 543 -- -- 4,732,158 -- -- -- -- -- -- 4,732,701
Net income -- -- -- -- -- -- -- -- -- 4,591,871 -- 4,591,871
--------- ------- ----- ------ ----------- ------- ---------- ---------- ------- ----------- -------- ----------
Balances at
December 31,
1995 7,186,032 7,186 -- -- 21,944,000 -- 780,125 (1,140,000) -- (538,461)(632,709) 20,420,141
Issuance of
shares from
exercise
of stock
options and
warrants 189,900 190 -- -- 588,599 -- -- -- -- -- -- 588,789
Tax benefit of
stock option
and warrants
exercised -- -- -- -- 199,798 -- -- -- -- -- -- 199,798
Proceeds from
issuance of
Series A
preferred stock,
net of issuance
costs -- -- 116 -- 5,342,152 -- -- -- -- -- -- 5,342,152
Conversion of,
and settlements
of dividends
on, Series A
preferred
stock 872,736 873 (108) -- 318,635 -- -- -- -- -- -- 319,508
Dividends on
Series A
preferred stock -- -- -- -- (358,618) -- -- -- -- -- -- (358,618)
Obligation to
issue common
stock related
to 1994
acquisition -- -- -- -- -- -- 2,284,931 -- -- -- -- 2,284,931
Issuance of
shares in
conjunction
with
acquisition 205,598 205 -- -- 2,045,994 -- -- -- -- -- -- 2,046,199
Net loss -- -- -- -- -- -- -- -- -- (4,074,369) -- (4,074,369)
--------- ------- ----- ------ ----------- ------- ---------- ---------- ------- ------------ -------- ----------
Balances at
December 31,
1996 8,454,266 8,454 8 -- 30,080,560 -- 3,065,056 (1,140,000) -- (4,612,830)(632,709) 26,768,531
Issuance of
shares from
exercise of
stock options 25,875 26 -- -- 98,337 -- -- -- -- -- -- 98,363
Premium and
other
adjustments
on redemption
of Series B
preferred
stock -- -- -- -- (454,866) -- -- -- -- -- -- (454,866)
Dividends on
Series A
preferred stock -- -- -- -- (176,268) -- -- -- -- -- -- (176,268)
Conversion of,
and settlement
of dividends
on, Series A
preferred
stock 102,525 102 (8) -- 52,240 -- -- -- -- -- -- 52,342
Issuance of
options and
treasury stock
in conjunction
with consulting
agreements -- -- -- -- 52,608 -- -- -- -- -- 18,349 70,957
Adjustment of
marketable
equity securitie
to market, net
of tax -- -- -- -- -- -- -- -- 604,500 -- -- 604,500
Issuance of
shares in
conjunction
with amendment
of purchase
agreement 624,991 625 -- -- 3,319,640 -- -- -- -- -- -- 3,320,265
Issuance of
shares in
conjunction
with 1994
acquisition
agreement 406,700 407 -- -- 3,064,649 -- (3,065,056) -- -- -- -- --
Issuance of
shares in
conjunction
with acquisition
of intangible
assets 535,515 536 -- -- 3,416,164 -- -- -- -- -- -- 3,416,700
Issuance of
warrants in
conjunction with
Series B
preferred stock
offering -- -- -- -- -- 592,500 -- -- -- -- -- 592,500
Net loss -- -- -- -- -- -- -- -- -- (7,253,084) -- (7,253,084)
--------- ------- ----- ------ ----------- ------- ---------- --------- ------ ------------ -------- -----------
Balances at
December 31,
1997 10,149,872 $10,150 -- $ -- $39,453,064 592,500 -- (1,140,000) 604,500 (11,865,914) (614,360) 27,039,940
========= ======= ===== ====== =========== ======= ========== =========== ======= ============ ========= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,253,084) (4,074,369) 4,591,871
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on sale of subsidiaries (4,129,057) -- --
Depreciation and amortization 2,892,456 1,004,275 480,557
Provision for uncollectible accounts 2,366,995 502,000 930,734
Decrease (increase) in accounts receivable, net (176,029) 3,663,542 (7,826,693)
Increase in notes receivable, net (362,584) (1,832,532) (3,722,696)
Increase in inventories (1,236,042) (1,492,153) (406,594)
Increase (decrease) in accounts payable 859,808 (70,201) 1,146,918
Increase (decrease) in accrued liabilities 1,411,710 (529,449) 2,404,448
Increase (decrease) in income taxes 1,688,145 (1,446,053) 678,205
Other, net (415,097) 102,482 (195,497)
----------- ------------- ------------
Net cash used in operating activities (4,352,779) (4,172,458) (1,918,747)
----------- ------------- ------------
Cash flows from investing activities:
Proceeds from sale of subsidiaries 6,500,000 -- --
Purchases of property and equipment (630,550) (296,520) (403,063)
Net proceeds from exclusive license of patents 3,958,436 -- --
Proceeds from sale leaseback transaction -- 957,180 --
Transfer to restricted cash account (3,200,000) -- --
Proceeds from restricted cash account 3,172,000 -- --
Purchase of managed care contract (150,000) -- --
Acquisition of other intangible assets (15,428,961) -- --
Purchase of businesses, net of cash acquired -- (640,463) 109,489
----------- ------------- ------------
Net cash provided by (used in) investing
activities (5,779,075) 20,197 (293,574)
----------- ------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 1,323,333
Proceeds from issuance of preferred stock, net 14,834,219 5,342,152 --
Proceeds from exercise of stock options and warrants 98,363 588,789 1,108,061
Repayments of notes payable - officer -- (465,000) (500,000)
Repayments on notes payable (3,000,000) (799,100) (3,262)
Redemption of preferred stock (3,172,000) -- --
Proceeds from issuance of note payable, net 3,414,142 -- --
Repayment of capital lease obligation (187,971) (109,418) --
----------- ------------- ------------
Net cash provided by financing activities 11,986,753 4,557,423 1,928,132
----------- ------------- ------------
Increase (decrease) in cash and cash
equivalents 1,854,899 405,162 (284,189)
Cash and cash equivalents:
Beginning of year 2,003,501 1,598,339 1,882,528
----------- ------------- ------------
End of year $3,858,400 2,003,501 1,598,339
========== ============= ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LASERSIGHT INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 -- BUSINESS
- ------------------
LaserSight Incorporated (the Company) is the parent company of three major
wholly-owned operating subsidiaries: LaserSight Technologies, Inc., which
develops, manufactures and sells ophthalmic lasers and related products
primarily for use in photorefractive keratectomy (PRK) and laser in-situ
keratomileusis (LASIK) procedures; LaserSight Patents, Inc., which owns and
licenses various patents related to refractive surgical procedures; and MRF,
Inc. d/b/a The Farris Group, a consulting firm servicing health care providers.
In December 1997, the Company sold two operating subsidiaries: MEC Health Care,
Inc. (MEC), a managed care intermediary that contracted with various health
maintenance organizations (HMOs) and eye care providers to provide comprehensive
vision services to the HMO subscribers; and LSI Acquisition, Inc. (LSIA), which
managed ophthalmic practices and ambulatory surgery centers (see note 4).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
- -------------------------
For financial reporting purposes, the Company considers short-term, highly
liquid investments with original maturities of three months or less to be cash
equivalents.
Marketable Securities
- ---------------------
The Company classifies all of its marketable securities as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of income taxes, reported as a component of stockholders'
equity.
Credit Risk
- -----------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade accounts and notes receivable.
<PAGE>
The Company sells products to customers, at times extending credit for such
sales. Exposure to losses on receivables is principally dependent on each
customer's financial condition and their ability to generate revenue from the
Company's products. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses. To mitigate a portion of the
Company's exposure on certain sales, the Company has obtained letters of credit
to be drawn on foreign financial institutions in the event a customer should
default. At December 31, 1997 and 1996, the Company was the payee on letters of
credit with foreign financial institutions aggregating approximately $0.2
million and $2.1 million, respectively.
Income Taxes
- ------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Inventory
- ---------
Inventory, which consists primarily of laser systems parts and components, is
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Furniture and equipment are
depreciated using the straight-line method over the estimated lives (three to
seven years) of the assets. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset. Capital leases are amortized on a straight-line basis over the
term of the leases.
Patents
- -------
Costs associated with obtaining patents are capitalized as incurred and are
amortized over their remaining useful lives (generally 17 years or less).
Goodwill and Acquired Technology
- --------------------------------
Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
up to 20 years. Management evaluates the carrying value of goodwill using future
undiscounted operating cash flows of the acquired businesses.
Acquired technology was recorded as an intangible asset and is amortized over a
period of 12 years based on the Company's estimate of the lifespan of the
solid-state laser product and the useful life of a related patent acquired. The
Company continually assesses the potential market for solid-state as an
improvement to existing excimer laser technology.
<PAGE>
Research and Development
- ------------------------
Research and development costs are charged to operations in the year incurred.
The cost of certain equipment used in research and development activities which
have alternative uses is capitalized as equipment and depreciated using the
straight-line method over the estimated lives (five to seven years) of the
assets. Total expenditures on research and development for the years ended
December 31, 1997, 1996, and 1995 were $1,836,151, $948,520, and $983,130,
respectively.
Product Warranty Costs
- ----------------------
Estimated future warranty obligations related to the Company's products are
provided by charges to operations in the period in which the related revenue is
recognized.
Revenue Recognition
- -------------------
The Company recognizes revenue from the sale of its products in the period that
the products are shipped to the customers.
Service revenues from consulting clients are recognized in the period that the
services are provided.
The Company recognizes premiums from HMOs and other payors as income in the
period to which vision care coverage relates. Substantially all premiums are
collected on a monthly basis and relate to vision care coverage during that
month. Capitation revenue for the years ended December 31, 1997, 1996, and 1995
was approximately $7,955,000, $6,095,000 and $1,189,700, respectively (see note
4).
Revenues from managing an ophthalmic practice and an ambulatory surgery center
are recognized when earned in accordance with the practice services agreement
(see note 4).
Cost of Revenues
- ----------------
Cost of revenues consist of product cost and cost of services. Product cost
relates to the cost from the sale of its products in the period that the
products are shipped to the customers.
Cost of services consists of the costs related to servicing consulting clients,
managing an ophthalmic practice and an ambulatory surgery center and provider
payments. Provider payments consist of benefit claims and capitation payments
made to providers.
Earnings (Loss) Per Share
- -------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", in the fourth quarter of 1997.
This Statement replaces the historical measures of earnings per share (primary
and fully diluted) with two new computations (basic and diluted). Basic earnings
(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 earnings (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. Diluted earnings (loss) per share for the years ended December 31, 1997
and 1996 is the same as basic earnings (loss) per share.
<PAGE>
Pursuant to Emerging Issue Task Force (EITF) Announcement No. D-60, the value of
the conversion discount on the Series B Convertible Participating Preferred
Stock (Series B Preferred Stock) issued in August 1997 (approximately $42,000)
and the Series A Convertible Preferred Stock issued (Series A Preferred Stock)
in January 1996 (approximately $1 million) has been reflected as an increase to
the loss attributable to common stockholders for the years ended December 31,
1997 and 1996, respectively. The value of the conversion discounts, which had no
per share effect in 1997 and ($0.13) basic and ($0.13) diluted in 1996, have
been reflected in the consolidated statement of operations.
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations for the years ended December 31, 1997, 1996
and 1995:
1997 1996 1995
---- ---- ----
Numerator:
Net income (loss) $ (7,253,084) (4,074,369) 4,591,871
Conversion discount
on preferred stock (41,573) (1,010,557) --
Preferred stock accretion
and dividends (298,269) (358,618) --
------------- ----------- ---------
Income (loss)
attributable
to common
stockholders $ (7,592,926) (5,443,544) 4,591,871
------------- ----------- ---------
Denominator (basic):
Weighted averages
shares
outstanding 9,504,000 7,486,300 6,325,300
Issuable shares,
acquisiton
of The Farris
Group -- 406,700 406,700
------------ --------- ---------
9,504,000 7,893,000 6,732,000
Basic earnings
(loss) per
share $ (0.80) (0.69) 0.68
============= ========== =========
Denominator (diluted):
Weighted averages
shares
outstanding 9,504,000 7,486,300 6,325,300
Issuable shares,
acquisition of
The Farris
Group -- 406,700 406,700
Effect of dilutive
securities -
stock options -- -- 493,000
------------- --------- ---------
9,504,000 7,893,000 7,225,000
Diluted earnings
(loss) per
share $ (0.80) (0.69) 0.64
============= ========== =========
<PAGE>
Common share equivalents, including contingently issuable shares, options,
warrants, and convertible preferred stock totaling 4,722,000 and 317,000 common
stock equivalents at December 31, 1997 and 1996 respectively, are not included
in the computation of diluted earnings per share because they have an
antidilutive effect.
From January 1, 1998 through March 27, 1998, 350 shares of Series B Preferred
Stock were converted into 2,011,975 shares of Common Stock (unaudited).
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
- -----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
Company's consolidated financial position, results of operations, or liquidity.
Stock Option Plans
- ------------------
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. On January 1,
1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure pursuant to the provisions
of SFAS No. 123.
Reclassifications
- -----------------
Certain reclassifications have been made to prior years' financial statements to
conform to the 1997 financial statement presentation.
NOTE 3 -- ACQUISITIONS
- ----------------------
Photomed, Inc.
- --------------
In July 1997, the Company acquired from Photomed, Inc. the rights to a
Pre-Market Approval (PMA) application filed with the Food and Drug
Administration (FDA) for a laser to perform LASIK, a refractive surgery
alternative to surface PRK. In addition, the Company purchased from a
stockholder of Photomed, Inc. U.S. patent number 5,586,980 for a keratome, the
<PAGE>
instrument necessary to create the corneal "flap" in the LASIK procedure. The
Company issued a combination of 535,515 unregistered shares of Common Stock
(valued at $3,416,700) and $333,300 in cash as consideration for the PMA
application and the keratome patent. The seller will also receive a percentage
of any licensing fees or sale proceeds related to the patent. The total value
was capitalized as the cost of PMA application and patent and is being amortized
over 5 and 15 years, respectively. If the FDA approves the PMA so as to allow
the Company to commercialize a laser to perform LASIK in the U.S., the Company
will pay an additional $1.75 million to the sellers. If such FDA approval is not
obtained by July 29, 1998, the Company has the option to unwind the PMA
transaction and receive from Photomed, Inc. 274,285 shares of the Company's
Common Stock. If the transaction is unwound, the Company's investment will be
reduced by that portion of the PMA value applicable to the proportionate ratio
of shares returned. The remaining portion of the PMA value will be assessed as
to impairment. Additionally, if the FDA approves the use of a laser for the
treatment of hyperopia (farsightedness), the Company will issue unregistered
Common Stock valued at $1 million to the sellers. If the Company's scanning
laser is approved by the FDA for commercial sale in the United States on or
before April 1, 1998, the Company will pay $1 million cash to the sellers.
Approval after such date will result in lesser payments until January 1, 1999,
and after such date no payment will be required. Additional consideration paid,
if any, will be recorded as additional purchase price. As of December 31, 1997,
the unamortized carrying values of the LASIK PMA application and the keratome
patent were included in other assets.
Patents
- -------
In August 1997, the Company finalized an agreement with IBM, in which the
Company acquired certain patents (IBM Patents) relating to ultraviolet light
ophthalmic products and procedures for ultraviolet ablation for $14.9 million.
The total value was capitalized and is being amortized over approximately 9
years. Under the agreement, IBM transferred to the Company all of IBM's rights
under its patent license agreements with certain licensees. Royalties from such
assigned patent licenses totaled approximately $803,000 for the year ended
December 31, 1997. Royalties accrued on or after January 1, 1997 but before
September 1997, totaling approximately $581,000, reduced the Company's cost of
the IBM Patents. The acquisition was financed through the private placement of
Series B Preferred Stock (see note 11).
In September 1997, the Company sold an exclusive worldwide royalty-free patent
license covering the vascular and cardiovascular rights included in the IBM
Patents for $4 million, reducing the Company's basis in the IBM Patents. No gain
or loss was recognized as a result of this sale. Approximately $3.2 million of
these funds were placed in a restricted cash account and in October 1997 were
used to voluntarily redeem 305 shares of the Series B Preferred Stock issued to
finance the purchase of the IBM Patents. In connection with such redemption, the
Company paid a total of $3,172,000 including a four percent premium (see note
11). As of December 31, 1997, the unamortized carrying value of the patents was
included in other assets.
Keratome License
- ----------------
In September 1997, the Company acquired worldwide distribution rights to the
Ruiz disposable keratome for the LASIK procedure and entered into a limited
exclusive license agreement for intellectual property related to the keratome
products known as Automated Disposable Keratomes (ADK). In exchange, the Company
paid $400,000 in cash at closing and agreed to supply to the licensors, at no
cost, one excimer laser. Six months after the first shipment of the disposable
keratome product, the Company will pay an additional $150,000 to the licensors
<PAGE>
with another installment of $150,000 due twelve months after the initial
shipment date. The total value was capitalized, including the net book value of
the laser, and is being amortized over 31 months. The Company will also share
the product's gross profit with the sellers with minimum quarterly royalties of
$400,000 beginning approximately seven months after the initial shipment date.
Under the arrangement, gross profit is defined as the selling price less certain
costs of sales and commissions. As of December 31, 1997, the unamortized
carrying value of the keratome license was included in other assets. No ADK
shipments were made through December 31, 1997.
Assets of Northern New Jersey Eye Institute
- -------------------------------------------
In July 1996, the Company acquired the assets of the Northern New Jersey Eye
Institute (NNJEI) and contracted with the practice to provide ongoing management
services through its LSIA subsidiary.
The acquisition was accounted for using the purchase method. Accordingly, the
Company's results of operations resulting from LSIA's service agreement with
NNJEI are included in the Company's consolidated financial statements subsequent
to the acquisition date. The total purchase cost, including acquisition costs,
of $2,576,882, was comprised of a 5.05% promissory note in the amount of
$340,000 and 205,598 unregistered shares of the Company's Common Stock. Up to
102,798 additional shares will be issuable on July 3, 1998 if the Company's
quoted stock price is lower than $15.00 per share at that date. The fair value
of the purchase consideration was determinable at the date of acquisition and
was recorded at that time. If and when the additional shares are issued in July
1998, the entry will be to record the par value of shares issued in Common Stock
with the offset to additional paid-in capital. The promissory note was repaid in
September 1996. Cost to enter into the management services agreement was
recognized as a result of the acquisition, totaling $1,606,774, was being
amortized over 25 years.
In December 1997, the Company sold LSIA to an unrelated company (see note 4).
MEC Health Care, Inc.
- ---------------------
In October 1995, the Company acquired all of the issued and outstanding shares
of common stock of MEC. The acquisition was accounted for using the purchase
method. Accordingly, MEC's results of operations are included in the Company's
consolidated financial statements subsequent to the acquisition date. The total
purchase cost, including acquisition costs, of $6,579,087 was comprised of an
8.75% promissory note in the total amount of $1,799,100 (see note 10) and
543,464 unregistered shares of the Company's Common Stock. Goodwill recognized
as a result of the acquisition, totaling $6,667,918, was being amortized over 20
years.
In December 1997, the Company sold MEC to an unrelated company (see note 4).
The Farris Group
- ----------------
In February 1994, the Company acquired MRF, Inc. d/b/a The Farris Group. The
acquisition was accounted for using the purchase method. Accordingly, The Farris
Group's results of operations are included in the Company's consolidated
financial statements subsequent to the acquisition date. The terms of the
acquisition provided, among other things, for the Company to pay $2 million and
up to 750,000 unregistered shares of the Company's Common Stock issuable if The
Farris Group achieves certain future performance objectives. Based on The Farris
<PAGE>
Group's pre-tax profits for each of the years ended December 31, 1996, 1995, and
1994, 406,700 shares were issued in April 1997 (see note 11). These earn-out
shares were valued at $3,065,056 and accounted for as additional purchase price
since there are a maximum number of shares issuable, termination of the former
owner's employment does not impact the agreement, and the agreement is entirely
separate from compensation agreements. No earnout shares were earned for the
year ended December 31, 1997.
LaserSight Centers Incorporated
- -------------------------------
In April 1993, the Company acquired all of the outstanding stock of LaserSight
Centers Incorporated (Centers), a privately held corporation. Centers is a
development stage corporation which intends to provide services for ophthalmic
laser surgical centers using excimer and other lasers. The terms for the closing
of this transaction provided for the issuance of 500,000 unregistered shares of
the Company's Common Stock and the agreement of the Company to issue up to an
additional 1,265,333 unregistered shares of its common stock based on the
outcome of certain future events and whether Centers achieves certain
performance objectives.
In March 1997, the Company amended the purchase and royalty agreements related
to the 1993 acquisition of Centers. The amended purchase agreement provided for
the Company to issue approximately 625,000 unregistered common shares with
600,000 additional shares contingently issuable based upon future operating
profits. This replaces the provision calling for 1,265,333 contingently issuable
shares based on cumulative revenues or other future events and the uncertainties
associated therewith. The amended royalty agreement reduces the royalty from $86
to $43 per refractive procedure and delays the obligation to pay such royalties
until the sooner of five years or the issuance of all contingently issuable
shares as described above. The value of shares issued in March 1997, $3,320,321,
was accounted for as additional purchase price based upon historical and
expected growth in the excimer laser industry and undiscounted projected cash
flows.
NOTE 4 -- DIVESTITURES
- ----------------------
In December 1997, the Company sold all of the outstanding stock of MEC and LSIA
to Vision Twenty-One, Inc. (Vision 21) in a transaction which was effective as
of December 1, 1997. The total consideration paid by Vision 21 to the Company
consisted of $6.5 million in cash paid at closing and 820,085 unregistered
shares of Vision 21 Common Stock. The final number of the Vision 21 shares to be
received by the Company is subject to certain post-closing adjustments, for
which a portion of the unregistered Vision 21 shares, valued at $1 million at
the closing date, have been placed in escrow. The Vision 21 shares are to be
liquidated pursuant to the agreement from February through May 1998. The Company
is to receive a minimum of $6.5 million and a maximum of $7.475 million from the
liquidation of the Vision 21 shares. If the Company has not received at least
$6.5 million (subject to certain post-closing adjustments) from the liquidation
of the Vision 21 shares by May 29, 1998, then Vision 21 is to pay the Company
any shortfall in cash. At December 31, 1997, the market value of the Vision 21
shares was approximately $7,586,000 (see notes 10 and 16).
The Company has recorded a liability in the amount of approximately $770,000 as
of December 31, 1997, representing the maximum potential post-closing
adjustments. Upon final determination of post-closing adjustments, any reduction
in such amount will be reflected as additional gain on sale of subsidiaries in
1998.
<PAGE>
As a result of this transaction, the Company recorded a gain before income taxes
of $4,129,057 in the year ended December 31, 1997.
NOTE 5 -- ACCOUNTS AND NOTES RECEIVABLE
- ---------------------------------------
Accounts and notes receivable at December 31, 1997 and 1996 were net of
allowance for uncollectibles of $1,825,000 and $1,350,000, respectively. During
1997, approximately $1,892,000, net of associated commissions, in accounts and
notes receivable were written off as uncollectible. Accounts and notes
receivable write-offs were not significant for the years ended December 31,
1996, and 1995.
Notes receivable at December 31, 1997 and 1996 primarily represent unpaid
balances due on laser equipment sales. Notes receivable balances,
discounted at 8%, and less an allowance for uncollectibles, consisted of the
following at December 31, 1997 and 1996:
1997 1996
---- ----
Notes receivable $7,814,773 6,967,120
Less: Discount 315,968 476,170
Allowance for
uncollectible
notes 1,356,271 711,000
----------- ----------
6,142,534 5,779,950
Less current portion 3,762,341 3,159,575
----------- ---------
$2,380,193 2,620,375
========== =========
NOTE 6 -- INVENTORIES
- ---------------------
The components of inventories at December 31, 1997 and 1996 are summarized as
follows:
1997 1996
---- ----
Raw materials $2,958,782 2,008,610
Work in process 263,353 448,906
Finished goods 862,775 664,646
Test equipment-clinical trials 263,325 206,741
---------- ---------
$4,348,235 3,328,903
========== =========
As of December 31, 1997, the Company had six laser systems being used under
arrangements for clinical trials in various countries. At December 31, 1996,
four laser systems were in use under similar arrangements.
<PAGE>
NOTE 7 -- PROPERTY AND EQUIPMENT
- --------------------------------
Property and equipment at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Leasehold improvements $ 70,883 118,087
Furniture and equipment 947,032 962,014
Assets under capital lease -- 957,180
Laboratory equipment 1,354,086 717,055
----------- ----------
2,372,001 2,754,336
Less accumulated
depreciation and
amortization 1,017,833 818,116
----------- ----------
$ 1,354,168 1,936,220
=========== ==========
NOTE 8 -- OTHER ASSETS
- ----------------------
Other assets at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Restricted cash $ 200,000 240,000
Cost to enter into a manage-
ment agreement, net of
accumulated amortization
of $30,498 -- 1,576,276
Goodwill, net of accumu-
lated amortization of
$749,739 in 1997 and
$685,464 in 1996 7,077,491 10,522,756
Acquired technology, net
of accumulated amorti-
zation of $355,608 in 1997
and $209,604 in 1996 1,396,392 1,542,396
Ultraviolet patents, net of
accumulated amortization
of $371,906 in 1997 10,185,993 --
LASIK pre-market approval
application, net of accum-
ulated amortization of
$233,790 in 1997 2,571,682 --
Other assets, net of accumu-
lated amortization of
$456,529 in 1997 and
$32,076 in 1996 2,411,244 168,984
----------- ----------
$23,842,802 14,050,412
=========== ==========
<PAGE>
Restricted cash represents deposits in connection with service contracts with
approximately 100 and 134 ophthalmologists at December 31, 1997 and 1996,
respectively, granting them exclusive market areas to perform specific services
as set forth in the Center's service contracts.
NOTE 9 -- EMPLOYEE BENEFIT PLAN
- -------------------------------
Effective January 1, 1996, the Company adopted a 401(k) plan for the benefit of
substantially all of its full-time employees. The plan provides, among other
things, for employer-matching contributions to be made at the discretion of the
Board of Directors. Employer-matching contributions vest over a seven-year
period. Administrative expenses of the plan are paid by the Company. For the
years ended December 31, 1997 and 1996, expense incurred related to the 401(k)
plan was approximately $33,000 and $42,000, respectively.
NOTE 10 -- NOTES PAYABLE
- ------------------------
In April 1997, the Company entered into a loan agreement with Foothill Capital
Corporation (Foothill) for up to $8 million, consisting of a term loan in the
amount of $4 million and a revolving loan in an amount of 80% of the eligible
receivables of LaserSight Technologies, Inc., but not more than $4 million. The
term loan bears interest at an annual rate of 12.50% and the revolving loan
bears interest at a variable annual rate of 1.50% above the base rate of Norwest
Bank Minnesota (10% at December 31, 1997). In connection with the loan, the
Company paid an origination fee of $150,000 and issued warrants to purchase
500,000 shares of Common Stock. The warrants are exercisable at any time from
April 1, 1998 through April 1, 2002 at an exercise price per share of $6.0667.
Subject to certain conditions based on the market price of the Common Stock, up
to half of the warrants are eligible for repurchase by the Company. Any warrants
that remain outstanding on April 1, 2002 are subject to mandatory repurchase by
the Company at a price of $1.50 per warrant. The warrants have certain
anti-dilution features which provide for approximately 50,000 additional shares
pursuant to the issuance of the Series B Preferred Stock and a corresponding
reduction in the exercise price to approximately $5.52 per share and repurchase
price to approximately $1.36 per warrant. The warrants were valued at $500,000
and are classified as long-term obligations at December 31, 1997. The recorded
amount of the obligation will change with the fair value of the warrants, with a
corresponding adjustment to interest expense.
In December 1997, in conjunction with the sale of MEC and LSIA (see note 4), the
Company restructured its agreements with Foothill. Based on such restructured
agreements, the Company used $2.0 million of its cash proceeds from the sale of
MEC and LSIA to reduce the Company's term loan from $4.0 million to $2.0
million. Additionally, the Company used approximately $1.5 million of cash
proceeds from the sale to repay in full the then outstanding balance under its
revolving loan with Foothill. The Company's availability under the revolving
loan was reduced to $2.0 million. In addition, the Company pledged the Vision 21
shares to Foothill as collateral under the loan facility. Moreover, after the
Company has received $2.5 million from the liquidation of the Vision 21 shares,
any additional proceeds must first be applied to pay off the Company's term loan
with Foothill, and any further proceeds to retire any then-outstanding advances
under its revolving loan. The Company's term loan is, in any event, due on June
15, 1998 and all availability under the Company's revolving loan terminates on
June 15, 1998. Until June 16, 1998, Foothill has waived the Company's compliance
with the financial covenants which were contained in the original loan
agreements.
<PAGE>
At December 31, 1996, the Company owed $1,000,000 to former owners of MEC. The
note payable was secured by stock of MEC, and bore interest at 8.75%. In April
1997, the Company repaid the note in full.
Interest paid during 1997, 1996, and 1995 approximated $515,000, $172,000, and
$50,000, respectively.
In July 1996, the Company entered into an agreement for the sale and leaseback
of certain assets acquired. The lease, with a four-year term, was classified as
a capital lease. The fair market value of the assets financed was approximately
$957,000 and payments under the lease approximated $300,000 annually and
commenced in July 1996. This obligation was assumed by the purchaser as a result
of the sale of LSIA (see notes 4 and 16).
NOTE 11 -- STOCKHOLDERS' EQUITY
- -------------------------------
In August 1997, the Company completed a private placement of 1,600 shares of
Series B Preferred Stock yielding net proceeds, after costs of financing, of
$14.83 million. The Company also issued warrants to purchase 790,000 shares of
Common Stock for a period of five years at $5.91 per share to the investors and
placement agent. The Series B Preferred Stock is convertible into the Company's
Common Stock at the option of the holders at any time through August 29, 2000,
on which date all preferred stock remaining outstanding will automatically be
converted into Common Stock. The conversion price equals the lesser of $6.68 per
share or the average of the three lowest closing bid prices during a 30-trading
day period preceding the conversion date. Additionally, in the event of
liquidation, the Series B Preferred Stock is entitled to the IBM Patent's
royalties. At December 31, 1997, 1,295 shares of Series B Preferred Stock were
outstanding. In October 1997, 305 shares were voluntarily redeemed with a 4
percent redemption premium totaling $122,000, which was recorded as a dividend
to the Series B Preferred Stock stockholders. The Series B Preferred Stock is
recorded at the amount of gross proceeds less the costs of the financing and the
fair value of the warrants and classified as mezzanine financing above the
stockholders' equity section on the balance sheet. Upon an event of redemption,
as defined, some of which are outside of the Company's control, the Series B
Preferred Stock will become mandatorily redeemable. The financing costs and
warrants will be accreted against additional paid-in capital if and when an
event of redemption is assessed as probable.
In January 1996, the Company completed a private placement of 116 shares of
Series A Preferred Stock, yielding net proceeds, after costs of financing, of
$5.34 million. The Company also issued warrants to purchase 17,509 shares of
common stock at $13.25 per share to the placement agent. The conversion price
equaled the lesser of $14.18 per share or 85% of the average closing price of
the common stock during the five trading days preceding the conversion date,
subject to a minimum conversion price. At December 31, 1997 and 1996, zero and
eight shares of Series A Preferred Stock, respectively, were outstanding. The
conversion of 116 shares of Series A Preferred Stock through December 31, 1997
resulted in the issuance of 975,261 shares of Common Stock, including the
issuance of Common Stock in settlement of preferred dividends (at an annual rate
of 10%) accrued through the respective conversion dates.
In January 1995, 289,000 shares were sold under a stock purchase agreement for
net proceeds to the Company of approximately $2,463,000, including a note
receivable totaling $1,500,000 with interest at 10% per annum. A modified
promissory note was executed in August 1995 with an adjusted balance of
$1,250,000 with monthly payments of varying amounts through April 30, 1996. The
balance due at December 31, 1997 and 1996 was $1,140,000 and was classified as a
<PAGE>
stock subscription receivable and reduction of stockholders' equity. After a
trial in December 1997, the Company received a final judgment for such amount
plus interest and costs of trial. The defendants have appealed the judgment.
In July 1995, in consideration for the acquisition of certain technology (see
note 8) the transferor of such technology received options to purchase 240,000
unregistered shares of the Company's Common Stock at the greater of $1.13 per
share or $12.00 less than the market value on the date of exercise. The options
were exercised in September 1995.
Pursuant to the agreements related to the acquisition of The Farris Group, up to
343,300 unregistered shares of the Company's stock may become issuable to the
seller based upon The Farris Group's 1998 pre-tax profits, as defined in the
agreement. The number of issuable shares is determined annually and, based on
terms of the acquisition agreement, amended as of December 28, 1995, were issued
in 1997 for the three-year period ending December 31, 1996 and will be issued,
if earned, in 1999 for the two-year period ending December 31, 1998. Based on
The Farris Group's pre-tax profits for each of the years ended December 31,
1996, 1995, and 1994, 406,700 shares were issued in April 1997. For purposes of
computing earnings per share, issuable shares attributable to historical
performance levels of The Farris Group are included in weighted average shares
outstanding on a basic and diluted basis for 1996 and 1995.
NOTE 12 -- STOCK OPTION PLANS
- -----------------------------
The Company has options outstanding at December 31, 1997 related to five stock
based compensation plans (the Plans). Options are currently issuable by the
Board of Directors only under the 1996 Equity Incentive Employee Plan (1996
Incentive Plan) and the LaserSight Incorporated Non-employee Directors Stock
Option Plan (Directors Plan), both of which were approved by the Company's
stockholders in June 1996 and the latter of which was amended in June 1997.
Under the 1996 Incentive Plan, all employees of the Company are eligible to
receive options, although no employee may receive options to purchase greater
than 250,000 shares of common stock during any one year. Pursuant to terms of
the 1996 Incentive Plan, 750,000 shares of common stock may be issued at
exercise prices of no less than 100% of the fair market value at date of grant,
and options become exercisable in four annual installments on the anniversary
dates of the grant.
The Directors Plan, as amended, provides for the issuance of up to 300,000
shares of common stock to directors of the Company who are not officers or
employees. Grants to individual directors are based on a fixed formula that
establishes the timing, size, and exercise price of each option grant. At the
date of each annual stockholders' meeting, 15,000 options will be granted to
each outside director, and 5,000 options will be granted to each outside
director that chairs a standing committee, at exercise prices of 100% of the
fair market value as of that date, with the options becoming fully exercisable
on the first anniversary date of the grant. The options will expire in ten years
or three years after an outside director ceases to be a director of the Company.
The per share weighted-average fair value of stock options granted during the
years ended December 31, 1997 and 1996 was $3.62 and $4.60 on the dates of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions:
<PAGE>
1997 1996 1995
---- ---- ----
Expected dividend yield 0% 0% 0%
Volatility 49% 44% 44%
Risk-free interest rate 5.70-5.71% 6.04%-6.33% 5.66%-6.20%
Expected life (years) 5-10 3-5 3-5
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its Plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net income (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net income (loss)
As reported $(7,253,084) (4,074,369) 4,591,871
Pro forma (8,012,317) (4,653,040) 3,571,890
Basic EPS
As reported $ (0.80) (0.69) 0.68
Pro forma (0.88) (0.76) 0.53
Diluted EPS
As reported $ (0.80) (0.69) 0.64
Pro forma (0.88) (0.76) 0.49
In accordance with SFAS No. 123, the pro forma net income (loss) reflects only
options granted in 1997, 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) amounts presented above because
compensation cost does not reflect options granted prior to January 1, 1995,
that vested in 1997, 1996 or 1995.
Stock option activity for all plans during the periods indicated is as follows:
Weighted
Shares Average
Under Exercise
Option Price
------ -----
Balance at January 1, 1995 371,800 3.93
Granted 327,400 11.94
Exercised (174,540) 4.29
Terminated (28,400) 5.58
---------
Balance at December 31, 1995 496,260 9.12
Granted 574,000 9.83
Exercised (9,900) 4.93
Terminated (180,510) 11.00
---------
Balance at December 31, 1996 879,850 9.29
Granted 286,000 6.29
Exercised (25,875) 3.80
Terminated (90,975) 7.27
---------
Balance at December 31, 1997 1,049,000 8.75
=========
<PAGE>
The following table summarizes the information about stock options outstanding
and exercisable at December 31, 1997:
Range of Exercise Prices
$1.58-$5.14 $5.31-$7.03 $9.50-$12.81
----------- ----------- ------------
Options outstanding:
Number outstanding at
December 31, 1997 100,000 439,000 510,000
Weighted average
remaining contractual
life 2.3 years 5.6 years 2.8 years
Weighted average
exercise price $3.18 $6.73 $11.57
Options exercisable:
Number exercisable at
December 31, 1997 69,000 92,500 410,832
Weighted average
exercise price $2.93 $6.85 $11.72
The underwriter of the Company's 1991 initial public offering received warrants
to purchase up to 180,000 shares of the Company's Common Stock at an exercise
price of $3.00 per share through November 13, 1996. During 1996, all of the
underwriter's warrants were exercised.
NOTE 13 -- INCOME TAXES
- -----------------------
The components of the income tax expense (benefit) for the years ended December
31, 1997, 1996, and 1995 were as follows:
1997 1996 1995
---- ---- ----
Current:
Federal $ 67,066 (707,130) 858,800
State 812,934 (22,878) 130,000
--------- ---------- ---------
880,000 (730,008) 988,800
--------- ---------- ---------
Deferred:
Federal - (351,677) 344,000
State - (57,323) 65,000
--------- ---------- ---------
- (409,000) 409,000
--------- ---------- ---------
Total income tax
expense (benefit) $ 880,000 (1,139,008) 1,397,800
========= =========== =========
<PAGE>
Deferred tax assets and liabilities consist of the following components as of
December 31, 1997 and 1996:
1997 1996
---- ----
Deferred tax liabilities:
Acquired technology $ 555,764 611,338
Change in tax status of subsidiaries 134,938 273,639
Unrealized gain on marketable equity
securities 370,500 --
Property and equipment 84,768 166,254
---------- ---------
1,145,970 1,051,231
Deferred tax assets:
Intangibles 69,522 --
Inventory 232,512 237,446
Receivable allowance 800,063 596,026
Limitation on capital loss -- 155,042
Warranty accruals 157,970 61,562
NOL carry forward -- 462,081
Other 58,893 67,100
---------- ---------
1,318,960 1,579,257
Valuation allowance (172,990) (528,026)
---------- ---------
1,145,970 1,051,231
---------- ---------
Net deferred tax liability $ -- --
========== =========
<PAGE>
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is a
risk that certain of these deferred tax assets may expire unused and,
accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable earnings or alternative tax strategies. However, the net deferred tax
assets could be reduced in the near term if management's estimates of the
taxable income during the carryforward period are significantly reduced or
alternative tax strategies are no longer viable.
No payments for income taxes were made during the year ended December 31, 1997.
Payments for income taxes during the years ended December 31, 1996 and 1995 were
$307,360 and $719,595, respectively.
For the years ended December 31, 1997, 1996 and 1995, the difference between the
Company's effective income tax provision and the "expected" tax provision,
computed by applying the federal statutory income tax rate to income before
provision for income taxes, is reconciled below:
1997 1996 1995
---- ---- ----
"Expected" tax provision
(benefit) $(2,166,849) (1,772,548) 2,036,000
State income taxes, net
of federal income tax
benefit 536,536 (29,462) 85,000
Tax basis of subsidiaries sold 2,478,304 - -
Utilization of net operating
loss carry forwards - - (426,000)
Foreign sales corporation
tax benefit - - (216,000)
Valuation allowance (355,036) 528,026 -
Research and development - - (151,000)
Intangible amortization 369,210 162,321 75,000
Nondeductible expenses 17,835 18,920 55,000
Other items, net - (46,265) (60,200)
----------- ----------- ----------
Income tax
expense (benefit) $ 880,000 (1,139,008) 1,397,800
========== =========== =========
NOTE 14 -- SEGMENT INFORMATION
- ------------------------------
1997 1996 1995
---- ---- ----
Operating revenues:
Technology related $12,170,018 10,634,663 19,899,584
Health care services 12,218,815 10,869,327 6,088,481
----------- ---------- ----------
Consolidated 24,388,833 21,503,990 25,988,065
=========== ========== ==========
Operating profit (loss):
Technology related (6,492,423) (2,148,280) 4,692,757
Health care services (462,263) (895,181) 1,072,407
General corporate
expenses (2,040,328) (1,828,285) (1,006,462)
Developmental stage
company expenses -
LaserSight Centers
Incorporated (267,140) (88,603) (206,558)
------------ ----------- -----------
Income (loss)
from operations $(9,262,154) (4,960,349) 4,552,144
============ =========== ==========
Identifiable assets:
Technology related $30,669,076 16,569,845
Health care services 4,398,202 15,244,579
General corporate assets 12,083,276 2,145,663
Developmental stage
company assets -
LaserSight Centers
Incorporated 3,310,519 290,126
----------- ----------
Total assets $50,461,073 34,250,213
=========== ==========
<PAGE>
The Company operates principally in two industries: technology related (laser
equipment) products and health care services. Laser equipment operations involve
the development, manufacture, and sale of ophthalmic lasers primarily for use in
PRK procedures. Such operations generally relate to the LaserSight Technologies,
Inc. subsidiary. Health care services generally relate to MEC, The Farris Group
and LSIA. Due to the sale of MEC and LSIA (see note 4) effective December 1,
1997, only The Farris Group is included in the identifiable asset information as
of December 31, 1997. In addition, only eleven months of operating activity is
included for MEC and LSIA regarding operating revenues and operating profits for
1997.
Operating profit is total revenue less operating expenses. In determining
operating profit for industry segments, the following items have not been
considered: general corporate expenses; expenses attributable to Centers, a
developmental stage company; non-operating income; and the income tax expense
(benefit). Identifiable assets by industry segment are those that are used by or
applicable to each industry segment. General corporate assets consist primarily
of cash, marketable equity securities and income tax accounts.
Export sales are as follows:
1997 1996 1995
---- ---- ----
North and
Central America $ 1,075,000 - 2,511,469
South America 5,995,000 3,600,637 4,904,565
Asia 2,235,000 2,844,752 8,631,066
Europe 2,526,500 3,378,000 1,683,555
Africa - 295,000 195,000
----------- --------- ---------
$11,831,500 10,118,389 17,925,655
=========== ========== ==========
The geographic areas above include significant sales to the following countries:
North and Central America - Mexico and Costa Rica; South America - Argentina,
Brazil, Columbia and Venezuela; Asia - China, India and Japan; Europe - France,
Italy and Spain. In the Company's experience, sophistication of ophthalmic
communities varies by region, and is better segregated by the geographic areas
above than by individual country.
NOTE 15 --RELATED PARTY TRANSACTIONS
- ------------------------------------
During January 1993, Centers entered into a royalty agreement with Florida Laser
Partners, a Florida general partnership, in which two of the Company's former
presidents and the Company's chairman are partners. The royalty agreement
provides, among other things, for a perpetual royalty payment to Florida Laser
Partners of a number of shares of Centers' common stock, as determined by a
formula defined in the royalty agreement. Also during January 1993, the Company
entered into an exchange agreement with Florida Laser Partners, which provides
among other things, that Laser Partners shall exchange, from time to time,
shares of Centers' common stock that it acquires pursuant to the royalty
agreement for shares of the Company's stock. This agreement was amended in March
1997 (see note 3).
In December 1995, the Company sold one laser system for $235,000 to a company
owned by a director of the Company. The Company received full payment on the
account in January 1997.
<PAGE>
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
- ----------------------------------------
Pillar Point Partners
- ---------------------
On March 31, 1995, the Company was served with a complaint by Pillar Point
Partners, alleging infringement by the Company of certain patent rights
allegedly held by Pillar Point Partners under exclusive licenses from Summit
Technology, Inc. and Visx Incorporated, both of whom subsequently joined the
suit.
The Company has categorically denied the allegation of patent infringement. In
addition, the Company asserted several defenses which alleged the patent to be
invalid and unenforceable. In March 1997, the action was dismissed without
prejudice. As part of the settlement, the Company received a release from
liability under any of Pillar Point Partners' patents for certain systems and
any service or procedure performed with such systems before the effective date
of the settlement.
Public Company Publishing, Inc.
- -------------------------------
In May 1996, the Company received a complaint alleging that the Company had
breached a written agreement entered into during 1992 that provided for the
rendering of consulting services to the Company. In December 1996, the action
was settled for payments totaling $100,000 and an agreement to issue 75,000
shares of common stock in the event that the plaintiff did not receive 75,000
shares of common stock from the former holders of Centers stock. Such shares
were delivered by the former holders of Centers stock. The settlement expense is
reflected in other expenses in 1996. Of this amount, $50,000 was paid during
1996 and $50,000 was paid in February 1997.
Visx Incorporated
- -----------------
In May 1997, the Company entered into a license agreement with Visx Incorporated
to settle litigation and any and all potential claims related to patent
infringement prior to May 1997. The aggregate amount of $230,400 is reflected in
other expenses in 1997 and is to be paid in eight quarterly installments.
Northern New Jersey Eye Institute
- ---------------------------------
In October 1997, the Company received a request for mediation/arbitration from
Northern New Jersey Eye Institute, P.A. (NNJEI) which relates to the services
agreement between LSIA and NNJEI. This services agreement was entered into as
part of the Company's July 1996 acquisition of the assets of NNJEI. The request
for mediation alleges breach of contract and fraud which the Company denies and
intends to vigorously defend. The mediation process began in mid-November and
was discontinued following the December 1997 sale of LSIA to an unrelated
company (see note 4). Under the terms of the services agreement, mediation will
be followed by binding arbitration if a resolution cannot be reached. Based on
the Company's legal assessment of the contracts between the parties, the Company
does not expect the outcome of mediation or, if necessary, arbitration to have a
material impact on the Company's consolidated financial position or results of
operations.
<PAGE>
Capital Lease Obligation
- ------------------------
In connection with certain divestitures completed in December 1997 (see note 4),
the Company continues to guarantee a capital lease obligation. The Company is
indemnified for this by the purchaser, and the purchaser is obligated to take
all necessary steps to remove the Company as a guarantor. If the purchaser fails
to pay the lease obligation, an event which the Company believes to be unlikely,
management estimates that it could settle these obligations for approximately
$660,000 at December 31, 1997. In the opinion of management, the ultimate
disposition of these guarantees will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or future cash
flows.
Lease Obligations
- -----------------
The Company leases office space and certain equipment under operating lease
arrangements.
Future minimum payments under non-cancelable operating leases, with initial or
remaining terms in excess of one year, as of December 31, 1997, are as follows:
1998 $373,224
1999 326,017
2000 139,197
2001 459
Rent expense during 1997, 1996, and 1995 was approximately $755,000, $781,000,
and $311,000, respectively.
Other Matters
- -------------
In 1995, the Company received $980,125 in settlement of its claims against the
obligor of promissory notes held by the Company. The notes had previously been
reserved and the receipt is reflected in other income. Also in 1995, the Company
received a settlement of $350,000 from the Company's former president related to
matters in connection with his prior employment.
NOTE 17 -- SUBSEQUENT EVENTS
- ----------------------------
Sale of International Patent Rights
On February 10, 1998, the Company closed a transaction for the sale of certain
rights to the international patents that make up a portion of the IBM Patents,
and granted a non-exclusive license to use the IBM Patents issued in the United
States, in exchange for the Company receiving $7.5 million in cash. The
transaction will not result in any current gain or loss. It will, however,
reduce the Company's amortization expense over the remaining useful life of the
IBM Patents. A portion of the proceeds will be accounted for as prepaid
royalties that will be amortized to income over time.
<PAGE>
Series B Preferred Stock Redemption Agreement
- ---------------------------------------------
On February 4, 1998, in exchange for the consent of the holders of its Series B
Preferred Stock to the sale of international patent rights described above, the
Company agreed to deposit $4.2 million of the sale transaction proceeds into a
blocked account for the exclusive benefit of the preferred holders.
The preferred holders received an option to sell to the Company up to 351 shares
of Series B Preferred Stock (representing an aggregate face amount of
$3,510,000) at any time during the 150-day period ending July 10, 1998. As of
March 9, 1998 all 351 shares (unaudited) had been repurchased with funds from
the blocked account at a 20% premium.
The amount of the repurchase price in excess of the carrying value of the Series
B Preferred Stock repurchased will increase the loss (or decrease any income)
available to holders of Common Stock in the first quarter of 1998.
CERTIFICATE OF INCORPORATION
----------------------------
OF
Smal Incorporated
-----------------
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter called the "corporation")
is
Smal Incorporated
SECOND: The address, including street, number, city, and county, of the
registered office of the corporation in the State of Delaware is 229 South State
Street, City of Dover, County of Kent; and the name of the registered agent of
the corporation in the State of Delaware is The Prentice-Hall Corporation
System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation shall
have authority to issue is Three Thousand (3,000), all of which are without par
value. All such shares are of one class and are shares of Common Stock.
FIFTH: The name and the mailing address of the incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
T. M. Bonovich 229 South State Street, Dover, Delaware
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
<PAGE>
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
EIGHTH: For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and regulation
of the powers of the corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of
the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
fixed by, or in the manner provided in, the By-Laws. The phrase "whole
Board" and the phrase "total number of directors" shall be deemed to have
the same meaning, to wit, the total number of directors which the
corporation would have if there were no vacancies. No election of directors
need be by written ballot.
2. After the original or other By-Laws of the corporation have been
adopted, amended, or repealed, as the case may be, in accordance with the
provisions of Section 109 of the General Corporation Law of the State of
Delaware, and, after the corporation has received any payment for any of
its stock, the power to adopt, amend, or repeal the By-Laws of the
corporation may be exercised by the Board of Directors of the corporation;
provided, however, that any provision for the classification of directors
of the corporation for staggered terms pursuant to the provisions of
subsection (d) of Section 141 of the General Corporation Law of the State
of Delaware shall be set forth in an initial By-Law or in a By-Law adopted
by the stockholders entitled to vote of the corporation unless provisions
for such classification shall be set forth in this certificate of
incorporation.
3. Whenever the corporation shall be authorized to issue only one
class of stock, each outstanding share shall entitle the holder thereof to
notice of, and the right to vote at, any meeting of stockholders. Whenever
the corporation shall be authorized to issue more than one class of stock,
no outstanding share of any class of stock which is denied voting power
under the provisions of the certificate of incorporation shall entitle the
holder thereof to the right to vote at any meeting of stockholders except
<PAGE>
as the provisions of paragraph (2) of subsection (b) of section 242 of the
General Corporation Law of the State of Delaware shall otherwise require;
provided, that no share of any such class which is otherwise denied voting
power shall entitle the holder thereof to vote upon the increase or
decrease in the number of authorized shares of said class.
NINTH: The personal liability of the directors of the corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented.
TENTH: The corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ELEVENTH: From time to time any of the provisions of this certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any tie conferred upon the stockholders of the corporation by this
certificate of incorporation are granted subject to the provisions of this
Article ELEVENTH.
Signed on September 29, 1987.
/s/ T.M. Bonovich
-----------------
T. M. Bonovich
Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
SMAL INCORPORATED
-----------------
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is
Smal Incorporated.
2. The certificate of incorporation of the corporation is hereby amended by
striking out Article First thereof and by substituting in lieu of said Article
the following new Article:
1. The name of the corporation is Starwood Industries, Inc.
3. The corporation has not received any payment for any of its stock.
4. The amendment of the certificate of incorporation herein certified has
been duly adopted in accordance with the provisions of Section 241 of the
General Corporation Law of the State of Delaware.
EXECUTED as of this 28th day of May, 1991.
/s/ Jonnie R. Williams
---------------------------
Jonnie R. Williams, sole Director
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
STARWOOD INDUSTRIES, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is
Starwood Industries, Inc. (formerly Smal Incorporated).
2. The certificate of incorporation of the corporation is hereby amended by
striking out Article First thereof and by substituting in lieu of said Article
the following new Article:
1. The name of the corporation is LaserSight Incorporated
3. The corporation has not received any payment for any of its stock.
4. The amendment of the certificate of incorporation herein certified has
been duly adopted in accordance with the provisions of Section 241 of the
General Corporation Law of the State of Delaware.
EXECUTED as of this 11th day of June, 1991.
/s/ Jonnie R. Williams
--------------------------
Jonnie R. Williams, sole Director
<PAGE>
Certificate of Amendment of Certificate Of Incorporation
of
LaserSight Incorporated
-----------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation Law
of the State of Delaware
The undersigned, Chief Executive Officer, and Secretary of LaserSight
Incorporated, a corporation existing under the laws of the State of Delaware,
does hereby certify as follows:
FIRST: The Certificate of Incorporation is amended to delete paragraph
"FOURTH:" in its entirety and to replace same with the following:
"FOURTH: The total number of Shares of stock which the Corporation
shall have the authority to issue is 15,000,000 Shares, par value one
cent (.01) per share. All such Shares are of one class, and all Shares
are Common Stock. The purpose of this amendment is to split the
Company's Common Stock on a 5,000-for-one basis."
SECOND: That such amendment has been duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the
State of Delaware by the written consent of the holders of not less than a
majority of the outstanding stock entitled to vote thereon and that written
notice of the corporate action has been given to those stockholders who
have not consented in writing, all in accordance with the provisions of
Section 228 of the General Corporation Law.
All of the rest and remainder of the corporation's Certificate of
Incorporation shall remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Certificate this 17th day of July,
1991.
ATTEST:
/s/ J.T. Lin /s/ J.T. Lin
- ------------------------ -------------------------
J.T. LIN J.T. LIN
Title: Assistant Secretary Title: Chief Executive Officer
<PAGE>
Certificate of Amendment of Certificate of Incorporation
of
LaserSight Incorporated
-----------------------
Adopted in accordance with the provisions
of Section 242 of the General Corporation Law
of the State of Delaware
The undersigned, Chief Executive Officer, and Assistant Secretary of
LaserSight Incorporated, a corporation existing under the laws of the State of
Delaware, does hereby certify as follows:
FIRST: The Certificate of Incorporation is amended to delete paragraph
"FOURTH:" in its entirety and to replace same with the following:
"FOURTH: The total number of Shares of stock which the Corporation
shall have the authority to issue is 10,000,000 Shares, par value one
cent (.01) per Share. All such Shares are of one class, and all Shares
are Common Stock. The purpose of this amendment is to effect a
two-for-three reverse split of the Corporation's Common Stock, and
adjust par value to remain at $.01 per Share. As a result of this
amendment, the number of Shares the Corporation shall have the
authority to issue shall be reduced from 15,000,000 to 10,000,000, and
the outstanding Shares shall be reduced from 1,505,000 to 1,003,333.
SECOND: That such amendment has been duly adopted in accordance with the
provisions of the Sections 228 and 242 of the General Corporation Law of
the State of Delaware by the written consent of the holders of not less
than a majority of the outstanding stock entitled to vote thereon and that
written notice of the corporate action has been given to those stockholders
who have not consented in writing, all in accordance with the provisions of
Section 228 of the General Corporation Law.
All of the rest and remainder of the corporation's Certificate of
Incorporation shall remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Certificate this second day of
September, 1991.
ATTEST:
/s/ J.T. Lin /s/ J.T. Lin
- ---------------------------- ---------------------------
J.T. LIN J.T. LIN
Title: Assistant Secretary Title: Chief Executive Officer
<PAGE>
CERTIFICATE OF AMENDMENT OF CERTIFICATE
OF INCORPORATION OF LASERSIGHT INCORPORATED
The undersigned, President and Secretary of LaserSight Incorporated, a
corporation existing under the laws of the State of Delaware, hereby certify as
follows:
FIRST: The Certificate of Incorporation is amended to delete Paragraph
"Fourth:" in its entirety and to replace the same with the following:
FOURTH: The total number of shares of stock which the corporation
shall have the authority to issue is 20,000,000 shares, par value one
tenth of one cent ($.001) per share. All such shares are of one class,
and all shares are common stock.
SECOND: That such Amendment has been duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware by the duly authorized vote of the shareholders at a meeting called
for such purpose. Except as amended hereby, the rest and remainder of the
Corporation's Certificate of Incorporation shall be and remain in full force and
effect.
IN WITNESS WHEREOF, the undersigned have signed this Certificate this 30th
day of June, 1993.
LaserSight Incorporated
By: /s/ J.T. Lin
---------------------
J.T. Lin, Ph.D., President
ATTEST:
/s/ Wen S. Dai
- -------------------------
Wen S. Dai, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
LASERSIGHT INCORPORATED
The undersigned President and Secretary of LaserSight Incorporated, a
corporation existing under the laws of the State of Delaware, hereby certify as
follows:
1. The Certificate of Incorporation is amended to delete Paragraph Fourth
in its entirety and to replace the same with the following:
FOURTH: Number and Class of Shares Authorized; Par Value.
1. Authorized Stock. This corporation is authorized to issue the
following shares of capital stock:
(a) Common Stock. The aggregate number of shares of Common Stock
which the corporation shall have authority to issue is 20,000,000 with a
par value of $.001 per share.
(b) Preferred Stock. The aggregate number of shares of Preferred
Stock which the corporation shall have authority to issue is 10,000,000
with a par value of $.001 per share.
2. Description of Common Stock. Holders of Common Stock are entitled
to one vote for each share held of record on all matters submitted to a
vote of stockholders and may not cumulate their votes for the election of
directors. Shares of Common Stock are not redeemable, do not have any
conversion or preemptive rights, and are not subject to further calls or
assessments once fully paid.
Holders of Common Stock will be entitled to share pro rata in such
dividends and other distributions as may be declared from time to time by
the board of Directors out of funds legally available therefor, subject to
any prior rights accruing to any holders of preferred stock of the Company.
Upon liquidation or dissolution of the Company, holders of shares of Common
Stock will be entitled to share proportionally in all assets available for
distribution to such holders.
3. Description of Preferred Stock. The terms, preferences, limitations
and relative rights of the Preferred Stock are as follows:
(a) The Board of Directors is expressly authorized at any time and
from time to time to provide for the issuance of shares of Preferred Stock
<PAGE>
in one or more series, with such voting powers, full or limited, but not to
exceed one vote per share, or without voting powers, and with such
designations, preferences and relative participating, optional or other
special rights, qualifications, limitations or restrictions, as shall be
fixed and determined in the resolution or resolutions providing for the
issuance thereof adopted by the Board of Directors, and as are not stated
and expressed in these Articles of Incorporation or any amendment hereto,
including (but without limiting the generality of the foregoing) the
following:
(i) the distinctive designation of such series and the
number of shares which shall constitute such series, which number may be
increased (except where otherwise provided by the Board of Directors in
creating such series) or decreased (but not below the number of shares
thereof then outstanding) from time to time by resolution by the Board of
Directors;
(ii) the rate of dividends payable on shares of such series,
the times of payment, whether dividends shall be cumulative, the conditions
upon which and the date from which such dividends shall be cumulative;
(iii) whether shares of such series can be redeemed, the
time or times when, and the price of prices at which shares of such series
shall be redeemable, the redemption price, terms and conditions of
redemption, and the sinking fund provisions, if any, for the purchase of
redemption of such shares;
(iv) the amount payable on shares of such series and the
rights of holders of such shares in the event of any voluntary of
involuntary liquidation, dissolution or winding up of the affairs of the
corporation;
(v) the rights, if any, of the holders of shares of such
series to convert such shares into, or exchange such shares for, shares of
Common Stock or shares of any other class or series of Preferred Stock and
the terms and conditions of such conversion or exchange; and
(vi) the rights, if any, of the holders of shares of such
series to vote.
(b) Except in respect of the relative rights and preferences that
may be provided by the Board of Directors as hereinbefore provided, all
shares of Preferred Stock shall be of equal rank and shall be identical,
and each share of a series shall be identical in all respects with the
other shares of the same series.
2. Such Amendment has been duly adopted in accordance with the provisions
of Sections 228 and 242 of the General Corporation Law of the State of Delaware
by the duly authorized vote of the shareholders at a meeting called for such
<PAGE>
purpose. Except as amended hereby, the rest and remainder of the Corporation's
Certificate of Incorporation shall be and remain in full force and effect.
IN WITNESS WHEREOF, the undersigned have signed this Certificate this 2nd
day of June, 1995.
LASERSIGHT INCORPORATED
By: /s/ Robert Qualls
------------------------
Robert Qualls, President
ATTEST:
/s/ Robert Qualls
- ----------------------------
Robert Qualls, Secretary
<PAGE>
LASERSIGHT INCORPORATED
CERTIFICATE OF DESIGNATION RELATING
TO THE SERIES A CONVERTIBLE PREFERRED STOCK,
PAR VALUE OF $.001 PER SHARE,
OF LASERSIGHT INCORPORATED
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
LaserSight Incorporated, a Delaware corporation (the "Corporation"), hereby
certifies that pursuant to the authority contained in Article Fourth of the
Corporation's Certificate of Incorporation, as amended ("Certificate of
Incorporation"), and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the following resolution was
duly adopted by the Board of Directors of the Corporation ("Board"), creating a
series of its Preferred Stock designated as Series A Convertible Preferred
Stock:
RESOLVED, that there is hereby created and the Corporation be, and it
hereby is, authorized to issue 116 shares of a series of its Preferred Stock
designated Series A Convertible Preferred Stock (the "Series A Preferred") to
have the powers, preferences and rights and the qualifications, limitations or
restrictions thereof hereinafter set forth in this resolution:
1. Preference. The preferences of each share of Series A Preferred with respect
to dividend payments and distributions of the Corporation's assets upon
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation shall be equal to the preferences of every other share of 1995
Preferred (as defined in Section 12 hereof) from time to time outstanding in
every respect and prior in right to such preferences of all Common Stock of the
Corporation, whether now or hereafter authorized, except as approved in
accordance with the provisions of Section 11 hereof.
2. Voting Rights. The Holders of the Series A Preferred, by virtue of their
ownership thereof, will not have any voting rights, except as otherwise provided
herein, in the Certificate of Incorporation or by law. With respect to all
voting rights pursuant to Section 11 hereof or of any other certificate of
designation filed by the Corporation with respect to the 1995 Preferred, Holders
of Series A Preferred and Holders of 1995 Preferred shall vote together as a
single and separate class except as otherwise provided in the Certificate of
Incorporation, by law or by any other certificate of designation filed by the
Corporation with respect to a series of its Preferred Stock.
3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily
liquidated, dissolved or wound up, at any time when any shares of Series A
Preferred shall be outstanding, each then-outstanding share of Series A
<PAGE>
Preferred shall entitle the Holder thereof to a preference against the Property
of the Corporation available for distribution to the Holders of the
Corporation's Stock equal to the sum of the Original Issue Price plus an amount
equal to all unpaid dividends accrued on such share to the date of payment.
Neither the consolidation nor merger of the Corporation into or with any
corporation or corporations, nor the sale nor transfer by the Corporation of all
or any part of its Property, nor any reduction of the authorized or issued
shares of the Stock of the Corporation of any class, whether now or hereafter
authorized, shall be deemed to be a liquidation of the Corporation within the
meaning of any of the provisions of this Section 3.
All of the preferential amounts to be paid to the Holders of 1995 Preferred as
provided in this Section 3 or in any other certificate of designation filed by
the Corporation with respect to the 1995 Preferred shall be paid or set apart
for payment before the payment or setting apart for payment of any amount for,
or the distribution of any Property of the Corporation to, the Holders of any
Common Stock of the Corporation, whether now or hereafter authorized, in
connection with such liquidation, dissolution or winding up. If upon such
liquidation, dissolution or winding-up, the assets of the Corporation
distributable as aforesaid to Holders of the Preferred Stock (including the 1995
Preferred) then outstanding shall be insufficient to permit the payment to them
of the aggregate amount of the liquidation preference applicable to such
Preferred Stock, the entire assets of the Corporation available for distribution
shall be distributed ratably among the Holders of the Preferred Stock (including
the 1995 Preferred) in accordance with the aggregate liquidation preference of
the Preferred Stock held by such Holders.
4. Dividends. Commencing the Closing Date, the Holders of Series A Preferred
shall be entitled to receive, when and as declared by the Board out of shares
legally available therefor, dividends payable in shares of Common (valued in
each case at the Market Price of the Common on the NASDAQ National Market on the
day prior to the dividend payment date) at a per share annual rate of 10% of the
Original Issue Price. Such dividends shall be payable on the effective date
applicable to a conversion, exchange or redemption of the Series A Preferred to
the holders thereof as of such effective date and shall be cumulative from the
date of issuance of the Series A Preferred and shall accrue until paid, whether
or not earned, whether or not declared by the Board and whether or not there are
shares legally available therefor on the date such dividends are payable.
5. Conversion.
(A) General. For the purposes of conversion, the Series A Preferred shall
be valued at the Original Issue Price. Subject to adjustment as provided in
Section 8 hereof, if converted, the Series A Preferred shall be converted into
Common at a price per share of Common (the "Conversion Price") equal to (i) the
lesser of (x) the Adjusted Strike Price (as defined in Section 12 hereof) or (y)
85% of the Market Price (as defined in Section 12 hereof) divided by (ii) the
Registration Factor (as defined in Section 12 hereof); provided, however, that
the Conversion Price as of any date shall not be less than the Minimum
Conversion Price (as defined in Section 12 hereof) determined as of such date.
<PAGE>
(B) Right of Holders to Optional Conversion. Subject to the provisos to
this Section 5(B), the Holders of Series A Preferred shall have the right, at
their option, to convert such shares into Common at any time during the period
beginning 90 days after the Closing Date and ending two years after the Closing
Date; provided, however, that if the Conversion Price in effect at the time of
any optional conversion pursuant to this Section 5(B) is less than or equal to
the Cash Option Price (as defined in Section 12 hereof), the Corporation shall
have the right, but not the obligation, to redeem any or all of such shares of
Series A Preferred surrendered for conversion pursuant to this Section 5(B) for
cash in an amount equal to 115% of the aggregate Original Issue Price of the
shares of Series A Preferred to be so redeemed (such amount, the "Redemption
Amount"); and provided further, that the Corporation may at any time within two
business days after receipt of a notice of conversion pursuant to this Section
5(B), exercise any of its rights pursuant Section 6 hereof with respect to any
of the shares of Series A Preferred subject to such notice of conversion. Any
shares of Common issued pursuant to this Section 5(B) shall be valued at the
Market Price of the Common on the Effective Date (as defined in Section 5(C)
hereof).
(C) Method of Exercise; Payment; Issuance of Common; Transfer and Exchange.
The conversion right granted by Section 5(B) hereof may be exercised by a Holder
of Series A Preferred, in whole or in part, by telecopying a completed Notice
substantially in the form attached hereto as Exhibit A and delivering such
Notice, together with the stock certificate or certificates representing the
Series A Preferred to be converted, duly executed for transfer or accompanied by
executed stock powers (such execution to be either (i) accompanied by a
signature guarantee by a member firm of the New York Stock Exchange, or (ii)
evidenced by a signature on behalf of such Investor without such a guarantee,
provided that the Investor has previously delivered to the Company a written
instrument that (x) authorizes the Company to rely upon such unguaranteed
signature for all purposes relating to the transfer or conversion of Preferred
Shares, (y) includes a specimen of such unguaranteed signature on which the
Company shall be entitled to rely without further investigation, and (z) holds
the Company harmless from any loss resulting from any unauthorized or fraudulent
signature purporting on its face to be an authorized signature so long as the
Company relies on such specimen signature without gross negligence (such
instrument, a "Specimen Signature Authorization")), by express courier to the
principal office of the Corporation (or at such other place as the Corporation
may from time to time designate in a written notice sent to the Holder by
first-class mail, postage prepaid, at its address shown on the books of the
Corporation) against delivery of (1) that number of whole shares of Common equal
to the quotient of (a) the aggregate Original Issue Price of the Series A
Preferred so surrendered, divided by (b) the Conversion Price in effect on the
Effective Date, or (2) if the Conversion Price in effect on the Effective Date
is less than or equal to the Cash Option Price and the Corporation shall have
exercised its right pursuant to Section 5(B) hereof to redeem any or all of such
Series A Preferred for cash, cash in an amount equal to the Redemption Amount,
together with that number of whole shares of Common, if any, equal to the
quotient of (a) the aggregate Original Issue Price of the shares of Series A
Preferred not so redeemed by the Company, divided by (b) the Conversion Price in
effect on the Effective Date. Any conversion or redemption pursuant to Section
5(B) hereof shall irrevocably become effective upon, and only upon, the date of
acceptance (the "Effective Date") by the Corporation (which date shall in no
event be more than two business days after the date of its receipt) of the duly
<PAGE>
completed and executed Notice, certificates for all shares of Series A Preferred
being converted or redeemed, duly executed for transfer or accompanied by
executed stock powers (such execution to be either (i) accompanied by a
signature guarantee by a member firm of the New York Stock Exchange, or (ii) a
Specimen Signature Authorization), in accordance with this Section 5. In the
event of any exercise of the conversion and/or redemption rights granted by
Section 5(B) in accordance with the terms thereof, (i) stock certificates for
the shares of Common acquired by virtue of such exercise and/or cash (as
applicable) shall promptly (and in no event more than five business days after
the Effective Date) be sent to such Holder, and unless the Series A Preferred
has been fully converted or redeemed (as applicable), a new Series A Preferred
stock certificate, representing the Series A Preferred not so converted or
redeemed shall also be delivered to such Holder forthwith and (ii) any stock
certificates for the shares of Common so acquired shall be dated the Effective
Date and the Holder making such surrender shall be deemed for all purposes to be
the Holder of the shares of Common so acquired as of the Effective Date.
(D) Mandatory Conversion. All shares of Series A Preferred outstanding two
years after the Closing Date shall, without any further action by the Holders
thereof, be converted into Common (a "Mandatory Conversion") as of such date
(the "Mandatory Conversion Date"). The number of whole shares of Common to be
delivered to each Holder of Series A Preferred upon a Mandatory Conversion
pursuant to this Section 5(D) shall equal the quotient of 1) the aggregate
Original Issue Price of the Series A Preferred so surrendered divided by (2) the
Conversion Price in effect on the Mandatory Conversion Date. Upon the Mandatory
Conversion of the Series A Preferred pursuant to this Section 5(D), the
Corporation shall promptly (and in no event more than two business days after
the Mandatory Conversion Date) transmit to each Holder of Series A Preferred
notice thereof in reasonable detail. Upon receipt from each Holder of Series A
Preferred of the certificate or certificates representing such Holder's shares
of Series A Preferred so converted duly executed for transfer or accompanied by
executed stock powers (such execution to be either (i) accompanied by a
signature guarantee by a member firm of the New York Stock Exchange, or (ii) a
Specimen Signature Authorization), the Corporation shall promptly (and in no
event more than five business days after the date of such receipt) transmit
certificates representing the shares of Common issued to such Holder as a result
of the Mandatory Conversion. Such certificates shall be dated the Mandatory
Conversion Date, and such Holders shall be deemed for all purposes to be the
Holders of such Common as of the Mandatory Conversion Date.
(E) Stock Fully Paid; Reservation of Shares. All shares of Common which may
be issued upon conversion of Series A Preferred or as a dividend pursuant to
Section 4 hereof will, upon issuance, be duly issued, fully paid and
nonassessable and free from all taxes, liens, and charges with respect to the
issue thereof. At all times that any Series A Preferred is outstanding, the
Corporation shall have authorized, and shall have reserved for the purpose of
issuance upon such conversion, a sufficient number of shares of Common to
provide for (1) the conversion into Common of all Series A Preferred then
outstanding at the then-effective Conversion Price and (2) the payment of all
dividends payable with respect to the Series A Preferred pursuant to Section 4
hereof.
6. Redemption and Call for Exchange by the Corporation.
<PAGE>
(A) During the periods specified below, the Corporation, by written notice
to the Holders of outstanding shares of 1995 Preferred, may (but is not required
to) either:
(1) during the period beginning on the 90th day after the Closing Date
and ending 24 months after the Closing date, redeem for cash each (but not
less than all) of the then-outstanding shares of 1995 Preferred at a
redemption price per share of 1995 Preferred equal to the Original Issue
Price multiplied by the Redemption Factor (as defined in Section 12 hereof)
determined as of the date of such notice of redemption; or
(2) during the period beginning on the first day after the first
anniversary of the Closing Date and ending two years after the Closing
Date, exchange each (but not less than all) of the then-outstanding shares
of 1995 Preferred for a number of shares of Common equal to the Original
Issue Price (i) multiplied by the Redemption Factor determined as of the
date of such notice of exchange and then (ii) divided by the Market Price
determined as of the date of such notice; provided that a Registration
Statement is then effective under the Securities Act.
(B) Any notice of an optional redemption or exchange of the Series A
Preferred pursuant to Section 6(A) hereof shall be promptly delivered by the
Corporation to each Holder of outstanding Series A Preferred and shall describe
such optional redemption or exchange in reasonable detail. All shares of Series
A Preferred outstanding on the date of such notice shall, without any further
action by the Holders thereof, be redeemed or exchanged (as applicable) in
accordance with this Section 6 effective as of the date of such notice. Upon
receipt from each Holder of Series A Preferred of the certificates representing
the Series A Preferred so redeemed or exchanged duly executed for transfer or
accompanied by executed stock powers (such execution to be either (i)
accompanied by a signature guarantee by a member firm of the New York Stock
Exchange, or (ii) a Specimen Signature Authorization), the Corporation shall
promptly (and in no event more than five business days after the date of such
receipt) transmit cash or certificates representing shares of Common (as
applicable) in accordance with this Section 6. Any such certificates
representing shares of Common shall be dated the date of the notice delivered by
the Corporation pursuant to this Section 6(B), and such Holders shall be deemed
for all purposes to be the Holders of such Common as of the date of such notice.
7. Payment of Accrued Dividends. At the time of any conversion, redemption or
exchange of a share of Series A Preferred pursuant to Sections 5 or 6 hereof, as
applicable, the Corporation shall pay in Common (valued at the Market Price of
the Common on the date of conversion, redemption or exchange, as applicable) to
the Holder thereof an amount equal to all unpaid dividends accrued thereon to
the date of conversion, redemption or exchange (as applicable), whether or not
declared by the Board. If the Corporation has insufficient shares legally
available on the date specified above to pay such accrued but unpaid dividends
pursuant to this Section 7 (whether due to restrictions imposed by regulatory
authorities or applicable law), then shares to the extent legally available
shall be used to pay such amount, in which case the shares of Common shall be
issuable pro rata to each Holder whose Preferred Stock is being converted,
redeemed or exchanged, as applicable. From time to time thereafter, whenever
<PAGE>
additional shares of Common are legally available for the payment of dividends,
such shares shall be immediately used to pay the unpaid portion of any such
shares of Common issuable as accrued dividends.
8. Certain Adjustments. For purposes of Sections 5 and 6 hereof, the number of
shares of Common issuable upon the conversion or exchange of Series A Preferred,
the Adjusted Strike Price, and the Cash Option Price shall be appropriately
adjusted, as deemed equitable by the Corporation, from time to time upon the
happening of certain events, as follows:
(A) Reclassification, Consolidation or Merger. In case of any
reclassification or change of outstanding Common (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination thereof), or in case of any
consolidation or merger of the Corporation with or into another corporation
(other than a merger with another corporation in which the Corporation is the
surviving corporation and which does not result in any reclassification or
change (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination
thereof) of outstanding Common, the rights of the Holders of the outstanding
Series A Preferred shall be adjusted in the manner described below:
(1) In the event that the Corporation is the surviving corporation,
the Series A Preferred shall, without payment of additional consideration
therefor, be deemed modified so as to provide that upon conversion or
exchange thereof the Holder of the Series A Preferred being converted or
exchanged, as applicable, shall procure, in lieu of each share of Common
theretofore issuable upon such conversion or exchange, the kind and amount
of shares of Stock, other securities, money and Property receivable upon
such reclassification, change, consolidation or merger by the Holder of
each share of Common had such conversion or exchange occurred immediately
prior to such reclassification, change, consolidation or merger. The
provisions of this clause (a) shall similarly apply to successive
reclassifications, changes, consolidations and mergers.
(2) In the event that the Corporation is not the surviving
corporation, the surviving corporation shall, without payment of any
additional consideration therefor, issue new Series A Preferred, providing
that upon conversion or exchange thereof, the Holder thereof shall procure
in lieu of each share of Common theretofore issuable upon conversion or
exchange, as applicable, of the Series A Preferred the kind and amount of
shares of Stock, other securities, money and Property receivable upon such
reclassification, change, consolidation or merger by the Holder of each
share of Common issuable upon conversion or exchange, as applicable,of the
Series A Preferred had such conversion or exchange, as applicable, occurred
immediately prior to such reclassification, change, consolidation or
merger. Such new Series A Preferred shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 8. The provisions of this clause (b) shall
similarly apply to successive reclassifications, changes, consolidations
and mergers.
<PAGE>
(B) Subdivision or Combination of Shares. If the Corporation, at any time
while any of the Series A Preferred is outstanding, shall subdivide or combine
its Common, the Adjusted Strike Price, the Cash Option Price shall be
proportionately reduced, in case of subdivision of shares, as of the effective
date of such subdivision, or if the Corporation shall take a record of Holders
of its Common for the purpose of a subdividing, as of the close of business on
such record date, whichever is earlier, or shall be proportionately increased,
in the case of combination of shares, as of the effective date of such
combination or, if the Corporation shall take a record of Holders of its Common
for the purpose of so combining, as of the close of business on such record
date, whichever is earlier.
(C) Certain Dividends and Distributions. If the Corporation, at any time
while any of the Series A Preferred is outstanding, shall pay a dividend payable
in, or make any other distribution of, Common to all Holders of Common on a pro
rata basis, the Adjusted Strike Price and the Cash Option Price shall be
adjusted, as of the close of business on the date the Corporation shall take a
record of the Holders of its Common for the purpose of receiving such dividend
or other distribution (or if no such record is taken, as of the date of such
dividend or other distribution is paid), to that price determined by multiplying
each of the Adjusted Strike Price and the Cash Option Price by a fraction (a)
the numerator of which shall be the total number of shares of Common outstanding
immediately prior to the payment of such dividend or distribution and (2) the
denominator of which shall be the total number of shares of Common outstanding
immediately after the payment of such dividend or distribution (plus in the
event that the Corporation paid cash for fractional shares, the number of
additional shares which would have been outstanding had the Corporation issued
fractional shares in connection with said dividend or distribution). The number
of shares of Common at any time outstanding shall not include any shares thereof
then directly or indirectly owned or held by or for the account of the
Corporation or any Subsidiary.
9. Fractional Shares. No fractional shares of Common shall be issued in
connection with any conversion of Series A Preferred or dividend payable with
respect to the Series A Preferred, but in lieu of such fractional shares, the
Corporation shall make a cash payment therefor equal in amount to the product of
the applicable fraction, multiplied by either (1) the Conversion Price then in
effect (in the case of a conversion of Series A Preferred pursuant to Section 5
hereof) or (2) the Market Price then in effect (in the case of a dividend
payable pursuant to Section 4 hereof or an exchange pursuant to Section 6
hereof), in each case to the extent sufficient funds are legally available
therefore.
10. Status of Redeemed or Converted Series A Preferred. No shares of Series A
Preferred which have been redeemed for cash or converted into or exchanged for
Common shall be reissued by the Corporation.
11. Protective Provisions. So long as any shares of 1995 Preferred shall be
outstanding, the Corporation shall not, without the approval by the vote or
written consent of the Holders of at least a majority (or more if required by
law) of the then-outstanding shares of 1995 Preferred:
(A) Amend, waive or repeal any provisions of, or add any provision to,
(i) this Certificate of Designation, (ii) any other certificate of
<PAGE>
designation filed by the Corporation with respect to the 1995 Preferred or
(iii) if such amendment, waiver, repeal or addition would have an adverse
effect upon the rights, preferences or priorities of the Holders of 1995
Preferred, any provision of the Corporation's Certificate of Incorporation
or of any other certificate of designation filed with the Secretary of
State of Delaware by the Corporation with respect to its Preferred Stock
(other than Parity Stock);
(B) Amend, waive or repeal any provisions of, or add any provision to,
the Corporation's By-Laws, if such amendment, waiver, repeal or addition
would have an adverse effect upon the rights, preferences or priorities of
the Holders of 1995 Preferred;
(C) Authorize, create, issue or sell any shares of Senior Stock;
(D) Enter into, or permit any Subsidiary to enter into, any agreement,
indenture or other instrument which contains any provisions restricting the
Corporation's obligation to pay dividends on the 1995 Preferred in
accordance with Section 4 hereof or of any other certificate of designation
filed by the Corporation with respect to the 1995 Preferred;
(E) Sell, lease, encumber, transfer, liquidate or otherwise dispose
of, in one transaction or a series of related transactions, all or
substantially all of the Property of the Corporation; or
(F) Dissolve the Corporation.
12. Definitions. As used in this Certificate of Designation, the following terms
have the following meanings:
"Adjusted Strike Price" shall mean 107% of the closing price of the Common
on the NASDAQ National Market on the trading day prior to the execution and
delivery of the Subscription Agreements.
"Cash Option Price" shall initially mean $10.00 per share of Common,
subject to adjustment pursuant to Section 8 hereof.
"Closing Date" shall mean the date on which Spencer Trask certifies in
writing to the Corporation that it has completed the distribution of all the
1995 Preferred to be issued pursuant to and in accordance with the Spencer Trask
Commitment Letter.
"Common" shall mean the Corporation's Common Stock, par value $.001 per
share, and any stock into which such stock may hereafter be changed.
"Conversion Price" shall have the meaning specified in Section 5(A) hereof,
as adjusted from time to time pursuant to Section 8 hereof.
<PAGE>
"Effective Date" shall have the meaning specified in Section 5(C) hereof.
"Holders" shall mean, in respect of any Security, the Persons who shall,
from time to time, own of record such Security. The term "Holder" shall mean one
of the Holders.
"Mandatory Conversion" shall have the meaning set forth in Section 5(D)
hereof.
"Mandatory Conversion Date" shall have the meaning set forth in Section
5(D) hereof.
"Market Price" as of any date shall mean the average closing price of the
Common on the Nasdaq National Market during the five trading day period ending
on the trading day immediately preceding such date.
"Minimum Conversion Price" as of any date shall mean the highest price that
would, if all of the shares of 1995 Preferred then outstanding were converted at
such price, result in the issuance of a number of shares of Common that, when
added to the number of shares (if any) of Common issued in connection with all
previous conversions of shares of 1995 Preferred, would exceed the product of
(i) 1,401,016 shares (as such number may be equitably increased or decreased by
the Corporation from time to time to give effect to any subdivision or
combination, respectively, of the outstanding shares of Common) multiplied by
(ii) a fraction, the numerator of which is the Aggregate Issue Price of all
shares of 1995 Preferred theretofore issued (whether or not then outstanding)
and the denominator of which is $8,000,000.
"1995 Preferred" shall mean the Series A Preferred and any other series of
Preferred Stock of the Corporation issued in the aggregate amount of up to 116
shares pursuant to and in accordance with the Spencer Trask Commitment Letter.
"Original Issue Price" shall mean $50,000 per share of Series A Preferred
or 1995 Preferred, as applicable.
"Parity Stock" shall mean any shares of any class or series of Stock of the
Corporation having any preference or priority as to dividends or liquidation on
a parity with any such preference or priority of the 1995 Preferred and no
preference or priority as to dividends or liquidation superior to any such
preference or priority of the 1995 Preferred and any instrument or Security
convertible into or exchangeable for Parity Stock. Without limiting the
generality of the foregoing, a dividend rate, mandatory or optional sinking fund
payment amounts or schedules or optional redemption provisions, the existence of
a conversion right or the existence of a liquidation preference of up to 100% of
the original issue price thereof plus unpaid accrued dividends plus a premium of
up to the dividend rate or up to the percentage of the equity of the Corporation
represented by such Stock, with respect to any class or series of Stock,
differing from that of the 1995 Preferred, shall not prevent such class of Stock
from being Parity Stock.
"Person" shall mean an individual, a corporation, a partnership, a limited
liability company, a trust, an unincorporated organization or a government
organization or an agency or political subdivision thereof.
<PAGE>
"Property" shall mean an interest in any kind of property or assets,
whether real, personal or mixed, or tangible or intangible.
"Redemption Amount" shall have the meaning specified in Section 5(B)
hereof.
"Redemption Factor" shall mean (i) during the period ending one year after
the Closing Date, 1.35 and (ii) during the period beginning on the first day
after the first anniversary of the Closing Date and ending two years after the
Closing Date (such period, the "Second Year Period"), the sum of 1.35 plus the
product of (x) the number of calendar days elapsed in the Second Year Period up
to and including the redemption date multiplied by (y) 0.30 divided by 365
(rounded to the nearest 0.0001).
"Registration Factor" shall mean (i) if the Corporation shall have filed
the Registration Statement with the SEC within 60 days after the Closing Date,
one (1.0), (ii) if the Corporation shall not have filed the Registration
Statement with the SEC (the "delay") within 60 days after the Closing Date, 1.01
(if the delay is for 7 or fewer days); 1.02 (if the delay is between 8 and 14
days); 1.03 (if the delay is between 15 and 21 days); 1.04 (if the delay is
between 22 and 28 days); 1.05 (if the delay is between 29 and 31 days); 1.06 (if
the delay is between 32 and 45 days); 1.06 plus 0.01 multiplied by the number of
full months that such delay extends beyond the 45th day.
"Registration Statement" shall mean a registration statement pursuant to
the Securities Act of 1933 to register the offer and sale of the shares of
Common issuable upon conversion of Series A Preferred.
"SEC" shall mean the Securities and Exchange Commission.
"Securities" shall mean any debt or equity securities of a corporation,
whether now or hereafter authorized, and any instrument convertible into or
exchangeable for Securities or a Security. The term "Security" shall mean one of
the Securities.
"Senior Stock" shall mean any shares of any class or series of Stock of the
Corporation having any preference or priority as to dividends or Property
superior to any such preference or priority of the 1995 Preferred and any
instrument or Security convertible into or exchangeable for Senior Stock.
"Series A Preferred" shall mean the Corporation's Series A Convertible
Preferred Stock, $.001 par value per share, and any Stock into which such Stock
may hereafter be changed.
"Spencer Trask" shall mean Spencer Trask Securities Incorporated, a
Delaware corporation.
<PAGE>
"Spencer Trask Commitment Letter" shall mean that certain commitment letter
dated December 12, 1995 between the Corporation and Spencer Trask relating to a
private placement of the 1995 Preferred.
"Stock" shall include any and all shares, interests or other equivalents
(however designated) of, or participations in, corporate stock.
"Subscription Agreements" shall mean the certain Subscription Agreements
between the Corporation and the person or persons named on the signature pages
thereof dated various dates and accepted by the Corporation on the date hereof
and relating to the purchase and sale of shares of Series A Preferred.
"Subsidiary" shall mean any corporation at least 50% of whose outstanding
Voting Securities and capital stock are owned directly or indirectly by the
Corporation or by one or more Subsidiaries or by the Corporation and one or more
Subsidiaries.
"Voting Securities" as applied to the Securities of any corporation, shall
mean Securities of any class or classes (however designated) having ordinary
voting power for the election of one or more members of the board of directors
(or other governing body) of such corporation, other than Securities having such
power only by reason of the happening of a contingency.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be duly executed this 10th day of January, 1996.
LASERSIGHT INCORPORATED
By: /s/ Michael R. Farris
-------------------------
Name: Michael R. Farris
Title: President
Attest:
/s/ Gregory L. Wilson
- ----------------------------
Gregory L. Wilson, Secretary
<PAGE>
CONVERSION NOTICE Exhibit A
(To be executed if Holder desires to make a conversion election pursuant to
Section 5(B))
To LaserSight Incorporated:
The undersigned hereby irrevocably elects to convert ________ shares of
Series A Preferred Stock ("Preferred Shares") represented by the attached stock
certificate into shares of common stock, $.001 par value (such shares, the
"Common Shares") (or, if the Conversion Price in effect at the time of this
conversion is less than or equal to the Cash Option Price and you so elect, into
the right to receive cash at the election of the Corporation) pursuant to and in
accordance with Section 5 of the Certificate of Designation relating to the
Preferred Stock and requests that certificates for any such shares of Common
Stock be issued in the name of the undersigned.
If such number of Preferred Shares shall not be all the Preferred Shares
evidenced by the Series A Preferred Stock certificate, a new stock certificate
for the balance remaining of such shares shall be registered in the name of and
delivered to the undersigned.
The undersigned will not offer for sale, sell, pledge or otherwise transfer
the Common Shares except (i) in accordance with the plan of distribution
specified in the prospectus ("Prospectus") included in the registration
statement relating to the Common Shares filed or to be filed with the SEC (the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act"), (ii) pursuant to SEC Rule 144 under the Securities Act, or (iii) pursuant
to another available exemption from registration requirements of the Securities
Act. The undersigned will deliver a Prospectus to the buyer of any Common Shares
sold pursuant to the Registration Statement. The undersigned will not sell any
Common Shares pursuant to the Registration Statement during the period, if any,
during which the undersigned's right to sell under the Registration Statement
has been suspended by the Company in accordance with the provisions of the
Subscription Agreement between the Corporation and the undersigned or the
undersigned's predecessor-in-interest.
Dated: ____________________, 199_
_______________________________
Signature Guaranteed (if required): Signature
Must be signed by registered holder(s) exactly as name(s) on certificate(s) of
Series A Preferred. Signatures must (such execution to be either (i) accompanied
by a signature guarantee by a member firm of the New York Stock Exchange, or
(ii) evidenced by a signature on behalf of such Investor without such a
guarantee, provided that the Investor has previously delivered to the Company a
written instrument that (x) authorizes the Company to rely upon such
unguaranteed signature for all purposes relating to the transfer or conversion
of Preferred Shares, (y) includes a specimen of such unguaranteed signature on
which the Company shall be entitled to rely without further investigation, and
(z) holds the Company harmless from any loss resulting from any unauthorized or
fraudulent signature purporting on its face to be an authorized signature so
long as the Company relies on such specimen signature without gross negligence).
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, please identify that person's full title.
<PAGE>
First telefax this Conversion Notice to the Company on fax number (314)
576-1073; then return by air courier the original hard copy to the Company,
together with the original Preferred Share stock certificate by air courier to
LaserSight Incorporated, Attn: Chief Financial Officer, 12161 Lackland Road, St.
Louis, Missouri 63146.
<PAGE>
CORRECTED CERTIFICATE
OF
DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK
OF
LASERSIGHT INCORPORATED
I. DESIGNATION AND AMOUNT
The designation (this "Certificate of Designation") of this series, which
consists of 1600 shares of Preferred Stock of LaserSight Incorporated, a
Delaware corporation (the "Company"), is the Series B Convertible Participating
Preferred Stock (the "Preferred Stock") and the face amount shall be Ten
Thousand Dollars ($10,000.00) per share (the "Face Amount").
II. DIVIDENDS
The Preferred Stock will bear no dividends except as provided in Section
IX(B).
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "Business Day" means any day other than a Saturday, Sunday or a day on
which banks in New York, New York are permitted or required by law to be closed.
B. "Closing Bid Price" means, for any security as of any date, the closing
bid price of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Company and reasonably acceptable to registered holders of the
Preferred Stock (each, a "Holder") then holding a majority of the then
outstanding shares of a Preferred Stock ("Majority Holders") if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "Bloomberg"), or if the foregoing does not apply, the last
reported sale price of such security in the over-the-counter market on the
electronic bulletin board of such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as reasonably determined by an investment banking firm selected by the Company
and reasonably acceptable to the Majority Holders, with the costs of such
appraisal to be borne by the Company.
<PAGE>
C. "Conversion Date" means, for any Optional Conversion, the date specified
in the notice of conversion (the "Notice of Conversion"), so long as such date
is a Business Day and the copy of the Notice of Conversion is faxed (or
delivered by other means resulting in notice) to the Company before 5:00 p.m.,
St. Louis time, on the Conversion Date indicated in the Notice of Conversion. If
the date specified in the Notice of Conversion is not a Business Day, or if the
Notice of Conversion is not so faxed or otherwise delivered before such time,
then the Conversion Date shall be the first Business Day after the date on which
the Holder faxes or otherwise delivers the Notice of Conversion to the Company.
The Conversion Date for the Required Conversion at Maturity shall be the
Maturity Date (as such terms are defined herein).
D. "Common Stock" means the common stock, $.001 par value, of the Company.
E. "Conversion Price" means, with respect to any Conversion Date, the lower
of the Fixed Conversion Price and the Variable Conversion Price, each as in
effect as of such date and subject to adjustment as provided herein; provided
that such price shall be multiplied by .93 if such Conversion Date occurs at a
time when the Common Stock a Holder receives upon conversion of the Preferred
Stock is not listed on the Nasdaq National Market ("Nasdaq"), the American Stock
Exchange or the New York Stock Exchange.
F. "Fixed Conversion Price" means $6.68 (130% of the average Closing Bid
Prices of the Common Stock for the five (5) consecutive trading days ending on
the trading day immediately preceding the Closing Date (subject to equitable
adjustment for any stock splits, stock dividends, reclassifications or similar
events during such five (5) trading day period)), and shall be subject to
adjustment as provided herein.
G. "Securities Purchase Agreement" means the Securities Purchase Agreement
dated as of August 29, 1997, among the Company and the purchasers named therein,
as amended from time to time in accordance with the term thereof.
H. "Variable Conversion Price" means, as of any Conversion Date, the
average of the three (3) lowest Closing Bid Prices per share of Common Stock
during the Lookback Period (as herein defined) (subject to equitable adjustment
for any stock splits, stock dividends, reclassifications or similar events
during the Lookback Period), subject to adjustment as provided herein. For
purposes hereof, the "Lookback Period" shall mean the period of twenty (20)
consecutive trading days ending on the trading day immediately preceding the
Conversion Date; provided, however, that in the event the average Closing Bid
Price of the Common Stock during the period of five (5) consecutive trading days
ending on the date one hundred eighty (180) days after the Closing Date is less
than the average Closing Bid Price of the Common Stock for the five (5)
consecutive trading days ending on the trading immediately preceding the Closing
<PAGE>
Date, the Lookback Period shall be the period of thirty (30) consecutive trading
days ending on the trading day immediately preceding the Conversion Date.
I. "Warrants" means the stock purchase warrants to acquire shares of Common
Stock issued by the Company to the initial Holders in connection with the
transactions contemplated by the Securities Purchase Agreement.
IV. CONVERSION
A. Conversion at the Option of the Holder. Subject to the limitations on
conversions contained in Section IV.G, each Holder may, at any time and from
time to time after the Closing Date, convert (an "Optional Conversion") each of
its shares of Preferred Stock into a number of fully paid and nonassessable
shares of Common Stock determined by dividing the aggregate Face Amount of the
shares of Preferred Stock being converted by the Conversion Price.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
Holder shall: (x) fax (or otherwise deliver by other means resulting in notice)
a copy of the fully executed Notice of Conversion in the form of Exhibit A
hereto to the Company and (y) surrender or cause to be surrendered (or satisfy
the provisions of Section XIV.B, if applicable) the certificates representing
the Preferred Stock being converted (the "Preferred Stock Certificates")
accompanied by duly executed stock powers and the original executed version of
the Notice of Conversion as soon as practicable thereafter. Upon receipt by the
Company of the fax copy of a Notice of Conversion from a Holder, the Company
shall immediately send, via fax, a confirmation to such Holder stating that the
Notice of Conversion has been received, the date upon which the Company expects
to deliver the Common Stock issuable upon such conversion and the name and
telephone number of a contact person at the Company regarding the conversion.
C. Delivery of Common Stock Upon Conversion. Subject to Section IV.G, upon
the delivery of a Notice of Conversion, the Company shall, no later than the
later of (a) the third Business Day following the Conversion Date and (b) the
day that is the first Business Day (or the second Business Day in the event that
the Common Stock issuable upon conversion of such shares of Preferred Stock are
to be delivered outside of the United States or Canada) following the date of
the surrender of the Preferred Stock Certificates (or satisfaction of the
provisions of Section XIV.B, if applicable) and the original executed version of
the Notice of Conversion (the "Delivery Period"), issue and deliver to the
Holder (or at its direction) (x) that number of shares of Common Stock issuable
upon conversion of such shares of Preferred Stock being converted and (y) a
certificate representing the number of shares of Preferred Stock not being
converted, if any. The person or persons entitled to receive shares of Common
<PAGE>
Stock issuable upon such conversion shall be treated for all purposes as the
record holder of such shares at the close of business on the Conversion Date.
D. Stamp, Documentary and Other Similar Taxes. The Company shall pay all
stamp, documentary, issuance and other similar taxes which may be imposed with
respect to the issuance and delivery of the shares of Common Stock pursuant to
conversion of the Preferred Stock; provided that the Company will not be
obligated to pay stamp, transfer or other taxes resulting from the issuance of
Common Stock to any person other than the registered holder of the Preferred
Stock.
E. No Fractional Shares. No fractional shares of Common Stock are to be
issued upon the conversion of Preferred Stock, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Conversion Price of a share of
Common Stock (as determined for conversion of the Preferred Stock into whole
shares of Common Stock); provided that in the event that sufficient funds are
not legally available for the payment of such cash adjustment any fractional
shares of Common Stock shall be rounded up to the next whole number.
F. Conversion Disputes. In the case of any dispute with respect to a
conversion, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with Sections IV.A and IV.C hereof. If
such dispute involves the calculation of the Conversion Price, the Company shall
submit the disputed calculations to a "Big Six" independent accounting firm
selected by the Company via facsimile within two (2) business days of receipt of
the Notice of Conversion. The accounting firm shall audit the calculations and
notify the Company and the Holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accounting firm's
calculation shall be deemed conclusive, absent manifest error. The Company shall
then issue the appropriate number of shares of Common Stock in accordance with
Sections IV.A and IV.C hereof.
G. Limitation on Conversions. Notwithstanding anything to the contrary set
forth herein, the conversion of shares of Preferred Stock shall be subject to
the following limitations (each of which limitations shall be applied
independently):
(i) Cap Amount. For so long as Common Stock is listed on the Nasdaq,
the American Stock Exchange, the New York Stock Exchange or the Nasdaq Small Cap
Market, prior to Stockholder Approval (as herein defined), unless otherwise
permitted by the such market or exchange, in no event shall the total number of
shares of Common Stock issued upon conversion of the Preferred Stock and
exercise of the Warrants (as defined in the Securities Purchase Agreement)
exceed the maximum number of shares of Common Stock that the Company can without
stockholder approval so issue pursuant to Nasdaq Rule 4460(i) (or any successor
rule) (the "Cap Amount"), which, as of the date of issuance of the Preferred
<PAGE>
Stock, shall be 1,995,534 shares. The Cap Amount shall be allocated pro-rata to
the Holders as provided in Article XIV.C. In the event the Company is prohibited
from issuing shares of Common Stock as a result of the operation of this
subparagraph (i), the Company shall comply with Article VI.
(ii) Limitations Holdings. The Preferred Stock shall not be
convertible by a Holder to the extent (but only to the extent) that, if
converted by such Holder, the Holder would beneficially own in excess of 4.9%
(9.9% if the applicable box on the signature page of the Securities Purchase
Agreement for such Holder is marked) (the "Applicable Percentage") of the shares
of Common Stock. To the extent the foregoing limitation applies, the
determination of whether Preferred Stock shall be convertible (vis-a-vis other
securities owned by such Holder) and of which Preferred Stock shall be converted
shall be in the sole discretion of the Holder and submission of the Preferred
Stock for conversion shall be deemed to be the Holder's determination of whether
such Preferred Stock is convertible and of which Preferred Stock is convertible,
subject to such aggregate percentage limitation. No prior inability to convert
Preferred Stock pursuant to this Section shall have any effect on the
applicability of the provisions of this Section with respect to any subsequent
determination of convertibility. For the purposes of this Section, beneficial
ownership and all calculations, including without limitation, with respect to
calculations of percentage ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation
13D-G thereunder. The provisions of this Section may be amended and/or
implemented in a manner otherwise than in strict conformity with the terms of
this Section with the approval of the Board of Directors of the Company and the
Majority Holders: (i) with respect to any matter to cure any ambiguity herein,
to correct this subsection (or any portion thereof) which may be defective or
inconsistent with the intended Applicable Percentage beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such Applicable Percentage limitation; and
(ii) with respect to any other matter, with the further consent of the holders
of majority of the then outstanding shares of Common Stock; the provisions of
this Section may be waived with the approval of the Majority Holders upon ninety
(90) days prior written notice from such Holders to the Company and all other
Holders. The limitations contained in this Section shall apply to a successor
Holder of Preferred Stock if, and to the extent, elected by such successor
Holder concurrently with its acquisition of such Preferred Stock, such election
to be promptly confirmed in writing to the Company (provided no transfer or
series of transfers to a successor Holder or Holders shall be used by a Holder
to evade the limitations contained herein).
H. Required Conversion at Maturity. Subject to the limitations set forth in
Section IV.G. and provided all shares of Common Stock issuable upon conversion
of all outstanding shares of Preferred Stock are then (i) authorized and
reserved for issuance, (ii) registered under the Securities Act of 1933, as
amended (the "Securities Act") for resale by all Holders of such shares of
Preferred Stock and (iii) eligible to be traded on either the Nasdaq, the Nasdaq
<PAGE>
Small Cap Market, the New York Stock Exchange or the American Stock Exchange,
each share of Preferred Stock outstanding on the third anniversary of the
Closing Date (the "Maturity Date") (and any accrued and unpaid Conversion
Default Payments), automatically shall be converted into shares of Common Stock
on such date in accordance with the conversion formula set forth in Section IV.A
(the "Required Conversion at Maturity"). If a Required Conversion at Maturity
occurs, the Company and the Holders shall follow the applicable conversion
procedures set forth in this Article IV; provided, however, that a Notice of
Conversion shall be deemed to be delivered to the Company on the Maturity Date.
I. Electronic Transmission. In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, upon request of a Holder who shall have
previously instructed such Holder's prime broker to confirm such request to the
Company's transfer agent, the Company shall use its commercially reasonable
efforts to cause its transfer agent to electronically transmit the Common Stock
issuable upon conversion to the Holder by crediting the account of Holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system.
V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK
A. Reserved Amount. The Company shall have authorized and reserved and keep
available for issuance not less than 3,750,000 shares of Common Stock (the
"Reserved Amount") solely for the purpose of effecting the conversion of the
Preferred Stock and exercise of the warrants (the "Warrants"), in the form
attached to the Securities Purchase Agreement as Exhibit B, to acquire Common
Stock issued on the Closing Date pursuant to the terms of the Securities
Purchase Agreement. Subject to Section V.B and Article VI, the Company shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock a sufficient number of shares of Common Stock to provide for the
full conversion of all outstanding Preferred Stock and issuance of the shares of
Common Stock in connection therewith and the full exercise of the Warrants and
issuance of the shares of Common Stock in connection therewith. The Reserved
Amount shall be allocated among the Holders as provided in Section XIV.C. The
Board of Directors of the Company shall, not later than sixty (60) days
following the date of Closing, solicit by proxy the authorization of a number of
shares of Common Stock sufficient to increase the Reserved Amount to two hundred
percent (200%) of the number of shares of Common Stock then issuable upon
conversion of the Preferred Stock and the exercise of the Warrants.
B. Increases to Reserved Amount. Without limiting any other provision of
this Article V, if the Reserved Amount for any three (3) consecutive trading
days (the last of such three (3) trading days being the "Authorization Trigger
Date") is less than one hundred seventy-five percent (175%) of the number of
shares of Common Stock issuable upon conversion of the Preferred Stock on such
<PAGE>
trading days, without giving effect to the limitations set forth in Section
IV(G) hereof, the Company shall as soon as practicable notify the Holders of
such occurrence and shall as soon as practicable (and in any event in the case
of the initial authorization of additional shares of Common Stock, within the
period specified in Section VIII.A(viii)), take all necessary action (including,
if necessary, stockholder approval to authorize the issuance of additional
shares of Common Stock) to increase the Reserved Amount to two hundred percent
(200%) of the number of shares of Common Stock then issuable upon conversion of
the outstanding Preferred Stock.
VI. COMPLIANCE WITH CAP AMOUNT RESTRICTIONS
A. Share Authorization. The Board of Directors of the Company shall, not
later than 60 days following the date of the Closing, solicit by proxy the
authorization (the "Stockholder Approval") by the stockholders of the Company of
the issuance of shares of Common Stock upon conversion of shares of Preferred
Stock pursuant to the terms hereof in the aggregate in excess of twenty (20)
percent of the outstanding shares of Common Stock and to eliminate any
prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Company or any of its securities on the Company's
ability to issue shares of Common Stock in excess of the Cap Amount and use its
best efforts to obtain the Stockholder Approval no later than 120 days following
the date of the Closing.
B. Obligation to Notify. If at any time after the date of issuance of the
Preferred Stock the then unissued portion of any Holder's Cap Amount becomes
less than one hundred seventy-five percent (175%) of the number of shares of
Common Stock then issuable upon conversion of such Holder's shares of Preferred
Stock without giving effect to the limitations set forth in Section IV(G) hereof
(a "Trading Market Trigger Event"), the Company shall notify the Holders of such
occurrence as soon as practicable.
<PAGE>
VII. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a Holder submits a
Notice of Conversion (or is deemed to submit such notice pursuant to Section
IV.H) and the Company fails for any reason (other than because such issuance
would exceed such Holder's allocated portion of the Reserved Amount or the Cap
Amount, for which failure the Holders shall have the remedies set forth in
Article VIII) to deliver, on or prior to the second Business Day following the
expiration of the Delivery Period for such conversion (said period of time being
the "Extended Delivery Period"), such number of freely tradeable shares of
Common Stock to which such Holder is entitled upon such conversion, or (y) the
Company provides notice (including by way of public announcement) to any Holder
at any time of its intention not to issue shares of Common Stock upon exercise
by any Holder of its conversion rights in accordance with the terms of this
Certificate of Designation (other than because such issuance would exceed such
Holder's allocated portion of the Reserved Amount or the Cap Amount) (each of
(x) and (y) being a "Conversion Default"), then the Company shall pay to the
affected Holder, in the case of a Conversion Default described in clause (x)
above, and to all Holders, in the case of a Conversion Default described in
clause (y) above, an amount equal to 1% of the Face Amount of the Preferred
Stock with respect to which the Conversion Default exists (which amount shall be
deemed to be the aggregate Face Amount of all outstanding Preferred Stock in the
case of a Conversion Default described in clause (y) above) for each day such
Conversion Default exists. The Company shall promptly provide each Holder with
notice of the occurrence of a Conversion Default with respect to any of the
other Holders.
The payments to which a Holder shall be entitled pursuant to this Section
VII.A are referred to herein as "Conversion Default Payments." A Holder may
elect to receive accrued Conversion Default Payments in cash or to convert all
or any portion of such accrued Conversion Default Payments, at any time, into
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Conversion Default through the Cure Date for such
Conversion Default. In the event a Holder elects to receive any Conversion
Default Payments in cash, it shall so notify the Company in writing. Such
payment shall be made in accordance with and be subject to the provisions of
Section XIV.E. In the event a Holder elects to convert all or any portion of the
Conversion Default Payments, the Holder shall indicate on a Notice of Conversion
such portion of the Conversion Default Payments which such Holder elects to so
convert and such conversion shall otherwise be effected in accordance with the
provisions of Article IV. "Cure Date" means (i) with respect to a Conversion
Default described in clause (x) of its definition, the date the Company effects
the conversion of the portion of the Preferred Stock submitted for conversion
and (ii) with respect to a Conversion Default described in clause (y) of its
definition, the date the Company undertakes in writing to issue Common Stock in
satisfaction of all conversions of Preferred Stock in accordance with the terms
of this Certificate of Designation.
<PAGE>
B. Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) day after
the expiration of the Extended Delivery Period with respect to a conversion of
Preferred Stock for any reason (other than because such issuance would exceed
such Holder's allocated portion of the Reserved Amount or the Cap Amount, for
which failure the Holders shall have the remedies set forth in Article VIII),
then the Fixed Conversion Price in respect of any shares of Preferred Stock held
by such Holder shall thereafter be the lesser of (i) the Fixed Conversion Price
on the Conversion Date specified in the Notice of Conversion which resulted in
the Conversion Default and (ii) the lowest Conversion Price in effect during the
period beginning on, and including, such Conversion Date through and including
the Cure Date. If there shall occur a Conversion Default of the type described
in clause (y) of Section VII.A, then the Fixed Conversion Price with respect to
any conversion thereafter shall be the lowest Conversion Price in effect at any
time during the period beginning on, and including, the date of the occurrence
of such Conversion Default through and including the Cure Date. The Fixed
Conversion Price shall thereafter be subject to further adjustment for any
events described in Section XI.
C. Buy-In Cure. Unless a Conversion Failure described in clause (y) of
Section VII.A has occurred, if (i) the Company fails for any reason to deliver
during the Delivery Period shares of Common Stock to a Holder upon a conversion
of shares of Preferred Stock in accordance with the terms of this Certificate of
Designation and (ii) after the applicable Delivery Period with respect to such
conversion, such Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to make delivery in satisfaction of a sale by such Holder
of the shares of Common Stock (the "Sold Shares") which such Holder was entitled
to upon such conversion (a "Buy-In"), the Company shall pay such Holder (in
addition to any other remedies available to the Holder) the amount by which (x)
such Holder's total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased exceeds (y) the net proceeds received by
such Holder from the sale of the Sold Shares; provided, that such purchase
cannot be effected after the applicable Cure Date, if any, and both such
purchase and sale must be effected in a commercially reasonable manner under the
circumstances then facing the Holder to the extent such purchase and sale are
under the control of such Holder. For example, if a Holder purchases shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Company will be
required to pay the Holder $1,000. A Holder shall provide the Company written
notification indicating any amounts payable to such Holder pursuant to this
Section VII.C. The Company shall make any payments required pursuant to this
Section VII.C in accordance with and subject to the provisions of Section XIV.E.
<PAGE>
VIII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption Events. A "Redemption Event" means any one of the following
(after expiration of the applicable cure period in the case of the events
described in clauses (iv) and (vii)):
(i) the Common Stock (including any of the shares of Common Stock
issuable upon conversion of the Preferred Stock or upon exercise of the Warrants
or required from time to time to be reserved pursuant to this Certificate of
Designation or the Warrants) is suspended from trading on, or is not listed (and
authorized) for trading on, the Nasdaq, the Nasdaq Small Cap Market, the
American Stock Exchange, or the New York Stock Exchange for an aggregate of ten
(10) trading days in any twelve (12) month period;
(ii) the Company fails, and any such failure continues uncured for
seven (7) business days after the Company has been notified thereof in writing
by the Holder, to remove any restrictive legend on any certificate for any
shares of Common Stock issued to the Holders of Preferred Stock upon conversion
of the Preferred Stock or upon exercise of the Warrants as and when required by
this Certificate of Designation, the Warrants, the Securities Purchase
Agreement, or the Registration Rights Agreement, dated as of August 29, 1997, by
and among the Company and the other signatories thereto (the "Registration
Rights Agreement");
(iii) the Company provides notice to any Holder, including by way of
public announcement, at any time, of its intention not to issue shares of Common
Stock to any Holder upon conversion in accordance with the terms of this
Certificate of Designation; except to the extent that the Company has provided
the Holders with prior notice that it intends not to effect a conversion or
exercise because such issuance would cause the Cap Amount or the Reserved Amount
to be exceeded, in which event the Holders shall have the rights and remedies
pursuant to clauses (viii) and (ix) of this Section VIII(A) and elsewhere in
this Certificate of Designation;
(iv) the Company breaches any material covenant or other material term
or condition of this Certificate of Designation, the Warrants, the Securities
Purchase Agreement or the Registration Rights Agreement, the breach of which
would have a material adverse effect on the Company or the rights of the Holder
with respect to any of the shares of Preferred Stock or the shares of Common
Stock issuable upon conversion of the Preferred Stock or upon exercise of the
Warrants, and such breach continues for a period of ten (10) business days after
written notice thereof to the Company; provided, however, that if such breach
may be cured by the Company and the Company is using its best efforts to cure
such breach it shall not constitute a Redemption Event until such breach
continues for a period of thirty (30) days after written notice thereof to the
Company;
<PAGE>
(v) any representation or warranty of the Company made in any
agreement, statement or certificate given in writing in connection with the
issuance of the Preferred Stock (including, without limitation, the Warrants,
the Securities Purchase Agreement and the Registration Rights Agreement), shall
be false or misleading in any material respect when made and the breach of which
would have a material adverse effect on the Company or the rights of the Holder
with respect to any of the shares of Preferred Stock or the shares of Common
Stock issuable upon conversion of the Preferred Stock or upon exercise of the
Warrants;
(vi) the Company fails: (x) to cause the registration statement
required pursuant to Section 2.1 of the Registration Rights Agreement to be
declared effective on or before the one hundred fiftieth (150th) day following
Closing in a manner which would allow the sale of all Registrable Securities (as
defined in the Registration Rights Agreement) to the fullest extent permitted
under Section 2.1 of the Registration Rights Agreement; or (y) to cause the
holders of Preferred Stock to be able to utilize such registration statement for
the resale of all of their Registrable Securities (as defined in the
Registration Rights Agreement), unless the Company is using its best efforts to
remedy such inability to utilize such registration statement, subject to the
Company's Board of Directors having determined in their good faith business
judgment by resolution that the continued effectiveness of such registration
statement would have a material adverse effect on the Company's ability to
consummate a financing, acquisition, merger or joint venture, the failure of
which to consummate would have a material adverse effect on the Company's
financial condition, results of operations or future prospects; provided that in
no event shall such failure exist for a total of more than forty-five (45) days
in any fifteen (15) month period.
(vii) the Company fails, and such failure continues uncured for five
(5) business days after the Company has been notified thereof in writing by the
Holder, for any reason to issue shares of Common Stock within ten (10) Business
Days after the expiration of the Extended Delivery Period with respect to any
conversion of Preferred Stock; except to the extent that the Company has
provided the Holders with prior notice that it intends not to effect a
conversion or exercise because such issuance would cause the Cap Amount or the
Reserved Amount to be exceeded, in which event the Holders shall have the rights
and remedies provided in clauses (viii) and (ix) of this Section VIII(A) and
elsewhere in this Certificate of Designation;
(viii) the Company fails to increase the Reserved Amount within one
hundred twenty (120) days following Closing and thereafter an Authorization
Trigger Date occurs;
(ix) the Company fails to eliminate the Cap Amount prohibitions or
other prohibitions described in Section VI.A within one hundred twenty (120)
days following the Closing and thereafter a Trading Market Trigger Event occurs;
<PAGE>
(x) the Company fails to obtain the effectiveness of any amendment to
an existing registration statements within thirty (30) days or of any new
registration statement within ten (10) days after the shareholders meeting
required pursuant to Section V.A hereof and within thirty (30) days following
any other Registration Trigger Date (as defined in the Registration Rights
Agreement) as required by Section 3.2 of the Registration Rights Agreement; or
(xi) if there is a default under any agreement between Company or any
of its affiliates and Foothill Capital Corporation ("Foothill") which results in
the acceleration of the maturity of the debt owed by Company to Foothill (or if
the such debt is not repaid by Company to Foothill at Maturity).
B. Redemption By Holder. Upon the occurrence of a Redemption Event, each
Holder shall have the right to elect at any time and from time to time by
delivery of a Redemption Notice (as defined herein) to the Company while such
Redemption Event continues, to require the Company to purchase for cash for an
amount per share equal to the Redemption Amount (as defined herein), (i) in the
case of a Redemption Event described in clause (i) through (vii), any or all of
the then outstanding shares of Preferred Stock held by such Holder, (ii) in the
case of a Redemption Event described in clause (viii), a portion of the Holder's
Preferred Stock such that, after giving effect to such purchase, the Holder's
allocated portion of the Reserved Amount exceeds two hundred percent (200%) of
the total number of Common Stock issuable to such Holder upon conversion of its
Preferred Stock and exercise of its Warrants, (iii) in the case of a Redemption
Event described in clause (ix), a portion of the Holder's Preferred Stock such
that, after giving effect to such purchase, the Holder's allocated portion of
the Cap Amount exceeds two hundred percent (200%) of the total number of Common
Stock issuable to such Holder upon conversion of its Preferred Stock and
exercise of its Warrants and (iv) in the case of a Redemption Event described in
clause (x), a portion of the Holder's Preferred Stock such that, after giving
effect to such purchase, the Holder's allocated portion of the Registrable
Securities (as defined in the Registration Rights Agreement) exceeds two hundred
percent (200%) of the total number of Common Stock issuable to such Holder upon
conversion of its Preferred Stock and exercise of its Warrants.
C. Definition of Redemption Amount. The "Redemption Amount" with respect to
a share of Preferred Stock means an amount equal to the greater of (i) 1.25
times the aggregate Face Amount of the Preferred Stock for which a demand is
being made and (ii) an amount determined by the following formula:
<PAGE>
Face Amount
---------------------
( C P ) X M
--------------------- ---------
where:
"CP" means the Conversion Price in effect on the date of the Redemption
Notice; and
"M" means the highest closing bid price of the Company's Common Stock
during the period beginning on the date ten (10) trading days before the date of
the Redemption Notice and ending on the date five (5) trading days after the
date of the Redemption Notice, as reported on the principal securities exchange
or trading market on which the Common Stock is traded.
D. Redemption Defaults. If the Company fails to pay any Holder the
Redemption Amount with respect to any share of Preferred Stock within five (5)
business days of its receipt of a notice requiring such redemption (a
"Redemption Notice"), then the Holder delivering such Redemption Notice (i)
shall be entitled to interest on the Redemption Amount at a per annum rate equal
to the lower of (x) the sum of prime rate published from time to time by the
Wall Street Journal plus five percent (5%) and (y) the highest interest rate
permitted by applicable law from the date of the Redemption Notice until the
date of redemption hereunder, and (ii) shall have the right, at any time and
from time to time, to require the Company, upon written notice, to immediately
convert (in accordance with the terms of Section IV.A) all or any portion of the
Redemption Amount, plus interest as aforesaid, into shares of Common Stock at a
Conversion Price equal to the lower of (x) the Conversion Price in effect on the
date of the Redemption Notice and (y) the Conversion Price in effect on the date
that such Holder receives shares of Common Stock with respect to such Redemption
Amount. In the event the Company is not able to redeem all of the shares of
Preferred Stock subject to Redemption Notices, the Company shall redeem shares
of Preferred Stock from each Holder pro rata, based on the total number of
shares of Preferred Stock included by such Holder in the Redemption Notice
relative to the total number of shares of Preferred Stock in all of the
Redemption Notices. The interest provided for in this Section VIII.D shall not
be duplicative of the 1% per day payment provided for pursuant to Section VII.A
of this Certificate of Designation.
<PAGE>
E. Additional Cap Amount Remedies. Upon a Redemption Event described in
clause (ix), any Holder who is so prohibited from converting its Preferred Stock
may elect one or both of the following: (i) require, with the consent of the
Majority Holders (including any shares of Preferred Stock held by the requesting
Holder), the Company to terminate the listing of its Common Stock on Nasdaq and
to cause its Common Stock to be listed on the Nasdaq Small Cap Market or on the
over-the-counter electronic bulletin board, at the option of the requesting
Holder; and (ii) require the Company to issue shares of Common Stock in
accordance with such holder's Notice of Conversion at a conversion price equal
to the Conversion Price in effect on the date of the Holder's written notice to
the Company of its election to receive shares of Common Stock pursuant to this
subparagraph (ii).
F. Partial Redemption Upon Sale or Licensing of Patent Rights.
(i) From time to time following the sale or license by the Company or
any subsidiary of the Company of patent rights pursuant to Section 12 of that
certain Patent Security Agreement dated as of August 29, 1997, and so long as no
Redemption Event shall have occurred and the Company is not in material
violation of any of its obligations under the Securities Purchase Agreement, the
Company shall have the right to redeem (a "Voluntary Redemption") Preferred
Stock having a Face Amount of up to $11,200,000 for an amount in cash paid by
wire transfer of immediately available funds equal to the Face Amount plus the
applicable Voluntary Redemption Premium (as defined below) of the Preferred
Stock so redeemed.
(ii) Any Voluntary Redemption pursuant to this Section VIII.F shall be
made ratably among Holders in proportion to the Face Amount of Preferred Stock
then outstanding and held by such Holders.
(iii) The "Voluntary Redemption Premium" shall be: (x) if the
aggregate Face Amount of Preferred Stock redeemed pursuant to this Section
VIII.F is equal to or less than $6,400,000, (A) with respect to Voluntary
Redemptions for which payment is made on or prior to October 28, 1997, 4.0%; (B)
with respect to Voluntary Redemptions for which payment is made after October
28, 1997 and on or prior to November 27, 1997, 6.75%; (C) with respect to
Voluntary Redemptions for which payment is made after November 27, 1997, and on
or prior to December 27, 1997, 10.0%; and (D) with respect to Voluntary
Redemptions for which payment is made after December 27, 1997 and on or prior to
January 26, 1998, 14.0%; and (y) if the aggregate Face Amount of Preferred Stock
redeemed pursuant to this Section VIII.F is greater than $6,400,000, (A) with
respect to Voluntary Redemptions for which payment is made on or prior to
September 28, 1997, 15.0%; (B) with respect to Voluntary Redemptions for which
payment is made after September 28, 1997 and on or prior to October 28, 1997,
20.0%; and (C) with respect to Voluntary Redemptions for which payment is made
after October 28, 1997 and on or prior to November 27, 1997, 30.0%; provided,
that if following one or more Voluntary Redemptions with respect to which a
Voluntary Redemption Premium determined pursuant to clause (x) above is paid, a
<PAGE>
Voluntary Redemption is made which would cause the aggregate Face Amount of
Preferred Stock redeemed pursuant to this Section VIII.F to exceed $6,400,000,
then the Voluntary Redemption Premium for all of such prior Voluntary
Redemptions shall be recalculated pursuant to clause (y) above, and the
difference between the Voluntary Redemption Premium determined pursuant to
clause (y) with respect to each such previous Voluntary Redemption and the
Voluntary Redemption Premium paid as determined pursuant to clause (x) with
respect to such previous Voluntary Redemption shall be paid as additional
Voluntary Redemption Premium at the time of the Voluntary Redemption which
triggers the application of this provision.
(iv) No Voluntary Redemption may be made after November 27, 1997 if
the aggregate Face Amount of Preferred Stock redeemed pursuant to this Section
VIII.F would thereby be greater than $6,400,000. No Voluntary Redemption may be
made after January 26, 1998.
(v) The Company shall effect a Voluntary Redemption under this Section
VIII.F by giving prior written notice (the "Voluntary Redemption Notice"), which
notice may only be delivered on a business day on or after August 29, 1997 and
on or prior to January 12, 1998. The Voluntary Redemption Notice shall state the
Face Amount of Preferred Stock to be redeemed and the date on which the
Voluntary Redemption is to occur (which shall not be less than ten (10) business
days after the date of delivery of the Voluntary Redemption Notice) and shall be
delivered by the Company to the Holders at the address of such Holder appearing
on the register of the Company for the Preferred Stock.
Within seven (7) business days after the date of delivery of the
Voluntary Redemption Notice, each Holder shall provide the Company with
instructions as to the account to which payments associated with such Voluntary
Redemption should be deposited. On the date of the Voluntary Redemption,
provided for in the relevant Voluntary Redemption Notice, (x) the Company will
deliver the redemption amount via wire transfer to the account designated by the
Holders, (y) the Holders will deliver the certificates relating to that number
of shares of Preferred Stock being redeemed, duly executed for transfer or
accompanied by executed stock powers, in either case, transferring that number
of shares to be redeemed. Within five (5) business days after such Voluntary
Redemption the Company will deliver to the Holders new certificates representing
that number of shares held by the Holders after such Voluntary Redemption. Upon
the occurrence of the wire transfer (or, in the absence of a Holder designating
an account to which funds should be transferred, delivery of a certified check
in the amount due such Holder in connection with such Voluntary Redemption to
the address of such Holder appearing on the register of the Company for the
Preferred Stock), that number of shares to be redeemed pursuant to such
Voluntary Redemption as represented by the previously issued certificates will
be deemed no longer outstanding.
<PAGE>
G. Capital Impairment. In the event that Section 160 of the Delaware
General Corporation Law ("GCL"), would be violated by the redemption of any
shares of Preferred Stock that are otherwise subject to redemption pursuant to
this Article VIII, the Company: (i) will redeem the greatest number of shares of
Preferred Stock possible without violation of said Section; (ii) the Company
thereafter shall use its best efforts to take all necessary steps permitted
pursuant to this Certificate of Designation and the agreements entered into in
connection with the issuance of Preferred Stock pursuant hereto in order to
remedy its capital structure in order to allow further redemptions without
violation of said Section; and (iii) from time to time thereafter as promptly as
possible the Company shall redeem shares of Preferred Stock at the request of
the Holders to the greatest extent possible without causing a violation of
Section 160 of the GCL. Any Holder shall have the right, at any time and from
time to time, to require the Company, upon written notice, to immediately
convert (in accordance with the terms of Section IV.A) all or any portion of the
Redemption Amount plus any interest or other charges which have accrued into
shares of Common Stock at a Conversion Price equal to the lowest Conversion
Price in effect during the period beginning on the date of the Redemption Notice
and ending on the Conversion Date with respect to the Conversion of such
Redemption Amount. In the event the Company is not able to redeem all the shares
of the stock subject to Redemption Notices, the Company shall redeem shares of
Preferred Stock from each Holder pro rata, based on the total number of shares
of Preferred Stock included by such Holder in the Redemption Notice relative to
the total number of Preferred Stock in all Redemption Notices. In addition, so
long as the Company is prevented from redeeming shares of Preferred Stock
pursuant to this Section VIII.G, the Company (i) will operate only in the
ordinary course of business and will not incur any expenditures outside of the
ordinary course of business, and (ii) will not enter into any acquisition,
merger or joint venture transactions.
IX. RANK; PARTICIPATION
A. Rank. All shares of the Preferred Stock shall rank (i) prior to the
Common Stock; (ii) prior to any class or series of capital stock of the Company
hereafter created (unless, with the consent of the Holders obtained in
accordance with Article XIII hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Preferred
Stock) (collectively, with the Common Stock, "Junior Securities"); (iii) pari
passu with any class or series of capital stock of the Company hereafter created
(with the consent of the Holders obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Preferred Stock
(the "Pari Passu Securities"); and (iv) junior to any class or series of capital
stock of the Company hereafter created (with the consent of the Holders obtained
in accordance with Article XIII hereof) specifically ranking, by its terms,
senior to the Preferred Stock (the "Senior Securities"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary.
<PAGE>
B. Participation. Subject to the rights of the holders (if any) of Pari
Passu Securities and Senior Securities, the Holders shall, as such Holders, be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if such Holders had converted their shares of
Preferred Stock into Common Stock (without regard to any limitations on
conversion herein or elsewhere contained) and had been issued such Common Stock
on the day before the record date for said dividend or distribution. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
X. LIQUIDATION PREFERENCE
A. Liquidation of the Company. If the Company shall commence a voluntary
case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Company or of any substantial part of its property, or make an assignment for
the benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Company shall be entered by a court having jurisdiction in the premises in
an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60) consecutive
days and, on account of any such event, the Company shall liquidate, dissolve or
wind up, or if the Company shall otherwise liquidate, dissolve or wind up (a
"Liquidation Event"), no distribution shall be made to the Holders of any shares
of capital stock of the Company (other than Senior Securities) upon liquidation,
dissolution or winding up unless prior thereto the Holders shall have received
the Liquidation Preference (as herein defined) with respect to each share. If,
upon the occurrence of a Liquidation Event, the assets and funds available for
distribution among the Holders and holders of Pari Passu Securities shall be
insufficient to permit the payment to such Holders of the preferential amounts
payable thereon, then the entire assets and funds of the Company legally
available for distribution to the Preferred Stock and the Pari Passu Securities
shall be distributed ratably among such shares in proportion to the ratio that
the Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.
B. Certain Acts Not a Liquidation. The purchase or redemption by the
Company of stock of any class, in any manner permitted by law, shall not, for
the purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Company. Neither the consolidation or merger of the Company with or into any
other entity nor the sale or transfer by the Company of less than substantially
<PAGE>
all of its assets shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Company.
C. Definition of Liquidation Preference. The "Liquidation Preference" with
respect to a share of Preferred Stock means an amount equal to the Face Amount
thereof plus any other amounts that may be due from the Company with respect
thereto through the date of final distribution. The Liquidation Preference with
respect to any Pari Passu Securities shall be as set forth in the Certificate of
Designation filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
Closing Date, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Company shall notify the Company's transfer agent of such change on or before
the effective date thereof.
B. Certain Public Announcements. In the event that (i) the Company makes a
public announcement that it intends to consolidate or merge with any other
entity (other than a merger in which the Company is the surviving or continuing
entity and its capital stock is unchanged and there is no distribution thereof))
or to sell or transfer all or substantially all of the assets of the Company or
(ii) any person, group or entity (including the Company) publicly announces a
tender offer to purchase 50% or more of the Common Stock (the date of the
announcement referred to in clause (i) or (ii) of this paragraph is hereinafter
referred to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the consummation of
the proposed tender offer or transaction or the Abandonment Date (as defined
below), be equal to the lesser of (x) the Conversion Price calculated as
provided in Article IV or (y) the Conversion Price which would have been
applicable for Conversion occurring on the Announcement Date. From and after the
Abandonment Date, as the case may be, the Conversion Price shall be determined
as set forth in Article IV. The "Abandonment Date" means with respect to any
proposed transaction or tender offer for which a public announcement as
contemplated by this paragraph has been made, the date which is seven trading
days after the date upon which the Company (in the case of clause (i) above or
the person, group or entity (in the case of clause (ii) above) publicly
announces the termination or abandonment of the proposed transaction or tender
offer which cause this paragraph to become operative, or such offer expires in
accordance with its terms.
<PAGE>
C. Major Transactions. If the Company shall consolidate with or merge into
any corporation or reclassify its outstanding shares of Common Stock (other than
by way of subdivision or reduction of such shares) (each a "Major Transaction"),
then each Holder shall thereafter be entitled to receive consideration, in
exchange for each share of Preferred Stock held by it, equal to the greater of,
as determined in the sole discretion of such Holder: (i) the number of shares of
stock or securities or property of the Company, or of the entity resulting from
such consolidation or merger (the "Major Transaction Consideration"), to which a
Holder of the number of shares of Common Stock delivered upon conversion of such
shares of Preferred Stock would have been entitled upon such Major Transaction
had the Holder exercised its right of conversion (without regard to any
limitations on conversion herein contained) on the trading date immediately
preceding the public announcement of the transaction resulting in such Major
Transaction and had such Common Stock been issued and outstanding and had such
Holder been the holder of record of such Common Stock at the time of such Major
Transaction, and the Company shall make lawful provision therefor as a part of
such consolidation, merger or reclassification; and (ii) 125% of the Face Amount
of such shares of Preferred Stock in cash. No sooner than ten (10) days nor
later than five (5) days prior to the consummation of the Major Transaction, but
not prior to the public announcement of such Major Transaction, the Company
shall deliver written notice ("Notice of Major Transaction") to each Holder,
which Notice of Major Transaction shall be deemed to have been delivered one (1)
business day after the Company's sending such notice by telecopy (provided that
the Company sends a confirming copy of such notice on the same day by overnight
courier) of such Notice of Major Transaction. Such Notice of Major Transaction
shall indicate the amount and type of the Major Transaction Consideration which
such Holder would receive under clause (i) of this Section XI.B If the Major
Transaction Consideration does not consist entirely of United States dollars,
such Holder may elect to receive United States dollars in an amount equal to the
value, determined by a Big-6 accounting firm selected by the Company that is
reasonably acceptable to Holders of the Major Transaction Consideration in lieu
of the Major Transaction Consideration by delivering notice of such election to
the Company within five (5) days of the Holder's receipt of the Notice of Major
Transaction.
D. Adjustment Due to Distribution. If at any time after the Closing Date,
the Company shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Company's stockholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the Fixed Conversion Price shall be equitably adjusted to
take account of such distribution.
E. Issuance of Other Securities With Variable Conversion Price. If, at any
time after the Closing Date the Company shall issue any securities which are
convertible into or exchangeable for Common Stock ("Convertible Securities") at
<PAGE>
a conversion or exchange rate based on a discount from the market price of the
Common Stock at the time of conversion or exercise, then the Variable Conversion
Price in respect of any conversion of Preferred Stock after such issuance shall
be calculated utilizing the greatest percentage discount applicable to any such
Convertible Securities.
F. Purchase Rights. If at any time after the Closing Date, the Company
issues any Convertible Securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the Holders will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if such Holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Preferred Stock (without regard to any limitations on conversion or exercise
herein or elsewhere contained) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article XI, the Company,
at its expense, shall promptly compute such adjustment or readjustment and
prepare and furnish to each Holder a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any Holder, furnish to such Holder a like certificate setting forth (i) such
adjustment or readjustment, (ii) the Conversion Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Preferred Stock.
XII. VOTING RIGHTS
The holders of Preferred Stock shall have no voting power whatsoever,
except as otherwise provided by the Delaware General Corporation Law (the
"General Corporation Law"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Company shall provide each Holder with prior
notification of any meeting of the stockholders (and copies of proxy materials
and all other information sent to stockholders). If the Company takes a record
of its stockholders for the purpose of determining stockholders entitled to (a)
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the Company, or
any proposed merger, consolidation, liquidation, dissolution or winding up of
<PAGE>
the Company, the Company shall mail a notice to each Holder, at least twenty
(20) days prior to the record date specified therein (or thirty (30) days prior
to the consummation of the transaction or event, whichever is earlier, but in no
event earlier than public announcement of such proposed transaction), of the
date on which any such record is to be taken for the purpose of such vote,
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such vote, dividend, distribution, right or other
event to the extent known at such time.
To the extent that under the General Corporation Law the vote of the
holders of the Preferred Stock, voting separately as a class or series, as
applicable, is required to authorize a given action of the Company, the
affirmative vote or consent of the Holders of at least a majority of the shares
of the Preferred Stock represented at a duly held meeting at which a quorum is
present or by written consent of the Majority Holders (except as otherwise may
be required under the General Corporation Law) shall constitute the approval of
such action by the class. To the extent that under the General Corporation Law
Holders are entitled to vote on a matter with holders of Common Stock, voting
together as one class, each share of Preferred Stock shall be entitled to a
number of votes equal to the number of shares of Common Stock into which it is
then convertible using the record date for the taking of such vote of
stockholders as the date as of which the Conversion Price is to be calculated
for this purpose.
XIII. PROTECTION PROVISIONS
So long as any shares of Preferred Stock are outstanding, the Company shall
not, without first obtaining the approval of the Majority Holders: (a) alter or
change the rights, preferences or privileges of the Preferred Stock; (b) alter
or change the rights, preferences or privileges of any capital stock of the
Company so as to affect adversely the Preferred Stock; (c) create any Senior
Securities; (d) create any Pari Passu Securities; (e) increase the authorized
number of shares of Preferred Stock; (f) redeem, or declare or pay any cash
dividend or distribution in excess of __% per annum on, any Junior Securities;
or (g) do any act or thing not authorized or contemplated by this Certificate of
Designation which would result in any taxation with respect to the Preferred
Stock under Section 305 of the Internal Revenue Code of 1986, as amended, or any
comparable provision of the Internal Revenue Code as hereafter from time to time
amended, (or otherwise suffer to exist any such taxation as a result thereof).
If the Majority Holders agree to allow the Company to alter or change the
rights, preferences or privileges of the shares of Preferred Stock pursuant to
subsection (a) above, then the Company shall deliver notice of such approved
change to the Holders that did not agree to such alteration or change (the
"Dissenting Holders") and the Dissenting Holders shall have the right, for a
period of thirty (30) days after the date such notice was given by the Company,
to convert pursuant to the terms of this Certificate of Designation as they
existed prior to such alteration or change or to continue to hold their shares
of Preferred Stock.
<PAGE>
XIV. MISCELLANEOUS
A. Cancellation of Preferred Stock. If any shares of Preferred Stock are
converted pursuant to Article IV, the shares so converted shall be canceled,
shall return to the status of authorized but unissued preferred stock of no
designated series, and shall not be issuable by the Company as Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence
of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Company, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Company shall not be
obligated to reissue such lost, stolen, destroyed or mutilated Preferred Stock
Certificate(s) if the Holder contemporaneously requests the Company to convert
such Preferred Stock.
C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and
Reserved Amount shall be allocated among the Holders in the same proportion as
the number of shares of Preferred Stock initially held by such Holder bears to
the aggregate number of outstanding shares of Preferred Stock. Each increase to
the Cap Amount or Reserved Amount shall be allocated pro rata among the Holders
based on the number of shares of Preferred Stock held by each Holder at the time
of the increase in the Cap Amount or Reserved Amount, as the case may be. In the
event a Holder shall sell or otherwise transfer any of such Holder's shares of
Preferred Stock, each transferee shall be allocated a pro rata portion of such
transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or
Reserved Amount which remains allocated to any person or entity which does not
hold any Preferred Stock shall be allocated among the remaining Holders, pro
rata based on the number of shares of Preferred Stock then held by such Holders.
D. Statements of Available Shares. Upon request, the Company shall deliver
to each Holder a written report notifying the Holders of any occurrence which
prohibits the Company from issuing Common Stock upon such conversion. The report
shall also specify (i) the total number of shares of Preferred Stock outstanding
as of the date of the request, (ii) the total number of shares of Common Stock
issued upon all conversions of Preferred Stock through the date of the request,
(iii) the total number of shares of Common Stock which are reserved for issuance
upon conversion of the Preferred Stock as of the date of the request, and (iv)
the total number of shares of Common Stock which may thereafter be issued by the
Company upon conversion of the Preferred Stock before the Company would exceed
the Cap Amount and Reserved Amount. The Company shall provide, within fifteen
(15) days after delivery to the Company of a written request by any Holder, all
of the information enumerated in clauses (i) - (iv) of this Section XIV.D.
<PAGE>
E. Payment of Cash; Defaults. Whenever the Company is required to make any
cash payment to a Holder under this Certificate of Designation (as a Conversion
Default Payment, Redemption Amount or otherwise), such cash payment shall be
made to the Holder by the method (by certified or cashier's check or wire
transfer of immediately available funds) elected by such Holder. If such payment
is not delivered when due such Holder shall thereafter be entitled to interest
on the unpaid amount until such amount is paid in full to the Holder at a per
annum rate equal to the lower of (x) the sum of prime rate published from time
to time by the Wall Street Journal plus five percent (5%) and (y) the highest
interest rate permitted by applicable law. Payment of interest under this
Section XIV.E shall not be duplicative of the interest provided for in clause
(i) of Section VIII.D or the 1% per day payment provided for pursuant to Section
VII.A of this Certificate of Designation.
F. Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a Holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designation. Company covenants to each Holder that there shall be no
characterization concerning this instrument other than as expressly provided
herein; provided, however, that the Company shall be entitled to prepare
summaries of this Certificate of Designation for purposes of complying with its
disclosure obligations and in connection with bona fide disputes as to the
operations of the provisions of this Certificate of Designation. Amounts set
forth or provided for herein with respect to payments, conversion and the like
(and the computation thereof) shall be the amounts to be received by the Holder
hereof and shall not, except as expressly provided herein or in the
Intercreditor Agreement entered into with Foothill Capital Corporation in
connection with the issuance of the Preferred Stock, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
the holders of Preferred Stock and that the remedy at law for any such breach
may he inadequate. The Company therefore agrees, in the event of any such breach
or threatened breach, the Holders shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
G. Specific Shall Not Limit General. No specific provision contained in
this Certificate of Designation shall limit or modify any more general provision
contained herein.
H. Failure or Indulgency Not Waiver. No failure or delay on the part of a
Holder in the exercise of any power, right or privilege hereunder shall operate
<PAGE>
as a waiver thereof, not shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be duly executed this 29th day of August, 1997.
LASERSIGHT INCORPORATED
By: /s/ Michael R. Farris
-------------------------
Name: Michael R. Farris
Title: President
Attest:
/s/ Gregory L. Wilson
- -------------------------
Gregory L. Wilson, Secretary
<PAGE>
EXHIBIT A
---------
NOTICE OF CONVERSION
The undersigned hereby irrevocably elects to convert (the "Conversion")
$__________ Face Amount of the Series B Convertible Participating Preferred
Stock (the "Preferred Stock") (i.e., $_________) plus all accrued and unpaid
Conversion Default Payments relating thereto (if any) (each defined term used
but not defined in this notice shall have the meaning assigned to it in the
Designation, Preferences and Rights of Series B Convertible Participating
Preferred Stock of LaserSight Incorporated (the "Certificate of Designation")),
into shares of common stock ("Common Stock") of Lasersight Incorporated (the
"Company") according to the conditions of the Certificate of Designation, as of
the date written below. If securities are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto. No fee will be charged to the Holder for any conversion
except as provided herein.
The undersigned covenants that all offers and sales by the undersigned of the
securities issuable to the undersigned upon conversion of this Preferred Stock
shall be made pursuant to registration of the Common Stock under the Securities
Act of 1933, as amended (the "Act"), or pursuant to an exemption from
registration under the Act.
In the event of partial exercise, please reissue an appropriate Preferred
Stock(s) for the principal balance which shall not have been converted.
Date of Conversion:____________________________
Applicable Conversion Price:___________________
Amount of Conversion Default Payments
to be Converted, if any:_______________________
Number of Shares of
Common Stock to be Issued:_____________________
Signature:_____________________________________
Name:__________________________________________
Address:_______________________________________
ACKNOWLEDGED AND AGREED:
LASERSIGHT INCORPORATED
BY:__________________________
NAME:________________________
TITLE:_______________________ DATE:________________________________
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
LASERSIGHT INCORPORATED
LaserSight Incorporated (the "Company"), a corporation organized and
existing under the laws of the State of Delaware, in order to amend its
Certificate of Incorporation (the "Certificate") pursuant to the provisions of
the General Corporation Law of the State of Delaware (the "Act"), does hereby
certify as follows:
1. At a meeting duly called and held, the Board of Directors of the
Company unanimously adopted a resolution to submit to the shareholders of the
Company a proposal to amend Section 1(a) of Article IV of the Certificate to
increase the number of shares of common stock which the company is authorized to
issue from 20,000,000 to 40,000,000.
2. The full text of Section 1(a) of Article IV of the Certificate shall
be amended hereby to read as follows:
(a) Common Stock. The aggregate number of shares of Common
Stock which the corporation shall have authority to issue is
40,000,000, each with a par value of $.001 per share.
3. At a special meeting of the Company's stockholders duly called and
held upon notice in accordance with Section 222 of the Act, the foregoing
amendment to the Certificate was duly adopted by the holders of at least a
majority of the outstanding common stock of the Company entitled to vote thereon
in accordance with the provisions of Section 242 of the Act.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Amendment to be signed by its duly authorized officer this 27th day of February,
1998.
LASERSIGHT INCORPORATED
By: /s/ Michael R. Farris
--------------------------
Michael R. Farris
President
Attest: /s/ Gregory L. Wilson
--------------------------
Gregory L. Wilson
Secretary
<TABLE>
EXHIBIT 11
LASERSIGHT INCORPORATED
COMPUTATION OF EARNINGS (LOSS) PER SHARE
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC
Weighted average shares outstanding 9,504,000 7,486,300 6,325,300
Issuable shares, acquisition of The Farris Group - 406,700 406,700
------------ ------------ -----------
9,504,000 7,893,000 6,732,000
============ ============ ===========
Net income (loss) $ (7,253,084) $ (4,074,369) $ 4,591,871
Conversion discount on preferred stock (41,573) (1,010,557) ===========
Dividends on preferred stock (298,269) (358,618)
------------ ------------
Loss attributable to common shareholders $ (7,592,926) $ (5,443,544)
============ ============
Basic earning (loss) per share $ (0.80) $ (0.69) $ 0.68
============ ============ ===========
DILUTED
Weighted average number of shares, as adjusted 9,504,000 7,486,300 6,325,300
Issuable shares, acquisition of The Farris Group - 406,700 406,700
Net effect of dilutive stock options - - 493,000
------------ ----------- -----------
9,504,000 7,893,000 7,225,000
============ =========== ===========
Net income (loss) $ (7,253,084) $ (4,074,369) $ 4,591,871
Conversion discount on preferred stock (41,573) (1,010,557) ===========
Dividends on preferred stock (298,269) (358,618)
------------ -----------
Loss attributable to common shareholders $ (7,592,926) $ (5,443,544)
============ ============
Diluted earnings (loss) per share $ (0.80) $ (0.69) $ 0.64
============ ============ ===========
Loss attributable to common shareholders above $ (7,592,926) $ (5,443,544)
Additional adjustment to weighted average number
of shares:
Weighted average number of shares as adjusted per
above 9,504,000 7,893,000
Dilutive effect of contingently issuable shares,
stock options and convertible preferred stock 4,722,000 317,000
------------ ------------
Weighted average number of shares, as adjusted 14,226,000 8,210,000
============ ============
Diluted loss per share, as adjusted $ (0.53)(A) $ (0.66)(A)
============ ============
- ------------------------------------
<FN>
(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.
</FN>
</TABLE>
EXHIBIT 21
----------
SUBSIDIARIES OF REGISTRANT
State or jurisdiction
Subsidiary in which incorporated
- ---------- ---------------------
LaserSight Technologies, Inc. . . . . . . . . . . . . . . Delaware
LaserSight Patents, Inc. . . . . . . . . . . . . . . . . Delaware
MRF, Inc. (d/b/a The Farris Group) . . . . . . . . . . . Missouri
Photomed Acquisition, Inc. . . . . . . . . . . . . . . . Delaware
LaserSight Centers Incorporated . . . . . . . . . . . . Delaware
LS Export, Ltd. . . . . . . . . . . . . . . . . . . . . . U.S. Virgin Islands
LST Laser, S.A.. . . . . . . . . . . . . . . . . . . . . Costa Rica
LS Japan Company, Limited (Not active). . . . . . . . . . Japan
Exhibit 23
----------
Independent Auditors' Consent
-----------------------------
The Board of Directors
LaserSight Incorporated:
We consent to incorporation by reference in the registration statement (No.
33-96390) on Form S-8, registration statement (No. 33-52170) on Form S-8,
registration statement (No. 333-16817) on Form S-8, registration statement (No.
333-16823) on Form S-8, registration statement (No. 333-2198) on Form S-3,
registration statement (No. 333-25237) on Form S-3, registration statement (No.
333-36655) on Form S-3 and registration statement (No. 333-36837) on Form S-3 of
LaserSight Incorporated of our report dated February 27, 1998, with respect to
the consolidated balance sheets of LaserSight Incorporated and Subsidiaries as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the 1997
annual report on Form 10-K of LaserSight Incorporated.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,858,400
<SECURITIES> 7,475,000
<RECEIVABLES> 7,910,997
<ALLOWANCES> 1,499,454
<INVENTORY> 4,348,235
<CURRENT-ASSETS> 22,883,910
<PP&E> 2,372,001
<DEPRECIATION> 1,017,833
<TOTAL-ASSETS> 50,461,073
<CURRENT-LIABILITIES> 10,154,210
<BONDS> 0
11,477,184
0
<COMMON> 10,150
<OTHER-SE> 27,029,790
<TOTAL-LIABILITY-AND-EQUITY> 50,461,073
<SALES> 12,170,018
<TOTAL-REVENUES> 24,388,833
<CGS> 4,127,908
<TOTAL-COSTS> 12,701,840
<OTHER-EXPENSES> 18,862,552
<LOSS-PROVISION> 2,366,995
<INTEREST-EXPENSE> 1,343,198
<INCOME-PRETAX> (6,373,084)
<INCOME-TAX> 880,000
<INCOME-CONTINUING> (7,253,084)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,253,084)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
</TABLE>
