SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(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, 1999
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.)
3300 University Blvd, Suite 140, Winter Park, Florida 32792
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 678-9900
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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
Preferred Share Purchase Rights
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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, 2000 was
approximately $124,841,854. Shares of Common Stock held by each officer and
director and by each person who has voting power of 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Number of shares of Common Stock outstanding as of May 5, 2000:
19,803,663.
EXPLANATORY NOTE
This filing amends certain information on the cover page and certain other
previously-filed information contained in Items 1 and 7. No other items have
been amended.
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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 Item 7 under the caption "Risk Factors and Uncertainties" as well
as those discussed elsewhere in this Report. All references to "LaserSight"
"we," "our" and "us" in this Report refer to LaserSight Incorporated and its
subsidiaries unless the context otherwise requires.
PART I
Item 1. Business
Overview
We develop, manufacture and market quality product technologies for
laser refractive surgery and other areas of vision correction. Our products
include narrow beam scanning excimer laser systems used to perform procedures
that correct common refractive vision disorders such as nearsightedness
(myopia), farsightedness (hyperopia) and astigmatism, as well as keratome
systems, keratome blades and other products used in refractive vision correction
procedures. We believe that our narrow beam scanning lasers have significant
technological advantages and produce smoother and more precise ablation areas
than the older, broad-beam laser systems offered by many of our competitors. We
also believe that the breadth of our product offering provides us with a
competitive advantage relative to many other excimer laser system manufacturers
because it provides us with a platform to become a single-source supplier of
refractive vision correction products to refractive surgeons. Moreover, our
broad product offering affords us the opportunity to participate in the
anticipated growth in refractive laser vision correction procedure volume by
collecting per procedure fees and by selling our single-use keratome products
and keratome blades.
We have over five years of experience in the manufacture, sale and
service of narrow beam scanning laser systems for refractive vision correction
procedures. Since 1994, we have sold our scanning laser systems commercially in
over 30 countries worldwide. As a result, we believe that our installed base of
over 250 scanning laser systems, including approximately 80 of our most advanced
laser system, the LaserScan LSX, is among the largest installed bases of
scanning laser systems in the industry. In November 1999, the FDA approved our
LaserScan LSX scanning laser system for commercial sale in the U.S. for the
treatment of nearsightedness of up to 6.0 diopters using a pulse repetition rate
of 100 Hz. Our approval will also allow refractive surgeons in the U.S. to use
our laser system to treat patients for nearsightedness up to 10.0 diopters at
the discretion of the physician. We currently have pending with the FDA a
supplemental PMA application seeking approval of the use of our laser system for
the treatment of nearsightedness with astigmatism, and expect to file PMA
supplements in the near future which would permit our laser systems sold to
customers in the U.S. to operate at a 200 Hz pulse rate, the pulse rate
currently used in international versions of our LaserScan LSX system and the
fastest pulse rate currently available in our industry, and to operate with our
advanced eye tracking system. We are currently in litigation with one of our
major competitors regarding intellectual property claims. We have a broad
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intellectual property portfolio, and believe that we own or license all
intellectual property necessary for commercialization of our products. See Item
3 ("Legal Proceedings") below.
Our MicroShape(TM) family of keratome products includes our
UniShaper(TM) single-use keratome, UltraShaper(TM) durable keratome, a control
console which may be used interchangeably with our single-use and durable
keratomes, and our UltraEdge(TM) keratome blades. Our MicroShape family of
keratome products work with the LaserScan LSX and also with other laser systems
used to perform LASIK. We began commercial shipment of keratome blades in July
1999 and of our single-use keratomes and control consoles in December 1999. We
anticipate that sales of our UniShaper single-use keratome and our UltraEdge
keratome blades will provide us with the opportunity to participate in the
expected growth in refractive laser vision correction procedure volume by
generating recurring revenue streams, regardless of which laser system a
refractive surgeon uses. We intend to aggressively develop and market other
refractive vision correction products in the future, including our UltraShaper
durable keratome product which recently received FDA 510(k) clearance, and which
we expect to commercially launch in the second quarter of 2000.
Operating Segments. LaserSight Incorporated and its subsidiaries
(collectively, "LaserSight"(TM)) operate in three major operating segments:
refractive products, patent services and health care services. Our principal
wholly-owned subsidiaries include: LaserSight Technologies, Inc. ("LaserSight
Technologies"), LaserSight Patents, Inc. ("LaserSight Patents"), and MRF, Inc.
("The Farris Group" or "TFG").
Our refractive products segment, which includes LaserSight Technologies
and LaserSight Centers Incorporated, develops, manufactures and markets
ophthalmic lasers with a galvanometric scanning system for use in performing
refractive surgery. The LaserScan LSX 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. Since August 29, 1997, our patent
services segment has consisted of LaserSight Patents, which licenses various
patents related to the use of excimer lasers to ablate biological tissue. Since
December 31, 1997, the health care services segment has consisted of TFG. TFG
provides health care and vision care consulting services to hospitals, managed
care companies and physicians. Until that date, this segment also included MEC
Health Care, Inc. and LSI Acquisition, Inc. Under our 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. For information regarding our export sales and operating revenues,
operating profit (loss) and identifiable assets by industry segment, see Note 14
of the Notes to Consolidated Financial Statements.
Organization and History. LaserSight was incorporated in Delaware in
1987, but was inactive until 1991. In April 1993, we 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, we acquired TFG. In
July 1994, LaserSight was reorganized as a holding company. In October 1995, we
acquired MEC. In July 1996, our LSIA subsidiary acquired the assets of the
Northern New Jersey Eye Institute, P.A. On December 30, 1997, we sold MEC and
LSIA in connection with a transaction which was effective as of December 1,
1997. Our principal offices and mailing address are 3300 University Boulevard,
Suite 140, Winter Park, Florida 32792, and our telephone number is (407)
678-9900.
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Industry Overview
Refractive Vision Correction
Laser vision correction is a surgical procedure for correcting vision
disorders such as nearsightedness, farsightedness and astigmatism using an
excimer laser. This procedure uses ultraviolet laser energy to ablate, or
remove, tissue from the cornea and sculpt the cornea into a predetermined shape.
Because the excimer laser is a cold laser, it is possible to ablate precise
amounts of corneal tissue without causing thermal damage to surrounding tissue.
The goal of laser vision correction is to achieve patient vision levels which
eliminate or significantly reduce a person's reliance on corrective eyewear. The
first laser vision correction procedure on human eyes was conducted in 1985 and
the first human eye was treated with the excimer laser in the U.S. in 1988.
There are currently two principal methods for performing laser vision
correction with excimer laser systems: photorefractive keratectomy, or PRK, and
laser in-situ keratomileusis, or LASIK. According to industry sources,
approximately 80% of the refractive vision correction procedures performed in
the U.S. in 1998 were LASIK procedures. In both PRK and LASIK procedures, a
refractive surgeon determines the exact refractive correction required to be
made to the cornea, typically using the same examination used to prescribe
eyeglasses and contact lenses. Required corrections are then programmed into the
excimer laser system's computer. During the procedure, the excimer laser system
emits laser pulses, each of which lasts several billionths of a second, to
remove submicron layers of corneal tissue. While the average laser treatment
lasts approximately 15 to 60 seconds, cumulative exposure to the laser light
during each procedure is less than one second. The entire procedure, including
patient preparation and post-operative dressing, generally lasts no longer than
thirty minutes.
Photorefractive Keratectomy (PRK)
In PRK, the refractive surgeon prepares the eye by gently removing the
surface layer of the cornea called the epithelium. The surgeon then applies the
excimer laser beam, reshaping the curvature of the cornea. A bandage contact
lens is then placed on the eye to protect it. Following PRK, a patient typically
experiences blurred vision and discomfort until the epithelium heals. It
generally takes one month, but may take up to six months, for the full benefit
of PRK to be realized. PRK has been used commercially since 1988.
Laser in-situ Keratomileusis (LASIK)
LASIK was commercially adopted internationally in 1994 and in the U.S.
in 1996. Immediately prior to a LASIK procedure, the refractive surgeon uses a
surgical instrument called a keratome to create a thin, hinged flap of corneal
tissue. Patients do not feel or see the cutting of the corneal flap, which takes
only a few seconds. The flap is flipped back, the laser beam is directed to the
exposed corneal surface, the flap is placed back and the flap and interface are
rinsed. Once the procedure is completed, surgeons generally wait two to three
minutes to ensure the corneal flap has fully re-adhered. At this point, patients
can blink normally and the corneal flap remains secured in position by the
natural suction within the cornea. Since the surface layer of the cornea remains
intact during LASIK, no bandage contact lens is required and the patient
experiences virtually no discomfort. The LASIK procedure often results in a
higher degree of patient satisfaction due to an immediate improvement in visual
acuity and generally involves less post-operative discomfort than PRK.
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Refractive Vision Correction Market
The worldwide market for products and services to correct common
refractive vision disorders such as nearsightedness, farsightedness and
astigmatism is large and growing. Industry sources estimate that 50% of the U.S.
population, or approximately 140 million people, presently wear eyeglasses or
contact lenses. There are approximately 14,000 practicing ophthalmologists in
the U.S., and a growing percentage of them regularly perform refractive laser
vision correction procedures.
Laser vision correction is a fast growing segment of the vision
correction market. Total laser refractive procedure volume in the U.S. has more
than doubled each year since 1996 to an estimated 980,000 procedures in 1999. A
procedure refers to laser treatment on a single eye, and most patients have
procedures performed on both eyes during a single visit to a refractive surgeon.
Laser vision correction's growth in the U.S. is also reflected in the expansion
of excimer laser installations and in the rise in average annual procedure
volume per laser. This growth also reflects patient and surgeon acceptance of
using excimer laser systems approved by the FDA for PRK to perform LASIK as part
of the practice of medicine.
Many, but not all, manufacturers of excimer laser systems seek to share
in the anticipated growth in procedure volume by receiving a fee for each
procedure performed by a refractive surgeon using laser systems manufactured by
them. The per procedure fees charged by these manufacturers vary and have been
significantly reduced in recent months due to competitive pressures and changing
market conditions. See "Business-Competition."
Development of Excimer Laser System and Keratome Technology
Excimer Laser Systems
The excimer laser systems utilized for laser vision correction have evolved over
time with improvements in laser and beam delivery technology. Until recently,
broad beam laser systems, which were initially developed during the late 1980's,
were the only systems approved by the FDA for commercial use in the U.S. As a
result, broad beam laser systems currently represent over 90% of the installed
laser systems in the U.S. Broad beam laser systems are characterized by the use
of a relatively large, fixed laser beam of six to eight millimeters in diameter
to deliver relatively high amounts of laser energy (100 - 200 mj) at low laser
pulse repetition rates (generally 10 Hz) to the corneal surface. Because of the
relatively large diameter of the laser beam, these systems require a number of
mechanical elements to condition, size, shape and deliver the beam profiles
necessary to produce the required ablation. These mechanical means of beam
shaping have limited the flexibility of broad beam systems and made it necessary
to modify the mechanical means in order to adapt to a broader range of treatment
modalities and other expanded applications.
Broad beam laser systems operate by delivering a consistent laser beam
across the entire vision field of the cornea. In order to reduce the likelihood
of possible adverse effects resulting from constant exposure, the beam width is
reduced incrementally, or in steps, during the course of the procedure. The use
of broad beam laser systems can result in a corneal ablation profile
characterized by ridges on the corneal surface as a result of the stepping
action of the mechanical elements, and may also result in central islands, an
irregularity formed on the corneal bed resulting from the fixed nature of the
laser beam. Additionally, the relatively high laser energy of broad beam systems
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can lead to damage from acoustic shock and the possibility of retinal
detachment. Glare, halo when looking at lights and other bright objects, and
reduction in night vision have also been associated with the use of broad beam
systems.
Improvements in excimer laser technology during the early 1990's have
made it possible to develop refractive excimer laser systems which have
significantly narrower laser beams (one millimeter in diameter) and that use
reduced amounts of laser energy (10 mj) at higher pulse repetition rates (up to
200 Hz). Developers of this new generation of narrow beam scanning excimer laser
systems incorporated scanning mirrors and computer control to shape the ablation
profile, making it unnecessary to utilize mechanical elements to size and shape
the laser beam to attain the desired results. Techniques incorporated into
scanning laser technology such as purposeful overlapping of laser pulses and
random scanning patterns can lead to overall improved clinical results as
evidenced by the elimination of ridges and central islands, and the reduction in
the incidence of glare, halos, and loss or reduction of night vision and by
smoother ablation profiles. Narrow beam scanning excimer laser systems are
currently the most flexible laser vision correction platforms available as they
can be adapted to expansions in treatment modalities and the incorporation of
new technologies such as higher laser pulse repetition rate, active eye tracking
and custom topography through software and minor hardware upgrades.
Keratomes
Keratomes used to cut the thin corneal flap during the LASIK procedure
are similar in design to those used to perform earlier non-laser surgical
refractive techniques such as automated lamellar keratoplasty (ALK). The
Automated Corneal Shaper (ACS), developed by Luis A. Ruiz, M.D. and Sergio
Lenchig, is an example of an ALK keratome that is utilized extensively in
association with LASIK procedures without modification from its original design.
Prior to the commercial introduction of our UniShaper single-use
keratome in December 1999, most keratomes were durable keratomes. Durable
keratomes require some degree of disassembly, sterilization and blade
replacement between uses. This makes the durable keratome an instrument with
relatively high maintenance requiring a degree of skill to ensure proper
functioning. We believe that a large percentage of flap-related complications
associated with LASIK procedures are related to durable keratome performance or
maintenance.
The ACS durable keratome, manufactured and marketed by Bausch & Lomb
pursuant to a license agreement, was the leading keratome during the early and
mid-1990's at a time when many refractive surgeons learned to perform LASIK.
Since we licensed the rights to commercially market keratomes based on the same
technology in 1997, Bausch & Lomb has not aggressively marketed or serviced the
ACS, and has introduced an alternative durable keratome product which requires a
modified surgical technique. We believe that a significant number of refractive
surgeons prefer the surgical technique associated with the ACS.
The introduction of our MicroShape family of keratome products provides
refractive surgeons with the opportunity to utilize keratomes based on the
original design of the ACS, but which incorporate a number of significant
improvements to make the instruments safer and more adaptable for use prior to
LASIK procedures. Our single-use keratome provides the refractive surgeon with a
sterilized, fully assembled and tested keratome solution which eliminates the
cleaning and maintenance associated with durable keratomes. We believe our
UltraEdge blades offer refractive surgeons the ability to use the only blades
currently offered in the market made from surgical steel.
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LaserSight Recent Developments
Our LaserScan LSX excimer laser system is based on narrow beam scanning
technology rather than broad beam technology, which until recently was the only
commercially available excimer laser vision correction technology in the U.S. We
believe we are well-positioned to become a leading provider of excimer laser
systems, disposable and durable keratomes and other related products as a result
of our technology and the following recent developments:
o Commercial Launch of our LaserScan LSX Excimer Laser System in the
U.S. In November 1999, the FDA approved our LaserScan LSX narrow
beam scanning excimer laser system for use in the U.S. for the
treatment of nearsightedness using a pulse repetition rate of 100
Hz. We intend to aggressively enter the U.S. market, and begin
commercial shipment of our laser systems to customers in the U.S.
within the next week. We currently have a supplemental PMA
application pending with the FDA seeking approval of the use of our
laser system for the treatment of nearsightedness with astigmatism.
We expect to file a supplemental PMA in the near future which would
permit our laser systems sold to U.S. customers to operate at a 200
Hz pulse repetition rate, the fastest pulse rate currently available
in our industry and the pulse rate used in international versions of
our LaserScan LSX system. We are currently in litigation with Visx,
one of our major competitors, regarding intellectual property
claims. We have a broad intellectual property portfolio, and believe
that we own or license all intellectual property necessary for
commercialization of our products. See Item 3 ("Legal Proceedings--
Visx, Incorporated") below.
o Commercial Launch of our MicroShape Family of Keratome Products.
We began commercial shipments of our UltraEdge keratome blades in
July 1999 and of our UniShaper single-use keratome and our control
console in December 1999. We believe that our UltraEdge keratome
blades, which are intended to be replaced after each procedure
when used in durable keratomes, and our UniShaper single-use
keratome provide us with an attractive opportunity to generate
recurring revenues on a per procedure basis.
o Alliance with Becton Dickinson. In October 1999, we entered into a
marketing and distribution alliance with Becton Dickinson, the
manufacturer of our UltraEdge keratome blades and a leading
worldwide manufacturer of medical supplies, devices and diagnostic
systems. This alliance will enable us to leverage the extensive
U.S. and international marketing and distribution capabilities of
Becton Dickinson in connection with the marketing and distribution
of our MicroShape family of keratome products in the U.S., the
U.K., Ireland and Japan.
o Individualized Ablations. In March 2000, we purchased from Premier
Laser Systems, Inc. all intellectual property related to a
development project designed to provide front-to-back analysis and
total refractive measurement of the eye. The technology we acquired
includes the acquisition of two U.S. patents, six foreign patents,
and a pending patent application along with an exclusive license to
nine patents that are intended to be used to complete development of
an integrated refractive diagnostic work station. This diagnostic
tool is intended to be utilized with our Advanced Shape Technology
Refractive Algorithms (ASTRA(TM)) system, for personalized treatment
plans. Upon completion of development, the new work station will be
designed to integrate wavefront analysis and corneal topography into
a single instrument with additional diagnostic capabilities. We
believe ASTRA represents a new standard of eyecare that goes beyond
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conventional laser vision correction by individualizing the laser
treatment utilizing a patient-specific set of diagnostic criteria
intended to address and control both refractive error and optical
aberrations. We intend to launch international studies for ASTRA
during the second quarter of 2000.
Products
Excimer Lasers
Our current and most advanced scanning excimer laser system, the
LaserScan LSX, has evolved from the patented optical scanning system
incorporated in the Compak-200 Mini-Excimer laser system, which we introduced
internationally in 1994. Since the introduction of the Compak-200 laser system
we have offered several generations of our scanning laser, each incorporating
enhancements and new features. We have sold our narrow beam scanning excimer
laser systems in over 30 countries and believe our installed base of over 250
scanning laser systems, including approximately 80 of our most advanced laser
system, the LaserScan LSX, is among the largest installed bases of scanning
laser systems in the industry. Throughout the evolution of our scanning excimer
laser systems, the core concept of utilizing our proprietary scanning software
to ablate corneal tissue with a low energy, narrow laser beam at a rapid pulse
repetition rate has remained the underlying basis for our technology.
In November 1999, the LaserScan LSX was approved by the FDA for
commercialization in the U.S., and we expect to begin commercial shipments to
U.S. customers within the next week. We believe that the narrow-beam scanning
technology and other advanced features incorporated into our LaserScan LSX
excimer laser system offer refractive surgeons and patients significant
advantages over broad beam laser systems. The key benefits of the LaserSight LSX
include the following:
o Narrow Beam Scanning Laser. We believe that techniques like the
purposeful overlapping of laser pulses and random scanning patterns
used by our narrow beam scanning technology can lead to overall
improvements in clinical results with smoother ablations, the
elimination of surgical anomalies associated with broad beam laser
systems such as rings, ridges and central islands, and reductions in
the incidence of glare, halos and loss of night vision. The
LaserScan LSX uses a patented scanning system to deliver a high
resolution, one millimeter low-energy "flying spot," the highest
resolution currently available, in a proprietary, randomized
pattern. The LaserScan LSX is a true scanning software-controlled
laser which uses a pair of galvanometer controlled mirrors to
reflect and scan the laser beam directly onto the corneal surface,
without the mechanical elements used by some broad beam excimer
laser systems.
o Higher Pulse Repetition Rate. Operating at higher pulse repetition
rates can result in a number of benefits relative to laser systems
which operate at lower pulse repetition rates, including reduced
average procedure times and elimination or reduction of
dehydration problems associated with longer exposure of the
corneal tissue to ambient conditions. The LaserScan LSX operates
at pulse repetition rates of 100 Hz (200 Hz in international
models), and we intend in the near future to apply for FDA
approval to operate the laser system at a 200 Hz pulse repetition
rate in the U.S. Many competitive laser systems currently operate
at lower pulse repetitions, often 50 Hz or less.
o Eye Tracking. Proper alignment of the refractive correction is
important in all laser vision correction procedures, and is
essential in order to perform custom ablations. Our AccuTrack eye
tracking system maintains alignment of the refractive correction
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relative to the visual axis of the eye, and can be turned on or off
based on the refractive surgeon's inical preference. The LaserSight
AccuTrack eye tracker is an "Active + Passive" system that is
capable of following even small, involuntary eye movements. The
tracking system eliminates most errors normally introduced by eye
movements during untracked laser refractive surgery, and does not
require dilation of the pupil or any apparatus to be in contact
with the eye. Our AccuTrack eye tracking system is currently
available only on international versions of the LaserScan
LSX, and we are pursuing FDA approval for use of this system in the
U.S.
o Software Driven Flexible Platform. Individualized ablations have
resulted in increased patient satisfaction in international studies
and we believe the ability to perform individualized ablations will
generally result in improved, more predictable results and less post
-operative regression relative to other refractive surgery
techniques. We also believe that individualized ablation will also
be the technique most preferred by refractive surgeons for
correction of irregular astigmatism. In our LaserScan LSX scanning
laser, ablation profiles and spot location are determined by system
software, not mechanical elements. It is the ability to move the
"flying spot" beam to many areas across the cornea using software
which provides the ability to perform individualized ablation.
Software upgrades can be used to readily update U.S. models upon
receipt of FDA approvals to include features currently available
only on international models, including the ability to operate at a
200 Hz pulse repetition rate and the ability to treat farsightedness
or astigmatism, with or without our AccuTrack eye tracking system.
o Advanced Design and Ergonomics. The LaserScan LSX's relatively
light weight and compact design allows it to fit into small
spaces, and its wheels enable it to be easily moved around in a
multi-surgeon practice. This allows for higher utilization of the
laser system. The efficient design also enables users to implement
a mobile strategy, since the laser is readily transportable to
other locations.
o Improved Reliability and Lower Maintenance Requirements. Our
LaserScan LSX laser system uses a lower energy laser, fewer
optical elements, and a smaller laser head compared to broad beam
laser systems. This design requires less frequent replacement of
expensive optical elements and a lower volume of laser gas.
Savings achieved from less frequent replacement of optical
elements and reduced laser gas usage translate directly into lower
maintenance requirements and costs.
Clinical Experience and Outcome Quality
We believe that there are several measures to evaluate with regard to
the safety and clinical effectiveness of a laser vision correction system,
including the incidence of adverse side effects such as double vision, night
driving problems or haze, the post-operative best visual acuity that can be
obtained using corrective eyewear such as glasses or contact lenses, or the
BSCVA, and the post-operative uncorrected visual acuity, or UCVA (such as 20/20
or 20/40).
We believe that the degree to which negative, and sometimes permanent,
side effects occur as a result of refractive procedures performed using a laser
system is a key measure of a laser system's performance. In some cases, the
BSCVA deteriorates following a laser vision correction procedure. In addition,
the incidence of side effects such as double vision or haze can substantially
reduce patient satisfaction even if a high level of post-operative visual acuity
is achieved. The data from FDA clinical trials shows that with respect to
symptoms such as corneal haze and night vision problems the LaserSight LSX
compares favorably to the data for the Visx and/or Summit broad beam laser
systems. We believe these qualitative improvements are a result of the
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technological features of the LaserScan LSX, including larger treatment zones
and a small scanning spot resulting in smoother ablation surfaces.
Clinical Results
FDA clinical trials for the LaserScan LSX laser were conducted in the
U.S. on patients with nearsightedness with required levels of correction of 6
diopters and less. We believe that the average pre-operative level of required
correction is a significant factor which must be taken into account in
evaluating the clinical results of an excimer laser system. The average
pre-operative level of required correction in our FDA clinical trials was 4.8
diopters. Six months following the procedure, approximately 88% of patients
could see 20/40 or better, which is the refractive condition required to drive
in most states without corrective lenses.
.
We expect the post-procedure UCVA of patients treated with our
LaserScan LSX laser system following FDA approval to exceed the results obtained
in our FDA clinical trials as refractive surgeons gain experience using our
laser system and are not subject to the strict clinical controls of FDA trials
which can limit the refractive surgeon's ability to tailor the treatment to the
patient's specific needs and the procedure environment.
We intend to continue to develop and improve our technology and to
aggressively continue the process of gaining regulatory approvals for our laser
products in order to expand our access to the U.S. market for refractive
procedures. We currently have a supplemental PMA application pending with the
FDA to expand the use of our laser systems for the treatment of nearsightedness
with astigmatism using PRK, and we anticipate filing PMA supplements in the near
future to operate the LaserScan LSX at a 200 Hz pulse repetition rate using PRK
and to utilize our advanced eye tracking system. We also are planning to seek
FDA approval of the LaserScan LSX to perform LASIK procedures to treat
nearsightedness, with and without astigmatism, and farsightedness, with and
without astigmatism, in each case with and without use of our AccuTrack eye
tracking system.
Overview of Competitive Laser Systems
The table below summarizes the product features and approved treatment
ranges with PRK as of March 20, 2000 for all excimer laser systems currently
approved by the FDA and which are currently or are expected to be commercialized
in the U.S. Although most of the excimer lasers currently on the market have not
been approved for LASIK, many refractive surgeons use these to perform LASIK
procedures as part of the practice of medicine.
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<TABLE>
<CAPTION>
Bausch &
LaserSight Lomb Nidek Summit Visx
---------- ---- ----- ----------------------------- ----
<S> <C> <C> <C> <C> <C> <C>
Model Name LaserScan LSX 217 EC-5000 Ladarvision Apex Plus Star S2
Weight(lbs.) 570 1,496 1,430 799 1,399 1,597
Beam Size Narrow Narrow Broad Narrow Broad Broad
(1 mm) (2 mm) (7x2 mm) (1 mm) (6.5 mm) (6.5 mm)
Pulse Rate 100-200 Hz(1) 50 Hz 50 Hz 60 Hz 10 Hz 10 Hz
Eye Tracking Active or passive Active or Active or Active None None
(2) passive passive
FDA Approval Status (diopters):
Nearsightedness To -10 (3) To -7 To -13 To -10 To -14 To -14
Nearsightedness with Not Approved To -3 To -4 To -4 (4) To -5 To -5
astigmatism (PMA
supplement
pending)
Farsightedness Not Approved Not Approved Not Approved Not Approved (5) +1.5 to 4.0 +1.0 to 6.0
Farsightedness with
astigmatism Not Approved Not Approved Not Approved Not Approved (5) Not Approved Not Approved
LASIK Not Approved Approved Not Approved Not Approved (5) Approved Approved
-------------
(1) 200 Hz pulse rate currently available only on systems sold
in international markets. Systems sold to customers in the U.S.
currently use a pulse rate of 100 Hz. We intend to file a PMA
supplement in the near future to enable operation of the system at
200 Hz in the U.S.
(2) Active eye tracking currently available only on systems sold
in international markets. PMA supplement anticipated for use
of eye tracking system in models sold in the U.S.
(3) The LaserScan LSX has been approved by the FDA for treatment
of nearsightedness of up to -6 diopters, and may be used to
treat nearsightedness of up to -10 diopters at the discretion of the
refractive surgeon.
(4) With combined spherical equivalent of up to -10 diopters.
(5) The FDA Ophthalmic Advisory Panel recommended approval on March 20,
2000 for farsightedness of up to +6 diopters and an astigmatism
range of up to -6 diopters.
</TABLE>
11
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Keratome Products
Our MicroShape family of keratome products includes our UniShaper
single-use keratome, UltraShaper durable keratome, a control console which may
be used interchangeably with our single-use and durable keratomes, and our
UltraEdge keratome blades. We began commercial shipment of keratome blades in
July 1999 and of our single-use keratomes and control consoles in December 1999.
The following is an overview of our MicroShape family of keratome products:
FDA Status Product Features/Benefits
------------------ -----------------
UniShaper 510(k)
single-use clearance o Preassembled (including
Keratome received blade), sterile and ready
to use
o Built-in stopper provides
consistent stopping point for
flaps
o Covered gears reduces possible
eyelash or eyelid entrapment
or injury
o Automated dual-drive mechanism
with 7,500 RPM blade speed
can create flap size of 8.5
millimeters or larger
UltraShaper 510(k) o Easy-to-use blade insertion
durable clearance eliminates manual handling of
Keratome received blades
o Built-in stopper provides
consistent stopping pointfor
flaps
o Integrated components provide
reduced assembly time
o Design reduces possible eyelash
or eyelid entrapment or injury
o Automated mechanism with 7,500
RPM blade speed can create
flap size of 7.2 millimeters
or larger
Control 510(k) o Interchangeable for use with
console clearance the UniShaper single-use
received keratome and the UltraShaper
durable keratome
o Continuous suction monitoring
features including visual and
auditory cautionary alarms and
indicated total time elapsed at
high suction
o Low suction setting for
surgeons using suction ring
for globe fixation
keratome No 510(k) o Manufactured to precise
UltraEdge notification specifications for dimensional
Blades required accuracy and consistency
o Proprietary finishing processes
applied to every blade
o Manufactured with surgical
grade steel
o Extensive testing and
verification
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<PAGE>
We acquired the right to manufacture and sell the UniShaper single-use
disposable keratome, formerly known as the Automated Disposable Keratome
(AoDoKTM), in September 1997 from inventors Ruiz and Lenchig, who had invented
the ACS distributed by another company. The UniShaper single-use keratome and
the UltraShaper durable keratome each incorporate the market proven features
found in the ACS with new enhancements and features, including pre-assembly,
transparent components for improved visibility while cutting the flap, and a
dual drive mechanism with covered gears. See "Risk Factors - Company and
Business Risks -- Required Minimum Payments Under Our UniShaper License
Agreement may Exceed Our Gross Profits From Sales of Our UniShaper Product."
Product Upgrades and Other Products. We also offer a number of
ancillary products which either complement our core laser system and keratome
product portfolio or leverage our laser technology and generally are offered as
a convenience to our customers. We offer various upgrades and modules to
purchasers of prior models of our excimer laser systems, including the AccuTrack
eye tracking system for international customers, a video display system for
observation or recording of refractive procedures, and the latest version of our
proprietary software, version 9.0, which provides international users with
features including expanded treatment options and patient databases. In
addition, we offer aesthetic and scientific lasers and related equipment for
medical, medical research, and scientific research applications. Our primary
focus in this area has been our erbium laser, the Crystalase, which is used to
perform dermatological procedures. Our revenue from sales of our ancillary and
other products generally is included in refractive product net revenue and
represents, in the aggregate, less than 5% of our total refractive product net
revenue.
Growth Strategy
Our goal is to become a leading worldwide provider of excimer laser
systems, single-use and durable keratomes and other products for the refractive
vision correction industry. We believe that our over five years of experience in
the manufacture, sales and service of excimer laser systems, our significant
penetration of international markets and the advanced technology of our laser
systems and keratome products provide us with a strong platform for future
growth as we enter the U.S. market for excimer laser systems and the U.S. and
international markets for our MicroShape family of keratome products. We believe
that our ability to successfully expand and leverage our strategic alliance with
Becton Dickinson, a leading worldwide provider of medical supplies, devices and
diagnostic systems, will be instrumental in our ability to achieve this goal.
The following are the key elements of our growth strategy:
o Penetrate U.S. Excimer Laser Market. We believe that our LaserScan
LSX scanning excimer laser system represents a significant
technological advancement over the broad beam laser systems
currently being marketed in the U.S., as narrow beam scanning
lasers can provide more precise corneal ablation, reduced visual
side effects, enhanced visual acuity and shorter procedure times.
o Penetrate Worldwide Keratome and Keratome Blade Markets. We believe
that a key competitive strength of our MicroShape family of keratome
products is that the compatibility of the keratome control console
offers refractive surgeons the option to utilize either a single-use
or durable keratome based on their clinical preference. Commercial
shipments of our UniShaper single-use keratome product began in
December 1999 and the commercial launch of our UltraShaper durable
keratome is expected to occur in the second quarter of 2000. In
addition to the keratome blades we make for use in our keratome
products, in July 1999 we also began distributing our UltraEdge
keratome blades for use in the keratomes of other manufacturers. We
also believe that our distribution alliance with Becton Dickinson
will assist us in penetrating the U.S. and international keratome
and keratome blade markets.
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<PAGE>
o Provide Comprehensive Product Solutions for Refractive Vision
Correction. We believe that most excimer laser system
Manufacturers currently approved to sell their laser systems in
the U.S. do not offer the breadth of refractive vision correction
equipment and products that we do. As the market for refractive
vision correction continues to evolve, we believe refractive
surgeons will increasingly seek a comprehensive equipment and
product solution from a single supplier. In addition to our laser
systems, keratomes and keratome blades currently available, we
plan to develop and market additional ophthalmic products,
including cannulas and custom kits, to provide a full product
offering to refractive surgeons.
o Generate Recurring Revenue Streams. We have positioned our
business to benefit from the anticipated future growth in
refractive vision correction procedure volume. In addition to
receiving the purchase price for each laser system sold in the
U.S., we believe we will generate recurring revenue streams by
participating in per procedure fees resulting from the use of our
systems. We also believe that our UniShaper single-use keratome
and our UltraEdge keratome blades, which are intended to be
replaced after each procedure when used in durable keratomes,
provide additional sources of recurring revenue for us. In
addition, we also plan to continue to develop or acquire
additional single-use ophthalmic products in order to complement
our line of products for refractive vision correction.
o Proprietary Technology Leadership. We believe that technological
advances in the refractive vision correction market will continue
to evolve through the advancement of existing technologies and the
introduction of new treatment modalities. Accordingly, we intend
to strategically develop and/or acquire complementary products and
other refractive vision correction modalities. For example, in
October 1999 we acquired the rights to a development stage
technology that uses infrared light to correct farsightedness and
in March 2000, we acquired the intellectual property relating to a
technology development project under design to provide an
integrated refractive diagnostic work station that includes
front-to-back analysis of aberrations within the total eye.
Strategic Relationship
Marketing and Distribution Alliance with Becton Dickinson. In October
1999, we entered into a marketing and distribution alliance with Becton
Dickinson, the manufacturer of our UltraEdge keratome blades and a leading
worldwide manufacturer of medical supplies, devices and diagnostic systems.
Becton Dickinson is, subject to limited exceptions, the exclusive distributor of
our MicroShape family of keratome products in the U.S., the U.K., Ireland and
Japan, and has a non-exclusive right to distribute kits including keratome
products in other countries. Becton Dickinson utilizes its approximately
28-person sales force to promote, market and sell our MicroShape family of
keratome products in these markets. We have retained the right to sell directly
to TLC Laser Eye Centers Inc. and to market and sell our keratome products in
markets other than the U.S., U.K., Ireland and Japan. This agreement has a term
of five years and specifies minimum product sales for two years of the agreement
beginning in July 2000. If Becton Dickinson does not sell the required number of
14
<PAGE>
products or if the parties are unable to agree on purchase minimums for future
years of the agreement, this agreement may be terminated.
Sales and Marketing
We sell our excimer laser systems, keratomes and related products
through a direct sales force, independent sales representatives and
distributors, and through the sales and marketing capabilities of our strategic
allies. Since 1994, we have marketed our laser systems commercially in over 30
countries worldwide and currently have an installed base of over 250 scanning
lasers outside the U.S., including over 80 of our LaserScan LSX laser systems.
Excimer Laser Systems
Following receipt of FDA approval of the LaserScan LSX in November
1999, we began to commercially market our excimer laser systems in the U.S. We
employ two territorial managers and three independent distributors in the U.S.
in connection with our launch in the U.S. market. These territorial managers and
independent distributors are responsible for sales within their respective
territories.
Laser system sales in international markets are generally to hospitals,
corporate centers or established and licensed ophthalmologists. We market our
excimer laser systems in Canada, Europe, Russia, the Pacific Rim, Asia, South
and Central America, and the Middle East. We are also exploring potential
clinical trial advisors and distribution agents in Japan. As of December 31,
1999, we employed three territorial managers who are responsible for sales in
international markets, both directly and through our approximately 36
independent distributors and representatives within their respective
territories.
All of our distributors and representatives have been selected based on
their experience and knowledge of the ophthalmic equipment market. In addition,
the selection of international distributors and representatives is also based on
their ability to offer technical support. Distributor and representative
agreements provide for either exclusive territories, with continuing exclusivity
dependent upon achievement of mutually-agreed levels of annual sales, or
non-exclusive agreements without sales minimums. Currently, separate distributor
and representative agreements are in place for all major market areas. During
1999, approximately 83% of our product sales resulted from distributors and
representatives with the balance from sales made by employees of LaserSight.
Other than TLC, no single customer or distributor was responsible for generating
sales in excess of 10% of our consolidated revenues in 1999. TLC represented
approximately 14% of our consolidated revenues in 1999.
In conjunction with our sales activities, we participate in a number of
foreign and domestic ophthalmology meetings, exhibits and seminars.
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 our products.
We believe that educating our customers and informing them about system
developments is an important way to ensure customer satisfaction and desirable
clinical results. After installation, one of our clinical specialists will
typically travel to a customer site to train the refractive surgeon on how to
safely operate our excimer laser system. We have also developed an extensive set
of written materials to inform refractive surgeons about how our laser system
works.
15
<PAGE>
Keratome Products
In October 1999, we entered into a marketing and distribution alliance
with Becton Dickinson, the manufacturer of our UltraEdge keratome blades and a
leading worldwide manufacturer of medical supplies, devices and diagnostic
systems. Becton Dickinson is, subject to limited exceptions, the exclusive
distributor of our keratomes and keratome related products in the U.S., the
U.K., Ireland and Japan, and has a non-exclusive right to distribute kits
including keratome products in other countries. Becton Dickinson utilizes its
approximately 28-person sales force to promote, market and sell our MicroShape
family of keratome products in these markets. We have retained the right to sell
directly to TLC and to market and sell our keratome products in markets other
than the U.S., U.K., Ireland and Japan. In these markets, our keratome products
are marketed both through our existing distributor network for excimer laser
system sales and through direct sales efforts.
Manufacturing
Excimer Laser Systems
Manufacturing Facilities. Our manufacturing operations primarily
consist of assembly, inspection and testing of parts and system components to
assure performance and quality. We acquire components of our laser system and
assemble them into a complete unit from components which include both
"off-the-shelf" materials and assemblies and key components which are produced
by others to our design and specifications. We conduct a series of final
integration and acceptance tests prior to shipping a completed system. The
proprietary computer software which operates the scanning system in our laser
systems was developed and is maintained internally.
We have excimer laser system manufacturing operations in Winter Park,
Florida and San Jose, Costa Rica. Generally, LaserScan LSX excimer laser systems
assembled in our Florida facility are shipped to U.S. customers and systems
assembled in our Costa Rica facility are shipped to our international customers.
In August 1999, our Florida facility was inspected by the FDA in conjunction
with our then pending PMA application for our LaserScan LSX excimer laser
system. This QSR/GMP inspection was required for the commercial sale of our
LaserScan LSX excimer laser system in the U.S. We intend to move our U.S.
manufacturing operations to another leased location in Winter Park during the
second quarter of 2000. In October 1996, we received certification under ISO
9002, an international system of quality assurance, for our manufacturing and
quality assurance activities in our Florida and Costa Rica facilities. Since
that time we have maintained our ISO 9002 certification through a series of
periodic surveillance audits and have also been certified to ISO 9001 quality
system standards.
We opened our Cost Rica facility in late 1995 in a free trade zone to
manufacture our lasers for international sales, and for delivery to U.S.
investigational sites under our investigational device exemption, or IDE,
protocols. From 1996 until we received FDA clearance to market our LaserScan LSX
in the U.S., all of our lasers sold commercially were manufactured at this
facility. The establishment of an offshore manufacturing facility permitted us
to sell products to any international customer prior to receipt of FDA approval.
Availability of Components. We purchase the vast majority of components
for our laser systems from commercial suppliers. These include both standard,
"off-the-shelf" items, as well as components produced to our designs and
specifications. While most components are acquired from single sources, we
believe that in many cases there are multiple sources available to us in the
16
<PAGE>
event a supplier is unable or unwilling to perform. Since we need an
uninterrupted supply of components to produce our laser systems, we are
dependent upon these suppliers to provide us with a continuous supply of
integral components and sub-assemblies.
We contracted with TUI Lasertechnik und Laserintegration GmbH, Munich,
Germany, in 1996 to develop an improved performance laser head based on their
innovative technology and our performance specification and laser lifetime
requirements. We began to incorporate this new laser head into our products,
notably the LaserScan LSX, in the fourth quarter of 1997. Currently, TUI is a
single source for the laser heads used in the LaserScan LSX. Currently,
SensoMotoric Instruments GmbH, Teltow, Germany, is a single source for the eye
tracker boards used in the LaserScan LSX. We continue to evaluate joint ventures
with critical suppliers as well as other potential supplier relationships.
Keratome Products
Our UltraEdge keratome blades are manufactured by Becton Dickinson
pursuant to our manufacturing agreement with them. Becton Dickinson has agreed
to manufacture keratome blades exclusively for us, and we have agreed to
purchase keratome blades exclusively from them. We generally are required to
purchase one million keratome blades over a five-year period. The consummation
of this agreement resulted in the cessation of internal blade manufacturing
operations by LaserSight.
The UniShaper single-use keratome is manufactured for us under an
exclusive agreement with Frantz Medical Development Ltd., an ISO 9001 certified
company experienced in the manufacture of disposable medical devices from
engineering-grade polymer. This agreement has a 30-month term which expires in
May 2002, and we are obligated to purchase 50,000 units during each year of the
contract following receipt of final product approval, which occurred in October
1999.
The UltraShaper durable keratome is expected to be manufactured
exclusively for us by Owens Industries, Inc. Owens is experienced in the
machining and assembly of precision instruments. The control console for our
keratomes is manufactured for us by Humphrey Instruments, a division of Carl
Zeiss, Inc., located in San Leandro, California.
Competition
The vision correction industry is subject to intense, increasing
competition. We operate in this highly competitive environment which has
numerous well-established U.S. and foreign companies with substantial market
shares, as well as smaller companies. Many of our competitors are substantially
larger, better financed, better known, and have existing products and
distribution systems in the U.S. marketplace. FDA approval requirements are a
significant barrier to entry into the U.S. market for commercial sales of
medical devices. Two of our competitors, Visx and Summit, received FDA approval
of their broad beam laser systems more than three years ago, and have
manufactured and sold laser systems which currently account for more than 90% of
the installed excimer laser systems in the U.S. Summit currently manufactures
the only laser system specifically approved by the FDA for use in LASIK
procedures. In the market for keratome products, Bausch & Lomb sold a
significant majority of the keratomes and keratome blades used by refractive
surgeons in the U.S. in 1998 and 1999.
We believe competition in the excimer laser system market is primarily
based on safety and effectiveness, technology, price, regulatory approvals, per
procedure fee payments, royalty payments, dependability, warranty coverage and
customer service capabilities. We believe that safety and effectiveness,
17
<PAGE>
technology, price, dependability, warranty coverage and customer service
capabilities are among the most significant competitive factors, and we believe
that we compete favorably with respect to these factors.
Currently, five manufacturers, Visx, Summit, Nidek, Bausch & Lomb and
LaserSight, have excimer laser systems with the required FDA approval to
commercially sell the systems in the U.S. Some of the approvals are for broader
labeled indications, a key competitive element in the industry. A laser system
with broader labeling approvals is attractive because it enlarges the pool of
laser vision correction candidates to whom the procedure can be marketed. At
present, the laser systems manufactured by most of our competitors in the U.S.
market have FDA approval to perform a wider range of treatments than our laser
system, including higher degrees of nearsightedness, astigmatism, and in the
case of Visx and Summit, farsightedness. These approvals have given Visx a
competitive advantage, with laser systems sold by Visx having performed a
significant majority of the laser vision correction procedures performed in the
U.S. in 1998 and 1999. Our LaserScan LSX excimer laser system is not presently
approved to treat farsightedness, astigmatism or more than 10 diopters of
nearsightedness in the U.S. Our PMA supplement for treatment of nearsightedness
with astigmatism is presently pending. While regulatory approvals play a
significant role with respect to the U.S. market, competition from new entrants
may be prevalent in other countries where regulatory barriers are lower.
In February 2000, Visx announced that it was reducing the fee it
charges to customers from $250 to $100 for each laser vision correction
procedure performed on an excimer laser manufactured by Visx. Shortly after this
announcement, Summit announced it would also reduce its licensing fee to $100,
plus an additional $25 for astigmatism and hyperopia correction and $150 for its
Ladarvision systems. Bausch & Lomb has indicated it will charge a fee of $100
for each laser vision correction procedure performed on an excimer laser
manufactured by Bausch & Lomb. We currently intend to charge a per procedure fee
of up to $130. Nidek has indicated that it does not intend to charge per
procedure fees. The per procedure fees received by us as well as our competitors
who currently receive such fees are subject to change based on competitive
factors and changing market conditions, and there can be no assurance that such
fees will not be reduced or eliminated in the future.
In addition to conventional vision correction treatments such as
eyeglasses and contact lenses, we also compete against other surgical
alternatives for correcting refractive vision disorders such as surgically
implantable rings which recently received FDA approval, as well as implantable
intraocular lenses and a holmium laser system developed for the treatment of
farsightedness, neither of which have been approved by the FDA, though the
holmium laser system recently received a recommendation for the approval of
temporary reduction of hyperopia by FDA's Ophthalmic Advisory Panel.
We believe competition in the market for keratome products is primarily
on the basis of performance, design, automation, price, availability, regulatory
approvals, royalty payments, warranty coverage and customer service
capabilities. We believe that performance, design, automation, and price are
among the most significant, and believe that we compete favorably with respect
to these factors. In addition to Bausch & Lomb, who manufactured a significant
majority of the keratomes and keratome blades used by refractive surgeons in the
U.S. in 1998 and 1999, our principal competitors in the keratome and keratome
blade business include Moria and Innovative Optics.
Intellectual Property
There are a number of U.S. and foreign patents or patent rights
relating to the broad categories of laser devices, use of laser devices in
refractive surgical procedures, delivery systems for using laser devices in
18
<PAGE>
refractive surgical procedures and keratomes. We maintain a portfolio of
strategically important patents, patent applications, and licenses. Our patents,
patent applications and licenses generally relate to the following areas:
UV-wavelength laser ablation, our laser scanning method, infrared technology,
frequency conversion techniques, solid-state technology, calibration technology,
glaucoma and retinal treatments, corneal topography developments, treatment
techniques for nearsightedness and farsightedness, treatment techniques to
optimize clinical outcomes, and keratome design and usage. We monitor
intellectual property rights in our industry on an ongoing basis and take action
as we deem appropriate, including protecting our intellectual property rights
and securing additional patent or license rights.
A number of our competitors, including Visx and Summit, have asserted
broad intellectual property rights in technology related to excimer laser
systems and related products, and intellectual property lawsuits are sometimes a
competitive factor in our industry. In November 1999, Visx asserted that the
Company's technology infringed one of Visx's U.S. patents for equipment used in
ophthalmic surgery. See "Legal Proceedings--Visx, Incorporated" in Item 3 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors and Uncertainties - We are subject to risks and
uncertainties relating to our patent litigation with Visx" in Item 7. We believe
that we own or have a license to all intellectual property necessary for
commercialization of our products.
Patent Segment. We generate royalty income pursuant to license
agreements with respect to certain of our intellectual property rights,
including most significantly two key patents and related license agreements we
acquired from IBM in August 1997. These patents (the "IBM Patents"), U.S. Patent
No. 4,784,135 (Blum Patent) and U.S. Patent No. 4,925,523 (Braren Patent) relate
to the use of ultraviolet light for the removal of organic tissue and may be
used in laser vision correction, as well as for non-ophthalmic applications.
Under the license agreements with Visx and Summit we acquired from IBM, Visx and
Summit are each obligated to pay a royalty to us on all excimer laser systems
they manufacture, sell or lease in the U.S., excluding those systems
manufactured in the U.S. and sold into a country where a foreign counterpart to
the IBM Patents exists. We believe a license to the Blum Patent is required for
all companies desiring to enter the laser vision correction market in the U.S.
We have licensed or sold certain of the vascular and cardiovascular
patent rights and international patent rights covered by the IBM Patents. In
September 1997, we received a one-time lump sum payment of $4 million from a
third party in exchange for an exclusive, worldwide, royalty-free license to the
vascular and cardiovascular rights covered by the IBM Patents. In February 1998,
we entered into an agreement with Nidek pursuant to which we retained all of the
IBM Patent rights within the U.S., and transferred to Nidek ownership of the
foreign counterparts to those patents, including those in Australia, Austria,
Belgium, Brazil, Canada, France, Germany, Italy, Japan, Spain, Sweden,
Switzerland, and the U.K. We also granted Nidek a non-exclusive license to
utilize the IBM Patents in the U.S. In addition, Nidek granted us an exclusive
license to the foreign counterparts to the IBM Patents in the non-ophthalmic,
non-vascular and non-cardiovascular fields.
We also believe that our other intellectual property rights are
valuable assets of our business. For example, we entered into an agreement with
a subsidiary of TLC in October 1998 that grants us an exclusive license under
U.S. Patent No. 5,630,810 (TLC Patent) relating to a treatment method for
preventing formation of central islands during laser surgery. Central islands is
a problem generally associated with laser refractive surgery performed with
broad beam laser systems used to ablate corneal tissue. We recently filed a
lawsuit against Visx, our competitor, asserting that they infringe this patent.
We have agreed to pay TLC for the term of the exclusive license 20% of the
aggregate net royalties we receive in the future from licensing the TLC patent
and other patents currently owned by us. The TLC Patent is currently in reissue
19
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at the U.S. Patent and Trademark Office. We may negotiate additional license
agreements relating to the IBM Patents and our other patents in the future.
However, we cannot provide any assurance as to whether, when or on what terms we
may be able to do so.
Other Intellectual Property. Among the more significant of our
intellectual property rights are our scanning and solid-state laser-related
patents, including a patent we were granted in May 1996 (U.S. Patent No.
5,520,679) relating to an ophthalmic surgery method utilizing a non-contact
scanning laser. U.S. Patent No. 5,520,679 is currently in reissue at the U.S.
Patent and Trademark Office. Another of our patents (U.S. Patent No. 5,144,630)
covers the apparatus and use of the solid-state (ultraviolet and infrared)
LaserHarmonic System. The extent of protection that may be afforded to
LaserSight, or whether any claim embodied in these patents will be challenged or
found to be invalid or unenforceable, cannot be determined at this time. These
patents and other pending applications may not afford a significant advantage or
product protection to us.
Regulation
Medical device regulation
The FDA regulates the manufacture, use, distribution and production of
medical devices in the U.S. Our products are regulated as medical devices by the
FDA under the Federal Food, Drug, and Cosmetic Act. In order to sell such
medical devices in the U.S., a company must file a 510(k) premarket notice or
obtain premarket approval after filing a PMA application. Noncompliance with
applicable FDA regulatory requirements can result in one or more of the
following:
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products;
o total or partial suspension of production;
o denial or withdrawal of premarket clearance or approval of
devices;
o exclusion from government contracts; and
o criminal prosecution.
The FDA also has authority to request repair, replacement or refund of the cost
of any device manufactured or distributed by a company.
Medical devices are classified by the FDA as Class I, Class II or Class
III based upon the level of risk presented by the device and whether the device
is substantially equivalent to an already legally marketed Class I or II device.
Class III devices are subject to the most stringent regulatory review and cannot
be marketed in the U.S. until the FDA approves a PMA for the device.
Class III Devices. A PMA application must be filed if a proposed device
is not substantially equivalent to a legally marketed Class I or Class II
device, or if it is a Class III device for which the FDA requires PMAs. The
process of obtaining approval of a PMA application is lengthy, expensive and
uncertain. It requires the submission of extensive clinical data and supporting
information to the FDA. Human clinical studies may be conducted only under an
FDA-approved and must be conducted in accordance with FDA regulations. In
addition to the results of clinical trials, the PMA application includes other
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information relevant to the safety and efficacy of the device, a description of
the facilities and controls used in the manufacturing of the device, and
proposed labeling. After the FDA accepts a PMA application for filing and
reviews the application, a public meeting may be held before an FDA advisory
panel comprised of experts in the field.
After the PMA is reviewed and discussed, the panel issues a favorable
or unfavorable recommendation to the FDA and may recommend conditions. Although
the FDA is not bound by the panel's recommendations, it historically has given
them significant weight. If the FDA's evaluation of the PMA application is
favorable, the FDA typically issues an "approvable letter" requiring the
applicant's agreement to comply with specific conditions (such as specific
labeling language) or to supply specific additional data (such as post-approval
patient follow-up data) or other information in order to secure final approval.
Once the approvable letter is satisfied, the FDA will issue approval for certain
indications which may be more limited than those originally sought by the
manufacturer. The PMA approval can include post-approval conditions that the FDA
believes necessary to ensure the safety and effectiveness of the device
including, among other things, restrictions on labeling, promotion, sale and
distribution. Failure to comply with the conditions of approval can result in
enforcement action, including withdrawal of the approval. Products manufactured
and distributed pursuant to a PMA will be subject to extensive, ongoing
regulation by the FDA. The FDA review of a PMA application generally takes one
to two years from the date such application is accepted for filing but may take
significantly longer. The review time is often significantly extended by FDA
requests for additional information, including additional clinical trials or
clarification of information previously provided.
Modifications to a device subject to a PMA generally require approval
by the FDA of PMA supplements or new PMAs. We believe that our excimer laser
systems require a PMA or a PMA supplement for each of the surgical procedures
which they are intended to perform. The FDA may grant a PMA with respect to a
particular procedure only when it is satisfied that the use of the device for
that particular procedure is safe and effective. In granting a PMA, the FDA may
restrict the types of patients who may be treated.
FDA regulations authorize any interested person to petition for
administrative review of the FDA's decision to approve a PMA application.
Challenges to an FDA approval have been rare. We are not aware that any
challenge has been asserted against us and do not believe any PMA application
has ever been revoked by the agency based on such a challenge.
During 1994, we began the clinical studies required for approval and
commercialization of our laser scanning system in the U.S. In April 1998, we
filed a PMA application for PRK treatment of nearsightedness using our scanning
laser system. We received notification from the FDA that our laser system had
received PMA approval for low to moderate nearsightedness in November 1999. The
QSR/GMP regulations impose certain procedural and documentation requirements
upon us with respect to our manufacturing and quality assurance activities. Our
facilities will be subject to ongoing inspections by the FDA, and compliance
with QSR/GMP regulations is required for us to continue marketing our laser
products in the U.S. In addition, our suppliers of significant components or
sub-assemblies must meet quality requirements established and monitored by
LaserSight, and some may also be subject to FDA regulation.
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The following table summarizes the FDA regulatory status of the
LaserScan LSX excimer laser system. The labeling for each device contains a more
detailed description of the ranges summarized below.
Condition Regulatory Status
--------- -----------------
Low to Moderate Nearsightedness...... Approved (to -6 diopters) (PRK) (1)
-- with astigmatism............... Supplemental PMA filed (PRK)
Higher Degrees of Nearsightedness.... Clinical trials underway (LASIK)
-- with astigmatism............... Clinical trials underway (LASIK)
Low to Moderate Farsightedness....... Clinical trials underway (LASIK)
-- with astigmatism............... Clinical trials underway (LASIK)
200 Hz pulse rate.................... Supplemental PMA to be filed in the
near future
AccuTrack eye tracking system........ Clinical trials underway (LASIK)
(1) The LaserScan LSX has been approved by the FDA for treatment of
nearsightedness of up to -6 diopters, and may be used to treat
nearsightedness of up to -10 diopters at the discretion of the
refractive surgeon.
During 1998, we submitted and received approval to begin U.S. clinical
trials of our scanning laser for treatment of nearsightedness and
farsightedness, with and without astigmatism, utilizing the LASIK procedure. We
also began a clinical trial of our scanning laser system for LASIK treatment of
nearsightedness and nearsightedness astigmatism in Canada in late 1998 and
received Device License Approval from Canadian Medical Devices Bureau in
mid-1999. During 1996, we began clinical trials for photo-astigmatic refractive
keratectomy, or PARK, in the U.S.
In July 1997, we acquired from Photomed the rights to a PMA application
filed with the FDA by Dr. Kremer for an excimer laser system for LASIK
treatment. In July 1998, the FDA approved the PMA application for the laser to
perform LASIK for correction of nearsightedness and nearsightedness with
astigmatism. This approval, however, is for the treatment of nearsightedness and
nearsightedness with astigmatism, specifically using LASIK at a single-site
only. The commercial sale of the Photomed laser in the U.S. would require
additional FDA approvals and compliance with QSR/GMP. The FDA's approval of this
PMA is unrelated to the PMA for our LaserScan LSX scanning laser system.
Summit's Apex Plus Excimer Laser Workstation recently received FDA approval for
the LASIK treatment of myopia (nearsightedness) with or without astigmatism. The
approval is for the correction of myopia in the range of 0 D to -14.0D with or
without astigmatism in the range of -0.5D to -5.0D. The Summit laser system is
currently the only laser system commercially available in the U.S. with FDA
approval for use in LASIK. Laser systems manufactured by other companies
approved by FDA for PRK, including Visx, Nidek, and LaserSight, are routinely
used off-label to perform LASIK. A physician may decide, as part of the practice
of medicine, to use a medical device outside of its FDA-approved indications for
an unapproved or "off-label" use. Prior to Summit's approval, all LASIK
procedures performed in the U.S. with commercially available lasers were
performed in accordance with the practice of medicine. See "Products--Overview
of Competitive Laser Systems" above.
Class I or II Devices. Devices deemed to pose relatively less risk are
placed in either Class I or II, which requires the manufacturer to submit a
510(k) premarket notification, unless an exemption applies. The premarket
notification must demonstrate that the proposed device is "substantially
equivalent" to a "predicate device" that is either in Class I or II, or is a
"pre-amendment" Class III device that was in commercial distribution before May
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28, 1976, for which the FDA does not require PMA approval. The FDA issued
determinations of equivalency for our UniShaper single-use keratome in January
1998 and for our UltraShaper durable keratome in January 2000. Our UltraEdge
keratome blades are exempt from the 501(k) requirement.
After the FDA has issued a determination of equivalency for a device,
any modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in its intended use, requires a new 510(k)
notice. The FDA requires each manufacturer to make this determination in the
first instance, but the FDA can review any such decision. If the FDA disagrees
with a manufacturer's decision not to submit a new 510(k), the agency may
retroactively require the manufacturer to submit a premarket notification. The
FDA also can require the manufacturer to cease marketing and/or recall the
modified device until 510(k).
Other Regulatory Requirements. Labeling and promotional activities are
subject to scrutiny by the FDA and by the Federal Trade Commission. Current FDA
enforcement policy prohibits manufacturers from marketing and advertising their
approved medical devices for unapproved or off label uses. The scope of this
prohibition has been the subject of recent litigation. The only materials
related to unapproved devices that may be disseminated by companies are peer
reviewed articles. Our lasers are also subject to the Radiation Control for
Health and Safety Act administered by the Center for Devices and Radiological
Health of the FDA. The law requires laser manufacturers to file new product and
annual reports and to maintain quality control, product testing and sales
records. In addition, laser manufacturers must incorporate specified design and
operating features in lasers sold to end users and comply with labeling and
certification requirements. Various warning labels must be affixed to the laser
depending on the class of the product under the performance standard. The
manufacture, sale and use of our products is also subject to numerous federal,
state and local government laws and regulations relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
International Regulatory Requirements. The manufacture, sale and use of
our products is also subject to regulation in countries other than the U.S.
During November 1996 we completed all requirements necessary to obtain authority
to apply the CE Mark to our LaserScan 2000 System, an earlier generation of
excimer laser system we sold in international markets. In September 1998, we
received similar certification to apply the CE Mark to our LaserScan LSX excimer
laser system. The CE Mark, certifying that the LaserScan Models 2000 and
LaserScan LSX meet all requirements of the European Community's medical
directives, provides our products with marketing access in all member countries
of the EU. All countries in the EU require the CE Mark certification of
compliance with the EU Medical Directives as the standard for regulatory
approval for sale of excimer 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
commencement of testing, 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 comply with the Medical Device
Vigilance reporting requirements. In obtaining the CE Mark for our excimer laser
system, we demonstrated that we satisfied all engineering and electro-mechanical
requirements of the EU by having our manufacturing processes and controls
evaluated by a Notified Body (Semko) for compliance with ISO 9002 and ISO 9001
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requirements, and conducted a clinical study in France to confirm the safety and
efficacy of the excimer laser system on patients.
Research and Development
We continue to research and develop new laser products, laser systems,
product upgrades, keratome products, and ancillary product lines. In March 2000,
we acquired the intellectual property relating to a technology development
project under design to provide an integrated refractive diagnostic work station
that includes front-to-back analysis of aberrations within the total eye. We
believe this project will assist us in developing our ASTRA individualized
ablation capabilities.
Other research and development efforts include the continued
development of a new solid-state laser, enhancements for our advanced
eye-tracking system that is standard on the international model of LaserScan LSX
and the development of a mobile platform for an excimer laser system. The
solid-state is the first true non-gas laser capable of delivering a laser beam
in the ultraviolet spectrum (common to all excimer lasers used for refractive
surgery). In addition, the solid-state laser could be capable of generating
multiple wavelengths, thus permitting its use for other ophthalmic procedures
which now require separate lasers.
The solid-state research and development effort has already resulted in
the identification of many features that have been subsequently incorporated
into our excimer laser system. Further efforts will continue to be directed at
an appropriate level towards production of a clinical design for this product to
ensure that a commercial version is available to meet the market's demand for
such a system.
Upon completion of a clinical design for the solid-state system,
pre-clinical trials and formal clinical trials are anticipated. Once sufficient
clinical and safety data have been gathered, we intend to initially market the
solid-state system for medical uses outside of the U.S. We continue to assess
numerous issues related to manufacturing and marketing of the solid-state
system. As is the case with many new technology products, the commercialization
of the solid-state laser is subject to potential delays.
Our research and development activities continue to include efforts to
develop completely new designs for solid-state laser heads that are not
currently available or produced anywhere in the world. While the risk of failure
of these specific activities may be significant, we believe that if developed,
these products could provide us with a leading edge technology that would
further differentiate our products from other companies in the industry. There
is no assurance that any of these research and development efforts will be
successful.
Health Care Consulting Services
We also provide health care and vision care consulting services to
hospitals, managed care companies and physicians through our TFG subsidiary. The
core business of TFG is two-fold: developing and maintaining physician databases
for clients' needs and providing customized strategic plans. Services included
are physician recruitment tools, competitive intelligence, demand studies,
community health analyses and distribution channel mapping. TFG clients include
multi-hospital health systems, community hospitals, academic medical centers,
specialty health care providers and manufacturers and distributors of health
care products. In 1998, as a result of losses incurred in previous years, TFG
reduced staffing substantially, tightened it business focus and began
outsourcing certain services such as teleresearch and physician recruiting. In
1999, two senior consultants joined who are expected to develop new business and
help lead TFG towards significant financial improvement during 2000.
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<PAGE>
The senior consulting staff of TFG includes seven individuals with
significant experience in health care. We believe that new business will
increase as a result of existing business relationships and previously-developed
leads for new business. In addition to working with former clients, sales
efforts are in development to generate new clients in the hospital, academic
medical center, hospital system and other health care provider categories. TFG
served approximately 13 clients in 1999.
Industry projections indicate continued turbulence in the health care
industry as prices paid by government and managed care organizations continue to
decrease. Consolidation, diversification, divestiture and downsizing are among
the actions many health care providers are being forced to consider in order to
solidify a position in the fast changing market place. TFG believes it is
positioned to assist health care managers in understanding the range of
available options and selecting an appropriate course of action. See
"Management's Discussion and Analysis -- Results of Operations -- Revenues."
Clients are generally asked to pay a certain amount at the commencement
of the engagement and at the point where predefined milestones are reached, but
no less than monthly. Certain clients pay a monthly retainer. Projects may be
priced on an hourly rate or at a fixed project price, exclusive of out of pocket
expenses.
We believe that the key competitive factors in the health care
consulting services segment is the experience of consultants, contacts within
the industry, pricing of services and satisfaction of clients. Primary
competitors are national consulting firms and small health care consulting
firms.
Employees
As of December 31, 1999, we had 129 full-time and two part-time
employees. None of our employees is a member of a labor union or subject to a
collective bargaining agreement. LaserSight generally considers its employee
relations to be good.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of LaserSight's consolidated
results of operations and consolidated financial position should be read in
conjunction with the Selected Consolidated Financial Data and LaserSight's
consolidated financial statements, including the notes thereto, appearing
elsewhere in this report.
All references to years are to LaserSight's fiscal years ended December
31, 1999, 1998 and 1997, unless otherwise indicated.
Overview
LaserSight's net loss and loss attributable to common shareholders for
1999 was $14,423,980, or $0.89 per basic and diluted common share, on net sales
of $21,728,452, while the net loss for 1998 was $11,882,389 and its loss
attributable to common stockholders that year was $15,493,214, or $1.26 per
basic and diluted common share, on net sales of $17,756,116. The net losses are
primarily attributable to the expenses generated by our technology segment. The
difference between the net loss and the loss attributable to common stockholders
in 1998 resulted from preferred stock dividends, accretion, premiums on
repurchases and the conversion discount on preferred stock.
LaserSight is principally engaged in the manufacture and supply of
narrow beam scanning excimer laser systems, keratomes, keratome blades and other
related products used to perform procedures that correct common refractive
vision disorders such as nearsightedness, farsightedness and astigmatism. Since
1994, we have marketed our laser systems commercially in over 30 countries
worldwide and currently have an installed base of over 250 scanning laser
systems outside the U.S., including approximately 80 of our LaserScan LSX laser
systems.
In November 1999, we received FDA approval for commercialization of our
LaserScan LSX laser systems in the U.S., and shipments of that product in the
U.S. are expected to begin within the next week.
Our MicroShape family of keratome products includes our UniShaper
single-use keratome, UltraShaper durable keratome, a control console which may
be used interchangeably with our single-use and durable keratomes, and our
UltraEdge keratome blades. We began commercial shipment of keratome blades in
July 1999 and of our single-use keratomes in December 1999, and anticipate that
both of these products will provide us with the opportunity to participate in
the significant growth in refractive laser vision correction procedure volume by
generating recurring revenue streams. We currently expect to begin commercial
shipments of our UltraShaper durable keratomes during the second quarter of
2000.
As a result of these significant developments, our historical financial
statements may not be indicative of our future performance. In particular, we
anticipate that our LaserScan LSX laser system will make a more significant
contribution to our future operating results in the future as a result of the
first commercial shipments of these laser systems to U.S. customers within the
next week. In addition, commercial shipment of our UniShaper single-use keratome
products to U.S. and international customers began in December 1999, and we
expect to commercially launch our UltraShaper durable keratome in the second
quarter of 2000, which we also expect to contribute to our future operating
results. However, we expect to continue to incur a loss and a deficit in cash
flow at least through the first quarter of 2000.
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We also license to other participants in the excimer laser industry
various patents held by LaserSight related to the use of excimer lasers to
ablate biological tissue, and provide health care and vision care consulting
services to hospitals, managed care companies and physicians. For information
regarding our export sales and operating revenues, operating profit (loss) and
identifiable assets by industry segment, see note 14 of the notes to our
consolidated financial statements included in this prospectus.
Certain Pro Forma Financial Information
We sold our MEC Health Care, Inc. and LSIA subsidiaries to Vision
Twenty-One, Inc. in a transaction effective as of December 1, 1997. Under
LaserSight's ownership, MEC was a vision managed care company which managed
vision care programs for health maintenance organizations and other insured
enrollees and LSIA was a physician practice management company which managed the
ophthalmic practice known as the Northern New Jersey Eye Institute (NNJEI) under
a management services agreement.
The following pro forma information has been prepared assuming that the
disposition of both MEC and LSIA had occurred as of the beginning of the year
ended December 31, 1997. The pro forma adjustments serve to eliminate revenues
and expenses related to MEC and LSIA for the periods presented and do not
include any overhead allocations. The unaudited pro forma condensed consolidated
revenues, gross profit and net loss are not necessarily indicative of results
that would have occurred had the disposition been consummated as of the
beginning of the year ended December 31, 1997, or that which might be attained
in the future.
For the Year Ended December 31, 1997
(Unaudited)
Pro Forma Adjustments
---------------------
Historical MEC LSIA Pro Forma
---------- --- ---- ---------
Revenues, net $ 24,388,833 $(7,988,419) $(3,021,304) $13,379,110
Gross profit 11,686,993 (2,229,356) (607,517) 8,850,120
Net loss (7,253,084) (450,700) (214,420) (7,918,204)
Results of Operations
The following table sets forth, for the periods indicated, information
derived from our statements of operations expressed as a percentage of net
sales, and the percentage change in such items from the comparable prior year
period. Any trends illustrated in the following table are not necessarily
indicative of future results.
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<TABLE>
<CAPTION>
Percentage Increase (Decrease)
As a Percentage of Net Sales Over Prior Periods
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
1997 1998 1999 1997 to 1998 1998 to 1999
---- ---- ---- ------------ ------------
Statements of Operations Data:
Net revenues:
<S> <C> <C> <C> <C> <C>
Refractive products................ 48.9% 89.9% 89.3% 33.9% 21.5%
Patent services.................... 1.0 6.3 9.1 *nm 77.2
Healthcare services................ 5.0 3.8 1.6 (44.1) (47.6)
Subsidiaries sold.................. 45.1 -- -- (100.0) 0.0
----- ----- -----
Net revenues..................... 100.0 100.0 100.0 (27.2) 22.4
Gross profit(1)...................... 47.9 64.3 55.0 (2.4) 4.7
Research, development and
regulatory expenses (2) ......... 11.5 21.6 14.4 36.8 (18.3)
Other general and administrative
expenses ........................ 53.8 68.5 76.7 (7.3) 37.1
Selling-related expenses (3) 13.5 25.7 21.7 38.8 3.2
Amortization of intangibles ......... 7.1 13.0 11.7 33.0 9.9
------ ------ ------
Loss from operations................. (38.0) (64.5) (69.5) 23.7 31.8
</TABLE>
- ---------------
* Not meaningful.
(1) As a percentage of net revenues, the gross profit for refractive
products only for each of the three years ended December 31, 1997, 1998
and 1999, were 65%, 62% and 50%, respectively.
(2) As a percentage of refractive product net revenues, research,
development and regulatory expenses for each of the three years ended
December 31, 1997, 1998 and 1999, were 24%, 24% and 16%, respectively.
(3) As a percentage of refractive product net revenues, selling-related
expenses for each of the three years ended December 31, 1997, 1998 and
1999, were 28%, 29% and 24%, respectively.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Net revenues for the year ended December 31, 1999 increased
by $3.9 million, or 22%, to $21.7 million from $17.8 million for the comparable
period in 1998. During the year ended December 31, 1999, refractive products
revenues increased $3.4 million, or 22%, to $19.4 million from $16.0 million for
the comparable period in 1998. This revenue increase was primarily the result of
increased sales of our higher priced LaserScan LSX excimer laser system. During
the year ended December 31, 1999, excimer laser system sales accounted for
approximately $17.0 million in revenues compared to $14.6 million in revenues
over the same period in 1998. During the year ended December 31, 1999 and 1998,
respectively, LaserScan LSX system sales accounted for 89% and 60%,
respectively, of total excimer laser system sales. During the year ended
December 31, 1999, 65 laser systems were sold compared to 50 system sales over
the comparable period in 1998. The 65 systems sold during 1999 include 51 system
sales to new customers and 14 LaserScan LSX excimer laser systems sold to
existing customers to replace older laser systems. The replacement systems were
sold at discounted prices at a positive gross margin, though at a lower gross
margin than sales to new customers. Additional improvements in refractive
products related revenues during the year ended December 31, 1999 were
attributable to an increase in the level of service contract revenues and
increased revenues generated from our aesthetic product line, which was acquired
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in April 1998. These increases were slightly offset by a reduction in revenues
generated from miscellaneous part sales for the year ended December 31, 1999 as
compared to the year ended December 31, 1998. Net revenues from patent services
for the year ended December 31, 1999 increased approximately $0.9 million, or
77%, to $2.0 million from $1.1 million for the comparable period in 1998, due to
increased licensing fees. Net revenues from health care services for the year
ended December 31, 1999 decreased approximately $0.3 million, or 48% to $0.4
million from $0.7 million for the comparable period in 1998. This decrease was
primarily attributable to a reduction in consulting services provided and was
accompanied by a reduction in expenses of approximately $0.2 million over the
year ended December 31, 1998. Such revenue and expense reductions are primarily
the result of staffing reductions instituted during mid-1998 to more closely
match the cost structure of this segment with anticipated revenues going
forward.
Cost of revenues; Gross profits. For the year ended December 31, 1999
and 1998, gross profit margins were 55% and 64%, respectively. The gross profit
margin decrease during the year ended December 31, 1999 was primarily
attributable to higher raw material costs relating to the LaserScan LSX excimer
laser system of $2.0 million, an increase in manufacturing overhead of $0.5
million, an increase in our inventory obsolescence reserve of $0.9 million, and
an increase of $0.2 million in raw materials relating to our aesthetics
division, which was acquired in April 1998.
Research, development and regulatory expenses. Research, development
and regulatory expenses for the year ended December 31, 1999 decreased by $0.7
million, or 18%, to $3.1 million from $3.8 million for the comparable period in
1998. We continued to develop our keratome systems, excimer laser systems and
continued to pursue protocols in our effort to attain FDA approval for our
products. As a result of a continuation of these efforts plus the anticipated
development of new product concepts, we expect research and development expenses
during 2000 to increase over levels incurred during 1999. Regulatory expenses
are expected to increase as a result of our continued pursuit of FDA approval
for our PMA supplements, protocols added during 1999 related to the potential
use of our laser systems for treatments utilizing LASIK procedures and the
possible development of additional pre-market approval supplements and future
protocols for submission to the FDA.
Other general and administrative expenses. Other general and
administrative expenses for the year ended December 31, 1999 increased $4.5
million, or 37%, to $16.7 million from $12.2 million for the comparable period
in 1998. This increase was due to an increase in expenses related to our
refractive products business of approximately $4.6 million over the comparable
period in 1998. These included enhancements to the customer support and
training, quality assurance, marketing, software development and engineering
departments of $2.5 million, $0.4 million of costs relating to our efforts to
develop a blade manufacturing operation, $0.5 million of higher depreciation and
lease costs (including the second Winter Park, Florida facility and larger
office space), $0.4 million of salaries primarily resulting from staffing
additions to accounting, information systems and human resources departments and
bad debt expense of $0.8 million, which represented a general increase in
reserves. See "Risk Factors--Financial and Liquidity Risks -- If our
uncollectible receivables exceed our reserves we will incur additional
unanticipated expenses, and we may experience difficulty collecting restructured
receivables with extended payment terms." The total increase was partially
offset by a $0.2 million reduction of expenses related to our patent services
business from the comparable period in 1998.
Selling-related expenses. Selling-related expenses consist of those
items directly related to sales activities, including commissions on sales,
royalty or license fees, warranty expenses, and costs of shipping and
installation. Commissions and royalties, in particular, can vary significantly
from sale-to-sale or period-to-period depending on the location and terms of
29
<PAGE>
each sale. Selling-related expenses for the year ended December 31, 1999
increased $0.1 million, or 3%, to $4.7 million from $4.6 million during the
comparable period in 1998. This increase was primarily attributable to an $0.5
million increase in estimated warranty expense being accrued resulting from
higher sales and an increase in the per system estimate to provide annual
warranty coverage from the comparable 1998 period, partially offset by a $0.4
million decrease in sales commissions, which vary depending on the location of
sale. There were no material changes in the levels of royalty fees, system
installation and shipping costs in the comparable periods.
Amortization of intangibles. During the year ended December 31, 1999,
costs relating to the amortization of intangible assets increased by $0.2
million, or 10%, to $2.5 million from $2.3 million for the comparable period in
1998. Items directly related to the amortization of intangible assets are
acquired technologies, patents, license agreements and goodwill.
Loss from operations. The operating loss for the year ended December
31, 1999 was $15.1 million compared to the operating loss of $11.5 million for
the same period in 1998. This increase in the loss from operations was primarily
due to the increase in other general and administrative expenses related to the
sale of our refractive products and the decrease in our gross profit margin,
partially offset by an improvement in the operating gain generated by our patent
services subsidiary.
Other income and expense. Interest and dividend income for the year
ended December 31, 1999 was $0.8 million compared to $0.6 million for the
comparable period in 1998. Interest and dividend income was earned from the
investment of cash and cash equivalents and the collection of long-term
receivables related to laser system sales. Interest expense for the year ended
December 31, 1999 was $0.1 million compared to interest expense of $0.8 million
for the comparable period in 1998. Interest expense incurred during the year
ended December 31, 1999 related primarily to an adjustment to the fair value of
the warrant issued to Foothill Capital Corporation and interest paid on a
capital lease obligation during the first half of 1999. Interest expense
incurred during the year ended December 31, 1998 related primarily to the credit
facility established with Foothill on April 1, 1997 which was repaid in full in
June 1998. In addition to interest paid on the outstanding note payable balance,
interest expense in 1998 included 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. During the year ended December 31,
1998, LaserSight recognized gains on the sale of subsidiaries and securities of
$0.4 million resulting from the sale of marketable equity securities which were
received in December 1997 in exchange for the sale of two health care
subsidiaries.
Income taxes. For the year ended December 31, 1999, LaserSight had no
income tax expense, while income tax expense of $0.2 million was recognized
during the year ended December 31, 1998. The net expense for the year ended
December 31, 1998 is primarily the result the payment of Japanese taxes in
connection with the receipt of $1.2 million in royalties for the non-exclusive
license of certain patents, the income from which is deferred for accounting
purposes.
Net loss. Net loss for the year ended December 31, 1999, was $14.4
million compared to a net loss of $11.9 million for the comparable period in
1998. The increase in net loss for the year ended December 31, 1999 can be
attributed to the increase in other general and administrative expenses incurred
by our refractive products operations and the decrease in our gross profit
margin, partially offset by an improvement in the operating gain generated by
our patent services subsidiary.
Loss attributable to common shareholders. The loss attributable to
common shareholders for the year ended December 31, 1998 was impacted by the
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$1.1 million premium paid on the repurchase of the 525 remaining shares of
Series B Preferred Stock, the accretion of $0.6 million of financing costs
related to such shares, the $0.8 million value of the conversion discount on the
Series C Preferred Stock and Series D Preferred Stock, the impact of the $0.7
million premium paid on the first quarter 1998 repurchase of 351 shares of
Series B Preferred Stock and the accretion of $0.4 million of financing costs
related to such shares. The comparable period in 1999 was not impacted by any
such adjustments.
Loss per share. The loss per basic and diluted share decreased to $0.89
for the year ended December 31, 1999, compared to $1.26 for the comparable
period in 1998. Of the basic and diluted losses per share for the year ended
December 31, 1998, $0.29 was a result of the value of the conversion discount on
preferred stock in accordance with EITF Topic D-60 and accretion and dividend
requirements on the Series B Preferred Stock. During the year ended December 31,
1999, the weighted average shares of common stock outstanding increased
primarily due to the exercise of options and warrants and the private placement
completed in March 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Net revenues decreased by $6.6 million, or 27%, to $17.8
million in 1998 from $24.4 million in 1997 primarily as a result of the
subsidiaries sold in 1997. Refractive product revenues increased by $4.0
million, or 34%, to $16.0 million in 1998 from $11.9 million in 1997. The
improvement in refractive product net revenues can be primarily attributed to
increased sales of our newer LaserScan LSX excimer laser system during 1998 at a
higher average selling price, resulting in $3.4 million of the total revenue
increase. The average system selling price increased by approximately 11% from
1997 levels. Fifty laser systems, including 30 of our LaserScan LSX systems,
were sold during 1998 compared to 46 laser systems, including nine LaserScan LSX
systems, which were sold in 1997. Other contributing factors leading to the
increase in refractive product revenues were a $0.3 million increase in service
contract revenues, and a $0.4 million increase in revenues generated from our
aesthetic product line. Patent related revenues also increased by $0.9 million
to $1.1 million in 1998 from $0.2 million in 1997.
More than offsetting the increases in refractive product and patent
revenues were decreases in health care services revenues, which was attributable
to the sale of MEC and LSIA effective December 1, 1997. These two subsidiaries
contributed revenues of $8.0 million and $3.0 million, respectively, during the
year ended 1997. All of our health care services revenue was generated by TFG
during 1998. Net sales for TFG for the year ended 1998 decreased by $0.5 million
from the same period in 1997. This decrease was due primarily to a reduction in
consulting services provided and was accompanied by a total expense reduction,
including cost of services, of $1.0 million for the year ended 1998. Such
revenue and expense decreases are primarily the result of staffing reductions
instituted during 1998 to more closely match the cost structure of the health
care services segment with anticipated revenues going forward.
Cost of revenues; gross profits. Gross profit margins were 64% of net
sales in 1998 compared to 48% in 1997. However, gross profit decreased by $0.3
million, or 2.4%, to $11.4 million in 1998 from $11.7 million in 1997. The gross
profit margin percentage increase was primarily attributable to the sale of MEC
and LSIA effective December 1, 1997. MEC and LSIA operated at gross margins of
28% and 20%, respectively, for the year ended 1997. An additional contributing
factor leading to the improvement in the gross profit margin was a higher level
of LaserScan LSX laser system sales, which generally carry a higher gross
margin.
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Research, development and regulatory expenses. Research, development
and regulatory expenses increased by $1.0 million, or 37%, to $3.8 million in
1998 from $2.8 million in 1997. The increase can be primarily attributed to
continued development and validation of the keratome product line and the
development of a new mobile scanning refractive laser system, partially offset
by a decrease in costs relating to the continued development of the LaserScan
LSX, which was substantially completed during 1998. Additionally, LaserSight
incurred minor increases in costs related to the FDA regulatory approval
process, both for its own scanning laser system and the LASIK laser system
acquired from Dr. Kremer. In 1998, approximately $1.1 million was incurred in
the development of and clinical and manufacturing validation of the UniShaper
single-use keratome compared to $0.1 million in 1997. During 1998, LaserSight
began a project to develop a mobile platform for an excimer laser system and
incurred approximately $0.4 million in related costs. Expenses related to the
development of the LaserScan LSX excimer laser system decreased approximately
$0.3 million from 1997 levels to approximately $0.6 million in 1998. As a result
of a continuation of the efforts described plus the anticipated development of
new product ideas, we expect research and development expense during 1999 to
remain at levels consistent with those incurred during 1998. Regulatory expenses
may increase as a result of our continued pursuit of FDA approval, protocols
added during 1997 and 1998 related to the potential use of our laser systems for
LASIK and the possible development of additional future protocols for submission
to the FDA.
Other general and administrative expenses. Other general and
administrative expenses decreased by $1.0 million, or 7%, to $12.1 million in
1998 from $13.1 million in 1997. This decrease was primarily attributable to the
sale of MEC and LSIA effective December 1, 1997. MEC and LSIA incurred $1.5
million and $0.3 million, respectively, in other general and administrative
costs during 1997. Additional factors resulting in this decrease were the
reduction in the operating costs of TFG of $0.9 million from 1997 levels and the
reduction in bad debt expense of $1.3 million from 1997 levels. This decrease
was partially offset by an increase in other general and administrative expenses
incurred at our refractive product subsidiary of $1.5 million from 1997 levels
and by strategic initiatives of LaserSight and the development of it products
and services. Such strategic initiatives included enhancements to the customer
support, quality assurance, marketing, software development and engineering
departments of $1.4 million, $0.8 million of costs of the aesthetic laser
product line acquired in April 1998, $0.3 million of higher depreciation and
lease costs (including a larger facility in Florida), $0.2 million of legal
expenses, and patent related expenses of $0.1 million, which were nominal during
1997.
Selling-related expenses. Selling-related expenses increased by $1.3
million, or 39%, to $4.6 million in 1998 from $3.3 million in 1997. This
increase was primarily attributable to a higher level of laser system sales with
an associated distributor commission of $0.2 million, a $0.5 million increase in
royalty fees, a $0.5 million increase in warranty expenses accrued based on more
sales of the LaserScan LSX, and higher shipping and installation expenses
resulting from increased system sales.
Amortization of intangibles. Costs relating to the amortization of
intangible assets increased by $0.6 million, or 33%, to $2.3 million in 1998
from $1.7 million in 1997. This increase was primarily attributable to a higher
level of amortization costs relating to patent acquisitions as a result of 1998
being the first full year for patents acquired in 1997 of $0.2 million, and a
higher level of amortization costs relating to acquired technology as a result
of 1998 being the first full year that the acquired LASIK PMA application and
keratome license were amortized of $0.7 million. This increase was partially
offset by a $0.4 million reduction in goodwill amortization resulting from the
sale of MEC and LSIA.
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Loss from operations. LaserSight recognized a loss from operations of
$11.5 million in 1998 compared to $9.3 million in 1997. This increase in loss
from operations can be attributed primarily to the increases in research,
development, regulatory and selling related expenses and the sale of MEC and
LSIA, which generated income from operations of $0.4 million and $0.2 million,
respectively, during 1997. This increase was partially offset by a reduction in
the operating loss generated by TFG.
Other income and expenses. Interest and dividend income of $0.6 million
was earned in 1998 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 $0.2 million from the $0.4 million of interest and
dividend income earned in 1997. Interest expense incurred during 1998 was $0.8
million and related primarily to the credit facility established with Foothill
on April 1, 1997, which was repaid in full in June 1998. In addition to the
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 1997 was $1.3 million and related primarily to
the credit facility established with Foothill and the note payable to the former
owners of MEC which was repaid in full on April 1, 1997. Included in other
expense in 1998 and 1997 are costs of $0.4 million and $0.3 million,
respectively, related to the settlement of patent and other filed and threatened
litigation. Included in other income in 1998 and 1997 are gains of $0.4 million
and $4.1 million, respectively, related to the sale MEC and LSIA. The 1998 total
includes $28,148 of gain on the sale of Vision Twenty-One, Inc. stock that was
originally received as partial consideration in the sale of MEC and LSIA.
Income taxes. LaserSight recorded an income tax provision of $0.2
million in 1998 compared to $0.9 million in 1997. The 1998 provision for income
taxes is primarily the result of the payment of Japanese taxes in connection
with a licensing transaction. The 1997 provision for income taxes primarily
result from the gain on the sale of two of our subsidiaries after utilization of
net operating loss and capital loss carryforwards.
Net loss. LaserSight incurred a net loss of $11.9 million in 1998
compared to a net loss of $7.3 million in 1997. The 1998 results are primarily
attributable to an increase in operating loss resulting from the sale of MEC and
LSIA in late 1997, losses generated from TFG and higher operating expenses as
described above, which were partially offset by increased revenues from the sale
of refractive products. The 1997 results are primarily attributable to losses
generated from TFG and higher operating expenses described above, which were
partially offset by increased revenues from refractive products and MEC
services.
Loss attributable to common shareholders. During 1998, our loss
attributable to common shareholders was impacted by the following events, which
occurred in the first and second quarters of 1998: premiums of $1.8 million paid
on the repurchase of shares of Series B Preferred Stock, accretion of $1.0
million of financing costs related to such shares, and the value of the
conversion discount on Series B Preferred Stock of $25,372 and on Series C
Preferred Stock and Series D Preferred Stock of $0.8 million. In 1997, the
conversion discount on Series B Preferred Stock was $41,573 and accretion and
dividend requirements totaled $0.3 million.
Loss per share. Loss per basic and diluted common share increased to
$1.26 in 1998 from $0.80 in 1997. This increase was attributable to the larger
net loss incurred and accretion, dividend requirements, and premiums on the
redemption of Series B Preferred Stock. The basic and diluted losses per share
in 1998 of $0.29 were a result of the value of the conversion discount on Series
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B, C and D Preferred Stock in accordance with EITF Topic D-60 and accretion,
dividend requirements and repurchase premiums on the Series B Preferred Stock.
Weighted average shares outstanding increased in 1998 primarily as a result of
the conversion of 419 shares of Series B Preferred Stock into common stock.
Other increases were from acquisition activity and the exercise of options and
warrants. 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 the
PMA application for the excimer laser and keratome patent, and the exercise of
options.
The basic and diluted losses per share in 1997 of $0.04 were a result
of the value of the conversion discount on preferred stock in accordance with
EITF Topic D-60, and accretion and dividend requirements on the Series B
Preferred Stock.
Liquidity and Capital Resources
Our principal sources of funds have historically been from sales of
preferred stock and common stock, sales of subsidiaries and patent rights and,
to a lesser extent, our operating cash flows. We issued securities totaling
approximately $14.8 million in 1997, $15.8 million in 1998, $8.9 million in 1999
and $13.3 million to date in 2000, and received proceeds from the exercise of
stock options and warrants of approximately $98,000 in 1997, $0.5 million in
1998 and $10.4 million in 1999. In addition, we sold subsidiaries and various
patent rights, resulting in proceeds to us of approximately $10.5 million in
1997 and $12.7 million in 1998. We have principally used these capital resources
to fund operating losses, working capital, capital expenditures, acquisitions
and retirement of debt. At December 31, 1999, we had an accumulated deficit of
$38.2 million.
We entered into a $2.5 million revolving credit facility with The
Huntington National Bank in June 1999. We may borrow amounts under this credit
facility at an annual rate equal to 0.5% above the prime rate for short-term
working capital needs or for such other purposes as may be approved by
Huntington. The credit agreement with Huntington expires on June 30, 2000,
though we expect to renew it, and requires us to maintain a specified liquidity
level and tangible net worth levels. At December 31, 1999, we had no outstanding
borrowings under this credit facility.
Operating activities used net cash of $11.7 million during 1999,
compared to $14.3 million during the year ended December 31, 1998. We expect to
incur a loss and a deficit in cash flow from operations for the first quarter of
2000. There can be no assurance that we can regain or sustain profitability or
positive operating cash flow in any subsequent fiscal period. Net cash used in
investing activities of $0.7 million during 1999 can be attributed primarily to
the purchase of furniture, equipment and leasehold improvements. As of December
31, 1999, we had no material commitments for capital expenditures. Net cash
provided from financing activities during 1999 of $19.2 million resulted from
the issuance of 2,250,000 shares of common stock and 225,000 warrants in a
private placement to six investors for gross proceeds of $8.9 million (including
$2.0 million each from TLC and the Pequot Funds) and from the aggregate exercise
price of $10.4 million received upon the exercise of stock options and warrants.
Our working capital increased $6.7 million from $14.9 million at
December 31, 1998 to $21.6 million as of December 31, 1999. This increase in
working capital resulted primarily from the March 1999 private placement of
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common stock and warrants for gross proceeds of $8.9 million and $10.4 million
received upon the exercise of stock options and warrants, offset primarily by
cash used in operating activities of $11.7 million.
On January 31, 2000, we issued 1,269,841 shares of common stock in
exchange for proceeds of $12.5 million (including $10.0 million from TLC). On
February 22, 2000, we issued 76,189 shares of common stock in exchange for
proceeds of $750,000. We believe that the proceeds from these issuances,
together with our existing balances of cash and cash equivalents and our cash
flows from operations, should be sufficient to fund our anticipated working
capital requirements for the next 12 months in accordance with our current
business plan. Our belief regarding future working capital requirements is based
on various factors and assumptions including the commercial acceptance of our
LaserScan LSX excimer laser system, our UltraEdge keratome blades and our
UniShaper single-use keratomes, the commercial acceptance of our UltraShaper
durable keratome, the anticipated timely collection of receivables, and the
absence of unanticipated product development and marketing costs. These factors
and assumptions are subject to certain contingencies and uncertainties, some of
which are beyond our control. Similarly, our long-term liquidity will be
dependent on the successful entrance into the U.S. market with our laser
systems, the successful entrance into U.S. and international markets of our
keratome products, and our ability to collect our receivables on a timely basis.
We cannot assure you that we will not seek additional debt or equity financing
in the future to implement our business plan or any changes thereto in response
to future developments or unanticipated contingencies. Other than the $2.5
million credit facility signed in June 1999 with The Huntington National Bank,
we currently do not have any commitments for additional financing.
Seasonality, Backlog and Customer Payment Terms
Based on our historical activity, we do not believe that seasonal
fluctuations have a material impact on our financial performance.
To date, we have been able to ship laser units as orders are received.
As a result, order backlog is not a meaningful factor in our business.
In the U.S., we expect that sales of our laser systems will generally be to
customers with approved credit, and we anticipate that the purchase price for
such laser systems will generally be paid to us within 30 days of installation.
In international markets, unless a letter of credit or other acceptable security
has been obtained, we generally require a significant down payment or deposit
from our laser system customers at or before installation. At December 31, 1999,
we were the payee on letters of credit with foreign financial institutions
aggregating approximately $0.6 million (compared to approximately $2.5 million
at December 31, 1998). On occasion, it is necessary to meet a competitor's more
liberal terms of payment. In those and other cases, we may provide term
financing. Our internally-financed sales with repayment periods exceeding 18
months (measured from the installation date) decreased from 13 systems in 1997,
to 10 systems in 1998 and consisted of five systems during 1999. In our
experience, sales of major capital equipment such as excimer laser systems in
certain areas, including much of South and Central America, often require
payment terms ranging from 12 to 24 months.
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Risk Factors and Uncertainties
The business, results of operations and financial condition of
LaserSight and the market price of our common stock may be adversely affected by
a variety of factors, including the ones noted below:
Industry and Competitive Risks
WE CANNOT ASSURE YOU THAT OUR LASERSCAN LSX LASER SYSTEM WILL ACHIEVE
MARKET ACCEPTANCE IN THE U.S., AND OUR BUSINESS MODEL FOR SELLING OUR LASER
SYSTEM IN THE U.S. IS NEW AND UNPROVEN.
We only recently received the Food & Drug Administration approval
necessary for the commercial marketing and sale of our LaserScan LSX excimer
laser system in the U.S. and expect our first commercial shipments to customers
in the U.S. within the next week. Our previous experience marketing and selling
our LaserScan LSX excimer laser system in the U.S. had been limited to
cost-recovery sales to refractive surgeons participating in our FDA clinical
trials.
The required level of per procedure fees payable to us by the
refractive surgeon may not be accepted by the marketplace or may exceed those
charged by our competitors. While we believe that gaining access to our
recently-approved scanning narrow beam laser technology justifies the required
per procedure fee levels, we cannot assure you that this business model will be
accepted by a large number of refractive surgeons. If our competitors reduce or
do not charge per procedure fees to users of their systems, we could be forced
to reduce or eliminate the fees charged under this business model, which could
significantly reduce our revenues. For example, Nidek Co., Ltd., one of our
competitors, has publicly stated that it does not intend to charge per procedure
fees to users of its laser systems in the U.S. and internationally.
Successful implementation of this business model is crucial to the
commercial launch of our LaserScan LSX laser system in the U.S. and may require
the expenditure of significant financial and other resources to create awareness
of the LaserScan LSX laser system and create demand by refractive surgeons. If
our laser system fails to achieve market acceptance in the U.S., we may not be
able to execute our business plan, which would have a material adverse effect on
our business, financial condition and results of operations.
WE CANNOT ASSURE YOU THAT OUR KERATOME PRODUCTS WILL ACHIEVE MARKET
ACCEPTANCE, AND WE ARE SIGNIFICANTLY DEPENDENT UPON OUR MARKETING ALLIANCE WITH
BECTON DICKINSON WITH RESPECT TO THE SALE OF OUR KERATOME PRODUCTS.
Keratomes are surgical devices used to create a corneal flap
immediately prior to LASIK laser vision correction procedures. We began to roll
out our MicroShape family of keratome products only recently with the commercial
launch of our UltraEdge keratome blades in July 1999 and of our UniShaper
single-use keratomes and control consoles in December 1999. We anticipate the
commercial launch of our UltraShaper durable keratomes during the second quarter
of 2000. We cannot provide any assurances that there will not be unanticipated
delays in the launch of our UltraShaper durable keratome. Our UniShaper
single-use keratome is the first disposable keratome product to be commercially
marketed, and we cannot assure you that refractive surgeons, including in
particular refractive surgeons who perform a large volume of LASIK procedures,
will accept our UniShaper product as either a replacement for or a supplement to
the durable keratomes traditionally used to create corneal flaps. Our
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UltraShaper durable keratome incorporates the features found in the Automated
Corneal Shaper keratome previously marketed by Bausch & Lomb with new
enhancements and features. However, Bausch & Lomb has not aggressively marketed
or serviced the ACS since 1997 when we licensed the rights to commercially
market keratomes based on the same technology, and has successfully transitioned
a large number of refractive surgeons from the ACS to its Hansatome durable
keratome product. We believe that many refractive surgeons learned to perform
the LASIK procedure using the ACS and prefer the surgical technique required by
the ACS, which is also used to operate our UltraShaper durable keratome, to that
required to operate the Hansatome keratome product. However, we cannot assure
you that we will be successful in achieving broad market acceptance of our
UltraShaper durable keratome or our other keratome products.
Successful implementation of our keratome product sales strategy is
significantly dependent upon our marketing and distribution alliance with Becton
Dickinson. Pursuant to our October 1999 agreement, Becton Dickinson is, subject
to limited exceptions, the exclusive distributor of our keratomes and keratome
related products in the U.S., the U.K., Ireland and Japan, and has a
non-exclusive right to distribute kits including keratome products in other
countries. While our agreement with Becton Dickinson has a five-year term, it is
subject to early termination in certain circumstances, including the failure of
Becton Dickinson to achieve minimum sales levels. If we cannot successfully
market and sell our keratome products or if our marketing and distribution
alliance with Becton Dickinson fails to benefit us as expected, we may not be
able to execute our business plan, which would have a material adverse effect on
our business, financial condition and results of operations. See also "--Company
and Business Risks -- Required minimum payments under our keratome license
agreement may exceed our gross profits from sales of our keratome product."
THE VISION CORRECTION INDUSTRY CURRENTLY CONSISTS OF A FEW ESTABLISHED
PROVIDERS WITH SIGNIFICANT MARKET SHARES AND WE MAY ENCOUNTER DIFFICULTIES
COMPETING IN THIS HIGHLY COMPETITIVE ENVIRONMENT.
The vision correction industry is subject to intense, increasing
competition, and we do not know if we will be able to compete successfully
against our current and future competitors. Many of our competitors have
established products, distribution capabilities and customer service networks in
the U.S. marketplace, are substantially larger and have greater brand
recognition and greater financial and other resources than we do. Visx,
Incorporated, the current industry leader for excimer laser system sales in the
U.S., sold laser systems which performed a significant majority of the laser
vision correction procedures performed in the U.S. in 1998 and 1999. Similarly,
Bausch & Lomb sold a significant majority of the keratomes used by refractive
surgeons in the U.S. in 1998 and 1999. Two of our other competitors, Summit
Technology, Inc. and Autonomous Technology Corporation merged in April 1999. The
merger resulted in a combined entity with enhanced market presence, technology
base and distribution capabilities and provided Summit with a narrow beam laser
technology platform which will enable Summit to compete more directly with our
narrow beam LaserScan LSX excimer laser system. In addition, as a result of the
merger, the combined entity will be able to sell narrow beam laser systems under
a royalty-free license to certain Visx patents without incurring the expense and
uncertainty associated with intellectual property litigation with Visx.
MANY OF OUR COMPETITORS RECEIVED EARLIER REGULATORY APPROVALS THAN US
AND MAY HAVE A COMPETITIVE ADVANTAGE OVER US DUE TO THE SUBSEQUENT EXPANSION OF
THEIR REGULATORY APPROVALS AND THEIR SUBSTANTIAL EXPERIENCE IN THE U.S. MARKET.
We received the FDA approval necessary for the commercial sale of our
LaserScan LSX excimer laser system in the U.S. in November 1999, and expect our
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first commercial shipments to customers in the U.S. to occur within the next
week. Our direct competitors include large corporations such as Visx and Summit,
each of whom received FDA approval of excimer laser systems more than three
years ago and has substantial experience manufacturing, marketing and servicing
laser systems in the U.S. In addition to Visx, Summit, and Nidek, Bausch & Lomb
recently obtained FDA approval for their laser system.
In the U.S., a manufacturer of excimer laser vision correction systems
gains a competitive advantage by having its systems approved by the FDA for a
wider range of treatments. Initial FDA approvals of excimer laser vision
correction systems historically have been limited to PRK treatment of low to
moderate nearsightedness, with additional approvals for other and broader
treatments granted only as a result of subsequent FDA applications and clinical
trials. Our LaserScan LSX is currently approved only for the PRK treatment of
low to moderate nearsightedness (up to -6.0 diopters) without astigmatism using
a pulse repetition rate of 100 Hz, and its use for the treatment of higher
levels of nearsightedness (up to -10.0 diopters) is allowed only if the
refractive surgeon deems it to be reasonable. Currently, excimer laser vision
correction systems manufactured by Visx, Summit and Nidek have been approved for
higher levels of nearsightedness than the LaserScan LSX and are also approved
for the treatment of nearsightedness with astigmatism for which the LaserScan
LSX currently does not have approval. The Visx and Summit excimer laser systems
are also approved for the treatment of moderate farsightedness. On March 20,
2000, the FDA Ophthalmic Advisory Panel recommended approval for Summit's
Ladarvision system for farsightedness of up to +6 diopters and an astigmatism
range of up to -6 diopters. Although we have submitted applications to the FDA
for approval for the treatment of nearsightedness with astigmatism and we expect
to file a PMA supplement in the near future which would permit our laser systems
sold to customers in the U.S. to operate at a 200 Hz pulse rate, if the FDA does
not approve our pending and expected applications in a timely manner or at all,
our ability to compete effectively in the U.S. may be severely impaired.
Summit's Apex Plus Excimer Laser Workstation and Visx's Star S2 Excimer
Laser System have received FDA approval for the LASIK treatment of myopia
(nearsightedness) with or without astigmatism. The approvals are for the
correction of myopia in the range of 0D to -14.0D and myopia with astigmatism in
the range of -0.5D to -5.0D. Bausch & Lomb's Technolas 217 excimer laser also
recently received FDA approval for the treatment of myopia up to -7.0D with up
to -3.0D of astigmatism. These laser systems are currently the only laser
systems commercially available in the U.S. with FDA approval for use in LASIK.
Laser systems manufactured by other companies approved by FDA for PRK, including
Nidek and LaserSight, are routinely used off-label to perform LASIK. A physician
may decide, as part of the practice of medicine, to use a medical device outside
of its FDA-approved indications for an unapproved or "off-label" use. Prior to
these laser approvals, all LASIK procedures performed in the U.S. with
commercially available lasers were performed as the practice of medicine.
Competitors' receipt of LASIK-specific FDA regulatory approval could be a
significant competitive advantage which could impede our ability to successfully
introduce our LaserScan LSX system in the U.S. or discourage physicians from
using our or other manufacturers' lasers off-label. Our failure to successfully
effect our product introduction in a timely manner could have a material adverse
effect on our business, financial condition and results of operations.
All of our principal competitors in the keratome business, including
current market leader Bausch & Lomb, received FDA clearance prior to the
commercialization of our keratome products and have substantial experience
marketing their keratome products. The established market presence in the U.S.
of previously-approved laser systems and keratome products, as well as the entry
of new competitors into the market upon receipt of new or expanded regulatory
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approvals, could impede our ability to successfully introduce our LaserScan LSX
system in the U.S. and our keratome products worldwide and may have a material
adverse effect on our business, financial condition and results of operations.
WE DEPEND UPON OUR ABILITY TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS.
We believe that our ability to establish and maintain strategic
relationships will have a significant impact on our ability to meet our business
objectives. These strategic relationships are critical to our future success
because we believe that these relationships will help us to:
o extend the reach of our products to a larger number of refractive
surgeons;
o develop and deploy new products;
o further enhance the LaserSight brand; and
o generate additional revenue.
Entering into strategic relationships is complicated because some of
our current and future strategic partners may decide to compete with us in some
or all of our markets. In addition, we may not be able to establish
relationships with key participants in our industry if they have relationships
with our competitors, or if we have relationships with their competitors.
Moreover, some potential strategic partners have resisted, and may continue to
resist, working with us until our products and services have achieved widespread
market acceptance. Once we have established strategic relationships, we will
depend on our partners' ability to generate increased acceptance and use of our
products and services. To date, we have established only a limited number of
strategic relationships, and many of these relationships are in the early stages
of development. There can be no assurance as to the terms, timing or
consummation of any future strategic relationships. If we lose any of these
strategic relationships or fail to establish additional relationships, or if our
strategic relationships fail to benefit us as expected, we may not be able to
execute our business plan, and our business will suffer.
BECAUSE THE SALE OF OUR PRODUCTS IS DEPENDENT ON THE CONTINUED MARKET
ACCEPTANCE OF LASER-BASED REFRACTIVE EYE SURGERY USING THE LASIK PROCEDURE, THE
LACK OF BROAD MARKET ACCEPTANCE WOULD HURT OUR BUSINESS.
We believe that whether we achieve profitability and growth will
depend, in part, upon the continued acceptance of laser vision correction using
the LASIK procedure in the U.S. and other countries. We cannot be certain that
laser vision correction will continue to be accepted by either the refractive
surgeons or the public at large as an alternative to existing methods of
treating refractive vision disorders. The acceptance of laser vision correction
and, specifically, the LASIK procedure may be adversely affected by:
o possible concerns relating to safety and efficacy, including the
predictability and stability of results;
o the public's general resistance to surgery;
o the effectiveness and lower cost of alternative methods of
correcting refractive vision disorders;
o the lack of long-term follow-up data;
o the possibility of unknown side effects;
o the lack of third-party reimbursement for the procedures;
o the cost of the procedure; and
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o possible future unfavorable publicity involving patient outcomes
from the use of laser vision correction.
Unfavorable side effects and potential complications which may result
from the use of laser vision correction systems manufactured by any manufacturer
may broadly affect market acceptance of laser-based vision correction surgery.
Potential patients may not distinguish between our narrow beam scanning
technology and the laser technology incorporated by our competitors in their
laser systems, and customers may not differentiate laser systems and procedures
that have not received FDA approval from FDA-approved systems and procedures.
Any adverse consequences resulting from procedures performed with a competitor's
systems or an unapproved laser system could adversely affect consumer acceptance
of laser vision correction in general. In addition, because laser vision
correction is an elective procedure which is not typically covered by insurance
and which involves more significant immediate expense than eyeglasses or contact
lenses, adverse changes in the U.S. or international economy may cause consumers
to reassess their spending choices and to select lower-cost alternatives for
their vision correction needs. Any such shift in spending patterns could reduce
the volume of LASIK procedures performed which would, in turn, reduce our
revenues from per procedure fees and sales of single-use products such as our
UniShaper keratome and our UltraEdge keratome blades.
The failure of laser vision correction to achieve continued market
acceptance could have a material adverse effect on our business prospects. Even
if laser vision correction achieves and sustains market acceptance, sales of our
keratome products could be adversely impacted if a laser procedure which does
not require the creation of a corneal flap were to emerge as the procedure of
choice.
NEW PRODUCTS OR TECHNOLOGIES COULD ERODE DEMAND FOR OUR PRODUCTS OR
MAKE THEM OBSOLETE, AND OUR BUSINESS COULD BE HARMED IF WE CANNOT KEEP PACE WITH
ADVANCES IN TECHNOLOGY.
In addition to competing with eyeglasses and contact lenses, excimer
laser vision correction competes or may compete with newer technologies such as
intraocular lenses, corneal rings and surgical techniques using different or
more advanced types of lasers. Two products that may become competitive within
the near term are intraocular lenses, which are pending FDA approval, and
corneal rings, which were recently approved by the FDA. Both of these products
require procedures with lens implants, and their ultimate market acceptance is
unknown at this time. To the extent that any of these or other new technologies
are perceived to be clinically superior or economically more attractive than
currently marketed excimer laser vision correction procedures or techniques,
they could erode demand for our excimer laser and keratome products, cause a
reduction in selling prices of such products or render such products obsolete.
In addition, if one or more competing technologies achieves broader market
acceptance or render laser vision correction procedures obsolete, it would have
a material adverse effect on our business, financial condition and results of
operations.
As is typical in the case of new and rapidly evolving industries, the
demand and market for recently-introduced products and technologies is
uncertain, and we cannot be certain that our LaserScan LSX laser system,
UniShaper single-use keratome, UltraShaper durable keratome, UltraEdge keratome
blades or future new products and enhancements will be accepted in the
marketplace. In addition, announcements or the anticipation of announcements of
new products, whether for sale in the near future or at some later date, may
cause customers to defer purchasing our existing products.
If we cannot adapt to changing technologies, our products may become
obsolete, and our business could suffer. Our success will depend, in part, on
our ability to continue to enhance our existing products, develop new technology
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that addresses the increasingly sophisticated needs of our customers, license
leading technologies and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. The development of
our proprietary technology entails significant technical and business risks. We
may not be successful in using new technologies effectively or adapting our
proprietary technology to evolving customer requirements or emerging industry
standards.
Company and Business Risks
WE ARE SUBJECT TO RISKS AND UNCERTAINTIES RELATING TO OUR PATENT
LITIGATION WITH VISX.
Visx Incorporated commenced a lawsuit in November 1999 in the United
States District Court, District of Delaware, against the Company alleging that
our LaserScan LSX laser system infringes one of Visx's U.S. patents for
equipment used in ophthalmic surgery. The LaserScan LSX is the only laser system
we are currently marketing and is the only laser system manufactured by us which
is approved for sale to U.S. customers. The suit requests, among other things,
injunctive relief, treble damages and attorneys' fees and expenses. Management
does not believe that our LaserScan LSX laser system infringes the asserted Visx
patent. However, we agreed to a stay of such litigation to pursue license
negotiations with Visx in an effort to help facilitate commercialization of the
LaserScan LSX in the U.S. market. We withdrew from license negotiations with
Visx in February 2000, and after the stay of the litigation was lifted, we filed
suit against Visx, claiming non-infringement and invalidity of the Visx patent
and asserting that Visx infringes the TLC Patent. We also expect to begin to
sell and ship our LaserScan LSX laser systems in the U.S. within the next week.
We believe that the Visx lawsuit is without merit and intend to
vigorously contest it. However, if we are unsuccessful in defending this
lawsuit, we may be enjoined from manufacturing and selling our LaserScan LSX
laser system in the U.S. without a license from Visx. In addition, we may be
subject to damages for past infringement. No assurance can be given as to
whether we will be subject to such damages or, if so, the amount of damages
which we may be required to pay. In addition, such patent litigation could be
time-consuming, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require us to develop non-infringing
technology or enter into license agreements in order to market our products.
Such license agreements, if required, may not be available on acceptable terms,
or at all. The outcome of patent litigation, particularly in jury trials, is
inherently uncertain, and an unfavorable outcome in the Visx litigation could
have a material adverse effect on our business, financial condition and results
of operations.
WE WILL BE REQUIRED TO SIGNIFICANTLY EXPAND OUR U.S. MANUFACTURING
OPERATIONS TO MEET OUR BUSINESS PLAN AND MUST COMPLY WITH STRINGENT REGULATION
OF OUR MANUFACTURING OPERATIONS.
We intend to manufacture our LaserScan LSX laser systems for sale in
the U.S. at our manufacturing facility in Winter Park, Florida, and to continue
to manufacture our laser systems for sale in international markets at our
manufacturing facility in Costa Rica. Our U.S. personnel have limited experience
manufacturing laser systems. We cannot, therefore, assure you that we will not
encounter difficulties in scaling up production of our laser systems at our
Florida facility, including problems involving production delays, quality
control or assurance, component supply and lack of qualified personnel. In
addition, we may in the future move our U.S. manufacturing operations to another
location leased by us in Winter Park, Florida, which could result in
unanticipated problems and production delays. Any products manufactured or
distributed by us pursuant to FDA clearances or approvals are subject to
extensive regulation by the FDA, including recordkeeping requirements and
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reporting of adverse experience with the use of the product. Our manufacturing
facilities are subject to periodic inspection by the FDA, certain state agencies
and international regulatory agencies. We require that our key suppliers comply
with recognized standards as well as our own quality standards, and regularly
test the components and sub-assemblies supplied to us. Any failure by us or our
suppliers to comply with applicable regulatory requirements, including the FDA's
quality systems/good manufacturing practice (QSR/GMP) regulations, could cause
production and distribution of our products to be delayed or prohibited, either
of which could have a material adverse effect on our business, financial
condition and results of operations.
REQUIRED MINIMUM PAYMENTS UNDER OUR KERATOME LICENSE AGREEMENT MAY
EXCEED OUR GROSS PROFITS FROM SALES OF OUR KERATOME PRODUCTS.
In addition to the risk that the UniShaper single-use keratome or
UltraShaper durable keratome will not be accepted in the marketplace, we are
required to make certain minimum payments to the licensor under our keratome
limited exclusive license agreement, unless the January 2000 amendment, as
described below, is triggered by April 30, 2000. Under the original agreement,
we are required to provide an excimer laser system and pay a total of $300,000
to the licensor in two equal installments due six and 12 months after the date
of our receipt of the production molds for the UniShaper product. We provided
the laser system to the licensor during the quarter ended June 30, 1998, and we
received the molds in October 1999. We shipped the first UniShaper single-use
keratome in December 1999. In addition, beginning seven months after the first
commercial shipment, we will be required to make royalty payments equal to 50%
of our defined gross profits from the sale of our UniShaper and UltraShaper
keratomes, with a minimum royalty of $400,000 per calendar quarter for a period
of eight quarters. As a result of our obligations under this license
arrangement, the minimum royalty payments we are required to make to the
licensor may exceed our gross profits from sales of our UniShaper and
UltraShaper keratome products. On January 18, 2000, the Company entered into a
first amendment to a license and royalty agreement related to certain keratome
related products. Under the terms of the amendment 555,552 shares of Common
Stock were placed in escrow and are included in common shares issued and
outstanding on that date. If certain conditions under the amendment are
satisfied by April 30, 2000, the shares will be released from escrow. Otherwise,
the shares will be returned to the Company. In addition, the Company agreed to
pay the licensors $200,000 upon execution of the amendment and $200,000 on April
1, 2000. The amendment eliminates the restriction on the Company manufacturing,
marketing and selling other keratomes, but the sale of such other keratomes is
included in the gross profit to be shared with the licensors. The Company agreed
to pay the costs of the UniShaper final production molds.
OUR FAILURE TO TIMELY OBTAIN OR EXPAND REGULATORY APPROVALS FOR OUR
PRODUCTS AND TO COMPLY WITH REGULATORY REQUIREMENTS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our excimer laser systems and keratome products are subject to strict
governmental regulations which materially affect our ability to manufacture and
market these products and directly impact our overall business prospects. FDA
regulations impose design and performance standards, labeling and reporting
requirements, and submission conditions in advance of marketing for all medical
laser products in the U.S. New product introductions, expanded treatment types
and levels for approved products, and significant design or manufacturing
modifications require a premarket clearance or approval by the FDA prior to
commercialization in the U.S. The FDA approval process, which is lengthy and
uncertain, requires supporting clinical studies and substantial commitments of
financial and management resources. Failure to obtain or maintain regulatory
approvals and clearances in the U.S. and other countries, or significant delays
in obtaining these approvals and clearances, could prevent us from marketing our
products for either approved or expanded indications or treatments, which could
substantially decrease our future revenues. Additionally, product and procedure
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labeling and all forms of promotional activities are subject to examination by
the FDA, and current FDA enforcement policy prohibits the marketing by
manufacturers of approved medical devices for unapproved uses. Noncompliance
with these requirements may result in warning letters, fines, injunctions,
recall or seizure of products, suspension of manufacturing, denial or withdrawal
of PMAs, and criminal prosecution. Laser products marketed in foreign countries
are often subject to local laws governing health product development processes,
which may impose additional costs for overseas product development. Future
legislative or administrative requirements, in the U.S. or elsewhere, may
adversely affect our ability to obtain or retain regulatory approval for our
products. The failure to obtain approvals for new or additional uses on a timely
basis could have a material adverse effect on our business, financial condition
and results of operations.
OUR BUSINESS DEPENDS ON OUR INTELLECTUAL PROPERTY RIGHTS, AND IF WE ARE
UNABLE TO PROTECT THEM, OUR COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED.
Our business plan is predicated on our proprietary systems and
technology, including our narrow-beam scanning laser systems. We protect our
proprietary rights through a combination of patent, trademark, trade secret and
copyright law, confidentiality agreements and technical measures. We generally
enter into non-disclosure agreements with our employees and consultants and
limit access to our trade secrets and technology. We cannot assure you that the
steps we have taken will prevent misappropriation of our intellectual property.
Misappropriation of our intellectual property would have a material adverse
effect on our competitive position. In addition, we may have to engage in
litigation or other legal proceedings in the future to enforce or protect our
intellectual property rights or to defend against claims of invalidity. These
legal proceedings may consume considerable resources, including management time
and attention, which would be diverted from the operation of our business, and
the outcome of any such legal proceeding is inherently uncertain.
We are aware that certain competitors are developing products that may
potentially infringe patents owned or licensed exclusively by us. In order to
protect our rights in these patents, we may find it necessary to assert and
pursue infringement claims against such third parties. We could incur
substantial costs and diversion of management resources litigating such
infringement claims and we cannot assure you that we will be successful in
resolving such claims or that the resolution of any such dispute will be on
terms that are favorable to us.
PATENT INFRINGEMENT ALLEGATIONS MAY IMPAIR OUR ABILITY TO MANUFACTURE
AND MARKET OUR PRODUCTS.
There are a number of U.S. and foreign patents covering methods and
apparatus for performing corneal surgery that we do not own or have the right to
use. If we were found to infringe a patent in a particular market, LaserSight
and its customers may be enjoined from manufacturing, marketing, selling and
using the infringing product in the market and may be liable for damages for any
past infringement of such rights. In order to continue using such rights, we
would be required to obtain a license, which may require us to make royalty, per
procedure or other fee payments. We cannot be certain if we or our customers
will be successful in securing licenses, or that if we obtain licenses, such
licenses will be available on acceptable terms. Alternatively, we might be
required to redesign the infringing aspects of these products. Any redesign
efforts that we undertake could be expensive and might require regulatory
review. Furthermore, the redesign efforts could delay the reintroduction of
these products into certain markets, or may be so significant as to be
impractical. If redesign efforts were impractical, we could be prevented from
manufacturing and selling the infringing products, which would have a material
adverse effect on our business, financial condition and results of operations.
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We are currently involved in patent litigation with Visx, and such
allegations are common in our industry. In 1992, Summit and Visx formed a U.S.
partnership, Pillar Point Partners, to pool certain of their patents related to
corneal sculpting technologies. As part of their agreement to dissolve Pillar
Point in June 1998, Summit and Visx granted each other a worldwide, royalty free
cross-license whereby each party has full rights to license for use with its own
systems all existing patents owned by either company relating to laser vision
correction. In connection with our March 1996 settlement of litigation with
Pillar Point regarding alleged infringement by our lasers of certain U.S. and
foreign patents, we entered into a license agreement with Visx covering various
foreign patents and patent applications pursuant to which we pay royalties to
Visx and agreed to notify Visx before we began manufacturing and selling our
laser systems in the U.S.
While we do not believe our laser systems or keratome products infringe
any valid and enforceable patents held by Visx, Summit or any other person, we
cannot assure you that one or more of our competitors or other persons will not
assert that our products infringe their intellectual property, or that we will
not in the future be deemed to infringe one or more patents owned by them or
some other party. We could incur substantial costs and diversion of management
resources defending any infringement claims. Furthermore, a party making a claim
against us could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief that could effectively block our ability to
market one or more of our products. In addition, we cannot assure you that
licenses for any intellectual property of third parties that might be required
for our products will be available on commercially reasonable terms, or at all.
See "--Risk Factors and Uncertainties--We are subject to risks and uncertainties
relating to our patent litigation with Visx."
WE ARE SUBJECT TO CERTAIN RISKS ASSOCIATED WITH OUR INTERNATIONAL
SALES.
Our international sales accounted for 72% and 87% of our total revenues
during the year ended December 31, 1999 and the year ended December 31, 1998,
respectively. In the future, we expect that sales to international accounts will
represent a lower percentage of our total sales as a result of our recent
regulatory approval to market our LaserScan LSX laser system in the U.S., the
anticipated commercial launch of our UltraShaper durable keratome in the second
quarter of 2000, and the recent commercial launch of our UltraEdge keratome
blades and our UniShaper single-use keratome. The majority of our international
revenues for the year ended December 31, 1999 were from customers in Canada,
Mexico Spain, , Italy, Belgium and France, and for the year ended December 31,
1998 were from customers in Canada, China, Brazil, Mexico, Italy, Argentina,
South Africa, and Turkey.
International sales of our products may be limited or disrupted by:
o the imposition of government controls;
o export license requirements;
o economic or political instability;
o trade restrictions;
o difficulties in obtaining or maintaining export licenses;
o changes in tariffs; and
o difficulties in staffing and managing international operations.
Our sales have historically been and are expected to continue to be
denominated in U.S. dollars. The European Economic Union's conversion to a
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common currency, the Euro, is not expected to have a material impact on our
business. However, due to our significant export sales, we are subject to
exchange rate fluctuations in the U.S. dollar, which could increase the
effective price in local currencies of our products. This could result in
reduced sales, longer payment cycles and greater difficulty in collecting
receivables relating to our international sales.
OUR SUPPLY OF CERTAIN CRITICAL COMPONENTS AND SYSTEMS MAY BE
INTERRUPTED BECAUSE OF OUR RELIANCE ON A LIMITED NUMBER OF SUPPLIERS.
We currently purchase certain components used in the production,
operation and maintenance of our laser systems and keratome products from a
limited number of suppliers and certain key components are provided by a single
vendor. For example, all of our keratome blades are manufactured exclusively by
Becton Dickinson pursuant to our agreement with them, and all of our UniShaper
single-use keratome products are manufactured exclusively by Frantz Medical
Development Ltd. pursuant to our agreement with them. We do not have written
long-term contracts with providers of some key laser system components,
including TUI Lasertechnik und Laserintegration GmbH, which currently is a
single source supplier for the laser heads used in our LaserScan LSX excimer
laser system. Currently, SensoMotoric Instruments GmbH, Teltow, Germany, is a
single source for the eye tracker boards used in the LaserScan LSX. Any
interruption in the supply of critical laser or keratome components could have a
material adverse effect on our business, financial condition and results of
operations. If any of our key suppliers ceases providing us with products of
acceptable quality and quantity at a competitive price in a timely fashion, we
would have to locate and contract with a substitute supplier and, in some cases,
such substitute suppliers would need to be qualified by the FDA. If substitute
suppliers cannot be located and qualified in a timely manner or could not
provide required products on commercially reasonable terms, it would have a
material adverse effect on our business, financial condition and results of
operations.
UNLAWFUL TAMPERING OF OUR SYSTEM CONFIGURATIONS COULD RESULT IN REDUCED
REVENUES.
We include a procedure counting mechanism on LaserScan LSX lasers
manufactured for sale and use in the U.S. Users of our LaserScan LSX excimer
laser system could tamper with the software or hardware configuration of the
system so as to alter or eliminate the procedure counting mechanism that
facilitates the collection of per procedure fees. Unauthorized tampering with
our procedure counting mechanism by users could result in the loss of per
procedure fees.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our ability to maintain our competitive position depends in part upon
the continued contributions of our executive officers and other key employees,
especially Michael R. Farris, our president and chief executive officer. A loss
of one or more such officers or key employees could have a material adverse
effect on our business. We do not carry "key person" life insurance on any
officer or key employee.
As we commercially launch our laser system and keratome products in the
U.S., we will need to continue to implement and expand our operational, sales
and marketing, financial and management resources and controls. While to date we
have not experienced problems recruiting or retaining the personnel necessary to
expand our business, we cannot assure you that we will not have such problems in
the future. If we fail to attract and retain qualified individuals for necessary
positions, and if we are unable to effectively manage growth in our domestic or
international operations, it could have a material adverse effect on our
business, financial condition and results of operations.
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INADEQUACY OR UNAVAILABILITY OF INSURANCE MAY EXPOSE US TO SUBSTANTIAL
PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability risks and
possible adverse publicity that are inherent in the development, testing,
manufacture, marketing and sale of medical devices for human use. These risks
increase with respect to our products that receive regulatory approval for
commercialization. We have agreed in the past, and we will likely agree in the
future, to indemnify certain medical institutions and personnel who conduct and
participate in our clinical studies. While we maintain product liability
insurance, we cannot be certain that any such liability will be covered by our
insurance or that damages will not exceed the limits of our coverage. Even if a
claim is covered by insurance, the costs of defending a product liability,
malpractice, negligence or other action, and the assessment of damages in excess
of insurance coverage in the event of a successful product liability claim,
could have a material adverse effect on our business, financial condition and
results of operations. Further, product liability insurance may not continue to
be available, either at existing or increased levels of coverage, on
commercially reasonable terms.
Financial and Liquidity Risks
WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND OPERATING CASH FLOW DEFICITS
AND WE EXPECT THAT OPERATING CASH FLOW DEFICITS WILL CONTINUE THROUGH AT LEAST
THE FIRST QUARTER OF 2000.
We experienced significant net losses and deficits in cash flow from
operations for the years ended December 31, 1999, 1998 and 1997, as set forth in
the following table. We cannot be certain that we will be able to achieve or
sustain profitability or positive operating cash flow in the future.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net Loss................... $ 7.3 million $ 11.9 million $ 14.4 million
Deficit in Cash Flow from
Operations.............. $ 4.4 million $ 14.3 million $ 11.7 million
</TABLE>
As of December 31, 1999, we had an accumulated deficit of $38.2
million.
IF OUR UNCOLLECTIBLE RECEIVABLES EXCEED OUR RESERVES WE WILL INCUR
ADDITIONAL UNANTICIPATED EXPENSES, AND WE MAY EXPERIENCE DIFFICULTY COLLECTING
RESTRUCTURED RECEIVABLES WITH EXTENDED PAYMENT TERMS.
Although we monitor the status of our receivables and maintain a
reserve for estimated losses, we cannot be certain that our reserves for
estimated losses, which were approximately $3.9 million at December 31, 1999,
will be sufficient to cover the amount of our actual write-offs over time. At
December 31, 1999, our net trade accounts and notes receivable totaled
approximately $13.2 million, and accrued commissions, the payment of which
generally depends on the collection of such net trade accounts and notes
receivable, totaled approximately $2.0 million. Actual write-offs that exceed
amounts reserved could have a material adverse effect on our consolidated
financial condition and results of operations. The amount of any loss that we
may have to recognize in connection with our inability to collect receivables is
principally dependent on our customer's ongoing financial condition, their
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ability to generate revenues from our laser systems, and our ability to obtain
and enforce legal judgments against delinquent customers.
Our ability to evaluate the financial condition and revenue generating
ability of our prospective customers located outside of the U.S., and our
ability to obtain and enforce legal judgments against customers located outside
of the U.S., is generally more limited than for our customers located in the
U.S. Our agreements with our international customers typically provide that the
contracts are governed by Florida law. We have not determined whether or to what
extent courts or administrative agencies located in foreign countries would
enforce our right to collect such receivables or to recover laser systems from
customers in the event of a customer's payment default. When a customer is not
paying according to established terms, we attempt to communicate and understand
the underlying causes and work with the customer to resolve any issues we can
control or influence. In most cases, we have been able to resolve the customer's
issues and continue to collect our receivable, either on the original schedule
or under restructured terms. If such issues are not resolved, we evaluate our
legal and other alternatives based on existing facts and circumstances. In most
such cases, we have concluded that the account should be written off as
uncollectible.
At December 31, 1999, we had extended the original payment terms of
laser customer accounts totaling approximately $1.4 million by periods ranging
from 12 to 60 months. Such restructured receivables represent approximately 8%
of our gross receivables as of that date. Our liquidity and operating cash flow
would be adversely affected if additional extensions become necessary in the
future. In addition, it would be more difficult to collect laser system
receivables if the payment schedule extends beyond the expected or actual
economic life of the system, which we estimate to be approximately five to seven
years. To date, we do not believe any payment schedule extends beyond the
economic life of the applicable laser system.
WE COULD REQUIRE ADDITIONAL FINANCING WHICH MIGHT NOT BE AVAILABLE IF
WE NEED IT.
During the years ended December 31, 1999 and 1998, we experienced
deficits in cash flow from operations of $11.7 million and $14.3 million,
respectively. We believe that the proceeds from our January 2000 private
placement of common stock, together with our existing balances of cash and cash
equivalents and our cash flows from operations, should be sufficient to fund our
anticipated working capital requirements for the next 12 months in accordance
with our current business plan. Our belief regarding future working capital
requirements is based on various factors and assumptions including the
commercial acceptance of our LaserScan LSX excimer laser system, our UltraEdge
keratome blades and our UniShaper single-use keratomes, the successful validity
testing and subsequent commercial acceptance of our UltraShaper durable
keratome, the anticipated timely collection of receivables, and the absence of
unanticipated product development and marketing costs. These factors and
assumptions are subject to certain contingencies and uncertainties, some of
which are beyond our control. If we do not collect a material portion of current
receivables in a timely manner, or experience less market demand for our
products than we anticipate, our liquidity could be materially and adversely
affected.
We cannot be certain that we will not seek additional debt or equity
financing in the future to implement our business plan or any changes thereto in
response to future developments or unanticipated contingencies. Other than the
$2.5 million credit facility signed in June 1999 with The Huntington National
Bank which expires in June 2000, we currently do not have any commitments for
additional financing. We cannot be certain that additional financing will be
available in the future to the extent required or that, if available, it will be
on commercially acceptable terms. If we raise additional funds by issuing equity
or convertible debt securities, the terms of the new securities could have
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rights, preferences and privileges senior to those of our common stock. If we
raise additional funds through debt financing, the terms of the debt could
require a substantial portion of our cash flow from operations to be dedicated
to the payment of principal and interest and may render us more vulnerable to
competitive pressures and economic downturns.
Common Stock Risks
VARIATIONS IN OUR SALES AND OPERATING RESULTS MAY CAUSE OUR STOCK PRICE
TO FLUCTUATE.
Our operating results have fluctuated in the past, and may continue to
fluctuate in the future, as a result of a variety of factors, many of which are
outside of our control. For example, historically a significant portion of our
laser system orders for a particular quarter have been received and shipped near
the end of the quarter. As a result, our operating results for any quarter often
depend on the timing of the receipt of orders and the subsequent shipment of our
laser systems. Other factors that may cause our operating results to fluctuate
include:
o timing of regulatory approvals and the introduction or delays in
shipment of new products;
o reductions, cancellations or fulfillment of major orders;
o the addition or loss of significant customers;
o the relative mix of our business;
o changes in pricing by us or our competitors;
o costs related to expansion of our business; and
o increased competition.
As a result of these fluctuations, we believe that period-to-period
comparisons of our operating results cannot be relied upon as indicators of
future performance. In some quarters our operating results may fall below the
expectations of securities analysts and investors due to any of the factors
described above.
THE MARKET PRICE OF OUR COMMON STOCK MAY CONTINUE TO EXPERIENCE EXTREME
FLUCTUATIONS DUE TO MARKET CONDITIONS THAT ARE UNRELATED TO OUR OPERATING
PERFORMANCE.
The stock market, and in particular the securities of technology
companies like us, could experience extreme price and volume fluctuations
unrelated to our operating performance. Our stock price has historically been
volatile. Factors such as announcements of technological innovations or new
products by us or our competitors, changes in domestic or foreign governmental
regulations or regulatory approval processes, developments or disputes relating
to patent or proprietary rights, public concern as to the safety and efficacy of
refractive vision correction procedures, and changes in reports and
recommendations of securities analysts, have and may continue to have a
significant impact on the market price of our common stock.
THE SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE AND DILUTIVE
STOCK ISSUANCES MAY ADVERSELY AFFECT OUR STOCK PRICE.
Sales, or the possibility of sales, of substantial amounts of our
common stock in the public market could adversely affect the market price of our
common stock. Substantially all of our 19,803,663 shares of common stock
outstanding at March 27, 2000 were freely tradable without restriction or
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further registration under the Securities Act of 1933, except to the extent such
shares are held by "affiliates" as that term is defined in Rule 144 under the
Securities Act or subject only to the satisfaction of a prospectus delivery
requirement.
Shares of common stock which we may issue in the future in connection
with acquisitions or financings or pursuant to outstanding warrants or
agreements could also adversely affect the market price of our common stock and
cause significant dilution in our earnings per share and net book value per
share. We may be required to issue more than eight million additional shares of
common stock upon the conversion of outstanding preferred stock, the exercise of
outstanding warrants and stock options, and the satisfaction of certain
contingent contractual obligations. See "Market for Company's Common Equity and
Related Stockholder Matters--Possible Dilutive Issuances of Common Stock."
The anti-dilution provisions of certain of our existing securities and
obligations require us to issue additional shares if we issue shares of common
stock below specified price levels. If a future share issuance triggers these
adjustments, the beneficiaries of such provisions effectively receive some
protection from declines in the market price of our common stock, while our
other stockholders incur additional dilution of their ownership interest. We may
include similar anti-dilution provisions in securities issued in connection with
future financings.
ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW AND IN OUR CERTIFICATE OF
INCORPORATION, BY-LAWS AND STOCKHOLDER RIGHTS PLAN MAY MAKE AN ACQUISITION OF
LASERSIGHT MORE DIFFICULT AND COULD PREVENT YOU FROM RECEIVING A PREMIUM OVER
THE MARKET PRICE OF OUR STOCK.
Certain provisions of our certificate of incorporation, by-laws,
stockholder rights plan and Delaware law could delay or frustrate the removal of
incumbent directors, discourage potential acquisition proposals and delay, defer
or prevent a change in control of LaserSight, even if such events could be
beneficial, in the short term, to the economic interests of our stockholders.
For example, our certificate of incorporation allows us to issue preferred stock
with rights senior to those of the common stock without stockholder action, and
our by-laws require advance notice of director nominations or other proposals by
stockholders. LaserSight also is subject to provisions of Delaware corporation
law that prohibit a publicly-held Delaware corporation from engaging in a broad
range of business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's common stock (an interested
stockholder) for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. We also have
adopted a stockholder rights agreement, or "poison pill," and declared a
dividend distribution of one preferred share purchase right for each share of
common stock. The rights would cause substantial dilution to a person or group
that attempts to acquire 15% or more of our common stock on terms not approved
by our board of directors.
Acquisition Risks
PAST AND POSSIBLE FUTURE ACQUISITIONS THAT ARE NOT SUCCESSFULLY
INTEGRATED WITH OUR EXISTING OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
We have made several significant acquisitions since 1994, and we may in
the future selectively pursue strategic acquisitions of, investments in, or
enter into joint ventures or other strategic alliances with, companies whose
business or technology complement our business. We may not be able to identify
suitable candidates to acquire or enter into joint ventures or other
arrangements with entities, and we may not be able to obtain financing on
satisfactory terms for such activities. In addition, we could have difficulty
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assimilating the personnel, technology and operations of any acquired companies,
which could prevent us from realizing expected synergies, and may incur
unanticipated liabilities and contingencies. This could disrupt our ongoing
business and distract our management and other resources.
AMORTIZATION AND CHARGES RELATING TO OUR SIGNIFICANT INTANGIBLE ASSETS
COULD ADVERSELY AFFECT OUR STOCK PRICE AND REPORTED NET INCOME OR LOSS.
Of our total assets at December 31, 1999, approximately $13.9 million,
or 28%, were goodwill or other intangible assets. Any reduction in net income or
increase in net loss resulting from the amortization of goodwill and other
intangible assets resulting from future acquisitions by us may have an adverse
impact upon the market price of our common stock. In addition, in the event of a
sale of LaserSight or our assets, we cannot be certain that the value of such
intangible assets would be recovered.
In accordance with SFAS 121, we review 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. If we determine that an intangible asset is impaired, a non-cash
impairment charge would be recognized. We continue to assess the current results
and future prospects of MRF, Inc., d/b/a The Farris Group (TFG), our subsidiary
which provides health care and vision care consulting services, in view of the
substantial reduction in the subsidiary's operating results in 1997. Though
TFG's operating results improved in 1998 when compared to 1997, operating losses
similar to those incurred during the first year of 1998 have continued during
1999. In 1999, two senior consultants joined who are expected to develop new
business and help lead TFG towards significant financial improvement during
2000. If TFG is unsuccessful in improving its financial performance, some or all
of the carrying amount of goodwill recorded, $3.5 million at December 31, 1999,
may be subject to an impairment adjustment.
OTHER RISKS
The risks described above under are not the only risks facing
LaserSight. There may be additional risks and uncertainties not presently known
to us or that we have deemed immaterial which could also negatively impact our
business operations. If any of the foregoing risks actually occur, it could have
a material adverse effect on our business, financial condition and results of
operations. In that event, the trading price of our common stock could decline,
and you may lose all or part of your investment.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LASERSIGHT INCORPORATED
Dated: May 8, 2000 By: /s/ Michael R. Farris
--------------------------------
Michael R. Farris, President and
Chief Executive Officer
Dated: May 8, 2000 By: /s/ Gregory L. Wilson
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Gregory L. Wilson, Chief Financial Officer
(Principal accounting officer)
