-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OmyIj6brJyrQq303nAGMlB4WJ3aZcc7bfP4rF5iCqVhySyrV0DwdX91Re97CTWm+ OFLn5x6rq9W7rXKpiDW/Ow== 0000879301-98-000029.txt : 19980401 0000879301-98-000029.hdr.sgml : 19980401 ACCESSION NUMBER: 0000879301-98-000029 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LASERSIGHT INC /DE CENTRAL INDEX KEY: 0000879301 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 650273162 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19671 FILM NUMBER: 98581016 BUSINESS ADDRESS: STREET 1: 12161 LACKLAND RD CITY: ST LOUIS STATE: MO ZIP: 63146 BUSINESS PHONE: 3144693220 MAIL ADDRESS: STREET 1: 12161 LACKLAND RD CITY: ST LOUIS STATE: MO ZIP: 63146 10-K 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-19671 LASERSIGHT INCORPORATED ----------------------- (Exact name of registrant as specified in its charter) Delaware 65-0273162 -------- ---------- (State of incorporation) (I.R.S. Employer Identification No.) 12249 Science Drive, Suite 160, Orlando, Florida 32836 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (407) 382-2700 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None N/A Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.001 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sale price on March 27, 1998 was approximately $29,521,498. Number of shares of Common Stock outstanding as of March 27, 1998: 11,996,647. DOCUMENTS INCORPORATED BY REFERENCE The information required to be included in Part III is incorporated herein by reference to the Company's definitive proxy materials to be filed with the Securities and Exchange Commission on or before April 30, 1998. LASERSIGHT INCORPORATED TABLE OF CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters Item 6. Selected Consolidated Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplemental Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relations and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K The information in this Annual Report on Form 10-K contains forward looking-statements, as indicated by words such as "anticipates," "expects," "believes," "estimates," "intends," "projects," and "likely," by statements of the Company's plans, intentions and objectives, or by any statements as to future economic performance. Forward-looking statements involve risks and uncertainties that could cause the Company's actual results to differ materially from those described in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis--Risk Factors and Uncertainties" as well as those discussed elsewhere in this Report. PART I Item 1. Business OVERVIEW LaserSight Incorporated and its subsidiaries (collectively, "LaserSight" or the "Company") operate in two major operating segments: technology and health care services. The Company's principal wholly-owned subsidiaries include: LaserSight Technologies, Inc. ("LaserSight Technologies"), LaserSight Patents, Inc. ("LaserSight Patents"), and MRF, Inc. ("The Farris Group" or "TFG"). Technology Segment. The Company's technology segment includes LaserSight Technologies, LaserSight Patents and LaserSight Centers Incorporated ("LaserSight Centers"). LaserSight Technologies develops, manufactures and markets ophthalmic lasers with a galvanometric scanning system primarily for use in performing PRK (photorefractive keratectomy) which uses a one millimeter scanning laser beam to ablate microscopic layers of corneal tissue to reshape the cornea and to correct the eye's point of focus in persons with myopia (nearsightedness), hyperopia (farsightedness) and astigmatism. LaserSight Patents and LaserSight Technologies license various patents related to the use of excimer lasers to ablate biological tissue and related to keratome design and usage. LaserSight Centers is a developmental-stage company through which the Company may in the future provide PRK, LASIK (Laser In-Situ Keratomileusis) and other eyecare surgical services. In 1994, the Company shifted its emphasis from research and development of its laser systems to the manufacturing and international sales of its lasers. The Company's Compak-200 Mini-Excimer laser ("Compak-200") was introduced internationally in 1994. The LaserScan 2000 Excimer Laser PhotoPolishing System ("LaserScan 2000") was introduced in late 1995 to replace the Compak-200. The LaserScan 2000 incorporates improvements that were developed and implemented as the result of the Company's worldwide clinical experience with the Compak-200. In 1997, the Company developed the LSX excimer laser system with a new laser head, an active eye-tracking system, and advanced engineering. The next-generation excimer laser is under development and improvement and is currently being marketed commercially in over 30 countries around the world. The Company enjoys the largest installed base of scanning lasers in the industry. The Company intends to continue to develop and improve upon its technology and to aggressively continue the process of gaining regulatory approval in order to access the domestic market, with approval presently anticipated during 1998. The Company's patent portfolio covers scanning technology, infrared technology, solid-state technology, calibration technology, and glaucoma treatment. The Company currently is pursuing domestic regulatory approval to market its excimer laser for glaucoma treatment. With glaucoma affecting over six million people in the United States ("U.S."), the Company believes that its laser will provide a real therapeutic use by treating this leading cause of blindness. Therefore, the Company intends to continue to build upon its leadership position internationally, moving into the domestic market for refractive surgery, while expanding the applicability of its technology to the therapeutic treatment of glaucoma. Health Care Services Segment. Since December 31, 1997, the health care services segment has consisted of The Farris Group. TFG provides health care and vision care consulting services to hospitals, managed care companies and physicians. Until that date, this segment had also included MEC Health Care, Inc. ("MEC") and LSI Acquisition, Inc. ("LSIA"). Under the Company's ownership, MEC was a vision managed care company that managed vision care programs for health maintenance organizations (HMOs) and other insured enrollees. LSIA was a physician practice management company that managed the ophthalmic practice known as the "Northern New Jersey Eye Institute" under a management services agreement. TFG works with marketers of health care manufacturers and the chief executive officers and planners of hospitals, integrated delivery systems and medical groups. The core business of TFG is two-fold: developing and maintaining physician databases in addition to providing customized strategic plans. Services included are physician recruitment tools, competitive intelligence, demand studies, community health analyses and distribution channel mapping. General. For information regarding the Company's export sales and operating revenues, operating profit (loss) and identifiable assets by industry segment, see Note 14 of the Notes to Consolidated Financial Statements. As of December 31, 1997, the Company had 93 full-time and 4 part-time employees. The Company considers its employee relations to be good. The Company was incorporated in Delaware in 1987, but was inactive until 1991. In April 1993, the Company acquired LaserSight Centers in a stock-for-stock exchange with additional shares issued in March 1997 pursuant to an amended purchase agreement. In February 1994, the Company acquired The Farris Group. In July 1994, the Company was reorganized as a holding company. In October 1995, the Company acquired MEC. In July 1996, the Company's LSIA subsidiary acquired the assets of the Northern New Jersey Eye Institute, P.A. ("NNJEI"). On December 30, 1997, the Company sold MEC and LSIA, effective as of December 1, 1997. See "Recent Developments--Liquidation of Vision 21 Shares." The Company's principal offices and mailing address are 12249 Science Drive, Suite 160, Orlando, Florida 32836, and its telephone number at that location is (407) 382-2700. Effective on or about May 1, 1998, such address is expected to be 3300 University Boulevard, Suite 140, Winter Park, Florida 32792. LASERSIGHT TECHNOLOGIES LSX Excimer Laser System The LSX laser system was introduced at the American Society of Cataract and Refractive Surgeons meeting in April 1997. LSX is designed to be the Company's premium excimer laser product, and incorporates improvements developed and implemented as the result of the Company's worldwide clinical experience. The LSX integrates the Company's new surgeon-intuitive version 9.0 software, the new high-reliability CeraLase ultraviolet laser source and AccuTrack eye tracking, with an ergonomic console design, to supply the complete refractive surgical workstation. Version 9.0 software incorporates an easy to use graphical user interface with expanded treatment capabilities for myopia, hyperopia and astigmatism, true spherical ablation profiles and a patient record database. The CeraLase ultraviolet-laser source was developed to satisfy the demanding requirements of refractive surgical systems and features 200 pulse per second operation, long reliable life, ease of day to day operation and simplified maintenance. The Company's AccuTrack eye-tracking technology was incorporated as standard feature in LSX that includes enhancements in lighting and image contrast to improve surgical centration accuracy. This fully integrated ophthalmic surgical workstation is designed for use by ophthalmologists to perform PRK and LASIK refractive laser procedures. These procedures are recognized by most ophthalmologists to be clinically predictable. A LSX was first shipped in December 1997 and regular commercial shipments are expected to begin at the end of March 1998. The LSX is expected to be the Company's primary excimer laser product by June 1998. LaserScan 2000Plus Excimer Laser System The LaserScan 2000Plus laser system was introduced in March 1998 as an enhanced version of the LaserScan 2000. The LaserScan 2000Plus was designed to replace the LS 300 as a lower-cost alternative excimer laser product. Its improvements include the Company's new surgeon-intuitive version 9.0 software, energy stabilization, and new patient alignment/fixation system. This surgical workstation is also designed for use by ophthalmologists to perform PRK and LASIK refractive laser procedures. LaserScan 2000 Excimer Laser System The LaserScan 2000 laser system was introduced at the Annual Meeting of the American Academy of Ophthalmology in October 1995. The LaserScan 2000 was designed to replace the Company's first excimer laser product, the Compak-200 laser system, and incorporates improvements developed and implemented as the result of the Company's worldwide clinical experience with the Compak-200. The LaserScan 2000 is a fully integrated ophthalmic surgical work station for use by ophthalmologists. It has been designed to perform PRK and LASIK refractive laser procedures currently recognized by most ophthalmologists as being clinically predictable. This compact, new-generation, ArF (193nm) excimer laser weighs less than 450 pounds, with low gas maintenance costs. All of the Company's excimer laser systems incorporate a scanning device utilizing a pair of galvanometer controlled mirrors that reflect and scan the laser beam directly on the corneal surface without the use of discs, masks, or diaphragms used by other excimer laser systems. The advantages of this scanning system include: (i) a smaller laser beam diameter that dramatically increases power density thereby permitting more compact systems; (ii) greater scanning pattern flexibility for refractive procedures, including the correction of myopia, hyperopia, and astigmatism; (iii) smoother surface quality without transition zones; and (iv) an ability to scan much larger optical zones (up to 9mm). The actual corneal ablation profile is computer-controlled to adjust the beam overlap and diameters of the scanning system. The source code of the scanning software is proprietary technology of the Company (patent applied for) and has been developed and tested by a series of experiments on both PMMA (plastic) and human cadaver eye tissue and at international and domestic clinical trial sites. LS 300 Excimer Laser System In June 1996, LaserSight Technologies introduced the LS 300 Excimer Laser System at the Annual Meeting of the American Society of Cataract and Refractive Surgeons. The LS 300 was introduced to offer a lower-cost alternative to the LaserScan 2000. As a modified version of the Compak-200, it allowed the Company to utilize its remaining Compak-200 inventory. The modifications to the original system included upgraded optics and illumination and automatic gas exchange. The Compak-200 laser system established the industry's standard for small diameter beam, galvanometer controlled scanning lasers. That system was improved upon with the introduction of the LaserScan 2000 and LS 300 systems. Production of the LS 300 was phased out during 1997 in favor of the LaserScan 2000 and LaserScan 2000Plus systems. Automated Disposable Keratome The Company acquired rights to the Automated Disposable Keratome ("A*D*K"), a device utilized in connection with the LASIK procedure, in September 1997 from inventors Luis A. Ruiz, M.D. ("Ruiz"), and engineer Sergio Lenchig ("Lenchig") of Bogota, Colombia. Ruiz and Lenchig invented the Automated Corneal Shaper ("ACS") distributed by another company. The A*D*K incorporates the market proven features found in the ACS with new enhancements: preassembled, factory inspected, single use, transparent components, and dual gear drive with covered gears. The enhanced device was designed in response to feedback received on the market leader device. Early A*D*K prototypes were shown at the American Academy of Ophthalmology conference held in San Francisco in October 1997. Section 510(k) clearance from the U.S. Food and Drug Administration ("FDA") was applied for in October 1997 and received in January 1998, thereby allowing it to be sold and used on a commercial basis in the U.S. Manufacturing validation began in late 1997. Clinical testing began during the first quarter of 1998. The A*D*K will be manufactured exclusively for LaserSight by Frantz Medical Development Ltd. ("Frantz Medical"), Cleveland, Ohio, which is an ISO 9001 company experienced in the manufacture of engineering-grade medical devices. Franz Medical was chosen for its experience with OEM manufacturing for other large medical companies and its reputation for consistent delivery of quality products. The A*D*K is currently in the process of final manufacturing and clinical validation. The Company had originally expected to begin commercial sales of the A*D*K in February 1998, but now expects such sales to begin during the second quarter of 1998 due to unanticipated complexities in the manufacturing validation process. The Company has developed a feature-enhanced control console to power the A*D*K. The new console adds suction monitoring functions with visual and auditory alarms to indicate a caution state; an ergonomic design, including quiet operating performance; a digital display in either inches or millimeters of mercury; an elapsed time indicator to show the amount of time the eye has been exposed to high suction; and a new low suction setting to allow the surgeon the option to use the suction ring as a globe fixation device. The A*D*K and related products are being marketed both through the Company's existing international distributor network and through direct sales. The U.S. market is being addressed through: (i) direct contact (telephone, mail, fax and internet) to refractive surgeons; (ii) a direct marketing effort targeting laser center national accounts; (iii) educational wet lab seminars which introduce the product in key metropolitan areas; and (iv) the CRS study (a multi-center LASIK study actively involving more than 250 refractive surgeons). The Company expects to benefit from favorable payment terms: direct sales with payment in cash or by credit card, at shipment of product or through distributor orders with letters of credit, prepayment, or up to 30-day terms. Relatively low product price and the prospect of repeat orders necessitates such payment terms, rather than extended terms often offered for higher cost capital equipment. The keratome market is developing globally with the perceived emergence of LASIK rather than PRK as the procedure of choice for laser refractive surgery. This trend was first evident in markets which were among the first to embrace laser refractive surgery, and appears to be spreading to other global markets, including the U.S. where LASIK appears to be capturing a majority of refractive surgery cases for the first time in 1998. The Company believes there are five main competitors in the keratome business, but the Company has the only FDA 510(k)-cleared disposable keratome. The Company does not believe certain of the keratome products currently being marketed by competitors are currently available in large supply. Others are manual devices, rather than automated. While the Company believes that its A*D*K has significant advantages over the keratomes manufactured by its principal competitors, some of these competitors are larger, more established, and presently have greater financial strength than the Company. The Company believes that the major competitive factors for this product will be quality, safety, availability, automation, simplicity and price. Ancillary Products The majority of ancillary revenues are part of the same class of products and services as excimer laser system sales and, in total, such revenues are less than 5% of Technology revenues. Certain ancillary products (such as the video display camera) are offered as a convenience to customers and are not manufactured by the Company. The more significant ancillary products are listed below. AccuTrack Eye Tracking System. The Company continues to offer an active eye tracking system as an option to the LaserScan 2000Plus. The system is integrated into the laser system and automatically detects slight saccadic movements of the patient's eye, automatically adjusting the position of the laser beam to ensure that the eye remains centered during the laser procedure. During 1997, the Company continued its engineering and development of the system to optimize the eye tracking system's functions, and to extend the capability of the tracking system hardware and software. Video Display Camera. The Company offers, as an option, a video display system for observation or recording of procedures. This camera can be installed on the LaserScan 2000Plus, either at the manufacturing facility or as an upgrade on site. The video display system includes a beam splitter, video adapter, and a single chip video camera. Intellectual Property Numerous patents have been applied for by, or have been issued to, other companies related to the broad technologies of lasers and laser devices, refractive surgical procedures using laser devices, and delivery systems for using laser devices in refractive surgical procedures. The Company maintains a portfolio of strategically important patents, and patent applications, covering its scanning method, solid-state technology, glaucoma and retinal treatments, corneal topography development, calibration methods, treatment for myopia and hyperopia, and keratomes. The Company continues to take actions to secure patent rights in its field. See "Management's Discussion and Analysis--Risk Factors and Uncertainties." Purchase of Certain Patents from IBM In 1992, LaserSight Technologies signed a License Agreement with International Business Machines Corporation ("IBM") for IBM's patents relating to ultraviolet light ophthalmic products and procedures for ultraviolet ablation. Under this license, LaserSight Technologies paid a royalty fee of 2% of the sales of its ultraviolet lasers in those countries in which IBM had such a patent. Sales of excimer lasers in other countries were not subject to such royalty payments. In August 1997, the Company purchased from IBM, two patents related to ultraviolet light ophthalmic products and procedures for ultraviolet ablation. These patents (the "IBM Patents"), U.S. Patent No. 4,787,135 (Blum Patent) and U.S. Patent No. 4,925,523 (Braren Patent) relate to the use of ultraviolet light for laser vision correction, as well as all non-ophthalmic applications. With the purchase of these patents the Company also acquired related patent license agreements, and all royalties accrued after January 1, 1997 under license agreements with Summit Technologies, Inc. and Visx, Incorporated. A license to the IBM Patents is necessary for companies desiring to enter the laser vision correction market in the U.S. and certain other countries. In addition to the royalties from licenses acquired and potential new licenses with other excimer laser manufacturers and users, the Company also has the right to pursue claims for all past infringement of the IBM Patents. Sale of Patent Rights and Licenses In September 1997, the Company received a one-time lump sum payment of $4 million from a third party in exchange for an exclusive worldwide, royalty-free license covering the vascular and cardiovascular rights covered in the IBM Patents. In February 1998, the Company entered into an agreement with Nidek Co., Ltd. ("Nidek") under the terms of which the Company retained all patent ownership rights within the U.S. to the IBM Patents, and transferred to Nidek ownership of the non-U.S. counterparts related to those patents, in exchange for $7.5 million in cash. The foreign counterpart rights to the IBM Patents include Australia, Austria, Belgium, Brazil, Canada, France, Germany, Italy, Japan, Spain, Sweden, Switzerland, and the United Kingdom. The Company also granted Nidek a non-exclusive license to utilize the U.S. patents on terms comparable with existing licensees. The agreement with Nidek does not affect any outstanding license agreements related to non-U.S. patents that have been previously granted to the Company or any other companies. The agreement with Nidek also provides for the Company to continue to have exclusive right to use and sublicense the non-U.S. patents in all fields other than ophthalmic, cardiovascular and vascular. The Company intends to negotiate additional license agreements relating to the IBM Patents with other companies. However, there can be no assurance as to whether, when or on what terms the Company may be able to do so. As of the date of this Annual Report, the Company had not entered into any other agreements relating to the IBM Patents other than those described herein. Scanning and Solid-State Laser-Related Patents for Refractive Surgery In May 1996, a patent (U.S. Patent No. 5,520,679) for an "Ophthalmic Surgery Method Utilizing Non-Contact Scanning Laser" was granted to the Company by the U.S. Patent Office. This patent includes claims that cover ultraviolet and infrared wavelengths wherein the purposeful overlapping of sequential small-diameter laser pulses achieves a "photopolishing" of the corneal surface. Another patent (U.S. Patent No. 5,144,630) has been granted covering the apparatus and use of the solid-state (ultraviolet and infrared) LaserHarmonic System. The extent of protection that may be afforded to the Company, or whether any claim embodied in these patents will be challenged or found to be invalid, cannot be determined at this time. These patents and other pending applications may not afford a significant advantage or product protection to LaserSight Technologies. In July 1995, the Company exercised its option to acquire technology of a solid-state UV-laser operating at 213 nm and 200 Hz developed by Dr. J.T. Lin pursuant to Dr. Lin's Research and Development Agreement with the Company. Dr. Lin is a former president and chief executive officer of the Company. This laser system employs harmonic wavelength mixing schemes different from those described in the Company's 1992 solid-state patent (U.S. Patent No. 5,144,630), Dr. Lin's patent application, which has been assigned to the Company, has been filed covering this new technology. During 1997, efforts on this project continued, but at a priority level lower than excimer-related activities within the company's engineering and research and development departments. In November 1995, the Company obtained an exclusive license for patent-pending technology developed by Dr. Peter McDonnell, Professor of Ophthalmology, Doheny Eye Institute, University of Southern California. This technology for epithelial boundary determination may allow for full automation (Auto-PRK) of the PRK procedure using the Company's patented delivery system. In February 1998, the Company ended this licensing arrangement with the University of Southern California based on its perception that the LASIK procedure has become the dominant refractive surgical technique. In October 1995, Francis E. O'Donnell, Jr., M.D., Chairman of the Board of the Company was granted a patent (U.S. Patent No. 5,460,627) for a method and apparatus for calibration of PRK lasers. Dr. O'Donnell licensed this patent to LaserSight Centers in exchange for a 6% royalty on the net sales or uses of the patented technology. In January 1996, the Company announced a joint venture with PAR Vision Systems, as the Ex-Caliper. It uses a rastersterographic topography system to measure the effects of a simulated PRK on a single-use, disposable target. Under the terms of the agreement, the joint venture partners share in software licensing income and in the sale of disposable targets for the Ex-Calipar system. Keratome Patents and Licenses In July 1997, the Company completed an agreement under which it purchased U.S. Patent No. 5,586,980 from Dr. Frederic B. Kremer. The Kremer patent covers a pivoting head in a keratome, the instrument required to create the corneal "flap" in the LASIK procedure. In September 1997, the Company entered into a limited exclusive license agreement with Ruiz and Lenchig for U.S. Patent No. 5,133,726/RE35421 and its foreign counterparts. The limited license agreement includes worldwide distribution rights to the A*D*K. Treatment of Glaucoma and Other Ophthalmic Indications Dr. O'Donnell was independently granted two patents (U.S. Patent No. 5,370,641) for the Laser Trabeculodissection for treatment of glaucoma, and (U.S. Patent No. 5,217,452) for Transscleral Laser Treatment of Subretinal Neovascularization for macular degeneration. These patents were assigned by Dr. O'Donnell to LaserSight Centers in January 1995 for $6,121 as reimbursement for attorney's fees and costs to prosecute the patent applications. Trade and Service Marks The Company has independently developed the trademarks "A*D*K", "LSX", "AccuTrack", and "ScanLink" and intends to enforce its prior appropriation of these trademarks and to seek registration thereof. "LaserSight" is a service mark developed by the Company. Manufacturing In late 1995, the Company opened a new manufacturing facility in San Jose, Costa Rica to manufacture its lasers for international sales, and for delivery to U.S. investigational sites under its Investigational Device Exemption ("IDE") protocols. Beginning in 1996, all lasers sold to international customers were manufactured at this facility, as well as laser systems delivered to U.S. clinical investigators. This facility, located in a free trade zone, is expected to produce all laser units sold internationally during 1998. As exports of laser products not approved for sale in the U.S. are closely regulated by the FDA, the Company's establishment of an offshore manufacturing facility permits it to sell products to any international customer without prior FDA approval. Many countries have their own regulatory requirements, however. The manufacturing process is mainly an assembly operation in which LaserSight Technologies acquires components of its system and assembles them into a complete unit. Components include both "off-the-shelf" materials and assemblies, as well as various key components which are produced by others to the Company's design and specifications. In general, the cost of the Company's lasers predominantly relate to hardware; the labor component of cost is relatively small. The proprietary computer software operating the scanning system has been developed internally. A number of key components necessary to produce the Company's laser products are obtained from single vendors. Should these suppliers become unable or unwilling to supply these components, the Company would be required to seek other qualified suppliers. See "Management's Discussion and Analysis--Risk Factors and Uncertainties--Availability of Components." During 1996 the Company completed implementation of an international system of quality assurance under ISO 9002, that was initiated during 1995. In October 1996 the Company received certification under ISO 9002 for its manufacturing and quality assurance activities in Orlando, Florida and San Jose, Costa Rica. During November 1996 the Company completed all requirements necessary to obtain authority to apply the CE Mark to its LaserScan 2000 System. The CE Mark, certifying that the LaserScan 2000 meets all requirements of the European Community's medical directives, gives the Company access to market its products into all member countries of the European Economic Union ("EU"). While at this time only certain member countries of the EU require compliance with the EU Medical Directives (including France and Germany), starting in 1998 all countries in the EU will require CE Mark certification of compliance with the EU Medical Directives as the standard for regulatory approval for sale of laser systems. The EU Medical Directives include all the requirements under EU laws regarding the placement of various categories of medical devices on the EU market. This includes a "directive" that an approved "Notified Body" will review technical and medical requirements for a particular device. All clinical testing of medical devices in the EU must be done under the Declaration of Helsinki, which means that companies must have ethics committee approval prior to starting, they must obtain informed consent from each patient tested and the studies must be monitored and audited. Patient records must be maintained for 15 years. Companies must also obey the Medical Device Vigilance reporting requirements. In obtaining the CE Mark for its excimer laser system, the Company had its manufacturing and controls evaluated by a Notified Body (Sernko) for maintenance of ISO 9002 conditions, satisfied all required engineering and electro-mechanical requirements of the EU and conducted a clinical study in France to confirm the efficacy and safety of the excimer laser system on patients. Availability of Components LaserSight Technologies purchases the vast majority of its components for its lasers from commercial suppliers. These include both standard, "off-the-shelf" items, as well as components produced to the Company's unique designs and specifications. While most are acquired from single sources, the Company believes that in many cases there are multiple sources available to it in the event a supplier is unable or unwilling to perform. As the Company is dependent upon an uninterrupted supply of components to produce its lasers, it is dependent upon these suppliers to provide a continuous supply of integral components and sub-assemblies. The Company presently has an exclusive supply arrangement from a single source, MPB Technologies Inc., Dorval, Quebec, Canada, for the laser head used in the LaserScan 2000. Under this exclusive arrangement, the supplier of the laser head is restricted from providing this relatively low energy, high repetition rate laser head to any company that would use the laser head in an excimer laser system for corneal refractive surgery. The Company historically experienced higher than anticipated warranty service costs associated with this component, and accordingly, during 1995 the Company began certain measures to address this issue that continued into 1997. These measures include 100% incoming inspection of all laser heads at time of receipt from the supplier, modification and upgrading of certain critical components, development and testing of new techniques for handling the laser heads, and a search for alternative components and suppliers. During 1996, the Company contracted with a potential new supplier of the laser head component to develop an improved performance laser head based on this supplier's innovative technology and the Company's performance specification and laser lifetime requirements. In 1997, the Company began engineering evaluation and testing and determined that with some modifications the new laser head satisfied all engineering requirements. The Company began to incorporate this new laser head into its products, notably the LSX, in the fourth quarter of 1997. Further development on new variations of this technology continue and the Company has a limited exclusive license to this technology in the field of ophthalmic surgery as long as minimum purchase requirements are satisfied, i.e., 45 lasers during the first year of the license. The current supply arrangement for this laser is from a single source, TUI Lasertechnik und Laserintegration GmbH, Munich, Germany. The Company continues to evaluate potential supplier relationships with other laser manufacturers. Marketing The use of LaserSight Technologies' medical laser systems in the U.S. requires FDA approval. LaserSight Technologies has been marketing these systems in the international market where approval is not required or has been obtained. These international sales require LaserSight to comply with the regulatory requirements of the importing nation and export requirements of the U.S. During 1997, LaserSight Technologies continued to market the LaserScan 2000 and, toward the end of the year, commenced the marketing of the LSX laser system in Europe, the Pacific Rim, Asia, South and Central America, and the Middle East. The Company sells its excimer laser systems and accessories using a multi-tiered marketing strategy directed toward ophthalmologists throughout the world. A combination of directly-employed sales representatives and independent international distributors and representatives is used to market directly to individual ophthalmologists, ophthalmic clinics, and hospitals. The Company directly employs two territorial managers who are responsible for sales, both direct and through distributors and representatives, within their respective territories. The Company's distributors and representatives have been selected based on their experience in the market for ophthalmic equipment and their capability for technical support. Distributor and representative agreements either provide for exclusive territories, with continuing exclusivity dependent upon mutually-agreed levels of annual sales, or nonexclusive agreements without sales minimums. Currently, separate distributor and representative agreements are in place for all major market areas. During 1997, approximately 89% of sales of LaserSight Technologies' products resulted from distributors and representatives with the balance from direct sales. During 1997, LaserSight Technologies continued to expand and negotiate with distributors and representatives for agreements to represent LaserSight Technologies' products into areas that will ensure complete worldwide sales coverage. In conjunction with its expanded sales activities, LaserSight Technologies continues to participate in a number of ophthalmology meetings, exhibits and seminars, both domestic and foreign. Historically, two large U.S. meetings, the American Academy of Ophthalmology and the American Society of Cataract and Refractive Surgery, have yielded substantial interest in the Company's laser products. During 1995, the Company entered into an agreement for the Japanese market with Noda Medical Consulting, Inc. ("Noda Medical"). Under this agreement, the Company and Noda Medical formed a new business entity, LS Japan Company, Limited ("LS Japan") during 1996. In December 1997, the Company terminated its agreements with Noda Medical and started the dissolution of its LS Japan subsidiary. The Company is negotiating an exclusive distribution agreement with another firm in Japan. In certain countries, clinical trials of lasers are required before commercial sales can take place. As a result, LaserSight Technologies has historically placed approximately five lasers with clinical investigators at no cost to the physician. At the conclusion of these clinical trials, the lasers are to be returned to the Company. While the focus of LaserSight Technologies' sales activities is on the international market, the Company has sold lasers in the U.S. to ophthalmologists participating in LaserSight Technologies' FDA clinical trials. Pricing of these units has generally been lower than for those sold in foreign markets as the FDA requires that these sales be based on specific manufacturing costs, which can include an allocation of research, development and other expenses. If LaserSight Technologies continues to establish additional clinical sites in the U.S. during 1998, these sites could represent an additional source of revenue for the Company as well as additional regulatory costs. Approximately 200 LaserSight excimer laser systems are now in place worldwide. Meetings and Trade Shows LaserSight Technologies' strategy is to encourage its clinical investigators and clinical users to present clinical papers at, and for Company personnel to attend, international meetings and exhibits to promote sales of the Company's laser systems. All distributor and representative agreements contain provisions for the agent to participate in national and regional meetings and exhibits. Attendance at meetings and exhibits held in the U.S. is limited to those meetings where a large attendance of foreign ophthalmologists is anticipated. These meetings include the Annual Meeting of the American Academy of Ophthalmology and the American Society of Cataract and Refractive Surgery. LaserSight Technologies limits its activities at these meetings to the distribution of technical information without making any offer to sell. Seasonality Based on historical activity, the Company does not believe seasonal fluctuations have a material impact on its financial performance. Payment Terms; Receivables LaserSight Technologies, which implemented more stringent sales criteria during 1996, may from time to time reassess its credit policy and the terms it will make available to individual customers. As a result of a growing presence in a number of countries and continued acceptance of the Company's laser systems, the Company's internally-financed sales with repayment periods exceeding 18 months (measured from the installation date) decreased from 28 systems in 1995 to 13 systems in each of 1996 and 1997. There can be no assurance as to the terms or amount of third-party financing, if any, that the Company's customers may obtain in the future. Since 1996, the Company has been placing greater emphasis on the terms and collection timing of future sales. Laser sales are generally to hospitals or established and licensed ophthalmologists. Unless a letter of credit or other acceptable security has been obtained, a significant down payment or deposit is generally required at or before installation, and LaserSight Technologies maintains regular contact with customers as routine maintenance work must be provided by LaserSight personnel. Maintenance services can be withheld should payment terms not be met. LaserSight Technologies' agreements with its customers typically provide that the contracts are governed by Florida law. LaserSight Technologies has not determined whether or to what extent courts or administrative agencies located in foreign countries would enforce its right to collect such receivables or to recover laser systems from customers in the event of a customer's payment default. At December 31, 1997 the Company was the payee on letters of credit with foreign financial institutions aggregating approximately $0.2 million (compared to $2.1 million at December 31, 1996). On occasion, it is necessary to meet a competitor's more liberal terms of payment. In those and other cases, the Company may provide term financing. See "Management's Discussion and Analysis--Risk Factors Uncertainties--Uncollectible Receivables Could Exceed Reserves." Backlog To date, the Company has been able to ship laser units as orders are received, therefore order backlog is not a meaningful factor in its business. Competition Competition in the medical and laser industries is intense, and technological developments are expected to continue at a rapid pace. The Company competes against both alternative and traditional medical technologies and other laser manufacturers. Many of the Company's competitors are substantially larger, better financed, and better known, with existing products and distribution systems in the marketplace. A number of lasers manufactured by other companies have either already received, or are much farther advanced in the process of receiving, FDA approval for specific procedures, and, accordingly, may have a higher level of acceptance in some markets than the Company's lasers. PRK and LASIK techniques for treatment of refractive vision disorders compete with eye glasses, contact lenses, and RK (radial keratotomy). In addition, medical companies, academic and research institutions and others could develop new therapies, including new medical devices or surgical procedures (such as corneal implants and surgery utilizing other types of lasers), for the conditions targeted by the Company, which therapies could be more medically effective and less expensive than PRK and LASIK, and could potentially render PRK and LASIK obsolete. Any such development could have a material adverse effect on the business, financial condition, and results of operations of the Company. In addition to general laser applications, LaserSight Technologies is targeting the LSX and the LaserScan 2000 for the PRK and LASIK UV-wavelength market. The Company believes that the worldwide UV-wavelength market includes six major competitors, including two major U.S. companies. For refractive surgery, LaserSight Technologies believes that its scanning laser systems, software-based flexibility and eye tracking technology have significant advantages over the excimer lasers manufactured by its principal competitors, but many of these competitors are larger, more established, and presently have greater financial strength than the Company. Competitive factors such as performance, price, warranty, and royalty issues play an important role in the customer's decision to purchase an excimer laser system. Regulatory issues also play a significant role in determining the markets accessible to the Company. As the Company must obtain approval from the FDA for marketing in the U.S., the Company must presently focus its marketing efforts on international markets. Both U.S. and foreign competitors may enter the excimer laser business or acquire existing companies. Such competitors may be able to offer their products at a lower cost or may develop procedures that involve lower per procedure costs. Competition from new entrants may be prevalent in those countries where significant regulatory approval is not required. Food and Drug Administration During 1994, the Company began the clinical studies required for approval of its laser systems in the U.S. During 1995, it completed the clinical activities required by the FDA for its Phase 2a myopia study and submitted the results of this phase of the trial to the FDA. In 1996, the Company filed a request to proceed with Phase 2b of its myopia study, as well as a request that its new laser model, the LaserScan 2000, be recognized as comparable in method and performance to the Compak-200 used in the earlier trials. Both of the Company's requests were approved by the FDA, and Phase 2b myopia clinical trials were started during the later part of 1996. As both models of the Company's excimer lasers will be utilized in future clinical activities, the Compak-200 systems utilized in the Phase 2a myopia trials have been upgraded with new Leica microscopes and other features that have brought these systems closer to the Company's LS 300 system configuration. During 1997, the Company completed the clinical activities required for its Phase 2b myopia study and submitted the results of the study to the FDA. The Company filed a request to proceed with Phase 3 of its myopia study, and such request was granted. In March 1998, the Company filed its Pre-Market Approval ("PMA") application for PRK treatment of myopia with its scanning laser system, and continues to enroll patients into a Phase 3 PRK study for the purpose of post-market surveillance. There can be no assurance as to whether or when the FDA will approve this PMA. During 1996, the Company submitted an additional protocol request to the FDA, and received its approval to proceed with clinical trials for PARK (photo-astigmatic refractive keratectomy). This Phase 2a trial is being conducted by four domestic investigators, and one international investigator and has continued through 1997 and into 1998. The Company is preparing to submit during 1998 additional protocol requests for hyperopia and LASIK (in which the stroma beneath the cornea is ablated rather than the surface of the cornea). The Company expects that these trials will be conducted by both domestic and foreign investigators. There is no assurance that these protocols will be approved by the FDA. If such approvals are received, the Company anticipates that it will establish up to an additional four domestic clinical trial sites, and one additional international site. The FDA currently limits to 20 the maximum number of clinical sites a manufacturer can establish. In July 1997, the Company acquired the rights to a PMA application filed with the FDA for a laser to perform LASIK, a refractive surgery alternative to surface PRK from Photomed. On February 13, 1998, the Ophthalmic Devices Panel of the FDA determined that the PMA presented by Dr. Frederic Kremer, a former shareholder of Photomed, was not approvable due to specific deficiencies which the FDA subsequently identified in letter to Dr. Kremer dated March 13, 1998. Dr. Kremer's PMA is for a single-site usage (rather than general commercial usage) and encompasses the treatment of myopia and myopic astigmatism, specifically using LASIK. The commercial sale of the Photomed laser in the United States would require, in addition to the approval of Dr. Kremer's PMA, certain additional FDA approvals, including GMP (Good Manufacturing Practice) clearance, the development and validation of a manufacturing process for the Photomed laser, and a payment by the Company of $1.75 million if the FDA approves such commercial sale before July 29, 1998. The FDA's action is unrelated to the PMA for the Company's scanning laser systems which the Company recently submitted to the FDA. In March 1998, the Company filed a PMA for its principle scanning laser platform for PRK treatment of myopia. The Company continues to enroll patients into a Phase 3 PRK study for the purpose of post-market surveillance. The Company is also conducting a Phase 2 clinical trial for PARK. The Company also has an IDE approved by the FDA for the treatment of glaucoma by laser trabeculodissection. The Company has completed a Phase 1 study in blind eyes and expects to submit the results to the FDA in April 1998, to request an expansion to study sighted glaucoma patients. Research and Development During 1997, the Company continued its research and development activities related to new laser products, laser systems, product upgrades and ancillary product lines. Excluding regulatory expenses, research and development expense was $1,723,695 in 1997 compared to $948,520 in 1996, an increase of 82%. In 1995, these expenses were $983,130. Considerable research and development effort was directed to the development of the LSX laser system and continued improvement of the LaserScan 2000 and 2000Plus systems, including completion of subsystems for automatic gas fill, power stabilization, operating software and other key components. Many of the subsystems developed were designed to be retrofitted to Compak-200 and LS 300 lasers already in use. Other research and development efforts have been focused on the development of the new solid-state LaserHarmonic laser and have resulted in an operational prototype. The LaserHarmonic is the first true non-gas laser capable of delivering a laser beam in the ultraviolet spectrum (common to all excimer lasers used for refractive surgery). The Company expects to direct additional efforts during 1998 toward the production of a commercial design for this product. In addition, the LaserHarmonic could be capable of generating multiple wave lengths, thus permitting its use for other ophthalmic procedures which now require separate lasers. The LaserHarmonic research and development effort resulted in the identification of many features which have been subsequently incorporated into the Company's excimer laser systems. Further efforts will continue to be directed at an appropriate level towards production of a clinical design for this product to ensure that a commercial version is available to meet the market's demand for such a system. There are no assurances that these activities will be successful. Upon completion of a clinical design for the LaserHarmonic system, pre-clinical trials and formal clinical trials are anticipated. Once sufficient clinical and safety data have been gathered, the Company intends to initially market the LaserHarmonic system for medical uses outside of the U.S. The Company continues to assess numerous issues related to manufacturing and marketing of the LaserHarmonic system. Prior to commercialization the LaserHarmonic will likely be renamed. As is the case with many new technology products, the commercialization of the LaserHarmonic is subject to potential delays. During 1997, the Company continued development of its advanced eye-tracking system which is standard on the LSX and offered as an option to LaserScan 2000 purchasers. The LaserSight eye tracker (AccuTrack) is an "Active + Passive" system that is capable of following even fine saccadic eye movements. The tracking system requires no dilation and no on-eye apparatus to eliminate most error normally introduced by gross and fine eye movements to untracked laser refractive surgery. Additionally, a larger margin of safety may be seen for patients with poor compliance. The Company's research and development activities also include efforts to develop completely new types of solid-state laser heads not currently available or produced anywhere in the world marketplace. While the risk of failure of these specific activities may be significant, the Company believes that if developed, these products could provide it with a leading edge technology that would differentiate its products from other companies in the industry. There is no assurance these efforts will be successful. In conjunction with the University of Southern California, the Company entered into agreements for the development of an epithelial boundary determination device and for a method of preventing keratocyte loss. Such agreements have not resulted in material revenues or expenses to date. In February 1998, the Company terminated its license to the method of preventing keratocyte loss. HEALTH CARE CONSULTING SERVICES (TFG) Introduction TFG has historically been a national provider of consulting services in strategic analysis, planning and implementation, and decision support for hospitals, health systems, HMOs and other organizations engaged in health care related services. During 1996 and 1997, as a result of losses incurred beginning the last half of 1996, TFG substantially reduced its staffing and more narrowly focused its resources on its business of developing decision support information, strategic planning and physician recruiting. TFG's clients include community hospitals, hospital systems, physician practices, specialty health care providers and manufacturers and distributors of products and services to health care providers. The senior consulting staff of TFG includes seasoned professionals with health care experience ranging from 10 years to more than 20 years of experience. These individuals represent expertise obtained from hospital settings in senior administrative roles in both non-profit and proprietary sectors. The consulting staff has significant experience in the health care industry in such areas as market research, hospital operations, strategic planning, turnaround management, finance, and medical practice operations. Principal Services Decision Support Information. Decision support information is developed by TFG from published data bases, demographic data, health services demand information, manpower projections, hospital utilization and community migration and emigration data, with which TFG performs patient service and primary market research including its proprietary Secret Shopper methodology. TFG adds value by obtaining primary information, understanding the various sources and characteristics of the available information, enhancing the commercially available information through interviews and teleresearch and managing large amounts of data for decision-making purposes. TFG provides client specific decision support information for planning and marketing activities of client organizations. Clients include hospitals, health care systems, integrated delivery systems, individual physicians and group practices and organizations marketing to health care providers. The Secret Shopper methodology is a versatile tool for gaining competitive intelligence. With certain embellishments, TFG is able to expand the results of Secret Shopper studies into a proprietary product called Distribution Channel Mapping, which examines all of the health care providers in a market along with the flow of referrals and other resources. Distribution Channel Mapping aids clients, particularly hospitals, in planning competitive growth strategies, acquisition targets, mergers and divestitures. Industry projections reflect that growth in health care services will be in areas other than in hospital services. Therefore, hospitals, to continue their growth, must either increase market share or diversify. TFG believes that it is well positioned to help hospital clients grow beyond the traditional inpatient and outpatient services because of its access to critical information and the experience of the consulting staff. Strategic Planning. TFG created a strategic planning model, which may be tailored in terms of amount of detail, sequence and confidence level of information utilized in the planning process. In addition, TFG provides various segments of the strategic planning process as may be required by the client. Securing decision support information to meet the needs of in-house planners, conducting planning retreats and assistance in defining the vision or mission determining functions are examples of strategic planning components which may be provided separately to clients. Senior consultants at TFG also provide general advisory services to senior managers of health care organizations. Physician Recruitment. TFG continues to assist clients in filling specific physician needs. The services include the traditional retained search program, contingency searches and providing source information for in-house recruiters. The Physician Recruitment service also provides candidate screening, coordinating on-site visits and pre-employment negotiations. The Recruitment consultants also assist physicians and potential purchasers of physician practices in valuations and contracting. Marketing Most of TFG's business comes from new projects for existing clients and through favorable referrals from such clients. Recently, TFG introduced the Distribution Channel Mapping product and increased the sales activities to hospitals located in competitive environments. New brochures have been created describing the services and the professional staff. Presentations to health care executives concerning the use of Distribution Channel Mapping for strategic decisions are given at scheduled conferences. Utilizing their extensive knowledge of hospitals and physicians in the U.S., TFG consultants have expanded their service offerings to companies selling to the health care provider market. TFG is introducing direct mail advertising followed by telephone follow-up for certain of its services. The success of such activities will be evaluated on an ongoing basis. TFG serviced approximately 30 clients in both 1997 and in 1996. Payment Terms Clients are generally billed monthly for services rendered with the amount due upon receipt of the invoice. The monthly billing may be either a retainer or based on actual time and materials incurred. Certain projects are capped as to a maximum billable fees. Competition The Company believes that key competitive factors relating to its health care services segment include the experience of consultants, contacts within the industry and pricing of services. Primary competitors are large national consulting firms and small health care consulting firms. The Company believes it holds advantages over many of these firms based upon (i) its commitment to be a turn-key provider, capable developer of strategic business plans, experienced and skilled executor of the plans, and implementers of critical follow-through required; (ii) its consultants' hands-on experience in numerous settings vital to the successful implementation of these services within this politically-charged, changing industry; and (iii) TFG's significant experience in the development of comprehensive, in-house data bases and research functions, both vital areas in delivering the set of turn-key consulting services demanded by the market. Item 2. Properties The table below describes the Company's present facilities. All such facilities are leased from independent third parties.
Square Monthly Expiration Location Description Footage Payment Date -------- ----------- ------- ------- ---- Orlando, Florida (1) Principal offices of Company and 7,600 $12,449 5/31/00 LaserSight Technologies Orlando, Florida (1) LaserSight Technologies-- 1,535 $1,763 5/31/98 additional space St. Louis, Missouri (2) The Farris Group office 7,900 $10,204 7/20/98 Near San Jose, Costa Rica Manufacturing facility for 6,400 $4,198 11/30/00 international sales (1) The Company is seeking to consolidate its Orlando facilities and to approximately double the existing space. The Company expects to enter into a lease for approximately 22,600 square feet at a cost of $23,334 per month, with an expiration date of June 14, 2002. The Company believes that such new facility will be adequate for the foreseeable future and that its existing space can be subleased. (2) The Company is seeking smaller office space for TFG.
Item 3. Legal Proceedings Euro Pacific Securities Service. In June 1996, the Company filed a lawsuit in a Florida state court against Euro Pacific Securities Service and Mr. Wolf Wiese (collectively, the "Wiese Defendants") to collect the $1,140,000 balance due on a promissory note executed by the Wiese Defendants in 1995 relating to a stock subscription receivable. In September 1996, the Wiese Defendants removed the lawsuit to the U.S. District Court for the Middle District of Florida-Orlando Division. In July 1997, after missing the deadline for filing counterclaims against the Company, and without having obtained permission from the Court to do so, the Wiese Defendants filed a separate lawsuit in the same U.S. District Court against the Company and its LaserSight Technologies subsidiary. In their lawsuit, the Wiese Defendants alleged against the Company breach of contract, coercion to enter into a contract, misrepresentation, together with other charges and sought an unspecified amount of monetary damages. On October 20, 1997, the Company filed a motion to dismiss the Wiese Defendants' lawsuit. On February 10, 1998, the Court dismissed the Wiese Defendants' lawsuit without prejudice. The Company's lawsuit against the Wiese Defendants was tried on December 15 and 16, 1997 and resulted in the issuance on December 29, 1997 of a final judgment in favor of the Company in the amount of $1,140,000, together with interest in the amount of $526,809 and costs and attorneys' fees in an amount yet to be determined. The Wiese Defendants have appealed the judgment to the U.S. Court of Appeals for the Eleventh Circuit, Atlanta, Georgia. To date, appellate briefs have not been filed with the court. The Company is taking steps to collect on the judgment, but there can be no assurance as to whether, when or in what amount it will be able to do so. Any recovery on the portion of the judgment representing the $1,140,000 amount due on the Wiese Defendants' promissory note will be credited to stockholders' equity, but will have no effect on the Company's results of operations. Northern New Jersey Eye Institute. In October 1997, the Company received a written request for mediation and, if necessary, arbitration from the physicians at NNJEI. The request related to the services agreement (the "Services Agreement") between LSIA and NNJEI that was entered into as part of LSIA's acquisition of NNJEI's assets in July 1996. The request alleged breach of contract and fraud by LSIA in connection with the Services Agreement and requested termination of the Services Agreement, "several hundred thousand dollars in lost income damages" and punitive damages in an amount to be determined. The Company has denied NNJEI's allegations. The Company and NNJEI discussed a possible restructuring of the relationship between LSIA and NNJEI at a mediation session held on November 16, 1997 and in subsequent correspondence, but did not reach an agreement. Thereafter, the Company sold LSIA to Vision Twenty-One, Inc. ("Vision 21") on December 30, 1997 in a transaction which was effective as of December 1, 1997. In connection with the LSIA sale, the Company agreed to indemnify Vision 21 from certain claims related to the Services Agreement arising before December 30, 1997. Management believes, based in part on the advice of outside counsel, that the Company's indemnification obligations under the Services Agreement should not have a material adverse effect on the Company's financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on The Nasdaq Stock Market under the symbol "LASE." The table below sets forth the high and low sales prices for the Common Stock during 1996 and 1997, as reported by The Nasdaq Stock Market. As of March 1, 1998 there were approximately 217 holders of record of the Common Stock and, as far as the Company can determine, approximately 3,700 total shareholders, including shareholders of record and shareholders in "street name."
High Low High Low ---- --- ---- --- Fiscal 1996 Fiscal 1997 First Quarter $13.38 $9.50 First Quarter $6.63 $5.19 Second Quarter 13.12 8.88 Second Quarter 7.31 3.38 Third Quarter 11.00 6.06 Third Quarter 6.94 4.19 Fourth Quarter 7.00 5.31 Fourth Quarter 5.25 2.56
On March 27, 1998, the last sale price of the Common Stock on The Nasdaq Stock Market was $2.625. The Company has not paid any cash dividends on the Common Stock since its inception. The Company currently does not anticipate paying cash dividends on Common Stock in the foreseeable future. The Company's loan agreement with its secured lender, Foothill Capital Corporation ("Foothill"), provides that the Company shall not pay any cash dividends. Item 6. Selected Consolidated Financial Data The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. The summary financial information as of and for each of the years in the five-year period ended December 31, 1997 is derived from the Company's consolidated financial statements for such years.
(In thousands, except for per share amounts) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Net sales $24,389 $21,504 $25,988 $9,594 $365 Gross profit 11,687 11,381 18,895 6,484 62 Income (loss) from operations (9,262) (4,960) 4,552 1,140 (1,657) Gain on sale of subsidiaries 4,129 --- --- --- --- Net income (loss) (7,253) (4,074) 4,592 1,018 (4,753) Conversion discount on preferred stock (42) (1,011) --- --- --- Dividends and accretion on preferred stock (298) (359) --- --- --- Income (loss) attributable to common stockholders (7,593) (5,444) 4,592 1,018 (4,753) Basic earnings (loss) per common share (0.80) (0.69) 0.68 0.18 (0.92) Diluted earnings (loss) per share (0.80) (0.69) 0.64 0.16 (0.92) Working capital 12,730 10,021 7,272 3,570 3,063 Total assets 50,461 34,250 29,102 8,641 4,511 Long-term obligations 500 642 --- --- --- Redeemable convertible preferred stock 11,477 --- --- --- --- Stockholders' equity 27,040 26,769 20,420 6,118 3,532
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations All yearly references are to the Company's fiscal years ended December 31, 1997, 1996 and 1995, unless otherwise indicated. Adoption of New Accounting Standard During 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which established new standards for computing and presenting earnings per share. The historical measures of earnings per share (primary and fully diluted) are replaced with two new computations of earnings per share (basic and diluted). The Company adopted SFAS 128 as of December 31, 1997. In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." They are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. SFAS No. 130 requires companies to classify items defined as "other comprehensive income" by their nature in a financial statement, and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The adoption of SFAS No. 130 is not expected to have a material impact on the Company's consolidated financial statements. SFAS No. 131 requires companies to report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This statement also requires that public companies report certain information about their products and services, the geographic areas in which they operate and their major customers. The Company is currently reviewing the impact of this statement on its current level of disclosure. Overview The Company's net loss for 1997 was $7,253,084 and its loss attributable to common stockholders was $7,592,926, or $0.80 per basic and diluted common share, on net sales of $24,388,833. The net loss is primarily attributable to increased expenses generated by the Company's technology segment. The difference between the net loss and the loss attributable to common stockholders resulted from preferred stock dividends and accretion and the conversion discount on preferred stock. On December 30, 1997, the Company sold its MEC and LSIA subsidiaries to Vision 21 in a transaction which was effective as of December 1, 1997. Under the Company's ownership, MEC was a vision managed care company which managed vision care programs for health maintenance organizations (HMOs) and other insured enrollees and LSIA was a physician practice management company which managed the ophthalmic practice known as NNJEI under a management services agreement. The Company received $6.5 million in cash paid at the closing and 820,085 unregistered shares of Vision 21 common stock ("Vision 21 Shares"), subject to certain post-closing adjustments. See "Recent Developments--Liquidation of Vision 21 Shares." Although the amount of post-closing adjustments could be as much as $770,000, the Company estimates, as of March 27, 1998, that the amount of such adjustments will be approximately $150,000. This estimate is subject to change and reflects the anticipated effect of the following: The Company is required to reimburse Vision 21 for operating profits for the month of December 1997 generated by MEC and LSIA, negative working capital as of November 30, 1997 of MEC and LSIA less than negative $180,000, if any, and negative net worth as of November 30, 1997 for MEC and LSIA, if any. In addition, if prior to December 31, 1998 Vision 21 does not enter into certain practice management agreements with NNJEI and an affiliated physician, or absent such agreements, if the benefits Vision 21 derives from existing practice management agreements for the period ending December 31, 1998 is less than $133,000, then the Company is required to reimburse Vision 21 for such shortfall on a dollar-for-dollar basis up to a maximum of $500,000. In an amendment to Form 8-K filed with the Securities and Exchange Commission (the "SEC") on March 17, 1998, Vision 21 disclosed that the physicians currently employed by NNJEI have threatened to discontinue providing professional services effective March 31, 1998. Results of Operations Net sales. The following table presents the Company's net sales by major operating segments: technology products and services and health care services for the previous three years.
1997 1996 1995 Net Sales % of Total Net Sales % of Total Net Sales % of Total --------- ---------- --------- ---------- --------- ---------- Technology $12,170,018 50% $10,634,663 50% $19,899,584 77% Health care services 12,218,815 50% 11,263,399 52% 6,088,481 23% Intercompany revenues -- -- (394,072) (2%) -- -- ----------- ----- ----------- ---- ----------- ----- Total net sales $24,388,833 100% $21,503,990 100% $25,988,065 100% Change from prior year 13% (17)%
Net sales and revenues increased by $2,884,843 between 1996 and 1997. Net sales and revenues decreased by $4,484,075 between 1995 and 1996. 1997 vs. 1996. The increase in health care services revenue was primarily attributable to increased revenues generated by MEC (an increase of $1,806,392) and LSIA (an increase of $1,317,780), offset by a substantial reduction in revenues generated by TFG. Of the total net sales and revenues for 1997, MEC, LSIA and TFG accounted for revenues of $7,985,811 (33% of total revenues), $3,021,304 (12%) and $1,211,700 (5%), respectively. Net sales for TFG for the year ended 1997 decreased by $2,168,756 from the same period in 1996. This decrease was due primarily to a reduction in consulting services provided and was accompanied by a total expense reduction, including costs of services, of $2,055,959 for the year ended 1997. Such revenue decrease is primarily a result of that subsidiary's primary revenue producer, Michael R. Farris, being named as president of the Company in late 1995, eliminating his day-to-day participation in the consulting business. Other consultants employed were unable to maintain revenues at historical levels. The increase in revenues generated by MEC resulted from new contracts entered into during 1997 and increased enrollments in existing contracts. The increase in revenues generated by LSIA in 1997 is primarily a result of LSIA being acquired in July 1996. The increase in revenues generated by the Company's technology subsidiary is primarily attributable to the phasing out of the LS 300 laser system which had a lower selling price than the LaserScan 2000 and LSX. Forty-six laser systems were sold during 1997 compared to 46 systems, net of returns, sold 1996. The Company's ability to sell the new LSX into certain European countries is limited until the system receives CE Mark certification, which is anticipated sometime in mid-1998. Technology revenues include the impact of 12 sales returns in 1996 (see the next paragraph) and one system return in 1997. Based upon the expected timing of increased availability of the LSX, the Company expects laser system sales to remain at 1997 levels for the first quarter of 1998, with moderately increased sales levels thereafter. 1996 vs. 1995. The increase in health care services revenue was primarily attributable to revenues generated by the Company's acquisitions of MEC on October 5, 1995 and of the assets of NNJEI on July 3, 1996, partially offset by a reduction in TFG's revenues of 31% relative to 1995. This decrease was due primarily to a reduction in consulting services provided. During the third quarter of 1996, the Company reduced the number of TFG's personnel in anticipation that 1997 revenues would continue below historical levels. Of the total net sales and revenues for 1996, MEC, TFG and LSIA accounted for revenues of $6,179,419 (29% of total revenues), $3,380,456 (16%) and $1,703,524 (8%), respectively. Of TFG's total revenues, $394,072 (2%) were intercompany revenues which have been eliminated in the Company's consolidated financial statements. LSIA's 1996 revenues reflect a six-month period. The higher revenues generated from health care services were offset primarily by a decrease in revenues of technology products and services during 1996. The decrease in revenues generated by the Company's technology subsidiary was primarily attributable to (i) a decrease in the number of laser systems sold in overseas markets in 1996; (ii) a higher allowance for sales returns, reflecting differences between actual experience and previously-estimated amounts; and (iii) a lower average system selling price in 1996. Although a total of 58 laser systems were sold in 1996 compared to 65 systems sold in 1995, 12 laser systems were returned in 1996 compared to one system returned in 1995. Through the first quarter of 1996, certain of the Company's sales contracts included provisions for returns over periods ranging from one to 12 months. Such provisions did not result in any material laser system returns through the end of 1995. In the second quarter of 1996, the Company ceased sales of systems with return rights. Based on the passage of time, the Company does not believe it faces significant exposure for future returns of systems. The decrease in laser system sales from 1995 levels was also the result of the Company's revised credit policy, which established more stringent criteria for acceptable sales terms. In addition, due to competitive pressures in certain markets and the Company's introduction of the lower priced LS 300 laser system in June 1996, the average sales price, net of commissions, declined by approximately 20% from 1995 average levels. Included in the first quarter of 1995 were non-recurring revenues from the sale of revenue rights from procedure fees at six surgical centers located in China in the amount of $600,000. The financial impact of systems sold in 1995 and returned in 1996 in excess of previously estimated amounts was approximately $1.8 million, broken down as follows: Net revenues were decreased by $2.7 million, offset by reductions in corresponding cost of sales ($0.6 million) and commissions and warranty-related costs ($0.3 million). Cost of revenues; gross profits. The following table presents a three-year comparative analysis of cost of revenues, gross profit and gross profit margins.
1997 % Change 1996 % Change 1995 ---- -------- ---- -------- ---- Product cost $4,127,908 21% $3,415,276 (30%) $4,859,039 Cost of services 8,573,932 28% 6,707,308 200% 2,234,131 Gross profit 11,686,993 11,381,406 18,984,895 Gross profit percentage 48% 53% 73% Products only: Gross profit 8,042,110 7,219,387 15,040,545 Gross profit percentage 66% 68% 76%
Gross profit margins were 48% of net sales in 1997 compared to 53% in 1996 and 73% in 1995. Gross profit increased $305,587 in 1997 from 1996 and decreased $7,513,489 in 1996 from 1995. 1997 vs. 1996. The gross profit margin decrease was attributable to (i) a significant increase in MEC revenues with a corresponding increase in provider payments, which historically have ranged from approximately 68 to 72% of MEC revenues, and (ii) a general increase in the operating costs of the Company's Costa Rican manufacturing facility due to the doubling of leased space and higher than average compensation increases paid to Costa Rican employees due to the competitive environment for engineers in that area, the costs of which are allocated entirely to cost of goods sold. The gross profit margin decrease was mitigated in part due to a substantial increase in revenues generated by LSIA. Costa Rican operating expenses are not expected to increase materially without a significant increase in the level of systems sold. 1996 vs. 1995. The gross profit margin decrease was attributable to (i) a full year's activity of MEC which, in 1996, operated at a gross profit percentage of 32% (which the Company believes is above average for the managed care industry); (ii) a lower average sales price for laser systems sold in 1996; (iii) the additional allowance for sales returns; and (iv) the sale of the Company's future revenue rights for six laser systems in China for $600,000 in 1995. After removing revenues from the sale of revenue rights in 1995 and all health care services revenues from 1996 and 1995 consolidated sales and revenues, the gross profit margins and gross profit margin were $7,219,387 and 68%, respectively, in 1996 and $14,440,545 and 75%, respectively, in 1995. Research, development and regulatory expenses. The following table presents a three-year comparative analysis of research, development and regulatory expenses.
1997 % Change 1996 % Change 1995 ---- -------- ---- -------- ---- Research, development and regulatory $2,807,579 63% $1,720,246 18% $1,460,842 As a percent of technology net sales 23% 16% 7%
Research, development and regulatory expenses increased by $1,087,333 between 1996 and 1997. Such expenses increased by $259,404 between 1995 and 1996. 1997 vs. 1996. The increase can primarily be attributed to ongoing research and development of new scanning refractive laser systems, including development of the LSX and add-on features for the LaserScan 2000, and continued software development for the laser systems. Additionally, the Company has incurred increased costs related to the FDA regulatory process, both for its own scanning laser system (the PMA application for which was filed in March 1998), and the LASIK laser system (for which the Company purchased the rights to manufacture and commercialize if FDA approval is received). Additional costs have been incurred in the clinical and manufacturing validation of the A*D*K. Increased commercial production and shipment of the LSX is anticipated during the second quarter of 1998. Since the initial announcement of the development of the LSX, the Company has solicited and received input from clinical users and prospective customers. This has resulted in modifications to the system, necessitating additional development and testing for clinical validation. As a result of a continuation of the efforts described, the Company expects research, development and regulatory expenses during the first two quarters of 1998 to remain at levels consistent with those incurred in the latter part of 1997. The Company does not anticipate 1998 expenses overall to exceed 1997 levels. Regulatory expenses may increase as a result of the Company's continuation of current FDA clinical trials, protocols added during 1997 related to the potential use of the Company's laser systems for treatment of glaucoma, the possible development of additional future protocols for submission to the FDA and the LASIK PMA acquired in July 1997. 1996 vs. 1995. The increase can primarily be attributed to ongoing research and development of new refractive laser systems, including refinements to and accessories for the LaserScan 2000, and continued software development for the excimer lasers. Regulatory expenses increased as a result of the Company's approval from the FDA to proceed with Phase 2b clinical trials for myopia and Phase 2a clinical trials for PARK and the development of additional protocols for possible future submission to the FDA. Selling, general and administrative expenses. The following table presents a three-year comparative analysis of selling, general and administrative expenses.
1997 % Change 1996 % Change 1995 ---- -------- ---- -------- ---- Selling, general and administrative $18,141,568 24 % $14,621,509 14 % $12,881,909 As a % of net sales 74 % 68 % 50 %
Selling, general and administrative expenses increased by $3,520,059 in 1997 from 1996. Such expenses increased by $1,739,600 in 1996 from 1995. 1997 vs. 1996. The primary reasons for these increases include the continued growth of MEC ($376,126), increased amortization costs resulting from acquired patents, license agreements and other intangibles ($1,074,365), additional provisions for uncollectible accounts ($1,902,432), and a general increase in personnel costs necessary to fund the strategic initiatives of the Company and the development of its products and services. Such strategic efforts include enhancements to field service, engineering and software development departments, the pursuit during 1997 of vision managed care contracts with HMOs, insurers and employer groups, the IBM patents and the A*D*K license. Additionally, LSIA began operations in July 1996, resulting in six months of expenses being included in 1996 operations and representing increased expenses of $269,069 during 1997. These increases were partially offset by the substantial reduction in the operating costs of TFG ($1,456,999). Legal and accounting expenditures continue to be incurred as a result of ongoing regulatory filings, general corporate issues, litigation and patent issues. 1996 vs. 1995. The primary reasons for these increases include increased employment and other operating costs as a result of the acquisition of MEC in October 1995 and its subsequent growth, the acquisition of the assets of NNJEI in July 1996, and a general increase in personnel and costs necessary to fund the strategic initiatives of the Company and the development of its products and services. The relationship of such expenses to revenues suffered during 1996 as a result of the lower average selling price for laser systems, the additional allowance for sales returns, and the decrease in TFG revenues. Without the impact of sales returns, total selling, general and administrative expenses would have totaled approximately $14.9 million and represented 62% of net sales. Additionally, in 1996, the Company spent approximately $400,000 and significant internal resources on the expansion of its ophthalmic practice management and vision managed care strategies. Expenses in 1996 included severance costs of approximately $330,000, and the costs attributable to the work required to achieve ISO 9002 certification and CE Mark designation on the LaserScan 2000. During 1996, the Company increased its net reserve for uncollectible accounts by $425,000. Legal and consulting expenditures continue to be incurred as a result of ongoing regulatory filings, general corporate issues, litigation and patent issues. Income (Loss) from Operations. The Company recognized a loss from operations of $9,262,154 in 1997 compared to a loss from operations of $4,960,349 in 1996 and an income from operations of $4,552,144 in 1995. 1997 vs. 1996. The decrease in operating results can be attributed primarily to the increases in research, development, regulatory and general and administrative expenses partially offset by increased revenues. Effective December 1, 1997, the Company sold two of its subsidiaries. See "Recent Developments-Liquidation of Vision 21 Shares". 1996 vs. 1995. The decrease in operating results can be attributed primarily to the decrease in net sales of the Company's laser systems, the higher-than-estimated level of laser system returns, and the loss incurred by TFG. Additional contributing factors included an overall increase in expenses, including research and development, regulatory and selling, general and administrative expenses, including resources devoted to the development of the Company's business strategies. Other Income and Expenses. Interest and dividend income of $383,611 was earned in 1997 from the investment of cash and cash equivalents and the collection of long-term receivables related to laser system sales. This represents an increase of $69,324 from 1996. Investment earnings in 1996 were $314,287, an increase of $124,739 from 1995, and consisted of the investment of cash and cash equivalents and a note receivable. Interest expense incurred during 1997 was $1,343,198 and related primarily to the credit facility established with Foothill on April 1, 1997 and the note payable to the former owners of MEC which was repaid on April 1, 1997. In addition to interest paid on the outstanding note payable balance, interest expense includes the amortization of deferred financing costs, the accretion of the discount on the note payable, and fees associated with amendments to the original loan agreement. Interest expense for 1996 was $151,634 and related primarily to the notes payable to the former owners of MEC and a capital lease on most of the NNJEI assets acquired. Included in other expense in 1997 and 1996 are costs of $280,400 and $415,681, respectively, related to the settlement of patent and other filed and threatened litigation. There were no such expenses in 1995. Included in other income is a $4,129,057 gain recognized from the sale of two of the Company's subsidiaries. See "Recent Developments--Liquidation of Vision 21 Shares." During 1995, the Company received payment of $350,000 from the Company's former president in settlement of securities trading losses incurred during 1993 and the first half of 1994, and recognized a non-recurring gain. In addition, the Company also received aggregate payments of $980,125 in settlement of its litigation claims against Residue Recovery Corp., and recognized a non-recurring gain. Without these gains, net income for 1995, after the estimated income tax effect of these gains, would have been approximately $3,528,000 or $0.52 per basic share. Income taxes. The Company recorded an income tax provision of $880,000 in 1997 compared to an income tax benefit of $1,139,008 in 1996 and an income tax provision of $1,397,800 in 1995. The 1997 provision for income taxes primarily results from the gain on the sale of two of the Company's subsidiaries after utilization of net operating loss and capital loss carryforwards. The 1996 benefit reflects an effective income tax rate of approximately 22% resulting from a limitation of available net operating loss carrybacks and the establishment of a valuation allowance on deferred tax assets. The 1995 provision for income taxes reflected an effective income tax rate of approximately 23% resulting from utilization of net operating loss carryforwards, a reduction of the deferred tax asset valuation allowance and income tax credits. Net Income (Loss). The Company incurred a net loss of $7,253,084 in 1997 compared to a net loss of $4,074,369 in 1996 and net income of $4,591,871 in 1995. The 1997 results are primarily attributable to a combination of increased revenues from technology products and MEC services, losses generated from TFG and higher operating expenses as previously described. The loss in 1996 was primarily attributable to the decrease in net sales of the Company's laser systems combined with the higher than estimated level of laser system returns, TFG's loss, an overall increase in expenses as previously described, and settlement expenses. The improved operating results in 1995 were primarily the result of increased sales of the Company's laser systems, the profitability of the health care services companies, and non-recurring gains. Earnings (loss) per share. Earnings (loss) per basic and diluted common share decreased to ($0.80) in 1997 from ($0.69) in 1996. The decreases in 1997 are attributable to the larger net loss incurred and accretion and dividend requirements on the redemption in October 1997 of, the Company's Series B Convertible Participating Preferred Stock, $.001 par value (the "Series B Preferred Stock") issued in August 1997. Of the basic and diluted losses per share in 1997, $0.04 and $0.04, respectively, were a result of the value of conversion discount on preferred stock in accordance with EITF Topic D-60 and accretion and dividend requirements on the Series B Preferred Stock. Weighted average shares outstanding increased in 1997 as a result of the conversion of eight shares of Series A Preferred Stock into Common Stock, the 1997 amendment to the purchase agreement related to LaserSight Centers, the issuance of shares under the earnout provisions of the 1994 acquisition of TFG, the issuance of shares in conjunction with the 1997 acquisition of rights to a PMA and keratome patent, and the exercise of options. The decreases in 1996 were attributable to the net loss incurred and dividends on the Series A Preferred Stock issued in January 1996. Of the basic and diluted losses per share in 1996, $0.13 and $0.13, respectively, were a result of the value of conversion discount on preferred stock in accordance with EITF Topic D-60, and $0.05 and $0.05, respectively, were a result of dividends on the Series A Preferred Stock. In 1995, earnings per share grew at a slower rate than net income, primarily because of a significant increase in weighted average shares outstanding -- 19% on a basic basis and 12% on a diluted basis. The increases were largely the result of a placement of Common Stock in early 1995, exercises of outstanding stock options and grants of additional stock options, shares issuable pursuant to the TFG acquisition agreements and shares issued in connection with the MEC acquisition in the fourth quarter. For purposes of computing basic and diluted earnings per share, 406,700 shares of Common Stock that were issuable pursuant to an earnout based on the pre-tax performance of TFG have been included in weighted average shares outstanding for both 1996 and 1995. Liquidity and Capital Resources Working Capital. Working capital increased $2,708,899 from $10,020,801 in 1996 to $12,729,700 in 1997. This increase resulted primarily from an increase in cash and cash equivalents and marketable equity securities resulting from the sale of two of the Company's subsidiaries. See "Recent Developments--Liquidation of Vision 21 Shares." Sources and uses of funds. Operating activities used net cash of $4,352,779 in 1997, compared to $4,172,458 used in 1996. This increase is primarily attributable to higher 1997 net loss compared to the net loss in 1996 and the sale of two of the Company's subsidiaries. These items were partially offset by an increase in amortization and depreciation costs and increases in accounts payable, accrued expenses and income tax accounts. Net cash used in investing activities was $5,779,075 in 1997 compared to $20,197 of net cash provided by investing activities during 1996 and net cash used of $293,574 in 1995. Net cash used in investing activities during 1997 can be primarily attributed to the acquisition of certain patents and license agreements from IBM and others, the purchase of office and computer equipment, and the purchase of a vision managed care contract, partially offset by the proceeds from the sale of two of the Company's subsidiaries and proceeds from the exclusive licensure of such patents. Net cash provided by investing activities in 1996 can be primarily attributed to the proceeds from the sale-leaseback transaction offset by the acquisition of the assets of NNJEI and the purchase of office and computer equipment and leasehold improvements. Net cash provided from financing activities during 1997 was $11,986,753 and consisted of net proceeds from the issuance of the Series B Preferred Stock to finance the acquisition of the IBM patents, the credit facility with Foothill and the exercise of stock options, offset by the redemption of Series B Preferred Stock, the repayment of a note payable to former owners of MEC and repayment of a capital lease obligation. Net cash provided from financing activities during 1996 was $4,557,423, consisting of net proceeds from the issuance of Series A Preferred Stock totaling $5,342,152, less a payment of $1,373,518 in debt relating to the Company's acquisitions of TFG in February 1994 and MEC in October 1995 and repayment of a capital lease obligation. The exercise of stock options and warrants generated cash of $588,789. Net cash provided from financing activities during 1995 was $1,928,132, consisting of net stock proceeds totaling $1,323,333 and receipt of $1,108,061 from the exercise of stock options, reduced by $503,262 in payments on Company debt. Financing. On April 1, 1997, the Company entered into a loan agreement with Foothill for a loan of up to $8 million, consisting of a term loan in the amount of $4 million and a revolving loan in an amount of 80% of the eligible receivables of LaserSight Technologies, but not in excess of $4 million. The original terms of the term loan provided for interest at an annual rate of 12.50% and required repayment of principal in monthly installments of $1.33 million beginning on May 1, 1998. The revolving loan bears interest at a variable annual rate of 1.50% above the base rate of Norwest Bank Minnesota. The original terms of the revolving loan provided that the $4 million maximum amount of the revolving loan was to decline by $1.33 million per month beginning on August 1, 1998. In connection with the loan, the Company paid an origination fee of $150,000 and issued warrants to purchase 500,000 shares of Common Stock. The warrants are exercisable at any time from April 1, 1998 through April 1, 2002 at an exercise price initially equal to $6.0667 per share. Subject to certain conditions based on the market price of the Common Stock, up to half of the warrants are eligible for repurchase by the Company. Any warrants that remain outstanding and unexercised on April 1, 2002 are subject to mandatory repurchase by the Company at a price of $1.50 per warrant. Based on an agreement between Foothill and the Company and certain anti-dilution features of the Foothill warrants, the issuance of the Series B Preferred Stock resulted in (i) an increase in number of Foothill warrant shares by approximately 50,000 (ii) a reduction in the warrant exercise price to approximately $5.52 per share, and (iii) a reduction in the repurchase price of the warrants to approximately $1.36 per warrant. The Foothill loan is secured by a pledge of substantially all of the Company's accounts receivable and other assets. The Company used a portion of the net proceeds of the term loan to pay in full the balance due under its note to the former owners of MEC. On December 30, 1997, the Company used $2.0 million of proceeds from the sale of MEC and LSIA to reduce the principal balance of its term loan with Foothill, from $4.0 million to $2.0 million. The Company also used approximately $1.5 million of proceeds from the sale to repay the balance under its revolving loan facility with Foothill as of December 30, 1997. Effective as of December 30, 1997, the Company restructured its agreements with Foothill as follows: The maximum amount available under its revolving loan facility has been reduced to $2.0 million. In addition, the Company pledged its Vision 21 Shares to Foothill as collateral. After the Company has received aggregate gross proceeds of $2.5 million from the liquidation of the Vision 21 Shares, it must apply any additional proceeds to repay its term loan with Foothill, and apply any remaining proceeds to retire any then-outstanding advances under its revolving loan with Foothill. In any event, the Company's term and revolving loans are to be paid in full by June 15, 1998. Until June 16, 1998, Foothill has waived the Company's compliance with the financial covenants contained in the loan agreements. Redemption and Repurchase of Series B Preferred Stock. The Company voluntarily redeemed 305 shares of the Series B Preferred Stock (approximately 19% of the 1,600 shares originally issued) in October 1997. The Company paid the redemption price of $3,172,000 (including a 4% redemption premium) with funds held in a blocked account which serves as collateral for the Company's contingent obligation to redeem Series B Preferred Stock. As required by its agreement with the preferred shareholders, the Company had established the $3.2 million blocked account to hold 80% of the $4 million the Company had received in September 1997 as a payment for an exclusive, worldwide, royalty-free license to a third party covering the use in the vascular and cardiovascular fields of the IBM Patents. The Company believes that its continued holding of the restricted funds in the blocked account (instead of redeeming the 305 preferred shares) would not have meaningfully enhanced the Company's liquidity and would, under the terms of the Series B Preferred Stock, have resulted in an increase in the redemption premium (to as much as 14%) or the expiration in January 1998 of the Company's option to redeem such 305 shares. In addition, the Company believes that the redemption reduced the dilutive effect of the Series B Preferred Stock on the Company's common shareholders. In addition, the Company repurchased 351 shares of Series B Preferred Stock (approximately 22% of the shares originally issued) in February and March 1998. In exchange for the consent of the holders of Series B Preferred Stock to the sale of the international patent rights to the IBM Patents (see "Recent Developments--Nidek Patent Transaction" and "--Agreements with Preferred Shareholders"), the Company agreed to deposit $4.2 million of the sale transaction proceeds into the blocked account. The Company used such funds to pay the repurchase price of $4,212,000 (including a 20% premium). The Company believes that without the consent of the preferred shareholders, the transaction would not have been completed. In addition, the Company believes that the repurchase reduced the dilutive effect of the Series B Preferred Stock on the Company's common shareholders. Working capital requirements. The Company experienced a significant negative cash flow from operations in 1997, largely resulting from the level of laser system sales and the increase in research, development and regulatory expenses resulting from the development of the LSX and other efforts as previously described. The Company expects cash flow from operations to begin to show improvement in the second and third quarters of 1998 as a result of the expected shipment of the LSX and A*D*K's as previously discussed. However, the Company expects to incur a loss and a deficit in cash flow from operations for the first quarter of 1998. There can be no assurance that the Company can regain or sustain profitability or positive operative cash flow in any subsequent fiscal period. Based on these factors, the Company believes that its balances of cash and cash equivalents along with expected operating cash flows, the anticipated liquidation of the Vision 21 Shares and the availability of the Foothill revolver through June 15, 1998, will be sufficient to fund its anticipated working capital requirements for the next 12 months based on modest growth and anticipated collection of receivables. A failure to collect timely a material portion of current receivables, unexpected delays in the shipment of the LSX or A*D*K products, or a delay in the anticipated liquidation of the Vision 21 Shares could have a material adverse effect on the Company's liquidity. The Company may from time to time reassess its credit policy and the terms it will make available to individual customers. With the anticipated sales of the new LSX laser system during 1998, the Company intends to internally finance a proportionately smaller number of sales over periods exceeding 18 months than in preceding years. There can be no assurance as to the terms or amount of third-party financing, if any, that the Company's customers may obtain in the future. The Company is placing greater emphasis on the terms and collection timing of future sales. The Company expects to increase the level of manufacturing and distribution of its laser systems and to continue a variety of research and development activities on its excimer and solid-state laser systems over the next twelve months and it is anticipated that such research and development as well as regulatory efforts in the U.S. will be the most significant technology related expenses in the foreseeable future. Possible joint ventures. The Company is receptive to joint venture discussions with compatible companies for the development and operation in international markets of surgical centers that will utilize the Company's products. The Company has no present commitments for joint venture relationships, and no assurance can be given that any such relationships will be secured on terms satisfactory to the Company. In October 1996, the Company announced an agreement with Laser Vision Centers, Inc. ("Laser Vision") to create a joint venture to make excimer laser technology available to the participating physicians of LaserSight Centers. If finalized, such an agreement would have provided for Laser Vision to provide the excimer laser and necessary technical personnel to locations serviced by the approximately 100 ophthalmologists currently under non-exclusive contract with LaserSight for excimer laser services. No written agreement has been executed and no further negotiations are under way at this time. Stock subscription receivable. The Company is owed $1,140,000 on a promissory note from the Company's former placement agent in connection with a placement of Common Stock in January 1995. The Company's lawsuit to collect on the note resulted in the issuance in December 1997 of a final judgment in favor of the Company in the amount of $1,140,000, together with interest in the amount of $526,809 and costs and attorneys' fees in an amount yet to be determined. Despite the fact that the defendants have appealed the judgment, the Company is currently pursuing efforts to collect the judgment. Risk Factors and Uncertainties The business, results of operations and financial condition of the Company and the market price of the Common Stock may be adversely affected by a variety of factors, including the ones noted below: Potentially Unlimited Number of Series B Conversion Shares Issuable. There is no limit on the number of shares of Common Stock potentially issuable in connection with conversions of Series B Preferred Stock. As illustrated in the table below, the number of shares of Common Stock issuable upon such conversions (the "Series B Conversion Shares") depends on the market price of the Common Stock at the time of conversions: Assumed Number of As % of Common Shares Conversion Series B Conversion Assumed Outstanding Price (1) Shares Issuable (2)(3) After Conversion (4) --------- ---------------------- -------------------- $0.50 11,880,000 49.8% $1.00 5,940,000 33.1% $1.739583 (5) 3,414,611 22.2% $2.00 2,970,000 19.8% $3.00 1,980,000 14.2% $4.00 1,485,000 11.0% $5.00 1,188,000 9.0% $6.00 990,000 7.6% $6.68 (6) 889,221 6.9% - -------------------------- (1) Equals the lesser of (A) $6.68 or (B) the average of the three lowest closing bid prices of the Common Stock during the 30 trading days immediately preceding the applicable conversion date. (2) Excludes an aggregate of 2,011,975 Series B Conversion Shares that have been issued in connection with conversions through March 27, 1998. (3) Based on an agreement between the Company and the holders of the Series B Preferred Stock, no more than 390,659 additional Series B Conversion Shares may be issued before June 12, 1998 or, subject to certain shareholder approval requirements, September 14, 1998. This agreement can be terminated by the preferred shareholders under certain circumstances. See "Recent Developments--Agreement With Preferred Shareholders--Proposed Revision of Terms." (4) Equals the 11,996,647 shares of Common Stock outstanding on March 27, 1998 plus the number of Series B Conversion Shares issuable upon the conversion (at a conversion price indicated in the table) of all 594 shares of Series B Preferred Stock outstanding as of such date. (5) Equals the conversion price in effect as of March 30, 1998. (6) Under the terms of the Series B Preferred Stock, the conversion price cannot exceed $6.68, regardless of the market price of the Common Stock. The Company has agreed, subject to the approval of its stockholders, to amend the terms of the Series B Preferred Stock to adjust this maximum conversion price to equal the lesser of $6.68 or 110% of the average closing bid prices of the Common Stock during the 20-trading day period ending on September 14, 1998. Failure to receive such approval on or before June 12, 1998 will require the Company to issue to the holders of the Series B Preferred Stock warrants to purchase up to 750,000 shares of Common Stock at a price of $2.724 per share. See "Recent Developments--Agreement With Preferred Shareholders--Proposed Revision of Terms." Potential Obligations to Redeem Preferred Stock. Any holder of Series B Preferred Stock could require the redemption of all or a portion of its shares for cash at a premium of at least 25% under any of the following circumstances: o If the Company fails to maintain the effectiveness of its registration statement under the Securities Act of 1933 (the "Securities Act") relating to the resale of the Series B Conversion Shares and the Common Stock issuable upon the exercise of warrants (such shares, the "Series B Warrant Shares") issued in connection with the Company's private placement of the Series B Preferred Stock in August 1997 by the holders thereof. o If the Company becomes required to register additional Series B Conversion Shares under the Securities Act, but for any reason fails to have a registration statement relating to such shares declared effective by the SEC within 30 days after such requirement first arises. Based on the number of shares of Series B Preferred Stock outstanding as of March 27, 1998, and the number of Series B Conversion Shares that have already been registered, the Company estimates that it would be required to file such a registration statement if the conversion price of the Series B Preferred Stock were to decline below approximately $1.36. o If the Company fails to take all necessary action (including obtaining any necessary stockholder approvals) to authorize the issuance of additional shares of Common Stock as may become required in connection with the exercise of the Series B Preferred Stock and the exercise of the Series B Warrants. Such authorization of additional Common Stock would be required if the number of shares of Common Stock reserved for such issuance becomes, for any period of three consecutive trading days, less than 175% of the number of shares of Common Stock that would then be issuable upon conversion of the outstanding Series B Preferred Stock. Under any of these circumstances, the redemption price per share of Series B Preferred Stock to be redeemed would equal the liquidation preference of $10,000 per share multiplied by the greater of (i) 1.25 or (ii) a fraction, the numerator of which would equal the highest closing bid price of the Common Stock during the period beginning 10 trading days before the redemption date and ending five business days after such date, and the denominator of which would equal the conversion price that would have been applicable if the preferred shares had been converted as of the redemption date. The fraction described in the preceding sentence will depend on market prices of the Common Stock and could significantly exceed 1.25. There can be no assurance that the Company would have the financial resources to pay any such redemption price. In addition, any required redemption of preferred shares would cause a default under the Company's credit facility with Foothill that would entitle Foothill to accelerate the otherwise-applicable maturity date (June 15, 1998) of the Company's Foothill debt. Shares Eligible For Future Sale. Except as provided below, substantially all of the Company's outstanding Common Stock (11,996,647 shares as of March 27, 1998) is freely tradeable without restriction or further registration under the Securities Act, unless such shares are held by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The shares of Common Stock listed below are "restricted securities." Restricted securities may be sold in the public market only if they have been registered under the Securities Act or if their sales qualify for Rule 144 or another available exemption from the registration requirements of the Securities Act. o All Series B Conversion Shares are freely saleable, subject only to the satisfaction of a prospectus delivery requirement. If all outstanding Series B Preferred Stock had been converted as of March 27, 1998, the number of such freely-tradeable shares would have been approximately 3,414,611. (Subject to certain exceptions specified in an agreement between the Company and its preferred shareholders, no more than 390,659 additional Conversion Shares may be issued before June 12, 1998 or, subject to certain shareholder approval requirements, September 14, 1998. See "Recent Developments--Agreement With Preferred Shareholders--Proposed Revision of Terms"). The actual number of Series B Conversion Shares will depend on future events, especially the market prices of the Common Stock and the timing of the conversion decisions of the holders of Series B Preferred Stock. o The 790,000 shares of Common Stock issuable upon exercise of the Series B Warrants (with an exercise price of $5.91 per share) will be freely saleable following such exercise, subject only to the satisfaction of a prospectus delivery requirement. o The 535,515 shares in an unregistered acquisition transaction in July 1997 (the "Photomed Shares") have become freely tradeable, subject only to a prospectus delivery requirement. o Other shares of Common Stock (the "Other Shares") which the Company may be required to issue in the future may become eligible for resale pursuant to Rule 144, the exercise of registration rights, or otherwise. See "Possible Dilutive Issuance of Common Stock--NNJEI; --LaserSight Centers and Florida Laser Partners; --TFG." Sales, or the possibility of sales, of the Series B Conversion Shares, Series B Warrant Shares, Photomed Shares, Centers Shares, or Other Shares, whether pursuant to a prospectus, Rule 144 or otherwise, could depress the market price of the Common Stock. Past and Expected Future Losses and Operating Cash Flow Deficits; No Assurance of Future Profits or Positive Operating Cash Flows. The Company incurred losses of $7.3 million and $4.1 million during 1997 and 1996, respectively. During such periods, the Company had a deficit in cash flow from operations of $4.4 million and $4.2 million, respectively. Although the Company achieved profitability during 1995 and 1994, it had a deficit in cash flow from operations of $1.9 million during 1995. In addition, the Company incurred losses in 1991 through 1993. As of December 31, 1997, the Company had an accumulated deficit of $11.9 million. The Company expects to incur a loss and a deficit in cash flow from operations during the first quarter of 1998. As a result of the Company's sale of its MEC and LSIA subsidiaries in December 1997, the Company's losses and deficits in cash flow from operations in future periods may be greater than if the Company had not sold MEC and LSIA. There can be no assurance that the Company can regain or sustain profitability or positive operating cash flow. Uncollectible Receivables Could Exceed Reserves. At December 31, 1997, the Company's trade accounts and notes receivable aggregated approximately $8,791,736, net of allowances for collection losses and returns of approximately $2,025,000. Accrued commissions, the payment of which generally depends on the collection of such net trade accounts and notes receivable, aggregated approximately $1,600,000 at December 31, 1997. Exposure to collection losses on receivables is principally dependent on the Company's customers ongoing financial condition and their ability to generate revenues from the Company's laser systems. In addition, approximately 90% and 87% of net receivables at December 31, 1997 and 1996, respectively, related to international accounts. The increase in this percentage between 1996 and 1997 resulted from the Company's December 1997 sale of its MEC and LSIA subsidiaries (substantially all of whose receivables related to U.S. accounts). The Company's ability to evaluate the financial condition and revenue generating ability of its prospective customers located outside of the U.S. is generally more limited than for customers located in the U.S. Although the Company monitors the status of its receivables and maintains a reserve for estimated losses, there can be no assurance that the Company's reserves for estimated losses ($1,825,000 at December 31, 1997) will be sufficient to cover actual write-offs over time. During 1997, the Company wrote off approximately $1,892,000 of receivables. Actual write-offs that materially exceed amounts reserved could have a material adverse effect on the Company's consolidated financial condition and results of operations. Restructuring of Receivables. At December 31, 1997, the Company had restructured laser customer accounts in the aggregate amount of approximately $1,070,000 (9.8% of the gross receivables as of such date), resulting in the extension of the original payment terms by periods ranging from 12 to 60 months. The Company's liquidity and operating cash flow will be adversely affected if additional extensions become necessary in the future. In addition, it may be more difficult to collect laser system receivables if the payment schedule extends beyond the expected economic life of the laser system. Potential Liquidity Problems. During the year ended December 31, 1997, the Company experienced a $4.4 million deficit in cash flow from operations, largely resulting from the loss incurred during 1997 and the increase in the Company's research, development and regulatory expenses. Of this amount, approximately 82% was incurred during the third and fourth quarters of the year. The Company expects that any improvements in cash flow from operations will depend on, among other things, the Company's ability to market, produce and sell its new LSX laser systems and its A*D*K product on a commercial basis. See "--New Products" and "--Minimum Payments Under A*D*K License Agreement" below. As of March 27, 1998, the LSX laser system had not made any significant contribution to the Company's operating cash flow. Based on the status of clinical validation and refinement of the manufacturing processes, the Company does not expect significant commercial shipments of the A*D*K until mid-1998. Subject to these factors, the Company believes that its balances of cash and cash equivalents, together with expected operating cash flows, the anticipated liquidation of the Vision 21 Shares, and the availability of up to $2.0 million under its revolving credit facility with Foothill through June 15, 1998, will be sufficient to fund its anticipated working capital requirements for a 12-month period based on anticipated collection of receivables. However, if the Company does not collect timely a material portion of current receivables, experiences significant further delays in the shipment of its LSX or A*D*K, experiences less market demand for such products than it anticipates, or experiences a delay in the anticipated liquidation of the Vision 21 Shares the Company's liquidity could be materially adversely affected. Uncertainty Regarding Availability or Terms of Capital to Satisfy Possible Additional Needs. The Company may need additional capital, including to fund the following: o Any future negative cash flow from operations or the repayment on or before June 15, 1998 of any amounts borrowed under the Company's revolving credit facility with Foothill to finance such negative cash flow. o Certain cash payment obligations under the Company's LASIK PMA application acquisition agreement of July 1997 with Photomed, Inc. ("Photomed"). Such cash payment obligations include (i) $1.75 million payable if the FDA approves the LASIK PMA application for commercial sale before July 29, 1998 and (ii) if the FDA approves the Company's scanning laser for commercial sale in the U.S. before January 1, 1999, $3,663 for each day (or approximately $110,000 for each month) between the date of such approval and January 1, 1999, subject to a maximum of $1.0 million. (These obligations are in addition to the Company's obligation to pay $1 million in Common Stock. See "--Possible Dilutive Issuance of Common Stock--Photomed.") o Additional working capital necessary to develop a production line for the LASIK laser system and to obtain the GMP (Good Manufacturing Practice) clearance from the FDA that is required for the commercial sale of the LASIK laser system. o Additional working capital necessary to support the commercial introduction of its laser systems into the U.S. market after receiving FDA approval. (The Company believes the earliest these expenses might occur is the second half of 1998.) In addition, the Company may seek alternative sources of capital to fund its product development activities and to consummate future strategic acquisitions. Except for additional borrowing available (as of March 27, 1998, up to $2.0 million) under its revolving credit facility with Foothill through June 15, 1998 and an aggregate of approximately $6.5 million to $7.45 million (subject to certain post-closing adjustments) scheduled to be received in increasing monthly installments from February through May of 1998 (approximately $1.6 million has been received to date in 1998) from the sale or redemption of the Vision 21 Shares (see "Recent Developments--Liquidation of Vision 21 Shares"), the Company has no commitments or proposals from third parties to supply additional capital, and there can be no assurance as to whether or on what terms the Company could obtain additional capital. To the extent that the Company satisfies its future financing requirements through the sale of equity securities, holders of Common Stock may experience significant dilution in earnings per share and in net book value per share. Such dilution may be more significant if the Company sells additional preferred stock with a conversion price linked to the market price of the Common Stock at the time of conversion (as is the case with the Series B Preferred Stock). The Foothill financing or other debt financing could result in a substantial portion of the Company's cash flow from operations being dedicated to the payment of principal and interest on such indebtedness and may render the Company more vulnerable to competitive pressures and economic downturns. If the Company cannot obtain additional capital on satisfactory terms, it may be required to sell additional assets. Adverse Consequences if Company Cannot Receive Agreed-Upon Value of Its Vision 21 Shares. As described in more detail below under "Recent Developments--Liquidation of Vision 21 Shares," Vision 21 has agreed to pay to the Company on May 29, 1998 an amount equal to the amount (the "Shortfall Payment"), if any, by which the gross proceeds of sales of the Vision 21 Shares fall short of $6.5 million (subject to certain post-closing adjustments). Both the value of the Vision 21 Shares and the ability of Vision 21 to make the Shortfall Payment (if any is required) is subject to risks, including without limitation the risks disclosed in Vision 21's filings with the SEC. Copies of such filings can be obtained, upon payment of prescribed fees, at the Public Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 or from the SEC's Web site containing information filed electronically with the SEC. The address of such site is http://www.sec.gov. The Company takes no responsibility for any information included in or omitted from any SEC filing by Vision 21. Such filings are not part of this document and are not incorporated by reference herein. To the extent that the liquidation of the Vision 21 Shares does not occur according to the schedule specified in the Company's agreement with Vision 21, or any required Shortfall Payment is not paid when due, the Company's liquidity and financial condition may be materially adversely affected. Possible Dilutive Issuance of Common Stock--LaserSight Centers and Florida Laser Partners. Based on previously-reported agreements entered into in 1993 in connection with the Company's acquisition of LaserSight Centers (the Company's development-stage subsidiary) and modified in July 1995 and March 1997, the Company is obligated as follows: o To issue to the former shareholders and option holders (including two trusts related to the Chairman of the Board of the Company and certain former officers and directors of the Company) of LaserSight Centers, up to 600,000 unregistered shares of Common Stock (the "Centers Contingent Shares") based on the Company's pre-tax operating income through March 2002 from performing PRK or other refractive laser surgical procedures. The Centers Contingent Shares are issuable at the rate of one share per $4.00 of such operating income. o To pay to a partnership whose partners include the Chairman of the Board of the Company and certain former officers and directors of the Company a royalty of up to $43 (payable in cash or shares of Common Stock (the "Royalty Shares")), for each eye on which a laser refractive optical surgical procedure is conducted on an excimer laser system owned or operated by LaserSight Centers or its affiliates. Royalties do not begin to accrue until the earlier of March 2002 or the delivery of all of the 600,000 Centers Contingent Shares. As of December 31, 1997, the Company had not accrued any obligation to issue Centers Contingent Shares or Royalty Shares. There can be no assurance that any issuance of Centers Contingent Shares or Royalty Shares will be accompanied by an increase in the Company's per share operating results. The Company is not obligated to pursue strategies that may result in the issuance of Centers Contingent Shares or Royalty Shares. It may be in the interest of the Chairman of the Board for the Company to pursue business strategies that maximize the issuance of Centers Contingent Shares and Royalty Shares. Possible Dilutive Issuance of Common Stock--TFG. To the extent that the Company's The Farris Group subsidiary achieves certain pre-tax income levels during 1998, the earnout provisions of the Company's agreement for the acquisition of The Farris Group in 1994 would require the Company to issue to the former owner of such company (Mr. Michael R. Farris, the President and Chief Executive Officer of the Company) up to approximately 343,000 shares of Common Stock (the "Farris Contingent Shares"). There can be no assurance that any issuance of the Farris Contingent Shares will be accompanied by an increase in the Company's per share operating results. Possible Dilutive Issuance of Common Stock--Photomed. If the FDA approves a LaserSight-manufactured laser system for general commercial use in the treatment of hyperopia (farsightedness) after having approved for commercial sale the LASIK PMA application to which the Company acquired rights in August 1997, the Company would be required to issue additional shares of Common Stock with a market value of $1.0 million (based on the average closing price of the Common Stock during the preceding 10-day period). If such market value had been computed as of March 27, 1998, the number of additional shares issuable would have been approximately 409,000. Depending on whether and when such FDA approval is received and on the market price of the Common Stock at the time of any such approval, the actual number of additional shares issuable could be more (but not more than permitted under the listing rules of The NASDAQ Stock Market) or less than this number. Possible Dilutive Issuance of Common Stock--NNJEI. In connection with the acquisition of the assets of NNJEI by the Company's LSIA subsidiary in July 1996, the Company agreed to issue up to 102,798 additional shares of Common Stock if the average closing price of the Common Stock during the 10-day period immediately preceding July 15, 1998 is less than $15 per share. All 102,798 shares will be issuable unless such average closing price is more than $10 per share. The Company's sale of LSIA in December 1997 does not affect this contingent obligation. Acquisition- and Financing-Related Contingent Commitments to Issue Additional Common Shares. The Company may from time to time include in future acquisitions and financings provisions which would require the Company to issue additional shares of its Common Stock at a future date based on the market price of the Common Stock at such date. Persons who are the beneficiaries of such provisions effectively receive some protection from declines in the market price of the Common Stock, but other shareholders of the Company will incur additional dilution of their ownership interest in the event of a decline in the price of the Common Stock. Such dilution may be increased by provisions in the warrant issued to Foothill that may increase the number of shares issuable under the Foothill warrant and decrease the exercise price of the Foothill warrant. The factors to be considered by the Company in including such provisions may include the Company's cash resources, the trading history of Common Stock, the negotiating position of the selling party or the investors, as applicable, and the extent to which the Company estimates that the expected benefit from the acquisition or financing exceeds the expected dilutive effect of the price-protection provision. See "Recent Developments--Schwartz Electro-Optics, Inc. Letter of Intent." Dependence on Key Personnel. The Company is dependent on its executive officers and other key employees, especially Michael R. Farris, its President and Chief Executive Officer, and J. Richard Crowley, the President and Chief Operating Officer of its LaserSight Technologies subsidiary. A loss of one or more such officers or key employees, especially of Mr. Farris or Mr. Crowley, could have a material adverse effect on the Company's business. The Company does not carry "key man" insurance on Mr. Farris, Mr. Crowley or any other officers or key employees. Risks Associated with Past and Possible Future Acquisitions. The Company has made several significant acquisitions since 1994, including TFG in 1994, Photomed in 1997, and its acquisition of the IBM Patents in August 1997. These acquisitions, as well as any future acquisition, may not achieve adequate levels of revenue, profitability or productivity or may not otherwise perform as expected. Acquisitions involve special risks, including unanticipated liabilities and contingencies, diversion of management attention and possible adverse effects on operating results resulting from increased goodwill amortization, increased interest costs, the issuance of additional securities and difficulties related to the integration of the acquired businesses. Although the Company is currently focusing on its existing operations, the future ability of the Company to achieve growth through acquisitions will depend on a number of factors, including the availability of attractive acquisition opportunities, the availability of funds needed to complete acquisitions, the availability of working capital needed to fund the operations of acquired businesses and the effect of existing and emerging competition on operations. Should additional acquisitions be sought, there can be no assurance that the Company will be able to successfully identify additional suitable acquisition candidates, complete additional acquisitions or integrate acquired businesses into its operations. See "Recent Developments--Schwarz Electro-Optics, Inc. Letter of Intent." Amortization of Significant Intangible Assets. Of the Company's total assets at December 31, 1997, approximately $23.1 million (46%) were intangible assets, of which approximately $7.1 million reflects goodwill (which is being amortized using an estimated life ranging from 12 to 20 years), approximately $11.3 million reflects the cost of patents (which is being amortized over a period ranging from approximately 9 to 17 years), and approximately $4.7 million reflects the cost of licenses and technology acquired (which is being amortized over a period ranging from 31 months to 12 years). The 12-year life of acquired technology was determined based on the Company's best judgment at the time of the most likely life-span of a solid-state laser product and related patent. The major factors involved in the Company's ongoing assessment are its judgment whether there will be a market for solid-state as an improvement to existing excimer laser technology and that there is an industry and marketplace interest in such development that can be successfully pursued by the Company or others that will result in revenue from the associated patent. The Company's intangible assets were decreased by approximately $6.0 million as a result of the February 1998 closing of the Company's patent agreement with Nidek. See "Recent Developments--Nidek Patent Transactions." Goodwill is an intangible asset that represents the difference between the total purchase price of the acquisitions and the amount of such purchase price allocated to the fair value of the net assets acquired. Goodwill and other intangibles are amortized over a period of time, with the amount amortized in a particular period constituting a non-cash expense that reduces the Company's net income (or increases the Company's net loss) in that period. A reduction in net income resulting from the amortization of goodwill and other intangibles may have an adverse impact upon the market price of the Common Stock. In addition, in the event of a sale or liquidation of the Company or its assets, there can be no assurance that the value of such intangible assets would be recovered. In accordance with SFAS 121, the Company reviews intangible assets for impairment whenever events or changes in circumstances, including a history of operating or cash flow losses, indicate that the carrying amount of an asset may not be recoverable. In such cases, the carrying amount of the asset is compared to the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss will be computed and recognized in accordance with SFAS 121. Expected cash flows are based on factors including historical results, current operating budgets and projections, industry trends and expectations, and competition. The Company continues to assess the current results and future prospects of its TFG subsidiary in view of the substantial reduction in its operating results in 1996 and 1997. If TFG is unsuccessful in meeting its 1998 budget or otherwise improving its financial performance, some or all of the carrying amount of goodwill recorded ($3,976,000 at December 31, 1997) may be subject to an impairment adjustment. Year 2000 Concerns. The Company believes that it has prepared its computer systems and related applications to accommodate date-sensitive information relating to the Year 2000. The Company expects that any additional costs related to ensuring such systems to be Year 2000-compliant will not be material to the financial condition or results of operations of the Company. Such costs will be expensed as incurred. In addition, the Company is discussing with its vendors the possibility of any interface difficulties which may affect the Company. To date, no significant concerns have been identified. However, there can be no assurance that no Year 2000-related operating problems or expenses will arise with the Company's computer systems and software or in their interface with the computer systems and software of the Company's vendors. Government Regulation. The Company's laser products are subject to strict governmental regulations which materially affect the Company's ability to manufacture and market these products and directly impact the Company's overall prospects. All laser devices to be marketed in interstate commerce are subject to the laser regulations required by the Radiation Control for Health and Safety Act, as administered by the FDA. Such Act imposes design and performance standards, labeling and reporting requirements, and submission conditions in advance of marketing for all medical laser products. The Company's laser systems produced for medical use require PMA by the FDA before they can be marketed in the U.S. Each separate medical device requires a separate FDA submission, and specific protocols have to be submitted to the FDA for each claim made for each medical device. In addition, laser products marketed in foreign countries are often subject to local laws governing health product development processes which may impose additional costs for overseas product development. The Company cannot determine the costs or time it will take to complete the approval process and the related clinical testing for its medical laser products. Future legislative or administrative requirements in the U.S., or elsewhere, may adversely affect the Company's ability to obtain or retain regulatory approval for its laser products. The failure to obtain required approvals on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. Uncertainty Concerning Patents--International. Should LaserSight Technologies' lasers infringe upon any valid and enforceable patents in international markets, then LaserSight Technologies may be required to obtain licenses for such patents. Should such licenses not be obtained, LaserSight Technologies might be prohibited from manufacturing or marketing its PRK-UV lasers in those countries where patents are in effect. The Company's international sales accounted for 49% and 47%, of the Company's total revenues during 1997 and 1996, respectively. The Company expects such percentages to increase in future periods as a result of its sale of MEC and LSIA in December 1997. Uncertainty Concerning Patents--U.S. Should LaserSight Technologies' lasers infringe upon any valid and enforceable patents held by Pillar Point Partners (a partnership of which the general partners are subsidiaries of Visx and Summit Technologies) in the U.S., then LaserSight Technologies may be required to obtain a license for such patents. In connection with its March 1996 settlement of litigation with Pillar Point Partners, the Company agreed to notify Pillar Point Partners before the Company begins manufacturing or selling its laser systems in the U.S. If such licenses are required but not obtained, LaserSight Technologies might be prohibited from manufacturing or marketing its PRK-UV lasers in the U.S. Competition. The vision correction industry is subject to intense, increasing competition. The Company competes against both alternative and traditional medical technologies (such as eyeglasses, contact lenses and RK) and other laser manufacturers. Many of the Company's competitors have existing products and distribution systems in the marketplace and are substantially larger, better financed, and better known. A number of lasers manufactured by other companies have either received, or are much further advanced in the process of receiving, FDA approval for specific procedures, and, accordingly, may have or develop a higher level of acceptance in some markets than the Company's lasers. The entry of new competitors into the markets for the Company's products could cause downward pressure on the prices of such products and a material adverse effect on Company's business, financial condition and results of operations. Technological Change. Technological developments in the medical and laser industries are expected to continue at a rapid pace. Newer technologies and surgical techniques could be developed which may offer better performance than the Company's laser systems. The success of any competing alternatives to PRK and LASIK could have a material adverse effect on the Company's business, financial condition and results of operations. New Products. The Company may experience difficulties that could further delay or prevent the successful development, introduction and marketing of its new LSX excimer laser, its recently-announced A*D*K, and other new products and enhancements, or that its new products and enhancements will be accepted in the marketplace. As is typical in the case of new and rapidly evolving industries, demand and market acceptance for recently-introduced technology and products are subject to a high level of uncertainty. In addition, announcements of new products (whether for sale in the near future or at some later date) may cause customers to defer purchasing existing Company products. Minimum Payments Under A*D*K License Agreement. In addition to the risks relating to the introduction of any new product (see "--New Products") above, the Company's A*D*K is subject to the risk that the Company is required to make certain minimum payments to the licensors under its limited exclusive license agreement relating to the A*D*K. Under that agreement, the Company is required to pay a total of $300,000 in two installments due six and 12 months after the date of the Company's receipt of completed limited production molds for the A*D*K and provide an excimer laser. The Company expects to receive such molds during the second quarter of 1998. In addition, commencing seven months after such date, the Company's royalty payments (50% of its gross profits from A*D*K sales) will become subject to a minimum of $400,000 per quarter. Uncertainty of Market Acceptance of Laser-Based Eye Treatment. The Company believes that its achievement of profitability and growth will depend in part upon broad acceptance of PRK or LASIK in the U.S. and other countries. There can be no assurance that PRK or LASIK will be accepted by either the ophthalmologists or the public as an alternative to existing methods of treating refractive vision disorders. The acceptance of PRK and LASIK may be affected adversely by their cost, possible concerns relating to safety and efficacy, general resistance to surgery, the effectiveness and lower cost of alternative methods of correcting refractive vision disorders, the lack of long-term follow-up data, the possibility of unknown side effects, the lack of third-party reimbursement for the procedures, any future unfavorable publicity involving patient outcomes from use of PRK or LASIK systems, and the possible shortages of ophthalmologists trained in the procedures. The failure of PRK or LASIK to achieve broad market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. International Sales. International sales may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in staffing and coordinating communications among and managing international operations. Additionally, the Company's business, financial condition and international results of operations may be adversely affected by increases in duty rates, difficulties in obtaining export licenses, ability to maintain or increase prices, and competition. To date, all sales made by the Company have been denominated in U.S. dollars. Therefore, the Company does not have exposure to typical foreign currency fluctuation risk. Due to its export sales, however, the Company is subject to currency exchange rate fluctuations in the U.S. dollar, which could increase the effective price in local currencies of the Company's products. This could in turn result in reduced sales, longer payment cycles and greater difficulty in collection of receivables. See "--Receivables" above. Although the Company has not experienced any material adverse effect on its operations as a result of such regulatory, political and other factors, such factors may have a material adverse effect on the Company's operations in the future or require the Company to modify its business practices. Potential Product Liability Claims; Limited Insurance. As a producer of medical devices, the Company may face liability for damages to users of such devices in the event of product failure. The testing and use of human care products entails an inherent risk of negligence or other action. An award of damages in excess of the Company's insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. While the Company maintains product liability insurance, there can be no assurance that any such liability of the Company will be included within its insurance coverage or that damages will not exceed the limits of its coverage. The Company's insurance coverage is limited to $6,000,000, including up to $5,000,000 of coverage under an excess liability policy. Supplier Risks. The Company contracts with third parties for certain components used in its lasers. Certain key components are provided by a single vendor. If any of these sole-source suppliers were to cease providing components to the Company, the Company would have to locate and contract with a substitute supplier, and there can be no assurances that such substitute supplier could be located and qualified in a timely manner or could provide required components on commercially reasonable terms. An interruption in the supply of critical laser components could have a material adverse effect on the Company's business, financial condition and results of operations. No Backlog; Concentration of Sales at End of Quarter. The Company has historically operated with little or no backlog because its products are generally shipped as orders are received. Historically, the Company has received and shipped a significant portion of its orders for a particular quarter near the end of the quarter. As a result, the Company's operating results for any quarter often depend on orders received and laser systems shipped late in that quarter. Any delay in such orders or shipments may cause a significant fluctuation in period-to-period operating results. Recent Developments Liquidation of Vision 21 Shares. In connection with the sale of its MEC and LSIA subsidiaries to Vision 21 on December 30, 1998, Vision 21 agreed to liquidate the Vision 21 Shares by a public sale pursuant to a registration statement or a private placement, or by its repurchase of the Vision 21 Shares. The Company is entitled to receive at least $6,500,000, but not more than $7,475,000 from the liquidation of the Vision 21 Shares. If the Company has not received the minimum amount (subject to the post-closing adjustments described below) by May 29, 1998, then on such date Vision 21 is to pay the Company the shortfall in cash. The Vision 21 Shares are to be liquidated on a monthly schedule between February and May 1998 approximately as follows (or sooner, at Vision 21's option): February (21%), March (21%), April (28%), May (30%). The Company received substantially all of the February installment on March 10, 1998. As of March 27, 1998, the March, April and May installments remain outstanding. Vision 21 has advised the Company that Vision 21 intends to file a registration statement to facilitate the liquidation of the remaining Vision 21 Shares. As of March 27, 1998, Vision 21 has not filed such registration statement. The Company cannot predict whether the remaining installments of the Vision 21 Shares will be liquidated on a timely basis. The remaining Vision 21 Shares represent approximately 5.3% of Vision 21's outstanding common stock as of March 13, 1998 (based on information provided by Vision 21 to the Company). Vision 21 common stock has traded on the Nasdaq Stock Market since August 18, 1997, the date of Vision 21's initial public offering at a price of $10.00 per share. The market price of Vision 21 common stock has since ranged from a low of $7.00 (on December 29, 1997) to $15.00 (on September 25, 1997). On March 27, 1998, the closing price of Vision 21 common stock was $11.625. Nidek Patent Transaction. On February 10, 1998, the Company closed the Nidek Transaction. The closing resulted in Nidek's payment of $7.5 million in cash (of which $200,000 was withheld for the payment of Japanese taxes) in exchange for the Company's grant to Nidek of certain rights in certain of the IBM Patents. The Company has transferred to Nidek all rights in those IBM Patents which have been issued in countries outside of the U.S. (the "Non-U.S. Patents"). In addition, the Company has granted Nidek a non-exclusive license to use the IBM Patents issued in the U.S. (the "U.S. Patents"). The Company continues to hold the following rights relating to the IBM Patents: o A nonexclusive license to use (subject to the payment of a per unit royalty) the Non-U.S. Patents in the ophthalmic field in all countries that issued them. o An exclusive license to use and sublicense the Non-U.S. Patents in all fields other than the ophthalmic, cardiovascular and vascular areas (subject to a 2% royalty in certain countries). o The ownership of the U.S. Patents, subject to (A) non-exclusive licenses granted to Nidek and five ophthalmic laser system producers (including Visx, Summit Technology and Autonomous Technologies) and (B) an exclusive license to use the IBM Patents in the vascular and cardiovascular fields granted to a third party in September 1997. o The right to receive royalties from Visx and Summit Technology equal to 2% of their U.S. revenue from the sale of laser systems that rely on the IBM Patents. The Nidek Transaction will not affect the rights of other companies to use the IBM Patents in any country covered by existing license agreements. The Nidek Transaction is not expected to result in any current gain or loss. It will, however, reduce the Company's amortization expense over the remaining useful life of the Non-U.S. Patents. The Nidek Transaction also will result in approximately $1.2 million of prepaid royalties that will be amortized to income over time. Agreement With Preferred Shareholders--Put Option. In exchange for the consent of the holders of its Series B Preferred Stock that the Company needed to obtain to be able to complete the Nidek Transaction, the Company entered into the following agreement with such preferred holders: o The Company deposited $4.2 million of the Nidek Transaction proceeds into a blocked account for the exclusive benefit of the preferred holders. (The $3.1 million remainder of the $7.3 million of the Nidek Transaction proceeds remained available for general corporate purposes after payment of expenses estimated at $100,000.) o The preferred holders received an option to sell to the Company (the "Put Option") up to 351 shares of Series B Preferred Stock (representing an aggregate face amount of $3,510,000) at a price equal to 120% of such face amount. The Put Option has been fully exercised. Agreement With Preferred Shareholders--Proposed Revision of Terms. On March 13, 1998, the Company entered into an agreement with all of the holders of its Series B Preferred Stock as follows: o Until June 12, 1998, the preferred holders will limit their conversions of Series B Preferred Stock so that no more than 1,000,000 common shares are issued during such period. (Immediately prior to this conversion restriction becoming effective, the preferred holders submitted to the Company notices for the conversion of 244 shares of Preferred Stock into 1,402,634 shares of Common Stock.) This conversion restriction will be extended to September 14, 1998 if the Company's stockholders approve certain proposals described below at the Company's annual meeting on June 12, 1998. o The preferred holders granted the Company an option to purchase any or all of the remaining Series B Preferred Stock at a 20% premium at any time before June 12, 1998. (Because the Company's agreement with Foothill prevents any redemptions of preferred stock so long as any of the Foothill loans remain outstanding, such a repurchase would require the Company to first obtain Foothill's approval. It would also require the Company to raise the funds necessary to finance such repurchase. There can be no assurance as to whether or on what terms the Company could obtain such Foothill consent or additional financing.) o Subject to the approval of the Company's common stockholders and the conversion restrictions being effective through September 14, 1998, the fixed conversion price component of the Series B Preferred Stock will equal the lower of (A) $6.68 (its current level) or (B) 110% of the average closing bid prices of the Common Stock during the 20 trading days ending on September 14, 1998. o Subject to the approval of the Company's common stockholders, the exercise price of the warrants issued to the preferred holders in August 1997 (the "Existing Warrants") will be reduced from $5.91 per share to $2.724 (115% of an average closing bid price of the Common Stock during the five trading days following March 17, 1998). The Existing Warrants would remain exercisable at any time through August 29, 2002 and their exercise would not be subject to the 1,000,000 common share limit on conversions of Preferred Stock. o If for any reason the Company's common stockholders fail to approve the change in the fixed conversion price component and the exercise price of the Existing Warrants on or before June 12, 1998, the Company will be required to issue to the preferred holders 750,000 additional warrants (the "Additional Warrants") to purchase Common Stock at a price equal to $2.724 per share (115% of an average closing bid price of the Common Stock during the five trading days following March 17, 1998). The Additional Warrants would be exercisable at any time through August 29, 2002 and would not be subject to the 1,000,000 common share limit on conversions of Preferred Stock. The restrictions on conversions and the Company's repurchase option may be terminated by the preferred holders under any of the following circumstances: o As of the end of any month, the Company's current ratio (current assets divided by current liabilities) falls below 1.1 to 1. o As of the end of the first or second quarter of 1998, the Company's income or loss from operations for such quarter has not improved relative to the Company's results for the prior quarter. o At any time, the Company undergoes or announces a material adverse change in its financial condition, operating results, assets, liabilities, operations or business prospects which is material to the Company and its subsidiaries taken as a whole. The agreement does not specify any criteria for determining whether such a change qualifies under this "material adverse" standard. If the restrictions on conversions described above are terminated prior to June 12, 1998 due to the occurrence of one or more of these circumstances, then the Company will be required to issue the Additional Warrants. Schwartz Electro-Optics, Inc. Letter of Intent. Based on the Company's desire to broaden its technology product line and offer expanded laser applications in the medical field, on March 24, 1998, the Company and Schwartz Electro-Optics, Inc. ("SEO") signed a letter of intent providing for the Company to purchase substantially all of the assets, and assume certain liabilities, of SEO's medical products division (the "Division"). The Division develops, tests, manufacturers, assembles, and sells lasers and their related equipment, accessories, parts, and software for medical and medical research applications. The Division's primary focus is erbium lasers which are primarily used to perform dermatology procedures. The purchase price would be calculated as of the closing date based on the then current value of the assets to be purchased as reduced by certain of the liabilities to be assumed. Currently the parties estimate the purchase price to be approximately $1,260,000. The purchase price will be paid by the Company issuing SEO shares of Common Stock; $250,000 of the purchase price will be paid by issuing shares (the "Liquid Shares") based on a five day average of bid and ask prices for Common Stock immediately prior to the closing date (the "Valuation Price") and the balance of the purchase price will be paid by issuing shares based on a $5.00 share price (the "Remaining Shares"). The Company will be obligated to file a registration statement covering the Liquid Shares and may be obligated to issue a limited number of additional shares of Common Stock (such limited number will be calculated based on the difference between $5.00 per share and the Valuation Price) if the price of the Remaining Shares is less than $5.00 on the first anniversary of the closing date. The closing of the transaction contemplated by the letter of intent is subject to the Company completing its due diligence review to its satisfaction and receipt of board of director, lender and other approvals. The transaction is anticipated to close in April 1998. Redemptions and Conversions of Series B Preferred Stock. A portion of the 1,600 shares of Series B Preferred Stock issued in August 1997 have been redeemed, repurchased or converted as follows: Number Balance Month Transaction of Shares Outstanding ----- ----------- --------- ----------- 10/97 Redemption (at a 4% premium) 305 1,295 2/98 Repurchases (at a 20% premium) 351 944 3/98 Conversions (at $1.739583 per share) 350 594 (to March 27) All such redemptions and repurchases have been funded from a blocked account established for the exclusive benefit of the holders of the Series B Preferred Stock, as required by the agreements the Company entered into with such holders in August 1997. The amount of the redemption or repurchase prices that exceeds the price at which the Company sold the Series B Preferred Stock in August 1997 ($10,000 per share) has been and will be treated as equivalent to a dividend on the Series B Preferred Stock for accounting purposes and will, therefore, increase the loss (or decrease any income) available to holders of Common Stock for the fiscal period in which the redemption or repurchase occurs. Item 8. Financial Statements and Supplemental Data Consolidated financial statements prepared in accordance with Regulation S-X are listed in Item 14 of Part IV of this Report, are attached to this Report and incorporated in this Item 8 by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers Information with respect to the Company's directors and executive officers is incorporated herein by reference to the definitive form of the Company's proxy materials to be filed with the Commission on or before April 30, 1998. Item 11. Executive Compensation Information with respect to executive compensation is incorporated herein by reference to the definitive form of the Company's proxy materials to be filed with the Commission on or before April 30, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to the security ownership of certain beneficial owners and management is incorporated herein by reference to the definitive form of the Company's proxy materials to be filed with the Commission on or before April 30, 1998. Item 13. Certain Relations and Related Transactions Information with respect to certain relations and related transactions is incorporated herein by reference to the definitive form of the Company's proxy materials to be filed with the Commission on or before April 30, 1998. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Financial Statements and Schedules. (a) (1) The following financial statements and related items are attached to this report: Independent Auditors' Reports Consolidated Balance Sheets as of December 31, 1997 and 1996. Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules: Schedules not filed: All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (3) Exhibits required by Item 601 of Regulation S-K. The Exhibit Index set forth in this Form 10-K is hereby incorporated herein by this reference. (b) Reports on Form 8-K On November 7, 1997, the Company filed with the Commission a Current Report on Form 8-K regarding a press release issued by the Company dated November 5, 1997 announcing the Company's third quarter operating results and reporting the events of the annual meeting of the American Academy of Ophthalmology. On December 29, 1997, the Company filed with the Commission a Current Report on Form 8-K regarding a press released issued by the Company dated December 24, 1997 announcing that the Company had reached an agreement with the holders of the Company's Series B Preferred Stock to extend the date by which the Company is required to obtain the approval of its common stockholders of the conversion and other terms of the preferred stock from December 26, 1997 to February 28, 1998. INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 2.1 See Exhibits 10.1, 10.6, 10.25 and 10.32. 3.1 Certificate of Incorporation, as amended. 3.2 Bylaws, as amended (filed as Exhibit 3 to the Company's Form 10-K for the year ended December 31, 1992*). 4.1 See Exhibits 3.1 and 3.2. 10.1 Agreement for Purchase and Sale of Stock by and among LaserSight Centers Incorporated, its stockholders and LaserSight Incorporated dated January 15, 1993 (filed as Exhibit 2 to the Company's Form 8-K/A filed on January 25, 1993*). 10.2 Amendment to Agreement for Purchase and Sale of Stock by and among LaserSight Centers Incorporated, its stockholders, and LaserSight Incorporated dated April 5, 1993 (filed as Exhibit 2 to the Company's Form 8-K/A filed on April 19, 1993*). 10.3 Royalty Agreement by and between LaserSight Centers Incorporated and LaserSight Partners dated January 15, 1993 (filed as Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 1995*). 10.4 Exchange Agreement dated January 25, 1993 between LaserSight Centers Incorporated and Laser Partners (filed as Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1995*). 10.5 Stipulation and Agreement of Compromise, Settlement and Release dated April 18, 1995 among James Gossin, Francis E. O'Donnell, Jr., J.T. Lin, Wen S. Dai, Emanuela Dobrin-Charlton, C.H. Huang, W. Douglas Hajjar, and LaserSight Incorporated (filed as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1995*). 10.6 Agreement for Purchase and Sale of Stock dated December 31, 1993, among LaserSight Incorporated, MRF, Inc., and Michael R. Farris (filed as Exhibit 2 to the Company's Form 8-K filed on December 31, 1993*). 10.7 First Amendment to Agreement for Purchase and Sale of Stock by and among MRF, Inc., Michael R. Farris and LaserSight Incorporated dated December 28, 1995 (filed as Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 1995*). 10.8 LaserSight Incorporated 1995 Stock Option Plan (filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended September 30, 1995*). 10.9 Modified Promissory Note between LaserSight Incorporated, EuroPacific Securities Services, GmbH and Co. KG and Wolf Wiese (filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended September 30, 1995*). 10.10 Employment Agreement by and between LaserSight Incorporated and Michael R. Farris dated December 28, 1995 (filed as Exhibit 10.17 to the Company's Form 10-K for the year ended December 31, 1995*). 10.11 Patent License Agreement dated December 21, 1995 by and between Francis E. O'Donnell, Jr. and LaserSight Centers, Inc. (filed as Exhibit 10.21 to the Company's Form 10-K for the year ended December 31, 1995*). 10.12 LaserSight Incorporated 1996 Equity Incentive Plan (filed as Exhibit A to the Company's definitive proxy statement dated April 30, 1996*). 10.13 LaserSight Incorporated Amended and Restated Non-Employee Directors Stock Option Plan (filed as Exhibit B to the Company's definitive proxy statement dated May 19, 1997*). 10.14 Agreement dated September 18, 1996 between David T. Pieroni and LaserSight Incorporated (filed as Exhibit 10.35 to the Company's Form 10-K for the year ended December 31, 1996*). 10.15 Agreement dated January 1, 1997, between International Business Machines Corporation and LaserSight Incorporated (filed as Exhibit 10.37 to the Company's Form 10-K for the year ended December 31, 1996*). 10.16 Addendum dated March 7, 1997 to Agreement between International Business Machines Corporation and LaserSight Incorporated (filed as Exhibit 10.38 to the Company's Form 10-K for the year ended December 31, 1996*). 10.17 Second Amendment to Agreement for Purchase and Sale of Stock by and among LaserSight Centers Incorporated, its stockholders and LaserSight Incorporated dated March 14, 1997 (filed as Exhibit 99.1 to the Company's Form 8-K filed on March 27, 1997*). 10.18 Amendment to Royalty Agreement by and between LaserSight Centers Incorporated, Laser Partners and LaserSight Incorporated dated March 14, 1997 (filed as Exhibit 99.2 to the Company's Form 8-K filed on March 27, 1997*). 10.19 Employment Agreement dated September 16, 1996 by and between LaserSight Incorporated and Richard L. Stensrud (filed as Exhibit 10.41 to the Company's Form 10-Q filed on May 9, 1997*). 10.20 Loan and Security Agreement dated March 31, 1997 by and between LaserSight Incorporated and certain of its subsidiaries and Foothill Capital Corporation (filed as Exhibit 10.42 to the Company's Form 10-Q filed on August 14, 1997*). 10.21 Consent and Amendment Number One to Loan and Security Agreement dated July 28, 1997 by and between LaserSight Incorporated and Foothill Capital Corporation (filed as Exhibit 10.43 to the Company's Form 10-Q filed on August 14, 1997*). 10.22 Warrant to purchase 500,000 shares of Common Stock dated March 31, 1997 by and between LaserSight Incorporated and Foothill Capital Corporation (filed as Exhibit 10.44 to the Company's Form 10-Q filed on August 14, 1997*). 10.23 License Agreement dated May 20, 1997 by and between Visx Incorporated and LaserSight Incorporated (filed as Exhibit 10.45 to the Company's Form 10-Q filed on August 14, 1997*). 10.24 Patent Purchase Agreement dated July 15, 1997 by and between LaserSight Incorporated and Frederic B. Kremer, M.D. (filed as Exhibit 2.(i) to the Company's Form 8-K filed on August 13, 1997*). 10.25 Agreement and Plan of Merger dated July 15, 1997 by and among LaserSight Incorporated, Photomed Acquisition, Inc., Photomed, Inc., Frederic B. Kremer, M.D., Linda Kremer, Robert Sataloff, Trustee for Alan Stewart Kremer and Robert Sataloff, Trustee for Mark Adam Kremer (filed as Exhibit 2.(ii) to the Company's Form 8-K filed on August 13, 1997*). 10.26 Securities Purchase Agreement dated August 29, 1997 by and between LaserSight Incorporated and purchasers of Series B Convertible Participating Preferred Stock of LaserSight Incorporated (filed as Exhibit 10.37 to the Company's Form 10-Q filed on November 14, 1997*). 10.27 Registration Rights Agreement dated August 29, 1997 by and between LaserSight Incorporated and purchasers of Series B Convertible Participating Preferred Stock of LaserSight Incorporated (filed as Exhibit 10.38 to the Company's Form 10-Q filed on November 14, 1997*). 10.28 Warrant to purchase 750,000 shares of Common Stock dated August 29, 1997 by and between LaserSight Incorporated and purchasers of Series B Convertible Participating Preferred Stock of LaserSight Incorporated (filed as Exhibit 10.39 to the Company's Form 10-Q filed on November 14, 1997*). 10.29 Consent and Amendment Number Two to Loan and Security Agreement dated August 29, 1997 by and between LaserSight Incorporated and Foothill Capital Corporation (filed as Exhibit 10.40 to the Company's Form 10-Q filed on November 14, 1997*). 10.30 Consent and Amendment Number Three to Loan and Security Agreement dated September 10, 1997 by and between LaserSight Incorporated and Foothill Capital Corporation (filed as Exhibit 10.41 to the Company's Form 10-Q filed on November 14, 1997*). 10.31 Independent Contractor Agreement by and between Byron Santos, M.D. and LaserSight Technologies, Inc. (filed as Exhibit 10.42 to the Company's Form 10-Q filed on November 14, 1997*). 10.32 Stock Purchase Agreement, dated December 30, 1997, by and among LaserSight Incorporated, LSI Acquisition, Inc., MEC Health Care, Inc. and Vision Twenty-One, Inc. (filed as Exhibit 2.(i) to the Company's Form 8-K filed on January 14, 1998*). 10.33 Stock Distribution Agreement, dated December 30, 1997, by and among LaserSight Incorporated, LSI Acquisition, Inc., MEC Health Care, Inc. and Vision Twenty-One, Inc. (filed as Exhibit 2.(ii) to the Company's Form 8-K filed on January 14, 1998*). 10.34 Consent and Amendment Number Four to Loan and Security Agreement dated September 10, 1997 by and between LaserSight Incorporated and Foothill Capital Corporation (filed as Exhibit 2.(iii) to the Company's Form 8-K filed on January 14, 1998*). Exhibit 11 Statement of Computation of Earnings (Loss) Per Share Exhibit 21 Subsidiaries of the Registrant Exhibit 23 Consent of KPMG Peat Marwick LLP Exhibit 27 Financial Data Schedule - ---------------------- *Incorporated herein by reference. File No. 0-19671. SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 1998 LASERSIGHT INCORPORATED By: /s/ Michael R. Farris -------------------------------- Michael R. Farris, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Michael R. Farris Dated: March 30, 1998 - ------------------------------------ Michael R. Farris, President, Chief Executive Officer and Director /s/ Francis E. O'Donnell, Jr., M.D. Dated: March 30, 1998 - ------------------------------------- Francis E. O'Donnell, Jr., M.D., Chairman of the Board, Director /s/ J. Richard Crowley Dated: March 30, 1998 - -------------------------------------- J. Richard Crowley, Director /s/ Terry A. Fuller Dated: March 30, 1998 - -------------------------------------- Terry A. Fuller, Ph.D., Director /s/ Richard C. Lutzy Dated: March 30, 1998 - -------------------------------------- Richard C. Lutzy, Director /s/ Thomas Quinn Dated: March 30, 1998 - -------------------------------------- Thomas Quinn, Director /s/ David T. Pieroni Dated: March 30, 1998 - -------------------------------------- David T. Pieroni, Director /s/ Gregory L. Wilson Dated: March 30, 1998 - -------------------------------------- Gregory L. Wilson, Chief Financial Officer (Principal accounting officer) Independent Auditors' Reports ----------------------------- The Board of Directors and Stockholders LaserSight Incorporated: We have audited the accompanying consolidated balance sheets of LaserSight Incorporated and Subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LaserSight Incorporated and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP St. Louis, Missouri February 27, 1998 LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
ASSETS 1997 1996 ---- ---- Current assets: Cash and cash equivalents $ 3,858,400 2,003,501 Marketable equity securities 7,475,000 -- Accounts receivable-trade, net 2,649,202 5,458,153 Notes receivable-current portion, net 3,762,341 3,159,575 Inventories 4,348,235 3,328,903 Deferred tax assets 571,009 667,998 Income taxes recoverable -- 803,154 Other current assets 219,723 221,922 ------------ ---------- Total current assets 22,883,910 15,643,206 Notes receivable, less current portion, net 2,380,193 2,620,375 Property and equipment, net 1,354,168 1,936,220 Other assets, net 23,842,802 14,050,412 ------------ ---------- $ 50,461,073 34,250,213 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,142,979 2,216,792 Notes payable-related parties -- 1,000,000 Note payable, less discount 1,758,333 -- Current portion of capital lease obligation -- 206,139 Accrued expenses 2,782,521 764,084 Accrued commissions 1,230,474 1,214,235 Income taxes payable 1,255,491 -- Other current liabilities 984,412 221,155 ------------ --------- Total current liabilities 10,154,210 5,622,405 Refundable deposits 200,000 240,000 Accrued expenses, less current portion 518,730 309,656 Deferred income taxes 571,009 667,998 Long-term obligations 500,000 641,623 Commitments and contingencies Redeemable convertible preferred stock: Series B-par value $.001 per share; authorized 10,000,000 shares; 1,295 and 0 issued and outstanding at December 31, 1997 and 1996, respectively 11,477,184 -- Stockholders' equity: Convertible preferred stock Series A-par value $0.001 per share; authorized 10,000,000 shares; 0 and 8 shares issued and outstanding at December 31, 1997 and 1996, respectively -- -- Common stock-par value $0.001 per share; authorized 20,000,000 shares, 10,149,872 and 8,454,266 shares issued and outstanding at December 31, 1997 and 1996, respectively 10,150 8,454 Additional paid-in capital 39,453,064 30,080,560 Paid-in capital-warrants 592,500 -- Obligation to issue common stock -- 3,065,056 Stock subscription receivable (1,140,000) (1,140,000) Unrealized gain on marketable securities, net of tax 604,500 -- Accumulated deficit (11,865,914) (4,612,830) Less treasury stock, at cost; 165,200 and 170,200 common shares at December 31, 1997 and 1996, respectively (614,360) (632,709) ------------ ---------- Total stockholders' equity 27,039,940 26,768,531 ------------ ---------- $ 50,461,073 34,250,213 ============ ========== See accompanying notes to consolidated financial statements.
LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1996, and 1995
1997 1996 1995 ---- ---- ---- Revenues: Products $ 12,170,018 10,634,663 19,899,584 Services 12,218,815 10,869,327 6,088,481 ------------- ------------ ----------- 24,388,833 21,503,990 25,988,065 Cost of revenues: Product cost 4,127,908 3,415,276 4,859,039 Cost of services 8,573,932 6,707,308 2,234,131 ------------- ------------ ----------- Gross profit 11,686,993 11,381,406 18,894,895 Research, development, and regulatory expenses 2,807,579 1,720,246 1,460,842 Selling, general and administrative expenses 18,141,568 14,621,509 12,881,909 ------------- ------------ ----------- Income (loss) from operations (9,262,154) (4,960,349) 4,552,144 Other income and expenses: Interest and dividend income 383,611 314,287 189,548 Interest expense (1,343,198) (151,634) (81,077) Gain on sale of subsidiaries 4,129,057 -- -- Other, net (280,400) (415,681) 1,329,056 ------------- ------------ ----------- Income (loss) before income tax expense (benefit) (6,373,084) (5,213,377) 5,989,671 Income tax expense (benefit) 880,000 (1,139,008) 1,397,800 ------------- ------------- ----------- Net income (loss) (7,253,084) (4,074,369) 4,591,871 Conversion discount on preferred stock (41,573) (1,010,557) -- Preferred stock accretion and dividend requirements (298,269) (358,618) -- ------------- ------------- ----------- Income (loss) attributable to common stockholders $ (7,592,926) (5,443,544) 4,591,871 ============= ============= =========== Earnings (loss) per common share: Basic $ (0.80) (0.69) 0.68 Diluted (0.80) (0.69) 0.64 ============= ============ ========== Weighted average number of shares outstanding: Basic 9,504,000 7,893,000 6,732,000 Diluted 9,504,000 7,893,000 7,225,000 ============= ============ ========== See accompanying notes to consolidated financial statements.
LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1997, 1996, and 1995
Obligation Total Common Stock Preferred Stock Additional Paid-in to Issue Stock Unreal- Accumu- Stock- ------------ --------------- Paid-in Capital- Common Subscription ized lated Treasury holders' Shares Amount Shares Amount Capital Warrants Stock Receivable Gain Deficit Stock Equity ------ ------ ------ ------ ------- -------- ----- ---------- ---- ------- ----- ------ Balances at December 31, 1994 5,936,028 $ 5,936 -- $ -- $11,875,092 -- -- -- -- (5,130,332)(632,709) 6,117,987 Issuance of shares in conjunction with private placement offering 289,000 289 -- -- 2,463,044 -- -- (1,500,000) -- -- -- 963,333 Obligation to issue common stock related to 1994 acquisition -- -- -- -- -- -- 780,125 -- -- -- -- 780,125 Issuance of shares from exercise of stock options 414,540 415 -- -- 1,107,646 -- -- -- -- -- -- 1,108,061 Issuance of options to purchase common stock in conjunction with acquired technology -- -- -- -- 1,752,000 -- -- -- -- -- -- 1,752,000 Stock subscriptions received -- -- -- -- -- -- -- 360,000 -- -- -- 360,000 Issuance of shares in conjunction with consulting agreement 3,000 3 -- -- 14,060 -- -- -- -- -- -- 14,063 Issuance of shares in conjunction with acquisition 543,464 543 -- -- 4,732,158 -- -- -- -- -- -- 4,732,701 Net income -- -- -- -- -- -- -- -- -- 4,591,871 -- 4,591,871 --------- ------- ----- ------ ----------- ------- ---------- ---------- ------- ----------- -------- ---------- Balances at December 31, 1995 7,186,032 7,186 -- -- 21,944,000 -- 780,125 (1,140,000) -- (538,461)(632,709) 20,420,141 Issuance of shares from exercise of stock options and warrants 189,900 190 -- -- 588,599 -- -- -- -- -- -- 588,789 Tax benefit of stock option and warrants exercised -- -- -- -- 199,798 -- -- -- -- -- -- 199,798 Proceeds from issuance of Series A preferred stock, net of issuance costs -- -- 116 -- 5,342,152 -- -- -- -- -- -- 5,342,152 Conversion of, and settlements of dividends on, Series A preferred stock 872,736 873 (108) -- 318,635 -- -- -- -- -- -- 319,508 Dividends on Series A preferred stock -- -- -- -- (358,618) -- -- -- -- -- -- (358,618) Obligation to issue common stock related to 1994 acquisition -- -- -- -- -- -- 2,284,931 -- -- -- -- 2,284,931 Issuance of shares in conjunction with acquisition 205,598 205 -- -- 2,045,994 -- -- -- -- -- -- 2,046,199 Net loss -- -- -- -- -- -- -- -- -- (4,074,369) -- (4,074,369) --------- ------- ----- ------ ----------- ------- ---------- ---------- ------- ------------ -------- ---------- Balances at December 31, 1996 8,454,266 8,454 8 -- 30,080,560 -- 3,065,056 (1,140,000) -- (4,612,830)(632,709) 26,768,531 Issuance of shares from exercise of stock options 25,875 26 -- -- 98,337 -- -- -- -- -- -- 98,363 Premium and other adjustments on redemption of Series B preferred stock -- -- -- -- (454,866) -- -- -- -- -- -- (454,866) Dividends on Series A preferred stock -- -- -- -- (176,268) -- -- -- -- -- -- (176,268) Conversion of, and settlement of dividends on, Series A preferred stock 102,525 102 (8) -- 52,240 -- -- -- -- -- -- 52,342 Issuance of options and treasury stock in conjunction with consulting agreements -- -- -- -- 52,608 -- -- -- -- -- 18,349 70,957 Adjustment of marketable equity securitie to market, net of tax -- -- -- -- -- -- -- -- 604,500 -- -- 604,500 Issuance of shares in conjunction with amendment of purchase agreement 624,991 625 -- -- 3,319,640 -- -- -- -- -- -- 3,320,265 Issuance of shares in conjunction with 1994 acquisition agreement 406,700 407 -- -- 3,064,649 -- (3,065,056) -- -- -- -- -- Issuance of shares in conjunction with acquisition of intangible assets 535,515 536 -- -- 3,416,164 -- -- -- -- -- -- 3,416,700 Issuance of warrants in conjunction with Series B preferred stock offering -- -- -- -- -- 592,500 -- -- -- -- -- 592,500 Net loss -- -- -- -- -- -- -- -- -- (7,253,084) -- (7,253,084) --------- ------- ----- ------ ----------- ------- ---------- --------- ------ ------------ -------- ----------- Balances at December 31, 1997 10,149,872 $10,150 -- $ -- $39,453,064 592,500 -- (1,140,000) 604,500 (11,865,914) (614,360) 27,039,940 ========= ======= ===== ====== =========== ======= ========== =========== ======= ============ ========= ========== See accompanying notes to consolidated financial statements.
LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (7,253,084) (4,074,369) 4,591,871 Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on sale of subsidiaries (4,129,057) -- -- Depreciation and amortization 2,892,456 1,004,275 480,557 Provision for uncollectible accounts 2,366,995 502,000 930,734 Decrease (increase) in accounts receivable, net (176,029) 3,663,542 (7,826,693) Increase in notes receivable, net (362,584) (1,832,532) (3,722,696) Increase in inventories (1,236,042) (1,492,153) (406,594) Increase (decrease) in accounts payable 859,808 (70,201) 1,146,918 Increase (decrease) in accrued liabilities 1,411,710 (529,449) 2,404,448 Increase (decrease) in income taxes 1,688,145 (1,446,053) 678,205 Other, net (415,097) 102,482 (195,497) ----------- ------------- ------------ Net cash used in operating activities (4,352,779) (4,172,458) (1,918,747) ----------- ------------- ------------ Cash flows from investing activities: Proceeds from sale of subsidiaries 6,500,000 -- -- Purchases of property and equipment (630,550) (296,520) (403,063) Net proceeds from exclusive license of patents 3,958,436 -- -- Proceeds from sale leaseback transaction -- 957,180 -- Transfer to restricted cash account (3,200,000) -- -- Proceeds from restricted cash account 3,172,000 -- -- Purchase of managed care contract (150,000) -- -- Acquisition of other intangible assets (15,428,961) -- -- Purchase of businesses, net of cash acquired -- (640,463) 109,489 ----------- ------------- ------------ Net cash provided by (used in) investing activities (5,779,075) 20,197 (293,574) ----------- ------------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock -- -- 1,323,333 Proceeds from issuance of preferred stock, net 14,834,219 5,342,152 -- Proceeds from exercise of stock options and warrants 98,363 588,789 1,108,061 Repayments of notes payable - officer -- (465,000) (500,000) Repayments on notes payable (3,000,000) (799,100) (3,262) Redemption of preferred stock (3,172,000) -- -- Proceeds from issuance of note payable, net 3,414,142 -- -- Repayment of capital lease obligation (187,971) (109,418) -- ----------- ------------- ------------ Net cash provided by financing activities 11,986,753 4,557,423 1,928,132 ----------- ------------- ------------ Increase (decrease) in cash and cash equivalents 1,854,899 405,162 (284,189) Cash and cash equivalents: Beginning of year 2,003,501 1,598,339 1,882,528 ----------- ------------- ------------ End of year $3,858,400 2,003,501 1,598,339 ========== ============= ============ See accompanying notes to consolidated financial statements.
LASERSIGHT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE 1 -- BUSINESS - ------------------ LaserSight Incorporated (the Company) is the parent company of three major wholly-owned operating subsidiaries: LaserSight Technologies, Inc., which develops, manufactures and sells ophthalmic lasers and related products primarily for use in photorefractive keratectomy (PRK) and laser in-situ keratomileusis (LASIK) procedures; LaserSight Patents, Inc., which owns and licenses various patents related to refractive surgical procedures; and MRF, Inc. d/b/a The Farris Group, a consulting firm servicing health care providers. In December 1997, the Company sold two operating subsidiaries: MEC Health Care, Inc. (MEC), a managed care intermediary that contracted with various health maintenance organizations (HMOs) and eye care providers to provide comprehensive vision services to the HMO subscribers; and LSI Acquisition, Inc. (LSIA), which managed ophthalmic practices and ambulatory surgery centers (see note 4). NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------- Basis of Presentation - --------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- For financial reporting purposes, the Company considers short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. Marketable Securities - --------------------- The Company classifies all of its marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a component of stockholders' equity. Credit Risk - ----------- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade accounts and notes receivable. The Company sells products to customers, at times extending credit for such sales. Exposure to losses on receivables is principally dependent on each customer's financial condition and their ability to generate revenue from the Company's products. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. To mitigate a portion of the Company's exposure on certain sales, the Company has obtained letters of credit to be drawn on foreign financial institutions in the event a customer should default. At December 31, 1997 and 1996, the Company was the payee on letters of credit with foreign financial institutions aggregating approximately $0.2 million and $2.1 million, respectively. Income Taxes - ------------ The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Inventory - --------- Inventory, which consists primarily of laser systems parts and components, is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment - ---------------------- Property and equipment are stated at cost. Furniture and equipment are depreciated using the straight-line method over the estimated lives (three to seven years) of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Capital leases are amortized on a straight-line basis over the term of the leases. Patents - ------- Costs associated with obtaining patents are capitalized as incurred and are amortized over their remaining useful lives (generally 17 years or less). Goodwill and Acquired Technology - -------------------------------- Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized on a straight-line basis over estimated useful lives up to 20 years. Management evaluates the carrying value of goodwill using future undiscounted operating cash flows of the acquired businesses. Acquired technology was recorded as an intangible asset and is amortized over a period of 12 years based on the Company's estimate of the lifespan of the solid-state laser product and the useful life of a related patent acquired. The Company continually assesses the potential market for solid-state as an improvement to existing excimer laser technology. Research and Development - ------------------------ Research and development costs are charged to operations in the year incurred. The cost of certain equipment used in research and development activities which have alternative uses is capitalized as equipment and depreciated using the straight-line method over the estimated lives (five to seven years) of the assets. Total expenditures on research and development for the years ended December 31, 1997, 1996, and 1995 were $1,836,151, $948,520, and $983,130, respectively. Product Warranty Costs - ---------------------- Estimated future warranty obligations related to the Company's products are provided by charges to operations in the period in which the related revenue is recognized. Revenue Recognition - ------------------- The Company recognizes revenue from the sale of its products in the period that the products are shipped to the customers. Service revenues from consulting clients are recognized in the period that the services are provided. The Company recognizes premiums from HMOs and other payors as income in the period to which vision care coverage relates. Substantially all premiums are collected on a monthly basis and relate to vision care coverage during that month. Capitation revenue for the years ended December 31, 1997, 1996, and 1995 was approximately $7,955,000, $6,095,000 and $1,189,700, respectively (see note 4). Revenues from managing an ophthalmic practice and an ambulatory surgery center are recognized when earned in accordance with the practice services agreement (see note 4). Cost of Revenues - ---------------- Cost of revenues consist of product cost and cost of services. Product cost relates to the cost from the sale of its products in the period that the products are shipped to the customers. Cost of services consists of the costs related to servicing consulting clients, managing an ophthalmic practice and an ambulatory surgery center and provider payments. Provider payments consist of benefit claims and capitation payments made to providers. Earnings (Loss) Per Share - ------------------------- The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", in the fourth quarter of 1997. This Statement replaces the historical measures of earnings per share (primary and fully diluted) with two new computations (basic and diluted). Basic earnings (loss) per common share is computed using the weighted average number of common shares and contingently issuable shares (to the extent that all necessary contingencies have been satisfied), if dilutive. Diluted earnings (loss) per common share is computed using the weighted average number of common shares, contingently issuable shares, and common share equivalents outstanding during each period. Common share equivalents include options, warrants to purchase common stock, and convertible Preferred Stock and are included in the computation using the treasury stock method if they would have a dilutive effect. Diluted earnings (loss) per share for the years ended December 31, 1997 and 1996 is the same as basic earnings (loss) per share. Pursuant to Emerging Issue Task Force (EITF) Announcement No. D-60, the value of the conversion discount on the Series B Convertible Participating Preferred Stock (Series B Preferred Stock) issued in August 1997 (approximately $42,000) and the Series A Convertible Preferred Stock issued (Series A Preferred Stock) in January 1996 (approximately $1 million) has been reflected as an increase to the loss attributable to common stockholders for the years ended December 31, 1997 and 1996, respectively. The value of the conversion discounts, which had no per share effect in 1997 and ($0.13) basic and ($0.13) diluted in 1996, have been reflected in the consolidated statement of operations. The following is the reconciliation of the numerators and denominators of the basic and diluted EPS computations for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 ---- ---- ---- Numerator: Net income (loss) $ (7,253,084) (4,074,369) 4,591,871 Conversion discount on preferred stock (41,573) (1,010,557) -- Preferred stock accretion and dividends (298,269) (358,618) -- ------------- ----------- --------- Income (loss) attributable to common stockholders $ (7,592,926) (5,443,544) 4,591,871 ------------- ----------- --------- Denominator (basic): Weighted averages shares outstanding 9,504,000 7,486,300 6,325,300 Issuable shares, acquisiton of The Farris Group -- 406,700 406,700 ------------ --------- --------- 9,504,000 7,893,000 6,732,000 Basic earnings (loss) per share $ (0.80) (0.69) 0.68 ============= ========== ========= Denominator (diluted): Weighted averages shares outstanding 9,504,000 7,486,300 6,325,300 Issuable shares, acquisition of The Farris Group -- 406,700 406,700 Effect of dilutive securities - stock options -- -- 493,000 ------------- --------- --------- 9,504,000 7,893,000 7,225,000 Diluted earnings (loss) per share $ (0.80) (0.69) 0.64 ============= ========== ========= Common share equivalents, including contingently issuable shares, options, warrants, and convertible preferred stock totaling 4,722,000 and 317,000 common stock equivalents at December 31, 1997 and 1996 respectively, are not included in the computation of diluted earnings per share because they have an antidilutive effect. From January 1, 1998 through March 27, 1998, 350 shares of Series B Preferred Stock were converted into 2,011,975 shares of Common Stock (unaudited). Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - ----------------------------------------------------------------------- The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. Stock Option Plans - ------------------ Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure pursuant to the provisions of SFAS No. 123. Reclassifications - ----------------- Certain reclassifications have been made to prior years' financial statements to conform to the 1997 financial statement presentation. NOTE 3 -- ACQUISITIONS - ---------------------- Photomed, Inc. - -------------- In July 1997, the Company acquired from Photomed, Inc. the rights to a Pre-Market Approval (PMA) application filed with the Food and Drug Administration (FDA) for a laser to perform LASIK, a refractive surgery alternative to surface PRK. In addition, the Company purchased from a stockholder of Photomed, Inc. U.S. patent number 5,586,980 for a keratome, the instrument necessary to create the corneal "flap" in the LASIK procedure. The Company issued a combination of 535,515 unregistered shares of Common Stock (valued at $3,416,700) and $333,300 in cash as consideration for the PMA application and the keratome patent. The seller will also receive a percentage of any licensing fees or sale proceeds related to the patent. The total value was capitalized as the cost of PMA application and patent and is being amortized over 5 and 15 years, respectively. If the FDA approves the PMA so as to allow the Company to commercialize a laser to perform LASIK in the U.S., the Company will pay an additional $1.75 million to the sellers. If such FDA approval is not obtained by July 29, 1998, the Company has the option to unwind the PMA transaction and receive from Photomed, Inc. 274,285 shares of the Company's Common Stock. If the transaction is unwound, the Company's investment will be reduced by that portion of the PMA value applicable to the proportionate ratio of shares returned. The remaining portion of the PMA value will be assessed as to impairment. Additionally, if the FDA approves the use of a laser for the treatment of hyperopia (farsightedness), the Company will issue unregistered Common Stock valued at $1 million to the sellers. If the Company's scanning laser is approved by the FDA for commercial sale in the United States on or before April 1, 1998, the Company will pay $1 million cash to the sellers. Approval after such date will result in lesser payments until January 1, 1999, and after such date no payment will be required. Additional consideration paid, if any, will be recorded as additional purchase price. As of December 31, 1997, the unamortized carrying values of the LASIK PMA application and the keratome patent were included in other assets. Patents - ------- In August 1997, the Company finalized an agreement with IBM, in which the Company acquired certain patents (IBM Patents) relating to ultraviolet light ophthalmic products and procedures for ultraviolet ablation for $14.9 million. The total value was capitalized and is being amortized over approximately 9 years. Under the agreement, IBM transferred to the Company all of IBM's rights under its patent license agreements with certain licensees. Royalties from such assigned patent licenses totaled approximately $803,000 for the year ended December 31, 1997. Royalties accrued on or after January 1, 1997 but before September 1997, totaling approximately $581,000, reduced the Company's cost of the IBM Patents. The acquisition was financed through the private placement of Series B Preferred Stock (see note 11). In September 1997, the Company sold an exclusive worldwide royalty-free patent license covering the vascular and cardiovascular rights included in the IBM Patents for $4 million, reducing the Company's basis in the IBM Patents. No gain or loss was recognized as a result of this sale. Approximately $3.2 million of these funds were placed in a restricted cash account and in October 1997 were used to voluntarily redeem 305 shares of the Series B Preferred Stock issued to finance the purchase of the IBM Patents. In connection with such redemption, the Company paid a total of $3,172,000 including a four percent premium (see note 11). As of December 31, 1997, the unamortized carrying value of the patents was included in other assets. Keratome License - ---------------- In September 1997, the Company acquired worldwide distribution rights to the Ruiz disposable keratome for the LASIK procedure and entered into a limited exclusive license agreement for intellectual property related to the keratome products known as Automated Disposable Keratomes (ADK). In exchange, the Company paid $400,000 in cash at closing and agreed to supply to the licensors, at no cost, one excimer laser. Six months after the first shipment of the disposable keratome product, the Company will pay an additional $150,000 to the licensors with another installment of $150,000 due twelve months after the initial shipment date. The total value was capitalized, including the net book value of the laser, and is being amortized over 31 months. The Company will also share the product's gross profit with the sellers with minimum quarterly royalties of $400,000 beginning approximately seven months after the initial shipment date. Under the arrangement, gross profit is defined as the selling price less certain costs of sales and commissions. As of December 31, 1997, the unamortized carrying value of the keratome license was included in other assets. No ADK shipments were made through December 31, 1997. Assets of Northern New Jersey Eye Institute - ------------------------------------------- In July 1996, the Company acquired the assets of the Northern New Jersey Eye Institute (NNJEI) and contracted with the practice to provide ongoing management services through its LSIA subsidiary. The acquisition was accounted for using the purchase method. Accordingly, the Company's results of operations resulting from LSIA's service agreement with NNJEI are included in the Company's consolidated financial statements subsequent to the acquisition date. The total purchase cost, including acquisition costs, of $2,576,882, was comprised of a 5.05% promissory note in the amount of $340,000 and 205,598 unregistered shares of the Company's Common Stock. Up to 102,798 additional shares will be issuable on July 3, 1998 if the Company's quoted stock price is lower than $15.00 per share at that date. The fair value of the purchase consideration was determinable at the date of acquisition and was recorded at that time. If and when the additional shares are issued in July 1998, the entry will be to record the par value of shares issued in Common Stock with the offset to additional paid-in capital. The promissory note was repaid in September 1996. Cost to enter into the management services agreement was recognized as a result of the acquisition, totaling $1,606,774, was being amortized over 25 years. In December 1997, the Company sold LSIA to an unrelated company (see note 4). MEC Health Care, Inc. - --------------------- In October 1995, the Company acquired all of the issued and outstanding shares of common stock of MEC. The acquisition was accounted for using the purchase method. Accordingly, MEC's results of operations are included in the Company's consolidated financial statements subsequent to the acquisition date. The total purchase cost, including acquisition costs, of $6,579,087 was comprised of an 8.75% promissory note in the total amount of $1,799,100 (see note 10) and 543,464 unregistered shares of the Company's Common Stock. Goodwill recognized as a result of the acquisition, totaling $6,667,918, was being amortized over 20 years. In December 1997, the Company sold MEC to an unrelated company (see note 4). The Farris Group - ---------------- In February 1994, the Company acquired MRF, Inc. d/b/a The Farris Group. The acquisition was accounted for using the purchase method. Accordingly, The Farris Group's results of operations are included in the Company's consolidated financial statements subsequent to the acquisition date. The terms of the acquisition provided, among other things, for the Company to pay $2 million and up to 750,000 unregistered shares of the Company's Common Stock issuable if The Farris Group achieves certain future performance objectives. Based on The Farris Group's pre-tax profits for each of the years ended December 31, 1996, 1995, and 1994, 406,700 shares were issued in April 1997 (see note 11). These earn-out shares were valued at $3,065,056 and accounted for as additional purchase price since there are a maximum number of shares issuable, termination of the former owner's employment does not impact the agreement, and the agreement is entirely separate from compensation agreements. No earnout shares were earned for the year ended December 31, 1997. LaserSight Centers Incorporated - ------------------------------- In April 1993, the Company acquired all of the outstanding stock of LaserSight Centers Incorporated (Centers), a privately held corporation. Centers is a development stage corporation which intends to provide services for ophthalmic laser surgical centers using excimer and other lasers. The terms for the closing of this transaction provided for the issuance of 500,000 unregistered shares of the Company's Common Stock and the agreement of the Company to issue up to an additional 1,265,333 unregistered shares of its common stock based on the outcome of certain future events and whether Centers achieves certain performance objectives. In March 1997, the Company amended the purchase and royalty agreements related to the 1993 acquisition of Centers. The amended purchase agreement provided for the Company to issue approximately 625,000 unregistered common shares with 600,000 additional shares contingently issuable based upon future operating profits. This replaces the provision calling for 1,265,333 contingently issuable shares based on cumulative revenues or other future events and the uncertainties associated therewith. The amended royalty agreement reduces the royalty from $86 to $43 per refractive procedure and delays the obligation to pay such royalties until the sooner of five years or the issuance of all contingently issuable shares as described above. The value of shares issued in March 1997, $3,320,321, was accounted for as additional purchase price based upon historical and expected growth in the excimer laser industry and undiscounted projected cash flows. NOTE 4 -- DIVESTITURES - ---------------------- In December 1997, the Company sold all of the outstanding stock of MEC and LSIA to Vision Twenty-One, Inc. (Vision 21) in a transaction which was effective as of December 1, 1997. The total consideration paid by Vision 21 to the Company consisted of $6.5 million in cash paid at closing and 820,085 unregistered shares of Vision 21 Common Stock. The final number of the Vision 21 shares to be received by the Company is subject to certain post-closing adjustments, for which a portion of the unregistered Vision 21 shares, valued at $1 million at the closing date, have been placed in escrow. The Vision 21 shares are to be liquidated pursuant to the agreement from February through May 1998. The Company is to receive a minimum of $6.5 million and a maximum of $7.475 million from the liquidation of the Vision 21 shares. If the Company has not received at least $6.5 million (subject to certain post-closing adjustments) from the liquidation of the Vision 21 shares by May 29, 1998, then Vision 21 is to pay the Company any shortfall in cash. At December 31, 1997, the market value of the Vision 21 shares was approximately $7,586,000 (see notes 10 and 16). The Company has recorded a liability in the amount of approximately $770,000 as of December 31, 1997, representing the maximum potential post-closing adjustments. Upon final determination of post-closing adjustments, any reduction in such amount will be reflected as additional gain on sale of subsidiaries in 1998. As a result of this transaction, the Company recorded a gain before income taxes of $4,129,057 in the year ended December 31, 1997. NOTE 5 -- ACCOUNTS AND NOTES RECEIVABLE - --------------------------------------- Accounts and notes receivable at December 31, 1997 and 1996 were net of allowance for uncollectibles of $1,825,000 and $1,350,000, respectively. During 1997, approximately $1,892,000, net of associated commissions, in accounts and notes receivable were written off as uncollectible. Accounts and notes receivable write-offs were not significant for the years ended December 31, 1996, and 1995. Notes receivable at December 31, 1997 and 1996 primarily represent unpaid balances due on laser equipment sales. Notes receivable balances, discounted at 8%, and less an allowance for uncollectibles, consisted of the following at December 31, 1997 and 1996: 1997 1996 ---- ---- Notes receivable $7,814,773 6,967,120 Less: Discount 315,968 476,170 Allowance for uncollectible notes 1,356,271 711,000 ----------- ---------- 6,142,534 5,779,950 Less current portion 3,762,341 3,159,575 ----------- --------- $2,380,193 2,620,375 ========== ========= NOTE 6 -- INVENTORIES - --------------------- The components of inventories at December 31, 1997 and 1996 are summarized as follows: 1997 1996 ---- ---- Raw materials $2,958,782 2,008,610 Work in process 263,353 448,906 Finished goods 862,775 664,646 Test equipment-clinical trials 263,325 206,741 ---------- --------- $4,348,235 3,328,903 ========== ========= As of December 31, 1997, the Company had six laser systems being used under arrangements for clinical trials in various countries. At December 31, 1996, four laser systems were in use under similar arrangements. NOTE 7 -- PROPERTY AND EQUIPMENT - -------------------------------- Property and equipment at December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Leasehold improvements $ 70,883 118,087 Furniture and equipment 947,032 962,014 Assets under capital lease -- 957,180 Laboratory equipment 1,354,086 717,055 ----------- ---------- 2,372,001 2,754,336 Less accumulated depreciation and amortization 1,017,833 818,116 ----------- ---------- $ 1,354,168 1,936,220 =========== ========== NOTE 8 -- OTHER ASSETS - ---------------------- Other assets at December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Restricted cash $ 200,000 240,000 Cost to enter into a manage- ment agreement, net of accumulated amortization of $30,498 -- 1,576,276 Goodwill, net of accumu- lated amortization of $749,739 in 1997 and $685,464 in 1996 7,077,491 10,522,756 Acquired technology, net of accumulated amorti- zation of $355,608 in 1997 and $209,604 in 1996 1,396,392 1,542,396 Ultraviolet patents, net of accumulated amortization of $371,906 in 1997 10,185,993 -- LASIK pre-market approval application, net of accum- ulated amortization of $233,790 in 1997 2,571,682 -- Other assets, net of accumu- lated amortization of $456,529 in 1997 and $32,076 in 1996 2,411,244 168,984 ----------- ---------- $23,842,802 14,050,412 =========== ========== Restricted cash represents deposits in connection with service contracts with approximately 100 and 134 ophthalmologists at December 31, 1997 and 1996, respectively, granting them exclusive market areas to perform specific services as set forth in the Center's service contracts. NOTE 9 -- EMPLOYEE BENEFIT PLAN - ------------------------------- Effective January 1, 1996, the Company adopted a 401(k) plan for the benefit of substantially all of its full-time employees. The plan provides, among other things, for employer-matching contributions to be made at the discretion of the Board of Directors. Employer-matching contributions vest over a seven-year period. Administrative expenses of the plan are paid by the Company. For the years ended December 31, 1997 and 1996, expense incurred related to the 401(k) plan was approximately $33,000 and $42,000, respectively. NOTE 10 -- NOTES PAYABLE - ------------------------ In April 1997, the Company entered into a loan agreement with Foothill Capital Corporation (Foothill) for up to $8 million, consisting of a term loan in the amount of $4 million and a revolving loan in an amount of 80% of the eligible receivables of LaserSight Technologies, Inc., but not more than $4 million. The term loan bears interest at an annual rate of 12.50% and the revolving loan bears interest at a variable annual rate of 1.50% above the base rate of Norwest Bank Minnesota (10% at December 31, 1997). In connection with the loan, the Company paid an origination fee of $150,000 and issued warrants to purchase 500,000 shares of Common Stock. The warrants are exercisable at any time from April 1, 1998 through April 1, 2002 at an exercise price per share of $6.0667. Subject to certain conditions based on the market price of the Common Stock, up to half of the warrants are eligible for repurchase by the Company. Any warrants that remain outstanding on April 1, 2002 are subject to mandatory repurchase by the Company at a price of $1.50 per warrant. The warrants have certain anti-dilution features which provide for approximately 50,000 additional shares pursuant to the issuance of the Series B Preferred Stock and a corresponding reduction in the exercise price to approximately $5.52 per share and repurchase price to approximately $1.36 per warrant. The warrants were valued at $500,000 and are classified as long-term obligations at December 31, 1997. The recorded amount of the obligation will change with the fair value of the warrants, with a corresponding adjustment to interest expense. In December 1997, in conjunction with the sale of MEC and LSIA (see note 4), the Company restructured its agreements with Foothill. Based on such restructured agreements, the Company used $2.0 million of its cash proceeds from the sale of MEC and LSIA to reduce the Company's term loan from $4.0 million to $2.0 million. Additionally, the Company used approximately $1.5 million of cash proceeds from the sale to repay in full the then outstanding balance under its revolving loan with Foothill. The Company's availability under the revolving loan was reduced to $2.0 million. In addition, the Company pledged the Vision 21 shares to Foothill as collateral under the loan facility. Moreover, after the Company has received $2.5 million from the liquidation of the Vision 21 shares, any additional proceeds must first be applied to pay off the Company's term loan with Foothill, and any further proceeds to retire any then-outstanding advances under its revolving loan. The Company's term loan is, in any event, due on June 15, 1998 and all availability under the Company's revolving loan terminates on June 15, 1998. Until June 16, 1998, Foothill has waived the Company's compliance with the financial covenants which were contained in the original loan agreements. At December 31, 1996, the Company owed $1,000,000 to former owners of MEC. The note payable was secured by stock of MEC, and bore interest at 8.75%. In April 1997, the Company repaid the note in full. Interest paid during 1997, 1996, and 1995 approximated $515,000, $172,000, and $50,000, respectively. In July 1996, the Company entered into an agreement for the sale and leaseback of certain assets acquired. The lease, with a four-year term, was classified as a capital lease. The fair market value of the assets financed was approximately $957,000 and payments under the lease approximated $300,000 annually and commenced in July 1996. This obligation was assumed by the purchaser as a result of the sale of LSIA (see notes 4 and 16). NOTE 11 -- STOCKHOLDERS' EQUITY - ------------------------------- In August 1997, the Company completed a private placement of 1,600 shares of Series B Preferred Stock yielding net proceeds, after costs of financing, of $14.83 million. The Company also issued warrants to purchase 790,000 shares of Common Stock for a period of five years at $5.91 per share to the investors and placement agent. The Series B Preferred Stock is convertible into the Company's Common Stock at the option of the holders at any time through August 29, 2000, on which date all preferred stock remaining outstanding will automatically be converted into Common Stock. The conversion price equals the lesser of $6.68 per share or the average of the three lowest closing bid prices during a 30-trading day period preceding the conversion date. Additionally, in the event of liquidation, the Series B Preferred Stock is entitled to the IBM Patent's royalties. At December 31, 1997, 1,295 shares of Series B Preferred Stock were outstanding. In October 1997, 305 shares were voluntarily redeemed with a 4 percent redemption premium totaling $122,000, which was recorded as a dividend to the Series B Preferred Stock stockholders. The Series B Preferred Stock is recorded at the amount of gross proceeds less the costs of the financing and the fair value of the warrants and classified as mezzanine financing above the stockholders' equity section on the balance sheet. Upon an event of redemption, as defined, some of which are outside of the Company's control, the Series B Preferred Stock will become mandatorily redeemable. The financing costs and warrants will be accreted against additional paid-in capital if and when an event of redemption is assessed as probable. In January 1996, the Company completed a private placement of 116 shares of Series A Preferred Stock, yielding net proceeds, after costs of financing, of $5.34 million. The Company also issued warrants to purchase 17,509 shares of common stock at $13.25 per share to the placement agent. The conversion price equaled the lesser of $14.18 per share or 85% of the average closing price of the common stock during the five trading days preceding the conversion date, subject to a minimum conversion price. At December 31, 1997 and 1996, zero and eight shares of Series A Preferred Stock, respectively, were outstanding. The conversion of 116 shares of Series A Preferred Stock through December 31, 1997 resulted in the issuance of 975,261 shares of Common Stock, including the issuance of Common Stock in settlement of preferred dividends (at an annual rate of 10%) accrued through the respective conversion dates. In January 1995, 289,000 shares were sold under a stock purchase agreement for net proceeds to the Company of approximately $2,463,000, including a note receivable totaling $1,500,000 with interest at 10% per annum. A modified promissory note was executed in August 1995 with an adjusted balance of $1,250,000 with monthly payments of varying amounts through April 30, 1996. The balance due at December 31, 1997 and 1996 was $1,140,000 and was classified as a stock subscription receivable and reduction of stockholders' equity. After a trial in December 1997, the Company received a final judgment for such amount plus interest and costs of trial. The defendants have appealed the judgment. In July 1995, in consideration for the acquisition of certain technology (see note 8) the transferor of such technology received options to purchase 240,000 unregistered shares of the Company's Common Stock at the greater of $1.13 per share or $12.00 less than the market value on the date of exercise. The options were exercised in September 1995. Pursuant to the agreements related to the acquisition of The Farris Group, up to 343,300 unregistered shares of the Company's stock may become issuable to the seller based upon The Farris Group's 1998 pre-tax profits, as defined in the agreement. The number of issuable shares is determined annually and, based on terms of the acquisition agreement, amended as of December 28, 1995, were issued in 1997 for the three-year period ending December 31, 1996 and will be issued, if earned, in 1999 for the two-year period ending December 31, 1998. Based on The Farris Group's pre-tax profits for each of the years ended December 31, 1996, 1995, and 1994, 406,700 shares were issued in April 1997. For purposes of computing earnings per share, issuable shares attributable to historical performance levels of The Farris Group are included in weighted average shares outstanding on a basic and diluted basis for 1996 and 1995. NOTE 12 -- STOCK OPTION PLANS - ----------------------------- The Company has options outstanding at December 31, 1997 related to five stock based compensation plans (the Plans). Options are currently issuable by the Board of Directors only under the 1996 Equity Incentive Employee Plan (1996 Incentive Plan) and the LaserSight Incorporated Non-employee Directors Stock Option Plan (Directors Plan), both of which were approved by the Company's stockholders in June 1996 and the latter of which was amended in June 1997. Under the 1996 Incentive Plan, all employees of the Company are eligible to receive options, although no employee may receive options to purchase greater than 250,000 shares of common stock during any one year. Pursuant to terms of the 1996 Incentive Plan, 750,000 shares of common stock may be issued at exercise prices of no less than 100% of the fair market value at date of grant, and options become exercisable in four annual installments on the anniversary dates of the grant. The Directors Plan, as amended, provides for the issuance of up to 300,000 shares of common stock to directors of the Company who are not officers or employees. Grants to individual directors are based on a fixed formula that establishes the timing, size, and exercise price of each option grant. At the date of each annual stockholders' meeting, 15,000 options will be granted to each outside director, and 5,000 options will be granted to each outside director that chairs a standing committee, at exercise prices of 100% of the fair market value as of that date, with the options becoming fully exercisable on the first anniversary date of the grant. The options will expire in ten years or three years after an outside director ceases to be a director of the Company. The per share weighted-average fair value of stock options granted during the years ended December 31, 1997 and 1996 was $3.62 and $4.60 on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1997 1996 1995 ---- ---- ---- Expected dividend yield 0% 0% 0% Volatility 49% 44% 44% Risk-free interest rate 5.70-5.71% 6.04%-6.33% 5.66%-6.20% Expected life (years) 5-10 3-5 3-5 The Company applies APB Opinion No. 25 and related interpretations in accounting for its Plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below: 1997 1996 1995 ---- ---- ---- Net income (loss) As reported $(7,253,084) (4,074,369) 4,591,871 Pro forma (8,012,317) (4,653,040) 3,571,890 Basic EPS As reported $ (0.80) (0.69) 0.68 Pro forma (0.88) (0.76) 0.53 Diluted EPS As reported $ (0.80) (0.69) 0.64 Pro forma (0.88) (0.76) 0.49 In accordance with SFAS No. 123, the pro forma net income (loss) reflects only options granted in 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost does not reflect options granted prior to January 1, 1995, that vested in 1997, 1996 or 1995. Stock option activity for all plans during the periods indicated is as follows: Weighted Shares Average Under Exercise Option Price ------ ----- Balance at January 1, 1995 371,800 3.93 Granted 327,400 11.94 Exercised (174,540) 4.29 Terminated (28,400) 5.58 --------- Balance at December 31, 1995 496,260 9.12 Granted 574,000 9.83 Exercised (9,900) 4.93 Terminated (180,510) 11.00 --------- Balance at December 31, 1996 879,850 9.29 Granted 286,000 6.29 Exercised (25,875) 3.80 Terminated (90,975) 7.27 --------- Balance at December 31, 1997 1,049,000 8.75 ========= The following table summarizes the information about stock options outstanding and exercisable at December 31, 1997: Range of Exercise Prices $1.58-$5.14 $5.31-$7.03 $9.50-$12.81 ----------- ----------- ------------ Options outstanding: Number outstanding at December 31, 1997 100,000 439,000 510,000 Weighted average remaining contractual life 2.3 years 5.6 years 2.8 years Weighted average exercise price $3.18 $6.73 $11.57 Options exercisable: Number exercisable at December 31, 1997 69,000 92,500 410,832 Weighted average exercise price $2.93 $6.85 $11.72 The underwriter of the Company's 1991 initial public offering received warrants to purchase up to 180,000 shares of the Company's Common Stock at an exercise price of $3.00 per share through November 13, 1996. During 1996, all of the underwriter's warrants were exercised. NOTE 13 -- INCOME TAXES - ----------------------- The components of the income tax expense (benefit) for the years ended December 31, 1997, 1996, and 1995 were as follows: 1997 1996 1995 ---- ---- ---- Current: Federal $ 67,066 (707,130) 858,800 State 812,934 (22,878) 130,000 --------- ---------- --------- 880,000 (730,008) 988,800 --------- ---------- --------- Deferred: Federal - (351,677) 344,000 State - (57,323) 65,000 --------- ---------- --------- - (409,000) 409,000 --------- ---------- --------- Total income tax expense (benefit) $ 880,000 (1,139,008) 1,397,800 ========= =========== ========= Deferred tax assets and liabilities consist of the following components as of December 31, 1997 and 1996: 1997 1996 ---- ---- Deferred tax liabilities: Acquired technology $ 555,764 611,338 Change in tax status of subsidiaries 134,938 273,639 Unrealized gain on marketable equity securities 370,500 -- Property and equipment 84,768 166,254 ---------- --------- 1,145,970 1,051,231 Deferred tax assets: Intangibles 69,522 -- Inventory 232,512 237,446 Receivable allowance 800,063 596,026 Limitation on capital loss -- 155,042 Warranty accruals 157,970 61,562 NOL carry forward -- 462,081 Other 58,893 67,100 ---------- --------- 1,318,960 1,579,257 Valuation allowance (172,990) (528,026) ---------- --------- 1,145,970 1,051,231 ---------- --------- Net deferred tax liability $ -- -- ========== ========= Realization of deferred tax assets is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is a risk that certain of these deferred tax assets may expire unused and, accordingly, has established a valuation allowance against them. Although realization is not assured for the remaining deferred tax assets, management believes it is more likely than not that they will be realized through future taxable earnings or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if management's estimates of the taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable. No payments for income taxes were made during the year ended December 31, 1997. Payments for income taxes during the years ended December 31, 1996 and 1995 were $307,360 and $719,595, respectively. For the years ended December 31, 1997, 1996 and 1995, the difference between the Company's effective income tax provision and the "expected" tax provision, computed by applying the federal statutory income tax rate to income before provision for income taxes, is reconciled below: 1997 1996 1995 ---- ---- ---- "Expected" tax provision (benefit) $(2,166,849) (1,772,548) 2,036,000 State income taxes, net of federal income tax benefit 536,536 (29,462) 85,000 Tax basis of subsidiaries sold 2,478,304 - - Utilization of net operating loss carry forwards - - (426,000) Foreign sales corporation tax benefit - - (216,000) Valuation allowance (355,036) 528,026 - Research and development - - (151,000) Intangible amortization 369,210 162,321 75,000 Nondeductible expenses 17,835 18,920 55,000 Other items, net - (46,265) (60,200) ----------- ----------- ---------- Income tax expense (benefit) $ 880,000 (1,139,008) 1,397,800 ========== =========== ========= NOTE 14 -- SEGMENT INFORMATION - ------------------------------ 1997 1996 1995 ---- ---- ---- Operating revenues: Technology related $12,170,018 10,634,663 19,899,584 Health care services 12,218,815 10,869,327 6,088,481 ----------- ---------- ---------- Consolidated 24,388,833 21,503,990 25,988,065 =========== ========== ========== Operating profit (loss): Technology related (6,492,423) (2,148,280) 4,692,757 Health care services (462,263) (895,181) 1,072,407 General corporate expenses (2,040,328) (1,828,285) (1,006,462) Developmental stage company expenses - LaserSight Centers Incorporated (267,140) (88,603) (206,558) ------------ ----------- ----------- Income (loss) from operations $(9,262,154) (4,960,349) 4,552,144 ============ =========== ========== Identifiable assets: Technology related $30,669,076 16,569,845 Health care services 4,398,202 15,244,579 General corporate assets 12,083,276 2,145,663 Developmental stage company assets - LaserSight Centers Incorporated 3,310,519 290,126 ----------- ---------- Total assets $50,461,073 34,250,213 =========== ========== The Company operates principally in two industries: technology related (laser equipment) products and health care services. Laser equipment operations involve the development, manufacture, and sale of ophthalmic lasers primarily for use in PRK procedures. Such operations generally relate to the LaserSight Technologies, Inc. subsidiary. Health care services generally relate to MEC, The Farris Group and LSIA. Due to the sale of MEC and LSIA (see note 4) effective December 1, 1997, only The Farris Group is included in the identifiable asset information as of December 31, 1997. In addition, only eleven months of operating activity is included for MEC and LSIA regarding operating revenues and operating profits for 1997. Operating profit is total revenue less operating expenses. In determining operating profit for industry segments, the following items have not been considered: general corporate expenses; expenses attributable to Centers, a developmental stage company; non-operating income; and the income tax expense (benefit). Identifiable assets by industry segment are those that are used by or applicable to each industry segment. General corporate assets consist primarily of cash, marketable equity securities and income tax accounts. Export sales are as follows: 1997 1996 1995 ---- ---- ---- North and Central America $ 1,075,000 - 2,511,469 South America 5,995,000 3,600,637 4,904,565 Asia 2,235,000 2,844,752 8,631,066 Europe 2,526,500 3,378,000 1,683,555 Africa - 295,000 195,000 ----------- --------- --------- $11,831,500 10,118,389 17,925,655 =========== ========== ========== The geographic areas above include significant sales to the following countries: North and Central America - Mexico and Costa Rica; South America - Argentina, Brazil, Columbia and Venezuela; Asia - China, India and Japan; Europe - France, Italy and Spain. In the Company's experience, sophistication of ophthalmic communities varies by region, and is better segregated by the geographic areas above than by individual country. NOTE 15 --RELATED PARTY TRANSACTIONS - ------------------------------------ During January 1993, Centers entered into a royalty agreement with Florida Laser Partners, a Florida general partnership, in which two of the Company's former presidents and the Company's chairman are partners. The royalty agreement provides, among other things, for a perpetual royalty payment to Florida Laser Partners of a number of shares of Centers' common stock, as determined by a formula defined in the royalty agreement. Also during January 1993, the Company entered into an exchange agreement with Florida Laser Partners, which provides among other things, that Laser Partners shall exchange, from time to time, shares of Centers' common stock that it acquires pursuant to the royalty agreement for shares of the Company's stock. This agreement was amended in March 1997 (see note 3). In December 1995, the Company sold one laser system for $235,000 to a company owned by a director of the Company. The Company received full payment on the account in January 1997. NOTE 16 -- COMMITMENTS AND CONTINGENCIES - ---------------------------------------- Pillar Point Partners - --------------------- On March 31, 1995, the Company was served with a complaint by Pillar Point Partners, alleging infringement by the Company of certain patent rights allegedly held by Pillar Point Partners under exclusive licenses from Summit Technology, Inc. and Visx Incorporated, both of whom subsequently joined the suit. The Company has categorically denied the allegation of patent infringement. In addition, the Company asserted several defenses which alleged the patent to be invalid and unenforceable. In March 1997, the action was dismissed without prejudice. As part of the settlement, the Company received a release from liability under any of Pillar Point Partners' patents for certain systems and any service or procedure performed with such systems before the effective date of the settlement. Public Company Publishing, Inc. - ------------------------------- In May 1996, the Company received a complaint alleging that the Company had breached a written agreement entered into during 1992 that provided for the rendering of consulting services to the Company. In December 1996, the action was settled for payments totaling $100,000 and an agreement to issue 75,000 shares of common stock in the event that the plaintiff did not receive 75,000 shares of common stock from the former holders of Centers stock. Such shares were delivered by the former holders of Centers stock. The settlement expense is reflected in other expenses in 1996. Of this amount, $50,000 was paid during 1996 and $50,000 was paid in February 1997. Visx Incorporated - ----------------- In May 1997, the Company entered into a license agreement with Visx Incorporated to settle litigation and any and all potential claims related to patent infringement prior to May 1997. The aggregate amount of $230,400 is reflected in other expenses in 1997 and is to be paid in eight quarterly installments. Northern New Jersey Eye Institute - --------------------------------- In October 1997, the Company received a request for mediation/arbitration from Northern New Jersey Eye Institute, P.A. (NNJEI) which relates to the services agreement between LSIA and NNJEI. This services agreement was entered into as part of the Company's July 1996 acquisition of the assets of NNJEI. The request for mediation alleges breach of contract and fraud which the Company denies and intends to vigorously defend. The mediation process began in mid-November and was discontinued following the December 1997 sale of LSIA to an unrelated company (see note 4). Under the terms of the services agreement, mediation will be followed by binding arbitration if a resolution cannot be reached. Based on the Company's legal assessment of the contracts between the parties, the Company does not expect the outcome of mediation or, if necessary, arbitration to have a material impact on the Company's consolidated financial position or results of operations. Capital Lease Obligation - ------------------------ In connection with certain divestitures completed in December 1997 (see note 4), the Company continues to guarantee a capital lease obligation. The Company is indemnified for this by the purchaser, and the purchaser is obligated to take all necessary steps to remove the Company as a guarantor. If the purchaser fails to pay the lease obligation, an event which the Company believes to be unlikely, management estimates that it could settle these obligations for approximately $660,000 at December 31, 1997. In the opinion of management, the ultimate disposition of these guarantees will not have a material adverse effect on the Company's consolidated financial condition, results of operations or future cash flows. Lease Obligations - ----------------- The Company leases office space and certain equipment under operating lease arrangements. Future minimum payments under non-cancelable operating leases, with initial or remaining terms in excess of one year, as of December 31, 1997, are as follows: 1998 $373,224 1999 326,017 2000 139,197 2001 459 Rent expense during 1997, 1996, and 1995 was approximately $755,000, $781,000, and $311,000, respectively. Other Matters - ------------- In 1995, the Company received $980,125 in settlement of its claims against the obligor of promissory notes held by the Company. The notes had previously been reserved and the receipt is reflected in other income. Also in 1995, the Company received a settlement of $350,000 from the Company's former president related to matters in connection with his prior employment. NOTE 17 -- SUBSEQUENT EVENTS - ---------------------------- Sale of International Patent Rights On February 10, 1998, the Company closed a transaction for the sale of certain rights to the international patents that make up a portion of the IBM Patents, and granted a non-exclusive license to use the IBM Patents issued in the United States, in exchange for the Company receiving $7.5 million in cash. The transaction will not result in any current gain or loss. It will, however, reduce the Company's amortization expense over the remaining useful life of the IBM Patents. A portion of the proceeds will be accounted for as prepaid royalties that will be amortized to income over time. Series B Preferred Stock Redemption Agreement - --------------------------------------------- On February 4, 1998, in exchange for the consent of the holders of its Series B Preferred Stock to the sale of international patent rights described above, the Company agreed to deposit $4.2 million of the sale transaction proceeds into a blocked account for the exclusive benefit of the preferred holders. The preferred holders received an option to sell to the Company up to 351 shares of Series B Preferred Stock (representing an aggregate face amount of $3,510,000) at any time during the 150-day period ending July 10, 1998. As of March 9, 1998 all 351 shares (unaudited) had been repurchased with funds from the blocked account at a 20% premium. The amount of the repurchase price in excess of the carrying value of the Series B Preferred Stock repurchased will increase the loss (or decrease any income) available to holders of Common Stock in the first quarter of 1998. EX-3.1 2 CERTIFICATE OF INCORPORATION CERTIFICATE OF INCORPORATION ---------------------------- OF Smal Incorporated ----------------- The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified and referred to as the "General Corporation Law of the State of Delaware"), hereby certifies that: FIRST: The name of the corporation (hereinafter called the "corporation") is Smal Incorporated SECOND: The address, including street, number, city, and county, of the registered office of the corporation in the State of Delaware is 229 South State Street, City of Dover, County of Kent; and the name of the registered agent of the corporation in the State of Delaware is The Prentice-Hall Corporation System, Inc. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the corporation shall have authority to issue is Three Thousand (3,000), all of which are without par value. All such shares are of one class and are shares of Common Stock. FIFTH: The name and the mailing address of the incorporator are as follows: NAME MAILING ADDRESS ---- --------------- T. M. Bonovich 229 South State Street, Dover, Delaware SIXTH: The corporation is to have perpetual existence. SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of section 291 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. EIGHTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the By-Laws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other By-Laws of the corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the By-Laws of the corporation may be exercised by the Board of Directors of the corporation; provided, however, that any provision for the classification of directors of the corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial By-Law or in a By-Law adopted by the stockholders entitled to vote of the corporation unless provisions for such classification shall be set forth in this certificate of incorporation. 3. Whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. NINTH: The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. TENTH: The corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ELEVENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any tie conferred upon the stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article ELEVENTH. Signed on September 29, 1987. /s/ T.M. Bonovich ----------------- T. M. Bonovich Incorporator CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF SMAL INCORPORATED ----------------- It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Smal Incorporated. 2. The certificate of incorporation of the corporation is hereby amended by striking out Article First thereof and by substituting in lieu of said Article the following new Article: 1. The name of the corporation is Starwood Industries, Inc. 3. The corporation has not received any payment for any of its stock. 4. The amendment of the certificate of incorporation herein certified has been duly adopted in accordance with the provisions of Section 241 of the General Corporation Law of the State of Delaware. EXECUTED as of this 28th day of May, 1991. /s/ Jonnie R. Williams --------------------------- Jonnie R. Williams, sole Director CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF STARWOOD INDUSTRIES, INC. It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Starwood Industries, Inc. (formerly Smal Incorporated). 2. The certificate of incorporation of the corporation is hereby amended by striking out Article First thereof and by substituting in lieu of said Article the following new Article: 1. The name of the corporation is LaserSight Incorporated 3. The corporation has not received any payment for any of its stock. 4. The amendment of the certificate of incorporation herein certified has been duly adopted in accordance with the provisions of Section 241 of the General Corporation Law of the State of Delaware. EXECUTED as of this 11th day of June, 1991. /s/ Jonnie R. Williams -------------------------- Jonnie R. Williams, sole Director Certificate of Amendment of Certificate Of Incorporation of LaserSight Incorporated ----------------------- Adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware The undersigned, Chief Executive Officer, and Secretary of LaserSight Incorporated, a corporation existing under the laws of the State of Delaware, does hereby certify as follows: FIRST: The Certificate of Incorporation is amended to delete paragraph "FOURTH:" in its entirety and to replace same with the following: "FOURTH: The total number of Shares of stock which the Corporation shall have the authority to issue is 15,000,000 Shares, par value one cent (.01) per share. All such Shares are of one class, and all Shares are Common Stock. The purpose of this amendment is to split the Company's Common Stock on a 5,000-for-one basis." SECOND: That such amendment has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware by the written consent of the holders of not less than a majority of the outstanding stock entitled to vote thereon and that written notice of the corporate action has been given to those stockholders who have not consented in writing, all in accordance with the provisions of Section 228 of the General Corporation Law. All of the rest and remainder of the corporation's Certificate of Incorporation shall remain in full force and effect. IN WITNESS WHEREOF, we have signed this Certificate this 17th day of July, 1991. ATTEST: /s/ J.T. Lin /s/ J.T. Lin - ------------------------ ------------------------- J.T. LIN J.T. LIN Title: Assistant Secretary Title: Chief Executive Officer Certificate of Amendment of Certificate of Incorporation of LaserSight Incorporated ----------------------- Adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware The undersigned, Chief Executive Officer, and Assistant Secretary of LaserSight Incorporated, a corporation existing under the laws of the State of Delaware, does hereby certify as follows: FIRST: The Certificate of Incorporation is amended to delete paragraph "FOURTH:" in its entirety and to replace same with the following: "FOURTH: The total number of Shares of stock which the Corporation shall have the authority to issue is 10,000,000 Shares, par value one cent (.01) per Share. All such Shares are of one class, and all Shares are Common Stock. The purpose of this amendment is to effect a two-for-three reverse split of the Corporation's Common Stock, and adjust par value to remain at $.01 per Share. As a result of this amendment, the number of Shares the Corporation shall have the authority to issue shall be reduced from 15,000,000 to 10,000,000, and the outstanding Shares shall be reduced from 1,505,000 to 1,003,333. SECOND: That such amendment has been duly adopted in accordance with the provisions of the Sections 228 and 242 of the General Corporation Law of the State of Delaware by the written consent of the holders of not less than a majority of the outstanding stock entitled to vote thereon and that written notice of the corporate action has been given to those stockholders who have not consented in writing, all in accordance with the provisions of Section 228 of the General Corporation Law. All of the rest and remainder of the corporation's Certificate of Incorporation shall remain in full force and effect. IN WITNESS WHEREOF, we have signed this Certificate this second day of September, 1991. ATTEST: /s/ J.T. Lin /s/ J.T. Lin - ---------------------------- --------------------------- J.T. LIN J.T. LIN Title: Assistant Secretary Title: Chief Executive Officer CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF LASERSIGHT INCORPORATED The undersigned, President and Secretary of LaserSight Incorporated, a corporation existing under the laws of the State of Delaware, hereby certify as follows: FIRST: The Certificate of Incorporation is amended to delete Paragraph "Fourth:" in its entirety and to replace the same with the following: FOURTH: The total number of shares of stock which the corporation shall have the authority to issue is 20,000,000 shares, par value one tenth of one cent ($.001) per share. All such shares are of one class, and all shares are common stock. SECOND: That such Amendment has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware by the duly authorized vote of the shareholders at a meeting called for such purpose. Except as amended hereby, the rest and remainder of the Corporation's Certificate of Incorporation shall be and remain in full force and effect. IN WITNESS WHEREOF, the undersigned have signed this Certificate this 30th day of June, 1993. LaserSight Incorporated By: /s/ J.T. Lin --------------------- J.T. Lin, Ph.D., President ATTEST: /s/ Wen S. Dai - ------------------------- Wen S. Dai, Secretary CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF LASERSIGHT INCORPORATED The undersigned President and Secretary of LaserSight Incorporated, a corporation existing under the laws of the State of Delaware, hereby certify as follows: 1. The Certificate of Incorporation is amended to delete Paragraph Fourth in its entirety and to replace the same with the following: FOURTH: Number and Class of Shares Authorized; Par Value. 1. Authorized Stock. This corporation is authorized to issue the following shares of capital stock: (a) Common Stock. The aggregate number of shares of Common Stock which the corporation shall have authority to issue is 20,000,000 with a par value of $.001 per share. (b) Preferred Stock. The aggregate number of shares of Preferred Stock which the corporation shall have authority to issue is 10,000,000 with a par value of $.001 per share. 2. Description of Common Stock. Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders and may not cumulate their votes for the election of directors. Shares of Common Stock are not redeemable, do not have any conversion or preemptive rights, and are not subject to further calls or assessments once fully paid. Holders of Common Stock will be entitled to share pro rata in such dividends and other distributions as may be declared from time to time by the board of Directors out of funds legally available therefor, subject to any prior rights accruing to any holders of preferred stock of the Company. Upon liquidation or dissolution of the Company, holders of shares of Common Stock will be entitled to share proportionally in all assets available for distribution to such holders. 3. Description of Preferred Stock. The terms, preferences, limitations and relative rights of the Preferred Stock are as follows: (a) The Board of Directors is expressly authorized at any time and from time to time to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, but not to exceed one vote per share, or without voting powers, and with such designations, preferences and relative participating, optional or other special rights, qualifications, limitations or restrictions, as shall be fixed and determined in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors, and as are not stated and expressed in these Articles of Incorporation or any amendment hereto, including (but without limiting the generality of the foregoing) the following: (i) the distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by resolution by the Board of Directors; (ii) the rate of dividends payable on shares of such series, the times of payment, whether dividends shall be cumulative, the conditions upon which and the date from which such dividends shall be cumulative; (iii) whether shares of such series can be redeemed, the time or times when, and the price of prices at which shares of such series shall be redeemable, the redemption price, terms and conditions of redemption, and the sinking fund provisions, if any, for the purchase of redemption of such shares; (iv) the amount payable on shares of such series and the rights of holders of such shares in the event of any voluntary of involuntary liquidation, dissolution or winding up of the affairs of the corporation; (v) the rights, if any, of the holders of shares of such series to convert such shares into, or exchange such shares for, shares of Common Stock or shares of any other class or series of Preferred Stock and the terms and conditions of such conversion or exchange; and (vi) the rights, if any, of the holders of shares of such series to vote. (b) Except in respect of the relative rights and preferences that may be provided by the Board of Directors as hereinbefore provided, all shares of Preferred Stock shall be of equal rank and shall be identical, and each share of a series shall be identical in all respects with the other shares of the same series. 2. Such Amendment has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware by the duly authorized vote of the shareholders at a meeting called for such purpose. Except as amended hereby, the rest and remainder of the Corporation's Certificate of Incorporation shall be and remain in full force and effect. IN WITNESS WHEREOF, the undersigned have signed this Certificate this 2nd day of June, 1995. LASERSIGHT INCORPORATED By: /s/ Robert Qualls ------------------------ Robert Qualls, President ATTEST: /s/ Robert Qualls - ---------------------------- Robert Qualls, Secretary LASERSIGHT INCORPORATED CERTIFICATE OF DESIGNATION RELATING TO THE SERIES A CONVERTIBLE PREFERRED STOCK, PAR VALUE OF $.001 PER SHARE, OF LASERSIGHT INCORPORATED Pursuant to Section 151 of the General Corporation Law of the State of Delaware LaserSight Incorporated, a Delaware corporation (the "Corporation"), hereby certifies that pursuant to the authority contained in Article Fourth of the Corporation's Certificate of Incorporation, as amended ("Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the following resolution was duly adopted by the Board of Directors of the Corporation ("Board"), creating a series of its Preferred Stock designated as Series A Convertible Preferred Stock: RESOLVED, that there is hereby created and the Corporation be, and it hereby is, authorized to issue 116 shares of a series of its Preferred Stock designated Series A Convertible Preferred Stock (the "Series A Preferred") to have the powers, preferences and rights and the qualifications, limitations or restrictions thereof hereinafter set forth in this resolution: 1. Preference. The preferences of each share of Series A Preferred with respect to dividend payments and distributions of the Corporation's assets upon voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall be equal to the preferences of every other share of 1995 Preferred (as defined in Section 12 hereof) from time to time outstanding in every respect and prior in right to such preferences of all Common Stock of the Corporation, whether now or hereafter authorized, except as approved in accordance with the provisions of Section 11 hereof. 2. Voting Rights. The Holders of the Series A Preferred, by virtue of their ownership thereof, will not have any voting rights, except as otherwise provided herein, in the Certificate of Incorporation or by law. With respect to all voting rights pursuant to Section 11 hereof or of any other certificate of designation filed by the Corporation with respect to the 1995 Preferred, Holders of Series A Preferred and Holders of 1995 Preferred shall vote together as a single and separate class except as otherwise provided in the Certificate of Incorporation, by law or by any other certificate of designation filed by the Corporation with respect to a series of its Preferred Stock. 3. Liquidation Rights. If the Corporation shall be voluntarily or involuntarily liquidated, dissolved or wound up, at any time when any shares of Series A Preferred shall be outstanding, each then-outstanding share of Series A Preferred shall entitle the Holder thereof to a preference against the Property of the Corporation available for distribution to the Holders of the Corporation's Stock equal to the sum of the Original Issue Price plus an amount equal to all unpaid dividends accrued on such share to the date of payment. Neither the consolidation nor merger of the Corporation into or with any corporation or corporations, nor the sale nor transfer by the Corporation of all or any part of its Property, nor any reduction of the authorized or issued shares of the Stock of the Corporation of any class, whether now or hereafter authorized, shall be deemed to be a liquidation of the Corporation within the meaning of any of the provisions of this Section 3. All of the preferential amounts to be paid to the Holders of 1995 Preferred as provided in this Section 3 or in any other certificate of designation filed by the Corporation with respect to the 1995 Preferred shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any Property of the Corporation to, the Holders of any Common Stock of the Corporation, whether now or hereafter authorized, in connection with such liquidation, dissolution or winding up. If upon such liquidation, dissolution or winding-up, the assets of the Corporation distributable as aforesaid to Holders of the Preferred Stock (including the 1995 Preferred) then outstanding shall be insufficient to permit the payment to them of the aggregate amount of the liquidation preference applicable to such Preferred Stock, the entire assets of the Corporation available for distribution shall be distributed ratably among the Holders of the Preferred Stock (including the 1995 Preferred) in accordance with the aggregate liquidation preference of the Preferred Stock held by such Holders. 4. Dividends. Commencing the Closing Date, the Holders of Series A Preferred shall be entitled to receive, when and as declared by the Board out of shares legally available therefor, dividends payable in shares of Common (valued in each case at the Market Price of the Common on the NASDAQ National Market on the day prior to the dividend payment date) at a per share annual rate of 10% of the Original Issue Price. Such dividends shall be payable on the effective date applicable to a conversion, exchange or redemption of the Series A Preferred to the holders thereof as of such effective date and shall be cumulative from the date of issuance of the Series A Preferred and shall accrue until paid, whether or not earned, whether or not declared by the Board and whether or not there are shares legally available therefor on the date such dividends are payable. 5. Conversion. (A) General. For the purposes of conversion, the Series A Preferred shall be valued at the Original Issue Price. Subject to adjustment as provided in Section 8 hereof, if converted, the Series A Preferred shall be converted into Common at a price per share of Common (the "Conversion Price") equal to (i) the lesser of (x) the Adjusted Strike Price (as defined in Section 12 hereof) or (y) 85% of the Market Price (as defined in Section 12 hereof) divided by (ii) the Registration Factor (as defined in Section 12 hereof); provided, however, that the Conversion Price as of any date shall not be less than the Minimum Conversion Price (as defined in Section 12 hereof) determined as of such date. (B) Right of Holders to Optional Conversion. Subject to the provisos to this Section 5(B), the Holders of Series A Preferred shall have the right, at their option, to convert such shares into Common at any time during the period beginning 90 days after the Closing Date and ending two years after the Closing Date; provided, however, that if the Conversion Price in effect at the time of any optional conversion pursuant to this Section 5(B) is less than or equal to the Cash Option Price (as defined in Section 12 hereof), the Corporation shall have the right, but not the obligation, to redeem any or all of such shares of Series A Preferred surrendered for conversion pursuant to this Section 5(B) for cash in an amount equal to 115% of the aggregate Original Issue Price of the shares of Series A Preferred to be so redeemed (such amount, the "Redemption Amount"); and provided further, that the Corporation may at any time within two business days after receipt of a notice of conversion pursuant to this Section 5(B), exercise any of its rights pursuant Section 6 hereof with respect to any of the shares of Series A Preferred subject to such notice of conversion. Any shares of Common issued pursuant to this Section 5(B) shall be valued at the Market Price of the Common on the Effective Date (as defined in Section 5(C) hereof). (C) Method of Exercise; Payment; Issuance of Common; Transfer and Exchange. The conversion right granted by Section 5(B) hereof may be exercised by a Holder of Series A Preferred, in whole or in part, by telecopying a completed Notice substantially in the form attached hereto as Exhibit A and delivering such Notice, together with the stock certificate or certificates representing the Series A Preferred to be converted, duly executed for transfer or accompanied by executed stock powers (such execution to be either (i) accompanied by a signature guarantee by a member firm of the New York Stock Exchange, or (ii) evidenced by a signature on behalf of such Investor without such a guarantee, provided that the Investor has previously delivered to the Company a written instrument that (x) authorizes the Company to rely upon such unguaranteed signature for all purposes relating to the transfer or conversion of Preferred Shares, (y) includes a specimen of such unguaranteed signature on which the Company shall be entitled to rely without further investigation, and (z) holds the Company harmless from any loss resulting from any unauthorized or fraudulent signature purporting on its face to be an authorized signature so long as the Company relies on such specimen signature without gross negligence (such instrument, a "Specimen Signature Authorization")), by express courier to the principal office of the Corporation (or at such other place as the Corporation may from time to time designate in a written notice sent to the Holder by first-class mail, postage prepaid, at its address shown on the books of the Corporation) against delivery of (1) that number of whole shares of Common equal to the quotient of (a) the aggregate Original Issue Price of the Series A Preferred so surrendered, divided by (b) the Conversion Price in effect on the Effective Date, or (2) if the Conversion Price in effect on the Effective Date is less than or equal to the Cash Option Price and the Corporation shall have exercised its right pursuant to Section 5(B) hereof to redeem any or all of such Series A Preferred for cash, cash in an amount equal to the Redemption Amount, together with that number of whole shares of Common, if any, equal to the quotient of (a) the aggregate Original Issue Price of the shares of Series A Preferred not so redeemed by the Company, divided by (b) the Conversion Price in effect on the Effective Date. Any conversion or redemption pursuant to Section 5(B) hereof shall irrevocably become effective upon, and only upon, the date of acceptance (the "Effective Date") by the Corporation (which date shall in no event be more than two business days after the date of its receipt) of the duly completed and executed Notice, certificates for all shares of Series A Preferred being converted or redeemed, duly executed for transfer or accompanied by executed stock powers (such execution to be either (i) accompanied by a signature guarantee by a member firm of the New York Stock Exchange, or (ii) a Specimen Signature Authorization), in accordance with this Section 5. In the event of any exercise of the conversion and/or redemption rights granted by Section 5(B) in accordance with the terms thereof, (i) stock certificates for the shares of Common acquired by virtue of such exercise and/or cash (as applicable) shall promptly (and in no event more than five business days after the Effective Date) be sent to such Holder, and unless the Series A Preferred has been fully converted or redeemed (as applicable), a new Series A Preferred stock certificate, representing the Series A Preferred not so converted or redeemed shall also be delivered to such Holder forthwith and (ii) any stock certificates for the shares of Common so acquired shall be dated the Effective Date and the Holder making such surrender shall be deemed for all purposes to be the Holder of the shares of Common so acquired as of the Effective Date. (D) Mandatory Conversion. All shares of Series A Preferred outstanding two years after the Closing Date shall, without any further action by the Holders thereof, be converted into Common (a "Mandatory Conversion") as of such date (the "Mandatory Conversion Date"). The number of whole shares of Common to be delivered to each Holder of Series A Preferred upon a Mandatory Conversion pursuant to this Section 5(D) shall equal the quotient of 1) the aggregate Original Issue Price of the Series A Preferred so surrendered divided by (2) the Conversion Price in effect on the Mandatory Conversion Date. Upon the Mandatory Conversion of the Series A Preferred pursuant to this Section 5(D), the Corporation shall promptly (and in no event more than two business days after the Mandatory Conversion Date) transmit to each Holder of Series A Preferred notice thereof in reasonable detail. Upon receipt from each Holder of Series A Preferred of the certificate or certificates representing such Holder's shares of Series A Preferred so converted duly executed for transfer or accompanied by executed stock powers (such execution to be either (i) accompanied by a signature guarantee by a member firm of the New York Stock Exchange, or (ii) a Specimen Signature Authorization), the Corporation shall promptly (and in no event more than five business days after the date of such receipt) transmit certificates representing the shares of Common issued to such Holder as a result of the Mandatory Conversion. Such certificates shall be dated the Mandatory Conversion Date, and such Holders shall be deemed for all purposes to be the Holders of such Common as of the Mandatory Conversion Date. (E) Stock Fully Paid; Reservation of Shares. All shares of Common which may be issued upon conversion of Series A Preferred or as a dividend pursuant to Section 4 hereof will, upon issuance, be duly issued, fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof. At all times that any Series A Preferred is outstanding, the Corporation shall have authorized, and shall have reserved for the purpose of issuance upon such conversion, a sufficient number of shares of Common to provide for (1) the conversion into Common of all Series A Preferred then outstanding at the then-effective Conversion Price and (2) the payment of all dividends payable with respect to the Series A Preferred pursuant to Section 4 hereof. 6. Redemption and Call for Exchange by the Corporation. (A) During the periods specified below, the Corporation, by written notice to the Holders of outstanding shares of 1995 Preferred, may (but is not required to) either: (1) during the period beginning on the 90th day after the Closing Date and ending 24 months after the Closing date, redeem for cash each (but not less than all) of the then-outstanding shares of 1995 Preferred at a redemption price per share of 1995 Preferred equal to the Original Issue Price multiplied by the Redemption Factor (as defined in Section 12 hereof) determined as of the date of such notice of redemption; or (2) during the period beginning on the first day after the first anniversary of the Closing Date and ending two years after the Closing Date, exchange each (but not less than all) of the then-outstanding shares of 1995 Preferred for a number of shares of Common equal to the Original Issue Price (i) multiplied by the Redemption Factor determined as of the date of such notice of exchange and then (ii) divided by the Market Price determined as of the date of such notice; provided that a Registration Statement is then effective under the Securities Act. (B) Any notice of an optional redemption or exchange of the Series A Preferred pursuant to Section 6(A) hereof shall be promptly delivered by the Corporation to each Holder of outstanding Series A Preferred and shall describe such optional redemption or exchange in reasonable detail. All shares of Series A Preferred outstanding on the date of such notice shall, without any further action by the Holders thereof, be redeemed or exchanged (as applicable) in accordance with this Section 6 effective as of the date of such notice. Upon receipt from each Holder of Series A Preferred of the certificates representing the Series A Preferred so redeemed or exchanged duly executed for transfer or accompanied by executed stock powers (such execution to be either (i) accompanied by a signature guarantee by a member firm of the New York Stock Exchange, or (ii) a Specimen Signature Authorization), the Corporation shall promptly (and in no event more than five business days after the date of such receipt) transmit cash or certificates representing shares of Common (as applicable) in accordance with this Section 6. Any such certificates representing shares of Common shall be dated the date of the notice delivered by the Corporation pursuant to this Section 6(B), and such Holders shall be deemed for all purposes to be the Holders of such Common as of the date of such notice. 7. Payment of Accrued Dividends. At the time of any conversion, redemption or exchange of a share of Series A Preferred pursuant to Sections 5 or 6 hereof, as applicable, the Corporation shall pay in Common (valued at the Market Price of the Common on the date of conversion, redemption or exchange, as applicable) to the Holder thereof an amount equal to all unpaid dividends accrued thereon to the date of conversion, redemption or exchange (as applicable), whether or not declared by the Board. If the Corporation has insufficient shares legally available on the date specified above to pay such accrued but unpaid dividends pursuant to this Section 7 (whether due to restrictions imposed by regulatory authorities or applicable law), then shares to the extent legally available shall be used to pay such amount, in which case the shares of Common shall be issuable pro rata to each Holder whose Preferred Stock is being converted, redeemed or exchanged, as applicable. From time to time thereafter, whenever additional shares of Common are legally available for the payment of dividends, such shares shall be immediately used to pay the unpaid portion of any such shares of Common issuable as accrued dividends. 8. Certain Adjustments. For purposes of Sections 5 and 6 hereof, the number of shares of Common issuable upon the conversion or exchange of Series A Preferred, the Adjusted Strike Price, and the Cash Option Price shall be appropriately adjusted, as deemed equitable by the Corporation, from time to time upon the happening of certain events, as follows: (A) Reclassification, Consolidation or Merger. In case of any reclassification or change of outstanding Common (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination thereof), or in case of any consolidation or merger of the Corporation with or into another corporation (other than a merger with another corporation in which the Corporation is the surviving corporation and which does not result in any reclassification or change (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination thereof) of outstanding Common, the rights of the Holders of the outstanding Series A Preferred shall be adjusted in the manner described below: (1) In the event that the Corporation is the surviving corporation, the Series A Preferred shall, without payment of additional consideration therefor, be deemed modified so as to provide that upon conversion or exchange thereof the Holder of the Series A Preferred being converted or exchanged, as applicable, shall procure, in lieu of each share of Common theretofore issuable upon such conversion or exchange, the kind and amount of shares of Stock, other securities, money and Property receivable upon such reclassification, change, consolidation or merger by the Holder of each share of Common had such conversion or exchange occurred immediately prior to such reclassification, change, consolidation or merger. The provisions of this clause (a) shall similarly apply to successive reclassifications, changes, consolidations and mergers. (2) In the event that the Corporation is not the surviving corporation, the surviving corporation shall, without payment of any additional consideration therefor, issue new Series A Preferred, providing that upon conversion or exchange thereof, the Holder thereof shall procure in lieu of each share of Common theretofore issuable upon conversion or exchange, as applicable, of the Series A Preferred the kind and amount of shares of Stock, other securities, money and Property receivable upon such reclassification, change, consolidation or merger by the Holder of each share of Common issuable upon conversion or exchange, as applicable,of the Series A Preferred had such conversion or exchange, as applicable, occurred immediately prior to such reclassification, change, consolidation or merger. Such new Series A Preferred shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 8. The provisions of this clause (b) shall similarly apply to successive reclassifications, changes, consolidations and mergers. (B) Subdivision or Combination of Shares. If the Corporation, at any time while any of the Series A Preferred is outstanding, shall subdivide or combine its Common, the Adjusted Strike Price, the Cash Option Price shall be proportionately reduced, in case of subdivision of shares, as of the effective date of such subdivision, or if the Corporation shall take a record of Holders of its Common for the purpose of a subdividing, as of the close of business on such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of shares, as of the effective date of such combination or, if the Corporation shall take a record of Holders of its Common for the purpose of so combining, as of the close of business on such record date, whichever is earlier. (C) Certain Dividends and Distributions. If the Corporation, at any time while any of the Series A Preferred is outstanding, shall pay a dividend payable in, or make any other distribution of, Common to all Holders of Common on a pro rata basis, the Adjusted Strike Price and the Cash Option Price shall be adjusted, as of the close of business on the date the Corporation shall take a record of the Holders of its Common for the purpose of receiving such dividend or other distribution (or if no such record is taken, as of the date of such dividend or other distribution is paid), to that price determined by multiplying each of the Adjusted Strike Price and the Cash Option Price by a fraction (a) the numerator of which shall be the total number of shares of Common outstanding immediately prior to the payment of such dividend or distribution and (2) the denominator of which shall be the total number of shares of Common outstanding immediately after the payment of such dividend or distribution (plus in the event that the Corporation paid cash for fractional shares, the number of additional shares which would have been outstanding had the Corporation issued fractional shares in connection with said dividend or distribution). The number of shares of Common at any time outstanding shall not include any shares thereof then directly or indirectly owned or held by or for the account of the Corporation or any Subsidiary. 9. Fractional Shares. No fractional shares of Common shall be issued in connection with any conversion of Series A Preferred or dividend payable with respect to the Series A Preferred, but in lieu of such fractional shares, the Corporation shall make a cash payment therefor equal in amount to the product of the applicable fraction, multiplied by either (1) the Conversion Price then in effect (in the case of a conversion of Series A Preferred pursuant to Section 5 hereof) or (2) the Market Price then in effect (in the case of a dividend payable pursuant to Section 4 hereof or an exchange pursuant to Section 6 hereof), in each case to the extent sufficient funds are legally available therefore. 10. Status of Redeemed or Converted Series A Preferred. No shares of Series A Preferred which have been redeemed for cash or converted into or exchanged for Common shall be reissued by the Corporation. 11. Protective Provisions. So long as any shares of 1995 Preferred shall be outstanding, the Corporation shall not, without the approval by the vote or written consent of the Holders of at least a majority (or more if required by law) of the then-outstanding shares of 1995 Preferred: (A) Amend, waive or repeal any provisions of, or add any provision to, (i) this Certificate of Designation, (ii) any other certificate of designation filed by the Corporation with respect to the 1995 Preferred or (iii) if such amendment, waiver, repeal or addition would have an adverse effect upon the rights, preferences or priorities of the Holders of 1995 Preferred, any provision of the Corporation's Certificate of Incorporation or of any other certificate of designation filed with the Secretary of State of Delaware by the Corporation with respect to its Preferred Stock (other than Parity Stock); (B) Amend, waive or repeal any provisions of, or add any provision to, the Corporation's By-Laws, if such amendment, waiver, repeal or addition would have an adverse effect upon the rights, preferences or priorities of the Holders of 1995 Preferred; (C) Authorize, create, issue or sell any shares of Senior Stock; (D) Enter into, or permit any Subsidiary to enter into, any agreement, indenture or other instrument which contains any provisions restricting the Corporation's obligation to pay dividends on the 1995 Preferred in accordance with Section 4 hereof or of any other certificate of designation filed by the Corporation with respect to the 1995 Preferred; (E) Sell, lease, encumber, transfer, liquidate or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of the Property of the Corporation; or (F) Dissolve the Corporation. 12. Definitions. As used in this Certificate of Designation, the following terms have the following meanings: "Adjusted Strike Price" shall mean 107% of the closing price of the Common on the NASDAQ National Market on the trading day prior to the execution and delivery of the Subscription Agreements. "Cash Option Price" shall initially mean $10.00 per share of Common, subject to adjustment pursuant to Section 8 hereof. "Closing Date" shall mean the date on which Spencer Trask certifies in writing to the Corporation that it has completed the distribution of all the 1995 Preferred to be issued pursuant to and in accordance with the Spencer Trask Commitment Letter. "Common" shall mean the Corporation's Common Stock, par value $.001 per share, and any stock into which such stock may hereafter be changed. "Conversion Price" shall have the meaning specified in Section 5(A) hereof, as adjusted from time to time pursuant to Section 8 hereof. "Effective Date" shall have the meaning specified in Section 5(C) hereof. "Holders" shall mean, in respect of any Security, the Persons who shall, from time to time, own of record such Security. The term "Holder" shall mean one of the Holders. "Mandatory Conversion" shall have the meaning set forth in Section 5(D) hereof. "Mandatory Conversion Date" shall have the meaning set forth in Section 5(D) hereof. "Market Price" as of any date shall mean the average closing price of the Common on the Nasdaq National Market during the five trading day period ending on the trading day immediately preceding such date. "Minimum Conversion Price" as of any date shall mean the highest price that would, if all of the shares of 1995 Preferred then outstanding were converted at such price, result in the issuance of a number of shares of Common that, when added to the number of shares (if any) of Common issued in connection with all previous conversions of shares of 1995 Preferred, would exceed the product of (i) 1,401,016 shares (as such number may be equitably increased or decreased by the Corporation from time to time to give effect to any subdivision or combination, respectively, of the outstanding shares of Common) multiplied by (ii) a fraction, the numerator of which is the Aggregate Issue Price of all shares of 1995 Preferred theretofore issued (whether or not then outstanding) and the denominator of which is $8,000,000. "1995 Preferred" shall mean the Series A Preferred and any other series of Preferred Stock of the Corporation issued in the aggregate amount of up to 116 shares pursuant to and in accordance with the Spencer Trask Commitment Letter. "Original Issue Price" shall mean $50,000 per share of Series A Preferred or 1995 Preferred, as applicable. "Parity Stock" shall mean any shares of any class or series of Stock of the Corporation having any preference or priority as to dividends or liquidation on a parity with any such preference or priority of the 1995 Preferred and no preference or priority as to dividends or liquidation superior to any such preference or priority of the 1995 Preferred and any instrument or Security convertible into or exchangeable for Parity Stock. Without limiting the generality of the foregoing, a dividend rate, mandatory or optional sinking fund payment amounts or schedules or optional redemption provisions, the existence of a conversion right or the existence of a liquidation preference of up to 100% of the original issue price thereof plus unpaid accrued dividends plus a premium of up to the dividend rate or up to the percentage of the equity of the Corporation represented by such Stock, with respect to any class or series of Stock, differing from that of the 1995 Preferred, shall not prevent such class of Stock from being Parity Stock. "Person" shall mean an individual, a corporation, a partnership, a limited liability company, a trust, an unincorporated organization or a government organization or an agency or political subdivision thereof. "Property" shall mean an interest in any kind of property or assets, whether real, personal or mixed, or tangible or intangible. "Redemption Amount" shall have the meaning specified in Section 5(B) hereof. "Redemption Factor" shall mean (i) during the period ending one year after the Closing Date, 1.35 and (ii) during the period beginning on the first day after the first anniversary of the Closing Date and ending two years after the Closing Date (such period, the "Second Year Period"), the sum of 1.35 plus the product of (x) the number of calendar days elapsed in the Second Year Period up to and including the redemption date multiplied by (y) 0.30 divided by 365 (rounded to the nearest 0.0001). "Registration Factor" shall mean (i) if the Corporation shall have filed the Registration Statement with the SEC within 60 days after the Closing Date, one (1.0), (ii) if the Corporation shall not have filed the Registration Statement with the SEC (the "delay") within 60 days after the Closing Date, 1.01 (if the delay is for 7 or fewer days); 1.02 (if the delay is between 8 and 14 days); 1.03 (if the delay is between 15 and 21 days); 1.04 (if the delay is between 22 and 28 days); 1.05 (if the delay is between 29 and 31 days); 1.06 (if the delay is between 32 and 45 days); 1.06 plus 0.01 multiplied by the number of full months that such delay extends beyond the 45th day. "Registration Statement" shall mean a registration statement pursuant to the Securities Act of 1933 to register the offer and sale of the shares of Common issuable upon conversion of Series A Preferred. "SEC" shall mean the Securities and Exchange Commission. "Securities" shall mean any debt or equity securities of a corporation, whether now or hereafter authorized, and any instrument convertible into or exchangeable for Securities or a Security. The term "Security" shall mean one of the Securities. "Senior Stock" shall mean any shares of any class or series of Stock of the Corporation having any preference or priority as to dividends or Property superior to any such preference or priority of the 1995 Preferred and any instrument or Security convertible into or exchangeable for Senior Stock. "Series A Preferred" shall mean the Corporation's Series A Convertible Preferred Stock, $.001 par value per share, and any Stock into which such Stock may hereafter be changed. "Spencer Trask" shall mean Spencer Trask Securities Incorporated, a Delaware corporation. "Spencer Trask Commitment Letter" shall mean that certain commitment letter dated December 12, 1995 between the Corporation and Spencer Trask relating to a private placement of the 1995 Preferred. "Stock" shall include any and all shares, interests or other equivalents (however designated) of, or participations in, corporate stock. "Subscription Agreements" shall mean the certain Subscription Agreements between the Corporation and the person or persons named on the signature pages thereof dated various dates and accepted by the Corporation on the date hereof and relating to the purchase and sale of shares of Series A Preferred. "Subsidiary" shall mean any corporation at least 50% of whose outstanding Voting Securities and capital stock are owned directly or indirectly by the Corporation or by one or more Subsidiaries or by the Corporation and one or more Subsidiaries. "Voting Securities" as applied to the Securities of any corporation, shall mean Securities of any class or classes (however designated) having ordinary voting power for the election of one or more members of the board of directors (or other governing body) of such corporation, other than Securities having such power only by reason of the happening of a contingency. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be duly executed this 10th day of January, 1996. LASERSIGHT INCORPORATED By: /s/ Michael R. Farris ------------------------- Name: Michael R. Farris Title: President Attest: /s/ Gregory L. Wilson - ---------------------------- Gregory L. Wilson, Secretary CONVERSION NOTICE Exhibit A (To be executed if Holder desires to make a conversion election pursuant to Section 5(B)) To LaserSight Incorporated: The undersigned hereby irrevocably elects to convert ________ shares of Series A Preferred Stock ("Preferred Shares") represented by the attached stock certificate into shares of common stock, $.001 par value (such shares, the "Common Shares") (or, if the Conversion Price in effect at the time of this conversion is less than or equal to the Cash Option Price and you so elect, into the right to receive cash at the election of the Corporation) pursuant to and in accordance with Section 5 of the Certificate of Designation relating to the Preferred Stock and requests that certificates for any such shares of Common Stock be issued in the name of the undersigned. If such number of Preferred Shares shall not be all the Preferred Shares evidenced by the Series A Preferred Stock certificate, a new stock certificate for the balance remaining of such shares shall be registered in the name of and delivered to the undersigned. The undersigned will not offer for sale, sell, pledge or otherwise transfer the Common Shares except (i) in accordance with the plan of distribution specified in the prospectus ("Prospectus") included in the registration statement relating to the Common Shares filed or to be filed with the SEC (the "Registration Statement") under the Securities Act of 1933 (the "Securities Act"), (ii) pursuant to SEC Rule 144 under the Securities Act, or (iii) pursuant to another available exemption from registration requirements of the Securities Act. The undersigned will deliver a Prospectus to the buyer of any Common Shares sold pursuant to the Registration Statement. The undersigned will not sell any Common Shares pursuant to the Registration Statement during the period, if any, during which the undersigned's right to sell under the Registration Statement has been suspended by the Company in accordance with the provisions of the Subscription Agreement between the Corporation and the undersigned or the undersigned's predecessor-in-interest. Dated: ____________________, 199_ _______________________________ Signature Guaranteed (if required): Signature Must be signed by registered holder(s) exactly as name(s) on certificate(s) of Series A Preferred. Signatures must (such execution to be either (i) accompanied by a signature guarantee by a member firm of the New York Stock Exchange, or (ii) evidenced by a signature on behalf of such Investor without such a guarantee, provided that the Investor has previously delivered to the Company a written instrument that (x) authorizes the Company to rely upon such unguaranteed signature for all purposes relating to the transfer or conversion of Preferred Shares, (y) includes a specimen of such unguaranteed signature on which the Company shall be entitled to rely without further investigation, and (z) holds the Company harmless from any loss resulting from any unauthorized or fraudulent signature purporting on its face to be an authorized signature so long as the Company relies on such specimen signature without gross negligence). If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please identify that person's full title. First telefax this Conversion Notice to the Company on fax number (314) 576-1073; then return by air courier the original hard copy to the Company, together with the original Preferred Share stock certificate by air courier to LaserSight Incorporated, Attn: Chief Financial Officer, 12161 Lackland Road, St. Louis, Missouri 63146. CORRECTED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK OF LASERSIGHT INCORPORATED I. DESIGNATION AND AMOUNT The designation (this "Certificate of Designation") of this series, which consists of 1600 shares of Preferred Stock of LaserSight Incorporated, a Delaware corporation (the "Company"), is the Series B Convertible Participating Preferred Stock (the "Preferred Stock") and the face amount shall be Ten Thousand Dollars ($10,000.00) per share (the "Face Amount"). II. DIVIDENDS The Preferred Stock will bear no dividends except as provided in Section IX(B). III. CERTAIN DEFINITIONS For purposes of this Certificate of Designation, the following terms shall have the following meanings: A. "Business Day" means any day other than a Saturday, Sunday or a day on which banks in New York, New York are permitted or required by law to be closed. B. "Closing Bid Price" means, for any security as of any date, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg Financial Markets or a comparable reporting service of national reputation selected by the Company and reasonably acceptable to registered holders of the Preferred Stock (each, a "Holder") then holding a majority of the then outstanding shares of a Preferred Stock ("Majority Holders") if Bloomberg Financial Markets is not then reporting closing bid prices of such security (collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sale price of such security in the over-the-counter market on the electronic bulletin board of such security as reported by Bloomberg, or, if no sale price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as reasonably determined by an investment banking firm selected by the Company and reasonably acceptable to the Majority Holders, with the costs of such appraisal to be borne by the Company. C. "Conversion Date" means, for any Optional Conversion, the date specified in the notice of conversion (the "Notice of Conversion"), so long as such date is a Business Day and the copy of the Notice of Conversion is faxed (or delivered by other means resulting in notice) to the Company before 5:00 p.m., St. Louis time, on the Conversion Date indicated in the Notice of Conversion. If the date specified in the Notice of Conversion is not a Business Day, or if the Notice of Conversion is not so faxed or otherwise delivered before such time, then the Conversion Date shall be the first Business Day after the date on which the Holder faxes or otherwise delivers the Notice of Conversion to the Company. The Conversion Date for the Required Conversion at Maturity shall be the Maturity Date (as such terms are defined herein). D. "Common Stock" means the common stock, $.001 par value, of the Company. E. "Conversion Price" means, with respect to any Conversion Date, the lower of the Fixed Conversion Price and the Variable Conversion Price, each as in effect as of such date and subject to adjustment as provided herein; provided that such price shall be multiplied by .93 if such Conversion Date occurs at a time when the Common Stock a Holder receives upon conversion of the Preferred Stock is not listed on the Nasdaq National Market ("Nasdaq"), the American Stock Exchange or the New York Stock Exchange. F. "Fixed Conversion Price" means $6.68 (130% of the average Closing Bid Prices of the Common Stock for the five (5) consecutive trading days ending on the trading day immediately preceding the Closing Date (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during such five (5) trading day period)), and shall be subject to adjustment as provided herein. G. "Securities Purchase Agreement" means the Securities Purchase Agreement dated as of August 29, 1997, among the Company and the purchasers named therein, as amended from time to time in accordance with the term thereof. H. "Variable Conversion Price" means, as of any Conversion Date, the average of the three (3) lowest Closing Bid Prices per share of Common Stock during the Lookback Period (as herein defined) (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during the Lookback Period), subject to adjustment as provided herein. For purposes hereof, the "Lookback Period" shall mean the period of twenty (20) consecutive trading days ending on the trading day immediately preceding the Conversion Date; provided, however, that in the event the average Closing Bid Price of the Common Stock during the period of five (5) consecutive trading days ending on the date one hundred eighty (180) days after the Closing Date is less than the average Closing Bid Price of the Common Stock for the five (5) consecutive trading days ending on the trading immediately preceding the Closing Date, the Lookback Period shall be the period of thirty (30) consecutive trading days ending on the trading day immediately preceding the Conversion Date. I. "Warrants" means the stock purchase warrants to acquire shares of Common Stock issued by the Company to the initial Holders in connection with the transactions contemplated by the Securities Purchase Agreement. IV. CONVERSION A. Conversion at the Option of the Holder. Subject to the limitations on conversions contained in Section IV.G, each Holder may, at any time and from time to time after the Closing Date, convert (an "Optional Conversion") each of its shares of Preferred Stock into a number of fully paid and nonassessable shares of Common Stock determined by dividing the aggregate Face Amount of the shares of Preferred Stock being converted by the Conversion Price. B. Mechanics of Conversion. In order to effect an Optional Conversion, a Holder shall: (x) fax (or otherwise deliver by other means resulting in notice) a copy of the fully executed Notice of Conversion in the form of Exhibit A hereto to the Company and (y) surrender or cause to be surrendered (or satisfy the provisions of Section XIV.B, if applicable) the certificates representing the Preferred Stock being converted (the "Preferred Stock Certificates") accompanied by duly executed stock powers and the original executed version of the Notice of Conversion as soon as practicable thereafter. Upon receipt by the Company of the fax copy of a Notice of Conversion from a Holder, the Company shall immediately send, via fax, a confirmation to such Holder stating that the Notice of Conversion has been received, the date upon which the Company expects to deliver the Common Stock issuable upon such conversion and the name and telephone number of a contact person at the Company regarding the conversion. C. Delivery of Common Stock Upon Conversion. Subject to Section IV.G, upon the delivery of a Notice of Conversion, the Company shall, no later than the later of (a) the third Business Day following the Conversion Date and (b) the day that is the first Business Day (or the second Business Day in the event that the Common Stock issuable upon conversion of such shares of Preferred Stock are to be delivered outside of the United States or Canada) following the date of the surrender of the Preferred Stock Certificates (or satisfaction of the provisions of Section XIV.B, if applicable) and the original executed version of the Notice of Conversion (the "Delivery Period"), issue and deliver to the Holder (or at its direction) (x) that number of shares of Common Stock issuable upon conversion of such shares of Preferred Stock being converted and (y) a certificate representing the number of shares of Preferred Stock not being converted, if any. The person or persons entitled to receive shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares at the close of business on the Conversion Date. D. Stamp, Documentary and Other Similar Taxes. The Company shall pay all stamp, documentary, issuance and other similar taxes which may be imposed with respect to the issuance and delivery of the shares of Common Stock pursuant to conversion of the Preferred Stock; provided that the Company will not be obligated to pay stamp, transfer or other taxes resulting from the issuance of Common Stock to any person other than the registered holder of the Preferred Stock. E. No Fractional Shares. No fractional shares of Common Stock are to be issued upon the conversion of Preferred Stock, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Conversion Price of a share of Common Stock (as determined for conversion of the Preferred Stock into whole shares of Common Stock); provided that in the event that sufficient funds are not legally available for the payment of such cash adjustment any fractional shares of Common Stock shall be rounded up to the next whole number. F. Conversion Disputes. In the case of any dispute with respect to a conversion, the Company shall promptly issue such number of shares of Common Stock as are not disputed in accordance with Sections IV.A and IV.C hereof. If such dispute involves the calculation of the Conversion Price, the Company shall submit the disputed calculations to a "Big Six" independent accounting firm selected by the Company via facsimile within two (2) business days of receipt of the Notice of Conversion. The accounting firm shall audit the calculations and notify the Company and the Holder of the results no later than two (2) business days from the date it receives the disputed calculations. The accounting firm's calculation shall be deemed conclusive, absent manifest error. The Company shall then issue the appropriate number of shares of Common Stock in accordance with Sections IV.A and IV.C hereof. G. Limitation on Conversions. Notwithstanding anything to the contrary set forth herein, the conversion of shares of Preferred Stock shall be subject to the following limitations (each of which limitations shall be applied independently): (i) Cap Amount. For so long as Common Stock is listed on the Nasdaq, the American Stock Exchange, the New York Stock Exchange or the Nasdaq Small Cap Market, prior to Stockholder Approval (as herein defined), unless otherwise permitted by the such market or exchange, in no event shall the total number of shares of Common Stock issued upon conversion of the Preferred Stock and exercise of the Warrants (as defined in the Securities Purchase Agreement) exceed the maximum number of shares of Common Stock that the Company can without stockholder approval so issue pursuant to Nasdaq Rule 4460(i) (or any successor rule) (the "Cap Amount"), which, as of the date of issuance of the Preferred Stock, shall be 1,995,534 shares. The Cap Amount shall be allocated pro-rata to the Holders as provided in Article XIV.C. In the event the Company is prohibited from issuing shares of Common Stock as a result of the operation of this subparagraph (i), the Company shall comply with Article VI. (ii) Limitations Holdings. The Preferred Stock shall not be convertible by a Holder to the extent (but only to the extent) that, if converted by such Holder, the Holder would beneficially own in excess of 4.9% (9.9% if the applicable box on the signature page of the Securities Purchase Agreement for such Holder is marked) (the "Applicable Percentage") of the shares of Common Stock. To the extent the foregoing limitation applies, the determination of whether Preferred Stock shall be convertible (vis-a-vis other securities owned by such Holder) and of which Preferred Stock shall be converted shall be in the sole discretion of the Holder and submission of the Preferred Stock for conversion shall be deemed to be the Holder's determination of whether such Preferred Stock is convertible and of which Preferred Stock is convertible, subject to such aggregate percentage limitation. No prior inability to convert Preferred Stock pursuant to this Section shall have any effect on the applicability of the provisions of this Section with respect to any subsequent determination of convertibility. For the purposes of this Section, beneficial ownership and all calculations, including without limitation, with respect to calculations of percentage ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder. The provisions of this Section may be amended and/or implemented in a manner otherwise than in strict conformity with the terms of this Section with the approval of the Board of Directors of the Company and the Majority Holders: (i) with respect to any matter to cure any ambiguity herein, to correct this subsection (or any portion thereof) which may be defective or inconsistent with the intended Applicable Percentage beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such Applicable Percentage limitation; and (ii) with respect to any other matter, with the further consent of the holders of majority of the then outstanding shares of Common Stock; the provisions of this Section may be waived with the approval of the Majority Holders upon ninety (90) days prior written notice from such Holders to the Company and all other Holders. The limitations contained in this Section shall apply to a successor Holder of Preferred Stock if, and to the extent, elected by such successor Holder concurrently with its acquisition of such Preferred Stock, such election to be promptly confirmed in writing to the Company (provided no transfer or series of transfers to a successor Holder or Holders shall be used by a Holder to evade the limitations contained herein). H. Required Conversion at Maturity. Subject to the limitations set forth in Section IV.G. and provided all shares of Common Stock issuable upon conversion of all outstanding shares of Preferred Stock are then (i) authorized and reserved for issuance, (ii) registered under the Securities Act of 1933, as amended (the "Securities Act") for resale by all Holders of such shares of Preferred Stock and (iii) eligible to be traded on either the Nasdaq, the Nasdaq Small Cap Market, the New York Stock Exchange or the American Stock Exchange, each share of Preferred Stock outstanding on the third anniversary of the Closing Date (the "Maturity Date") (and any accrued and unpaid Conversion Default Payments), automatically shall be converted into shares of Common Stock on such date in accordance with the conversion formula set forth in Section IV.A (the "Required Conversion at Maturity"). If a Required Conversion at Maturity occurs, the Company and the Holders shall follow the applicable conversion procedures set forth in this Article IV; provided, however, that a Notice of Conversion shall be deemed to be delivered to the Company on the Maturity Date. I. Electronic Transmission. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of a Holder who shall have previously instructed such Holder's prime broker to confirm such request to the Company's transfer agent, the Company shall use its commercially reasonable efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK A. Reserved Amount. The Company shall have authorized and reserved and keep available for issuance not less than 3,750,000 shares of Common Stock (the "Reserved Amount") solely for the purpose of effecting the conversion of the Preferred Stock and exercise of the warrants (the "Warrants"), in the form attached to the Securities Purchase Agreement as Exhibit B, to acquire Common Stock issued on the Closing Date pursuant to the terms of the Securities Purchase Agreement. Subject to Section V.B and Article VI, the Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock to provide for the full conversion of all outstanding Preferred Stock and issuance of the shares of Common Stock in connection therewith and the full exercise of the Warrants and issuance of the shares of Common Stock in connection therewith. The Reserved Amount shall be allocated among the Holders as provided in Section XIV.C. The Board of Directors of the Company shall, not later than sixty (60) days following the date of Closing, solicit by proxy the authorization of a number of shares of Common Stock sufficient to increase the Reserved Amount to two hundred percent (200%) of the number of shares of Common Stock then issuable upon conversion of the Preferred Stock and the exercise of the Warrants. B. Increases to Reserved Amount. Without limiting any other provision of this Article V, if the Reserved Amount for any three (3) consecutive trading days (the last of such three (3) trading days being the "Authorization Trigger Date") is less than one hundred seventy-five percent (175%) of the number of shares of Common Stock issuable upon conversion of the Preferred Stock on such trading days, without giving effect to the limitations set forth in Section IV(G) hereof, the Company shall as soon as practicable notify the Holders of such occurrence and shall as soon as practicable (and in any event in the case of the initial authorization of additional shares of Common Stock, within the period specified in Section VIII.A(viii)), take all necessary action (including, if necessary, stockholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to two hundred percent (200%) of the number of shares of Common Stock then issuable upon conversion of the outstanding Preferred Stock. VI. COMPLIANCE WITH CAP AMOUNT RESTRICTIONS A. Share Authorization. The Board of Directors of the Company shall, not later than 60 days following the date of the Closing, solicit by proxy the authorization (the "Stockholder Approval") by the stockholders of the Company of the issuance of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to the terms hereof in the aggregate in excess of twenty (20) percent of the outstanding shares of Common Stock and to eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities on the Company's ability to issue shares of Common Stock in excess of the Cap Amount and use its best efforts to obtain the Stockholder Approval no later than 120 days following the date of the Closing. B. Obligation to Notify. If at any time after the date of issuance of the Preferred Stock the then unissued portion of any Holder's Cap Amount becomes less than one hundred seventy-five percent (175%) of the number of shares of Common Stock then issuable upon conversion of such Holder's shares of Preferred Stock without giving effect to the limitations set forth in Section IV(G) hereof (a "Trading Market Trigger Event"), the Company shall notify the Holders of such occurrence as soon as practicable. VII. FAILURE TO SATISFY CONVERSIONS A. Conversion Default Payments. If, at any time, (x) a Holder submits a Notice of Conversion (or is deemed to submit such notice pursuant to Section IV.H) and the Company fails for any reason (other than because such issuance would exceed such Holder's allocated portion of the Reserved Amount or the Cap Amount, for which failure the Holders shall have the remedies set forth in Article VIII) to deliver, on or prior to the second Business Day following the expiration of the Delivery Period for such conversion (said period of time being the "Extended Delivery Period"), such number of freely tradeable shares of Common Stock to which such Holder is entitled upon such conversion, or (y) the Company provides notice (including by way of public announcement) to any Holder at any time of its intention not to issue shares of Common Stock upon exercise by any Holder of its conversion rights in accordance with the terms of this Certificate of Designation (other than because such issuance would exceed such Holder's allocated portion of the Reserved Amount or the Cap Amount) (each of (x) and (y) being a "Conversion Default"), then the Company shall pay to the affected Holder, in the case of a Conversion Default described in clause (x) above, and to all Holders, in the case of a Conversion Default described in clause (y) above, an amount equal to 1% of the Face Amount of the Preferred Stock with respect to which the Conversion Default exists (which amount shall be deemed to be the aggregate Face Amount of all outstanding Preferred Stock in the case of a Conversion Default described in clause (y) above) for each day such Conversion Default exists. The Company shall promptly provide each Holder with notice of the occurrence of a Conversion Default with respect to any of the other Holders. The payments to which a Holder shall be entitled pursuant to this Section VII.A are referred to herein as "Conversion Default Payments." A Holder may elect to receive accrued Conversion Default Payments in cash or to convert all or any portion of such accrued Conversion Default Payments, at any time, into Common Stock at the lowest Conversion Price in effect during the period beginning on the date of the Conversion Default through the Cure Date for such Conversion Default. In the event a Holder elects to receive any Conversion Default Payments in cash, it shall so notify the Company in writing. Such payment shall be made in accordance with and be subject to the provisions of Section XIV.E. In the event a Holder elects to convert all or any portion of the Conversion Default Payments, the Holder shall indicate on a Notice of Conversion such portion of the Conversion Default Payments which such Holder elects to so convert and such conversion shall otherwise be effected in accordance with the provisions of Article IV. "Cure Date" means (i) with respect to a Conversion Default described in clause (x) of its definition, the date the Company effects the conversion of the portion of the Preferred Stock submitted for conversion and (ii) with respect to a Conversion Default described in clause (y) of its definition, the date the Company undertakes in writing to issue Common Stock in satisfaction of all conversions of Preferred Stock in accordance with the terms of this Certificate of Designation. B. Adjustment to Conversion Price. If a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) day after the expiration of the Extended Delivery Period with respect to a conversion of Preferred Stock for any reason (other than because such issuance would exceed such Holder's allocated portion of the Reserved Amount or the Cap Amount, for which failure the Holders shall have the remedies set forth in Article VIII), then the Fixed Conversion Price in respect of any shares of Preferred Stock held by such Holder shall thereafter be the lesser of (i) the Fixed Conversion Price on the Conversion Date specified in the Notice of Conversion which resulted in the Conversion Default and (ii) the lowest Conversion Price in effect during the period beginning on, and including, such Conversion Date through and including the Cure Date. If there shall occur a Conversion Default of the type described in clause (y) of Section VII.A, then the Fixed Conversion Price with respect to any conversion thereafter shall be the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Default through and including the Cure Date. The Fixed Conversion Price shall thereafter be subject to further adjustment for any events described in Section XI. C. Buy-In Cure. Unless a Conversion Failure described in clause (y) of Section VII.A has occurred, if (i) the Company fails for any reason to deliver during the Delivery Period shares of Common Stock to a Holder upon a conversion of shares of Preferred Stock in accordance with the terms of this Certificate of Designation and (ii) after the applicable Delivery Period with respect to such conversion, such Holder purchases (in an open market transaction or otherwise) shares of Common Stock to make delivery in satisfaction of a sale by such Holder of the shares of Common Stock (the "Sold Shares") which such Holder was entitled to upon such conversion (a "Buy-In"), the Company shall pay such Holder (in addition to any other remedies available to the Holder) the amount by which (x) such Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the net proceeds received by such Holder from the sale of the Sold Shares; provided, that such purchase cannot be effected after the applicable Cure Date, if any, and both such purchase and sale must be effected in a commercially reasonable manner under the circumstances then facing the Holder to the extent such purchase and sale are under the control of such Holder. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for $10,000, the Company will be required to pay the Holder $1,000. A Holder shall provide the Company written notification indicating any amounts payable to such Holder pursuant to this Section VII.C. The Company shall make any payments required pursuant to this Section VII.C in accordance with and subject to the provisions of Section XIV.E. VIII. REDEMPTION DUE TO CERTAIN EVENTS A. Redemption Events. A "Redemption Event" means any one of the following (after expiration of the applicable cure period in the case of the events described in clauses (iv) and (vii)): (i) the Common Stock (including any of the shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants or required from time to time to be reserved pursuant to this Certificate of Designation or the Warrants) is suspended from trading on, or is not listed (and authorized) for trading on, the Nasdaq, the Nasdaq Small Cap Market, the American Stock Exchange, or the New York Stock Exchange for an aggregate of ten (10) trading days in any twelve (12) month period; (ii) the Company fails, and any such failure continues uncured for seven (7) business days after the Company has been notified thereof in writing by the Holder, to remove any restrictive legend on any certificate for any shares of Common Stock issued to the Holders of Preferred Stock upon conversion of the Preferred Stock or upon exercise of the Warrants as and when required by this Certificate of Designation, the Warrants, the Securities Purchase Agreement, or the Registration Rights Agreement, dated as of August 29, 1997, by and among the Company and the other signatories thereto (the "Registration Rights Agreement"); (iii) the Company provides notice to any Holder, including by way of public announcement, at any time, of its intention not to issue shares of Common Stock to any Holder upon conversion in accordance with the terms of this Certificate of Designation; except to the extent that the Company has provided the Holders with prior notice that it intends not to effect a conversion or exercise because such issuance would cause the Cap Amount or the Reserved Amount to be exceeded, in which event the Holders shall have the rights and remedies pursuant to clauses (viii) and (ix) of this Section VIII(A) and elsewhere in this Certificate of Designation; (iv) the Company breaches any material covenant or other material term or condition of this Certificate of Designation, the Warrants, the Securities Purchase Agreement or the Registration Rights Agreement, the breach of which would have a material adverse effect on the Company or the rights of the Holder with respect to any of the shares of Preferred Stock or the shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants, and such breach continues for a period of ten (10) business days after written notice thereof to the Company; provided, however, that if such breach may be cured by the Company and the Company is using its best efforts to cure such breach it shall not constitute a Redemption Event until such breach continues for a period of thirty (30) days after written notice thereof to the Company; (v) any representation or warranty of the Company made in any agreement, statement or certificate given in writing in connection with the issuance of the Preferred Stock (including, without limitation, the Warrants, the Securities Purchase Agreement and the Registration Rights Agreement), shall be false or misleading in any material respect when made and the breach of which would have a material adverse effect on the Company or the rights of the Holder with respect to any of the shares of Preferred Stock or the shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants; (vi) the Company fails: (x) to cause the registration statement required pursuant to Section 2.1 of the Registration Rights Agreement to be declared effective on or before the one hundred fiftieth (150th) day following Closing in a manner which would allow the sale of all Registrable Securities (as defined in the Registration Rights Agreement) to the fullest extent permitted under Section 2.1 of the Registration Rights Agreement; or (y) to cause the holders of Preferred Stock to be able to utilize such registration statement for the resale of all of their Registrable Securities (as defined in the Registration Rights Agreement), unless the Company is using its best efforts to remedy such inability to utilize such registration statement, subject to the Company's Board of Directors having determined in their good faith business judgment by resolution that the continued effectiveness of such registration statement would have a material adverse effect on the Company's ability to consummate a financing, acquisition, merger or joint venture, the failure of which to consummate would have a material adverse effect on the Company's financial condition, results of operations or future prospects; provided that in no event shall such failure exist for a total of more than forty-five (45) days in any fifteen (15) month period. (vii) the Company fails, and such failure continues uncured for five (5) business days after the Company has been notified thereof in writing by the Holder, for any reason to issue shares of Common Stock within ten (10) Business Days after the expiration of the Extended Delivery Period with respect to any conversion of Preferred Stock; except to the extent that the Company has provided the Holders with prior notice that it intends not to effect a conversion or exercise because such issuance would cause the Cap Amount or the Reserved Amount to be exceeded, in which event the Holders shall have the rights and remedies provided in clauses (viii) and (ix) of this Section VIII(A) and elsewhere in this Certificate of Designation; (viii) the Company fails to increase the Reserved Amount within one hundred twenty (120) days following Closing and thereafter an Authorization Trigger Date occurs; (ix) the Company fails to eliminate the Cap Amount prohibitions or other prohibitions described in Section VI.A within one hundred twenty (120) days following the Closing and thereafter a Trading Market Trigger Event occurs; (x) the Company fails to obtain the effectiveness of any amendment to an existing registration statements within thirty (30) days or of any new registration statement within ten (10) days after the shareholders meeting required pursuant to Section V.A hereof and within thirty (30) days following any other Registration Trigger Date (as defined in the Registration Rights Agreement) as required by Section 3.2 of the Registration Rights Agreement; or (xi) if there is a default under any agreement between Company or any of its affiliates and Foothill Capital Corporation ("Foothill") which results in the acceleration of the maturity of the debt owed by Company to Foothill (or if the such debt is not repaid by Company to Foothill at Maturity). B. Redemption By Holder. Upon the occurrence of a Redemption Event, each Holder shall have the right to elect at any time and from time to time by delivery of a Redemption Notice (as defined herein) to the Company while such Redemption Event continues, to require the Company to purchase for cash for an amount per share equal to the Redemption Amount (as defined herein), (i) in the case of a Redemption Event described in clause (i) through (vii), any or all of the then outstanding shares of Preferred Stock held by such Holder, (ii) in the case of a Redemption Event described in clause (viii), a portion of the Holder's Preferred Stock such that, after giving effect to such purchase, the Holder's allocated portion of the Reserved Amount exceeds two hundred percent (200%) of the total number of Common Stock issuable to such Holder upon conversion of its Preferred Stock and exercise of its Warrants, (iii) in the case of a Redemption Event described in clause (ix), a portion of the Holder's Preferred Stock such that, after giving effect to such purchase, the Holder's allocated portion of the Cap Amount exceeds two hundred percent (200%) of the total number of Common Stock issuable to such Holder upon conversion of its Preferred Stock and exercise of its Warrants and (iv) in the case of a Redemption Event described in clause (x), a portion of the Holder's Preferred Stock such that, after giving effect to such purchase, the Holder's allocated portion of the Registrable Securities (as defined in the Registration Rights Agreement) exceeds two hundred percent (200%) of the total number of Common Stock issuable to such Holder upon conversion of its Preferred Stock and exercise of its Warrants. C. Definition of Redemption Amount. The "Redemption Amount" with respect to a share of Preferred Stock means an amount equal to the greater of (i) 1.25 times the aggregate Face Amount of the Preferred Stock for which a demand is being made and (ii) an amount determined by the following formula: Face Amount --------------------- ( C P ) X M --------------------- --------- where: "CP" means the Conversion Price in effect on the date of the Redemption Notice; and "M" means the highest closing bid price of the Company's Common Stock during the period beginning on the date ten (10) trading days before the date of the Redemption Notice and ending on the date five (5) trading days after the date of the Redemption Notice, as reported on the principal securities exchange or trading market on which the Common Stock is traded. D. Redemption Defaults. If the Company fails to pay any Holder the Redemption Amount with respect to any share of Preferred Stock within five (5) business days of its receipt of a notice requiring such redemption (a "Redemption Notice"), then the Holder delivering such Redemption Notice (i) shall be entitled to interest on the Redemption Amount at a per annum rate equal to the lower of (x) the sum of prime rate published from time to time by the Wall Street Journal plus five percent (5%) and (y) the highest interest rate permitted by applicable law from the date of the Redemption Notice until the date of redemption hereunder, and (ii) shall have the right, at any time and from time to time, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Section IV.A) all or any portion of the Redemption Amount, plus interest as aforesaid, into shares of Common Stock at a Conversion Price equal to the lower of (x) the Conversion Price in effect on the date of the Redemption Notice and (y) the Conversion Price in effect on the date that such Holder receives shares of Common Stock with respect to such Redemption Amount. In the event the Company is not able to redeem all of the shares of Preferred Stock subject to Redemption Notices, the Company shall redeem shares of Preferred Stock from each Holder pro rata, based on the total number of shares of Preferred Stock included by such Holder in the Redemption Notice relative to the total number of shares of Preferred Stock in all of the Redemption Notices. The interest provided for in this Section VIII.D shall not be duplicative of the 1% per day payment provided for pursuant to Section VII.A of this Certificate of Designation. E. Additional Cap Amount Remedies. Upon a Redemption Event described in clause (ix), any Holder who is so prohibited from converting its Preferred Stock may elect one or both of the following: (i) require, with the consent of the Majority Holders (including any shares of Preferred Stock held by the requesting Holder), the Company to terminate the listing of its Common Stock on Nasdaq and to cause its Common Stock to be listed on the Nasdaq Small Cap Market or on the over-the-counter electronic bulletin board, at the option of the requesting Holder; and (ii) require the Company to issue shares of Common Stock in accordance with such holder's Notice of Conversion at a conversion price equal to the Conversion Price in effect on the date of the Holder's written notice to the Company of its election to receive shares of Common Stock pursuant to this subparagraph (ii). F. Partial Redemption Upon Sale or Licensing of Patent Rights. (i) From time to time following the sale or license by the Company or any subsidiary of the Company of patent rights pursuant to Section 12 of that certain Patent Security Agreement dated as of August 29, 1997, and so long as no Redemption Event shall have occurred and the Company is not in material violation of any of its obligations under the Securities Purchase Agreement, the Company shall have the right to redeem (a "Voluntary Redemption") Preferred Stock having a Face Amount of up to $11,200,000 for an amount in cash paid by wire transfer of immediately available funds equal to the Face Amount plus the applicable Voluntary Redemption Premium (as defined below) of the Preferred Stock so redeemed. (ii) Any Voluntary Redemption pursuant to this Section VIII.F shall be made ratably among Holders in proportion to the Face Amount of Preferred Stock then outstanding and held by such Holders. (iii) The "Voluntary Redemption Premium" shall be: (x) if the aggregate Face Amount of Preferred Stock redeemed pursuant to this Section VIII.F is equal to or less than $6,400,000, (A) with respect to Voluntary Redemptions for which payment is made on or prior to October 28, 1997, 4.0%; (B) with respect to Voluntary Redemptions for which payment is made after October 28, 1997 and on or prior to November 27, 1997, 6.75%; (C) with respect to Voluntary Redemptions for which payment is made after November 27, 1997, and on or prior to December 27, 1997, 10.0%; and (D) with respect to Voluntary Redemptions for which payment is made after December 27, 1997 and on or prior to January 26, 1998, 14.0%; and (y) if the aggregate Face Amount of Preferred Stock redeemed pursuant to this Section VIII.F is greater than $6,400,000, (A) with respect to Voluntary Redemptions for which payment is made on or prior to September 28, 1997, 15.0%; (B) with respect to Voluntary Redemptions for which payment is made after September 28, 1997 and on or prior to October 28, 1997, 20.0%; and (C) with respect to Voluntary Redemptions for which payment is made after October 28, 1997 and on or prior to November 27, 1997, 30.0%; provided, that if following one or more Voluntary Redemptions with respect to which a Voluntary Redemption Premium determined pursuant to clause (x) above is paid, a Voluntary Redemption is made which would cause the aggregate Face Amount of Preferred Stock redeemed pursuant to this Section VIII.F to exceed $6,400,000, then the Voluntary Redemption Premium for all of such prior Voluntary Redemptions shall be recalculated pursuant to clause (y) above, and the difference between the Voluntary Redemption Premium determined pursuant to clause (y) with respect to each such previous Voluntary Redemption and the Voluntary Redemption Premium paid as determined pursuant to clause (x) with respect to such previous Voluntary Redemption shall be paid as additional Voluntary Redemption Premium at the time of the Voluntary Redemption which triggers the application of this provision. (iv) No Voluntary Redemption may be made after November 27, 1997 if the aggregate Face Amount of Preferred Stock redeemed pursuant to this Section VIII.F would thereby be greater than $6,400,000. No Voluntary Redemption may be made after January 26, 1998. (v) The Company shall effect a Voluntary Redemption under this Section VIII.F by giving prior written notice (the "Voluntary Redemption Notice"), which notice may only be delivered on a business day on or after August 29, 1997 and on or prior to January 12, 1998. The Voluntary Redemption Notice shall state the Face Amount of Preferred Stock to be redeemed and the date on which the Voluntary Redemption is to occur (which shall not be less than ten (10) business days after the date of delivery of the Voluntary Redemption Notice) and shall be delivered by the Company to the Holders at the address of such Holder appearing on the register of the Company for the Preferred Stock. Within seven (7) business days after the date of delivery of the Voluntary Redemption Notice, each Holder shall provide the Company with instructions as to the account to which payments associated with such Voluntary Redemption should be deposited. On the date of the Voluntary Redemption, provided for in the relevant Voluntary Redemption Notice, (x) the Company will deliver the redemption amount via wire transfer to the account designated by the Holders, (y) the Holders will deliver the certificates relating to that number of shares of Preferred Stock being redeemed, duly executed for transfer or accompanied by executed stock powers, in either case, transferring that number of shares to be redeemed. Within five (5) business days after such Voluntary Redemption the Company will deliver to the Holders new certificates representing that number of shares held by the Holders after such Voluntary Redemption. Upon the occurrence of the wire transfer (or, in the absence of a Holder designating an account to which funds should be transferred, delivery of a certified check in the amount due such Holder in connection with such Voluntary Redemption to the address of such Holder appearing on the register of the Company for the Preferred Stock), that number of shares to be redeemed pursuant to such Voluntary Redemption as represented by the previously issued certificates will be deemed no longer outstanding. G. Capital Impairment. In the event that Section 160 of the Delaware General Corporation Law ("GCL"), would be violated by the redemption of any shares of Preferred Stock that are otherwise subject to redemption pursuant to this Article VIII, the Company: (i) will redeem the greatest number of shares of Preferred Stock possible without violation of said Section; (ii) the Company thereafter shall use its best efforts to take all necessary steps permitted pursuant to this Certificate of Designation and the agreements entered into in connection with the issuance of Preferred Stock pursuant hereto in order to remedy its capital structure in order to allow further redemptions without violation of said Section; and (iii) from time to time thereafter as promptly as possible the Company shall redeem shares of Preferred Stock at the request of the Holders to the greatest extent possible without causing a violation of Section 160 of the GCL. Any Holder shall have the right, at any time and from time to time, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Section IV.A) all or any portion of the Redemption Amount plus any interest or other charges which have accrued into shares of Common Stock at a Conversion Price equal to the lowest Conversion Price in effect during the period beginning on the date of the Redemption Notice and ending on the Conversion Date with respect to the Conversion of such Redemption Amount. In the event the Company is not able to redeem all the shares of the stock subject to Redemption Notices, the Company shall redeem shares of Preferred Stock from each Holder pro rata, based on the total number of shares of Preferred Stock included by such Holder in the Redemption Notice relative to the total number of Preferred Stock in all Redemption Notices. In addition, so long as the Company is prevented from redeeming shares of Preferred Stock pursuant to this Section VIII.G, the Company (i) will operate only in the ordinary course of business and will not incur any expenditures outside of the ordinary course of business, and (ii) will not enter into any acquisition, merger or joint venture transactions. IX. RANK; PARTICIPATION A. Rank. All shares of the Preferred Stock shall rank (i) prior to the Common Stock; (ii) prior to any class or series of capital stock of the Company hereafter created (unless, with the consent of the Holders obtained in accordance with Article XIII hereof, such class or series of capital stock specifically, by its terms, ranks senior to or pari passu with the Preferred Stock) (collectively, with the Common Stock, "Junior Securities"); (iii) pari passu with any class or series of capital stock of the Company hereafter created (with the consent of the Holders obtained in accordance with Article XIII hereof) specifically ranking, by its terms, on parity with the Preferred Stock (the "Pari Passu Securities"); and (iv) junior to any class or series of capital stock of the Company hereafter created (with the consent of the Holders obtained in accordance with Article XIII hereof) specifically ranking, by its terms, senior to the Preferred Stock (the "Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. B. Participation. Subject to the rights of the holders (if any) of Pari Passu Securities and Senior Securities, the Holders shall, as such Holders, be entitled to such dividends paid and distributions made to the holders of Common Stock to the same extent as if such Holders had converted their shares of Preferred Stock into Common Stock (without regard to any limitations on conversion herein or elsewhere contained) and had been issued such Common Stock on the day before the record date for said dividend or distribution. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock. X. LIQUIDATION PREFERENCE A. Liquidation of the Company. If the Company shall commence a voluntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Company shall be entered by a court having jurisdiction in the premises in an involuntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of sixty (60) consecutive days and, on account of any such event, the Company shall liquidate, dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or wind up (a "Liquidation Event"), no distribution shall be made to the Holders of any shares of capital stock of the Company (other than Senior Securities) upon liquidation, dissolution or winding up unless prior thereto the Holders shall have received the Liquidation Preference (as herein defined) with respect to each share. If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the Holders and holders of Pari Passu Securities shall be insufficient to permit the payment to such Holders of the preferential amounts payable thereon, then the entire assets and funds of the Company legally available for distribution to the Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares. B. Certain Acts Not a Liquidation. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Neither the consolidation or merger of the Company with or into any other entity nor the sale or transfer by the Company of less than substantially all of its assets shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. C. Definition of Liquidation Preference. The "Liquidation Preference" with respect to a share of Preferred Stock means an amount equal to the Face Amount thereof plus any other amounts that may be due from the Company with respect thereto through the date of final distribution. The Liquidation Preference with respect to any Pari Passu Securities shall be as set forth in the Certificate of Designation filed in respect thereof. XI. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS The Conversion Price shall be subject to adjustment from time to time as follows: A. Stock Splits, Stock Dividends, Etc. If at any time on or after the Closing Date, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, combination, reclassification or other similar event, the Fixed Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar event, the Fixed Conversion Price shall be proportionately increased. In such event, the Company shall notify the Company's transfer agent of such change on or before the effective date thereof. B. Certain Public Announcements. In the event that (i) the Company makes a public announcement that it intends to consolidate or merge with any other entity (other than a merger in which the Company is the surviving or continuing entity and its capital stock is unchanged and there is no distribution thereof)) or to sell or transfer all or substantially all of the assets of the Company or (ii) any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Common Stock (the date of the announcement referred to in clause (i) or (ii) of this paragraph is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the consummation of the proposed tender offer or transaction or the Abandonment Date (as defined below), be equal to the lesser of (x) the Conversion Price calculated as provided in Article IV or (y) the Conversion Price which would have been applicable for Conversion occurring on the Announcement Date. From and after the Abandonment Date, as the case may be, the Conversion Price shall be determined as set forth in Article IV. The "Abandonment Date" means with respect to any proposed transaction or tender offer for which a public announcement as contemplated by this paragraph has been made, the date which is seven trading days after the date upon which the Company (in the case of clause (i) above or the person, group or entity (in the case of clause (ii) above) publicly announces the termination or abandonment of the proposed transaction or tender offer which cause this paragraph to become operative, or such offer expires in accordance with its terms. C. Major Transactions. If the Company shall consolidate with or merge into any corporation or reclassify its outstanding shares of Common Stock (other than by way of subdivision or reduction of such shares) (each a "Major Transaction"), then each Holder shall thereafter be entitled to receive consideration, in exchange for each share of Preferred Stock held by it, equal to the greater of, as determined in the sole discretion of such Holder: (i) the number of shares of stock or securities or property of the Company, or of the entity resulting from such consolidation or merger (the "Major Transaction Consideration"), to which a Holder of the number of shares of Common Stock delivered upon conversion of such shares of Preferred Stock would have been entitled upon such Major Transaction had the Holder exercised its right of conversion (without regard to any limitations on conversion herein contained) on the trading date immediately preceding the public announcement of the transaction resulting in such Major Transaction and had such Common Stock been issued and outstanding and had such Holder been the holder of record of such Common Stock at the time of such Major Transaction, and the Company shall make lawful provision therefor as a part of such consolidation, merger or reclassification; and (ii) 125% of the Face Amount of such shares of Preferred Stock in cash. No sooner than ten (10) days nor later than five (5) days prior to the consummation of the Major Transaction, but not prior to the public announcement of such Major Transaction, the Company shall deliver written notice ("Notice of Major Transaction") to each Holder, which Notice of Major Transaction shall be deemed to have been delivered one (1) business day after the Company's sending such notice by telecopy (provided that the Company sends a confirming copy of such notice on the same day by overnight courier) of such Notice of Major Transaction. Such Notice of Major Transaction shall indicate the amount and type of the Major Transaction Consideration which such Holder would receive under clause (i) of this Section XI.B If the Major Transaction Consideration does not consist entirely of United States dollars, such Holder may elect to receive United States dollars in an amount equal to the value, determined by a Big-6 accounting firm selected by the Company that is reasonably acceptable to Holders of the Major Transaction Consideration in lieu of the Major Transaction Consideration by delivering notice of such election to the Company within five (5) days of the Holder's receipt of the Notice of Major Transaction. D. Adjustment Due to Distribution. If at any time after the Closing Date, the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise (including any dividend or distribution to the Company's stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the Fixed Conversion Price shall be equitably adjusted to take account of such distribution. E. Issuance of Other Securities With Variable Conversion Price. If, at any time after the Closing Date the Company shall issue any securities which are convertible into or exchangeable for Common Stock ("Convertible Securities") at a conversion or exchange rate based on a discount from the market price of the Common Stock at the time of conversion or exercise, then the Variable Conversion Price in respect of any conversion of Preferred Stock after such issuance shall be calculated utilizing the greatest percentage discount applicable to any such Convertible Securities. F. Purchase Rights. If at any time after the Closing Date, the Company issues any Convertible Securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the Holders will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of the Preferred Stock (without regard to any limitations on conversion or exercise herein or elsewhere contained) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. G. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article XI, the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Preferred Stock. XII. VOTING RIGHTS The holders of Preferred Stock shall have no voting power whatsoever, except as otherwise provided by the Delaware General Corporation Law (the "General Corporation Law"), in this Article XII and in Article XIII below. Notwithstanding the above, the Company shall provide each Holder with prior notification of any meeting of the stockholders (and copies of proxy materials and all other information sent to stockholders). If the Company takes a record of its stockholders for the purpose of determining stockholders entitled to (a) receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation or recapitalization) any share of any class or any other securities or property, or to receive any other right, or (b) to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Company, or any proposed merger, consolidation, liquidation, dissolution or winding up of the Company, the Company shall mail a notice to each Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier, but in no event earlier than public announcement of such proposed transaction), of the date on which any such record is to be taken for the purpose of such vote, dividend, distribution, right or other event, and a brief statement regarding the amount and character of such vote, dividend, distribution, right or other event to the extent known at such time. To the extent that under the General Corporation Law the vote of the holders of the Preferred Stock, voting separately as a class or series, as applicable, is required to authorize a given action of the Company, the affirmative vote or consent of the Holders of at least a majority of the shares of the Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of the Majority Holders (except as otherwise may be required under the General Corporation Law) shall constitute the approval of such action by the class. To the extent that under the General Corporation Law Holders are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is to be calculated for this purpose. XIII. PROTECTION PROVISIONS So long as any shares of Preferred Stock are outstanding, the Company shall not, without first obtaining the approval of the Majority Holders: (a) alter or change the rights, preferences or privileges of the Preferred Stock; (b) alter or change the rights, preferences or privileges of any capital stock of the Company so as to affect adversely the Preferred Stock; (c) create any Senior Securities; (d) create any Pari Passu Securities; (e) increase the authorized number of shares of Preferred Stock; (f) redeem, or declare or pay any cash dividend or distribution in excess of __% per annum on, any Junior Securities; or (g) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in any taxation with respect to the Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended, or any comparable provision of the Internal Revenue Code as hereafter from time to time amended, (or otherwise suffer to exist any such taxation as a result thereof). If the Majority Holders agree to allow the Company to alter or change the rights, preferences or privileges of the shares of Preferred Stock pursuant to subsection (a) above, then the Company shall deliver notice of such approved change to the Holders that did not agree to such alteration or change (the "Dissenting Holders") and the Dissenting Holders shall have the right, for a period of thirty (30) days after the date such notice was given by the Company, to convert pursuant to the terms of this Certificate of Designation as they existed prior to such alteration or change or to continue to hold their shares of Preferred Stock. XIV. MISCELLANEOUS A. Cancellation of Preferred Stock. If any shares of Preferred Stock are converted pursuant to Article IV, the shares so converted shall be canceled, shall return to the status of authorized but unissued preferred stock of no designated series, and shall not be issuable by the Company as Preferred Stock. B. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or (z) in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to reissue such lost, stolen, destroyed or mutilated Preferred Stock Certificate(s) if the Holder contemporaneously requests the Company to convert such Preferred Stock. C. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and Reserved Amount shall be allocated among the Holders in the same proportion as the number of shares of Preferred Stock initially held by such Holder bears to the aggregate number of outstanding shares of Preferred Stock. Each increase to the Cap Amount or Reserved Amount shall be allocated pro rata among the Holders based on the number of shares of Preferred Stock held by each Holder at the time of the increase in the Cap Amount or Reserved Amount, as the case may be. In the event a Holder shall sell or otherwise transfer any of such Holder's shares of Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Preferred Stock shall be allocated among the remaining Holders, pro rata based on the number of shares of Preferred Stock then held by such Holders. D. Statements of Available Shares. Upon request, the Company shall deliver to each Holder a written report notifying the Holders of any occurrence which prohibits the Company from issuing Common Stock upon such conversion. The report shall also specify (i) the total number of shares of Preferred Stock outstanding as of the date of the request, (ii) the total number of shares of Common Stock issued upon all conversions of Preferred Stock through the date of the request, (iii) the total number of shares of Common Stock which are reserved for issuance upon conversion of the Preferred Stock as of the date of the request, and (iv) the total number of shares of Common Stock which may thereafter be issued by the Company upon conversion of the Preferred Stock before the Company would exceed the Cap Amount and Reserved Amount. The Company shall provide, within fifteen (15) days after delivery to the Company of a written request by any Holder, all of the information enumerated in clauses (i) - (iv) of this Section XIV.D. E. Payment of Cash; Defaults. Whenever the Company is required to make any cash payment to a Holder under this Certificate of Designation (as a Conversion Default Payment, Redemption Amount or otherwise), such cash payment shall be made to the Holder by the method (by certified or cashier's check or wire transfer of immediately available funds) elected by such Holder. If such payment is not delivered when due such Holder shall thereafter be entitled to interest on the unpaid amount until such amount is paid in full to the Holder at a per annum rate equal to the lower of (x) the sum of prime rate published from time to time by the Wall Street Journal plus five percent (5%) and (y) the highest interest rate permitted by applicable law. Payment of interest under this Section XIV.E shall not be duplicative of the interest provided for in clause (i) of Section VIII.D or the 1% per day payment provided for pursuant to Section VII.A of this Certificate of Designation. F. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under this Certificate of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a Holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation. Company covenants to each Holder that there shall be no characterization concerning this instrument other than as expressly provided herein; provided, however, that the Company shall be entitled to prepare summaries of this Certificate of Designation for purposes of complying with its disclosure obligations and in connection with bona fide disputes as to the operations of the provisions of this Certificate of Designation. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder hereof and shall not, except as expressly provided herein or in the Intercreditor Agreement entered into with Foothill Capital Corporation in connection with the issuance of the Preferred Stock, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of Preferred Stock and that the remedy at law for any such breach may he inadequate. The Company therefore agrees, in the event of any such breach or threatened breach, the Holders shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. G. Specific Shall Not Limit General. No specific provision contained in this Certificate of Designation shall limit or modify any more general provision contained herein. H. Failure or Indulgency Not Waiver. No failure or delay on the part of a Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, not shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be duly executed this 29th day of August, 1997. LASERSIGHT INCORPORATED By: /s/ Michael R. Farris ------------------------- Name: Michael R. Farris Title: President Attest: /s/ Gregory L. Wilson - ------------------------- Gregory L. Wilson, Secretary EXHIBIT A --------- NOTICE OF CONVERSION The undersigned hereby irrevocably elects to convert (the "Conversion") $__________ Face Amount of the Series B Convertible Participating Preferred Stock (the "Preferred Stock") (i.e., $_________) plus all accrued and unpaid Conversion Default Payments relating thereto (if any) (each defined term used but not defined in this notice shall have the meaning assigned to it in the Designation, Preferences and Rights of Series B Convertible Participating Preferred Stock of LaserSight Incorporated (the "Certificate of Designation")), into shares of common stock ("Common Stock") of Lasersight Incorporated (the "Company") according to the conditions of the Certificate of Designation, as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. No fee will be charged to the Holder for any conversion except as provided herein. The undersigned covenants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of this Preferred Stock shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from registration under the Act. In the event of partial exercise, please reissue an appropriate Preferred Stock(s) for the principal balance which shall not have been converted. Date of Conversion:____________________________ Applicable Conversion Price:___________________ Amount of Conversion Default Payments to be Converted, if any:_______________________ Number of Shares of Common Stock to be Issued:_____________________ Signature:_____________________________________ Name:__________________________________________ Address:_______________________________________ ACKNOWLEDGED AND AGREED: LASERSIGHT INCORPORATED BY:__________________________ NAME:________________________ TITLE:_______________________ DATE:________________________________ CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF LASERSIGHT INCORPORATED LaserSight Incorporated (the "Company"), a corporation organized and existing under the laws of the State of Delaware, in order to amend its Certificate of Incorporation (the "Certificate") pursuant to the provisions of the General Corporation Law of the State of Delaware (the "Act"), does hereby certify as follows: 1. At a meeting duly called and held, the Board of Directors of the Company unanimously adopted a resolution to submit to the shareholders of the Company a proposal to amend Section 1(a) of Article IV of the Certificate to increase the number of shares of common stock which the company is authorized to issue from 20,000,000 to 40,000,000. 2. The full text of Section 1(a) of Article IV of the Certificate shall be amended hereby to read as follows: (a) Common Stock. The aggregate number of shares of Common Stock which the corporation shall have authority to issue is 40,000,000, each with a par value of $.001 per share. 3. At a special meeting of the Company's stockholders duly called and held upon notice in accordance with Section 222 of the Act, the foregoing amendment to the Certificate was duly adopted by the holders of at least a majority of the outstanding common stock of the Company entitled to vote thereon in accordance with the provisions of Section 242 of the Act. IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment to be signed by its duly authorized officer this 27th day of February, 1998. LASERSIGHT INCORPORATED By: /s/ Michael R. Farris -------------------------- Michael R. Farris President Attest: /s/ Gregory L. Wilson -------------------------- Gregory L. Wilson Secretary EX-11 3 COMPUTATION OF EARNING (LOSS) PER SHARE EXHIBIT 11 LASERSIGHT INCORPORATED COMPUTATION OF EARNINGS (LOSS) PER SHARE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995 ---- ---- ---- BASIC Weighted average shares outstanding 9,504,000 7,486,300 6,325,300 Issuable shares, acquisition of The Farris Group - 406,700 406,700 ------------ ------------ ----------- 9,504,000 7,893,000 6,732,000 ============ ============ =========== Net income (loss) $ (7,253,084) $ (4,074,369) $ 4,591,871 Conversion discount on preferred stock (41,573) (1,010,557) =========== Dividends on preferred stock (298,269) (358,618) ------------ ------------ Loss attributable to common shareholders $ (7,592,926) $ (5,443,544) ============ ============ Basic earning (loss) per share $ (0.80) $ (0.69) $ 0.68 ============ ============ =========== DILUTED Weighted average number of shares, as adjusted 9,504,000 7,486,300 6,325,300 Issuable shares, acquisition of The Farris Group - 406,700 406,700 Net effect of dilutive stock options - - 493,000 ------------ ----------- ----------- 9,504,000 7,893,000 7,225,000 ============ =========== =========== Net income (loss) $ (7,253,084) $ (4,074,369) $ 4,591,871 Conversion discount on preferred stock (41,573) (1,010,557) =========== Dividends on preferred stock (298,269) (358,618) ------------ ----------- Loss attributable to common shareholders $ (7,592,926) $ (5,443,544) ============ ============ Diluted earnings (loss) per share $ (0.80) $ (0.69) $ 0.64 ============ ============ =========== Loss attributable to common shareholders above $ (7,592,926) $ (5,443,544) Additional adjustment to weighted average number of shares: Weighted average number of shares as adjusted per above 9,504,000 7,893,000 Dilutive effect of contingently issuable shares, stock options and convertible preferred stock 4,722,000 317,000 ------------ ------------ Weighted average number of shares, as adjusted 14,226,000 8,210,000 ============ ============ Diluted loss per share, as adjusted $ (0.53)(A) $ (0.66)(A) ============ ============ - ------------------------------------ (A) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 13-14 of SFAS 128 because it produces an anti-dilutive result.
EX-21 4 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF REGISTRANT State or jurisdiction Subsidiary in which incorporated - ---------- --------------------- LaserSight Technologies, Inc. . . . . . . . . . . . . . . Delaware LaserSight Patents, Inc. . . . . . . . . . . . . . . . . Delaware MRF, Inc. (d/b/a The Farris Group) . . . . . . . . . . . Missouri Photomed Acquisition, Inc. . . . . . . . . . . . . . . . Delaware LaserSight Centers Incorporated . . . . . . . . . . . . Delaware LS Export, Ltd. . . . . . . . . . . . . . . . . . . . . . U.S. Virgin Islands LST Laser, S.A.. . . . . . . . . . . . . . . . . . . . . Costa Rica LS Japan Company, Limited (Not active). . . . . . . . . . Japan EX-23 5 INDEPENDENT AUDITORS' CONSENT Exhibit 23 ---------- Independent Auditors' Consent ----------------------------- The Board of Directors LaserSight Incorporated: We consent to incorporation by reference in the registration statement (No. 33-96390) on Form S-8, registration statement (No. 33-52170) on Form S-8, registration statement (No. 333-16817) on Form S-8, registration statement (No. 333-16823) on Form S-8, registration statement (No. 333-2198) on Form S-3, registration statement (No. 333-25237) on Form S-3, registration statement (No. 333-36655) on Form S-3 and registration statement (No. 333-36837) on Form S-3 of LaserSight Incorporated of our report dated February 27, 1998, with respect to the consolidated balance sheets of LaserSight Incorporated and Subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the 1997 annual report on Form 10-K of LaserSight Incorporated. /s/ KPMG Peat Marwick LLP St. Louis, Missouri March 30, 1998 EX-27 6 FDS
5 This schedule contains summary financial information extracted from the accompanying financial statements and is qualified in its entirety by reference to such financial statements. Year DEC-31-1997 DEC-31-1997 3,858,400 7,475,000 7,910,997 1,499,454 4,348,235 22,883,910 2,372,001 1,017,833 50,461,073 10,154,210 0 11,477,184 0 10,150 27,029,790 50,461,073 12,170,018 24,388,833 4,127,908 12,701,840 18,862,552 2,366,995 1,343,198 (6,373,084) 880,000 (7,253,084) 0 0 0 (7,253,084) (.80) (.80)
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