-----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, JYUdV5hVoeNgf46hKYlpTv4Bmv9Z92s96QUBLlC5KXxlIrfUcuXwwuFmyqA/pS1d 3EH0yGFDHKPJFR+1QMKaIQ== 0000879301-99-000004.txt : 19990402 0000879301-99-000004.hdr.sgml : 19990402 ACCESSION NUMBER: 0000879301-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99579995 BUSINESS ADDRESS: STREET 1: 3300 UNIVERSITY BLVD STREET 2: SUITE 140 CITY: WINTER PARK STATE: FL ZIP: 32792 BUSINESS PHONE: 4076789900 MAIL ADDRESS: STREET 1: 3300 UNIVERSITY BLVD STREET 2: SUITE 140 CITY: WINTER PARK STATE: FL ZIP: 32792 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, 1998 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.) 3300 University Blvd, Suite 140, Winter Park, Florida 32792 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (407) 678-9900 -------------- 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 Preferred Share Purchase Rights ------------------------------- 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 29, 1999 was approximately $64,039,264. Shares of Common Stock held by each officer and director and by each person who has voting power of 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares of Common Stock outstanding as of March 29, 1999: 15,442,635. 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, 1999. 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 7A. Quantitative and Qualitative Disclosures about Market Risk 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 2 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" (TM) or the "Company") operate in three major operating segments: technology, patents 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 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 Technologies also has a license and owns patents related to keratome design and usage, a new product line the Company started developing in late 1997 and expects to commercialize during the second quarter of 1999. LaserSight Centers is a developmental-stage company through which the Company may in the future provide PRK, LASIK (Laser In-Situ Keratomileusis) and other vision care surgical services. In 1994, the Company shifted its emphasis from research and development of its laser systems to the manufacture and international sale 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 LaserScan LSXTM excimer laser system with a new laser head, an active eye-tracking system, and advanced engineering. The Company's lasers are currently being marketed commercially in over 30 countries around the world. The Company enjoys having among the largest installed bases 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 for its laser products in order to access the domestic market for refractive procedures, with such approval presently anticipated during 1999. The Company currently is also 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."), 3 the Company believes that its laser will provide a therapeutic alternative for treating this leading cause of blindness. Therefore, the Company intends to continue to build upon its leadership position internationally by expanding its product line, entering the domestic market for refractive surgery, and expanding the applicability of its technology to the therapeutic treatment of glaucoma. While LaserSight generally does not need approvals of its technology to treat glaucoma in international markets, we will need to obtain the CE Mark before systems can be used in Europe with the glaucoma software, requiring limited clinical trial data. The LaserScan LSX excimer laser system has already received the CE Mark for refractive procedures. LaserSight Technologies' patent portfolio covers scanning technology, infrared technology, solid-state technology, calibration technology, keratome design and glaucoma treatment, all related to the Company's existing or planned technology related products. PATENT SEGMENT. Since August 29, 1997, the patents segment has consisted of LaserSight Patents, which licenses various patents related to the use of excimer lasers to ablate biological tissue. HEALTH CARE SERVICES SEGMENT. Since December 31, 1997, the health care services segment has consisted of TFG. TFG provides health care and vision care consulting services to hospitals, managed care companies and physicians. Until that date, this segment also included MEC Health Care, Inc. ("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 representatives of health care manufacturers and the chief executive officers and strategic planning personnel of hospitals, integrated delivery systems and medical groups. The core business of TFG is two-fold: developing and maintaining physician databases for clients needs and providing customized strategic plans. Services included are physician recruitment tools, competitive intelligence, demand studies, community health analyses and distribution channel mapping. 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, 1998, the Company had 108 full-time and five 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 TFG. 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 in connection with a transaction which was effective as of December 1, 1997. The Company's principal offices and mailing address are 3300 University Boulevard, Suite 140, Winter Park, Florida 32792, and its telephone number is (407) 678-9900. 4 LASERSIGHT TECHNOLOGIES LaserScan LSX Excimer Laser System The LaserScan LSX excimer laser system was introduced for international sale at the American Society of Cataract and Refractive Surgeons meeting in April 1997. The LaserScan LSX, with its patented optical scanning system, was designed to be the Company's premier excimer laser product, and incorporates improvements developed and implemented as the result of the Company's worldwide experience with clinical use of its laser products. The LaserScan LSX integrates the Company's new surgeon-intuitive software, a new high-reliability ultraviolet laser source and AccuTrack "TM" eye tracking, into an ergonomically designed system enclosure and control console, to supply its international customers with a complete refractive surgical workstation intended to meet current clinical requirements with capabilities for adapting to future innovations. The Version 9.0 software incorporates an easy to use graphical user interface with expanded treatment capabilities for its international users that include myopia, hyperopia and astigmatism, true spherical ablation profiles and a patient record database. The new higher-reliability ultraviolet-laser source was developed to satisfy the demanding clinical requirements of refractive surgical systems and offers operation at a pulse repetition rate of up to 100 Hz (pulses per second), long reliable lifetime, ease of day to day operation and simplified maintenance. The Company's AccuTrack eye-tracking technology, incorporated internationally as a standard feature in the LaserScan LSX, includes enhancements in lighting and image contrast to improve tracking and surgical centration accuracy. In the international market, the Company's LaserScan LSX is a fully integrated ophthalmic surgical workstation designed for use by ophthalmologists to perform PRK and LASIK refractive laser procedures. These procedures are recognized by most ophthalmologists to be clinically predictable. In September 1998 the Company received approval to sell the LaserScan LSX excimer laser system in the European Community through its certification to apply the CE Mark. CE Marking was made possible by receipt of a Certificate of Conformity to the European Medical Device Directive, 93/42/EEC. The first LaserScan LSX unit was shipped into the international market during December 1997 and regular commercial shipments to non-U.S. customers commenced during the first calendar quarter of 1998. The LaserScan LSX is now the Company's primary excimer laser product in the international market. Presently, the LaserScan LSX is restricted to investigational use in the U.S. as it is the subject of clinical trial research for LASIK treatment of myopic astigmatism and hyperopic astigmatism. The LaserScan LSX is also in clinical studies in Canada for LASIK treatment of myopic astigmatism. LaserScan 2000Plus Excimer Laser System The LaserScan 2000Plus laser system was introduced to the international market in March 1998 as an enhanced version of the LaserScan 2000. The LaserScan 2000Plus was designed to replace the Company's 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 a new patient alignment/fixation system. This surgical workstation is also designed for use by ophthalmologists to perform PRK and LASIK refractive laser procedures. 5 LaserScan 2000 and LS-300 Excimer Laser Systems The LaserScan 2000 laser system was introduced to the international market at the Annual Meeting of the American Academy of Ophthalmology in October 1995. The LaserScan 2000 was designed as a fully integrated ophthalmic surgical workstation for use by ophthalmologists, to perform PRK and LASIK refractive laser procedures. The system was introduced as a replacement for the Company's first excimer laser product, the Compak-200 laser system, and incorporated improvements developed and implemented as the result of the Company's worldwide experience with the clinical use of the Compak-200. In June 1996, LaserSight Technologies introduced the LS 300 Excimer Laser System for international sales 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, with its patented optical scanning system, established the industry's standard for high repetition rate, small diameter beam, galvanometer controlled scanning laser systems. That system was improved upon with the introduction of the LaserScan 2000 and LS 300 systems. Production of the LS 300 for the international market was phased out during 1997 in favor of the LaserScan 2000 and LaserScan 2000Plus systems, for which production plans have now been scaled back with the Company's emphasis on the LaserScan LSX excimer laser system. All of the Company's excimer laser systems incorporate a scanning device that utilizes a pair of galvanometer controlled mirrors that reflect and scan the laser beam directly onto the corneal surface without the use of discs, masks, diaphragms, or rotating elements used by other excimer laser systems. The advantages of this patented scanning technique include: (i) use of a lower energy, higher frequency laser with a smaller diameter beam that dramatically increases power density thereby permitting smaller, more compact systems; (ii) greater scanning pattern flexibility, through system software, 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 controlled by a computer that adjusts the beam overlap and diameters of the scanning system. The source code for the scanning software is proprietary technology of the Company (copyright) and has been developed and tested by a series of verification and validation procedures utilizing both PMMA (plastic), human cadaver and living rabbit eye tissue, and at international and domestic clinical trial sites. Keratome Systems During 1997, the Company began design and engineering activities to expand its keratome product line to include durable keratomes and replacement blades in addition to its single use disposable keratome. The keratome is a surgical instrument used during LASIK procedures to produce the corneal flap required for this procedure. The Company anticipates that it will have the opportunity to generate recurring revenues on a per procedure basis through sales of the single-use keratomes and the blades necessary to perform each refractive procedure. The Company believes that its complete keratome system, known as the LaserSight "MicroShape"(TM) keratome system, is the first of its kind that, because of the keratome consoles compatibility, offers surgeons the option to utilize either a single use or durable keratome based on their clinical preference. The Company acquired rights to manufacture and sell the single use disposable keratome, formerly known as the Automated Disposable Keratome "A*D*K" (TM), in September 1997 from inventors Luis A. Ruiz, M.D. ("Ruiz"), and 6 engineer Sergio Lenchig ("Lenchig") of Bogota, Colombia. The trade name for this single use keratome is now the LaserSight "UniShaper" (TM) single use keratome. See "Management's Discussion and Analysis - Risk Factors and Uncertainties - Company and Business Risks-"Required Minimum Payments Under Our UniShaper License Agreement may Exceed Our Gross Profits From Sales of Our UniShaper Product." Ruiz and Lenchig had earlier invented the Automated Corneal Shaper ("ACS") distributed by another company. The UniShaper single use keratome incorporates the market proven features found in the ACS with new enhancements and features, including pre-assembly, factory inspection, single use, transparent components for improved visibility while cutting the flap, and a dual drive mechanism with covered gears. The enhanced device was designed in response to the accumulated experience and feedback after several years of operation with the market leader ACS device. Early single use keratome 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 and continued together with clinical testing and further validation throughout 1998. The Company believes that commercial shipment of any keratome product should not commence until the instrument or consumable, and their related manufacturing processes, have been clinically validated through carefully controlled testing that includes both in vitro and in vivo evaluations and until previously established criteria for clinical use have been met. The UniShaper single use keratome is currently in the process of final clinical validation. The Company had originally expected to begin commercial sales of the single use device in early 1998, but now expects such sales to begin during the second quarter of 1999 due to unanticipated complexities in the manufacturing and clinical validation processes. During initial validation in late 1997 and early 1998, it was determined that the product didn't meet the performance requirements set by LaserSight. The product then underwent a number of additional rounds of design and clinical validations. We now believe that performance issues relevant to the product have been resolved. The UniShaper single use keratome is manufactured for LaserSight under an exclusive agreement with Frantz Medical Development Ltd. ("Frantz Medical"), located in Cleveland, Ohio, which is an ISO 9001 certified company experienced in the manufacture of engineering-grade medical devices. Frantz Medical was chosen for its experience with OEM manufacturing for other large medical companies, and its reputation for consistent delivery of quality products. Under the agreement, LaserSight is responsible for providing product specifications and for the cost of mold revisions and certain special tooling and equipment required. Frantz Medical is responsible for production in accordance with product specifications, as amended, and maintaining their facility in compliance with ISO 9002 requirements and Good Manufacturing Practices ("GMP") as required by the FDA. Upon final product approval, the Company is obligated to purchase 50,000 units during each year of the contract. The Company's "UltraShaper" (TM) durable keratome is a fabricated stainless steel surgical instrument that was designed utilizing the same clinical criteria applied to its single use counterpart. The decision to commercialize a durable keratome, in addition to the single use version, resulted from the company's marketing activities and surgeon feedback. The UltraShaper durable keratome is expected to be manufactured exclusively for the Company by specialized Medical Devices, Inc. ("SMD") located in Lancaster, Pennsylvania. SMD is ecperienced in the machining and assembly of precision instruments having previously manufactured their own vesion of a keratome for several years. The UltraShaper durable keratome requires replacement of a precision manufactured blade for each procedure. 7 The Company intends to manufacture its own "UltraEdge" (TM) blades for its durable instruments, as well as for keratomes manufactured by its competition. In preparation for the commercial launch of its keratome blades, the Company added several employees with experience in manufacturing similar products to its staff, entered into a lease for additional manufacturing space in Winter Park, Florida, and procured the equipment necessary to establish its blade manufacturing capability. Approximately 9,000 square feet have been dedicated to UltraEdge blade production, with the remaining space secured for additional manufacturing or distribution needs. The Company has developed a feature-enhanced control console that will provide power and control for its keratomes. The console will be interchangeable between the UniShaper single use keratome and the Company's new durable model. The new console incorporates suction monitoring functions with visual and auditory alarms to indicate a caution state; an ergonomic design with quiet operating performance; a digital display reading suction 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 that offers the surgeon the option to use the keratome's suction ring as a globe fixation device. The control console is being manufactured for the Company by Humphrey Instruments, a division of Carl Zeiss, Inc., San Leandro, California. The keratome systems will be marketed both through the Company's existing international distributor network and direct sales. Sales in the domestic market will be handled through: (i) direct contact (telephone, mail, fax and internet) to refractive surgeons; (ii) a direct marketing effort that targets national Laser Center accounts; and (iii) educational wet lab seminars to introduce the product in key metropolitan areas. The Company expects to benefit from the favorable payment terms associated with keratome products. Direct sales will be handled with payment in cash or by credit card at time of shipment of product. Distributor orders will be secured with letters of credit, prepayment, or up to 30-day terms. The 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 emergence of LASIK rather than PRK as both the surgeon and patient's procedure of choice for laser refractive surgery. This trend first became 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 captured a majority of refractive surgery cases during 1998. The Company believes there are five main competitors in the keratome business, but the Company has the first FDA 510(k)-cleared disposable keratome and, it believes, the only keratome product line that includes both single use and durable instruments that utilize a single control console design. Other instruments are manual devices, rather than automated. While the Company believes that its single use and durable keratomes have significant advantages over the keratomes manufactured by its principal competitors, some of these competitors are larger, more established, and have greater financial strength than the Company. The Company believes that the major competitive factors for its keratome products will include quality, safety, availability, automation, simplicity and price. 8 Aesthetic and Scientific Laser Products Based on the Company's desire to broaden its technology product line and offer expanded laser applications in the medical field, during April 1998, the Company and Schwartz Electro-Optics, Inc. ("SEO") entered into an agreement under which the Company purchased substantially all of the assets, and assumed certain liabilities, of SEO's medical products division. The aesthetic and scientific laser product division of LaserSight Technologies develops, manufacturers, and sells lasers and related equipment for medical, medical research, and scientific research applications. The division's primary focus has been on its erbium laser, the Crystalase, which is primarily used to perform dermatological procedures. The division also manufactures and sells its scientific product, the Laser 1-2-3. 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 (TM) Eye Tracking System. The Company continues to offer its international customers 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 and adjusts the position of the laser beam to ensure that the eye remains centered during the laser procedure. During 1998, 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. Version 9.0 Software. The Company offers its newest version software for installation as an upgrade to its earlier laser systems. The Version 9.0 software upgrade provides international users with features including expanded treatment options and patient databases. Intellectual Property Numerous patents have been applied for by, or have been issued to, other companies related to the broad categories 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, patent applications, and licenses, covering its laser scanning method, solid-state technology, glaucoma and retinal treatments, corneal topography development, calibration methods, treatment techniques for myopia and hyperopia, and keratomes. 9 The Company continues to take actions to secure patent rights in its field. See "Management's Discussion and Analysis--Risk Factors and Uncertainties-Company and Business Risks-Patent Infringement Allegations May Impair Our Ability to Manufacture and Market Our Products." Purchase of Certain Patents from IBM In 1992, LaserSight 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 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 for all non-ophthalmic applications. With the purchase of these patents the Company also acquired related patent license agreements, and the rights to 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 10 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. Efforts continued on this project during 1998, 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 to develop the Ex-Caliper calibration system. 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. In October 1998, the Company entered into an agreement with a subsidiary of TLC The Laser Center Inc. ("TLC"), Toronto, Ontario, Canada, that grants the Company an exclusive license under U.S. Patent No. 5,630,810 relating to a treatment method for preventing formation of central islands during laser surgery. Central islands are a problem generally associated with laser refractive surgery performed with broad beam laser systems used to ablate corneal tissue. The Company has agreed during the term of the patent license agreement to pay TLC 20% of the aggregate net royalties it receives in the future from licensing of the TLC patent and certain other patents owned by the Company. In January 1999, the Company received Notice of Allowance from the U.S. Patent and Trademark Office for its patent application covering a multizone, multipass, treatment method for refractive surgery, and expects that the corresponding patent will be issued in the near future. 11 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 single use A*D*K keratome. The license has also provided the technology necessary for the Company to design its durable keratome. 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 "MicroShape", "UniShaper", "UltraShaper", "UltraEdge", "A*D*K", "LaserScan LSX", "AccuTrack", "ScanLink" (TM), "OnSite" (TM), and "Crystalase" (TM) 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, has produced all laser units sold internationally since that time. 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, however, have their own regulatory requirements. For example, the CE Mark is required for sale into member countries of the European Economic Union ("EU"). 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. 12 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--Company and Business Risks-Our Supply of Certain Critical Components and Systems may be Interrupted Because of Our Reliance on a Limited Number of Suppliers." 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. Since that time the Company has maintained its ISO 9002 certification through a series of periodic surveillance audits by its "Notified Body". During November 1996 the Company completed all requirements necessary to obtain authority to apply the CE Mark to its LaserScan 2000 System. In September 1998, the Company received similar certification to apply the CE Mark to its LaserScan LSX excimer laser system. The CE Mark, certifying that the LaserScan Models 2000 and LaserScan LSX meet all requirements of the European Community's medical directives, gives the Company access to market its products into all member countries of the EU. Although during 1997 and the first half of 1998 only certain member countries of the EU required compliance with the EU Medical Directives (including France and Germany), after June 1998 all countries in the EU required the 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 processes and controls evaluated by a Notified Body (Semko) for maintenance of ISO 9002 conditions, demonstrated that it satisfied all engineering and electro-mechanical requirements of the EU, and conducted a clinical study in France to confirm the safety and efficacy of the excimer laser system on patients. Availability of Components LaserSight Technologies purchases the vast majority of components for its laser systems 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 has contracted under an exclusive supply arrangement with 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 which have continued through 1998. These measures include 100% incoming inspection of all laser heads at time of receipt from the 13 supplier, modification and upgrading of certain critical components, development and testing of new techniques for handling the laser heads, and procurement of an alternate component from another supplier. During 1996, the Company contracted with a new supplier for the laser head component, TUI Lasertechnik und Laserintegration GmbH, Munich, Germany, 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 its 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 LaserScan 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. Currently, TUI is a single source for this improved performance laser head. The agreement is for a term of 18 months, renewable for consecutive 18 month terms at the Company's option. The Company continues to evaluate potential supplier relationships with other laser manufacturers. Marketing The use of the Company's medical laser systems in the U.S. requires FDA approval. The Company has been marketing these systems in the international market where approval is either 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 1998, the Company continued to market its LaserScan 2000 and LaserScan LSX excimer laser systems in Europe, Russia, 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 1998, approximately 86% of sales of the Company's product sales resulted from distributors and representatives with the balance from sales made by employees of the Company. No one customer or distributor was responsible for generating sales in excess of 10% of consolidated revenues. In conjunction with its sales activities, the Company continues to participate in a number of foreign and domestic ophthalmology meetings, exhibits and seminars. Historically, two large U.S. meetings, the American Academy of Ophthalmology and the American Society of Cataract and Refractive Surgery, have yielded substantial interest in the Company's laser and keratome products. 14 The Company is exploring potential clinical trial advisors and distribution agents in Japan. In certain countries, clinical trials of lasers are required before commercial sales can take place. As a result, the Company has historically placed from three to six 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 the Company's sales activities is on the international market, the Company has sold lasers in the U.S. to ophthalmologists participating in the Company's 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 the Company continues to establish additional clinical sites in the U.S. during 1999, these sites could represent an additional source of revenue for the Company as well as additional regulatory costs. Approximately 250 LaserSight excimer laser systems are now in place worldwide. Meetings and Technical Exhibits LaserSight Technologies' strategy for international meetings and technical exhibits is for Company personnel to attend appropriate national and regional meetings, and to encourage its clinical investigators and clinical users to present clinical papers to promote sales of the Company's laser systems. When possible, Company personnel participate in, or provide, wet lab or hands on demonstrations of the Company products. 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 (most recently held in November 1998 in New Orleans) and the American Society of Cataract and Refractive Surgery (most recently held in April 1998 in San Diego). During these U.S. meetings, the Company limits its activities for its excimer laser refractive systems 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 The Company 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 13 systems in both 1996 and 1997, to 10 systems in 1998. 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. In the Company's experience, sales of major capital equipment such as excimer laser systems in certain areas, including much of South and Central America, often require payment terms from 12 to 18 months. Since 1996, the Company has been placing greater emphasis on the terms and the timing of collections of future sales. 15 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. The Company 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, 1998, the Company was the payee on letters of credit with foreign financial institutions aggregating approximately $2.5 million (compared to $0.2 million at December 31, 1997). 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 and Uncertainties-Financial and Liquidity Risks-If Our Uncollectible Receivables Exceed Our Reserves We will Incur Additional Unanticipated Expenses." The Company's sales have historically been and are expected to continue to be denominated in U.S. dollars. The EU's conversion to a common currency, the Euro, is not expected to have a material impact on the Company's pricing, financial condition or results of operations. 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 eyeglasses, contact lenses, and RK (radial keratotomy), and recently introduced corneal implants. In addition, medical companies, academic and research institutions and others could develop new therapies, including new medical devices or surgical procedures (such as new designs of 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. LaserSight Technologies is targeting the LaserScan LSX and the LaserScan 2000 to the PRK and LASIK refractive correction market that utilizes a UV-wavelength (currently excimer) laser. The Company believes that there are currently six major competitors in the worldwide UV-wavelength market, including three major U.S. companies. LaserSight Technologies believes that in the market for refractive surgery its scanning laser technology, software-based flexibility and eye tracking technology have significant advantages over the excimer lasers manufactured by its principal competitors. Many of these competitors are larger, more established, and have greater financial strength than the Company. 16 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 prior to 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. These 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 The Company's laser products are subject to strict governmental regulations which affect the Company's ability to manufacture and market these products. 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 approval by the FDA before the Company can ship its laser systems for commercial use in the U.S. Each separate medical device requires a separate FDA submission, and specific protocols have to be submitted to the FDA for each claim made for each medical device. During 1994, the Company began the clinical studies required for approval and commercialization of its laser scanning systems in the U.S. In April 1998, the Company filed its Pre-Market Approval ("PMA") application for PRK treatment of myopia using its scanning laser system. The Company continues to enroll patients into a Phase 3 PRK study for the purpose of post-market surveillance. In May 1998, the Company received notification from the FDA that its PMA application had been accepted for filing. If and when the Company's laser systems receive PMA approval by the FDA, the Company will be required to obtain GMP clearance with respect to its manufacturing facilities. These regulations impose certain procedural and documentation requirements upon the Company with respect to its manufacturing and quality assurance activities. The Company's facilities will be subject to inspections by the FDA, and compliance with GMP guidelines is required before the Company can begin marketing its laser products. In addition, the Company's suppliers of significant components or sub-assemblies must meet the quality requirements of the Company. There can be no assurance as to whether or when the FDA will approve this PMA or that the PMA will not require review before an FDA Advisory Panel. During 1996, the Company began clinical trials for PARK (photo-astigmatic refractive keratectomy) in the U.S. During 1998, the Company submitted and received approval to begin U.S. clinical trials of its scanning laser for treatment of myopia and hyperopia, with and without astigmatism, utilizing the LASIK procedure (in which the stroma beneath the cornea is ablated rather than the surface of the cornea). The Company also began a clinical trial of its scanning laser system for LASIK treatment of myopia and myopia astigmatism in Canada in late 1998. 17 In July 1997, as amended in September 1998, 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. In July 1998, the FDA approved the PMA application for the Kremer Excimer Laser to perform LASIK for correction of myopia and myopic astigmatism. This is the only laser to receive FDA approval for LASIK in the United States. 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 clearance and the development and validation of a manufacturing process for the Photomed laser. The FDA's approval is unrelated to the PMA for the Company's scanning laser systems that the Company submitted to the FDA. The Company also has an IDE approved by the FDA for the treatment of glaucoma by laser trabeculodissection. The Company has completed a feasibility study in blind eyes and intends to continue its efforts in this area. Research and Development During 1998, the Company continued its research and development activities related to new laser products, laser systems, product upgrades, its keratome products, and ancillary product lines. Excluding regulatory expenses, research and development expense was $2,813,461 in 1998 compared to $1,836,151 in 1997, an increase of 53%. In 1996, these expenses were $948,520. Considerable research and development effort was directed towards continued development and expansion of the complete keratome product line (representing $1,031,751 of the increased costs between 1997 and 1998) and development costs of a mobile laser platform, partially offset by reduced expenses related to the LaserScan LSX excimer laser system, which was substantially completed during the year. Other research and development efforts have been focused on the continued development of the new solid-state laser. The solid-state is the first true non-gas laser capable of delivering a laser beam in the ultraviolet spectrum (common to all excimer lasers used for refractive surgery). The Company directed additional efforts during 1998 toward the production of a commercial design for this product. In addition, the solid-state laser could be capable of generating multiple wavelengths, thus permitting its use for other ophthalmic procedures which now require separate lasers. The solid-state research and development effort has already resulted in the identification of many features that have been subsequently incorporated into 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 solid-state 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 solid-state system for medical uses outside of the U.S. The Company continues to assess numerous issues related to manufacturing and marketing of the solid-state system. As is the case with many new technology products, the commercialization of the solid-state laser is subject to potential delays. During 1998, the Company continued development of its advanced eye-tracking system that is standard on the LaserScan LSX and offered as an option to LaserScan 2000 purchasers. The LaserSight AccuTrack eye tracker is an "Active + Passive" system that is capable of following even fine saccadic eye movements. The tracking system eliminates most error normally introduced by gross and fine eye movements during untracked laser refractive surgery, and does not require dilation of the pupil or any apparatus to be in contact with the eye. Additionally, a larger margin of safety may be achieved for patients with above average eye movement. 18 The Company's research and development activities continue to include efforts to develop completely new designs for solid-state laser heads that are not currently available or produced anywhere in the world 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 did not result in material revenues or expenses and, in February 1998, the Company terminated its license to the method of preventing keratocyte loss. HEALTH CARE CONSULTING SERVICES (TFG) Introduction TFG is a national provider of consulting services in strategy development and implementation and provision of critical decision support information for health care provider organizations, managed care organizations and manufacturers/distributors of health care products. In 1998, as a result of losses incurred in previous years, TFG reduced staffing substantially, tightened it business focus and began outsourcing certain services such as teleresearch and physician recruiting. TFG clients include multi-hospital health systems, community hospitals, academic medical centers, specialty health care providers and manufacturers and distributors of health care products. The senior consulting staff of TFG includes individuals with 10 to 20 years of health care experience. These individuals have held executive positions in market research, hospital operations, strategic planning and turnaround management. Industry projections indicate continued turbulence in the health care industry as prices paid by government and managed care organizations continue to decrease. Consolidation, diversification, divestiture and downsizing are among the actions many health care providers are being forced to consider in order to solidify a position in the fast changing market place. TFG believes it is positioned to assist health care managers in understanding the range of available options and selecting an appropriate course of action. See "Management's Discussion and Analysis -- Results of Operations -- Revenues." Principal Services Decision Support Information. TFG draws upon the experience of the consulting staff to characterize the decisions health care executives are facing and develop methodologies to gather information to clarify the issues. Demand for health services and the corresponding supply of health care providers are fundamental components of Decision Support Information. TFG consultants add value by studying available information to discern previously unidentified or unquantified patterns of supply and demand. The product of TFG Decision Support studies is information which will move market share or otherwise impact the bottom line of clients. This category of consulting services include Benchmarking, Competitive Intelligence, Distribution Channel Mapping, Entry Point Analysis, Environmental Assessment, Market Demand Studies, Physician Resource Studies, and Portfolio Analysis. 19 Strategic Planning. TFG created a strategic planning model which stresses implementable goals and objectives, realistic time tables, and the profiles of the human resources needed for implementation. The segments of the strategic planning process include determining mission, vision setting, alternative futures and strategy formulation. Other services such as conducting executive retreats, board room consultation and executive support, are also provided. Marketing Most of TFG's business comes from new projects for existing and former clients and through favorable referrals from such clients. The Company believes that new business will increase in 1999 as a result of existing business relationships and leads developed during 1998. In addition to working with former clients, sales efforts are in development to generate new clients in the hospital, academic medical center, hospital system and other health care provider categories. TFG served approximately 10 clients in 1998. Payment Terms Clients are generally asked to pay a certain amount at the commencement of the engagement and at the point where predefined milestones are reached, but no less than monthly. Certain clients pay a monthly retainer. Projects may be priced on an hourly rate or at a fixed project price, exclusive of out of pocket expenses. Competition The Company believes that the key competitive factors it brings to its health care services segment is the experience of consultants, contacts within the industry, pricing of services and satisfied clients. Primary competitors are national consulting firms and small health care consulting firms. TFG believes it holds advantage over many of the competitors based upon (i) its commitment to bring measurable value to each engagement; (ii) experience of the consultants in the environment in which the client competes; and (iii) a recognized expertise in developing unique provider databases geared to decisions which result in improving the financial performance of the client organization. Recently, TFG completed a consulting engagement with a nationally recognized academic medical center. The work consisted of a number of the information gathering services utilized in a typical planning process. Since the successful completion of this engagement, the services provided by TFG have been featured in a telemarketing sales effort to similar organizations throughout the mid-west U.S. 20 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 -------- ----------- ------- ------- ---- Winter Park, Florida Principal offices of Company and LaserSight Technologies 22,700 $21,600 6/14/2002 Winter Park, Florida LaserSight Technologies-additional space 15,600 $13,900 1/31/2004 St. Louis, Missouri The Farris Group office 3,900 $5,150 7/31/2001 Near San Jose, Costa Rica Manufacturing facility 6,400 $4,198 11/30/2000
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 the Company's 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 of $85,952. The Wiese Defendants appealed the judgment to the U.S. Court of Appeals for the Eleventh Circuit, Atlanta, Georgia. On November 30, 1998, the District Courts decision was affirmed by the U.S. Court of Appeals. 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. 21 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 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. Visx, Incorporated. In May 1998, Visx asserted that the Company was underpaying royalties due under an international license agreement (the "License Agreement") and submitted the dispute for binding arbitration, which is currently scheduled in mid-1999. The Company has denied Visx's allegations and intends to vigorously defend its position under the terms of the License Agreement. Management believes that its obligations under the License Agreement will not result in a material adverse effect on the Company's financial condition or results of operations. Mercacorp, Inc. On August 3, 1998, Mercacorp, Inc. commenced an action in the U.S. District Court for the Eastern District of New York against the Company, Michael R. Farris (the President and Chief Executive Officer of the Company), Wall & Broad Equities, Inc., a "purported investment banking establishment" and Isaac Weinhouse, the principal of such purported investment banking establishment. This action asserted violations of Section 10(b) of the Securities and Exchange Act of 1934 and common law fraud in connection with the alleged issuance of false press releases, misrepresentations and omissions by all of the defendants on which the plaintiff allegedly relied in purchasing the Company's Common Stock and later holding (rather than selling) such Common Stock. The plaintiff asked that they be awarded $5 million in actual damages and $50 million in punitive damages. On November 11, 1998, the plaintiff dismissed the action, with prejudice, and the parties agreed to a release of all claims. In connection with the dismissal and release of claims the Company issued the plaintiff two separate warrants to purchase Common Stock. Under the first warrant, the plaintiff is entitled to purchase up to 750,000 shares of Common Stock at an exercise price of $4.00 per share, the closing bid price on November 10, 1998, and the second warrant, the plaintiff is entitled to purchase up to 750,000 shares of Common Stock at an exercise price of $5.00 per share. Both of the warrants contain certain prohibitions against assignment and transfer to third parties as well as other terms and conditions. Both of these warrants will terminate if the first warrant is not exercised in full within 14 days after the effective date of a registration statement covering the shares of common stock to be issued upon exercise of the warrants. For a more complete description of the terms and conditions of the warrants, reference is hereby made to the warrants which are attached to this Report as Exhibits 10.32 and 10.33, and are incorporated in this Item 3 by this reference. Former NNJEI Owners. On March 22, 1999, the Company received notice of an action filed on March 15, 1999 by the former owners of NNJEI and related assets and entities against the Company in U.S. District Court - District of New Jersey. The complaint alleges breach of contract in connection with a provision in the Company's July 1996 acquisition agreements related to the assets of NNJEI and related assets and entities. Such provision provided for additional issuance of the Company's Common Stock if its stock price was not at certain levels in July 1998. The Company issued the additional Common Stock in July 1998 in accordance with the provisions of the agreements. The plaintiffs allege that, based on the price of the Company's Common Stock in July 1998, additional payments are required of approximately $540,000. Management disagrees with the plaintiffs' interpretation of the NNJEI agreements and believes that its 22 obligations under the agreements will not result in 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 1998 and 1997, as reported by The Nasdaq Stock Market. As of March 15, 1999, there were approximately 215 holders of record of the Common Stock and, as far as the Company can determine, approximately 2,800 total shareholders, including shareholders of record and shareholders in "street name."
Fiscal 1998 High Low Fiscal 1997 High Low - ----------- ----- ----- ----------- ---- ----- First Quarter $3.38 $1.56 First Quarter $6.63 $5.19 Second Quarter 5.38 2.25 Second Quarter 7.31 3.38 Third Quarter 8.03 3.38 Third Quarter 6.94 4.19 Fourth Quarter 6.00 2.75 Fourth Quarter 5.25 2.56
On March 29, 1999, the last sale price of the Common Stock on The Nasdaq Stock Market was $4.78. 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. Possible Dilutive Issuances of Common Stock. Each of the following issuances of Common Stock may depress the market price of the Common Stock. See "Management's Discussion and Analysis - Risk Factors and Uncertainties - Common Stock Risks--The Significant Number of Shares Eligible for Future Sale and Dilutive Stock Issuances may Adversely Affect Our Stock Price." LaserSight Centers and Florida Laser Partners. Based on previously-reported agreements entered into in 1993 in connection with our acquisition of LaserSight Centers (our development-stage subsidiary) and modified in July 1995 and March 1997, we may be obligated as follows: o To issue up to 600,000 unregistered shares of Common Stock ("Centers Contingent Shares") to the former stockholders and option holders of LaserSight Centers (including two trusts related to our Chairman of the Board and certain of our former officers and directors). The Centers Contingent Shares will be issued only if we achieve certain pre-tax operating income levels through March 2002. Such income levels must be related to our use of a fixed or mobile excimer laser to perform PRK, the arranging for the delivery of PRK or receipt of license or royalty 23 fees associated with patents held by LaserSight Centers. The Centers Contingent Shares are issuable at the rate of one share per $4.00 of such operating income. o To pay to a partnership whose partners include our Chairman of the Board and certain of our former officers and directors a royalty of up to $43 (payable in cash or in shares of Common Stock ("Royalty Shares")), for each eye on which PRK is performed on a fixed or mobile excimer laser system owned or operated by LaserSight Centers or its affiliates. o 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 March 29, 1999, we have not accrued any obligation to issue Centers Contingent Shares or Royalty Shares. We cannot assure you that any issuance of Centers Contingent Shares or Royalty Shares will be accompanied by an increase in our per share operating results. We are 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 our Chairman of the Board for us to pursue business strategies that maximize the issuance of Centers Contingent Shares and Royalty Shares. Photomed. If the FDA approves (for general commercial use) a LaserSight-manufactured laser system in the treatment of farsightedness that uses part or all of the know-how of the laser technology we acquired from Photomed, we would be required to issue additional shares of Common Stock with a market value of up to $1.0 million (based on the average closing price of the Common Stock during the preceding 10-day period) to the former Photomed stockholders. If such approval is not received by June 1, 1999, this obligation will decrease by approximately $2,740 per day each day thereafter, and the obligation will be eliminated entirely on June 1, 2000. As of March 29, 1999, the number of additional shares issuable would have been approximately 200,000. Depending on whether and when such FDA approval is received and on the market price of the Common Stock at the time of any such approval, the actual number of additional shares of Common Stock issuable could be more (but not more than permitted under the listing rules of The NASDAQ Stock Market) or less than this number. SEO. In connection with our acquisition of SEO Medical in April 1998, we agreed to issue up to 223,280 additional shares of Common Stock if the average of the bid and ask prices of Common Stock for the five trading day period immediately prior to April 15, 1999 is less than $5.00 per share. All 223,280 shares of Common Stock will be issuable unless such price is more than $2.36 per share. Foothill Warrant. In April 1997, we issued to Foothill a warrant to purchase 500,000 shares of Common Stock (the "Foothill Warrant") at a price of $6.067 per share. We are required to make anti-dilution adjustments to both the number of warrant shares and the warrant exercise price if we sell Common Stock or Common Stock-equivalents (such as convertible securities or warrants) at a price per share that is (or could be) less than the fair market value of the Common Stock at the time of such sale (a "Below-Market issuance"). To date, such anti-dilution adjustments have resulted in (1) an increase in the number of Foothill Warrant shares to 594,525, and (2) a reduction to the exercise price of the Foothill Warrant shares to $5.10 per share. Additional anti-dilution adjustments to the Foothill Warrant could also result from any future Below-Market Issuance. Series B Warrant. In connection with our issuance of the Series B Preferred Stock in August 1997, we issued to the former holders of the Series B Preferred Stock warrants to purchase 750,000 shares of Common Stock (the "Series B Warrant") at a price of $5.91 per share at any time before August 29, 2002. In 24 connection with a March 1998 agreement whereby we obtained the option to repurchase the Series B Preferred Stock and a lock-up on conversions, the exercise price of the Series B Warrant shares was reduced to $2.753 per share. We are required to make anti-dilution adjustments to both the number of warrant shares and the warrant exercise price in the event we make a Below-Market Issuance. To date, these anti-dilution adjustments and other agreements among the former holders of the Series B Preferred Stock and us have resulted in (1) an increase in the number of Series B Warrant shares to 641,611, excluding warrants previously exercised, and (2) a reduction to the exercise price of Series B Warrant shares to $2.62 per share. Additional anti-dilution adjustments to the Series B Warrants could also result from any future Below-Market Issuance. As of March 29, 1999, 140,625 of such warrants had been exercised. Shoreline Warrant. In connection with our sale of the Series B Preferred Stock in August 1997, we issued to four individuals associated with our placement agent warrants to purchase 40,000 shares of Common Stock (the "Shoreline Warrant") at a price of $5.91 per share at any time before August 29, 2002. We are required to make anti-dilution adjustments to both the number of warrant shares and the warrant exercise price in the event we make a Below-Market Issuance. To date, these anti-dilution adjustments have resulted in (1) an increase in the number of Shoreline Warrant shares to 41,956, and (2) a reduction to the exercise price of Shoreline Warrant shares to $5.63 per share. Additional anti-dilution adjustments to the Shoreline Warrants could also result from any future Below-Market Issuance of Common Stock. Series D Preferred Stock. In accordance with the terms of our Certificate of Designation, Preferences and Rights of the Series D Preferred Stock, the holders of the Series D Preferred Stock are entitled to certain anti-dilution adjustments if we issue Common Stock or Common Stock-equivalents (such as convertible securities or warrants) at a price per share (or having a conversion or exercise price per share) less than $4.00 per share. To date, no anti-dilution adjustments have been made. Mercacorp Warrants. In connection with the dismissal and release of certain claims, the Company issued Mercacorp two separate warrants to purchase Common Stock. Under the first warrant, they are entitled to purchase up to 750,000 shares of Common Stock at an exercise price of $4.00 per share, the closing bid price on November 10, 1998, and the second warrant, they are entitled to purchase up to 750,000 shares of Common Stock at an exercise price of $5.00 per share. Both of the warrants contain certain prohibitions against assignment and transfer to third parties as well as other terms and conditions. Both of these warrants will terminate if the first warrant is not exercised in full within 14 days after the effective date of a registration statement covering the shares of Common Stock to be issued upon exercise of the warrants. March 1999 Private Placement Warrants. In connection with our sale of Common Stock in March 1999, we issued the purchasers warrants to purchase a total of 225,000 shares of Common Stock at an exercise price of $5.125 per share, the closing price of the Company's Common Stock on March 22, 1999. The warrants have a term of five years. 25 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, 1998 is derived from the Company's consolidated financial statements for such years.
(In thousands, except for per share amounts) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net sales $17,756 $24,389 $21,504 $25,988 $9,594 Gross profit 11,410 11,687 11,381 18,895 6,484 Income (loss) from operations (11,461) (9,262) (4,960) 4,552 1,140 Gain on sale of subsidiaries 364 4,129 -- -- -- Net income (loss) (11,882) (7,253) (4,074) 4,592 1,018 Conversion discount on preferred stock (859) (42) (1,011) -- -- Dividends and accretion on preferred stock (2,752) (298) (359) -- -- Income (loss) attributable to common stockholders (15,493) (7,593) (5,444) 4,592 1,018 Basic earnings (loss) per common share (1.26) (0.80) (0.69) 0.68 0.18 Diluted earnings (loss) per share (1.26) (0.80) (0.69) 0.64 0.16 Working capital 14,875 12,730 10,021 7,272 3,570 Total assets 43,873 50,461 34,250 29,102 8,641 Long-term obligations 560 500 642 -- -- Redeemable convertible preferred stock -- 11,477 -- -- -- Stockholders' equity 34,015 27,040 26,769 20,420 6,118
26 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, 1998, 1997 and 1996, unless otherwise indicated. Adoption of New Accounting Standard In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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 terms 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 Company adopted SFAS 130 as of January 1, 1998. 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 adopted SFAS 131 as of December 31, 1998. Overview The Company's net loss for 1998 was $11,882,389 and its loss attributable to common stockholders was $15,493,214, or $1.26 per basic and diluted common share, on net sales of $17,756,116. 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, accretion, premiums on repurchases and the conversion discount on preferred stock. On March 23, 1999, the Company received $9 million from the sale of 2,250,000 shares of Common Stock. The purchasers also received a total of 225,000 warrants to purchase Common Stock for a period of five years at $5.125 each, the closing price of the Common Stock on March 22, 1999. See "Management's Discussion and Analysis - Liquidity and Capital Resources -- Financings." On December 30, 1997, the Company sold its MEC and LSIA subsidiaries to Vision 21 in a transaction 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. 27 The following pro forma information has been prepared assuming that the disposition of both MEC and LSIA had occurred as of the beginning of the years ended December 31, 1997 and 1996. The pro forma adjustments serve to eliminate revenues and expenses related to MEC and LSIA for the periods presented and do not include any overhead allocations. The unaudited pro forma condensed consolidated revenues, gross profit and net loss are not necessarily indicative of results that would have occurred had the disposition been consummated as of the beginning of the years ended December 31, 1997 and 1996, or that which might be attained in the future. For the Year Ended December 31, 1997 (Unaudited) Pro Forma Adjustments --------------------- Historical MEC LSIA Pro Forma ---------- --- ---- --------- Revenues, net $ 24,388,833 $(7,988,419) $(3,021,304) $13,379,110 Gross profit 11,686,993 (2,229,356) (607,517) 8,850,120 Net loss (7,253,084) (450,700) (214,420) (7,918,204) For the Year Ended December 31, 1996 (Unaudited) Pro Forma Adjustments --------------------- Historical MEC LSIA Pro Forma ---------- --- ---- --------- Revenues, net $ 21,503,990 $ (6,179,419) $(1,703,524) $13,621,047 Gross profit 11,381,406 (1,957,820) (352,270) 9,071,316 Net loss (4,074,369) (546,352) (236,006) (4,856,727) Results of Operations Revenues. The following table presents the Company's net sales by major operating segments: technology products and services, patents and health care services for the previous three years.
1998 1997 1996 Net Sales % of Total Net Sales % of Total Net Sales % of Total --------- ---------- --------- ---------- --------- ---------- Technology $15,968,035 90 % $11,925,018 49 % $10,634,663 49 % Patent services 1,111,917 6 % 245,000 1 % -- -- Health care services 676,164 4 % 1,209,092 5 % 3,380,456 16 % Subsidiaries sold -- -- 11,009,723 45 % 7,882,943 37 % Intercompany revenues -- -- -- -- (394,072) (2 %) ----------- ----- ----------- ----- ------------ ----- Total net sales $17,756,116 100 % $24,388,833 100 % $21,503,990 100% Change from prior year (27%) 13%
Net sales and revenues decreased by $6,632,717 between 1997 and 1998 as a result of the subsidiaries sold in 1997. Net sales and revenues increased by $2,884,843 between 1996 and 1997. 28 1998 vs. 1997. The improvement in technology related revenues can be primarily attributed to increased sales of the Company's newer LaserScan LSX excimer laser system during 1998 at a higher average selling price, resulting in $3,420,000 of the total revenue increase. The average system selling price increased by approximately 11 percent from 1997 levels. Fifty laser systems were sold during 1998 compared to forty-six systems being sold in 1997. Of these total system sales, thirty LaserScan LSX models were sold in 1998 compared to nine LaserScan LSX models being sold in 1997. Other contributing factors leading to the increase in technology related revenues were a higher level of service contract revenues ($264,000) and revenues generated from the Company's aesthetic product line ($359,000). Patent related revenues also increased by $867,000. More than offsetting the increases in technology and patent revenues were decreases in health care services revenues, which was attributable to the sale of MEC and LSIA effective December 1, 1997. These two subsidiaries contributed $7,988,419 and $3,021,304, respectively, in revenues during the year ended 1997. All of the Compan's health care services revenue was generated by TFG during 1998. Net sales for TFG for the year ended 1998 decreased by $532,928 from the same period in 1997. This decrease was due primarily to a reduction in consulting services provided and was accompanied by a total expense reduction, including cost of services, of $957,456 for the year ended 1998. Such revenue and expense decreases are primarily the result of further staffing reductions during 1998 to more closely match their cost structure with anticipated revenues going forward. 1997 vs. 1996. The increase in health care services revenue was primarily attributable to increased revenues generated by MEC (an increase of $1,809,000) 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 $7,988,419 (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 $2,171,364 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 LaserScan LSX. Forty-six laser systems were sold during 1997 compared to 46 systems, net of returns, sold in 1996. Technology revenues include the impact of 12 sales returns in 1996 and one system return in 1997. 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). 29 Cost of revenues; gross profits. The following table presents a three-year comparative analysis of cost of revenues, gross profit and gross profit margins.
1998 % Change 1997 % Change 1996 ---- -------- ---- -------- ---- Product cost $ 6,048,730 47% $4,127,908 21% $3,415,276 Cost of services 297,512 (97%) 8,573,932 28% 6,707,308 Gross profit 11,409,874 11,686,993 11,381,406 Gross profit percentage 64% 48% 53% Products only: Gross profit $ 9,919,305 $7,797,110 $7,219,387 Gross profit percentage 62% 65% 68%
Gross profit margins were 64% of net sales in 1998 compared to 48% in 1997 and 53% in 1996. Gross Profit decreased $277,119 in 1998 from 1997 and increased $305,587 in 1997 from 1996. 1998 vs. 1997. The gross profit margin percentage increase was primarily attributable to the sale of MEC and LSIA effective December 1, 1997. MEC and LSIA operated at gross margins of 28% and 20% for the year ended 1997, respectively. An additional contributing factor leading to the improvement in the gross profit on products was a higher level of LaserScan LSX laser system sales. 1997 vs. 1996. The gross profit margin decrease was attributable to 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 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. Research, development and regulatory expenses. The following table presents a three-year comparative analysis of research, development and regulatory expenses. 1998 % Change 1997 % Change 1996 ---- -------- ---- -------- ---- Research, development and regulatory $3,840,924 37% $2,807,579 63% $1,720,246 As a percent of technology net sales 24% 24% 16% Research, development and regulatory expenses increased by $1,033,345 between 1997 and 1998. Such expenses increased by $1,087,333 between 1996 and 1997. 1998 vs. 1997. The increase can be primarily attributed to continued development and validation of the keratome product line and the development of a new mobile scanning refractive laser system, partially offset by a decrease in costs relating to the continued development of the LaserScan LSX, which was substantially completed during 1998. Additionally, the Company incurred minor increases in costs related to the FDA regulatory approval process, both for its own scanning laser system and the LASIK laser system. In 1998, approximately $1.1 million was incurred in the development of and clinical and manufacturing validation of the UniShaper single use keratome compared to $112,000 in 1997. During 1998, the Company began a project to develop a mobile platform for an excimer laser system and incurred approximately $394,000 in related costs. Expenses related to the development of the LaserScan LSX excimer laser system 30 decreased approximately $320,000 from 1997 levels to approximately $559,000 in 1998. As a result of a continuation of the efforts described plus the anticipated development of new product ideas, the Company expects research and development expense during 1999 to remain at levels consistent with those incurred during 1998. Regulatory expenses may increase as a result of the Company's continued pursuit of FDA approval, protocols added during 1997 and 1998 related to the potential use of the Company's laser systems for treatment of glaucoma and LASIK and the possible development of additional future protocols for submission to the FDA. 1997 vs. 1996. The increase can primarily be attributed to ongoing research and development of new scanning refractive laser systems, including development of the LaserScan LSX and add-on features for the LaserScan 2000 ($581,000), and continued software development for the laser systems. Additionally, the Company incurred increased costs related to the FDA regulatory process ($200,000), 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 were incurred in the clinical and manufacturing validation of the UniShaper ($112,000). Other general and administrative expenses. The following table presents a three-year comparative analysis of other general and administrative expenses.
1998 % Change 1997 % Change 1996 ---- -------- ---- -------- ---- Operating companies $12,156,982 7% $11,325,708 9% $10,390,795 Subsidiaries sold -- (100%) 1,792,581 53% 1,168,861 ----------- ------ ----------- --- ----------- Total other general and administrative expenses 12,156,982 (7%) 13,118,289 13% 11,559,656 As a % of revenues 68% 54% 54%
Other general and administrative expenses decreased by $961,307 in 1998 from 1997. Such expenses increased by $1,558,633 in 1997 from 1996. 1998 vs. 1997. The primary reason for this decrease was attributable to the sale of MEC and LSIA effective December 1, 1997. MEC and LSIA incurred $1,490,910 and $301,671, respectively, in other general and administrative costs during 1997. An additional factor resulting in this decrease was the reduction in the operating costs of TFG of $853,905 from 1997 levels. These decreases were partially offset by an increase in other general and administrative expenses incurred at the Company's technology subsidiary of $1,471,803 from 1997 levels. In addition, bad debt expense decreased $1,252,000 from 1997. These decreases were partially offset by strategic initiatives of the Company and the development of it products and services. Such strategic efforts included enhancements to the customer support, quality assurance, marketing, software development and engineering departments ($1,352,000), costs of the aesthetic laser product line acquired in April 1998 ($803,000), higher depreciation and lease costs (including a larger facility in Florida) ($287,000), legal expenses ($214,000), and patent related expenses ($149,000), which were nominal during 1997. Legal and accounting expenditures continue to be incurred as a result of ongoing regulatory filings, general corporate issues, litigation and patent issues. 31 1997 vs. 1996. The primary reasons for this increase include the continued growth of MEC and LSIA ($623,720), 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 included enhancements to the customer support, marketing, manufacturing, software development and engineering departments and the pursuit during 1997 of vision managed care contracts with HMOs, insurers and employer groups. These increases were partially offset by the substantial reduction in other general and administrative costs of TFG ($1,062,927). Selling related expenses. The following table presents a three-year comparative analysis of selling related expenses.
1998 % Change 1997 % Change 1996 ---- -------- ---- -------- ---- Selling related expense $4,562,740 39% $3,286,600 35% $2,430,335 As a percent of technology net sales 29% 28% 23%
Selling related expenses consist of those items directly related to sales activities, including commissions on sales, royalty or license fees, warranty expenses, and costs of shipping and installation. Commissions and royalties, in particular, can vary significantly from sale to sale or period to period depending on the location and terms of each sale. Selling related expenses increased by $1,276,140 in 1998 from 1997. Such expenses increased by $856,265 in 1997 from 1996. 1998 vs. 1997. The primary reasons for this increase include a higher level of laser system sales with an associated distributor commission ($223,000), a higher level of royalty fees ($508,000), an increase in warranty expenses accrued ($453,000) based on more sales of the LaserScan LSX, and higher shipping and installation expenses resulting from increased system sales. 1997 vs. 1996. The primary reasons for this increase include a higher level of laser system sales with an associated distributor commission ($350,000), a higher level of royalty fees ($359,000) based on a license agreement entered into during the second quarter of 1997, and higher warranty expenses resulting from increased system sales. Amortization of intangibles. The following table presents a three-year comparative analysis of amortization costs as related to intangible assets.
1998 % Change 1997 % Change 1996 ---- -------- ---- -------- ---- Amortization of intangibles $2,310,169 33% $1,736,679 175% $631,518
32 Those items directly related to the amortization of intangible assets are acquired technology, acquired patents and goodwill. Costs relating to the amortization of intangible assets increased by $573,490 in 1998 from 1997. Such costs increased by $1,105,161 in 1997 from 1996. 1998 vs. 1997. The primary reasons for this increase include a higher level of amortization costs relating to patent acquisitions as a result of 1998 being the first full year for patents acquired in 1997 ($234,000), a higher level of amortization costs relating to acquired technology as a result of 1998 being the first full year that the acquired LASIK PMA application and keratome license were amortized ($653,000), partially offset by a reduction in goodwill amortization resulting from the sale of MEC and LSIA ($385,000). 1997 vs. 1996. The primary reasons for this increase include a higher level of amortization costs relating to patent acquisitions in 1997 ($400,000), a higher level of amortization costs relating to acquired technology as a result of the acquisition of the LASIK PMA application and keratome license ($313,000) and an increase in amortization costs relating to goodwill ($375,000). Loss from operations. The Company recognized a loss from operations of $11,460,941 in 1998 compared to $9,262,154 in 1997 and $4,960,349 in 1996. 1998 vs. 1997. The decrease in operating results can be attributed primarily to the increases in research, development, regulatory and selling related expenses and the sale of MEC and LSIA, which generated income from operations of $414,083 and $244,840, respectively, during 1997, partially offset by a reduction in the operating loss generated by TFG. 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 its MEC and LSIA subsidiaries. Other income and expenses. Interest and dividend income of $591,481 was in earned in 1998 from the investment of cash and cash equivalents and the collection of long-term receivables related to laser system sales. This represents an increase of $207,870 from 1997. Investment earnings in 1997 were $383,611, an increase of $69,324 from 1996. Interest expense incurred during 1998 was $782,668 and related primarily to the credit facility established with Foothill Capital Corporation ("Foothill") on April 1, 1997 and repaid in full in June 1998. In addition to the interest paid on the outstanding note payable balance, interest expense includes the amortization of deferred financing costs, the accretion of the discount on the note payable, and fees associated with amendments to the original loan agreement. Interest expense for 1997 was $1,343,198 and related primarily to the credit facility established with Foothill and the note payable to the former owners of MEC which was repaid in full on April 1, 1997. Included in other expense in 1998, 1997 and 1996 are costs of $362,500, $280,400 and $415,681, respectively, related to the settlement of patent and other filed and threatened litigation. Included in other income in 1998 and 1997 are gains of $364,452 and $4,129,057, respectively, related to the sale MEC and LSIA. The 1998 total includes $28,148 of gain on the sale of Vision Twenty-One, Inc. stock that was originally received as partial consideration in the sale of MEC and LSIA. Income taxes. The Company recorded an income tax provision of $232,213 in 1998 compared to $880,000 in 1997 and an income tax benefit of $1,139,008 in 1996. The 1998 provision for income taxes is primarily the result of realized gains and the payment of Japanese taxes. The 1997 provision for income taxes primarily result 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. 33 Net loss. The Company incurred a net loss of $11,882,389 in 1998 compared to net losses of $7,253,084 in 1997 and $4,074,369 in 1996. The 1998 results are primarily attributable to a combination of increased revenues generated from the sale of technology products, an increase in operating loss resulting from the sale of MEC and LSIA in late 1997, losses generated from TFG and higher operating expenses as previously described. 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. Loss attributable to common shareholders. During 1998, the Company's loss attributable to common shareholders was impacted by the following events, which occurred in the first and second quarters of 1998: premiums paid on the repurchase of shares of Series B Preferred Stock ($1,752,000), accretion of the financing costs related to such shares ($999,953) and the value of the conversion discount on Series B Preferred Stock ($25,372) and on Series C Preferred Stock and Series D Preferred Stock ($833,500). In 1997, the conversion discount on Series B Preferred Stock was $41,573 and accretion and dividend requirements totaled $298,269. In 1996, the conversion discount on Series A Preferred Stock was $1,010,557 and dividend requirements totaled $358,618. Loss per share. Loss per basic and diluted common share increased to ($1.26) in 1998 from ($0.80) in 1997. The increases in 1998 are attributable to the larger net loss incurred and accretion, dividend requirements, and premiums on the redemption of Series B Preferred Stock. Of the basic and diluted losses per share in 1998, $0.29 and $0.29, respectively, were a result of the value of conversion discount on Series B, C and D Preferred Stock in accordance with EITF Topic D-60 and accretion, dividend requirements and repurchase premiums on the Series B Preferred Stock. Weighted average shares outstanding increased in 1998 primarily as a result of the conversion of 419 shares of Series B Preferred Stock in Common Stock. Other increases were from acquisition activity and the exercise of options and warrants. Weighted average shares outstanding increased in 1997 as a result of the conversion of eight shares of Series A Preferred Stock into Common Stock, the 1997 amendment to the purchase agreement related to LaserSight Centers, the issuance of shares under the earnout provisions of the 1994 acquisition of TFG, the issuance of shares in conjunction with the 1997 acquisition of rights to a PMA and keratome patent, and the exercise of options. 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. Of the basic and diluted losses per share in 1996, $0.17 and $0.17, respectively, were a result of the value of conversion discount on preferred stock in accordance with EITF Topic D-60, and dividends on the Series A Preferred Stock. Liquidity and Capital Resources Working capital. Working capital increased $2,144,938 from $12,729,700 in 1997 to $14,874,638 in 1998. This increase resulted primarily from a reduction in liabilities. 34 Sources and uses of funds. Operating activities used net cash of $14,329,012 in 1998, compared to $4,352,779 used in 1997 and $4,172,458 used in 1996. The 1998 increase is primarily attributable to the higher 1998 net loss as compared to the net loss in 1997 and the sale of MEC and LSIA, both of which generated income in 1997. Other factors contributing to the higher level of cash used in operating activities were increases in notes and accounts receivable ($4,573,223) and inventory ($2,942,720) and decreases in income taxes payable ($875,752), partially offset by the provision for uncollectible accounts ($1,212,896) and by increases in depreciation and amortization costs ($483,718), accrued expenses ($541,410) and deferred revenues ($1,156,716) from the licensing of certain patents. The Company's receivable turnover ratio for 1998, using technology revenues and receivables, was 1.43 compared to 1.24 in 1997. This improvement can be primarily attributed to generally improved terms of sales in 1998. Such terms also contributed to the reduction in the provision for uncollectible accounts. Of the Company's gross receivables at December 31, 1998, approximately 12% are considered past due compared to approximately 10% at December 31, 1997. The Company's inventory turnover ratio for 1998, excluding aesthetic related inventory acquired in April 1998, was 0.68 compared to 0.75 in 1997. This decrease can be attributed to an increase in inventory from 1997 levels and lower than anticipated system sales in the fourth quarter of 1998. Net cash provided by investing activities in 1998 was $11,087,103 compared to $5,779,075 of net cash used in investing activities during 1997 and $20,197 of net cash provided in 1996. Net cash provided by investing activities during 1998 can be primarily attributed to proceeds generated from the exclusive licensing of patents ($6,710,000) and from the sale of Vision 21 common stock resulting from the Company's sale of MEC and LSIA ($6,527,452), partially offset by the acquisition of the LASIK PMK application ($989,874) and the purchase of furniture, equipment and leasehold improvements ($648,475). Net cash used in investing activities during 1997 can be primarily attributed to the acquisition of certain patent rights and license agreements from IBM and others ($15,428,961), the purchase of office and computer equipment ($630,550), and the purchase of a vision managed care contract ($150,000), partially offset by the proceeds from the sale of two of the Company's subsidiaries ($6,500,000) and proceeds from the exclusive licensure of such patents ($3,958,436). Net cash provided by investing activities in 1996 can be primarily attributed to the proceeds from the sale-leaseback transaction ($957,180) offset by the acquisition of the assets of NNJEI ($640,463) and the purchase of office and computer equipment and leasehold improvements ($296,520). Net cash provided from financing activities during 1998 was $3,821,227 and resulted from the exercise of stock options and warrants ($513,672) and net proceeds from the Series C Preferred Stock and Series D Preferred Stock issuances ($15,819,555), offset by the repurchase of Series B Preferred Stock ($10,512,000) and the repayment of the note payable to Foothill ($2,000,000). 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 ($14,834,219), the credit facility with Foothill ($3,414,142) and the exercise of stock options ($98,363), offset by the redemption of Series B Preferred Stock ($3,172,000), the repayment of a note payable to former owners of MEC ($3,000,000) and repayment of a capital lease obligation ($187,971). 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 ($109,418). The exercise of stock options and warrants generated cash of $588,789. As of December 31, 1998, the Company had no material commitments for capital expenditures. 35 Financings. TLC Private Placement. In June 1998, the Company entered into a Securities Purchase Agreement with TLC The Laser Center Inc. ("TLC"), pursuant to which the Company issued 2,000,000 shares of newly-created Series C Convertible Participating Preferred Stock ("Series C Preferred Stock") with a face value of $4.00 per share, resulting in an aggregate offering price of $8 million. The Series C Preferred Stock is convertible by TLC on a fixed, one-for-one basis into 2,000,000 shares of Common Stock at any time until June 2001, on which date all shares of Series C Preferred Stock then outstanding will automatically be converted into an equal number of shares of Common Stock. The net proceeds to the Company, after deduction of costs of issuance, was approximately $7.9 million. The net proceeds were partially used to repurchase all 525 outstanding shares of the Company's Series B Convertible Participating Preferred Stock ("Series B Preferred Stock") on June 5, 1998 for approximately $6.3 million, including a 20% premium. Pequot Private Placement. In June 1998, the Company entered into a Securities Purchase Agreement with Pequot Private Equity Fund, L.P., Pequot Scout Fund, L.P., and Pequot Offshore Private Equity Fund, Inc. ("Pequot Funds"), pursuant to which the Company issued, collectively, 2,000,000 shares of the newly-created Series D Convertible Participating Preferred Stock ("Series D Preferred Stock") with a face value of $4.00 per share, resulting in an aggregate offering price of $8 million. The Series D Preferred Stock is convertible by the Pequot Funds on a one-for-one basis into 2,000,000 shares of Common Stock at any time until June 2001, on which date all shares of Series D Preferred Stock then outstanding will automatically be converted into an equal number of shares of Common Stock. The Series D Preferred Stock is subject to certain anti-dilution adjustments if the Company issues or sells shares of Common Stock before June 2001 at a price per share less than $4.00. The net proceeds to the Company, after deduction of costs of issuance, was approximately $7.9 million. Series B Preferred Stock Repurchase. In June 1998, the Company repurchased the remaining 525 shares of Series B Preferred Stock, representing an aggregate face amount of $5,250,000, using proceeds from the issuance of Series C Preferred Stock, at a 20% premium. Prior to such date, the holders of Series B Preferred Stock had converted 419 shares of Series B Preferred Stock into 2,392,220 shares of Common Stock. In February 1998, the holders of the Series B Preferred Stock had exercised an option to require the Company to repurchase 351 shares of Series B Preferred Stock, also at a 20% premium, using proceeds from the sale of international patent rights. The amount of the repurchase price in excess of the carrying value of the Series B Preferred Stock repurchased and a pro rata portion of Series B Preferred Stock-related financing costs increased the loss attributable to common shareholders for the nine month period ended September 30, 1998. Loan Repayment. In June 1998, the Company repaid its note payable to Foothill of $2,000,000 and also terminated its line of credit arrangement with Foothill. March 1999 Private Placement. On March 23, 1999, the Company closed a private placement for the sale of 2,250,000 shares of Common Stock to a total of six investors (including $2 million each from TLC and Pequot Funds) in exchange for the Company receiving $9 million in cash before transaction costs, estimated 36 at $150,000. In addition, the investors received a total of 225,000 warrants to purchase Common Stock at $5.125 each, the Common Stock closing price on March 22, 1999. Within 45 days of the closing, the Company is obligated to file a registration statement pursuant to a registration rights agreement. Redemption and Repurchase of Series B Preferred Stock. In addition to the June 1998 Series B Preferred Stock repurchase describe above, 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, 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 1998, largely resulting from fewer laser system sales and the increase in research, development and regulatory expenses resulting from the development of the LaserScan LSX and other efforts as previously described. We expect that any improvements in cash flow from operations will depend on, among other things, our ability to market, produce and sell our new LaserScan LSX laser systems in larger quantities and our ability to market, produce and sell our keratome related products on a commercial basis. During 1998, LaserScan LSX laser system sales accounted for the majority of laser systems sold, and we expect sales of our LaserScan LSX laser system to make a more significant contribution to our operating results in the future. We are finalizing the clinical validation of our UniShaper single use keratome product, and believe that regular commercial shipments of that product will begin in the second quarter of 1999. With our $9 million financing that closed in March 1999, we believe that our balances of cash and cash equivalents, together with our cash flows from operations, should be sufficient to fund our anticipated working capital requirements through 1999 in accordance with our current business plan. Our belief regarding future working capital requirements is based on various factors and assumptions including the anticipated timely entry into the international marketplace with keratome related products and the U.S. market with both our keratome related products and LaserScan LSX system, the anticipated timely collection of receivables including faster anticipated collections and the lack of extended payment terms on keratome related products, and the absence of unanticipated product development costs. These factors and assumptions are subject to certain contingencies and uncertainties, some of which are beyond our control. If we do not collect a material portion of current receivables in a timely manner, experience significant further delays in the shipment of our UniShaper single use keratome product or in the FDA clearance and entry into the U.S. market of our LaserScan LSX laser system, or experience less market demand for our products than we anticipate, our liquidity could be materially and adversely affected. We cannot assure you that we will not seek additional debt or equity financing in the future to implement our business plan or any changes thereto in response to future developments or unanticipated contingencies. We currently do not have any commitments for additional financing. We cannot be certain that additional financing will be available in the future to the extent required or that, if available, it will be on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the terms of the new securities could have rights, preferences and privileges senior to those of our Common Stock. If we raise additional funds through debt financing, the terms of the debt could require a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest and may render us more vulnerable to competitive pressures and economic downturns. The Company expects cash flow from operations to show improvement during 1999 as a result of the 37 expected shipment of the LaserScan LSX excimer laser system and UniShaper single use keratomes as previously discussed. However, the Company expects to incur a loss and a deficit in cash flow from operations for the first quarter of 1999. There can be no assurance that the Company can regain or sustain profitability or positive operative cash flow in any subsequent fiscal period. The Company may from time to time reassess its credit policy and the terms it will make available to individual customers. 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 begin commercial shipment of its keratome products, 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 keratome, research and development and 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. 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: Industry and Competition Risks WE MAY ENCOUNTER DIFFICULTIES COMPETING IN THE HIGHLY COMPETITIVE VISION CORRECTION INDUSTRY. The vision correction industry is subject to intense, increasing competition, and we do not know if we will be able to compete successfully against our current and future competitors. Many of our competitors have existing products and distribution systems in the marketplace and are substantially larger, better financed, and better known. Two of our principal competitors, Summit Technology, Inc. and Autonomous Technology Corporation, recently entered into a merger agreement. If the proposed merger is approved by stockholders, it is anticipated that the merger would be completed during the first quarter of 1999. If completed, the market presence, technology base and distribution capabilities of the combined entity would be substantial. Further, the merger would provide Autonomous with licenses to use certain patents owned by Visx, Inc. OUR COMPETITORS MAY HAVE OR RECEIVE BROADER REGULATORY APPROVALS WHICH MAY PREVENT US FROM MARKETING OUR PRODUCTS. We have not yet received the GMP clearance from the FDA that is required for the commercial sale of our LaserScan LSX laser system. Based on the current status of development efforts, we believe that it is reasonable to expect such FDA clearance in the next four to seven months. However, we cannot be certain as to the receipt or the timing of receipt of such clearance. A number of lasers manufactured by other companies have either received, or are 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 our lasers. In addition to laser systems of Summit 38 Technology, Inc., Visx, Inc. and others already approved for commercial sale in the U.S., Nidek Co., Ltd. obtained FDA approval of its EC-5000 excimer laser system in December 1998. Other manufacturers, including Bausch & Lomb, are expected to obtain approval during 1999, giving them the right to market their systems commercially in the U.S. The established market presence in the U.S. of previously-approved laser systems, as well as the entry of new competitors into the market upon receipt of regulatory approvals, could impede our ability to successfully introduce our LaserScan LSX system and have a material adverse effect on our business, financial condition and results of operations. NEW PRODUCTS OR TECHNOLGIES COULD ERODE DEMAND FOR OUR PRODUCTS OR MAKE THEM OBSOLETE. In addition to competing with eyeglasses, contact lenses and RK, excimer laser vision correction competes or may compete with newer technologies such as intraocular lenses, corneal rings and surgical techniques using different types of lasers. To date, we have not been materially affected by the introduction of new or advanced technologies in the laser vision correction industry. Two products that may become competitive within the next one to three years are intraocular lenses and corneal rings. Both of these procedures involve lens implants that require an invasive surgical procedure, unlike an excimer laser, and their ultimate market acceptance is unknown at this time. To the extent that any of these or other new technologies are perceived to be clinically superior or economically more attractive than excimer laser vision correction, they could erode demand for our excimer laser products, cause a reduction in selling prices of such products or render such products obsolete. In addition, if one or more competing technologies achieve broader market acceptance or render our PRK and LASIK lasers procedures obsolete, it could have a material adverse effect on our business, financial condition and results of operations. While we do not anticipate that additional technical difficulties will arise that would further delay or prevent the successful development, introduction and marketing of our UniShaper single use keratome product, we cannot be certain that new difficulties will not arise. Unanticipated logistical issues, such as the manufacturer's failure to meet expected production goals, may arise which could further delay the commercialization of the product. As is typical in the case of new and rapidly evolving industries, demand and market for recently-introduced technology and products is uncertain, and we cannot be certain that our UniShaper single use product or future new products and enhancements will be accepted in the marketplace. In addition, announcements of new products, whether for sale in the near future or at some later date, may cause customers to defer purchasing our existing products. THE LACK OF BROAD MARKET ACCEPTANCE OF LASER-BASED EYE TREATMENT MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS. We believe that whether we achieve profitability and growth will depend, in part, upon broad acceptance of PRK or LASIK in the U.S. and other countries. We cannot be certain 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 adversely affected by: o The cost of the procedure o Possible concerns relating to safety and efficacy o The public's general resistance to surgery o The effectiveness and lower cost of alternative methods of correcting refractive vision disorders o The lack of long-term follow-up data o The possibility of unknown side effects o The lack of third-party reimbursement for the procedures o Possible future unfavorable publicity involving patient outcomes from the use of PRK or LASIK systems o The possible shortages of ophthalmologists trained in the procedures. 39 The failure of PRK or LASIK to achieve broad market acceptance could have a material adverse effect on our business, financial condition and results of operations. Financial and Liquidity Risks WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE LOSSES AND OPERATING CASH FLOW DEFICITS. We experienced significant net losses and deficits in cash flow from operations for the fiscal years ended December 31, 1996, 1997 and 1998, as set forth in the following table. We cannot be certain that we will be able to regain or sustain profitability or positive operating cash flow.
For the Twelve Month Period Ended December 31, 1998 1997 1996 ---- ---- ---- Net Loss $11.9 million $7.3 million $4.1 million Deficit in Cash Flow from Operations $14.3 million $4.4 million $4.2 million
Although we achieved profitability during 1994 and 1995, we had a deficit in cash flow from operations of $1.9 million during 1995. In addition, we incurred losses in 1991 through 1993. As of December 31, 1998, we had an accumulated deficit of $23.7 million. We expect to report a loss and deficit in cash flow from operations for the first quarter of 1999. IF OUR UNCOLLECTIBLE RECEIVABLES EXCEED OUR RESERVES WE WILL INCUR ADDITIONAL UNANTICIPATED EXPENSES. Although we monitor the status of our receivables and maintain a reserve for estimated losses, we cannot be certain that our reserves for estimated losses, which was approximately $2.6 million at December 31, 1998, will be sufficient to cover the amount of our actual write-offs over time. At December 31, 1998, our trade accounts and notes receivable totaled approximately $12.3 million, and accrued commissions, the payment of which generally depends on the collection of such net trade accounts and notes receivable, totaled approximately $1.9 million. Actual write-offs that materially exceed amounts reserved could have a material adverse effect on our consolidated financial condition and results of operations. The amount of any loss that we may have to recognize in connection with our inability to collect receivables is principally dependent on our customer's ongoing financial condition, their ability to generate revenues from our laser systems, and our ability to obtain and enforce legal judgments against delinquent customers. Approximately 91% of our net receivables at December 31, 1998 related to international accounts. Our ability to evaluate the financial condition and revenue generating ability of our prospective customers located outside of the United States, and our ability to obtain and enforce legal judgments against non-U.S. customers, is generally more limited than for our customers located in the U.S. See "--Company and Business Risks--We are Subject to Certain Risks Associated with our International Sales." IF WE EXPERIENCE DIFFICULTY COLLECTING RESTRUCTURED RECEIVABLES WITH EXTENDED PAYMENT TERMS, WE MAY EXPERIENCE LIQUIDITY PROBLEMS. At December 31, 1998, we had extended the original payment terms of laser customer accounts totaling approximately $1,366,000 by periods ranging from 12 to 60 months. Such restructured receivables represent approximately 11 percent of our net receivables as of that date. Our liquidity and operating cash flow would be 40 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 or actual economic life of the system, which we estimate to be approximately five to seven years. To date, we do not believe any payment schedules extend beyond the economic life of the applicable systems. WE MAY EXPERIENCE LIQUIDITY PROBLEMS AND THERE IS UNCERTAINTY REGARDING THE TERMS OR AVAILABILITY OF ADDITIONAL CAPITAL. During the year ended December 31, 1998, we experienced a $14.3 million deficit in cash flow from operations. We expect that any improvements in cash flow from operations will depend on, among other things, our ability to market, produce and sell our new LaserScan LSX laser systems in larger quantities and our ability to market, produce and sell our UniShaper single use keratome product on a commercial basis. During the fourth quarter of 1998, LaserScan LSX laser system sales accounted for the majority of laser systems sold, and we expect sales of our LaserScan LSX laser system to make a more significant contribution to our operating results in the future. Because we are still in the process of completing the clinical validation of our UniShaper single use keratome product, we do not believe that regular commercial shipments of that product will begin until the second quarter of 1999. With our financing that closed in March 1999, we believe that our balances of cash and cash equivalents, together with our cash flows from operations, should be sufficient to fund our anticipated working capital requirements for the next 12 months in accordance with our current business plan. Our belief regarding future working capital requirements is based on various factors and assumptions including the anticipated timely entry into the international marketplace with keratome related products and the U.S. market with both our keratome related products and LaserScan LSX system, the anticipated timely collection of receivables including faster anticipated collections and the lack of extended payment terms on keratome related products, and the absence of unanticipated product development costs. These factors and assumptions are subject to certain contingencies and uncertainties, some of which are beyond our control. If we do not collect a material portion of current receivables in a timely manner, experience significant further delays in the shipment of our UniShaper single use keratome product or in the FDA clearance and entry into the U.S. market of our LaserScan LSX laser system, or experience less market demand for our products than we anticipate, our liquidity could be materially and adversely affected. We cannot be certain that we will not seek additional debt or equity financing in the future to implement our business plan or any changes thereto in response to future developments or unanticipated contingencies. We currently do not have any commitments for additional financing. We cannot be certain that additional financing will be available in the future to the extent required or that, if available, it will be on acceptable terms. If we raise additional funds by issuing equity or convertible debt securities, the terms of the new securities could have rights, preferences and privileges senior to those of our common stock. If we raise additional funds through debt financing, the terms of the debt could require a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest and may render us more vulnerable to competitive pressures and economic downturns. Common Stock Risks THE MARKET PRICE OF OUR COMMON STOCK MAY CONTINUE TO EXPERIENCE EXTREME FLUCTUATIONS DUE TO MARKET CONDITIONS THAT ARE UNRELATED TO OUR OPERATING PERFORMANCE. The volatility of our common stock imposes a greater risk of capital losses on stockholders as compared to less volatile stocks. In addition, such volatility makes it difficult to ascribe a stable valuation to a stockholder's holdings of LaserSight common stock. Factors such as announcements of technological innovations or new products by LaserSight or its competitors, 41 changes in domestic or foreign governmental regulations or regulatory approval processes, developments or disputes relating to patent or proprietary rights, public concern as to the safety and efficacy of the procedures for which the laser system is used, and changes in reports and recommendations of security analysts, have and may continue to have a significant impact on the market price of LaserSight common stock. Moreover, the possibility exists that the stock market, and in particular the securities of technology companies such as LaserSight, could experience extreme price and volume fluctuations unrelated to operating performance. VARIATIONS IN OUR SALES AND OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE. Our operating results have fluctuated in the past, and may continue to fluctuate in the future, as a result of a variety of factors, many of which are outside of our control. For example, we have historically operated with little or no backlog because our products are generally shipped as orders are received, and a significant portion of orders for a particular quarter have been received and shipped near the end of the quarter. As a result, our operating results for any quarter often depend on orders received and laser systems shipped late in that quarter. Other factors that may cause our operating results to fluctuate include: o timing of regulatory approvals and the introduction of new products; o reductions, cancellations or fulfillment of major orders; o the addition or loss of significant customers; o our relative mix of business; o changes in pricing by us or our competitors; o changes in personnel and employee utilization rates; o costs related to expansion of our business; o increased competition; and o budget decisions by our customers. As a result of these fluctuations, we believe that period-to-period comparisons of our operating results cannot necessarily be relied upon as indicators of future performance. In some quarters our operating results may fall below the expectations of securities analysts and investors due to any of the factors described above. In such event, the trading price of our common stock would likely decline. THE SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE AND DILUTIVE STOCK ISSUANCES MAY ADVERSELY AFFECT OUR STOCK PRICE. Sales, or the possibility of sales, of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock. As of March 29, 1999, of LaserSight's 15,442,635 shares of common stock outstanding, approximately 13.1 million shares were freely tradable without restriction or further registration under the Securities Act, except to the extent such shares are held by "affiliates" of LaserSight as that term is defined in Rule 144 under Securities Act or subject only to the satisfaction of a prospectus delivery requirement. Shares included in the March 1999 private placement will be freely tradable on a similar basis once a registration statement covering such shares is filed and declared effective. Shares of common stock which LaserSight may issue in connection with future acquisitions or financings or pursuant to outstanding warrants or agreements could also adversely affect the market price of our common stock and cause significant dilution in our earnings per share and net book value per share. 42 o We may be required to issue more than 4 million additional shares of common stock upon the exercise of outstanding warrants and to satisfy certain contingent contractual obligations. See "Market for Company's Common Equity and Related Stockholder Matters." o In addition, the 4 million outstanding shares of Series C and Series D Preferred Stock may be converted into common stock at any time. See "Market for Company's Common Equity and Related Stockholder Matters." o The anti-dilution provisions of certain of our existing securities and obligations require us to issue additional shares if we issue shares of common stock below specified price levels. If a future share issuance triggers these adjustments, the beneficiaries of such provisions effectively receive some protection from declines in the market price of our common stock, while our other stockholders incur additional dilution of their ownership interest. We may include similar anti-dilution provisions in securities issued in connection with future financings. Some of the factors we consider when we determine whether to include such provisions are our cash resources, the trading history of our common stock, the negotiating position of the selling party or the investors, and the extent to which we estimate that the expected benefit from the acquisition or financing exceeds the expected dilutive effect of the price-protection provision. CERTAIN ANTI-TAKEOVER MEASURES MAY HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE. Certain provisions of our certificate of incorporation, by-laws and Delaware law could delay or frustrate the removal of incumbent directors, discourage potential acquisition proposals and delay, defer or prevent a change in control of LaserSight, even if such events could be beneficial, in the short term, to the interests of our stockholders. For example, our certificate of incorporation allows us to issue preferred stock with rights senior to those of the common stock without stockholder action. LaserSight also is subject to provisions of Delaware corporation law that prohibit a publicly-held Delaware corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 15% or more of the corporation's common stock (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. We also have adopted a stockholder rights agreement and declared a dividend distribution of one preferred share purchase right ("Right") on each outstanding share of common stock. The Rights would cause substantial dilution to a person or group that attempts to acquire 15% or more of our common stock on terms not approved by our Board of Directors. Company and Business Risks WE DEPEND ON OUR KEY PERSONNEL FOR OUR FUTURE SUCCESS. Our ability to maintain our competitive position depends in part upon the continued contributions of our executive officers and other key employees, especially Michael R. Farris, our President and Chief Executive Officer, and J. Richard Crowley, the President and Chief Operating Officer of our 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 our business. We do not carry "key man" insurance on Mr. Farris, Mr. Crowley or any other officers or key employees. As we continue the clinical development of our excimer lasers and other products and prepare for regulatory approvals and other commercialization activities, we will need to continue to implement and expand our operational, financial and management resources and controls. While to date we haven't experienced problems recruiting or retaining the personnel necessary to implement such actions, we cannot be certain that such problems won't arise in the future. If we fail to attract and retain qualified individuals for necessary positions, and if we are unable to effectively manage growth in our domestic and 43 international operations, it could have a material adverse effect on our business, financial condition and results of operations. FAILURE OF OUR "Y2K" COMPLIANCE EFFORTS, LACK OF COMPLIANCE BY OUR MATERIAL SUPPLIERS AND OTHER UNCERTAINTIES RELATED TO THE "Y2K ISSUE" COULD ADVERSELY AFFECT OUR BUSINESS. As many computer systems, software programs and other equipment with embedded chips or processors use only two digits rather than four to define the applicable year, they may be unable to process accurately certain data, during or after the year 2000. As a result, LaserSight as well as other business and governmental entities are at risk for possible miscalculations or systems failures which could cause material disruptions in business operations. This is commonly known as the Year 2000 ("Y2K") issue. The Y2K issue concerns not only information systems and technology used by LaserSight, but also concerns third parties, such as our customers, vendors and distributors, using information systems and technology that may interact with or affect our operations. We have implemented a Y2K readiness program with the objective of having all of our significant information systems and technology functioning properly with respect to Y2K before January 1, 2000. We have developed a comprehensive plan to assess the actual and potential Y2K impact on our operations, both in information technology ("IT") areas and non-information technology ("Non-IT") areas, as well as our product offerings. Our assessment included our manufacturing and operating systems and the readiness of vendors and other third parties upon whom we rely. o IT Systems. Our IT systems are microcomputer-based and consist of standard software purchased from outside vendors. All software is being identified and assessed to determine the extent of modification required in order to be Y2K compliant. We believe that all software will be made Y2K compliant before the end of June 1999 through vendor-provided updates or replacement with other Y2K compliant hardware and software. We, as has been planned for some time, are also replacing our financial and accounting software, and expect to have the majority of such new software implemented in the second quarter of 1999. The vendors of our financial and accounting software have represented to us that the software is Y2K compliant. Our IT inventory related to Y2K compliance is approximately 90% complete, the remediation assessment of problem areas is approximately 90% complete, and testing, including validation of compliance, is expected to be completed by the end of April 1999. o Non-IT Systems. For our Non-IT systems, we have identified third parties with which we have a significant relationship that, in the event of a Y2K failure, could have a material impact on our business, financial condition or results of operations. The third parties include utility suppliers, material and supply vendors, communication vendors and our significant distributors. Some of these relationships, especially those associated with certain suppliers, are material to us and a Y2K failure by one or more of these parties could have a material adverse effect on our business, financial condition and results of operations. We are corresponding with these business partners and service providers to assess their ability to support our operations with respect to each of their Y2K issues. The issues that are identified as part of this process are being prioritized in order of significance to our operations and we will take corrective action as appropriate. We have contacted approximately 98% of our vendors, business partners and service providers. Approximately 95% have responded to date, and we are continuing to assess their responses. 44 o Products. We are not aware of any Y2K problems with our current production model, the LaserScan LSX, as all applicable components and the software have been validated and tested. Older models, generally manufactured in the first half of 1998 and earlier, may require upgraded software and/or hardware. We are taking steps to promptly notify affected users and, except for those users under warranty or service contract, offer such upgrades at additional cost to the user. Such upgrades are currently available and, in addition to resolving potential Y2K problems, also provide for more efficient system performance. We intend to develop contingency plans for Y2K issues which, if not timely resolved, could have a significant impact on our operations. These plans will be designed to minimize the impact of failure to achieve Y2K compliance. Such contingency plans are substantially complete although we will continue to monitor our plans as a result of future events and circumstances. We estimate the costs to address Y2K issues will total $150,000, of which approximately $60,000 has been incurred to date. Such costs will be expensed as incurred, and will exclude the costs of our new financial and accounting software. Y2K compliance related costs are estimated to be 50% of our total IT expense budget through the end of 1999. No material IT projects are expected to be delayed. The costs and time necessary to complete the Y2K modification and testing processes are based on our best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. Our Y2K readiness program is an ongoing process and the estimates of costs and completion dates for various components of the Y2K readiness program described above are subject to change. Due to the general uncertainty inherent in our Y2K compliance, mainly resulting from our dependence upon the Y2K compliance of the government agencies, suppliers, vendors and distributors with whom we and our service providers deal, we are unable to determine at this time our most reasonably likely worst case scenario. While we expect our Y2K compliance efforts to reduce significantly our level of uncertainty about the impact of Y2K issues affecting IT and Non-IT systems and our product offerings, we cannot be certain that costs related to the lack of Y2K compliance of third parties, business interruptions, litigation and other liabilities related to Y2K issues will not have a material adverse effect on our business, financial condition and results of operations. GOVERNMENT REGULATION AND REGULATORY DECISIONS MAY RESTRICT OR DELAY THE MANUFACTURE AND MARKETING OF OUR PRODUCTS. Our laser products are subject to strict governmental regulations which materially affect our ability to manufacture and market these products and directly impact our overall prospects. All laser devices 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. The regulations impose design and performance standards, labeling and reporting requirements, and submission conditions in advance of marketing for all medical laser products. Our ophthalmic laser systems produced for medical use require PMA approval by the FDA before we can ship our laser systems for use in the U.S. Each separate medical device requires a separate FDA submission, and specific protocols have to be submitted to the FDA for each claim made for each medical device. If and when our ophthalmic laser systems receive PMA approval by the FDA, we will be required to obtain GMP clearance with respect to our manufacturing facilities. These regulations impose certain procedural and documentation requirements with respect to our manufacturing and quality assurance activities. Our facilities will be subject to inspections by the FDA, and if any noncompliance with GMP guidelines is noted during facility inspections, the 45 marketing of our laser products may be adversely affected. In addition, if any of our suppliers of significant components or sub-assemblies cannot meet our quality requirements, we could be delayed in producing commercial systems for the U.S. market. Additionally, product and procedure labeling and all forms of promotional activities are subject to examination by the FDA, and current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. Noncompliance with these requirements may result in warning letters, fines, injunctions, recall or seizure of products, suspension of manufacturing, denial or withdrawal of PMAs, and criminal prosecution. Laser products marketed in foreign countries are often subject to local laws governing health product development processes which may impose additional costs for overseas product development. In particular, all member countries of the EU require CE Mark certification of compliance with the EU medical directives as the standard for regulatory approval for sale of laser systems in EU member countries. Both of our LaserScan LSX and LaserScan 2000 laser systems have received CE Mark certification, the former of which was received in September 1998. We cannot determine the costs or time it will take to complete the approval process and the related clinical testing for our medical laser products. Future legislative or administrative requirements, in the U.S., or elsewhere, may adversely affect our ability to obtain or retain regulatory approval for our laser products. The failure to obtain required approvals on a timely basis could have a material adverse effect on our business, financial condition and results of operations. PATENT INFRINGEMENT ALLEGATIONS MAY IMPAIR OUR ABILITY TO MANUFACTURE AND MARKET OUR PRODUCTS. There are a number of U.S. and foreign patents covering methods and apparatus for performing corneal surgery that we do not own or have the right to use. If we were found to infringe a patent in a particular market, LaserSight and its customers may be enjoined from making, using and selling that product in the market and be liable for damages for any past infringement of such rights. In order to continue using such rights, we would be required to obtain a license which may require us to make royalty, per procedure or other fee payments. We cannot be certain if we or our customers will be successful in securing licenses, or that if we obtain licenses, such licenses will be on acceptable terms. Alternatively, we might be required to redesign the infringing aspects of these products. Any redesign efforts that we undertake could be expensive and might require regulatory review. Furthermore, the redesign efforts could delay the reintroduction of these products into certain markets, or may be so significant as to be impractical. If redesign efforts were impractical, we could be prevented from manufacturing and selling the infringing products, which would have a material adverse effect on our business, financial and results of operations. While we are not currently involved in any material patent litigation, we have been the subject of patent infringement allegations in the past and such allegations are common in our industry. In 1992, Summit and Visx formed a U.S. partnership, Pillar Point Partners, to pool certain of their patents related to corneal sculpting technologies. As part of their agreement to dissolve Pillar Point in June 1998, Summit and Visx granted each other a worldwide, royalty free cross-license whereby each party will have full rights to license all existing patents owned by either company relating to laser vision correction for use with their systems. In connection with our March 1996 settlement of litigation with Pillar Point regarding alleged infringement by our lasers of certain U.S. patents, we agreed to notify Pillar Point before we begin manufacturing or 46 selling our laser systems in the U.S. While we are not contractually obligated to anyone to obtain a license prior to the selling our lasers in the U.S., one or more of our competitors may assert that such a license is required. As of the date of this prospectus, we have not obtained a U.S. license from either Summit or Visx, and the terms of any license, if such license is granted, have not been determined. REQUIRED MINIMUM PAYMENTS UNDER OUR UNISHAPER LICENSE AGREEMENT MAY EXCEED OUR GROSS PROFITS FROM SALES OF OUR UNISHAPER PRODUCT. In addition to the risk that the UniShaper single use keratome will not be accepted in the marketplace, we are required to make certain minimum payments to the licensors under our UniShaper single use keratome limited exclusive license agreement. Under the agreement, we are required to pay a total of $300,000 in two installments due six and 12 months after the date of our receipt of completed limited production molds and to provide an excimer laser. We provided the laser during the quarter ended June 30, 1998, and we expect to accept and receive such molds once we determine that the product is ready to be commercially shipped. We currently anticipate regular commercial shipments to commence in the second quarter of 1999. In addition, commencing seven months after such date, we will be required to make royalty payments equal to 50% of our defined gross profits from UniShaper single use keratome sales, with a minimum royalty of $400,000 per calendar quarter for a period of eight quarters. WE ARE SUBJECT TO CERTAIN RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES. Our international sales accounted for 87% of our total revenues during the year ended December 31, 1998. We expect sales to international accounts will continue to represent a comparable percentage of our total sales unless and until our systems are cleared for commercial distribution in the U.S., or with respect to those products that do not require regulatory approval, otherwise enter the U.S. market. The majority of our international sales for the twelve months ended December 31, 1998 were to customers in Canada, China, Brazil, Mexico, Italy, Argentina, South Africa, and Turkey. Our business, financial condition and international results of operations may be adversely affected by present economic instability in Brazil and the impact of that instability on other South American countries, future economic instability in other countries in which we have sold or may sell, increases in duty rates, difficulties in obtaining export licenses, ability to maintain or increase prices, and competition. In addition, international sales may be limited or disrupted by: o The imposition of government controls o Export license requirements o Political instability o Trade restrictions o Changes in tariffs o Difficulties in staffing and coordinating communications among and managing international operations. Because all of our sales have been denominated in U.S. dollars, we do not have exposure to typical foreign currency fluctuation risk. However, due to our significant export sales, we are subject to currency exchange rate fluctuations in the U.S. dollar, which could increase the effective price in local currencies of our products. This could in turn result in reduced sales, longer payment cycles and greater difficulty in collecting receivables. See "--If Our Uncollectible Receivables Exceed Our Reserves We will Incur Additional Unanticipated Expenses" above. Although we have not experienced any material adverse effect on our operations as a result of such regulatory, political and other factors, such factors may have a material adverse effect on our operations in the future or require us to modify our business practices. 47 INADEQUACY OR UNAVAILABILITY OF INSURANCE MAY EXPOSE US TO SUBSTANTIAL PRODUCT LIABILITY CLAIMS. Our business exposes us to potential product liability risks that are inherent in the development, testing, manufacture, marketing and sale of medical devices for human use. We have agreed in the past, and we will likely agree in the future, to indemnify certain medical institutions and personnel who conduct and participate in our clinical studies. While we maintain product liability insurance, we cannot be certain that any such liability will be covered by our insurance or that damages will not exceed the limits of our coverage. Even if a claim is covered by insurance, the costs of defending a product liability, malpractice, negligence or other action, and the assessment of damages in excess of insurance coverage, could have a material adverse effect on our business, financial condition and results of operations. Our "claims made" product liability insurance coverage is limited to $10 million and our general liability insurance coverage is limited to $6 million, including up to $5 million of coverage under an excess liability policy. Further, product liability insurance may not continue to be available, either at existing or increased levels of coverage, on commercially reasonable terms. OUR SUPPLY OF CERTAIN CRITICAL COMPONENTS AND SYSTEMS MAY BE INTERRUPTED BECAUSE OF OUR RELIANCE ON A LIMITED NUMBER OF SUPPLIERS. LaserSight currently purchases certain components used in the production, operation and maintenance of its laser systems and related products from a limited number of suppliers and certain key components are provided by a single vendor. Any interruption in the supply of critical laser components could have a material adverse effect on our business, financial condition and results of operations. For example, the UniShaper single use keratome product will be manufactured exclusively for LaserSight by Frantz Medical Development Ltd., an ISO 9001 company experienced in the manufacture of engineering-grade medical devices. We also have exclusive supply arrangements for certain key laser system components with TUI Lasertechnik und Laserintegration GmbH. If any of our key suppliers cease providing us with products of acceptable quality and quantity in a timely fashion, we would have to locate and contract with a substitute supplier. We do not know if such substitute suppliers could be located and qualified in a timely manner or could provide required products on commercially reasonable terms. Acquisition Risks PAST AND POSSIBLE FUTUTE ACQUISITIONS THAT ARE NOT SUCCESSFULLY INTEGRATED WITH OUR EXISTING OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS. We have made several significant acquisitions since 1994, including The Farris Group in 1994, Photomed in 1997 and 1998, IBM Patents in August 1997 and our acquisition of certain assets of SEO Medical in April 1998. Although we are currently focusing on our existing operations, we may in the future selectively pursue strategic acquisitions of, investments in, or enter into joint ventures or other strategic alliances with, companies whose business or technology complement our business. We may not be able to identify suitable candidates to acquire or enter into joint ventures or other arrangements with or we may not be able to obtain financing on satisfactory terms for such activities. In addition, with respect to our recent acquisitions as well as any future transactions, we could have difficulty assimilating the personnel, technology and operations of the acquired company, which would prevent us from realizing expected synergies, and may incur unanticipated liabilities and contingencies. This could disrupt our ongoing business and distract our management and other resources. We cannot be certain that we would succeed in overcoming these risks or any other problems in connection with any acquisitions we may make or joint ventures or arrangements we may enter into. 48 AMORTIZATION AND CHARGES RELATING TO OUR SIGNIFICANT INTANGIBLE ASSETS COULD ADVERSELY AFFECT OUR STOCK PRICE AND REPORTED NET INCOME OR LOSS. 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 intangible assets are amortized over a period of time, with the amount amortized in a particular period constituting a non-cash expense that reduces our net income or increases our net loss. Of our total assets at December 31, 1998, approximately $16.2 million or 37% were intangible assets. The following table presents an overview of our significant intangible assets and goodwill at December 31, 1998:
Value of Assets Amortization Period -------------------------- -------------------------- Goodwill $6.6 million 12-20 years Cost of Patents $4.3 million 8-17 years Acquired Licenses and Technology $5.3 million 31 months-12 years
A reduction in net income resulting from the amortization of goodwill and other intangible assets may have an adverse impact upon the market price of our common stock. In addition, in the event of a sale or liquidation of LaserSight or our assets, we cannot be certain that the value of such intangible assets would be recovered. In accordance with SFAS 121, we review intangible assets for impairment whenever events or changes in circumstances, including a history of operating or cash flow losses, indicate that the carrying amount of an asset may not be recoverable. If we determine that an intangible asset is impaired, a noncash impairment charge would be recognized. We continue to assess the current results and future prospects of TFG in view of the substantial reduction in the subsidiary's operating results in 1996 and 1997. TFG's operating results have improved in 1998 when compared to 1996 and 1997. If TFG is unsuccessful in continuing to improve its financial performance, some or all of the carrying amount of goodwill recorded, $3.7 million at December 31, 1998, may be subject to an impairment adjustment. Other Risks The risks described above under are not the only risks facing LaserSight. There may be additional risks and uncertainties not presently known to us or that we have deemed immaterial which could also negatively impact our business operations. If any of the foregoing risks actually occur, it could have a material adverse effect on our business, financial condition and results of operations. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company believes that its exposure to market risk for changes in interest and currency rates is not significant. The Company's investments are limited to highly liquid instruments with maturities of three months or less. At December 31, 1998, the Company had less than $3 million of short-term investments classified as cash and equivalents. All of the Company's transactions with international customers and suppliers are denominated in U.S. dollars. 49 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, 1999. 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, 1999. 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, 1999. 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, 1999. 50 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, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Comprehensive Loss for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. 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 No reports on Form 8-K were filed during the three months ended December 31, 1998. 51 INDEX TO EXHIBITS Exhibit Number Description - ------ ------------------------------------------------------------- 2.1 See Exhibits 10.1, 10.2, 10.6, 10.7, 10.16, 10.22, 10.25, 10.26, 10.30 and 10.31. 3.1 Certificate of Incorporation, as amended (incorporated by reference to Exhibit 1 of Form 8-A/A (Amendment No. 4) filed by the Company on June 25, 1998*). 3.2 Bylaws, as amended (filed as Exhibit 3 to the Company's Form 10-K for the year ended December 31, 1992*). 3.3 Rights Agreement, dated as of July 2, 1998, between LaserSight Incorporated and American Stock Transfer & Trust Company, as Rights Agent, which includes (i) as Exhibit A thereto the form of Certificate of Designation of the Series E Junior Participating Preferred Stock, (ii) as Exhibit B thereto the form of Right Certificate (separate certificates for the Rights will not be issued until after the Distribution Date) and (iii) as Exhibit C thereto the Summary of Stockholder Rights Agreement (incorporated by reference to Exhibit 99.1 to the Form 8-K filed by the Company on July 8, 1998*). 3.4 First Amendment to Rights Agreement, dated as of March 22, 1999, between LaserSight Incorporated and American Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 2 to Form 8-A/A filed by the Company on March 29, 1999*). 4.1 See Exhibits 3.1,3.2, 3.3, 3.4, 10.19, 10.23, 10.32, 10.33 and 10.39. 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*). 52 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 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*). 10.11 LaserSight Incorporated Amended and Restated 1996 Equity Incentive Plan (filed as Exhibit 10.12 to the Company's Form 10-Q/A for the quarter ended June 30, 1998*). 10.12 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*). 10.13 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*). 10.14 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*). 10.15 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*). 10.16 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*). 10.17 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*). 53 10.18 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*). 10.19 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*). 10.20 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*). 10.21 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*). 10.22 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*). 10.23 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*). 10.24 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*). 10.25 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*). 10.26 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*). 10.27 Agreement dated April 1, 1992 between International Business Machines Corporation and LaserSight Incorporated (filed as Exhibit 10.1 on Form 10-K for the year ended December 31, 1995*). 10.28 Securities Purchase Agreement, dated June 5, 1998, by and between LaserSight Incorporated and TLC The Laser Center, Inc. (filed as Exhibit 99.1 to the Company's Form 8-K filed on June 25, 1998*). 54 10.29 Securities Purchase Agreement, dated June 12, 1998, by and between LaserSight Incorporated and Pequot Funds (filed as Exhibit 99.5 to the Company's Form 8-K filed on June 25, 1998*). 10.30 Letter Agreement dated September 11, 1998, amending the 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 10.31 to the Company's Form 10-Q filed on November 16, 1998*). 10.31 Exclusive License Agreement dated August 20, 1998, by and between LaserSight Technologies, Inc. and TLC The Laser Center Patents Inc. (filed as Exhibit 10.32 to the Company's Form 10-Q filed on November 16, 1998*). 10.32 Warrant to Purchase Common Stock, dated November 11, 1998 by and between LaserSight Incorporated and Mercacorp, Inc. (filed as Exhibit 10.33 to the Company's Form 10-Q filed on November 16, 1998*). 10.33 Warrant to Purchase Common Stock, dated November 11, 1998 by and between LaserSight Incorporated and Mercacorp, Inc. (filed as Exhibit 10.34 to the Company's Form 10-Q filed on November 16, 1998*). 10.34 Purchase Agreement, dated June 9, 1997, by and between LaserSight Technologies, Inc. and TUI Lasertechnik Und Laserintegration GmbH (filed as Exhibit 10.1 to the Company's Form S-3, Pre-Effective Amendment No. 1 filed on February 1, 1999*). 10.35 License and Royalty Agreement, dated September 10, 1997, by and between LaserSight Technologies, Inc. and Luis A. Ruiz, M.D. and Sergio Lenchig (filed as Exhibit 10.2 to the Company's Form S-3, Pre-Effective Amendment No. 1 filed on February 1, 1999*). 10.36 Manufacturing Agreement, dated September 10, 1997, by and between LaserSight Technologies, Inc. and Frantz Medical Development Ltd. (filed as Exhibit 10.3 to the Company's Form S-3, Pre-Effective Amendment No. 1 filed on February 1, 1999*). 10.37 Employment Agreement by and between LaserSight Incorporated and Michael R. Farris dated October 30, 1998. 55 10.38 Securities Purchase Agreement by and between LaserSight Incorporated and purchasers of Common Stock dated March 22, 1999. 10.39 Warrant to purchase 225,000 shares of Common Stock dated March 22, 1999 by and between LaserSight Incorporated and purchasers of Common Stock of LaserSight Incorporated. Exhibit 11 Statement of Computation of Loss Per Share Exhibit 21 Subsidiaries of the Registrant Exhibit 23 Consent of KPMG LLP Exhibit 27 Financial Data Schedule Exhibit 99 Press release dated March 29, 1999 - ---------------------- *Incorporated herein by reference. File No. 0-19671. 56 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, 1999 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, 1999 - ------------------------------------------- Michael R. Farris, President, Chief Executive Officer and Director /s/ Francis E. O'Donnell, Jr., M.D. Dated: March 30, 1999 - ------------------------------------------- Francis E. O'Donnell, Jr., M.D., Chairman of the Board, Director /s/ Juliet Tammenoms Bakker Dated: March 30, 1999 - ------------------------------------------- Juliet Tammenoms Bakker, Director /s/ J. Richard Crowley Dated: March 30, 1999 - ------------------------------------------- J. Richard Crowley, Chief Operating Officer and Director /s/ Terry A. Fuller, Ph.D. Dated: March 30, 1999 - ------------------------------------------- Terry A. Fuller, Ph.D., Director /s/ Gary F. Jonas Dated: March 30, 1999 - ------------------------------------------- Gary F. Jonas, Director /s/ Richard C. Lutzy Dated: March 30, 1999 - ------------------------------------------- Richard C. Lutzy, Director /s/ David T. Pieroni Dated: March 30, 1999 - ------------------------------------------- David T. Pieroni, Director /s/ Thomas Quinn Dated: March 30, 1999 - ------------------------------------------- Thomas Quinn, Director /s/ Gregory L. Wilson Dated: March 30, 1999 - ------------------------------------------- Gregory L. Wilson, Chief Financial Officer (Principal accounting officer) 57 Independent Auditors' Report 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, 1998 and 1997, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP St. Louis, Missouri March 25, 1999 F-1 LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents $4,437,718 3,858,400 Marketable equity securities -- 7,475,000 Accounts receivable-trade, net 4,611,834 2,649,202 Notes receivable-current portion, net 4,805,831 3,762,341 Inventories 8,517,636 4,348,235 Deferred tax assets 184,997 571,009 Other current assets 159,057 219,723 ----------- ---------- Total current assets 22,717,073 22,883,910 Notes receivable, less current portion, net 2,880,358 2,380,193 Property and equipment, net 1,502,339 1,354,168 Other assets, net 16,773,213 23,842,802 ----------- ---------- $43,872,983 50,461,073 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $2,220,045 2,142,979 Note payable, less discount -- 1,758,333 Accrued expenses 3,224,369 2,782,521 Accrued commissions 1,451,180 1,230,474 Income taxes payable 9,239 1,255,491 Deferred revenue 937,602 214,219 Other current liabilities -- 770,193 ----------- ----------- Total current liabilities 7,842,435 10,154,210 Refundable deposits 194,000 200,000 Accrued expenses, less current portion 642,880 518,730 Deferred royalty revenue, less current portion 433,333 -- Deferred income taxes 184,997 571,009 Long-term obligations 560,000 500,000 Commitments and contingencies Redeemable convertible preferred stock: Series B - par value $.001 per share; authorized 1,600 shares; zero and 1,295 shares issued and outstanding at December 31, 1998 and 1997, respectively -- 11,477,184 Stockholders' equity: Convertible preferred stock: Series C - par value $.001 per share; authorized 2,000,000 shares; 2,000,000 and zero shares issued and outstanding at December 31, 1998 and 1997, respectively 2,000 -- Series D - par value $.001 per share; authorized 2,000,000 shares, 2,000,000 and zero shares issued and outstanding at December 31, 1998 and 1997, respectively 2,000 -- Common stock-par value $0.001 per share; authorized 40,000,000 shares, 13,332,835 and 10,149,872 shares issued and outstanding at December 31, 1998 and 1997, respectively 13,333 10,150 Additional paid-in capital 59,407,392 40,045,564 Stock subscription receivable (1,140,000) (1,140,000) Accumulated deficit (23,748,303) (11,865,914) Accumulated other comprehensive income - unrealized gain -- 604,500 Less treasury stock, at cost; 140,200 and 165,200 common shares at December 31, 1998 and 1997, respectively (521,084) (614,360) ------------ ----------- Total stockholders' equity 34,015,338 27,039,940 ------------ ----------- $ 43,872,983 50,461,073 ============ ===========
See accompanying notes to consolidated financial statements. F-2 LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ---- ---- ---- Revenues: Products $15,968,035 11,925,018 10,634,663 Royalties 1,111,917 245,000 -- Services 676,164 12,218,815 10,869,327 ----------- ---------- ---------- 17,756,116 24,388,833 21,503,990 Cost of revenues: Product cost 6,048,730 4,127,908 3,415,276 Cost of services 297,512 8,573,932 6,707,308 ----------- ---------- ---------- Gross profit 11,409,874 11,686,993 11,381,406 Research, development, and regulatory expenses 3,840,924 2,807,579 1,720,246 Other general and administrative expenses 12,156,982 13,118,289 11,559,656 Selling related expenses 4,562,740 3,286,600 2,430,335 Amortization of intangibles 2,310,169 1,736,679 631,518 ----------- ---------- ---------- 19,029,891 18,141,568 14,621,509 ----------- ---------- ---------- Loss from operations (11,460,941) (9,262,154) (4,960,349) Other income and expenses: Interest and dividend income 591,481 383,611 314,287 Interest expense (782,668) (1,343,198) (151,634) Gain on sale of subsidiaries and securities 364,452 4,129,057 -- Other, net (362,500) (280,400) (415,681) ----------- ---------- ----------- Loss before income tax expense (benefit) (11,650,176) (6,373,084) (5,213,377) Income tax expense (benefit) 232,213 880,000 (1,139,008) ----------- ---------- ---------- Net loss (11,882,389) (7,253,084) (4,074,369) Conversion discount on preferred stock (858,872) (41,573) (1,010,557) Preferred stock accretion and dividend requirements (2,751,953) (298,269) (358,618) ------------ ----------- ----------- Loss attributable to common stockholders $(15,493,214) (7,592,926) (5,443,544) ============= =========== =========== Loss per common share - basic and diluted $ (1.26) (0.80) (0.69) ============= =========== =========== Weighted average number of shares outstanding - basic and diluted 12,272,000 9,504,000 7,893,000 ============= =========== ===========
See accompanying notes to consolidated financial statements. F-3 LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- Net loss $(11,882,389) (7,253,084) (4,074,369) Other comprehensive income (loss), net of tax: Unrealized gain (reversal) on marketable securities (net of tax of $(353,675) in 1998 and $370,500 in 1997) (577,048) 604,500 -- Reclassification adjustment for gains included in net loss (net of tax of $16,825) (27,452) -- -- ----------- ---------- ---------- Comprehensive loss $(12,486,889) (6,648,584) (4,074,369) ============ =========== ===========
See accompanying notes to consolidated financial statements. F-4 LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1998, 1997, and 1996
Obligation Common Stock Preferred Stock Additional to Issue Stock Unreal Accu- Total ------------ --------------- Paid-in Common Subscription -ized mulated Treasury Stockholders' Shares Amount Shares Amount Capital Stock Receivable Gain Deficit Stock Equity ------ ------ ------ ------ ------- ----- ---------- ---- ------- ----- ------ 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 options 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) ---------- --------- -------- -------- ----------- -------- ---------- ------- ---------- ---------- --------- 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 F-5a Issuance of shares from exercise of stock options 25,875 26 -- -- 98,337 -- -- -- -- -- 98,363 Premium and other adjustments on redemption of Series B stock -- -- -- -- (454,866) -- -- -- -- -- (454,866) preferred 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 securities 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 -- -- 40,045,564 -- (1,140,000) 604,500 (11,865,914)(614,360) 27,039,940 F-5b Conversion of Series B preferred stock 2,392,220 2,392 -- -- 3,714,747 -- -- -- -- -- 3,717,139 Issuance of Series C and D preferred stock -- -- 4,000,000 4,000 15,815,556 -- -- -- -- -- 15,819,556 Issuance of shares from exercise of stock options and warrants 194,625 195 -- -- 513,476 -- -- -- -- -- 513,671 Issuance of warrants in conjunction with settlement -- -- -- -- 250,000 -- -- -- -- -- 250,000 Issuance of shares in conjunction with amendment of purchase agreement 187,500 187 -- -- 749,813 -- -- -- -- -- 750,000 Issuance of shares in conjunction with acquisi- tion 305,820 306 -- -- 1,249,777 -- -- -- -- -- 1,250,083 Issuance of shares in conjunction with 1996 acquisition agreement 102,798 103 -- -- (103) -- -- -- -- -- -- Premium and other adjustments on redemption of Series B preferred stock -- -- -- -- (2,969,180) -- -- -- -- -- (2,969,180) Adjustment of marketable equity securities to market, net of tax -- -- -- -- -- -- --(604,500) -- -- (604,500) Issuance of options and shares in conjunction with consulting agreements -- -- -- -- 37,742 -- -- -- -- 93,276 131,018 Net loss -- -- -- -- -- -- -- -- (11,882,389) -- (11,882,389) ------- -------- ------- ------- ---------- --------- --------- ------- ----------- -------- ----------- Balances at December 31, 1998 3,332,835 $13,333 4,000,000 $4,000 59,407,392 -- (1,140,000) -- (23,748,303) (521,084) 34,015,338 ========= ======= ========= ====== ========== ========= ========== ======= =========== ======== ==========
See accompanying notes to consolidated financial statements. F-5c LASERSIGHT INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net loss $(11,882,389) (7,253,084) (4,074,369) Adjustments to reconcile net loss to net cash used in operating activities: Realized gain on sale of investments and subsidiaries (364,452) (4,129,057) -- Depreciation and amortization 3,376,174 2,892,456 1,004,275 Provision for uncollectible accounts 1,212,896 2,366,995 502,000 Stock, options and warrants issued in conjunction with consulting agreements and settlement 381,018 -- -- Increase in notes receivable, net (2,357,750) (362,584) (1,832,532) Increase in accounts receivable, net (2,215,473) (176,029) 3,663,542 Increase in inventories (2,942,720) (1,236,042) (1,492,153) Increase (decrease) in accounts payable 11,492 859,808 (70,201) Increase (decrease) in accrued expenses 541,410 1,411,710 (529,449) Increase (decrease) in income taxes (875,752) 1,688,145 (1,446,053) Increase in deferred revenue 1,156,716 -- -- Other, net (370,182) (415,097) 102,482 ----------- ----------- ----------- Net cash used in operating activities (14,329,012) (4,352,779) (4,172,458) ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (648,475) (630,550) (296,520) Proceeds from sale of subsidiaries 6,527,452 6,500,000 -- Net proceeds from exclusive and non-exclusive license of patents 6,170,000 3,958,436 -- Proceeds from sale and leaseback transaction -- -- 957,180 Acquisition of other intangible assets (989,874) (15,428,961) -- Purchase of managed care contract -- (150,000) -- Transfer to restricted cash account (4,200,000) (3,200,000) -- Proceeds from restricted cash account 4,228,000 3,172,000 Purchase of businesses, net of cash acquired -- -- (640,463) ----------- ----------- ----------- Net cash provided by (used in) investing activities 11,087,103 (5,779,075) 20,197 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from preferred stock financings, net 15,819,555 14,834,219 5,342,152 Redemption and repurchase of preferred stock (10,512,000) (3,172,000) -- Proceeds from issuance of note payable, net -- 3,414,142 -- Repayments on notes payable - officer -- -- (465,000) Repayments on notes payable (2,000,000) (3,000,000) (799,100) Proceeds from exercise of stock options and warrants 513,672 98,363 588,789 Repayment of capital lease obligation -- (187,971) (109,418) ----------- ----------- ----------- Net cash provided by financing activities 3,821,227 11,986,753 4,557,423 ----------- ----------- ----------- Increase in cash and cash equivalents 579,318 1,854,899 405,162 Cash and cash equivalents: Beginning of year 3,858,400 2,003,501 1,598,339 ----------- ----------- ----------- End of year $ 4,437,718 3,858,400 2,003,501 =========== =========== =========== See accompanying notes to consolidated financial statements.
F-6 LASERSIGHT INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 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, 1998 and 1997, the Company was the payee on letters of credit with foreign financial institutions aggregating approximately $2.5 million and $0.2 million, respectively. F-7 Income Taxes - ------------ The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated 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 were amortized on a straight-line basis over the term of the leases. Such depreciation and amortization is included in other general and administrative expenses on the consolidated statements of operations. 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 projected 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, 1998, 1997, and 1996 were approximately $2,813,000, $1,836,000, and $949,000, respectively. Product Warranty Costs - ---------------------- Estimated future warranty obligations related to the Company's products, typically for a period of one year, are provided by charges to operations in the period in which the related revenue is recognized. F-8 Extended Service Contracts - -------------------------- The Company sells product service contracts covering periods beyond the initial warranty period. Revenues from the sale of such contracts are deferred and amortized on a straight-line basis over the life of the contracts. Service contract costs are charged to operations as incurred. Revenue Recognition - ------------------- The Company recognizes revenue from the sale of its products in the period that the products are shipped to the customers. Royalty revenues from the license of patents owned are recognized in the period earned. Service revenues from consulting clients are recognized in the period that the services are provided. The Company recognized premiums from HMOs and other payors as income in the period to which vision care coverage related. 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, 1998, 1997, and 1996 was approximately $0, $7,955,000 and $6,095,000, respectively (see note 4). Revenues from managing an ophthalmic practice and an ambulatory surgery center were 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. Loss Per Share - -------------- Basic loss per common share is computed using the weighted average number of common shares and contingently issuable shares (to the extent that all necessary contingencies have been satisfied), if dilutive. Diluted loss per common share is computed using the weighted average number of common shares, contingently issuable shares, and common share equivalents outstanding during each period. Common share equivalents include options, warrants to purchase Common Stock, and convertible Preferred Stock and are included in the computation using the treasury stock method if they would have a dilutive effect. Diluted loss per share for the years ended December 31, 1998, 1997 and 1996 is the same as basic loss per share. Pursuant to Emerging Issue Task Force (EITF) Announcement No. D-60, the value of the conversion discount on the Series C and D Convertible Participating Preferred Stock (Series C and D Preferred Stock) issued in June 1998 (approximately $834,000), the Series B Convertible Participating Preferred Stock (Series B Preferred Stock) issued in August 1997 (approximately $42,000 in 1997 and $25,000 in 1998) and the Series A Convertible Participating Preferred Stock F-9 (Series A Preferred Stock) issued in January 1996 (approximately $1,011,000) has been reflected as an increase to the loss attributable to common stockholders for the years ended December 31, 1998, 1997, and 1996, respectively. The value of the conversion discounts, ($0.07) basic and diluted in 1998, and ($0.13) basic and diluted in 1996, have been reflected as an adjustment to the loss attributable to common shareholders. The value of the conversion discount in 1997 had no per share effect. The following is the reconciliation of the numerators and denominators of the basic and diluted EPS computations for the years ended December 31, 1998, 1997, and 1996: 1998 1997 1996 ---- ---- ---- Numerator: Net loss $(11,882,389) (7,253,084) (4,074,369) Conversion discount on preferred stock (858,872) (41,573) (1,010,557) Preferred stock accretion and dividends (2,751,953) (298,269) (358,618) ------------ ---------- ---------- Loss attributable to common stockholders $(15,493,214) (7,592,926) (5,443,544) ============ ========== ========== Denominator, basic and diluted: Weighted average shares outstanding 12,272,000 9,504,000 7,486,300 Issuable shares, acquisition of The Farris Group -- -- 406,700 ------------ ---------- ---------- 12,272,000 9,504,000 7,893,000 ============ ========== ========== Basic and diluted loss per share $ (1.26) (0.80) (0.69) ============ ========== ========== Common share equivalents, including contingently issuable shares, options, warrants, and convertible Preferred Stock totaling 2,530,000, 4,722,000 and 317,000 common stock equivalents at December 31, 1998, 1997, and 1996, respectively, are not included in the computation of diluted loss per share because they have an antidilutive effect. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - ----------------------------------------------------------------------- Long-lived assets and certain identifiable intangibles are 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. F-10 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. Comprehensive Loss - ------------------ The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income", on January 1, 1998. SFAS No. 130 requires companies to classify items defined as "other comprehensive income" by their nature in a financial statement and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the consolidated balance sheet. Operating Segments - ------------------ The Company adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", on December 31, 1998. 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. Reclassifications - ----------------- Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1998 consolidated financial statement presentation. NOTE 3 - ACQUISITIONS - --------------------- Aesthetic Product - ----------------- In April 1998, the Company acquired from Schwartz Electro-Optics, Inc. (SEO) substantially all the assets, and assumed certain liabilities, of SEO's medical products division (the Division) in exchange for 305,820 shares of the Company's Common Stock. The Company is contingently obligated to issue up to 223,280 additional shares on April 15, 1999 if its five day average Common Stock price is not then $5.00 or greater. The value of the acquisition was $1,250,000. The Division develops, tests, manufactures, 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-related procedures. F-11 The acquisition was accounted for using the purchase method. Accordingly, the Division's results of operations are included in the Company's consolidated financial statements subsequent to the acquisition date. The fair value of the purchase consideration was determined at the date of acquisition and was recorded at that time. If and when the additional shares are issued in April 1999, the entry will be to record the par value of shares issued in Common Stock with the offset to additional paid-in capital. The acquisition did not have a material effect of the assets or operations of the Company. 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. In September 1998, the Company entered into an amendment with Photomed based on a FDA approval received in July 1998, and paid Photomed a total of $1,740,000, of which $990,000 was paid in cash and the balance paid through the issuance of 187,500 shares of Common Stock. Upon receipt of FDA approval of a laser for general commercial use for the treatment of hyperopia by June 1, 1999, utilizing part or all of the know how of the laser acquired, the Company is required to issue $1 million in Common Stock. Approval after such date will result in lesser payments until June 1, 2000, and after such date no payment will be required. Upon receipt of FDA approval of equivalency of the Company's refractive scanning laser to the laser acquired, payment of up to $1 million in cash is due if the approval is obtained within four months after Photomed takes delivery of the Company's refractive scanning laser. Such obligation decreases approximately $2,740 per day after such four month period. If, prior to August 1, 1999, the Company's gross sales of refractive lasers for final use within the United States exceeds $14 million, Photomed is to receive 25% of gross sales in excess of $14 million. Additional consideration paid, if any, will be recorded as additional purchase price. As of December 31, 1998 and 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 8 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 $1,112,000 and $803,000 for the years ended December 31, 1998 and 1997, respectively. 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 F-12 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). In February 1998, the Company sold certain rights in certain patents to Nidek Co., Ltd. for $6.3 million in cash (of which $200,000 was withheld for the payment of Japanese taxes). The Company transferred all rights in those patents issued in countries outside of the U.S. but retained the exclusive right to use and sublicense the non-U.S. patents in all fields other than ophthalmic, cardiovascular and vascular. The Company received a non-exclusive license to the non-U.S. patents in the ophthalmic field. In addition, the Company has granted a non-exclusive license to use those patents issued in the U.S., which resulted in $1.2 million of deferred royalties that are being amortized to income over three years. The transaction did not result in any current gain or loss, but reduced the Company's amortization expense over the remaining useful life of the U.S. patents. As of December 31, 1998 and 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-Lenchig disposable keratome for the LASIK procedure and entered into a limited exclusive license agreement for intellectual property related to the keratome products formerly known as Automated Disposable Keratomes (A*D*K). The trade name for this single use keratome is now the LaserSight "UniShaper" (TM) single use keratome. In exchange, the Company paid $400,000 in cash at closing and supplied to the licensors 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, 1998, the unamortized carrying value of the keratome license was included in other assets. No UniShaper shipments were made through December 31, 1998. 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 were 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. The Company issued 102,798 additional shares on July 3, 1998 because the Company's quoted stock price was 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. When the additional shares were issued in July 1998, the entry was 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, totaling $1,606,774, was recognized as a result of the acquisition, and was being amortized over 25 years. In December 1997, the Company sold LSIA to an unrelated company (see note 4). F-13 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 achieved 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 additional shares will be issued. LaserSight Centers Incorporated - ------------------------------- In April 1993, the Company acquired all of the outstanding stock of LaserSight Centers Incorporated (Centers), a privately held corporation, whose former owners include two of the Company's former presidents and its chairman. 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 replaced 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 reduced the royalty from $86 to $43 per refractive procedure and delayed 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. F-14 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 was subject to certain post-closing adjustments, for which a portion of the unregistered Vision 21 shares, valued at $1 million at the closing date, were placed in escrow. The Vision 21 shares were to be liquidated pursuant to the agreement from February through May 1998. The Company was to receive a minimum of $6.5 million and a maximum of $7.475 million from the liquidation of the Vision 21 shares. The Company received a total of approximately $6.5 million through June 1998. A portion of the proceeds was used to repay the Foothill loan. The Company believes Vision 21 owes it approximately $800,000 in additional proceeds, an amount in dispute at this time. At December 31, 1997, the market value of the Vision 21 shares was approximately $7,586,000 (see notes 10 and 16). The Company recorded a current liability in the amount of approximately $770,000 as of December 31, 1997, representing the maximum potential post-closing adjustments. The post-closing adjustments were resolved during 1998 and no liability is recorded at December 31, 1998. As a result of this transaction, the Company recorded gains before income taxes of $364,452 and $4,129,057 in the years ended December 31, 1998 and 1997, respectively. Approximately $191,000 of the gain in 1998 related to the sale of Vision 21 securities. The following pro forma unaudited information has been prepared assuming that the disposition of both MEC and LSIA had occurred as of the beginning of the years ended December 31, 1997 and 1996. The pro forma adjustments serve to eliminate revenues and expenses related to MEC and LSIA for the periods presented and do not include any overhead allocations. The unaudited pro forma condensed consolidated revenues, gross profit and net loss are not necessarily indicative of results that would have occurred had the disposition been consummated as of the beginning of the years ended December 31, 1997 and 1996, or that which might be attained in the future. For the Year Ended December 31, 1997 (Unaudited) Subsidiaries Historical Sold Pro Forma ---------- ---- --------- Revenues, net $24,388,833 (11,009,723) 13,379,110 Gross profit 11,686,993 (2,836,873) 8,850,120 Net loss $(7,253,084) (665,120) (7,918,204) =========== =========== ========== F-15 For the Year Ended December 31, 1996 (Unaudited) Subsidiaries Historical Sold Pro Forma ---------- ---- --------- Revenues, net $21,503,990 (7,882,943) 13,621,047 Gross profit 11,381,406 (2,310,090) 9,071,316 Net loss $(4,074,369) (782,358) (4,856,727) =========== ========== =========== NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE - -------------------------------------- Accounts and notes receivable at December 31, 1998 and 1997 were net of allowance for uncollectibles of approximately $2,576,000 and $1,825,000, respectively. During 1998 and 1997, approximately $462,000 and $1,892,000, respectively, 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 year ended December 31, 1996. The Company currently provides internal financing for sale of its laser systems. Sales for which there is no stated interest rate are discounted at a rate of eight percent, an estimate of the prevailing market rate for such purchases. Note receivable payments due within one year are classified as current. At December 31, 1998 and 1997, notes receivable maturity dates ranged from 1999 to 2002 and from 1998 to 2002, respectively. Notes receivable at December 31, 1998 and 1997 primarily represent unpaid balances due on laser equipment sales. Notes receivable balances, less an allowance for uncollectibles, consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Notes receivable $9,690,749 7,814,773 Less: Discount 282,422 315,968 Allowance for uncollectible notes 1,722,138 1,356,271 ---------- --------- 7,686,189 6,142,534 Less current portion 4,805,831 3,762,341 --------- --------- $2,880,358 2,380,193 ========== ========= NOTE 6 - INVENTORIES - -------------------- The components of inventories at December 31, 1998 and 1997 are summarized as follows: 1998 1997 ---- ---- Raw materials $5,266,146 2,958,782 Work in process 1,837,460 263,353 Finished goods 1,046,756 862,775 Test equipment-clinical trials 407,274 263,325 ---------- --------- $8,517,636 4,348,235 ========== ========= F-16 As of December 31, 1998, the Company had three laser systems being used under arrangements for clinical trials in various countries. At December 31, 1997, six laser systems were in use under similar arrangements. As described in Note 3, in April 1998, the Company acquired an aesthetic product line. Included in these assets at acquisition was approximately $1,230,000 of inventory. At December 31, 1998, inventory related to the aesthetic products division was approximately $1,545,000. NOTE 7 - PROPERTY AND EQUIPMENT - ------------------------------- Property and equipment at December 31, 1998 and 1997 are as follows: 1998 1997 ---- ---- Leasehold improvement $ 213,622 70,883 Furniture and equipment 1,429,413 947,032 Laboratory equipment 1,372,473 1,354,086 ---------- --------- 3,015,508 2,372,001 Less accumulated depreciation 1,513,169 1,017,833 ---------- --------- $1,502,339 1,354,168 ========== ========= NOTE 8 - OTHER ASSETS - --------------------- Other assets at December 31, 1998 and 1997 are as follows: 1998 1997 ---- ---- Restricted cash $ 194,000 200,000 Goodwill, net of accumu- lated amortization of $1,274,371 in 1998 and $749,739 in 1997 6,552,863 7,077,491 Acquired technology, net of accumulated amorti- zation of $501,612 in 1998 and $355,608 in 1997 1,250,388 1,396,392 Ultraviolet patents, net of accumulated amortization of $939,093 in 1998 and $371,906 in 1997 3,448,804 10,185,993 LASIK PMA application, net of accumulated amortization of $881,884 in 1998 and $233,790 in 1997 3,663,466 2,571,682 Other assets, net of accumu- lated amortization of $571,776 in 1998 and $456,529 in 1997 1,663,692 2,411,244 ----------- ----------- $16,773,213 23,842,802 =========== ========== Restricted cash represents deposits in connection with service contracts with approximately 95 and 100 ophthalmologists at December 31, 1998 and 1997, respectively, granting them exclusive market areas to perform specific services as set forth in the Center's service contracts. F-17 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, 1998, 1997 and 1996, expense incurred related to the 401(k) plan, including employer-matching contributions, was approximately $49,000, $36,000 and $45,000, 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. In June 1998, the Company fully repaid its note payable to Foothill and also terminated its line of credit arrangement with Foothill. In connection with the loan, the Company 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 84,000 additional shares to be issued as a result of the issuance of the Series B, C & D Preferred Stock and a corresponding reduction in the exercise price to approximately $5.20 per share and repurchase price to approximately $1.29 per warrant. The warrants were valued at $560,000 and $500,000 at December 31, 1998 and 1997, respectively, and were classified as long-term obligations. The recorded amount of the obligation will change with the fair value of the warrants, with the corresponding adjustment to interest expense. 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 1998, 1997, and 1996 approximated $199,000, $515,000, and $172,000, 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 June 1998, the Company entered into a Securities Purchase Agreement with TLC The Laser Center Inc. (TLC), pursuant to which the Company issued 2,000,000 shares of newly-created Series C Preferred Stock with a face value of $4.00 per share, resulting in an aggregate offering price of $8 million. The Series C Preferred Stock is convertible by TLC on a fixed, one-for-one basis into 2,000,000 shares of Common Stock at any time until June 2001, on which date all shares of Series C Preferred Stock then outstanding will automatically be converted into an equal number of shares of Common Stock. F-18 The net proceeds to the Company, after deduction of costs of issuance, was approximately $7.9 million. The net proceeds were partially used to repurchase all 525 outstanding shares of the Company's Series B Preferred Stock on June 5, 1998 for approximately $6.3 million, including a 20% premium. In June 1998, the Company entered into a Securities Purchase Agreement with Pequot Private Equity Fund, L.P., Pequot Scout Fund, L.P., and Pequot Offshore Private Equity Fund, Inc. (Pequot Funds), pursuant to which the Company issued, collectively, 2,000,000 shares of the newly-created Series D Preferred Stock with a face value of $4.00 per share, resulting in an aggregate offering price of $8 million. The Series D Preferred Stock is convertible by the Pequot Funds on a one-for-one basis into 2,000,000 shares of Common Stock at any time until June 2001, on which date all shares of Series D Preferred Stock then outstanding will automatically be converted into an equal number of shares of Common Stock. The Series D Preferred Stock is subject to certain anti-dilution adjustments if the Company issues or sells shares of Common Stock before June 2001 at a price per share less than $4.00. The net proceeds to the Company, after deduction of costs of issuance, was approximately $7.9 million. In August 1997, the Company completed a private placement of 1,600 shares 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 warrant price to the investors was reduced to $2.75 in February 1998 in exchange for certain amendments to the agreement as approved by the Company's shareholders. The warrants have certain anti-dilution features which provide for approximately 13,000 additional shares primarily pursuant to the issuance of the Series C and D Preferred Stock and a corresponding reduction in the exercise price to approximately $2.71. The Series B Preferred Stock was convertible into the Company's Common Stock at the option of the holders at any time through August 29, 2000. The conversion price equaled 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. 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. At December 31, 1997, 1,295 shares of Series B Preferred Stock were outstanding. The Series B Preferred Stock was 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 consolidated balance sheet. In February 1998, 351 shares were repurchased at a 20 percent premium totaling $702,000 which was recorded as a dividend to the Series B Preferred Stock stockholders. In June 1998, 525 shares were repurchased at a 20 percent premium totaling $1,050,000, which was recorded as a dividend to the Series B Preferred Stock stockholders. Prior to June 1998, the holders of Series B Preferred Stock had converted 419 shares of Series B Preferred Stock into 2,392,220 shares of common stock. At December 31, 1998, no shares of Series B Preferred Stock were outstanding. In January 1996, the Company completed a private placement of 116 shares 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, 1998 and 1997, zero shares of Series A Preferred Stock 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. F-19 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. No further shares are issuable under this agreement. NOTE 12 - STOCK OPTION PLANS - ---------------------------- The Company has options outstanding at December 31, 1998 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, the former of which was amended in June 1998 and the latter of which was amended in June 1997. Under the 1996 Incentive Plan, as amended, 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, 1,250,000 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 generally 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, 1998, 1997 and 1996 was $2.16, $3.62 and $4.60, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1998 1997 1996 ---- ---- ---- Expected dividend yield 0% 0% 0% Volatility 50% 49% 44% Risk-free interest rate 5.5% 5.70-5.71% 6.04%-6.33% Expected life (years) 3-10 5-10 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 loss and loss per share would have been reduced to the pro forma amounts indicated below: F-20 1998 1997 1996 ---- ---- ---- Net loss As reported $(11,882,389) (7,253,084) (4,074,369) Pro forma (12,834,441) (8,012,317) (4,653,040) Basic and diluted EPS As reported $ (1.26) (0.80) (0.69) Pro forma (1.34) (0.88) (0.76) In accordance with SFAS No. 123, the pro forma net loss reflects only options granted on or after January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost does not reflect options granted prior to January 1, 1995, that vested in 1998, 1997 or 1996. Stock option activity for all plans during the periods indicated is as follows: Weighted Shares Average Under Exercise Option Price ------ ----- Balance at January 1, 1996 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 Granted 750,000 4.16 Exercised (54,000) 2.46 Terminated (88,000) 12.01 --------- Balance at December 31, 1998 1,657,000 6.25 ========= On June 12, 1998, the Company repriced 110,000 shares of stock options previously granted to employees (excluding executive officers) with option prices ranging from $7.03 to $12.81 to the market value of the stock on June 12, 1998 of $4.31. All shares repriced were not exercisable until the later of December 12, 1998 or the original vesting date and expire on the later of June 12, 1999 or the original expiration date. The following table summarizes the information about stock options outstanding and exercisable at December 31, 1998: Range of Exercise Prices ------------------------ $1.58-$5.14 $5.31-$7.03 $9.50-$12.81 ----------- ----------- ------------ Options outstanding: Number outstanding at December 31, 1998 903,500 412,500 341,000 Weighted average remaining contractual life 3.75 years 3.75 years 2.65 years Weighted average exercise price $4.17 6.70 $11.20 Options exercisable: Number exercisable at December 31, 1998 180,725 263,750 336,000 Weighted average exercise price $3.99 6.82 11.21 F-21 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, 1998, 1997, and 1996 were as follows: 1998 1997 1996 ---- ---- ---- Current: Federal $ 208,992 67,066 (707,130) State 23,221 812,934 (22,878) --------- ------- --------- 232,213 880,000 (730,008) --------- ------- --------- Deferred: Federal -- -- (351,677) State -- -- (57,323) --------- ------- --------- -- -- (409,000) --------- ------- --------- Total income tax expense (benefit) $ 232,213 880,000 (1,139,008) ========= ======= ========== Deferred tax assets and liabilities consist of the following components as of December 31, 1998 and 1997: 1998 1997 ---- ---- Deferred tax liabilities: Acquired technology $ 425,132 555,764 Change in tax status of subsidiaries 55,494 134,938 Unrealized gain on marketable equity securities -- 370,500 Property and equipment -- 84,768 --------- --------- 480,626 1,145,970 Deferred tax assets: Intangibles 131,145 69,322 Inventory 400,737 232,512 Receivable allowance 943,873 800,063 Royalty fees 283,333 -- Commissions 167,579 -- Warranty accruals 295,695 157,970 NOL carry forward 2,381,196 -- Other 38,352 58,893 ----------- --------- 4,642,910 1,318,960 Valuation allowance (4,162,284) (172,990) ----------- --------- 480,626 1,145,970 ----------- --------- Net deferred tax asset (liability) $ -- -- =========== ========= F-22 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. Payments for income taxes for the year ended December 31, 1998, 1997 and 1996 were $905,000, $0 and $307,360, respectively. Income taxes paid during 1998 primarily related to the sale of MEC and LSIA. For the years ended December 31, 1998, 1997 and 1996, 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: 1998 1997 1996 ---- ---- ---- "Expected" tax provision (benefit) $(3,961,060) (2,166,849) (1,772,548) State income taxes, net of federal income tax benefit 48,493 536,536 (29,462) Tax basis of subsidiaries sold -- 2,478,304 -- Utilization of net operating loss carry forwards -- -- -- Foreign sales corporation tax benefit -- -- -- Valuation allowance 3,989,294 (355,036) 528,026 Intangible amortization 417,064 369,210 162,321 Nondeductible expenses 26,594 17,835 18,920 Other items, net (288,172) -- (46,265) ---------- ---------- ---------- Income tax expense (benefit) $ 232,213 880,000 (1,139,008) ========== ========== ========== NOTE 14 - SEGMENT INFORMATION - ----------------------------- The Company operates principally in three segments: technology related (laser equipment) products, patent services and health care services. Laser equipment operations involve the development, manufacture, and sale of lasers primarily for use in vision correction procedures. Patent services generally relate to LaserSight Patents, Inc., and primarily involves the revenues and expenses generated from the ownership of certain refractive laser procedure patents. Subsidiaries sold consist of MEC and LSIA, which were sold in December 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. F-23 1998 1997 1996 ---- ---- ---- Operating revenues: Technology related $15,968,035 11,925,018 10,634,663 Patent services 1,111,917 245,000 -- Health care services 676,164 1,209,092 2,986,384 Subsidiaries sold -- 11,009,723 7,882,943 ----------- ---------- ---------- Total revenues $17,756,116 24,388,833 21,503,990 =========== ========== ========== Operating profit (loss): Technology related $(9,038,922) (6,329,036) (2,148,280) Patent services 349,673 (163,387) -- Health care services (541,670) (1,121,186) (1,672,516) Subsidiaries sold -- 658,923 777,335 General corporate (1,953,326) (2,040,328) (1,828,285) Developmental stage company-LaserSight Centers Incorporated (276,696) (267,140) (88,603) ------------ ---------- ---------- Loss from operations $(11,460,941) (9,262,154) (4,960,349) ============ ========== ========= Identifiable assets: Technology related $28,818,547 20,056,924 Patent services 3,838,804 10,614,652 Health care services 3,910,200 4,398,202 General corporate assets 4,267,269 12,080,776 Developmental stage company-LaserSight Centers Incorporated 3,038,163 3,310,519 ----------- ---------- Total assets $43,872,983 50,461,073 =========== ========== Depreciation and amortization: Technology related $ 1,659,571 751,682 305,190 Patent services 567,187 371,906 -- Health care services 333,205 319,823 185,974 Subsidiaries sold -- 641,501 510,924 General corporate 3,731 2,751 2,187 Development stage company-LaserSight Centers Incorporated 276,696 254,634 -- ---------- --------- --------- Total depreciation and amortization $2,840,390 2,342,297 1,004,275 ========== ========= ========= Amortization of deferred financing costs and accretion of discount on note payable of $545,784 and $550,159 for the years ended December 31, 1998 and 1997, respectively, are included as interest expense in the table below. 1998 1997 1996 ---- ---- ---- Capital expenditures: Technology related $ 599,873 560,946 234,516 Health care services 30,228 12,154 19,190 Subsidiaries sold -- 57,450 39,469 General corporate 18,374 -- 3,345 ----------- ------- ------- Total capital expenditures $ 648,475 630,550 296,520 =========== ======= ======= F-24 1998 1997 1996 ---- ---- ---- Interest income: Technology related $ 293,731 267,590 181,939 Patent service 9,377 10,717 -- Health care services -- 150 11,940 Subsidiaries sold -- 65,490 51,432 General corporate 278,033 26,541 59,289 Development stage company -LaserSight Centers, Inc. 10,340 13,123 9,687 ---------- --------- ------- Total interest income $ 591,481 383,611 314,287 ========== ========= ======= Interest expense: General corporate $ 782,668 1,283,904 113,524 Subsidiaries sold -- 59,294 38,110 ---------- --------- ------- Total interest expense $ 782,668 1,343,198 151,634 ========== ========= ======= The following table presents the Company's technology related segment net revenues by geographic area for the three years ended December 31, 1998. The individual countries shown generated net revenues of at least ten percent of the total segment net revenues for at least one of the years presented. 1998 1997 1996 ---- ---- ---- Geographic area: Argentina $ 808,400 1,382,000 1,005,600 Brazil 1,825,000 3,290,000 844,131 Canada 2,512,000 288,000 -- China 1,980,000 1,346,000 523,752 Colombia 510,000 1,245,400 630,780 Japan -- -- 1,340,000 Other 8,332,635 4,373,618 6,290,400 ----------- ---------- ---------- Total technology related revenues $15,968,035 11,925,018 10,634,663 =========== ========== ========== Export sales are as follows: North and Central America $ 3,781,712 1,075,000 -- South America 4,473,156 5,995,000 3,600,637 Asia 3,746,171 2,235,000 2,844,752 Europe 2,735,631 2,526,500 3,378,000 Africa 642,250 -- 295,000 ----------- ---------- ---------- $15,378,920 11,831,500 10,118,389 =========== ========== ========== The geographic areas above include significant sales to the following countries: North and Central America - Canada, 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. F-25 As of December 31, 1998 and 1997, the Company had approximately $72,000 and $117,000, respectively, in assets located at a manufacturing facility in Costa Rica. The Company does not have any other subsidiaries in countries where it does business. As a result, substantially all of the Company's operating losses and assets apply to the U.S. Revenues from one customer of the technology related segment totaled $900,000, or 5%, of the Company's consolidated revenues (see note 15). 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 June 1998, the Company sold three laser systems for a total of $900,000 to TLC. As previously discussed in Note 11, the Company entered into a Securities Purchase Agreement with TLC in June 1998. The Company received full payment for the systems sold in August 1998. NOTE 16 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- 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 was 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. F-26 Mercacorp, Inc. - --------------- In August 1998, Mercacorp, Inc. filed an action in the U.S. District Court for the Eastern District of New York against the Company, the President and Chief Executive Officer of the Company, Wall & Broad Equities, Inc., a "purported investment banking establishment" and Isaac Weinhouse, the principal of such purported investment banking establishment, asserting violations of Section 10(b) of the Securities and Exchange Act of 1934 and common law fraud in connection with the alleged issuance of false press releases, misrepresentations and omissions by all of the defendants on which the plaintiff allegedly relied in purchasing the Company's Common Stock. The action sought both actual and punitive monetary damages from the Company in the amounts of $5 million and $50 million, respectively. On November 11, 1998, the plaintiff dismissed the action, with prejudice, and the parties agreed to a release of all claims. In connection with the dismissal and release of claims the Company issued the plaintiff two separate warrants to purchase Common Stock. Under the first warrant, the plaintiff is entitled to purchase up to 750,000 shares of Common Stock at an exercise price of $4.00 per share, the closing bid price on November 10, 1998, and under the second warrant, the plaintiff is entitled to purchase up to 750,000 shares of Common Stock at an exercise price of $5.00 per share. Both of the warrants contain certain prohibitions against assignment and transfer to third parties as well as other terms and conditions. The fair value of the warrants and other costs related to the matter are included in other expenses in 1998. 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 $429,000 at December 31, 1998. 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, 1998, are approximated as follows: 1999 $754,000 2000 727,000 2001 670,000 2002 392,000 2003 186,000 Thereafter 14,000 Rent expense during 1998, 1997, and 1996 was approximately $606,000, $755,000 and $781,000, respectively. NOTE 17 - SUBSEQUENT EVENT - -------------------------- Private Placement - ----------------- On March 23, 1999, the Company closed a transaction for the sale of 2,250,000 shares of Common Stock to a total of six investors, including Pequot Funds and TLC, in exchange for the Company receiving $9 million in cash. In addition, the investors received a total of 225,000 warrants to purchase Common Stock at $5.125 each, the Common Stock closing price on March 22, 1999. F-27 EX-10.37 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into effective as of October 30, 1998, by and between LASERSIGHT INCORPORATED, a Delaware corporation (the "Company"), and MICHAEL R. FARRIS, an individual residing in the State of Florida (the "Executive"). RECITALS WHEREAS, the Executive is the President and Chief Executive Officer of the Company; and WHEREAS, the Company desires to retain the Executive as President and Chief Executive Officer of the Company upon the terms and conditions hereafter set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. Employment of the Executive. Subject to the terms and conditions of this Agreement, the Company hereby employs the Executive, and the Executive hereby accepts such employment and agrees to perform the services specified herein. 2. Duties. The Executive shall hold the titles of and serve as President and Chief Executive Officer of the Company. The Executive shall report to and be subject to the direction of the Board of Directors of the Company. During the term of his employment hereunder, the Executive shall: (a) Perform those duties assigned to him from time to time by the Board of Directors of the Company, provided, however, that such duties shall be reasonably related to the positions held by the Executive pursuant hereto; (b) Devote his full time and first priority business efforts to the Company's business, provided that nothing herein shall prohibit the Executive from spending reasonable amounts of time for personal affairs, including, without limitation, managing his personal investments; and (c) Carry out Company policies and directives in a manner that will promote and develop the Company's best interests. 3. Base Salary. In consideration of Executive satisfying his obligation under this Agreement Executive will receive a base salary (the "Base Salary") which will be calculated at an annual rate of Two Hundred Fifty Thousand Dollars ($250,000), provided that on January 1, 1999 and on each anniversary of such date during the term of this Agreement the Base Salary then in effect will be increased (on a cumulative basis) by five percent (5%). The Base Salary shall be payable in equal installments in accordance with the Company's customary mode of salary payments for senior executives of the Company (but not less than monthly) and shall be subject to the Company's standard withholdings for applicable taxes and benefit contributions. 4. Additional Compensation. (a) On an annual basis Executive will be eligible to receive a cash bonus (the "Performance Bonus") in an aggregate amount of up to twenty-five percent (25%) of the Base Salary for the relevant year if Executive (or the Company, as appropriate) meets all or a portion of the specific objectives (the "Performance Objectives") which (i) are established by the Company's Executive Compensation and Stock Option Committee (the "Committee"), and (ii) are communicated in writing to Executive. Prior to the expiration of the thirty (30) day period immediately following the date on which Executive presents the Company's budget for the next succeeding year to the Board of Directors of the Company, the Committee shall notify Executive in writing of the Performance Objectives which relate to the next succeeding year. The Committee shall award all or the relevant portion of the Performance Bonus on an annual basis within sixty (60) days after the end of the relevant year. The payment of the Performance Bonus shall be subject to the Company's standard withholdings for applicable taxes and benefit contributions, as applicable. (b) In addition to the Performance Bonus, on an annual basis Executive will be eligible to receive a cash bonus (the "Additional Bonus") in an aggregate amount of twenty percent (20%) of the Base Salary for the relevant year if all or a portion of certain events or goals identified from time to time by the Committee (the "Additional Objectives") occur or are achieved. On or before February 15 of each year during the term of this Agreement, or on any other earlier date as may be determined appropriate by the Committee, the Committee shall review the Additional Objectives for the relevant year and determine if Executive should receive the Additional Bonus. The payment of the Additional Bonus shall be subject to the Company's standard withholdings for applicable taxes and benefit contributions, as applicable. (c) To the extent that (i) the Internal Revenue Service or any similar state or local taxing authority takes the position that any compensation or benefits, of any kind, provided to Executive pursuant to this Agreement are "golden parachute payments," "excess parachute payments" or any similar, excess, parachute-like compensation, and (ii) to the extent that such taxing authority also takes the position that any compensation or benefits, of any kind, provided to Executive pursuant to this Agreement result in Executive being responsible for the payment of any excise tax described in Internal Revenue Code Sections 4999 or 280G, or any similar federal, state or local statute, rule or regulation, and (iii) to the extent that Executive ultimately pays such excise tax, then the Company will pay Executive a "grossed up" sum which, after reduction for any appropriate withholdings, will equal the amount of such excise tax paid by Executive. 5. Stock Options. (a) Immediately upon execution of this Agreement Executive will be granted options to purchase 341,250 shares of the Company's common stock at an option price per share equal to the Fair Market Value per share, as defined in the Company's Amended and Restated 1996 Equity Incentive Plan (the "1996 Equity Incentive Plan"), on the date of grant which shall be the effective date of this Agreement (the "Stock Options"). The Stock Options shall be granted to Employee pursuant to all terms and conditions of the 1996 Equity Incentive Plan and the Award Agreement attached hereto as Exhibit A, and incorporated herein by this reference. The Stock Options shall vest as follows: (i) the option to purchase 100,000 shares shall vest on January 1, 1999, (ii) the option to purchase 111,250 shares shall vest on January 1, 2000, (iii) the option to purchase 111,250 shares shall vest on January 1, 2001, and (iv) the option to purchase 18,750 shares shall vest on January 1, 2002. (b) If this Agreement is terminated for Cause (as defined in Section 11), then the options granted by this Section which have not previously vested will terminate and be of no further force and effect and Executive will have ninety (90) days after the date of such termination to exercise any options which had previously vested. If the options previously vested are not exercised on or before the ninetieth (90th) day following the date of termination, then such options will terminate and be of no further force and effect. (c) If this Agreement is terminated without Cause, then the options granted by this Section which have not previously vested will terminate and be of no further force and effect and Executive will have twelve (12) months after the date of such termination to exercise any options which had previously vested. If the options previously vested are not exercised on or before twelve (12) months following the date of termination, then such options will terminate and be of no further force and effect. (d) If in connection with a Change of Control (as defined in Section 11) Executive terminates his employment hereunder for Good Reason, the Stock Options and the Contingent Stock Options (as defined herein), to the extent granted, will immediately vest and be exercisable upon the date of such termination of employment; provided, however, if Executive does not terminate his employment hereunder for Good Reason in connection with a Change of Control, the Stock Options, and the Contingent Stock Options, to the extent granted, will vest in accordance with Section 5(a) and Section 5(f) as applicable. (e) If not sooner exercised or terminated pursuant to the terms of this Agreement or the 1996 Equity Incentive Plan, the Stock Options shall terminate on December 31, 2006. (f) If during the term of this Agreement the Company amends the 1996 Equity Incentive Plan such that at least 58,750 additional shares of the Company's common stock will become available for issuance under the 1996 Equity Incentive Plan, then as of the date of such amendment to the 1996 Equity Incentive Plan Executive shall be granted options to purchase up to an additional 58,750 shares of the Company's common stock (the "Contingent Stock Options"). If issued, the Contingent Stock Options shall have an option price per share equal to the Fair Market Value per share on the date of grant, shall vest on January 1, 2002 and shall expire on December 31, 2006, unless earlier exercised. 6. Fringe Benefits. During the term of his employment hereunder, the Executive shall be entitled to all fringe benefits and perquisites which the Company from time to time makes available to other senior executives of the Company, on such terms and levels as are at least commensurate with those provided to such other senior executives, including, without limitation, those benefits and perquisites set forth on Exhibit B hereto. 7. Expenses. The Company shall pay all of Executive's reasonable costs and expenses, including, but not limited to, travel, lodging and meals, incurred in connection with the performance of his duties hereunder, consistent with the reimbursement guidelines established and implemented from time to time by the Company. 8. Terms of Employment; Severance. (a) The term of this Agreement shall begin on the date hereof and shall continue until January 1, 2002, unless sooner terminated as provided in this Section 8. Unless either party shall give notice of intent not to renew this Agreement to the other party at least sixty (60) days prior to January 1, 2002, the term of this Agreement shall, on such anniversary date, be automatically extended for a term of three (3) years. (b) Notwithstanding the foregoing, the Executive's employment hereunder may be terminated by the Company at any time for Cause upon not less than seven (7) days' prior written notice to the Executive. Such notice must specify the nature of the Cause, the manner in which it can be cured (as reasonably determined by the Company), if any, and the effective date of termination if not cured. (c) Notwithstanding the foregoing, the Executive's employment hereunder shall terminate in the event of his death or Disability (as defined in Section 11). (d) Notwithstanding the foregoing, the Executive's employment hereunder may be terminated by the Executive at any time for Good Reason (as defined in Section 11) upon prior written notice to the Company specifying therein the grounds for termination and the effective date of termination. (e) In addition to all other rights of Executive and obligations of the Company described herein which arise or continue upon termination of Executive's employment, the following shall apply: (i) Upon termination of the Executive's employment hereunder for any reason whatsoever, the Company shall pay to the Executive all salary, benefits, bonuses and other Compensation (as defined in Section 11) (including reimbursements) earned through the effective date of termination. (ii) If the Executive's employment hereunder is terminated by the Company without Cause, the Executive shall be entitled to receive, in addition to all other damages and remedies available to him at law or in equity, the Base Salary and health insurance coverage for Executive and his family through the later of (i) the remaining term of this Agreement, or (ii) the end of the twelve (12) month period immediately following the effective date of his termination. If the Executive's employment is terminated by the Company without Cause, then all salary owed to the Executive shall be paid over the relevant period of time in accordance with the Company's normal payroll practices. (iii) If the Executive's employment hereunder is terminated by the Company with Cause, the Executive shall be entitled to receive, in addition to all other damages and remedies available to him at law or in equity, a lump sum severance payment payable within ten (10) business days of such termination in an amount equal to the Base Salary for one week for each year that Executive has been employed by the Company or a Subsidiary. (iv) If the Executive's employment hereunder is terminated by the Executive for Good Reason, or for any reason within the twelve (12) months immediately after a Change of Control, the Executive shall be entitled to receive, in addition to all other damages and remedies available to him at law or in equity, the Base Salary and health insurance coverage for Executive and his family through the later of (i) the remaining term of this Agreement, or (ii) the end of the twelve (12) month period immediately following the effective date of his termination. If the Executive's employment is terminated by the Executive for Good Reason, or for any reason within twelve (12) months after a Change of Control, then all salary owed to the Executive, shall, at the Executive's option, be payable in lump sum within ten (10) business days of the Executive's written demand therefore. 9. Restriction Against Competition. (a) In consideration of the Compensation to be received hereunder, the Executive agrees that while he is employed by the Company pursuant to this Agreement, and during (A) the two (2) year period following the effective date of termination of this Agreement by the Company for Cause or Disability or by the Executive without Good Reason, or (B) the one (1) year period following the effective date of termination of this Agreement by the Company without Cause or by the Executive for Good Reason, the Executive shall not, directly or indirectly, as a stockholder, partner, officer, director, agent, consultant, employee, or otherwise: (i) engage in any business that competes with the business of the Company ("Company" defined in Sections 9, 10 and 11(b) herein to mean all Subsidiaries, Affiliates, divisions, successors, and assigns of the Company and any of their Subsidiaries or Affiliates) anywhere the Company is conducting its business, except that with respect to the one-year or two-year period, as applicable, following termination of this Agreement, such restriction shall apply only to locations where the Company is conducting business or actively serving customers or soliciting business on the effective date of termination of this Agreement; provided, however, that the foregoing shall not prohibit the Executive's ownership of up to five percent (5%) of the outstanding shares of capital stock of any corporation whose securities are publicly traded on a national or regional stock exchange; (ii) purposefully interfere or attempt to interfere with any of the Company's contracts (regardless of whether these contracts are in writing or verbal) or business relationships or advantages existing and in effect as of the effective date of termination of this Agreement; (iii) solicit for employment, either directly or indirectly, for himself or for another, any of the technical or professional employees who are or were employed by the Company during the one-year or two-year period, as applicable, following the termination of this Agreement; (iv) purposefully interfere with the business relationship of or solicit the business or orders of (a) a customer of the Company, except that with respect to the one-year or two-year period, as applicable, following the effective date of termination of this Agreement, such restriction shall apply only to such customers existing on the effective date of termination of this Agreement, or within sixty (60) days prior thereto, or (b) a prospective or potential customer of the Company, except that with respect to the one-year or two-year period, as applicable, following the effective date of termination of this Agreement, such restriction shall apply only to prospective or potential customers (1) to whom the Company has submitted a formal quotation within the sixty (60) days prior to the effective date of termination of this Agreement, or (2) that have been previously listed or identified by the Company as a business prospect at any time during the six (6) months preceding the effective date of termination. (b) The parties agree that if the Executive commits or threatens to commit a breach of the covenants of this Section 8, the Company shall have the right to seek and obtain all appropriate injunctive and other equitable remedies therefor, in addition to any other rights and remedies that may be available at law, it being acknowledged and agreed that any such breach would cause irreparable injury to the parties and that money damages would not provide an adequate remedy therefor. 10. Protection of Confidential Information and Trade Secrets of the Company. (a) Confidentiality. During the term of this Agreement and for a period of five (5) years after any termination or expiration thereof, the Executive agrees that he will not use for himself or others or divulge or convey to others any secret or confidential information, knowledge or data of the Company obtained by the Executive during his employment with the Company. Such information, knowledge or data includes but is not limited to secret or confidential matters: (i) of a technical nature such as, but not limited to, methods, know-how, formulae, compositions, processes, discoveries, machines, inventions, intellectual property, computer programs and similar items or research projects; (ii) of a business nature such as, but not limited to, information about the cost, purchasing, profits, markets, sales or customers; and (iii) pertaining to future developments such as, but not limited to, research and development, future marketing or merchandising plans and future expansion plans. The term "secret or confidential information, knowledge or data" shall not be deemed to include information that is published, information that is generally known throughout the industry, or which generally is available to the industry without restriction through no fault of the Executive. (b) Injunctive Relief. The Executive agrees that the Company's remedies at law for any breach or threat of breach by him of the provisions of paragraph (a) of this Section 10 will be inadequate, and that the Company shall be entitled to an injunction or injunctions to prevent breaches of the provisions of paragraph (a) of this Section 10 and to enforce specifically the terms and provisions thereof, in addition to any other remedy to which the Company may be entitled at law or equity. (c) Return of Documents and Other Property. Upon the termination of the Executive's employment with the Company, or at any time upon the request of the Company, the Executive shall deliver to the Company (i) all documents and materials containing secret or confidential information, knowledge or data relating to the Company's business and affairs, and (ii) all documents, materials and other property belonging to the Company, which in either case are in the possession or under the control of the Executive. 11. Certain Defined Terms. For purposes of this Agreement, the following definitions shall apply: (a) "Affiliate" shall mean with respect to any Person, (i) any Person which directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person or (ii) any Person who is a director or executive officer (A) of such Person, (B) of any Subsidiary of such Person, or (C) of any Person described in the foregoing clause (i). For purposes of this definition, "control" of a Person shall mean the power, direct or indirect, (i) to vote or direct the voting of more than 20% of the outstanding voting securities of such Person, or (ii) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. (b) "Cause" shall mean any of the following: (i) The Executive's conviction of or plea of no contest to any crime involving moral turpitude, the theft or willful destruction of money or other property of the Company or his conviction of or plea of no contest to any felony crime; (ii) The Executive's inability to perform his responsibilities due to his abuse or misuse of alcohol or prescribed drugs or any use of illegal drugs; (iii) The Executive's commission of theft, embezzlement or fraud against the Company; (iv) The Executive has willfully damaged the Company's property, business reputation, or good will; or (v) The Executive's incompetence, deliberate neglect of duty, or material breach of this Agreement that is not cured within thirty (30) days after Executive is notified of such incompetence, neglect or breach. The term "Cause" shall not mean the Executive's bad judgment or negligence, any act or omission believed by the Executive to have been in or not opposed to the best interests of the Company, any act or omission lacking the intent of the Executive to gain a profit to which he is not legally entitled, or any other matter not specifically described in clauses (i) through (v) above. (c) "Change in Control" shall mean any one or more of the following: (i) the acquisition or holding by any person, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "1934 Act"), other than by the Company or any employee benefit plan of the Company, or beneficial ownership (within the meaning of Securities and Exchange Commission ("SEC") Rule 13d-3 under the 1934 Act) of 25% or more of the Company's then outstanding common stock; provided, however, that no Change of Control shall occur solely by reason of any such acquisition by a corporation with respect to which, after such acquisition more than 60% of the then-outstanding common shares of such corporation are then beneficially owned, directly or indirectly, by the persons who were the beneficial owners of the Company's common stock immediately before such acquisition in substantially the same proportions as their respective ownership, immediately before such acquisition, of the Company's then-outstanding common stock; or (ii) individuals who, as of the date of this Agreement constitute the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Company's Board of Directors; provided that any individual who becomes a director after the date of this Agreement whose election or nomination for election by the stockholders of the Company was approved by at least a majority of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest (as such terms are used in SEC Rule 14a-11 under the 1934 Act) relating to the election of the directors of the Company) shall be deemed to be a member of the Incumbent Board; or (iii) approval by the stockholders of the Company of (A) a merger, reorganization or consolidation ("Transaction") with respect to which persons who were the respective beneficial owners of the Company's common stock immediately before the Transaction do not, immediately thereafter, beneficially own, directly or indirectly, more than 60% of the then-outstanding common shares of the corporation resulting from the Transaction, (B) a liquidation or dissolution of the Company or (C) the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred if Executive is, by agreement or understanding (written or otherwise), a participant on his own behalf in a transaction which causes the Change of Control to occur. (d) "Compensation" shall mean, with respect to any Person, all payments and accruals, if any, commonly considered to be compensation, including, without limitation, all wages, salary, deferred payment arrangements, bonus payments and accruals, profit sharing arrangements, payments in respect of equity options or phantom equity options or similar arrangements, equity appreciation rights or similar rights, incentive payments, pension or employment benefit contributions or similar payments, made to or accrued for the account of such Person or otherwise for the direct or indirect benefit of such Person, plus auto benefits provided to such Person, if any. (e) "Disability" shall mean the inability, by reason of illness or other incapacity, of the Executive substantially to perform the duties of his then regular employment with the Company, which inability continues for at least ninety (90) consecutive days, or for shorter periods aggregating one hundred twenty (120) days during any consecutive twelve-month period. (f) "Good Reason" shall mean: (i) any material breach or default by the Company (and failure to cure within any applicable grace or cure period) of any material obligation of this Agreement; (ii) any material change in the duties to be performed or titles to be held by the Executive pursuant hereto either (A) within the twelve (12) month period immediately after a Change in Control, or (B) without the Executive's prior written consent, which consent may be withheld for any reason or for no reason; (iii) any change in the metropolitan area where the Executive is required to perform the duties set forth herein which occurs either (A) within the twelve (12) month period immediately after a Change in Control, or (B) without the Executive's consent; which consent may be withheld for any reason or for no reason; or (iv) any material reduction in the Executive's salary, benefits, bonuses or other Compensation pursuant to this Agreement, unless similar reductions are also made to the salary, benefits, bonuses or other compensation, as applicable, payable to other executive officers of the Company and such reductions are made for justifiable business reasons. (g) "Person" shall mean an individual or a corporation, association, partnership, joint venture, organization, business, individual, trust, or any other entity or organization, including a government or any subdivision or agency thereof. (h) "Subsidiary" shall mean as to any Person a corporation, partnership or other entity of which 25% or more of the outstanding shares of voting stock or other equity ownership are at the time owned, directly or indirectly through one or more intermediaries, or both, by such Person and shall include any such entity which becomes a Subsidiary of such Person after the date hereof. Consolidated Subsidiary shall mean any Subsidiary of which 51% or more of the outstanding shares or voting stock or other equity ownership are at the time owned, directly or indirectly through one or more intermediaries, or both, by such Person and shall include any such entity which becomes a Subsidiary of such Person after the date hereof. 12. Payments. Except as specifically provided herein, all amounts payable pursuant to this Agreement shall be paid without reduction regardless of any amounts of salary, compensation or other amounts which may be paid or payable to the Executive from any source or which the Executive could have obtained upon seeking other employment; provided that the Company shall be permitted to make all payments pursuant to this Agreement net of any legally required tax withholdings. The Executive shall not be required to seek other employment, and there shall be no offset to amounts due hereunder as a result of any salary, compensation or other amounts the Executive may be paid from other sources. 13. Expenses. In the event of any litigation between the parties relating to this Agreement and their rights hereunder, the prevailing party shall be entitled to recover all litigation costs and reasonable attorneys' fees and expenses from the non-prevailing party. 14. Entire Agreement. This Agreement comprises the entire agreement between the parties hereto and as of the date of this contract, supersedes, cancels and annuls any and all prior agreements between the parties hereto with respect to the Executive's employment by the Company. 15. Severability. If all or any part of this Agreement is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any portion of this Agreement not declared to be unlawful or invalid. Any portion so declared to be unlawful or invalid shall, if possible, be construed in a manner that will give effect to the terms of such portion to the fullest extent possible while remaining lawful and valid. 16. Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of the parties hereto and their respective heirs, successors, assigns and personal representatives. The Company may assign this Agreement to any successor or assignee to its business without the written consent of the Executive. The Executive may not assign, pledge, or encumber his interest in this Agreement, or any part thereof, without the written consent of the Company; provided, however, that Executive may, without the Company's prior consent, assign his rights to payment hereunder. 17. Notices. Any notice required or permitted pursuant to the provisions of this Agreement shall be deemed to have been properly given if in writing and when received by certified or registered United States mail, postage prepaid, by overnight courier, telecopy or when personally delivered, addressed as follows: If to the Company: LaserSight Incorporated 3300 University Boulevard Suite 140 Orlando, Florida 32792 Attn: Chairman of the Board Fax No.: (407) 678-9981 If to the Executive: Michael R. Farris 6540 Metro West Boulevard #301 Orlando, Florida 32825 Fax No.: (407) 578-5642 Each party shall be entitled to specify a different address for the receipt of subsequent notices by giving written notice thereof to the other party in accordance with this Section. Telecopy notices must be followed up with the original by certified mail, postmarked within one (1) business day of the date of the telecopy. 18. Amendments and Waivers. Any provision of this Agreement may be amended or waived only with the prior written consent of the Company and the Executive. No failure or delay on the part of either party to this Agreement in the exercise of any power or right, and no course of dealing between the parties hereto, shall operate as a waiver of such power or right, nor shall any single or partial exercise of any power or right preclude any further or other exercise thereof or the exercise of any other power or right. The remedies provided for herein are cumulative and not exclusive of any remedies which may be available to either party at law or in equity. Any waiver of any provision of this Agreement, and any consent to any departure by either party from the terms of any provision hereof, shall be effective only in the specific instance and for the specific purpose for which given. Nothing contained in this Agreement and no action or waiver by any party hereto shall be construed to permit any violation of any other provision of this Agreement or any other document or operate as a waiver by such party of any of his or its rights under any other provision of this Agreement or any other document. 19. Controlling Law. This Agreement shall be construed in accordance with the laws of the State of Florida, except for its choice of law provisions. The parties do hereby irrevocably submit themselves to the personal jurisdiction of the United States Federal Court for the Middle District of Florida and do hereby irrevocably agree to service of such Court's process on them. 20. Headings. Section headings herein are for convenience only and shall not affect the meaning or interpretation of the contents hereof. 21. Counterparts. This Agreement may be executed in counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Executive has executed this Agreement, all as of the first day and year written above. LASERSIGHT INCORPORATED By: /s/Francis E. O'Donnell, Jr. -------------------------------------- Francis E. O'Donnell, Jr., M.D. Chairman of the Board "EXECUTIVE" /s/Michael R. Farris ---------------------------------------- Michael R. Farris EX-10.38 3 SECURITIES PUCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT This SECURITIES PURCHASE AGREEMENT ("Agreement") is entered into as of March 22, 1999, by and among LaserSight Incorporated, a Delaware corporation (the "Company"), with its headquarters located at 3300 University Boulevard, Suite 140, Orlando, Florida 32792 and the purchasers (collectively, the "Purchasers" and each individually, a "Purchaser") named on the execution pages hereof, with regard to the following: RECITALS A. The Company and the Purchasers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933 (the "Securities Act") and Regulation D ("Regulation D") of the Securities and Exchange Commission (the "SEC") promulgated under the Securities Act. B. The Purchasers desire to (i) purchase, upon the terms and conditions stated in this Agreement, a total of 2,250,000 shares (the "Placement Shares") of the Company's common stock, $.001 par value per share ("Common Stock"), and (ii) receive, in consideration for such purchase, Warrants (the "Warrants") in the form attached hereto as Exhibit A to acquire a total of 225,000 shares of Common Stock. The shares of Common Stock issuable upon exercise of or otherwise pursuant to the Warrants are referred to herein as the "Warrant Shares." The Placement Shares, the Warrants and the Warrant Shares are collectively referred to herein as the "Securities." C. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement of even date herewith in the form attached hereto as Exhibit B (the "Registration Rights Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the Securities Act and applicable state securities laws. AGREEMENTS NOW, THEREFORE, in consideration of the foregoing recitals (which are incorporated into and deemed a part of this Agreement), their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows: ARTICLE 1 PURCHASE AND SALE OF COMMON STOCK 1.1 Purchase of Common Stock. Subject to the terms and conditions of this Agreement, on March 22, 1999 (the "Closing Date"), the Company agrees to issue and sell to each Purchaser, and each Purchaser severally agrees to purchase from the Company (the "Closing"), the number of shares of Common Stock indicated below at a price which shall be in the aggregate $9,000,000 (the "Purchase Price"):
No. of Shares of Purchaser Common Stock Purchase Price --------- ------------ -------------- Pequot Private Equity Fund, L.P. 388,333 $1,553,332 Pequot Scout Fund, L.P. 62,500 250,000 Pequot Offshore Private Equity Fund, Inc. 49,167 196,668 TLC The Laser Center Inc. 500,000 2,000,000 EGS Private Healthcare Partnership, L.P. 218,750 875,000 EGS Private Healthcare Counterpart, L.P. 31,250 125,000 William D. Corneliuson 300,000 1,200,000 Stark International 350,000 1,400,000 Shepherd Investments International, Ltd. 150,000 600,000 Special Situations Private Equity Fund, L.P. 200,000 800,000 Total 2,250,000 $9,000,000
Each Purchaser's obligation to purchase Common Stock hereunder is distinct and separate from each other Purchaser's obligation to purchase, and no Purchaser shall be required to purchase hereunder more than the number of shares of Common Stock set forth opposite its name immediately above. The obligations of the Company with respect to each Purchaser shall be separate from the obligations of each other Purchaser and, except as provided in Section 6.1(c) hereof, shall not be conditioned as to any Purchaser upon the performance of obligations of any other Purchaser. The Closing shall take place on the Closing Date at 10:00 A.M., Eastern Time, at the offices of Sonnenschein Nath & Rosenthal, 1221 Avenue of the Americas, 24th Floor, New York, New York 10020-1089, or at such other time and place as shall be agreed upon by the parties. At the Closing, the Company shall deliver to each Purchaser a (i) certificate representing the Placement Shares, and (ii) a Warrant issued in accordance with the terms of Section 1.5, each such certificate and Warrant registered in the name of such Purchaser or its nominee. Delivery of such certificate and Warrant to a Purchaser shall be made against receipt at the Closing by the Company from such Purchaser of the purchase price therefor, which shall be paid by wire transfer to an account designated at least one business day prior to the Closing by the Company. 1.2 Form of Payment. Upon satisfaction of the conditions contained in Section 7.1, each Purchaser shall pay its respective portion of the Purchase Price by wire transfer to the account designated by the Company. 1.3 Transfer of Securities. The Securities shall, when issued, be unregistered and therefore subject to the restrictions on sale, distribution and transfer imposed under the Securities Act and under applicable securities laws or blue sky laws of any state or foreign jurisdiction. 1.4 Registration of the Securities. Pursuant to the terms of the Registration Rights Agreement, the Company shall, at its own expense, prepare, and within 45 days after the Closing Date, file with the SEC a registration statement on such form as is then available in order to effect the registration of the Common Stock purchased pursuant to this Agreement and the Warrant Shares (the "Registration Statement"). The Company shall use all reasonable best efforts to have the Registration Statement declared effective as soon as practicable after the filing thereof and to remain effective for the Registration Period (as defined in the Registration Rights Agreement). 1.5 Warrants. In consideration of the purchase by Purchasers of the Placement Shares, the Company shall at the Closing issue to the Purchasers, in the aggregate, Warrants to acquire 225,000 shares of Common Stock (each Purchaser shall receive a separate Warrant in an amount proportionate to each Purchaser's purchase of Common Stock). ARTICLE 2 PURCHASER'S REPRESENTATIONS AND WARRANTIES Each Purchaser represents and warrants, solely with respect to itself and its purchase hereunder and not with respect to any other Purchaser or the purchase hereunder by any other Purchaser (and no Purchaser shall be deemed to make or have any liability for any representation or warranty made by any other Purchaser), to the Company as set forth in this Article 2. No Purchaser makes any other representations or warranties, express or implied, to the Company in connection with the transactions contemplated hereby and any and all prior representations and warranties, if any, which may have been made by a Purchaser to the Company in connection with the transactions contemplated hereby shall be deemed to have been merged in this Agreement and any such prior representations and warranties, if any, shall not survive the execution and delivery of this Agreement. 2.1 Investment Purpose. Such Purchaser is purchasing the Securities for Purchaser's own account for investment only and not with a view toward or in connection with the public sale or distribution thereof. Such Purchaser will not, directly or indirectly, offer, sell, pledge or otherwise transfer the Securities or any interest therein except pursuant to transactions that are exempt from the registration requirements of the Securities Act and/or sales registered under the Securities Act. Such Purchaser understands that it must bear the economic risk of this investment indefinitely, unless the Securities are registered pursuant to the Securities Act and any applicable securities laws or blue sky laws of any state or foreign jurisdiction an exemption from such registration is available, and that the Company has no intention or obligation to register any of the Securities other than as contemplated by Section 1.4 hereof and the Registration Rights Agreement. 2.2 Accredited Investor Status. Such Purchaser represents and warrants that it is an Accredited Investor (as that term is defined in Rule 501 promulgated by the SEC under the Securities Act), that it has such knowledge and experience in business and financial matters as to be capable of evaluating the merits and risks of the investment contemplated to be made hereunder, and that it (i) was not formed or organized for the specific purpose of investing in the Company; (ii) understands that such investment bears a high degree of risk and could result in a total loss of its investment; and (iii) has sufficient financial strength to hold the same as an investment and to bear the economic risks of such investment (including possible loss of such investment) for an indefinite period of time. 2.3 Reliance on Exemptions. Such Purchaser acknowledges that the Securities being sold to it hereunder are being sold pursuant to a private offering exemption under the Securities Act and are not being registered under the Securities Act or under the securities laws or blue sky laws of any state or foreign jurisdiction and understands that the Company is relying upon the truth and accuracy of, and such Purchaser's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the Securities. 2.4 Information. Such Purchaser has been furnished all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which it has specifically requested, including, without limitation, the Company's Annual Report on Form 10-K and 10-K/A for the year ended December 31, 1997, its Quarterly Report on Form 10-Q for the periods ended March 31, 1998, June 30, 1998, September 30, 1998, its Current Reports on Form 8-K filed with the SEC on January 2, 1998; January 14, 1998; January 20, 1998; January 22, 1998; February 17; February 27; March 13, 1998; March 16, 1998; March 18, 1998; June 8, 1998; June 16, 1998; June 25, 1998; July 8, 1998; and August 4, 1998; the description of the Common Stock contained in the Company's Form 8-A/A (Amendment No. 4) filed with the SEC on June 25, 1998; Proxy Statement dated May 28, 1998 and Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 filed with the SEC on February 2, 1999 (such documents, including any financial statements and related notes included in such documents, collectively the "Furnished SEC Documents"). In addition, such Purchaser has received and reviewed the Company's preliminary non-public financial results for the fourth quarter of 1998 and for the year ended December 31, 1998 (the "1998 Disclosure"). Such Purchaser and its advisors have been given the opportunity to obtain information and to examine all documents referred to herein and to ask questions of, and to receive answers from, the Company or any person acting on its behalf concerning the Company and the terms and conditions of this investment, and to obtain any additional information, to the extent the Company possesses such information or could acquire it without unreasonable effort or expense, to verify the accuracy of any information previously furnished. All such questions have been answered to such Purchasers' full satisfaction, and all information and agreements, documents, records and books pertaining to this investment which such Purchaser has requested have been made available to the Purchasers or their advisors. Such Purchaser understands that its investment in the Securities involves a high degree of risk. In making its investment decision, such Purchaser has not relied on any oral or written representation, other than those contained in the Furnished SEC Documents, the 1998 Disclosure, this Agreement (including the schedules hereto), the Warrants and the Registration Rights Agreement, with respect to the Securities, the Company, its business or prospects, or other matters. In making its decision to invest in the Company, such Purchaser has relied solely upon independent investigations made by the Purchasers and their advisors. 2.5 Governmental Review. Such Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities. 2.6 Transfer or Resale. Such Purchaser understands that (i) the Securities have not been and are not being registered under the Securities Act or under the securities laws or blue sky laws of any state or foreign jurisdiction, and may not be offered, sold, pledged or otherwise transferred unless subsequently registered thereunder or an exemption from such registration is available, and neither the Company nor any other person is under any obligation to register the Securities under the Securities Act or under the securities laws or blue sky laws of any state or foreign jurisdiction or to comply with the terms and conditions of any exemption thereunder (in each case, other than pursuant to this Agreement or the Registration Rights Agreement), and (ii) any sale of the Securities made in reliance on Rule 144 under the Securities Act, or a successor rule ("Rule 144"), may be made only in accordance with the terms of Rule 144 and Article 5 hereof and further, if Rule 144 is not applicable, any resale of the Securities without registration under the Securities Act under circumstances in which the seller may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder. 2.7 Authorization. Such Purchaser represents and warrants that as of the Closing Date the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by it. The fulfillment of and compliance with the terms of this Agreement will not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, or (iii) result in a violation of, breach of or default under (A) its partnership agreement or certificate of limited partnership, or other charter or constituent document, (B) any law, statute, rule or regulation to which it is subject, or (C any agreement, instrument, order, judgment or decree to which it is subject or is a party or by which it is bound. 2.8 Binding Effect. Such Purchaser represents and warrants that this Agreement constitutes its valid and binding obligation, enforceable in accordance with its terms, except (i) as limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally or by equitable principles in any action (legal or equitable), (ii) that the availability of equitable relief is subject to the discretion of the court before which any proceeding thereof may be brought, and (iii) that the enforceability of the indemnification provisions may be limited by applicable securities laws or public policy. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to each Purchaser, except as disclosed (including, in the case of financial statements, provided for) in the disclosure schedules delivered herewith, as set forth in this Article 3. The Company does not make any other representations or warranties, express or implied, to Purchasers in connection with the transactions contemplated hereby and any and all prior representations and warranties, if any, which may have been made by the Company to a Purchaser in connection with the transactions contemplated hereby shall be deemed to have been merged in this Agreement and any such prior representations and warranties, if any, shall not survive the execution and delivery of this Agreement. 3.1 Organization and Qualification. Each of the Company and its subsidiaries is a corporation duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and has the requisite corporate power to own its properties and to carry on its business as now being conducted or are presently expected to be conducted during the Company's current fiscal year. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction where the failure so to qualify or be in good standing would have a Material Adverse Effect. For purposes of this Agreement, "Material Adverse Effect" means any material adverse effect on the business, operations, assets, properties, liabilities, condition (financial or otherwise), the Common Stock price or operating results of the Company and its subsidiaries, taken as a whole on a consolidated basis, or on the transactions contemplated hereby. 3.2 Authorization; Enforcement. (a) The Company has the requisite corporate power and authority to enter into and perform this Agreement, and to issue, sell and perform its obligations with respect to the Securities in accordance with the terms hereof and thereof; (b) the execution, delivery and performance of this Agreement, the Warrants and the Registration Rights Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and, except as set forth on Schedule 3.2 hereof, no further consent or authorization of the Company, its board of directors, or its stockholders or any other person, body or agency is required with respect to any of the transactions contemplated hereby (whether under rules of The NASDAQ Stock Market (the "NASDAQ"), the National Association of Securities Dealers, Inc. or otherwise); (c) this Agreement, the Warrants, the Registration Rights Agreement, and the certificates for the Securities have been duly executed and delivered by the Company; and (d) this Agreement, the Warrants and the Registration Rights Agreement constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except (i) to the extent that such validity or enforceability may be subject to or affected by any bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement thereof, creditors' rights or remedies of creditors generally, or by other equitable principles of general application, (ii) that the availability of equitable relief is subject to the discretion of the court before which any proceeding thereof may be brought, and (iii) that the enforceability of indemnification provisions may be limited by applicable securities laws or public policy. 3.3 Capitalization. The capitalization of the Company as of the date hereof, including the authorized capital stock, the number of shares issued and outstanding, the number of shares reserved for issuance pursuant to the Company's stock option plans, the number of shares reserved for issuance pursuant to securities exercisable for, or convertible into or exchangeable for any shares of Common Stock is set forth on Schedule 3.3. All of such shares of capital stock have been, or upon issuance in accordance with the terms of the relevant security will be, validly issued, fully paid and nonassessable. Except as disclosed in Schedule 3.3, no shares of capital stock of the Company (including the Securities) are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed or suffered by the Company. Except as disclosed in Schedule 3.3, as of the date of this Agreement, there are no outstanding options, warrants, scrip, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries. The Company shall provide each Purchaser with a written update of this representation signed by the Company's Chief Executive Officer or Chief Financial Officer on behalf of the Company as of the Closing Date. Except as set forth in Schedule 3.3, since December 31, 1998, the Company has not declared or paid any dividend or made any other distribution of cash, stock or other property with respect to the Common Stock. Except as set forth in Schedule 3.3 or as contemplated by this Agreement or the Registration Rights Agreement or except for the right to vote its shares of Common Stock for the election of directors, no person has the right to nominate or elect one or more directors of the Company. 3.4 Issuance of Shares. As of the Closing the Placement Shares will be duly authorized, validly issued, fully paid and non-assessable with no personal liability attaching to the owners thereof, and free from all taxes, liens, claims and encumbrances imposed or suffered by the Company and except as disclosed in Schedule 3.3, will not be subject to preemptive rights or other similar rights of stockholders of the Company. As of the Closing, the Warrant Shares will be duly and validly reserved and upon exercise of the Warrants in accordance with the terms thereof the Warrant Shares will be validly issued, fully paid and non-assessable with no personal liability attaching to the owners thereof, and free from all taxes, liens, claims and encumbrances imposed or suffered by the Company and except as disclosed in Schedule 3.3, will not be subject to preemptive rights or other similar rights of stockholders of the Company. 3.5 No Conflicts. The execution, delivery and performance of this Agreement, the Warrants and the Registration Rights Agreement by the Company, and the consummation by the Company of transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance, as applicable, of the Securities) will not (i) result in a violation of the Company's Certificate of Incorporation or By-laws, or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, result in any loss of benefit under, or give to others any rights of termination, amendment, acceleration or cancellation of, any Material Contract (as defined herein) to which the Company or any of its subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries, or by which any property or asset of the Company or any of its subsidiaries, is bound or affected, or (iv) result in the creation or imposition of an Encumbrance (as defined herein) upon the Company's properties or assets (except with respect to items (ii), (iii) and (iv) of this Section 3.5 such possible conflicts, defaults, terminations, amendments, accelerations, cancellations, violations and Encumbrances as would not individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its subsidiaries is in violation of its Certificate of Incorporation or other organizational documents, and neither the Company nor any of its subsidiaries, is in default (and no event has occurred which has not been waived which, with notice or lapse of time or both, would put the Company or any of its subsidiaries in default) under, nor has there occurred any event giving others (with notice or lapse of time or both) any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, except for possible violations, defaults or rights as would not individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its subsidiaries are not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations the sanctions for which either singly or in the aggregate would not have a Material Adverse Effect. Except as set forth on Schedule 3.5, or except (i) as may be required under the Securities Act in connection with the performance of the Company's obligations pursuant to the Registration Rights Agreement, (ii) filing of a Form D with the SEC, and (iii) compliance with the state securities laws or blue sky laws of applicable jurisdictions, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement or to perform its obligations in accordance with the terms hereof. The Common Stock is listed on the NASDAQ, the Company is not in violation of the listing requirements of the NASDAQ and the Company is not aware of any fact (including any proceedings pending or, to the best of the Company's knowledge, contemplated) that could result in the Common Stock being delisted from the NASDAQ. The Company is not aware of any fact that could result in a refusal by the NASDAQ to approve the Placement Shares and Warrant Shares for listing. 3.6 SEC Documents. Except as disclosed in Schedule 3.6, since December 31, 1996, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act") (all of the foregoing filed after December 31, 1995 and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein, being referred to herein as the "SEC Documents"). The Company has delivered to each Purchaser true and complete copies of the Furnished SEC Documents, except for exhibits, schedules and incorporated documents. Each of the SEC Documents as originally filed or as amended complied in all material respects with the requirements of its respective report or form and did not on the date of filing contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and as of the date hereof, there is no fact or facts not disclosed in the SEC Documents or disclosed in writing to the Purchasers which relate specifically to the Company which individually or in the aggregate, may have a Material Adverse Effect. The consolidated financial statements of the Company (including any related schedules or notes thereto) included in the SEC Documents were prepared in accordance with generally accepted accounting principles, consistently applied, and the applicable rules and regulations of the SEC during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they do not include footnotes or are condensed or summary statements) and present accurately and completely, in all material respects, the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, year-end audit adjustments). To the extent required by the rules of the SEC applicable thereto, the SEC Documents contain a complete and accurate list of all material undischarged written or oral contracts, agreements, leases or other instruments to which the Company or any subsidiary is a party or by which the Company or any subsidiary is bound or to which any of the properties or assets of the Company or any subsidiary is subject (each a "Material Contract"). Except as set forth in Schedule 3.6, none of the Company, its subsidiaries or, to the best knowledge of the Company, any of the other parties thereto, is in breach or violation of any Material Contract, which breach or violation would have a Material Adverse Effect. To the best knowledge of the Company, no event, occurrence or condition exists which, with the lapse of time, the giving of notice, or both, would become a default by the Company or its subsidiaries thereunder which would have a Material Adverse Effect. Except as set forth in Schedule 3.6 or disclosed in writing to the Purchasers, there are no liabilities or obligations (whether accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due and regardless of when asserted), except (i) liabilities and obligations in the respective amounts reserved against in the 1998 Disclosure or the Company's balance sheet or the footnotes thereto as of September 30, 1998 included in the Furnished SEC Documents, (ii) liabilities and obligations incurred after December 31, 1998 in the ordinary course of business consistent (in amount and kind) with past practice (none of which is a liability resulting from breach of contract, breach of warranty, tort, infringement, claim or lawsuit), (iii) liabilities and obligations disclosed in the Furnished SEC Documents, and (iv) liabilities and obligations which would not individually or in the aggregate, have a Material Adverse Effect. Since December 31, 1997, the Company has operated its business only in the ordinary course and there has not been individually or in the aggregate, any change that would have a Material Adverse Effect (a "Material Adverse Change") other than changes disclosed in the SEC Documents or otherwise set forth in Schedule 3.6. 3.7 Absence of Certain Changes. Except as disclosed in Schedule 3.7 or in the 1998 Disclosure, since December 31, 1998, the business of the Company and its subsidiaries has been conducted in the ordinary course, consistent with past practice and there has not been (a) any Material Adverse Change, nor has any event or change occurred which could reasonably result in a Material Adverse Change, in the condition (financial or otherwise), results of operations, business, assets, liabilities or prospects of the Company or its subsidiaries or any event or condition which could reasonably be expected to have such a Material Adverse Change, (b) any waiver or cancellation of any valuable right of the Company or its subsidiaries, or the cancellation of any material debt or claim held by the Company or its subsidiaries, (c) any payment, discharge or satisfaction of any claim, liability or obligation of the Company or its subsidiaries other than in the ordinary course of business except where such payment, discharge or satisfaction would not, individually or in the aggregate, have a Material Adverse Effect, (d) the placement of any Encumbrance upon the assets of the Company or its subsidiaries other than any Permitted Encumbrance (as defined herein), (e) any declaration or payment of dividends on, or other distribution with respect to, or any direct or indirect redemption or acquisition of, any securities of the Company, (f) any issuance of any stock, bonds or other securities of the Company or its subsidiaries which is not disclosed in Schedule 3.3 or the Furnished SEC Documents, (g) any sale, assignment or transfer of any tangible or intangible assets of the Company or its subsidiaries except in the ordinary course of business, (h) any loan by the Company or its subsidiaries to any officer, director, employee, consultant or shareholder of the Company or its subsidiaries (other than advances to such persons in the ordinary course of business in connection with travel and travel related expenses), (i) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the assets, property, condition (financial or otherwise), results of operations or prospects of the Company or its subsidiaries, (j) any increase, direct or indirect, in the compensation paid or payable to any officer or director of the Company or its subsidiaries, other than in the ordinary course of business, to any other employee, consultant or agent of the Company or its subsidiaries, (k) any change in the accounting methods, practices or policies of the Company or its subsidiaries, (l) any indebtedness incurred for borrowed money by the Company or its subsidiaries other than in the ordinary course of business, (m) any amendment to or termination of any material agreement to which the Company or its subsidiaries is a party other than the expiration of any such agreement in accordance with its terms or as disclosed in the Furnished SEC Documents, (n) to the Company's knowledge, any change in the laws or regulations governing the Company or its subsidiaries, (o) any Material Adverse Change in the manner of business or operations of the Company or its subsidiaries (including, without limitation, material accelerations or material deferrals of the payment of accounts payable or other current liabilities or material deferrals of the collection of accounts or notes receivable), (p) any capital expenditures or commitments therefor by the Company or its subsidiaries other than in the ordinary course of business, (q) any amendment of the articles of incorporation, bylaws or other organizational documents of the Company or its subsidiaries which is not disclosed in the Furnished SEC Documents, (r) any material transaction entered into by the Company or its subsidiaries other than in the ordinary course of business or any other material transactions entered into by the Company or its subsidiaries whether or not in the ordinary course of business which is not disclosed in the Furnished SEC Documents, or (s) any agreement or commitment (contingent or otherwise) by the Company or its subsidiaries to do any of the foregoing. For purposes of this Agreement, "Permitted Encumbrance" shall mean (i) Encumbrances for unpaid taxes that either (A) are not yet due and payable, or (B) for which a reserve with respect to such obligation is established on the books of the Company, (ii) the interests of lessors under operating leases and purchase money liens of lessors under capital leases, (iii) Encumbrances arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or other similar encumbrances in the ordinary course of business of the Company, (iv) Encumbrances arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (v) with respect to any real property, easements, rights of way, zoning and similar covenants and restrictions, and similar Encumbrances and that do not individually or in the aggregate materially impair the property of the Company, (vi) Encumbrances resulting from any judgment or award that would not result in a Material Adverse Change, and (vii) other Encumbrances which arise in the ordinary course of business and which individually and in the aggregate do not materially impair the Company's use of such property or its ability to obtain financing by using such asset as collateral. 3.8 Absence of Litigation. Except as disclosed in Schedule 3.8 or as disclosed in the Furnished SEC Documents, there is no civil, criminal or administrative action, suit, proceeding, inquiry, claim, notice, hearing or investigation at law or in equity (a "Litigation") before or by any court, arbitrator or similar panel, public board, government agency, or self-regulatory organization or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against or affecting the Company, any of its subsidiaries, or any of their respective assets (including Intangibles (as defined herein)) or directors or officers in their capacities as such. There are no facts known to the Company which, if known by a potential claimant or governmental authority, could give rise to a claim or proceeding which, if asserted or conducted with results unfavorable to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 3.8, neither the Company nor its subsidiaries is subject to any order, writ, injunction or decree of any court of any federal, state, municipal or other domestic or foreign governmental department, commission, board, bureau, agency or instrumentality which could have a Material Adverse Effect. 3.9 Disclosure. Neither this Agreement, the SEC Documents nor any certificate, instrument or written statement furnished or made to the Purchasers by or on behalf of the Company in connection with this Agreement or the Registration Rights Agreement contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading as of the date such statements were made. There is no fact which is not disclosed in the Furnished SEC Documents or fact which the Company has not disclosed to the Purchasers or their counsel and of which the Company is aware which materially and adversely affects, or which could materially and adversely affect, the Company or its subsidiaries or the business, financial condition, operations, property, affairs or prospects of the Company or its subsidiaries or the ability of the Company or its subsidiaries to perform its obligations under the Agreement or any of the Registration Rights Agreement. 3.10 S-3 Registration. The Company is currently eligible to register the resale of the Placement Shares and Warrant Shares by the Purchasers pursuant to a registration statement on Form S-3 under the Securities Act. 3.11 No General Solicitation. Neither the Company nor any person acting for the Company has conducted any "general solicitation," as described in Rule 502(c) under Regulation D, with respect to any of the Securities being offered hereby. 3.12 No Integrated Offering. Neither the Company, nor any of its Affiliates (as defined herein), nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would prevent the parties hereto from consummating the transactions contemplated hereby pursuant to an exemption from registration under the Securities Act pursuant to the provisions of Regulation D. The transactions contemplated hereby are exempt from the registration requirements of the Securities Act, assuming the accuracy of the representations and warranties herein contained of each Purchaser. For purposes hereof, "Affiliate" shall mean any entity controlling, controlled by or under common control with a designated person or entity; for the purposes of this definition, "control" shall have the meaning presently specified for that word in Rule 405 promulgated by the SEC under the Securities Act. With respect to any entity which is a limited partnership, Affiliate shall also mean any general or limited partner of such limited partnership, or any person or entity which is a general partner in a general or limited partnership which is a general partner of such limited partnership. 3.13 No Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments by the Purchasers relating to this Agreement or the transactions contemplated hereby. 3.14 Intellectual Property. Each of the Company and its subsidiaries owns or possesses adequate and enforceable rights to use all material patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "Intangibles") used or necessary for the conduct of its business as now being conducted and as described in the Company's Annual Report on Form 10-K and Form 10-K/A for its most recently ended fiscal year. To the Company's knowledge, neither the Company nor any subsidiary of the Company infringes on or is in conflict with any right of any other person with respect to any Intangibles nor is there any claim of infringement made by a third party against or involving the Company or any of its subsidiaries, which infringement, conflict or claim, individually or in the aggregate, could reasonably be expected to result in an unfavorable decision, ruling or finding which would have a Material Adverse Effect. 3.15 Employee Benefit Plans. (a) Identification. Schedule 3.15(a) contains a complete and accurate list of all employee benefit plans (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) sponsored by the Company or to which the Company contributes on behalf of its employees (the "Employee Benefit Plans") and each employment, severance or change in control agreement to which the Company is a party. The Company has provided or made available to the Purchasers copies of all plan documents, determination letters, pending determination letter applications, VCR Submission (as defined below), trust instruments, insurance contracts, administrative services contracts, annual reports, actuarial valuations, summary plan descriptions, summaries of material modifications, administrative forms and other documents that constitute a part of or are incident to the administration of the Employee Benefit Plans. In addition, the Company has provided or made available to the Purchasers a written description of all existing practices engaged in by the Company that constitute Employee Benefit Plans. Except as set forth on Schedule 3.15(a) and subject to the requirements of the Internal Revenue Code of 1986, as amended (the "Code") and ERISA, each of the Employee Benefit Plans can be terminated or amended (without material cost to the Company) at will by the Company. Except as set forth on Schedule 3.15(a), no unwritten amendment exists with respect to any Employee Benefit Plan. The Company has no plan or commitment, whether legally binding or not, to establish any new Employee Benefit Plan, to enter into any employment severance or change in control agreement or to modify or to terminate any Employee Benefit Plan or agreement. (b) Administration. Each Employee Benefit Plan has been administered and maintained in compliance with all applicable laws, rules and regulations, except where the failure to be in compliance would not, individually or in the aggregate, result in a Material Adverse Effect. To the best of the knowledge of the Company, the Company has (i) made all necessary filings with respect to such Employee Benefit Plans, including the timely filing of Form 5500 if applicable, and (ii) made all necessary filings, reports and disclosures pursuant to and have complied with all requirements of the Internal Revenue Service ("IRS") Voluntary Compliance Resolution Program ("VCR Submission"), if applicable, with respect to all profit sharing retirement plans and pension plans in which employees of the Company participate. (c) Examinations. Except as set forth on Schedule 3.15(c), the Company has not received any notice that any Employee Benefit Plan is currently the subject of an audit, investigation, enforcement action or other similar proceeding conducted by any state or federal agency. (d) Prohibited Transactions. To the best of the knowledge of the Company, no prohibited transactions (within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA) have occurred with respect to any Employee Benefit Plans. (e) Claims and Litigation. No pending or, to the actual knowledge of the Company, threatened claims, suits, or other proceedings exist with respect to any Employee Benefit Plan other than normal benefit claims filed by participants or beneficiaries. (f) Qualification. As set forth in more detail on Schedule 3.15(f), the Company has applied for a favorable determination letter or ruling from the IRS for each of the Employee Benefit Plans intended to be qualified within the meaning of Section 401(a) of the Code and/or tax-exempt within the meaning of Section 501(a) of the Code. Except as set forth on Schedule 3.15(f), no proceedings exist or, to the actual knowledge of the Company has been threatened that could result in the revocation of any such favorable determination letter or ruling. (g) Funding Status. Neither the Company nor any member of a "Controlled Group" (within the meaning of Section 412(n)(6)(B) of the Code) with the Company sponsors any plans which (i) are subject to the minimum funding requirements of Code Section 412 or ERISA Section 302, or (ii) are subject to Title IV of ERISA assumptions. (h) Excise Taxes. To the best of the knowledge of the Company, neither the Company nor any member of a Controlled Group has any liability to pay excise taxes with respect to any Employee Benefit Plan under applicable provisions of the Code or ERISA. (i) Multi-Employer Plans. Neither the Company nor any member of a Controlled Group is or ever has been obligated to contribute to a multi-employer plan within the meaning of Section 3(37) of ERISA and neither the Company nor the Controlled Group has ever contributed to any plan subject to Title IV of ERISA. (j) Pension Benefit Guaranty Corporation. None of the Employee Benefit Plans are subject to the requirements of Title IV of ERISA. (k) Retirees. The Company has no obligation or commitment to provide medical, dental or life insurance benefits to or on behalf of any of its employees who may retire or any of its former employees who have retired except as may be required pursuant to the continuation of coverage provisions of Section 4980B of the Code and Sections 601 through 608 of ERISA. (l) Change in Control. The execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under an Employee Benefit Plan or employment, severance or change in control agreement that will or may result in any, payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee of the Company. No payment or benefit which will or may be made by the Company, any of its subsidiaries, Purchasers or any of their respective affiliates by reason of such execution or performance may be characterized as an "excess parachute payment," within the meaning of Section 28OG(b)(1) of the Code or which will not be deductible for federal tax purposes by virtue of Section 162(m) of the Code. (m) Insurance. With respect to each Employee Benefit Plan which is an employee welfare benefit plan (within the meaning of Section 3(l) of ERISA), all claims incurred by the Company are (i) insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims, or (ii) covered under a contract with a health maintenance organization which bears the liability for claims. (n) Labor Disputes. No work stoppage or labor strike against the Company is pending or threatened. The Company is not now, nor has been in the past (i) involved in or threatened with any labor dispute, grievance, or litigation relating to labor matters, including, without limitation, violation of any federal, state or local labor, safety or employment laws (domestic or foreign), charges of unfair labor practices or discrimination complaints which could have a Material Adverse Effect; (ii) engaged in any unfair labor practices within the meaning of the National Labor Relations Act or the Railway Labor Act, or (iii) a party to, or bound by, any collective bargaining agreement or union contract and no such agreement or contract is currently being negotiated by the Company or any of its affiliates. No employees of the Company are currently represented by any labor union for purposes of collective bargaining and no activities the purpose of which is to achieve such representation are threatened or ongoing. The Company (i) is in compliance with all applicable federal, state and local laws, rules and regulations (domestic and foreign) respecting employment, employment practices, labor, terms and conditions of employment and wages and hours, except for such possible non-compliance as would not, individually or in the aggregate, have a Material Adverse Effect; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits. 3.16 Year 2000 Compliance. All computer, network, or other data processing hardware, software, systems and technology (collectively, "Data Processing Systems") owned or used by the Company will be Year 2000 Compliant in all material respects prior to January 1, 2000. The Company has not suffered and reasonably expects that it will not at any time hereafter suffer any material interruption of, or interference with, its business operations or activities by reason of the failure of any Data Processing System owned or used by the Company to be Year 2000 Compliant. For purposes of this Section 3.16, "Year 2000 Compliant" means, with respect to any data processing system owned or used by any person, that such data processing system, at all times before as well as on and after January 1, 2000, (i) will correctly store, represent, and process all dates, such that errors will not occur when the date being used is in the Year 2000, or in a year preceding or following the Year 2000, and (ii) will operate and will not cause or result in an abnormal termination or ending. 3.17 Equity Investments; Subsidiaries. Set forth on Schedule 3.17 is a list of all of the Company's subsidiaries. Except as set forth on Schedule 3.17, the Company does not own, whether directly or indirectly, any capital stock or other proprietary interest directly or indirectly, in any corporation, association, trust, partnership, joint venture or other entity which is currently involved in the Company's ordinary course of business. 3.18 Title to Assets and Properties; Insurance. (a) The Company has good and marketable title, or a valid leasehold interest in or contractual right to use, all of its assets and properties, free and clear of any mortgages, judgments, claims liens, security interests, pledges, escrows, charges or other encumbrances of any kind or character whatsoever ("Encumbrances") except in each case for Permitted Encumbrances and such defects in title and such other liens and Encumbrances which do not individually or in the aggregate materially detract from the value to the Company of the properties and assets of the Company and its subsidiaries taken as a whole. (b) The Company and its subsidiaries maintain insurance (including D&O insurance) in such amounts (to the extent available in the public market), including self-insurance, retainage and deductible arrangements, and of such a character as is reasonable for companies engaged in the same or similar business. 3.19 Compliance with Laws; Permits. Except as provided in Schedule 3.19, the Company and its subsidiaries are in compliance, and have been conducted in compliance with, all federal, state, local and foreign laws, rules, ordinances, codes, consents, authorizations, registrations, regulations, decrees, directives, judgments and orders applicable to it except where the failure to comply would not individually or in the aggregate have a Material Adverse Effect. The Company has all federal, state, local and foreign governmental licenses, permits, qualifications and authorizations ("Permits") necessary in the conduct of its business as currently conducted. All such Permits are in full force and effect and no violations have been recorded in respect of any such Permit; no proceeding is pending or, to the best knowledge of the Company, threatened to revoke or limit any such Permit and no such Permit will be suspended, cancelled or adversely modified as a result of the execution and delivery of this Agreement, the Warrants or the Registration Rights Agreement and the consummation of the transactions contemplated hereby or thereby, except where failure to have such Permit would not individually or in the aggregate have a Material Adverse Effect. 3.20 Taxes. (a) For purposes of this Agreement, (i) "Taxes" shall mean all taxes, assessments, charges, duties, fees, levies or other governmental charges (including interest, penalties or additions associated therewith) (including, without limitation, federal, state, city, county, local, foreign, or other income, franchise, ad valorem, value added, excise, real or personal property, asset, franchise taxes withheld, capital, withholding, real or tangible property, employment, unemployment compensation, transfer, sales, use, excise and all other taxes of any kind whatsoever imposed by the United States or any state, city, county, country or foreign government or subdivision or agency thereof, whether disputed or not, and (ii) "Transaction" means one or more transactions, acts, events, or omissions of whatever nature. (b) The Company has filed on a timely basis all returns and reports, including all estimated returns and reports of every kind and have timely given all notices, in respect of Taxes required to be filed or given under applicable law within the applicable statute of limitations period by any of them, or except where proper action has been taken by the Company to extend the relevant filing deadline. Such returns, reports and notices are complete and accurate in all material respects. All Taxes shown on such returns or reports have been, and all Taxes subsequently assessed with respect to the periods and/or Transactions to which such returns or reports relate have been or will be, timely, and fully paid, except for amounts which the Company is contesting in good faith. The provisions in the financial statements (and the notes and schedules related thereto) contained in the Furnished SEC Documents for Taxes currently payable and for deferred Taxes are adequate in all material respects to provide for such Taxes for which the Company and its Subsidiaries taken as a whole may be liable in respect of periods or Transactions through the dates thereof. (c) No fact or condition relating to any past or present Transaction, except as set forth in the Company's disclosure schedules delivered herewith, which, if known to any tax authority having jurisdiction, would likely result in a successful challenge by such authority of the treatment or omission of such factor or condition on any tax return, report or notice of the Company or its subsidiaries, and no issue has arisen in any examination of the Company by the IRS that, in either case, if raised with respect to any other period not so examined would result in a proposed material deficiency for any other period not so examined, if upheld. The Company and its subsidiaries have made all payments or estimated Taxes required to be made under Section 6655 of the Code and any comparable provisions of state, local or foreign law. Except as set forth on Schedule 3.20, there is no pending nor, to the Company's knowledge, threatened or contemplated action, audit, proceeding or investigation for the assessment or collection of Taxes from the Company. There are no requests for rulings, outstanding subpoenas or requests for information with respect to Taxes of the Company, proposed reassessments of any property owned or leased by the Company, or similar matters pending with respect to any taxing authority. 3.21 Environmental Matters. Except as listed in Schedule 3.21: (a) There are, with respect to the Company and its subsidiaries, or any predecessor of the foregoing, no present violations of Environmental Law (as defined herein), any actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any liability of the Company pursuant to any Environmental Law and neither the Company nor its subsidiaries has received any notice with respect to any of the foregoing nor is any Litigation pending or threatened in connection with any of the foregoing. (b) To the knowledge of the Company and except in the normal course of the Company's or its subsidiaries' business, (i) no Hazardous Materials (as defined herein) are present on or about any real property currently owned, leased or used by the Company or its subsidiaries, and (ii) no Hazardous Materials were present on or about any real property previously owned, leased or used by the Company or its subsidiaries during the period the property was owned, leased or used by the Company or its subsidiaries. (c) To the knowledge of the Company, no Hazardous Materials have been released on or about, or where they may pose a threat of migration to, any real property currently owned, leased or used by the Company or its subsidiaries and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or its subsidiaries during the period the property was owned, leased or used by the Company or its subsidiaries, except as may be required in the normal course of business and in material compliance with applicable Environmental Law. (d) To the knowledge of the Company, no asbestos-containing materials or PCBs are present on or about any property currently owned, leased or used by the Company or its subsidiaries. (e) To the knowledge of the Company, there are not now, nor have there ever been, any underground storage tanks or similar facilities of any kind on or under any real property currently or previously owned, leased or used by the Company or its subsidiaries. (f) For purposes of this Section 3.21, capitalized terms used herein shall have the following meanings: "Environmental Laws" shall mean, at any date, all provisions of federal, state, local or foreign law (including applicable principles of common and civil law), statutes, ordinances, rules, regulations, published standards and directives that have the force and effect of laws, statutes, regulations, permits, licenses, judgments, writs, injunctions, decrees and orders enacted, promulgated or issued by any Public Authority, and all indemnity agreements and other contractual obligations, as in effect at such date, relating to (i) the protection of the environment, including the air, surface and subsurface soils, surface waters, groundwaters and natural resources, and (ii) occupational health and safety and exposure of persons to Hazardous Materials. Environmental Laws shall include the Comprehensive Environmental Response, Compensation and Liability Act 42 U.S.C. Sections 9601 et seq., and any other laws imposing or creating liability with respect to Hazardous Materials. "Environmental Liability" shall mean any liabilities, obligations, costs, losses, payments or damages, including compensatory and punitive damages, incurred (i) to contain, remove, clean up, assess, abate or otherwise remedy any actual or alleged release or threatened release of Hazardous Materials, any actual or alleged contamination (by Hazardous Materials) of air, surface or subsurface soil, groundwater or surface water, or any personal injury or damage to natural resources or property resulting from any such release or contamination, pursuant to the requirements of any Environmental Law or in response to any claim by any Public Authority or other third party under any Environmental Law; (ii) to modify facilities or processes or take any other remedial action in response to any claim by any Public Authority of non-compliance with any Environmental Law, (iii) as a result of the imposition of any civil or criminal fine or penalty by any Public Authority for the violation or alleged violation of any Environmental Law, or (iv) as a result of any action, suit, proceeding or claim by any third party under any Environmental Law. The term "Environmental Liability" shall include: (i) reasonable fees of counsel and consultants (but not any corporate allocation for management time or for the use of similar in-house services or facilities), and (ii) the costs and expenses of any investigation undertaken to ascertain the existence or extent of any potential or actual Environmental Liability. "Hazardous Material" shall mean any substance regulated by any Environmental Law or which may now or in the future form the basis for any Environmental Liability. "Public Authority" shall mean any supranational, national, regional, state or local government court, governmental agency, authority, board, bureau, instrumentality or regulatory body. 3.22 Suppliers and Customers. Except as set forth on Schedule 3.22, the Company does not have any knowledge of any termination, cancellation or threatened termination or cancellation or limitation of, or any material modification or change in, or expressed material dissatisfaction with the business relationship between the Company or its subsidiaries and any supplier or vendor of the Company or its subsidiaries, in each case, of materials or services in an amount in excess of $50,000 per year. 3.23 Holding Company Act and Investment Company Act. Neither the Company nor its subsidiaries is: (i) a "public utility company" or a "holding company," or an "affiliate" or a "subsidiary company" of a "holding company," or an "affiliate" of such a "subsidiary company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, or (ii) a "public utility," as defined in the Federal Power Act, as amended, or (iii) an "investment company" or an "affiliated person" thereof or an "affiliated person" of any such "affiliated person," as such terms are defined in the Investment Company Act of 1940, as amended. 3.24 Foreign Corrupt Practices. To the Company's best knowledge, the Company has no notice and neither the Company, nor any of its subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any subsidiary has violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended. To the Company's best knowledge, the Company has no notice and neither the Company, nor any of its subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any subsidiary has, in the course of his actions or, on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity, made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. 3.25 Accounts Receivable. The accounts receivable of the Company and its subsidiaries reflected in the SEC Documents, to the extent uncollected on the date hereof, are, and the accounts receivable of the Company and the subsidiaries relating to the operation of the Company to be reflected on the books of the Company on the Closing Date (the "Accounts Receivable") will be, in all material respects, valid, existing and collectible (taking into consideration the allowance for sales returns and doubtful accounts set forth in the financial statements) using reasonably diligent collection methods taking into account the size and nature of the receivable, and represents amounts due for goods sold and delivered or services performed. There are not, and on the date of Closing there will not be, any material refunds, discounts, set-offs, defenses, counterclaims or other adjustments payable or assessable with respect to the Accounts Receivable. ARTICLE 4 COVENANTS 4.1 Best Efforts. The parties shall use their best efforts timely to satisfy each of the conditions described in Articles 6 and 7 of this Agreement. 4.2 Securities Laws. The Company shall file a Form D with respect to the Securities with the SEC as required under Regulation D and shall provide a copy thereof to each Purchaser within 15 days after the Closing Date. The Company shall file a Form 8-K disclosing this Agreement and the transactions contemplated hereby with the SEC within five business days following the Closing Date. The Company shall, on or prior to the Closing Date, take such action as is necessary to sell the Securities to each Purchaser under applicable securities laws of the states of the United States, and shall provide evidence of any such action so taken to each Purchaser on or prior to the Closing Date. 4.3 Reporting Status. So long as any Purchaser beneficially owns any of the Securities, the Company shall use its best efforts to timely file all reports required to be filed by it with the SEC pursuant to the Exchange Act, and make and keep public information available as those terms are defined in Rule 144 and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. 4.4 Use of Proceeds. The Company shall use the Purchase Price to facilitate the development, manufacture and sale of keratome products and laser systems and for other general corporate purposes. 4.5 Expenses. Except as may otherwise agreed to, the Company and each Purchaser shall pay all the costs and expenses incurred by it or on its behalf in connection with this Agreement and the consummation of the transactions contemplated hereby. 4.6 Listing. The Company shall use its best efforts to continue the listing and trading of its Common Stock on the NASDAQ, the New York Stock Exchange or American Stock Exchange; and comply in all respects with the Company's reporting, filing and other obligations under the by-laws or rules of the NASDAQ or such exchange, as applicable. As of the Closing the Placement Shares and the Warrant Shares shall be approved for quotation on the NASDAQ. 4.7 Prospectus Delivery Requirement. Each Purchaser understands that the Securities Act requires delivery of a prospectus relating to the Placement Shares and the Warrant Shares in connection with any sale or other disposition thereof pursuant to the Registration Statement, and each Purchaser shall comply with the applicable prospectus delivery requirements of the Securities Act in connection with any such sale or other disposition. 4.8 Transactions with Affiliates. The Company will not, and will not permit any subsidiaries to, engage in any transaction or group of related transactions (including, without limitation, the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any affiliate (other than the Company), except in the ordinary course and pursuant to the reasonable requirements of the Company's or the subsidiaries' business and upon fair and reasonable terms no less favorable to the Company or such subsidiaries than would be obtainable in a comparable arm's-length transaction with a person not an affiliate. The Company will not be deemed in default of this Section 4.8 in connection with carrying out its obligations pursuant to those agreements or transactions described in the Furnished SEC Documents. ARTICLE 5 TRANSFER OF SECURITIES The Securities shall not be transferable except upon the conditions specified in this Article 5, which conditions are intended to insure compliance with the provisions of the Securities Act and state securities laws in respect of the transfer of any such Securities. 5.1 Restrictive Legend. (a) Unless and until otherwise permitted by this Article 5, each certificate for the Placement Shares and the Warrant Shares issued to Purchasers or to any subsequent transferee of the Placement Share or Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: "These shares have not been registered under the Securities Act of 1933 and may not be offered for sale, sold, transferred or otherwise disposed of unless registered under such Act or unless an exemption from such registration is available. Further, such transfer is subject to the conditions specified in a Securities Purchase Agreement dated as of March 22, 1999 pursuant to which such shares were issued and sold by LaserSight Incorporated (the "Company"), a copy of which Agreement will be furnished by the Company to the holder hereof upon request and without charge." (b) The Company may order its transfer agent for the Common Stock to stop the transfer of any of the Placement Shares or Warrant Shares bearing the legend set forth in Subsection (a) of this Section 5.1 until the conditions of this Article 5 with respect to the transfer of such securities have been satisfied. 5.2 Notice of Proposed Transfer. If, prior to any transfer or sale of any the Placement Shares or Warrant Shares, Purchaser desiring to effect such transfer or sale shall deliver a written notice to the Company describing briefly the manner of such transfer or sale and a written opinion of counsel for such Purchaser (provided that such counsel, and the form and substance of such opinion, are reasonably satisfactory to the Company) to the effect that such transfer or sale may be effected without the registration of such Securities under the Securities Act, the Company shall thereupon permit or cause its transfer agent to permit such transfer or sale to be effected; provided, however, that if in such written notice the transferring Purchaser represents and warrants to the Company that the transfer or sale is to a purchaser or transferee whom the transferring Purchaser knows or reasonably believes to be a "qualified institutional buyer," as that term is defined in Rule 144A promulgated by the SEC under the Securities Act ("Rule 144A"), no opinion shall be required unless reasonably requested in writing by the Company within five days after receipt of such written notice, in which case such Purchaser shall deliver to Company such a written opinion of counsel. 5.3 Termination of Restrictions. (a) Notwithstanding the foregoing provisions of this Article 5, the restrictions imposed by this Article 5 upon the transferability of the Placement Shares and the Warrant Shares shall terminate as to any particular share of such securities when (i) such security shall have been effectively registered under the Securities Act and sold by Purchaser thereof in accordance with such registration, or (ii) a written opinion to the effect that such restrictions are no longer required or necessary under any federal or state securities law or regulation has been received from counsel for Purchaser thereof (provided that such counsel, and the form and substance of such opinion, are reasonably satisfactory to the Company) or counsel for the Company, or (iii) such security shall have been sold without registration under the Securities Act in compliance with Rule 144, or (iv) the Company is reasonably satisfied that Purchaser of such security shall, in accordance with the terms of Subsection (k) of Rule 144, be entitled to sell such security pursuant to such Subsection, or (v)a letter or an order shall have been issued to Purchaser thereof by the staff of the SEC or the SEC stating that no enforcement action shall be recommended by such staff or taken by the SEC, as the case may be, if such security is transferred without registration under the Securities Act in accordance with the conditions set forth in such letter or order and such letter or order specifies that no subsequent restrictions on transfer are required. (b) Whenever the restrictions imposed by this Article 5 shall terminate, as hereinabove provided, a Purchaser who then holds any particular Placement Shares or Warrant Shares then outstanding as to which such restrictions shall have terminated shall be entitled to receive from the Company, without expense to such Purchaser, one or more new certificates for such securities not bearing the restrictive legend set forth in Section 5.1(a) hereof. 5.4 Compliance with Rule 144 and Rule 144A. At the written request of any Purchaser who proposes to sell any of the Placement Shares or Warrant Shares in compliance with Rule 144, the Company shall furnish to such Purchaser, within 10 days after receipt of such request, a written statement as to whether or not the Company is in compliance with the filing requirements of the SEC as set forth in such Rule. For purposes of effecting compliance with Rule 144A, in connection with any resales of any Placement Shares or Warrant Shares that hereafter may be effected pursuant to the provisions of Rule 144A, any Purchaser desiring to effect such resale and each prospective institutional purchaser of such shares designated by such Purchaser shall have the right, at any time the Company is not subject to Section 13 or 15(d) of the Securities and Exchange Act, to obtain from the Company, upon the written request of such Purchaser and at the Company's expense the documents specified in Section (d)(4)(i) of Rule 144A, as such rule may be amended from time to time. 5.5 Non-Applicability of Restrictions on Transfer. Notwithstanding the provisions of Section 5.2 hereof, any record owner of Placement Shares or Warrant Shares may from time to time transfer all or part of such record owner's Placement Shares or Warrant Shares (i) to a nominee identified in writing to the Company as being the nominee of or for such record owner, and any nominee of or for a beneficial owner of Placement Shares or Warrant Shares identified in writing to the Company as being the nominee of or for such beneficial owner may from time to time transfer all or part of the Placement Shares or Warrant Shares registered in the name of such nominee but held as nominee on behalf of such beneficial owner, to such beneficial owner, (ii) to an Affiliate of such record owner, or (iii) if such record owner is a partnership or limited liability company or the nominee of a partnership or limited liability company, to a partner, member, retired partner or member, or estate of a partner, member or retired partner or member, of such partnership or limited liability company, so long as such transfer is in accordance with the transferee's interest in such partnership or limited liability company and is without consideration; provided, however, that (A) such record owner shall deliver a written notice to the Company describing in reasonable detail the manner of such transfer or sale prior to the consummation of such transfer or sale, (B) each such transferee shall remain subject to all restrictions on the transfer of Placement Shares or Warrant Shares herein contained, and (C) if reasonably requested in writing by the Company within five days after receipt of such written notice, such record owner shall deliver to the Company such additional information requested by the Company or its counsel (in form and substance satisfactory to the Company and such counsel) that the proposed transfer is within the scope of this Section 5.5 or a written opinion of counsel for such record owner (provided that such counsel, and the form and substance of such opinion, are reasonably satisfactory to the Company) to the effect that such transfer or sale may be effected without the registration of such securities under the Securities Act. ARTICLE 6 CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL 6.1 Conditions to the Company's Obligation to Sell. The obligation of the Company hereunder to issue and sell the Placement Shares and to issue the Warrants to any Purchaser at the Closing is subject to the satisfaction, as of the Closing Date and with respect to such Purchaser, of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: (a) Such Purchaser shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company. (b) Such Purchaser shall have wired same-day funds to the account designated by the Company equal to the applicable portion of the Purchase Price. (c) The aggregate Purchase Price delivered by all of the Purchasers for the Securities purchased at the Closing shall equal at least $9,000,000. (d) The representations and warranties of such Purchaser shall be true and correct as of the date when made and as of the Closing as though made at that time (except for representations and warranties that speak as of a specific date), and such Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Purchaser at or prior to the Closing. (e) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated by this Agreement. ARTICLE 7 CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE 7.1 The obligation of each Purchaser hereunder to purchase the Placement Shares to be purchased by it on the Closing Date is subject to the satisfaction of each of the following conditions, provided that these conditions are for each Purchaser's sole benefit and may be waived by such Purchaser at any time in such Purchaser's sole discretion: (a) The Company shall have executed this Agreement, the Warrants and the Registration Rights Agreement and delivered the same to Purchasers. (b) The Company shall have delivered to each of the Purchasers duly executed certificates for the Securities being so purchased by such Purchaser. (c) The Placement Shares and Warrant Shares shall be approved for quotation on the NASDAQ and trading in the Common Stock shall not have been suspended by the NASDAQ or the SEC or other regulatory authority. (d) The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing as though made at that time and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing. Purchaser shall have received a certificate, executed by the Chief Executive Officer or Chief Financial Officer of the Company, dated as of the Closing Date to the foregoing effect. (e) The Purchasers shall have completed to their satisfaction all business, legal, accounting and financial due diligence with respect to the Company. (f) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated by this Agreement. (g) Purchasers shall have received the Officer's Certificate described in Section 3.3 dated as of the Closing Date. (h) Purchaser shall have received an opinion of Sonnenschein Nath & Rosenthal, dated as of the Closing Date, in the form attached hereto as Exhibit C. (i) The aggregate Purchase Price delivered by all of the Purchasers for the Securities purchased at the Closing shall equal $9,000,000. (j) The Company shall have delivered to the Purchasers certificates of good standing of the Company and the subsidiaries which are organized pursuant to the corporate laws of a State within the United States as of a date no earlier than ten days prior to the Closing. (k) The Company shall have delivered to the Purchasers a certificate executed by a duly authorized officer certifying (i) a copy of the Company's certificate of incorporation and the by-laws, (ii) resolutions authorizing the execution of this Agreement, the Warrants and the Registration Rights Agreement, and (iii) incumbency matters. (l) Without limiting the generality of Section 7.1(d), no Material Adverse Effect shall have occurred, nor shall any event or events have occurred which would reasonably likely to have a Material Adverse Effect. (m) Purchasers shall have received a fully executed Lock-Up Agreement from each of the officers and directors of the Company, in the form of Exhibit D hereto. ARTICLE 8 GOVERNING LAW; MISCELLANEOUS 8.1 Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the Delaware General Corporation Law (in respect of matters of corporation law) and the laws of the State of New York (in respect of all other matters) applicable to contracts made and to be performed in the State of New York, without giving effect to the principles of conflicts of law. The parties hereto irrevocably consent to the jurisdiction of the United States federal courts and state courts located in the County of New Castle in the State of Delaware or the County of New York in any suit or proceeding based on or arising under this Agreement or the transactions contemplated hereby and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company and each Purchaser irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process upon the Company or any Purchaser mailed by certified mail, return receipt requested, shall be deemed in every respect effective service of process upon the Company in any suit or proceeding arising hereunder. Nothing herein shall affect Purchaser's right to serve process in any other manner permitted by law. A final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 8.2 Counterparts. This Agreement may be executed in two or more counterparts, including, without limitation, by facsimile transmission, all of which counterparts shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause additional original executed signature pages to be delivered to the other parties. 8.3 Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 8.4 Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. 8.5 Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived other than by an instrument in writing signed by the party to be charged with enforcement and no provision of this Agreement may be amended other than by an instrument in writing signed by the Company and each Purchaser. 8.6 Notice. Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by nationally-recognized overnight courier or by facsimile-machine confirmed telecopy, and shall be deemed delivered at the time and date of receipt (which shall include telephone line facsimile transmission). Each party shall provide notice to the other party of any change in address. The addresses for such communications shall be: If to the Company: LaserSight Incorporated 3300 University Boulevard Suite 140 Orlando, Florida 32792 Telecopy: (407) 678-9981 Attention: Chief Executive Officer with a copy to: The Lowenbaum Partnership, L.L.C. 222 South Central Avenue Suite 901 St. Louis, Missouri 63105 Telecopy: (314) 746-4848 Attention: Timothy L. Elliott, Esq. and Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606 Telecopy: (312) 876-7934 Attention: Paul Miller, Esq. If to the Purchasers: Pequot Private Equity Fund, L.P. Pequot Scout Fund, L.P. Pequot Offshore Private Equity Fund, Inc. 500 Nyala Farm Road Westport, Connecticut 06880 Telecopy: (203) 429-2420 Attention: Juliet Tammenoms Bakker TLC The Laser Center, Inc. 5600 Explorer Drive Suite 301 Mississauga, Ontario L4W4Y2 Canada Telecopy: (905) 602-7956 Attention: Elias Vamvakas with a copy to: Arent, Fox, Kintner, Plotkin & Kahn, P.L.L.C. 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5339 Telecopy: (202) 857-6395 Attention: Jeffrey E. Jordan, Esq. EGS Private Healthcare Partnership, L.P. EGS Private Healthcare Counterpart, LP c/o EGS Private Healthcare Management, L.L.C. 350 Park Avenue, 11th Floor New York, New York 10022 Telecopy: (212) 421-5193 Attention: Abhijeet Lele with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, New York 10022 Telecopy: (212) 593-5955 Attention: Peter Nussbaum, Esq. William D. Corneliuson 777 East Wisconsin Avenue Suite 3020 Milwaukee, Wisconsin 53202 Telecopy: (414) 291-7410 Stark International Shepherd Investments International, Ltd. c/o Staro Asset Management, L.L.C. 1500 West Market Street Mequon, Wisconsin 53092 Telecopy: (414) 241-7704 Attention: Brian Davidson Special Situations Private Equity Fund, L.P. 153 East 53rd Street 51st Floor New York, New York 10022 Telecopy: (212) 832-6141 Attention: Steven R. Becker 8.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor any Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. The provisions of this Agreement which are for each of the Purchaser's benefit as a purchaser of holder of Securities are also for the benefit of, and enforceable by, any subsequent holder of such Securities. 8.8 Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 8.9 Survival. All representations and warranties in this Agreement shall survive the execution and delivery of this Agreement and the Closing. All agreements contained herein shall survive the Closing until, by their respective terms, they are no longer operative. 8.10 Indemnification. (a) The Company shall indemnify and hold harmless each Purchaser, their respective officers, directors, partners, employees, attorneys, agents, representatives, successors and assigns (each a "Purchaser Entity") from any (a) Losses (as defined herein) insofar as such Losses (or actions in respect thereof) incurred or suffered by a Purchaser Entity (whether incurred or suffered directly or indirectly through ownership of capital stock of the Company) arise out of or are based upon or are incurred as a result of (i) the breach or falsity or incorrectness as of the Closing Date of any representation or warranty, covenants or agreements of the Company contained in or made pursuant to this Agreement, or (ii) the existence of any condition, event or fact constituting, or which with notice or passage of time, or both, would constitute a default in the observance of any of the Company's undertakings or covenants hereunder, under the Warrants, the Registration Rights Agreement or the Company's Certificate of Incorporation and By-laws. The Company shall also pay all reasonable attorney's and accountant's fees and costs and court costs incurred by any Purchaser in enforcing the indemnification provided for in this Section 8.10. Notwithstanding the foregoing, the Company expressly agrees and acknowledges that the right of indemnification granted herein to each Purchaser of shall not be deemed to be the exclusive remedy available to such Purchaser for any of the matters described in this Section 8.10. (b) For purposes of this Section 8.10, "Losses" shall mean each and all of the following items. claims, losses, (including, without limitation, losses of earnings) liabilities, obligations, payments, damages (actual, punitive or consequential), charges, judgments, fines, penalties, amounts paid in settlement; costs and expenses (including, without limitation, interest which may be imposed in connection therewith, costs and expenses of investigation, actions, suits, proceedings, demands, assessments and fees, expenses and disbursements of counsel, consultants and other experts). Any payment (or deemed payment) by the Company to a Purchaser pursuant to this Section 8.10 shall be treated for federal income tax purposes as an adjustment to the price paid by such Purchaser for the Securities pursuant to this Agreement. (c) Within five days after a party seeking indemnification under this Section 8.10 shall become aware of the facts indicating that a claim for indemnification may be warranted, such party shall give to the party from whom indemnification is being sought a claim notice relating to such Losses (a "Claim Notice"). Each Claim Notice shall specify the nature of the claim, the applicable provision(s) of this Agreement or other instrument under which the claim for indemnity arises and, if possible, the amount or the estimated amount thereof. 8.11 Stamp Tax and Delivery Costs. The Company will pay all stamp and other taxes, if any, which may be payable in respect of the sale or other transfer of the Securities to Purchasers and the issuance thereof to the Purchasers or their nominee, and will save Purchasers harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax. The Company will also pay all reasonable costs of delivery to Purchasers, or Purchasers' nominee, of the Securities to be purchased by Purchasers or otherwise transferred to Purchasers. 8.12 Public Filings; Publicity. No party hereto shall make any public statement regarding the transactions contemplated hereby unless the language and timing of such statement has been approved by both the Company and Purchasers or unless such party has been advised by its securities counsel to make such statement. Notwithstanding the foregoing, each of the parties hereto may, in documents required to be filed by it with the SEC or other regulatory bodies, make such statements with respect to the transactions contemplated hereby as each may be advised is legally necessary upon advice of its counsel; provided, however, that the party making such determination shall immediately notify the other party that it intends to make a public announcement and the parties hereto shall, in good faith, attempt to agree on any public announcements or publicity statements with respect thereto (which approval shall not be unreasonably withheld or delayed). 8.13 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 8.14 Remedies. No provision of this Agreement providing for any remedy to a Purchaser shall limit any remedy which would otherwise be available to such Purchaser at law or in equity. Nothing in this Agreement shall limit any rights a Purchaser may have with any applicable federal or state securities laws with respect to the investment contemplated hereby. 8.15 Termination. In the event that the Closing shall not have occurred on or before March 30, 1999, this Agreement shall terminate at the close of business on such date. IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused this Agreement to be duly executed as of the date first above written. LASERSIGHT INCORPORATED PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC. By: /s/Michael R. Farris By: /s/David J. Malat --------------------------------- ----------------------------- Michael R. Farris David J. Malat President and CEO Name: ----------------------------- CFO Title: ----------------------------- PEQUOT PRIVATE EQUITY FUND, L.P. By: Pequot Capital Management, Inc. Investment Manager By: /s/David J. Malat ------------------------------ David J. Malat Name: ----------------------------- CFO Title: ----------------------------- PEQUOT SCOUT FUND, L.P. By: Pequot Capital Management, Inc. Investment Manager By: /s/David J. Malat ------------------------------ David J. Malat Name: ------------------------------ CFO Title: ----------------------------- SIGNATURE PAGE NO. 1 TO SECURITIES PURCHASE AGREEMENT TLC THE LASER CENTER INC. By: /s/Ronald J. Kelly -------------------------------- Ronald J. Kelly Name: -------------------------------- General Cousel Title: -------------------------------- EGS PRIVATE HEALTHCARE PARTNERSHIP, L.P. By: EGS Private Healthcare Associates, L.L.C. By: /s/Fred Greenberg -------------------------------- Fred Greenberg Name: -------------------------------- Managing Director Title: -------------------------------- EGS PRIVATE HEALTHCARE COUNTERPART, L.P. By: EGS Private Healthcare Associates, L.L.C. By: /s/Fred Greenberg -------------------------------- Fred Greenberg Name: -------------------------------- Managing Director Title: -------------------------------- By: /s/William D. Corneliuson -------------------------------- William D. Corneliuson Name: -------------------------------- Individually Title: -------------------------------- SIGNATURE PAGE NO. 2 TO SECURITIES PURCHASE AGREEMENT STARK INTERNATIONAL By: /s/Michael A. Roth -------------------------------- Michael A. Roth Name: -------------------------------- Managing Partner Title: -------------------------------- SHEPHERD INVESTEMENTS INTERNATIONAL, LTD. By: /s/Michael A. Roth -------------------------------- Michael A. Roth Name: -------------------------------- Managing Partner Title: -------------------------------- SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. By: /s/David M. Greenhouse -------------------------------- Managing General Partner David M. Greenhouse Name: -------------------------------- Managing General Partner Title: -------------------------------- SIGNATURE PAGE NO. 3 TO SECURITIES PURCHASE AGREEMENT EX-10.39 4 WARRANT TO PURCHASE COMMON STOCK Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, TLC The Laser Center, Inc. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, fifty thousand (50,000) fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, Pequot Private Equity Fund, L.P. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, thirty-eight thousand eight hundred thirty-three (38,833), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, Pequot Scout Fund, L.P. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, six thousand two hundred fifty (6,250), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, Pequot Offshore Private Equity Fund, Inc. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, four thousand nine hundred seventeen (4,917), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, Stark International ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, thirty-five thousand (35,000), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, Shepherd Investments International, Ltd. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, fifteen thousand (15,000), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, William D. Corneliuson ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, thirty thousand (30,000), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, EGS Private Healthcare Partnership, L.P. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, twenty-one thousand eight hundred seventy-five (21,875), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, EGS Private Healthcare Counterpart, L.P. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, three thousand one hundred twenty-five (3,125), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. Void after 5:00 p.m., New York, New York time, on March 22, 2004 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND MAY NOT BE EXERCISED, OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED, EXCEPT AS PERMITTED UNDER THIS WARRANT AND THEN ONLY IF REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED, SUCH OPINION TO BE IN THE FORM OF OPINION ANNEXED TO THIS WARRANT. _______________________________________ WARRANT TO PURCHASE COMMON STOCK of LASERSIGHT INCORPORATED 1. Grant of Warrant. This is to certify that, for value received, Special Situations Private Equity Fund, L.P. ("Investor") or its permitted assigns (individually, "Holder" and collectively, "Holders") are entitled, subject to the terms set forth below, to purchase from LaserSight Incorporated, a Delaware corporation (the "Company") or its successors or assigns, twenty thousand (20,000), fully paid, validly issued and non-assessable shares of common stock, $0.001 par value, of the Company ("Common Stock") at an initial exercise price equal to $5.125 per share in the manner and subject to the conditions hereinafter provided. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as provided in Section 12. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price per share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." 2. Term. This Warrant shall expire in full to the extent not exercised by 5:00 p.m., New York, New York time, on March 22, 2004. 3. Exercise of Warrant. This Warrant may be exercised in whole or in increments of 5,000 shares of Common Stock, subject to the provisions hereof, by presentation and surrender hereof to the Company at its principal office (or such other office or agency of the Company as it may from time to time designate by notice in writing to Holder at the address of Holder appearing on the books of the Company ("Other Office")) with the Notice of Exercise annexed hereto duly completed and executed on behalf of Holder, with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and accompanied by payment of the Exercise Price by wire transfer, certified or official bank check. As soon as practicable after each such exercise of the Warrant, but not later than ten (10) business days from the date of such exercise, the Company shall issue and mail to Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of Holder. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, unless such date is not a day on which banks are open for business in New York, New York in which case this Warrant shall be deemed to have been exercised on the first succeeding day on which banks are open for business in New York, New York (such date, the "Exercise Date"). The person entitled to receive the shares of Common Stock issuable upon such exercise shall be deemed to be the holder of record thereof from and after the Exercise Date, notwithstanding that certificates representing such Warrant Shares shall not then have been physically delivered. 4. Reservation of Shares. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall from time to time be required for issuance and delivery upon exercise of the Warrant in full. 5. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. Any fractional share to which Holder would otherwise be entitled shall be rounded to the nearest whole share. 6. Warrant Register. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as named in the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company in accordance with the provisions hereof, the Company may treat the Holder named in the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. 7. Warrant Agent. The Company may, by written notice to all Holders, appoint an agent ("Warrant Agent") for the purpose of maintaining the Warrant Register, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, or replacing this Warrant. Thereafter, any such registration, issuance, exchange, or replacement shall be made at the office of the Warrant Agent. 8. Transfer, Exchange or Replacement. (a) Transferability and Non-Negotiability of Warrant. Neither this Warrant nor any interest therein may be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by Holder and the transferee or assignee thereof, including delivery of investment intent representation letters and a legal opinion acceptable to the Company and its counsel to the effect that such transfer or assignment is exempt from the registration requirements of the Securities Act of 1933 and the rules and regulations promulgated thereunder, or any similar successor statute (collectively, the "Securities Act"), and any applicable state securities laws. Subject to the preceding sentence and the Company's prior written approval of any proposed transferee (such approval, if any, being subject to the Company's sole and absolute discretion), this Warrant may be transferred by endorsement (by Holder executing the Assignment Form annexed hereto with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program) and delivery thereof to the Company or the Warrant Agent, as applicable, together with payment of any applicable transfer taxes. (b) Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form with Holder's signature guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program, and subject to Section 8(a), the Company at its expense shall issue to Holder a new warrant or warrants of like tenor, in the name of Holder or as Holder (on payment by Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. (c) Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in case of loss, theft or destruction, on delivery of a third-party indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, an new warrant of like tenor and amount. 9. Compliance with Securities Laws. (a) Holder, by acceptance of this Warrant, acknowledges that neither this Warrant nor the Warrant Shares have been registered under the Securities Act and represents and warrants to the Company that this Warrant is being acquired for investment and not for distribution or resale, solely for Holder's own account and not as a nominee for any other person, and that Holder will not offer, sell, pledge or otherwise transfer this Warrant or any Warrant Shares except (i) in compliance with the requirements for an available exemption from the Securities Act and any applicable state securities laws, or (ii) pursuant to an effective registration statement or qualification under the Securities Act and any applicable state securities laws. (b) Certificates for all Warrant Shares shall bear a legend in substantially the following form: THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS SUCH SHARES ARE REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED. 10. Rights of the Holder. Subject to Sections 12 and 13, and until the Warrant shall have been exercised as provided herein, Holder shall not be entitled to vote, receive dividends or other distributions on, or be deemed the holder for any purpose of, any Warrant Shares or any other securities of the Company that may from time to time be issuable upon the exercise hereof, nor shall Holder, in such capacity, enjoy any of the rights of a stockholder of the Company or any right to vote on, or consent (or withhold consent) to, the election of directors of the Company or any other matter submitted to the stockholders of the Company, or to receive notice of meetings thereof. 11. Registration Rights. Holder shall be entitled to the benefit of such registration rights in respect of the Warrant Shares as are set forth in that certain Registration Rights Agreement, dated as of the date hereof, by and among the Company and the other signatories thereto. 12. Anti-Dilution Provisions. So long as this Warrant, or any portion thereof, shall remain outstanding and unexpired, the Exercise Price in effect from time to time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time as follows: (a) If the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares (any of the foregoing, a "Dilutive Event"), the Exercise Price in effect at the time of the record date for such Dilutive Event shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such Dilutive Event, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such Dilutive Event (such fraction, the "Adjustment Factor"). Such adjustment shall be made successively whenever any Dilutive Event shall occur. (b) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Section 12(a), the number of shares purchasable upon exercise of this Warrant shall simultaneously be adjusted by dividing the number of shares issuable upon exercise of this Warrant by the Adjustment Factor. (c) If at any time, as a result of an adjustment made pursuant to Section 12(d) or 12(e), the Holder of this Warrant shall thereafter become entitled to receive any shares of the Company, other than Common Stock or shares of any issuer other than the Company, thereafter the Exercise Price and the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Sections 12(a) or 12(b). (d) If the Company by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 12. (e) If at any time there shall be (i) a reorganization (other than a subdivision, combination, reclassification, or other change of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii)a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer that a Holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 12. The foregoing provisions of this Section 12(e) shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporate that are at the time receivable upon the exercise of this Warrant. In all events, appropriate adjustment (as determined by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after the event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (f) Whenever the Exercise Price shall be adjusted as required by the provisions of Section 12, the Company shall promptly file in the custody of its Secretary or an Assistant Secretary at its principal office or Other Office and with the Warrant Agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock or other securities, if any, issuable upon exercise of this Warrant and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such certificate shall be made available at all reasonable times for inspection by Holder and the Company shall forthwith after each such adjustment mail a copy of such certificate to Holder at its address last appearing in the Warrant Register. 13. Notices to Warrant Holders. If at any time while this Warrant, or any portion thereof, remains outstanding and unexpired, (i) the Company shall pay any dividend or make any distribution upon the Common Stock (other than regular quarterly cash dividends or dividends paid in the form of Common Stock), (ii) the Company shall offer to the holders of Common Stock generally for subscription or purchase by them any share of the Company of any class or any other rights issued by the Company, or (iii) the capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale of all or substantially all of the property and assets of the Company to another corporation or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed to Holder at its address specified in the Warrant Register, at least 10 days prior to the date specified in (x) or (y) below, as applicable, a notice containing a brief description of the proposed event described in (i), (ii) or (iii) above and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, sale, dissolution, liquidation or winding up is to take place and the date, if any, is be fixed, as of which the holders of the Common Stock or other securities shall receive cash or other property deliverable upon such event. Notwithstanding the above, the failure to give such notice shall not affect the validity of any transaction for which the notice was required to be given. 14. Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of law. 15. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 16. Authorization. The Company and Investor each represent and warrant to the other, as applicable, that (i) each such party is duly organized, validly existing and in good standing under the laws of their respective jurisdiction of incorporation, (ii) each such party has the requisite corporate power and authority to execute this Warrant and to carry out and perform the terms and provisions of this Warrant, and (iii) this Warrant constitutes the valid and legally binding obligation of such party. 17. Counterparts. This Warrant may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 18. Notice. Any notice required or permitted to be given shall be in writing and may be personally served or delivered by courier or by confirmed telecopy, and shall be deemed to be delivered at the time and date of receipt (which shall include telephone line facsimile transmission). The addresses for such communications shall be: If to the Company: LaserSight Incorporated 3300 University Boulevard, Suite 140 Orlando, Florida 32792 Telecopy: (407) 678-9982 Attn: Chief Financial Officer With a copy to: The Lowenbaum Partnership, L.L.C. 222 South Central Avenue, Suite 901 St. Louis, Missouri 63105 Telecopy: (314) 746-4848 Attn: Timothy L. Elliott, Esq. And: Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago, Illinois 60606 Telecopy: (312) 876-7934 Attn: Paul J. Miller, Esq. If to the Holder: ---------------------------- ---------------------------- ---------------------------- Telecopy: ( ) - ------ ----------- With a copy to: ---------------------------- ---------------------------- ---------------------------- Telecopy: ( ) - ------ ----------- IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ---------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ------------------------------ Gregory L. Wilson, Secretary ACCEPTED AND AGREED: TLC THE LASER CENTER INC. - ------------------------- By: /s/Ronald J. Kelly ------------------------ Name: Ronald J. Kelly ------------------------ General Counsel Title:----------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ------------------------------ Michael R. Farris Attest: /s/Gregory L. Wilson ------------------------------ Gregory L. Wilson, Secretary ACCEPTED AND AGREED: PEQUOT PRIVATE EQUITY FUND, L.P. - -------------------------------- By: /s/David J. Malat ------------------------ Name: David J. Malat ------------------------ CFO Title:----------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ------------------------------ Gregory L. Wilson, Secretary ACCEPTED AND AGREED: PEQUOT SCOUT FUND, L.P. - ----------------------------- By: /s/David J. Malat ------------------------ Name: David J. Malat ------------------------ CFO Title:----------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: PEQUOT OFFSHORE PRIVATE EQUITY FUND, INC. - ----------------------------------------- By: /s/David J. Malat ------------------------ Name: David J. Malat ------------------------ CFO Title:----------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: STARK INTERNATIONAL - -------------------------------- By: /s/Michael A. Roth --------------------------- Name: Michael A. Roth --------------------------- Managing General Partner Title:-------------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: SHEPHERD INVESTMENTS INTERNATIONAL, LTD. - ---------------------------------------- By: /s/Michael A. Roth --------------------------- Name: Michael A. Roth --------------------------- Managing General Partner Title:------------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: WILLIAM D. CORNELIUSON - --------------------------------------- By: /s/William D. Corneliuson --------------------------- Name: William D. Corneliuson --------------------------- Individually Title:------------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: EGS PRIVATE HEALTHCARE COUNTERPART, L.P. - ---------------------------------------- By: EGS Private Healthcare Associates, L.L.C. ------------------------------------------- By: Fred Greenberg ------------------------------------------- Name: Fred Greenberg --------------------------- Managing Director Title:------------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: EGS PRIVATE HEALTHCARE COUNTERPART, L.P. - ---------------------------------------- By: EGS Private Healthcare Associates, L.L.C. ---------------------------------------------- By: Fred Greenberg --------------------------- Name: Fred Greenberg --------------------------- Manager Director Title:-------------------------- Date: March 22, 1999 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized, as of the date below. Dated as of: March 22, 1999 LASERSIGHT INCORPORATED By: /s/Michael R. Farris ----------------------------- Michael R. Farris Attest: /s/Gregory L. Wilson ----------------------------- Gregory L. Wilson, Secretary ACCEPTED AND AGREED: SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. - -------------------------------------------- By: /s/David M. Greenhouse --------------------------- Name: David M. Greenhouse --------------------------- Managing General Partner Title:-------------------------- Date: March 22, 1999 NOTICE OF EXERCISE TO: LaserSight Incorporated Dated: _________, 199__ (1) The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing _______ shares of Common Stock and hereby makes payment ______ of in payment of the actual exercise price thereof. (2) By exercising this Warrant, the undersigned acknowledges that such shares have not been registered under the Securities Act of 1933, and represents and warrants to the Company that such shares are being acquired for investment and not for distribution or resale, solely for the undersigned's own account and not as a nominee for any other person, and that the undersigned will not offer, sell, pledge or otherwise transfer such shares except (i) in compliance with the requirements for an available exemption from such Securities Act and any applicable state securities laws, or (ii) pursuant to an effective registration statement or qualification under such Securities Act and any applicable state securities laws. INSTRUCTIONS FOR REGISTRATION OF STOCK (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: Name: ------------------------------------------------------------------------ (Please typewrite or print in block letters) Name: ----------------------------------------------------------------------- Address: ------------------------------------------------------------------------ Signature: ------------------------------------------------------------------------ (All signatures must be guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guaranty program.) ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below: Name: ----------------------------------------------------------------------- (Please typewrite or print name of Assignee in block letters) Address: ----------------------------------------------------------------------- Number of Shares: ----------------------------------------------------------------------- and does hereby irrevocably constitute and appoint ______________________________, attorney to make such transfer on the books of LaserSight Incorporated, maintained for the purpose, with full power of substitution in the premises. Dated: -------------------------- Signature of Holder: --------------------------------------- The undersigned ASSIGNEE acknowledges that neither the within Warrant nor, if the registration statement contemplated by the Registration Rights Agreement referenced in Section 11 of this Warrant has not been declared effective, any of the Warrant Shares (as defined in the Warrant) have been registered under the Securities Act of 1933, and the undersigned ASSIGNEE represents and warrants to the Company that the Warrant and the Warrant Shares are being acquired for investment and not for distribution or resale, solely for the undersigned's own account and not as a nominee for any other person, and that the undersigned ASSIGNEE will not offer, sell, pledge or otherwise transfer the Warrant or the Warrant Shares except (i) in compliance with the requirements for an available exemption from such Securities Act and any applicable state securities laws or (ii) pursuant to an effective registration statement or qualification under such Securities Act and any applicable state securities laws. Dated: -------------------------- Signature of Assignee: --------------------------------------- (All signatures must be guaranteed by an eligible institution that is a member of a recognized medallion signature guaranty program.) EX-11 5 COMPUTATION OF LOSS PER SHARE EXHIBIT 11 LASERSIGHT INCORPORATED COMPUTATION OF LOSS PER SHARE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996 ---- ---- ---- Weighted average shares outstanding 12,272,000 9,504,000 7,486,300 Issuable shares, acquisition of The Farris Group -- -- 406,700 ------------ ----------- --------- 12,272,000 9,504,000 7,893,000 ============ =========== ========= Net loss $(11,882,389) (7,253,084) (4,074,369) Conversion discount on preferred stock (858,872) (41,573) (1,010,557) Dividends on preferred stock (2,751,953) (298,269) (358,618) ------------- ----------- ---------- Loss attributable to common shareholders $(15,493,214) (7,592,926) (5,443,544) ============ =========== ========== Basic loss per share (1.26) (0.80) (0.69) ============ =========== ========== DILUTED Weighted average number of shares, as adjusted per above 12,272,000 9,504,000 7,893,000 ============ =========== ========== Net loss $(11,882,389) (7,253,084) (4,074,369) Conversion discount on preferred stock (858,872) (41,573) (1,010,557) Dividends on preferred stock (2,751,953) (298,269) (358,618) ------------ ----------- ----------- Loss attributable to common shareholders $(15,493,214) (7,592,926) (5,443,544) Diluted loss per share $ (1.26) (0.80) (0.69) ============ =========== =========== Loss attributable to common shareholders above $(15,493,214) (7,592,926) (5,443,544) Additional adjustment to weighted average number of shares: Weighted average number of shares as adjusted per above 12,272,000 9,504,000 7,893,000 Dilutive effect of contingently issuable shares, stock options and convertible preferred stock 2,530,000 4,722,000 317,000 ------------ ----------- ---------- Weighted average number of shares, as adjusted 14,802,000 14,226,000 8,210,000 ============ =========== ========== Diluted loss per share, as adjusted $ (1.05)(A) (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 6 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 7 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. 333-62587) on Form S-8, registration statement (No. 333-62591) 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, registration statement (No. 333-36837) on Form S-3, registration statement (No. 333-59369) on Form S-3 and registration statement (No. 333-68495) on Form S-3 of LaserSight Incorporated of our report dated March 25, 1999, relating to the consolidated balance sheets of LaserSight Incorporated and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998, annual report on Form 10-K of LaserSight Incorporated. /s/ KPMG LLP St. Louis, Missouri March 30, 1999 EX-27 8 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-31-1998 DEC-31-1998 4,437,718 0 11,548,400 2,130,735 8,517,636 22,717,073 3,015,508 1,513,169 43,872,983 7,842,435 0 0 4,000 13,333 33,998,005 43,872,983 17,079,952 17,756,116 6,048,730 6,346,242 22,020,419 1,212,896 782,668 (11,650,176) 232,213 (11,882,389) 0 0 0 (11,882,389) (1.26) (1.26)
EX-99 9 PRESS RELEASE DATED MARCH 29, 1999 LASERSIGHT ANNOUNCES FOURTH QUARTER AND YEAR END RESULTS - ANNOUNCES $9 MILLION EQUITY FINANCING TO SUPPORT LAUNCH OF NEW PRODUCTS - Winter Park, FL, (March 29,1999) - LaserSight Incorporated (NASDAQ: LASE) today announced financial results for the fourth quarter and year ended December 31, 1998. The Company also announced the completion of a $9 million equity private placement. This additional financing strengthens the Company's resources to support the launch of its new keratome products and its entry into the U.S. market. Revenues for the fourth quarter of 1998 were $3.3 million, compared with approximately $4.0 million in the same period of 1997 adjusted for the sale of LaserSight's two health care subsidiaries sold in December 1997. Excluding these adjustments, revenues for the fourth quarter of 1997 were $6.3 million. Revenues in the fourth quarter of 1998 were lower relative to prior quarters in 1998 and the fourth quarter in 1997 due to the fact that the Company obtained CE Mark approval on the LaserScan LSX ("TM") excimer laser system on September 30, 1998, which resulted in manufacturing and shipping delays to Europe, one of the Company's key markets since it currently only sells lasers internationally. As a result, the Company sold 8 lasers compared with an average of 14 in prior quarters in 1998 because it was unable to ship as many units to Europe as expected. However, for the year the Company sold 50 laser systems in 1998 compared to 46 systems in 1997. The Company expects that first quarter of 1999 should return to quarterly unit sales levels in the international markets similar to that of the first three quarters of 1998. For the fourth quarter of 1998, the Company reported a net loss of $6.0 million, or $0.46 per share, compared to a net loss of $5.0 million, or $0.53 per share in the same period of 1997, reflecting adjustments for the gain on the sale of the two health care subsidiaries sold in December 1997. Excluding these adjustments, the net loss in the fourth quarter of 1997 was $1.8 million, or $0.20 per share. For the year ended December 31, 1998, the Company's revenues were $17.8 million, compared to $13.3 million in 1997, including adjustments for the sale of the two health care subsidiaries sold in December 1997. Excluding these adjustments, total revenues for 1997 were $24.4 million. The Company incurred a net loss for 1998 of $11.9 million, or $1.26 per share, as compared with a net loss of $10.5 million, or $1.14 per share in 1997, adjusting for the gain on the sale of the two health care subsidiaries sold in December 1997. Excluding these adjustments, the net loss was $7.3 million, or $0.80 per share. The Company's increased loss in the fourth quarter of 1998 was the result of lower revenues combined with higher expense in preparation for the launch in 1999 of its MicroShape ("TM") family of keratome products and the anticipated introduction of its excimer laser system in the U.S. In addition, 1999 is a significant year for the Company as it has a number of refractive surgery related product launches planned, allowing the Company to enter the U.S. market. First, the Company will launch its MicroShape family of keratome products and blades for sale in the U.S. and internationally. The Company expects to start shipping its ADK UniShaper ("TM") single use keratome in April 1999 to international markets with shipments in the U.S. to follow shortly thereafter. The Company expects to start shipping its UltraShaper ("TM") reusable keratome in the second quarter internationally and in the U.S. following anticipated clearance of its 510K filing for the product. The Company also expects to enter the market with its high quality UltraEdge("TM") blades used in keratomes. The Company has established a new blade manufacturing facility with production scheduled to begin in May 1999 and ramp up over the ensuing months. All the keratome and blade products will be displayed at the upcoming Annual Meeting of the American Society for Cataract and Refractive Surgery to be held in Seattle, Washington on April 10-14, 1999. Second, the Company's PMA application for its scanning excimer laser system, which was filed in the second quarter of 1998, is under review by the FDA. The Company has completed the biomonitoring audits with the FDA and awaits the final stages of review and inspection, including GMP and labeling issues as required by the FDA. The Company's Laserscan LSX excimer laser system has been received positively in the international market by some of the world's leading refractive surgeons. Indications of customer demand for the Compan's keratome and blade products have exceeded management's expectations due to the strong growth in refractive surgery procedures in 1998 and anticipated in 1999. The Company already has a significant order backlog. With the recent financing and added infrastructure, the Company is confident that it will successfully meet demand for its products and achieve significantly higher revenues in 1999 than in 1998. On March 23, 1999, the Company completed a $9 million equity private placement with certain existing and new investors. In connection with this financing, the Company issued 2,250,000 common shares and warrants to purchase 225,000 common shares at a price of $5.125 per share. Michael R. Farris, Chief Executive Officer, commented, "1998 was an important year for LaserSight as we created a number of key strategic alliances and prepared several products for launch into the U.S. market. These strategic alliances include an equity investment made by TLC The Laser Center, Inc., the largest vision correction corporate centers company in North America, and a joint venture arrangement with Humphrey Systems to develop topography planned laser vision correction." Mr Farris added, "We believe that the launch in 1999 of our products is very timely given that the refractive eye care industry is experiencing tremendous growth with U.S. procedure volumes projected to reach 800,000 in 1999 and 1,200,000 in the year 2000. We expect to be a significant player in this industry." LaserSight Incorporated provides quality technology solutions for laser refractive surgery and other innovative applications, mainly in the vision correction industry. The Company sells its products in more than 30 countries. In the United States, LaserSight's refractive scanning laser system has a pending pre-market approval application with the U.S. Food and Drug Administration and is not yet commercially available in this market. This press release contains forward-looking statements regarding future events and future performance of the Company, including statements with respect to anticipated sales revenue, which involves risks and uncertainties that could materially affect actual results. Investors should refer to documents that the Company files from time-to-time with the Securities and Exchange Commission for a description of certain factors that could cause the actual results to vary from current expectations and the forward looking statements contained in this press release. Such filings include, without limitation, the company's Form 10-K, Form 10-Q and Form 8-K reports. ### (tables to follow) The following are selected financial results LASERSIGHT INCORPORATED (In thousands, except per share data)
Three Months Ended Twelve Months Ended ------------------ ------------------- 12/31/98 12/31/97 12/31/98 12/31/97 -------- -------- -------- -------- Total Revenues $ 3,303 $ 6,306 $17,756 $24,389 Cost of Sales/Provider Payments 1,789 3,043 6,346 12,702 Gross Profit 1,514 3,263 11,410 11,687 Research, Development and Regulatory 1,356 1,079 3,841 2,808 Selling, General and Administrative expenses 5,893 6,847 19,030 18,141 Operating Loss (5,735) (4,663) (11,461) (9,262) Other Expense (283) (340) (553) (1,240) Gain on Sale of Subsidiaries -- 4,129 364 4,129 Income Tax Expense -- (880) (232) (880) Net Loss (6,018) (1,754) (11,882) (7,253) Preferred Stock Accretion/Dividends and Conversion Discounts -- (285) (3,611) (340) Loss Applicable to Common Shareholders (6,018) (2,039) (15,493) (7,593) Loss per Common Share Basic and Diluted (0.46) (0.20) (1.26) (0.80) Weighted Average Number of Common Shares and Equivalents Outstanding Basic and Diluted 13,173 9,985 12,272 9,504
SELECTED BALANCE SHEET DATA --------------------------- December 31, 1998 December 31, 1997 ----------------- ----------------- Cash and Cash Equivalents $ 4,438 $ 3,858 Marketable Equity Securities -- 7,475 Accounts and Notes Receivable (current), net 9,418 6,412 Total Current Assets 22,717 22,884 Total Current Liabilities 7,842 10,154 Long-Term Obligations 560 500 Redeemable Convertible Preferred Stock -- 11,477 Stockholders' Equity 34,015 27,040
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