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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended March 31, 1997.
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for
the transition period from to .
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COMMISSION FILE NUMBER 0-25242
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PREMIER LASER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 33-0472684
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 MORGAN, IRVINE, CALIFORNIA 92718
(Address of principal executive (Zip Code)
offices)
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (714) 859-0656
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, Class A Warrants, Class B Warrants, Units (each comprised
of one share of Class A Common Stock, one Class A Warrant and one Class B
Warrant)
(TITLE OF CLASS)
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 or
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 in response 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. / /
The aggregate market value of the registrant's voting stock held by
nonaffiliates was approximately $103,504,753 on May 19, 1997, based upon the
closing sale price of such stock.
Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date:
As of May 19, 1997:
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Class A Common Stock: 9,260,671
Shares
Class E-1 Common Stock: 1,257,178
Shares
Class E-2 Common Stock: 1,257,178
Shares
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DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents
if incorporated by reference, and the part of the Form 10-K (e.g., Part I, Part
II, etc.) into which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933: None.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Premier Laser Systems, Inc. (the "Company," or "Registrant") develops,
manufactures and markets several lines of proprietary medical lasers, fiberoptic
delivery systems and associated products for a variety of dental, ophthalmic and
surgical applications. The Company is currently in the process of acquiring
EyeSys Technologies, Inc. ("EyeSys"), which is a leading developer and supplier
of corneal topography (diagnostic imaging) systems with an installed base of
more than 3,500 systems worldwide. The Company's majority-owned Data.Site joint
venture ("Data.Site") assists physicians and researchers with ophthalmic data
collection and outcomes analysis for specific procedures.
The Company's lasers and related products use the controlled application of
thermal, acoustic and optical energy to allow the physician or dentist to
perform selected minimally invasive procedures which, compared to conventional
techniques not involving the use of lasers, vaporize or sever tissue with
minimal blood loss and scarring, increase patient comfort and reduce patient
treatment time and treatment costs. To date, the Company has received clearance
to market 20 models of medical lasers, which are covered by 20 U.S. patents, 14
pending U.S patent applications, 13 foreign patents and 44 pending foreign
patents. The Company currently markets certain of these lasers for dentistry,
ophthalmology and surgery.
The Company commenced operations in August 1991 after acquiring
substantially all of the assets of Pfizer Laser, a division of Pfizer Hospital
Products Group ("Pfizer HPG") which is a wholly-owned subsidiary of Pfizer, Inc.
The Company acquired from Proclosure, Inc. ("Proclosure") certain technology,
assets and proprietary rights relating to a laser system for tissue fusion in
1993, and completed its initial public offering of securities in 1994. In 1997,
it formed a joint venture, named "Data.Site," with Kansas City-based Refractive
Surgical Services for the purpose of providing data collection and outcomes
analysis and in April 1997 entered into an agreement to acquire EyeSys.
Completion of the EyeSys transaction is subject to the satisfaction of several
conditions including approval by the EyeSys shareholders.
The Company participates in three market segments: dentistry, ophthalmology
and surgery. The Company's innovations include: the first laser cleared for use
on hard tissue (teeth) in dentistry, the first diode laser in dentistry, the
first laser for cataract emulsification, the first Erbium:YAG laser for ablation
of skin and the first laser in clinical trials for tissue melding.
Although the Company has received more than 100 clearances from the United
States Food and Drug Administration (the "FDA") in multiple specialty areas to
market its laser products for a variety of medical applications, due to limited
financial resources the Company has initially focused its marketing efforts on
dental lasers which the Company believes have the most promise for commercial
success. The Company plans to initiate marketing efforts in ophthalmology in
calendar 1997. The level of future marketing efforts is partially dependent upon
the receipt of future financing. As resources permit, the Company plans to
commence marketing efforts with respect to other medical applications which it
believes may also be commercially successful.
MARKET OVERVIEW
The use of laser technology in dentistry, ophthalmology and surgery involves
the controlled application of laser light to hard or soft tissue causing an
optical, thermal, acoustic or plasma interaction with the tissue. When applied
to tissue, the laser light is partially absorbed. This process of absorption
converts the light to heat, which in turn alters the state of the tissue. The
degree of tissue absorption varies with the choice of wavelength and is an
important variable in the application of laser technology in treating various
tissues. The laser energy can also form a gas bubble in a water medium which
provides an acoustic cutting effect as it bursts. The Company often uses its
proprietary delivery systems to control the relative proportions of acoustic,
thermal and optical energy applied to tissue resulting in enhanced cutting
effects. These delivery systems include flexible fiberoptics, waveguides,
articulated arms and micromanipulators which are used on a disposable or limited
reuse basis, and which the Company expects will provide a
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recurring revenue stream for the Company. The Company's strategy is to target
specific applications in the dental, ophthalmic and surgical markets, where
management believes that the Company's technology and products have competitive
strengths.
DENTAL AND PERIODONTAL MARKET
The current market for laser equipment in dental procedures is comprised of
soft tissue procedures, composite curing and teeth whitening. The Company has
recently received FDA clearance to market its Er:YAG laser for hard tissue and
cavity preparation procedures, and is in the process of implementing its
marketing plans to address this market.
SOFT TISSUE. The dental laser can be used for certain periodontal
procedures and to treat early gum disease, postponing or in some cases
eliminating the need for conventional periodontal surgery and providing the
opportunity for overall cost savings. While the Company has clearance to market
six lasers (including the Aurora diode laser and Centauri Er:YAG laser) for soft
tissue dental procedures, the Company focuses its marketing efforts on its
Aurora diode laser in this area.
COMPOSITE CURING. Composites are rapidly replacing amalgams (gold and
silver) as the material of choice for restoration of cavities, because they more
closely match the color of teeth and because amalgams have drawn increasing
worldwide concern over safety due to the toxic gases which may be released when
the amalgams are removed from teeth. Composite fillings are typically cured
using a curing light which provides a broad spectrum of wavelengths. The use of
the argon laser for this application has been shown to result in a stronger
restoration than composites cured by traditional curing lights. The Company's
argon lasers can also be used to cure the resins used in placing veneers or bond
orthodontic brackets. The Company's Arago and MOD argon lasers have received FDA
clearance for use in these applications.
TEETH WHITENING. A large number of dentists use light accelerated bleaching
materials for teeth whitening. These materials are traditionally applied at
night over a six to eight week period to whiten a patient's teeth while he or
she sleeps. Lasers have been shown to facilitate the use of these light
sensitive materials in the dentist's office by accelerating this process and
resulting in an approximately three shade change in less than one hour. The
Company's MOD laser has been cleared to market for this procedure.
HARD TISSUE (CAVITY PREPARATION). Potential dental laser applications for
hard tissue procedures (i.e., procedures on teeth) include pit and fissure
sealing, etching, caries removal and cavity preparation. Based on user feedback
from the Company's clinical sites, the Company believes that the use of a laser
in dentistry reduces the pain associated with various traditional procedures
performed with a dental drill. On May 7, 1997, the Company's Er:YAG laser was
cleared to market for tooth etching, caries removal and cavity preparation. This
laser was the first to be cleared by the FDA for such procedures.
CAVITY PREVENTION. The Company is currently conducting research and is
initiating clinical trials to use its lasers for cavity prevention applications.
The Company's clinical trials are at an early stage and there can be no
assurances that FDA clearance will be obtained for these applications.
OPHTHALMIC MARKET
Laser systems have been used for the treatment of eye disorders for many
years and are widely accepted in the ophthalmic community. The original and most
widely accepted use of laser systems in ophthalmology has been for posterior
capsulotomy. The Company does not promote its lasers for this market, which it
believes is approaching saturation, but instead focuses on intraocular
procedures including anterior capsulotomy, cataract removal, glaucoma treatment,
corneal sculpting and occuloplastic or cosmetic procedures. The Company has
developed the Centauri Er:YAG laser which is capable of performing all of these
procedures, which are typically performed by several different types of medical
lasers. To date, however, the Centauri laser has only been cleared for use in
anterior capsulotomies and certain cosmetic procedures.
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CATARACT REMOVAL PROCEDURES. The Company believes that no medical lasers
have been approved to date for cataract extraction procedures, and that medical
lasers may result in less trauma and inflammation than traditional surgical
methods, providing more comfort to the patient. The Company's Centauri Er:YAG
laser has been cleared to market for anterior capsulotomy, a procedure which
opens the capsule of the eye prior to the removal of the cataract. The Company
is also currently conducting clinical trials on the Centauri laser for lens
emulsification (the removal of the cataract itself), as an alternative to
phacoemulsification (the breakup of the cataract by ultrasonic energy). The
Company believes that this patented technology for use in lens emulsification
may provide an easier and safer method of cataract removal.
TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by
increased intraocular pressure within the eyeball and progressive loss of
vision, has traditionally been treated with drug therapy. When drug therapy is
ineffective, periodic invasive surgery may be required. In these cases, lasers
may be used to open the sclera and relieve pressure in the eye. This procedure,
which must be repeated periodically, can be performed under local anesthesia
with a self closing incision on an outpatient basis. The Company is currently
conducting clinical trials prior to seeking clearance to market its Centauri
Er:YAG laser for this procedure. If clearance is obtained, concerning which
there can be no assurance, the Company's Er:YAG laser could provide a viable
alternative to the traditional invasive surgical procedures.
CORNEAL SCULPTING. The Company believes that the recent approval of excimer
lasers has resulted in greater acceptance and recognition of laser refractive
surgery in the ophthalmic market. Medical lasers may be used for corneal
sculpting (photorefractive keratectomy), a procedure in which the laser is used
to sculpt the cornea of the eye to a desired curvature to correct the myopia,
hyperopia or astigmatism. The Company plans to seek approval to market the
Centauri laser for corneal sculpting and has initiated animal studies for this
application. No assurance can be given, however, that approval will be given for
this application.
SURGICAL MARKET
Laser systems have been approved for and are currently being used in a
variety of surgical applications including orthopedics, neurosurgery, urology,
gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic
surgery. Although the Company's products are cleared to market in a number of
specialty areas within the surgical market, the Company has specifically
targeted tissue melding (tissue fusion) and cosmetic applications within the
surgical market.
TISSUE MELDING. The Company believes a significant number of wound closure
procedures may be addressed with surgical lasers in conjunction with or
independent of traditional sutures or staples. The clinically demonstrated
benefits of the use of surgical lasers for tissue melding, as compared to
sutures and staples, include fluid-static seals, immediate strength of the
closure and reduced surgical time. The Company and its strategic partner have
conducted animal tests to support IDE submittals for the use of the Company's
Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts,
and are currently conducting clinical studies for skin and hypospadias. The
Company has also completed clinical trials for vasovasotomy (reversal of
vasectomies) which demonstrated a success rate of approximately 89%. The Company
is also beginning Phase I clinical trials for the treatment of hypospadias, the
lengthening of the urethra to the end of the penis in infants, in which it is
anticipated that the laser's fluid-static seal may minimize post-surgical
complications such as the leakage of urine which results in secondary surgical
procedures. The Company has clearance for Phase II clinical trials for skin
closure following mastectomies and eyelid surgery at five clinical sites. Artery
and vein anastomosis is being tested in animals by the Company's strategic
partner in Japan in preparation for clinical studies.
COSMETIC SURGICAL PROCEDURES. The market for cosmetic surgery is growing
rapidly worldwide. The Company has a number of approvals for lasers to be used
in cosmetic applications and will devote further efforts in the future to
entering into and capitalizing on this market.
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The Company has regulatory clearance to market its products for a variety of
additional applications, including in urology, orthopedics, gynecology,
gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In
areas where the Company's technology is not being fully utilized, the Company
may seek agreements to supply its products under private label for other
manufacturers or may enter into strategic alliances to develop and market the
Company's lasers for other applications.
LASER PRODUCTS
The Company's line of portable lasers are specifically designed for use in
outpatient surgical centers and medical offices. The Company believes that its
lasers are also well suited for the international market, particularly in
facilities with many surgical suites where easy transportation of equipment is
necessary. By employing techniques developed in the computer industry, the
Company has designed a laser system that (i) is modularly designed and uses
similar components for multiple laser systems thereby reducing their overall
cost, (ii) allows for efficient and inexpensive repair by replacing a board or
assembly in the field or through the mail, reducing the need for a field service
force, and (iii) can be easily moved from the office to surgical centers because
of its compact size and limited voltage requirements. The Company's Er:YAG
lasers are currently priced from $39,000 to $126,000 and its Nd:YAG lasers are
currently priced from $25,000 to $80,000. The Company's diode lasers are
currently priced from $22,000 to $35,000 and its argon laser is priced from
$8,000 to $22,000. The prices of lasers within these ranges depend upon each
model's power capability and the features offered.
The following table presents in summary form, the Company's principal lasers
and delivery systems, the principal applications for which the Company intends
to use them, and the FDA status of such products.
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PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS
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Centauri (Er:YAG) Dental--Soft Tissue.......................................... Cleared to market
Dental--Hard Tissue.......................................... Cleared to market
Ophthalmology (e.g. Anterior Capsulotomy).................... Cleared to market
Ab-externo and Ab-interno Sclerostomy, Laser Lens
Emulsification............................................... Clinical trials
Corneal Sculpting............................................ Preclinical animal
studies
General Surgery, Neurosurgery, Orthopedics, Gastrointestinal
and Genitourinary Procedures, Urology, Gynecology and Oral
Surgery...................................................... Cleared to market
Pegasus (Nd:YAG) 20W Dental--Soft Tissue.......................................... Cleared to market
Polaris (1.32m Nd:YAG) Tissue Melding............................................... Clinical trials
General Surgery, Ophthalmology, Arthroscopic Surgery,
Gastrointestinal and Genitourinary Procedures, Urology,
Gynecology and Oral Surgery.................................. Cleared to market
Aurora (diode) Dental--Soft Tissue.......................................... Cleared to market
Dental and General Surgery, Ophthalmology, Arthroscopic
Surgery, Gastrointestinal and Genitourinary Procedures,
Urology, Dermatology, Plastic Surgery, Podiatry,
Neurosurgery, Gynecology, Pulmonary Surgery and Oral
Surgery...................................................... Cleared to market
MOD (argon) Dental--Composite Curing..................................... Cleared to market
Dental--Teeth Whitening...................................... Cleared to market
</TABLE>
CENTAURI ER:YAG LASER
The Company's Centauri Er:YAG laser is a portable Er:YAG pulsed solid state
laser which generates high frequencies (up to 30Hz) at relatively low peak
power. These high frequencies allow faster cutting at
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lower energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by
water, producing a cut similar to the scalpel. The Er:YAG wavelength is
delivered through a fiber optic delivery system which enables the beams to be
focused and angled. These fiberoptic catheters are difficult to produce and the
Company has invested heavily in the technology to develop fibers which can
handle adequate power. The Company had experienced difficulties in securing a
consistent source for these fibers in the past. It has procured two sources for
these fibers. See "--Manufacturing and Materials" and "Legal Proceedings."
The Company's Centauri Er:YAG laser has many potential applications in
different medical specialties, including cutting hard tissue such as bone and
teeth, which could replace or minimize the use of noisy, high speed dental hand
drills, and removing ocular structures or performing microsurgery with minimal
thermal damage. Although until recently marketed only for soft tissue dental
procedures and anterior capsulotomy, the Centauri laser also has received FDA
clearance to market for hard tissue dental procedures. This laser also has
received FDA clearances to market for hemostasis, excision and vaporization of
tissues in ophthalmology, general surgery, neurosurgery, orthopedics,
gastroenterology, urology, gynecology and oral surgery. See "--Government
Regulation." The Centauri laser is highly effective in cataract ophthalmic
procedures because its wavelength is at the peak of the water absorption
spectrum and water comprises greater than sixty percent of ophthalmic tissues.
Therefore, the Centauri laser can emulsify cataracts, surgically excise tissue
in the treatment of glaucoma and can precisely remove layers of cornea similarly
to an excimer laser. This system, which currently is cleared for anterior
capsulotomy and other procedures in ophthalmology, is estimated to be available
for approximately one-third the price of refractive excimer lasers currently on
the market and requires substantially lower maintenance costs than excimer
lasers (an estimated $10,000 per year as compared to approximately $70,000). In
addition, the multipurpose Centauri Er:YAG laser is completely portable and does
not emit any toxic gases or cause any potential mutagenic effect which may
result from the use of the excimer laser.
The Company has recently introduced what it believes to be the industry's
first fully-integrated Er:YAG laser system for ophthalmic procedures. The new
system incorporates the Centauri Er:YAG laser and provides the option of either
a bi-manual or coaxial, uni-manual handpiece to accommodate an individual
physician's technique. The Company has also recently introduced a new irrigation
aspiration product for use in conjunction with the Centauri system, which
integrates with the laser in performing the cataract removal procedures, and
includes proprietary vacuum monitoring connectors that create a sterile
aspiration line.
While animal studies have been encouraging, there can be no assurance that
the FDA will approve the use of the Company's Centauri laser for corneal
sculpting, or that the laser will work effectively in clinical trials. Clinical
trials are estimated to continue for two to five years before approval can be
sought in the United States. There are several patents pending on this
technology and application, although no assurances can be given that these
patents will be approved or approved with the current claims.
POLARIS AND PEGASUS ND:YAG LASERS
The energy of Nd:YAG lasers is absorbed by blood in tissue and as a result
these systems are the preferred lasers to limit bleeding during surgery and for
procedures requiring fiberoptic delivery, such as laparoscopic surgery. The
Nd:YAG fiberoptic delivery system allows the surgeon to perform surgery through
small incisions, providing minimally invasive surgery to patients and usually
reducing treatment costs and the length of hospital stays.
The Company manufactures a variety of continuous wave solid state Nd:YAG
lasers which are designed for use in dentistry and a number of medical
specialties. The Company received its first FDA clearance to market a continuous
wave Nd:YAG laser system for dental (soft tissue) applications and introduced
its 20 watt dental Pegasus Nd:YAG laser in February 1992 (which has in large
part been superseded by the Company's newer diode laser system). The Company
also manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have FDA
clearance to market for various applications and procedures in general surgery,
urology, gastrointestinal procedures, pulmonary procedures, gastroenterology,
gynecology and ophthalmology.
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These lasers also utilize the Company's disposable unique TouchTIPS,
AngleTIPS and sculptured fibers. By using the Pegasus laser with TouchTIPS, the
surgeon is allowed direct contact with tissue and the tactile feeling of the
scalpel or other surgical instruments. The Company believes that the
availability of these technologies permits the use of lower power laser systems
(20W in dental, 40-60W in surgery).
The Company holds the proprietary rights, including several patents, to
manufacture and sell the Polaris laser, a 1.32 micron Nd:YAG laser (except in
Japan, China and Taiwan), together with specialized software and delivery
systems, for tissue melding. The Company is developing the Polaris laser for use
in cosmetic skin closures, vascular surgeries and minimally invasive surgical
procedures normally performed with sutures and staples. Although the use of the
Polaris laser for tissue melding is still in the development stage, and no
clearance for this application has been received, the Company believes that
tissue melding offers clinical advantages over traditional sutures and staples
including fluid-static seals, immediate strength of the closure and reduced
surgical time.
AURORA DIODE LASER
The Aurora diode laser is the Company's first semiconductor laser and is the
first truly portable diode laser designed for dentistry. The Aurora diode laser
replaces the 20 watt Pegasus laser for periodontal procedures, and is one-fourth
the size and one-half of the cost of that system. The diode wavelength is
absorbed by blood in pigmentation and has been cleared for use in multiple
specialties such as general surgery, ophthalmology, urology and plastic surgery.
The Aurora laser, which was introduced for soft tissue dental applications in
February 1996, is designed to utilize the Nd:YAG delivery systems, including
TouchTIPS, AngleTIPS and sculptured fibers, for soft tissue surgery with minimal
bleeding or anesthesia. The dental laser can also be used to treat early stage
gum disease, postponing or in some cases eliminating the need for periodontal
surgery and providing the opportunity for overall cost savings. The Company
believes the Aurora laser compares favorably with competitive products including
pulsed Nd:YAG lasers, which cannot produce the required laser settings for use
with TouchTIPs, or in the new technique for the treatment of periodontal
disease, as well as with CO(2) lasers (which cannot be delivered through a
fiber), and argon lasers (which tend to be slower in cutting and may produce
charring).
ARAGO AND MOD ARGON LASERS
The Arago and the MOD (Multi Operatory Dentalaser) are gas lasers which have
been cleared to market in dentistry to accelerate the composite curing process.
Composites are rapidly replacing amalgams (gold and silver) as the material of
choice for the restoration of cavities. The argon wavelength penetrates through
the composite and has been shown to result in a stronger restoration than
composites cured by traditional curing lights. The Company's argon lasers can
also be used to cure the resins used in placing veneers or bonding orthodontic
brackets.
The argon laser can also be used to enhance teeth whitening procedures using
light activated bleaching materials which have traditionally been applied at
night over a six to eight week period. Lasers have been shown to facilitate the
use of these light activated products in a dentist's office by accelerating this
process and resulting in an approximately three shade change in less than one
hour. The argon laser has been cleared to market for this procedure. No
assurance may be given that the use of the argon laser for teeth whitening will
become a widely accepted practice in the dental industry. The Company plans to
bundle its lasers with light activated whitening materials and co-market these
products with the manufacturers of these materials. The Company is currently
manufacturing the MOD lasers in-house and has experienced some minor problems
with the supply of components required for such production. The Company's
supplier of components for its Arago laser previously ceased shipments causing
the Company to temporarily cease production of these lasers. By September 1997,
the Company intends to commence the in-house manufacture of the Arago lasers.
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OTHER LASERS
The Company has developed other solid state pulsed lasers including the
Sirius .532 Nd:YAG laser, Orion Ho:YAG laser and the Arcturus alexandrite:YAG
laser, and other applications for its existing lasers, but is not actively
marketing these lasers at the present time. The following table sets forth in
summary form, certain additional lasers owned by the Company which are not
currently marketed by the Company, and the principal applications for which the
Company has clearance to market such lasers.
<TABLE>
<CAPTION>
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS
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<S> <C> <C>
Altair (CO(2)) and a CO(2) Orthopedics, General and Plastic Surgery, Dermatology,
laser acquired from Pfizer Podiatry, Ear, Nose and Throat, Gynecology, Pulmonary
HPG Procedures; Neurosurgery and Ophthalmology................... Cleared to market
Dental--Soft Tissue.......................................... Cleared to market
Pegasus (Nd:YAG) 40W/60W General Surgery, Urology, Gastrointestinal Procedures,
Pulmonary Procedures, Gastroenterology, Gynecology and
Ophthalmology................................................ Cleared to market
Pegasus (Nd:YAG) 100W Oral, Arthroscopic and General Surgery, Gastroenterology,
Gastrointestinal and Genitourinary Procedures, Pulmonary
Procedures, Gynecology, Neurosurgery and Ophthalmology....... Cleared to market
Sirius (.532m Nd:YAG) Dermatology, General and Plastic Surgery, Podiatry and
Orthopedic Applications...................................... Cleared to market
Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and Throat,
Ophthalmology, Gastroenterology, Pulmonary Procedures and
Urology...................................................... Cleared to market
Er:YAG/Nd:YAG combination Various specialties.......................................... Cleared to market
</TABLE>
DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS
An integral part of any laser system is the means of delivering laser light
to the target tissue. Delivery systems commonly employed in laser surgery
include flexible fiberoptics, waveguides, articulated arms and
micromanipulators. The Company's proprietary delivery systems control the
relative proportions of acoustic, thermal and optical energy applied to tissue
resulting in enhanced cutting efforts. Flexible fibers are a preferred method of
delivery for most clinical procedures, but until recently were only available
for Nd:YAG and argon lasers. The end of a fiber may be shaped or used with a
detachable tip to control the mechanism of laser/tissue interaction, to give a
tactile feel, to provide certain mechanical effects and to angle or focus the
laser beam. The Company has also been granted a perpetual paid-up license to
manufacture, use and sell flexible waveguides to deliver CO(2) energy pursuant
to the Assignment and Modification Agreement dated July 26, 1991 among the
Company, Pfizer HPG and Medical Laser Technologies Limited.
While each laser system marketed by the Company consists of a laser and an
integral fiber, these fibers and other products, such as tubing sets, are used
by surgeons on a disposable or limited reuse basis for each clinical procedure.
The Company believes that expansion into this market could provide it with a
recurring revenue stream. The Company manufactures a variety of fiberoptic
delivery systems, sculpted fiberoptic probes, optical tips (AngleTIPS and
TouchTIPS), waveguides and catheters which are designed for single-patient use.
The patented connectors and need for product sterility encourage the users of
the Company's lasers to purchase only products which are compatible with this
system. The Company believes it can sell these products on a custom basis to
hospital administrators for other surgical laser systems at a significant
discount to competitors' published prices, while maintaining gross margins
through vertical
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integration and the extensive use of molds and tooling. The Company also
assembles and distributes a full line of laser accessories, including glasses,
goggles, laser signs and smoke evacuators.
MARKETING, SALES AND SERVICE
MARKETING AND SALES
The Company markets its products to the dental market in the United States
directly to dentists and periodontists through its direct sales force consisting
of five area sales managers and its distributor and manufacturer's
representative network consisting of approximately 20 people. The Company
markets its products primarily through conventions, educational courses, direct
mail, telemarketing and other dental training programs. In March 1994, the
Company entered into a sales and marketing arrangement for its dental lasers
with Burkhart Dental Supply Company, a member of the American Dental
Cooperative, Inc., which is one of the largest distributors of dental equipment
and supplies in the United States. This agreement is terminable by either party
at any time. If this strategic alliance is successful, the Company believes this
relationship may be expanded to the other members of the American Dental
Cooperative, Inc. which markets dental products to a significant number of the
approximately 129,000 practicing dentists in the United States. Such alliance is
expected to assist the Company's marketing of the Centauri laser for hard tissue
applications.
Through an active program of educational courses and preceptorships, the
Company has trained dentists in many countries during the past year using
industry recognized dentists and periodontists.
The Company markets its products in the ophthalmic market through two direct
sales managers who focus their efforts on key ophthalmologists worldwide. The
Company has entered into distribution agreements with distributors in many
countries in preparation for market introduction of the Centauri laser. The
Company grants exclusive distribution rights in select territories to its
distributors who must maintain certain distribution minimums in order to retain
their exclusive rights. The Company plans to expand its ophthalmic sales force
both by enlarging its domestic sales force, either internally or through
acquisition, and by acquiring or engaging additional international manufacturing
representatives. The Company has recently entered into an agreement to acquire
the operations and assets of EyeSys in preparation of the establishment of
increased international distribution. See "--Overview."
In the surgical market, the Company intends to form strategic alliances in
any specialty area where the partner has an established presence in the market
selling to either the physician or the hospital. The Company has entered into
such a strategic alliance with Nippon Shoji Kaisha, Ltd. ("NSK"), which is one
of the leading suppliers of sutures in the Pacific Rim pursuant to an Exclusive
Marketing Agreement. Under this agreement, Proclosure granted to NSK, in
exchange for a license fee, the exclusive rights to market and distribute the
Polaris Nd:YAG laser in Japan, China and Taiwan. In addition, under this
agreement the Company granted to NSK an option to manufacture the Polaris, which
if exercised would require NSK to pay the Company a $1.5 million fee and
royalties. NSK has not yet indicated whether it intends to manufacture these
products. There can be no assurance that the Company will receive any payments
under this agreement.
No customer accounted for more than 10% of net sales in fiscal 1997. Sales
in fiscal 1996 to one customer, Rockford Industries, Inc., a leasing company,
accounted for approximately 10% of the Company's net sales for that year. Sales
in fiscal 1995 to LaserSight Centers, Inc., accounted for approximately 11% of
the Company's net sales for that year.
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CUSTOMER SERVICE AND SUPPORT
The Company is seeking to create a group of loyal customers by focusing on
customer service, quality and reliability. In addition to its educational
courses, the Company performs a complete installation of its lasers and trains
the customers' staff in its proper use. Educational videos and papers are
available upon request. The Company conducts service training courses for the
representatives of its distributors. Prior to shipping, every laser is subjected
to an extensive battery of quality control tests. The Company generally provides
a one year warranty with all lasers and extended warranties are available at an
additional cost. The Company ordinarily provides service within one business day
to all of its customers in the United States. An owner is either sent a loaner
laser by overnight carrier or a service representative visits the owner to
repair the unit. International service is provided either by the foreign
distributor or by return of the laser to the Company. The Company has
experienced and may continue to experience difficulties in providing prompt and
cost-effective service of its medical lasers in foreign countries.
COMPETITION
The Company is and will continue to be subject to competition in its
targeted markets, principally from businesses providing other traditional
surgical and nonsurgical treatments, including existing and developing
technologies or therapies, some of which include medical lasers manufactured by
competitors. In the dental market, the Company competes primarily with dental
drills, traditional curing lights and other existing technologies, and to a
lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. In the
ophthalmic market, the Company is subject to competition principally from (i)
traditional surgical treatments using a tearing needle in anterior capsulotomy,
(ii) phacoemulsification, an ultrasound device used to break up cataracts in
cataract removal procedures, (iii) corrective eyewear (such as eyeglasses and
contact lenses) and surgical treatments for refractive disorders such as
photorefractive keratectomy which is typically performed with an excimer laser
and radial keratotomy which is performed with a scalpel, and (vi) drug therapy
or surgical treatment of glaucoma. In the surgical market, wound closure
procedures are usually performed using sutures and staples, and traditional
cosmetic surgical procedures may be performed with a scalpel or a CO(2) laser.
The Company believes that for many applications its patented or patent pending
methods and fiberoptic delivery systems provide clinical benefits over other
currently known technologies and competitors' laser products.
The medical laser industry in particular is also subject to intense
competition and rapid technological changes. The Company believes that there are
approximately 30 competitors in different sectors of the medical laser industry.
The Company believes that the principal competitive factors for medical laser
products are the products' technological capabilities, proven clinical ability,
patent protection, price and scope of regulatory approval, as well as industry
expert endorsements. Many conventional laser systems target one particular
application, while the Company's Er:YAG system is designed to perform in
multiple therapeutic applications. The Company's self-contained units are
significantly smaller than competitive surgical models, have internal cooling
devices and are powered primarily by dedicated readily available 110 volt lines
instead of the 220 volt lines used by most surgical solid state lasers. The
specialized menu-driven system software utilized in the Company's lasers also
enhances safety and ease of use of the lasers.
The Company believes that its ability to compete successfully against
traditional treatments, competitive laser systems and treatments that may be
developed in the future will depend on its ability to create and maintain
advanced technology, develop proprietary products, obtain required regulatory
approvals and clearances for its products, attract and retain scientific
personnel, obtain patent or other proprietary protection for its products and
technologies, and manufacture and successfully market products either alone or
through other parties. Certain of the Company's competitors have substantially
greater financial, technical and marketing resources than the Company. There can
be no assurance that such competition will not adversely affect the Company's
results of operations or its ability to maintain or increase market share.
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SEASONALITY
To date, the Company's revenues have typically been significantly higher in
the second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter. Although revenues during the summer of 1996 did not
follow this historical pattern, the Company expects that this seasonality will
continue indefinitely.
RESEARCH AND DEVELOPMENT
In the past three fiscal years, the Company has invested approximately $4.5
million in research and development programs. The Company's research and
development programs have capitalized on the research and development activities
conducted by Pfizer Laser wherein that company identified key military and
aerospace technologies and adapted these technologies to portable, efficient,
solid-state laser products that were modular in nature. This investment in
research and development has resulted in the development of 20 models of lasers,
reusable accessories such as smoke evacuators and irrigation aspiration systems,
more than 1,000 types of custom delivery systems and approximately 20 types of
surgical tips and accessories.
In order to maintain its technological advantage, the Company must continue
to invest in new product development. The Company seeks to augment its funding
of research and development through government grants. The Company has been
awarded a Phase II SBIR grant of $750,000, substantially all of which has been
drawn to fund additional research and clinical trials regarding laser
emulsification of cataracts. The Company has also applied for new Phase I
research grants related to dentistry, orthopedics, tissue melding, and
ophthalmology. No assurance can be given that the Company will be awarded any of
these potential government grants.
The Company's current research is focused on expanding the clinical
applications of its existing products, reducing the size and cost of current
laser systems, developing custom delivery systems and developing new innovative
products. The Company's in-house research and development efforts have focused
on the development of a systems approach to medical laser products with
proprietary delivery systems designed to allow the laser to interact with tissue
by a number of different mechanisms (e.g., acoustic, ablative and thermal) for
unique laser/tissue effects. These disposable fiberoptic delivery systems,
developed specifically for niche surgical applications, demonstrate the
principal focus of the Company's research efforts. Examples of patented or
patent pending products resulting from these research efforts include:
TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO(2) waveguides. Clinical research
has also yielded several new surgical procedures.
PATENTS AND PATENT APPLICATIONS
Patent protection is an important part of the Company's business strategy,
and the Company's success depends, in part, on its ability to maintain patents
and trade secret protection and on its ability to operate without infringing on
the rights of third parties. The Company has sought to protect its unique
technologies and clinical advances through the use of the patent process. Patent
applications filed in the United States are frequently also filed in selected
foreign countries. The Company focuses its efforts on filing only for those
patents which the Company believes will provide it with key defensible features
instead of filing for all potential minor device features. In the United States,
the Company holds 20 patents which expire at various times throughout
approximately the next 7-17 years, and has an additional 14 pending patent
applications, including divisional applications. In addition, the Company holds
13 foreign patents including two utility model patents and has at least 44
foreign patent applications. The Company also has a
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nonexclusive license to a number of basic laser technologies which are commonly
licensed on such basis in the laser industry.
The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve trade secrets and to
operate without infringing the rights of others. The Company is aware of certain
patents which, along with other patents that may exist or be granted in the
future, could restrict the Company's right to market certain of its technologies
without a license, including, without limitation, patents relating to the
Company's lens emulsification product and ophthalmic probes for its Er:YAG
laser. In the past, the Company has received allegations that certain of the
Company's laser products infringe other patents. There has been significant
patent litigation in the medical industry in general, and in the medical laser
industry in particular. Adverse determinations in litigation or other patent
proceedings in which the Company may become a party could subject the Company to
significant legal judgments or liabilities to third parties, and could require
the Company to seek licenses from third parties that may or may not be
economically viable. Patent and other intellectual property rights disputes
often are settled through licensing arrangements. No assurance can be given that
any licenses required under these or any other patents or proprietary rights
would be available on terms acceptable to the Company, if at all. If the Company
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or it could find
that the development, manufacture or sale of products requiring such licenses
could be enjoined. If the Company is found, in a legal proceeding, to have
infringed the patents or other proprietary rights of others, it could be liable
for significant damages. The Company also relies on unpatented trade secrets,
and no assurance can be given that others will not independently develop or
otherwise acquire substantially equivalent trade secrets.
GOVERNMENT REGULATION
FDA REGULATION
The lasers that are manufactured by the Company are regulated as medical
devices by the FDA under the FDC Act. Satisfaction of applicable regulatory
requirements may take several years and requirements vary substantially based
upon the type, complexity and novelty of such devices as well as the clinical
procedure. Pursuant to the FDC Act and the regulations promulgated thereunder,
the FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution, and promotion of medical devices. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, denial or
withdrawal of premarket clearance or approval for devices, recommendations by
the FDA that the Company not be allowed to enter into government contracts, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
The FDA classifies medical devices in commercial distribution into one of
three classes: Class I, II or Ill. This classification is based on the controls
the FDA deems necessary to reasonably ensure the safety and effectiveness of
medical devices. Class I devices are subject to general control (e.g., labeling,
premarket notification and adherence to applicable requirements for Good
Manufacturing Practices or cGMPs) and Class II devices are subject to general
and special controls (e.g., performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Generally, Class III devices are those
which must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have been found not to be substantially equivalent to
legally marketed devices). Lasers typically are classified as Class II devices,
but the FDA may classify certain indications or technologies into Class III and
require a premarket approval application ("PMA").
If a manufacturer or distributor of a medical device can establish that a
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a pre-1976 Class III medical device for which the
FDA has not called for a PMA, the manufacturer or distributor may seek FDA
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clearance for the device by filing a Section 510(k) premarket notification. If a
manufacturer or distributor of a medical device cannot establish that a proposed
device is substantially equivalent to another legally marketed device, the
manufacturer or distributor will have to seek premarket approval for the
proposed device. A 510(k) notification and the claim of substantial equivalence
will likely have to be supported by various types of data and materials,
possibly including test results or the results of clinical studies in humans. A
PMA would have to be submitted and be supported by extensive data, including
preclinical and clinical study data, to prove the safety and effectiveness of
the device. There can be no assurance that some of the Company's products will
not require the more rigorous and time consuming PMA approval, including laser
uses for vasovasotomy or other tissue melding procedures, cavity preparation,
cosmetic surgery, sclerostomy and lens emulsification, among others.
If human clinical studies of a proposed device are required, whether for a
510(k) or a PMA, and the device presents a "significant risk," the manufacturer
or the distributor of the devices will have to file an IDE application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. Submission of an IDE does not give assurance
that FDA will approve the IDE and, if it is approved, there can be no assurance
that the FDA will determine that the data derived from these studies support the
safety and efficacy of the device or warrant the continuation of clinical
studies. Sponsors of clinical studies are permitted to charge for those devices
distributed in the course of the study provided such compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
Clinical studies of nonsignificant risk devices may be performed without prior
FDA approval, but various regulatory requirements still apply, including the
requirement for approval by an IRB, conduct of the study according to applicable
portions of the IDE regulations, and prohibitions against commercialization of
an investigational device.
The manufacturer or distributor may not place the device into interstate
commerce until an order is issued by the FDA granting premarket clearance for
the device. The FDA has no specific time limit by which it must respond to a
510(k) premarket notification. The FDA has recently been requiring more rigorous
demonstration of substantial equivalence in connection with 510(k) notifications
and the review time can take four to 12 months or longer for a 510(k). If a PMA
submission is filed, the FDA has by statute 180 days to review it; however, the
review time is often extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's good manufacturing practice requirements
prior to approval of a PMA.
Devices are cleared by 510(k) or approved by PMA only for the specific
intended uses claimed in the submission and agreed to by the FDA. Labeling and
promotional activities are also subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. Marketing or promotion of products
for medical applications other than those that are cleared or approved could
lead to enforcement action by the FDA.
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances for its products on a timely basis or at all,
and delays in receipt of or failure to receive such approvals or clearances, the
loss of previously received approvals or clearances, limitations on intended use
imposed as a condition of such approvals or clearances, or failure to comply
with existing or future requirements would have a material adverse effect on the
Company's business, financial condition and results of operations. FDA or other
governmental approvals of products developed by the Company in the future may
require substantial filing fees which could limit the number of applications
sought by the Company and may entail limitations on the indicated uses for which
such products may be marketed. In
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addition, approved or cleared products may be subject to additional testing and
surveillance programs required by the FDA and other regulatory agencies, and
product approvals and clearances could be withdrawn for failure to comply with
regulatory standards or by the occurrence of unforeseen problems following
initial marketing.
REGULATORY STATUS OF PRODUCTS
The Company has received 510(k) clearance to market the following lasers in
an aggregate of more than 100 specialty areas: CO(2) (four models: 10W, 20W,
35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG
(two models); 1.32m Nd:YAG (two models: 15W, 25W); .532m Nd:YAG (one model);
Argon (two models); diode (four models); Nd:YAG/Er:YAG combination laser (one
model). Each of these lasers has clearances in multiple specialty areas. The
Company also has received 510(k) clearance to market sculptured fiber contact
tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared
wavelengths of the Company's lasers as well as argon lasers. If a device for
which the Company has already received 510(k) premarket clearance is changed or
modified in design, components, method of manufacture or intended use, such that
the safety or effectiveness of the device could be significantly affected, a new
510(k) premarket notification is required before the modified device can be
marketed in the United States. The Company has made modifications to certain of
its products which the Company believes do not require the submission of new
510(k) notifications. However, there can be no assurance that the FDA will agree
with the Company's determinations and not require the Company to discontinue
marketing one or more of the modified devices until they have been cleared by
the FDA. There also can be no assurance that any such clearance of modifications
would be granted should clearance be necessary.
The Company currently is conducting preclinical animal studies and clinical
trials, both under approved IDEs and as nonsignificant risk studies. There can
be no assurance that the results of any of these clinical studies will be
successful or that the FDA will not require the Company to discontinue any of
these studies in the interest of the public health or due to any violations of
the FDA's IDE regulations. There can be no assurance that the Company will
receive approval from the FDA to conduct any of the significant risk studies for
which the Company seeks IDE approval, or that the FDA will not disagree with the
Company's determination that any of its studies are "nonsignificant risk"
studies and require the Company to obtain approval of an IDE before the study
can continue.
ADDITIONAL REGULATORY REQUIREMENTS
Any products manufactured or distributed by the Company pursuant to a 510(k)
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires the Company to
manufacture its products in registered establishments and in accordance with
current cGMP regulations, which include testing, control and documentation
requirements. The Company must also comply with Medical Device Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product may
have caused or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, would be likely to cause or
contribute to a death or serious injury. The Company's facilities in the United
States are subject to periodic inspections by the FDA. The FDA may require
postmarketing surveillance with respect to the Company's products. The export of
medical devices is also subject to regulation in certain instances.
All lasers manufactured by the Company are subject to the Radiation Control
for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users pursuant to a performance standard, and to comply with
labeling and certification requirements. Various warning labels must be affixed
to the laser, depending on the class of the product under the performance
standard.
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In addition, the use of the Company's products may be regulated by various
state agencies. For instance, the Company is required to register as a medical
device manufacturer with certain state agencies. In addition to being subject to
inspection by the FDA, the Company also will be routinely inspected by the State
of California for compliance with cGMP regulations and other requirements.
Although the Company believes that it currently complies and will continue
to comply with the applicable regulations regarding the manufacture and sale of
medical devices, such regulations are always subject to change and depend
heavily on administrative interpretations. There can be no assurance that future
changes in law, regulations, review guidelines or administrative interpretations
by the FDA or other regulatory bodies, with possible retroactive effect, will
not adversely affect the Company's business, financial condition and results of
operations. In addition to the foregoing, the Company is subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. There can
be no assurance that the Company will not be required to incur significant costs
to comply with such laws and regulations in the future, or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to conduct business.
Furthermore, the introduction of the Company's products in foreign countries
may require obtaining foreign regulatory clearances, and additional safety and
effectiveness standards are required in certain other countries. The Company
believes that only a limited number of foreign countries currently have
extensive regulatory requirements. These countries include the European Union
countries, France, Germany, Canada, Mexico and Japan. Domestic manufacturing
locations of American companies doing business in certain foreign countries,
including European Union countries, may be subject to inspection. The time
required for regulatory approval in foreign countries varies and can take a
number of years. During the period in which the Company will be attempting to
obtain the necessary regulatory approvals, the Company expects to market its
products on a limited basis in certain other countries that do not require
regulatory approval. There can be no assurance that the Company's products will
be cleared or approved by the FDA or other governmental agencies for additional
applications in the United States or in other countries or that countries that
do not now require regulatory approval will not require such approval in the
future.
MANUFACTURING AND MATERIALS
Manufacturing consists of component assembly and systems integration of
electronic, mechanical and optical components and modules. The Company's product
costs are principally related to the purchase of raw materials while labor and
overhead have been reduced due to the use of customized tooling and automated
test systems. The Company believes that its customized tooling and automated
systems improve quality and manufacturing reliability resulting in lower overall
manufacturing costs. The Company believes that these systems will allow the
Company to expand production rapidly.
The Company purchases certain raw materials, components and subassemblies
included in the Company's products from a limited group of qualified suppliers
and does not maintain long-term supply contracts with any of its key suppliers.
While multiple sources of supply exist for most critical components used in the
laser and fiberoptic delivery systems, the disruption or termination of these
sources could have a material adverse effect on the Company's business and
results of operations. Vendor delays or quality problems could also result in
production delays of up to six months as several components have long production
lead times. These long lead times, as well as the need for demonstration units,
require a significant portion of working capital to fund inventory growth. The
Company has in the past experienced and may continue to experience shortages in
raw materials and certain supplies.
The Company owns the molds used to produce certain proprietary parts of the
devices. The Company also designs and develops the software necessary for the
operation of its laser systems. The Company designs and assembles its own
fiberoptic delivery systems and laser accessory equipment such as laser carts,
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smoke evacuation devices and associated disposable supplies. The Company
believes that its manufacturing practices are in accordance with cGMP
regulations.
BACKLOG OF ORDERS
At the end of fiscal 1997, the Company had a backlog of orders of
approximately $2,000,000, compared with the end of fiscal 1996 when the
Company's backlog of orders was negligible. The Company's backlog of orders has
increased substantially in both the dental and ophthalmic market segments during
the first quarter of fiscal 1998. The Company expects to build and ship all of
these orders within the current fiscal year. There can be no assurance that any
of such orders will not be cancelled by the customer prior to shipment by the
Company.
PRODUCT LIABILITY AND INSURANCE
Since the Company's products are intended for use in the treatment of human
medical conditions, the Company is subject to an inherent risk of product
liability and other liability claims which may involve significant claims and
defense costs. The Company currently has product liability insurance with
coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate
per year. Product liability insurance is expensive and subject to various
coverage exclusions, and in the future may not be available in acceptable
amounts, on acceptable terms, or at all. Although the Company does not have any
outstanding product liability claims, in the event the Company were to be held
liable for damages exceeding the limits of its insurance coverage or outside of
the scope of its coverage, the business and results of operations of the Company
could be materially adversely affected. The Company's reputation and business
could also be adversely affected by product liability claims, regardless of
their merit or eventual outcome.
EMPLOYEES
As of May 15, 1997, the Company employed 47 people, 2 of whom are employed
on a part-time basis. None of these employees are represented by a union. Eleven
employees perform sales, marketing and customer support activities. The
remaining employees perform manufacturing, financial, administration,
regulatory, research and development and quality control activities. The Company
also engages the services of many independent contractors and temporary
personnel. The Company believes that its relationship with its employees is
good.
ITEM 2. PROPERTIES.
The Company leases approximately 28,000 square feet in one facility in
Irvine, California pursuant to a lease which expires in December 2000. This
facility contains the Company's executive offices, service center and
manufacturing space. The Company is required to lease an additional 13,000
square feet in the same facility commencing in January 1999, or on such earlier
date that the adjoining tenant's lease terminates. While the Company believes
that its manufacturing and administrative facilities are adequate to satisfy the
Company's needs through at least 2000, it may need to lease additional clean
room facilities in the future.
ITEM 3. LEGAL PROCEEDINGS.
In March 1994, the Company instituted litigation (the "Fiber Litigation") in
the U.S. District Court, Central District of California, against Infrared Fiber
Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical
fiber to the Company for the Company's Er:YAG laser. Two of IFS's senior
officers are also named as defendants. The Company's complaint in this matter
alleges that IFS and two of its officers made misrepresentations to the Company
and that IFS breached its agreement to supply fibers and certain warranties
concerning the quality of the fiber to be provided. The Company is seeking
damages and an injunction requiring IFS to subcontract the production of optical
fiber to a third party, as provided
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in the supply agreement. In April 1994, IFS filed a general denial and a
cross-complaint against the Company alleging breach of contract and intentional
interference with prospective economic advantage, seeking compensatory damages
"in excess of $500,000," punitive damages and a judicial declaration that the
contract has been terminated and that IFS is free to market its fibers to
others. In September 1996, IFS filed a new cross-complaint alleging the same
causes of action and seeking substantially the same relief in the Orange County
California Superior Court. The Company has filed an answer to the complaint,
denying the allegations and asserting several affirmative defenses.
IFS has agreed to license certain fiber technologies, to which the Company
claims exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of
the Company. Coherent joined the above federal litigation on behalf of IFS,
seeking a declaration that IFS had the legal right to enter into this license
and supply the fiber covered by that agreement, and then subsequently filed a
new complaint in the Orange County California Superior Court for declaratory
relief, seeking an order that the Company's original agreement with IFS applies
only to a specific type of optical fiber. The Company has answered this
complaint.
In May 1995, the Company instituted litigation concerning this dispute in
the Orange County, California Superior Court against Coherent, Westinghouse
Electric Corporation ("Westinghouse") and an individual employee of Westinghouse
who was an officer of IFS from 1986 to 1993, when the events involved in the
federal action against IFS took place and while Westinghouse owned a substantial
minority interest in IFS. The complaint charges that Coherent conspired with IFS
in the wrongful conduct which is the subject of the federal lawsuit described
above and interfered with the Company's contracts and relations with IFS and
with prospective contracts and advantageous economic relations with third
parties. The complaint asserts that Westinghouse is liable for its employee's
wrongful acts as an IFS executive while acting within the scope of his
employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory
damages. In October 1995, the federal action was stayed by order of the court in
favor of the California state court action, in which the pleadings have been
amended to include all claims asserted by the Company in the federal action.
In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of the Company's claims against
Coherent. As a result, the claims that were the subject of the granted demurrers
have been dismissed, subject to the Company's right to appeal. The Company has
filed an appeal of these decisions and briefs have been submitted. No date has
been set for a hearing of this appeal. No trial date has been set as to the
remaining outstanding causes of action.
The Company is involved in various disputes and other lawsuits from time to
time arising from its normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of the IFS litigation, disputes
and other lawsuits may adversely affect the Company. It is the opinion of
management that the outcome of such matters will not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of shareholders was held on March 31, 1997. Two
matters were to be submitted to a vote of security holders at such meeting: the
election of the Board of Directors and the approval and adoption of a Stock
Option Plan. A quorum was not obtained and as a result, no vote was taken.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock, Class A Warrants and Class B Warrants
are listed on the Nasdaq National Market under the symbols "PLSIA," "PLSIW" and
"PLSIZ," respectively. Prior to May 1, 1995, such securities were listed on the
Nasdaq SmallCap Market under the same symbols. The Company's Units currently
trade on the Nasdaq SmallCap Market under the symbol "PLSIU." Each Unit consists
of one share of Common Stock, one Class A Warrant and one Class B Warrant.
The following table sets forth, for the quarters indicated, the high and low
bid prices of the Company's securities on the Nasdaq SmallCap Market, and the
high and low closing sale prices per share of the Common Stock, Class A Warrants
and Class B Warrants on the Nasdaq National Market. These prices are as reported
on the Nasdaq SmallCap Market through April 30, 1995, and as reported on the
Nasdaq National Market (for Common Stock, Class A Warrants and Class B Warrants
only) thereafter. The Units continue to trade on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK CLASS A CLASS B
WARRANTS WARRANTS
------------ ------------------------- ------------
HIGH LOW HIGH LOW HIGH
----- --- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter*........................................ 63/4 33/4 25/16 63/64 3/4
Second Quarter........................................ 7 55/8 21/2 13/4 2
Third Quarter......................................... 61/8 5 31/8 11/2 23/8
Fourth Quarter........................................ 85/8 37/8 43/4 13/4 3
FISCAL YEAR ENDED MARCH 31, 1997:
First Quarter......................................... 103/4 8 77/8 37/8 35/8
Second Quarter........................................ 9 61/8 57/8 3 23/4
Third Quarter......................................... 77/8 5 47/8 2 21/16
Fourth Quarter........................................ 81/8 53/16 49/16 2 111/16
<CAPTION>
UNITS
------------------------
LOW HIGH LOW
----- ------ -----
<S> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter*........................................ 25/32 101/8 53/4
Second Quarter........................................ 11/2 101/8 91/4
Third Quarter......................................... 13/8 101/8 83/4
Fourth Quarter........................................ 15/8 16 73/4
FISCAL YEAR ENDED MARCH 31, 1997:
First Quarter......................................... 21/8 213/4 15
Second Quarter........................................ 13/8 171/2 101/4
Third Quarter......................................... 13/16 151/2 8
Fourth Quarter........................................ 27/32 1515/16 8
</TABLE>
- ------------------------
* For April 1 through April 30, 1995, the high and low bid prices of the
Common Stock, Class A Warrants and Class B Warrants were $5.00 and $3.50,
$1.00 and $0.935, and $0.75 and $0.50, respectively.
On January 31, 1997, the Company issued 159,787 shares of its Class A Common
Stock to RSS, LLC, a Kansas limited liability company ("RSS") pursuant to a
Joint Venture Agreement between the Company, RSS, LLC and Data.Site, LLC.
Pursuant to this agreement, RSS transferred to the Company an undivided 30%
interest in all of its intangible assets. The assets of RSS were ultimately
transferred to Data.Site, in which the Company and RSS were issued a 51% and 49%
interest, respectively. The Company's issuance of these securities was exempt
from registration under Section 4(2) of the Securities Act of 1933.
In March 1997, the Company granted options to purchase an aggregate of
1,033,000 shares of its Class A Common Stock to certain employees and directors
pursuant to its 1997 Stock Option Plan. Such grants are not considered to be
sales of securities under the federal securities laws.
In addition, in June, 1996, in connection with its credit facility with
Silicon Valley Bank (the "Credit Facility"), the Company issued to Silicon
Valley Bank warrants to purchase up to 9,756 shares of Class A Common Stock at
an exercise price of $10.25 per share. The Company's issuance of warrants in
connection with its Credit Facility were exempt from registration under Section
4(2) of the Securities Act of 1933.
On May 13, 1997, the last reported sale price for the Company's Common
Stock, Class A Warrants and Class B Warrants on the Nasdaq National Market was
$11.75, $9.25 and $3.94, respectively. The closing bid price for the Company's
Units on the Nasdaq SmallCap Market as of May 14, 1997 was $21.50. As of May 15,
1997, the approximate number of holders of record of the Common Stock, Class A
18
<PAGE>
Warrants, Class B Warrants, Class E-1 Common Stock and Class E-2 Common Stock
were 247, 20, 18, 326 and 326, respectively. There is no public market for the
Company's Class E-1 and Class E-2 Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(HISTORICAL)
The following table contains certain selected consolidated financial data of
the Company and is qualified by the more detailed financial statements and notes
thereto of the Company included herein. The balance sheet and statement of
operations data for the periods ended March 31, 1994, 1995 and 1996, as well as
statement of operations data for the nine months ended March 31, 1993, have been
derived from the Company's financial statements, audited by Price Waterhouse
LLP, independent accountants. The report of Price Waterhouse LLP with respect to
such financial statements contains an explanatory paragraph that describes
uncertainty as to the ability of the Company to continue as a going concern. The
selected financial data for the year ended March 31, 1997 was derived from the
Company's financial statements audited by Ernst & Young LLP. The following
information should be read in conjunction with the Company's financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH
31, FISCAL YEAR ENDED MARCH 31,
------------ --------------------------------------------------
1993(1) 1994 1995 1996 1997
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net sales.................................... $1,527,457 $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 5,530,861
Cost of sales................................ 1,053,180 1,753,352 1,298,420 3,324,757 3,968,539
------------ ----------- ----------- ----------- -----------
Gross profit (loss).......................... 474,277 325,983 (49,017) (1,620,367) 1,562,322
Selling and marketing expenses............... 1,261,571 1,087,461 1,035,863 1,308,767 2,406,010
Research and development expenses............ 647,810 678,279 1,035,705 1,213,471 1,563,228
General and administrative expenses.......... 574,676 1,322,888 1,747,090 1,709,327 1,736,184
Write-off of investment in Mattan............ -- -- -- -- 881,010
Termination of strategic alliance with IBC... -- -- -- -- 331,740
In-process research and development acquired
in the Data.Site acquisition............... -- -- -- -- 250,000
------------ ----------- ----------- ----------- -----------
Loss from operations......................... (2,009,780) (2,762,645) (3,867,675) (5,851,932) (5,605,850)
Interest (expense) income.................... (201,697) (434,851) (322,540) 99,037 15,493
------------ ----------- ----------- ----------- -----------
Loss before extraordinary items.............. (2,211,477) (3,197,496) (4,190,215) (5,752,895) (5,590,357)
Extraordinary gain from extinguishment of
indebtedness............................... -- -- 381,730 -- --
------------ ----------- ----------- ----------- -----------
Net loss..................................... $(2,211,477) $(3,197,496) $(3,808,485) $(5,752,895) $(5,590,357)
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH
31, FISCAL YEAR ENDED MARCH 31,
------------ --------------------------------------------------
1993(1) 1994 1995 1996 1997
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Loss per share before extraordinary
item(2).................................... -- $ (2.45) $ (1.59) $ (1.26) $ (.96)
Extraordinary gain from extinguishment of
indebtedness -- .15
------------ ----------- ----------- ----------- -----------
Net loss per share........................... -- $ (2.45) $ (1.44) $ (1.26) $ (.96)
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Weighted average shares outstanding(3)....... -- 1,288,751 2,584,722 4,556,959 5,833,326
<CAPTION>
AT MARCH 31,
----------------------------------------------------------------
1993(1) 1994 1995 1996 1997
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents(4)................. $ 308,764 $ 5,888,237 $ 35,463 $ 173,610
Working capital(4)........................... 1,287,587 6,756,149 5,818,492 8,018,616
Total assets(5).............................. 7,459,161 12,325,029 16,883,975 15,674,568 19,320,611
Long-term debt(5)............................ 1,564,507 4,303,890 -- -- 49,356
Shareholders' equity(4)...................... 6,022,174 15,002,260 13,797,046 16,631,710
</TABLE>
- ------------------------------
(1) The Company changed its fiscal year end from June 30 to March 31, commencing
with the fiscal year ended March 31, 1993. Accordingly, the fiscal year
ended March 31, 1993 was a nine-month period.
(2) The effect on net loss per common share of the conversion of the Company's
debentures was to reduce historical net loss by $37,500 and $67,995 and to
increase weighted average shares outstanding by 76,875 shares and 321,099
shares for the fiscal years ended March 31, 1994 and 1995, respectively. Net
loss per common share was computed based on the weighted average number of
the Company's common shares outstanding during the fiscal years ended March
31, 1995 and 1994 after giving retroactive adjustment for recapitalization
and conversion of debentures into Units upon completion of the Company's
initial public offering.
(3) Does not include shares of Class E-1 or Class E-2 Common Stock, which are
subject to cancellation in certain circumstances.
(4) These amounts are unavailable at March 31, 1993.
(5) Total assets and long-term debt amounts at March 31, 1993 are unaudited.
Amounts for long-term debt at March 31, 1994 include $285,000 in mandatorily
redeemable warrants.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's Financial Statements and related notes thereto appearing elsewhere in
this Report. This Report contains forward-looking statements including, without
limitation, statements concerning future cost of sales, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in these forward-looking statements.
GENERAL
The Company develops, manufactures and markets several lines of proprietary
medical lasers, fiberoptic delivery systems and associated products for a
variety of dental, ophthalmic and surgical applications. The Company commenced
operations in August 1991, after acquiring substantially all of the assets of
Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a
wholly-owned subsidiary of Pfizer, Inc. The assets acquired by the Company
included the proprietary rights to a broad base of laser and fiberoptic
technologies developed by Pfizer Laser. This acquisition was led by the
Company's current Chief Executive Officer.
Since its formation and until its initial public offering in December 1994,
the Company principally focused on, and its research and development activities
related to, growing markets in dentistry, ophthalmology, cosmetic procedures and
certain surgical specialties to be used in surgical centers and medical offices.
To implement this strategy, the Company developed the Pegasus Nd:YAG dental
laser system from existing technology and introduced this laser to the dental
market in February 1992. In June 1993, the Company introduced the Centauri
Er:YAG laser for ophthalmology and initiated clinical trials for hard
20
<PAGE>
tissue procedures in dentistry. In December 1993, the Company acquired from
Proclosure certain technology, assets and proprietary rights relating to a 1.32
Nd:YAG laser system for tissue melding. From its formation in 1991 through its
initial public offering, the Company developed and received regulatory approvals
for 15 models of lasers and sold certain of those products for soft tissue
applications in dentistry and as part of clinical trials conducted by third
parties.
After the Company's initial public offering in December 1994 (the "IPO"),
the Company increased its inventory, acquired the distribution rights to two new
dental lasers and, in December 1995, expanded its dental sales force. In
September and November 1995, the Company acquired rights to market and
distribute the Arago and MOD argon lasers, respectively, for dental
applications, and in February 1996, the Company introduced and began shipping
its Aurora diode laser for soft tissue dental applications. The Company
completed a secondary offering in October 1996. In 1997, it formed a joint
venture named "Data.Site," with Kansas City-based Refractive Surgical Services
for the purposes of providing ophthalmic data collection and outcomes analysis.
In April 1997, the Company entered into an agreement to acquire EyeSys
Technologies, Inc., which is a leading developer and supplier of corneal
topography (diagnostic imaging) systems with an installed base of more than
3,500 systems worldwide. As of the date of this report, this transaction has not
yet been completed. No assurance can be given that the transactions contemplated
by such agreement will be consummated.
While the Company has received FDA clearance to market laser products
covering a variety of medical applications, to date the Company has focused its
research, development and marketing efforts on a limited number of products or
applications (principally specific dental and more recently, ophthalmic
applications). As future resources permit, the Company may introduce certain
products for applications for which it already has all necessary approvals or
may seek strategic alliances to develop, market and distribute such products.
The Company has recorded operating losses in each of the fiscal years since
its formation, resulting principally from substantial costs incurred in research
and development activities and obtaining regulatory approvals, together with the
absence of significant revenues to date and limited commercial sales of its
products.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1996
Net sales increased 225% to $5,531,000 for the year ended March 31, 1997
("fiscal 1997") from $1,704,000 for the year ended March 31, 1996 ("fiscal
1996"). This increase was primarily attributable to an increase in sales to the
dental market of the Aurora diode laser and argon lasers which were introduced
in the latter half of fiscal 1996. Ophthalmic sales also increased significantly
as the Er:YAG was purchased by key ophthalmic industry leaders in several
countries. Sales during the last two quarters of fiscal 1997 were adversely
affected by a disruption in the supply of the Company's Arago argon laser and
vendor supply problems with the MOD argon laser.
Cost of sales increased 19% to $3,969,000 in fiscal 1997 from $3,325,000 in
fiscal 1996, due to an increase in sales.
Selling and marketing expenses increased 84% to $2,406,000 in fiscal 1997
from $1,309,000 in fiscal 1996. This increase was primarily attributable to
increased commissions and associated selling expenses, expenses associated with
attendance at two ophthalmic shows and from the consolidation of the Company's
expenses with those of Data.Site.
Research and development expenses increased 29% to $1,563,000 in fiscal 1997
from $1,213,000 in fiscal 1996. This increase resulted primarily from increases
in research and development personnel at the Company, partially offset by a
$450,000 payment received by the Company under a Small Business
21
<PAGE>
Innovative Research ("SBIR") grant. The Company also recognized $190,000 as a
research and development expense from the issuance of stock options to clinical
evaluators and medical directors.
General and administrative expenses increased 2% to $1,736,000 in fiscal
1997 from $1,709,000 in fiscal 1996. This increase was partially due to $75,000
of additional expenses from the consolidation of Data.Site.
Net interest income decreased to $15,000 in fiscal 1997 from $99,000 in
fiscal 1996. This reduction reflected the Company's limited cash balances prior
to the completion of its secondary offering in October 1996.
In fiscal 1997, the Company wrote off its investment in Mattan of $881,000
when the Mattan shares ceased being traded on the public market. In addition,
the Company expensed $250,000 of in-process research and development incurred in
connection with the formation of Data.Site. During the year the Company also
wrote off $332,000 as a settlement of its joint marketing relationship with
International Biolaser Corporation ("IBC") since it is unlikely that IBC will
repay its debt to the Company.
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1995
Net sales increased 36% to $1,704,000 in fiscal 1996 from $1,249,000 for the
year ended March 31, 1995 ("fiscal 1995"). This increase was primarily
attributable to an increase of $723,000 in sales to the dental market, related
principally to the introduction of three new products in the latter half of
fiscal 1996, the Aurora diode laser, the Arago argon laser and the MOD argon
laser. This increase was partially offset by a decrease in sales to the surgical
market of approximately $200,000, largely due to a decline in the demand for the
Company's 10 and 20 watt CO(2) lasers, which are nearing the end of their
product life cycle. The Company has recently experienced supply difficulties
with its Arago and MOD argon lasers.
Cost of sales increased 156% to $3,325,000 in fiscal 1996 from $1,298,000 in
fiscal 1995. This increase in the cost of sales was due primarily to (i) a
write-down of approximately $848,000 principally attributed to the Company's
CO(2) lasers and accessories obtained in the acquisition of Pfizer Laser, and
Nd:YAG lasers and accessories, which lasers were developed prior to March 31,
1992 and are nearing the end of their product life cycle, (ii) the
underabsorption of manufacturing costs due to low production volumes due in part
to the unavailability of certain key components which require long lead-times
for delivery, coupled with an increase in the number of manufacturing employees
during fiscal 1996 from 12 to 17 employees resulting in an increase in payroll
expense of approximately $280,000, and (iii) increased costs associated with
higher sales volumes in fiscal 1996. Cost of sales for fiscal 1996 also included
a fee of $122,000 to a third party pursuant to the Company's manufacturing
arrangement relating to the MOD argon laser.
Selling and marketing expenses increased 26% to $1,309,000 in fiscal 1996
from $1,036,000 in fiscal 1995. This increase was primarily attributable to
marketing efforts related to the Company's dental products, which included a
$219,000 expense related to the appointment of more than 25 new manufacturer's
representatives during the third quarter, and associated expenses including
training, promotional costs and commissions.
Research and development expenses increased 17% to $1,213,000 in fiscal 1996
from $1,036,000 in fiscal 1995. This increase resulted primarily from increases
in outside industrial and software design services of approximately $305,000,
and expenses of approximately $196,000 associated with the development of new
laser products. This increase was partially offset by a $175,000 reduction in
clinical studies expense, due to the completion of the Company's dental hard
tissue clinical trials and a $250,000 payment received by the Company under a
SBIR grant.
General and administrative expenses decreased 2% to $1,709,000 in fiscal
1996 from $1,747,000 in fiscal 1995. This decrease was the result of a reduction
of legal expenses associated with the Fiber Litigation, partially offset by
increases associated with becoming a public company. In 1995, the Company
incurred legal expenses of approximately $400,000 in connection with the Fiber
Litigation. Future legal
22
<PAGE>
expenses related to the Fiber Litigation (not including out-of-pocket expenses)
are expected to be limited in accordance with the Company's agreement with its
legal counsel, although if the litigation is successful, counsel will be
entitled to certain contingency fees.
Net interest income increased to $99,000 in fiscal 1996 from net interest
expense of $323,000 on fiscal 1995, reflecting the investment of the Company's
remaining net proceeds from its IPO and the repayment in December 1994 of a
significant portion of the Company's outstanding debt. Net loss increased 51% to
$5,753,000 in fiscal 1996 from $3,808,000 in fiscal 1995. This increase was
principally attributable to increases in cost of sales, selling and marketing
expenses and research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been financed through the proceeds from the
sale of the Company's equity securities, including an initial public offering in
December 1994 and a secondary public offering in October 1996, revenues from
operations and the proceeds from an SBIR grant. The Company's principal capital
requirements include the financing of inventory, accounts receivable, research
and development activities, the development of an ophthalmic and a surgical
sales force, the development of marketing programs and the acquisition and/or
licensing of patents.
At March 31, 1997, the Company had cash and short-term investments of
$5,192,000 and its working capital was $8,019,000. This represents an increase
from March 31, 1996, when the Company had a minimal cash balance. The increase
in cash and short-term investments was the result of the secondary offering of
securities completed in October 1996.
At March 31, 1997, the Company's indebtedness consisted of a $800,000
balance on its Silicon Valley line of credit, $57,000 in capital lease
obligations and $24,000 in a note payable.
The Company's Credit Facility with Silicon Valley Bank permits borrowings of
up to $1,000,000. Borrowings under the Credit Facility are secured by a
Certificate of Deposit pledged to Silicon Valley Bank by the Company pursuant to
a Pledge Agreement and bear an interest rate equal to the prime rate of
interest, as announced by Silicon Valley Bank, and are due and payable in
February 1998. As of March 31, 1997, total borrowings under this agreement were
$800,000. In connection with the Credit Facility, the Company issued to such
lender warrants to purchase up to 9,756 shares of the Company's Class A Common
Stock at an exercise price equal to $10.25 per share.
At March 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes totaling approximately $20,400,000 which will begin
to expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which
may limit the net operating loss carryforwards available for use in any given
year if certain events occur, including significant changes in stock ownership.
Utilization of the Company's net operating loss carryforwards to offset future
income may be limited.
From the end of fiscal 1997 through May 22, 1997, the Company has received
approximately $19,108,000 from the exercise of approximately 1,401,000 Class A
Warrants and approximately 1,251,000 Class B Warrants. As a result of such
exercises, the Company has issued an additional 1,401,000 Class B Warrants and
2,652,000 shares of Class A Common Stock.
The Company's future capital requirements will depend on many factors,
including the progress of the Company's research and development activities, the
scope and results of preclinical studies and clinical trials, the costs and
timing of regulatory approvals, the rate of technology advances by the Company,
competitive conditions within the medical laser industry, the establishment of
manufacturing capacity and the establishment of collaborative marketing and
other relationships which may either involve cash infusions to the Company, or
require additional cash from the Company. The Company's ability to meet its
working capital needs will be dependent on its ability to achieve a positive
cash flow from operations and profitable operations, in addition to its ability
to secure additional debt or equity financing. No assurance
23
<PAGE>
can be given that the Company will be able to achieve a positive cash flow from
operations, profitable operations or secure financing on acceptable terms.
GOVERNMENT GRANTS
The Company has been awarded a SBIR grant for approximately $750,000 for the
study of laser cataract emulsification. Substantially all of this grant has been
drawn for such purposes. The remainder of the grant can be drawn over the next
six months upon the achievement of specified criteria.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements, including notes thereto, at March 31,
1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995 follow.
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Premier Laser Systems, Inc.
We have audited the accompanying consolidated balance sheet of Premier Laser
Systems, Inc. as of March 31, 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule listed in the index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Premier Laser Systems, Inc. at March 31, 1997, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Orange County, California
May 1, 1997
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and the Shareholders of
Premier Laser Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Premier Laser Systems, Inc. at March 31,
1996, and the results of its operations and its cash flows for each of the two
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 17, 1996
26
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 173,610 $ 35,463
Short-term investments........................................................... 3,968,288 4,547,377
Restricted cash.................................................................. 1,050,000 --
Accounts receivable, net of an allowance for doubtful accounts of $387,263 and
$154,677 in 1997 and 1996, respectively........................................ 1,718,312 508,315
Inventories...................................................................... 2,964,632 2,185,355
Prepaid expenses and other current assets........................................ 783,319 419,504
------------- -------------
Total current assets............................................................... 10,658,161 7,696,014
Property and equipment, net........................................................ 780,945 493,942
Intangible assets, net............................................................. 7,875,028 7,353,462
Other assets....................................................................... 6,477 131,150
------------- -------------
Total assets....................................................................... $ 19,320,611 $ 15,674,568
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 1,217,256 $ 1,208,219
Line of credit..................................................................... 800,000 --
Notes payable to Pfizer............................................................ -- 481,195
Accrued compensation and related costs............................................. 318,000 96,132
Other accrued liabilities.......................................................... 272,369 91,976
Note payable and current portion of capital lease obligations...................... 31,920 --
------------- -------------
Total current liabilities.......................................................... 2,639,545 1,877,522
Capital lease obligations, net of current portion.................................. 49,356 --
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value:
Authorized shares--8,850,000
Issued and outstanding shares--none -- --
Common stock, Class A, no par value:
Authorized shares--35,600,000
Issued and outstanding shares--7,313,841 at March 31, 1997 and 4,702,203 at
March 31, 1996............................................................... 27,320,449 16,317,376
Common stock, Class E-1, no par value:
Authorized shares--2,200,000
Issued and outstanding shares--1,257,178 at March 31, 1997 and 1,256,818 at
March 31, 1996............................................................... 4,769,878 4,769,878
Common stock, Class E-2, no par value:
Authorized shares--2,200,000
Issued and outstanding shares--1,257,178 at March 31, 1997 and 1,256,818 at
March 31, 1996............................................................... 4,769,878 4,769,878
Warrants and options............................................................. 3,978,276 2,889,961
Unrealized holding gain on short-term investments................................ -- 3,666,367
Accumulated deficit.............................................................. (24,206,771) (18,616,414)
------------- -------------
Total shareholders' equity......................................................... 16,631,710 13,797,046
------------- -------------
Total liabilities and shareholders' equity......................................... $ 19,320,611 $ 15,674,568
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales............................................................ $ 5,530,861 $ 1,704,390 $ 1,249,403
Cost of sales........................................................ 3,968,539 3,324,757 1,298,420
------------- ------------- -------------
Gross profit (loss).................................................. 1,562,322 (1,620,367) (49,017)
Selling and marketing expenses....................................... 2,406,010 1,308,767 1,035,863
Research and development expenses.................................... 1,563,228 1,213,471 1,035,705
General and administrative expenses.................................. 1,736,184 1,709,327 1,747,090
Write off of investment in Mattan Corporation........................ 881,010 -- --
Termination of strategic alliance with IBC........................... 331,740 -- --
In-process research and development acquired in the Data.Site
acquisition........................................................ 250,000 -- --
------------- ------------- -------------
Loss from operations................................................. (5,605,850) (5,851,932) (3,867,675)
Interest income (expense), net....................................... 15,493 99,037 (322,540)
------------- ------------- -------------
Loss before extraordinary item....................................... (5,590,357) (5,752,895) (4,190,215)
Extraordinary gain from extinguishment of indebtedness............... -- -- 381,730
------------- ------------- -------------
Net loss............................................................. $ (5,590,357) $ (5,752,895) $ (3,808,485)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share................................................... $ (0.96) $ (1.26)
------------- -------------
------------- -------------
Shares used in the computation of net loss per share................. 5,833,326 4,556,959
------------- -------------
------------- -------------
Pro forma net loss per share (unaudited):
Loss before extraordinary items.................................... $ (1.59)
Extraordinary gain from extinguishment of indebtedness............. 0.15
-------------
Net loss........................................................... $ (1.44)
-------------
-------------
Shares used in computation of pro forma net loss per share........... 2,584,722
-------------
-------------
</TABLE>
SEE ACCOMPANYING NOTES.
28
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK COMMON STOCK
CLASS A CLASS E-1 CLASS E-2
----------------------- ---------------------- ---------------------- CLASS A
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
---------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994.................. 1,432,636 $ 5,372,022 1,268,488 $4,756,528 1,268,488 $4,756,528 $ --
Exercise of common stock options......... 4,936 2,848 3,011 1,081 3,011 1,081 --
Common stock issued in lieu of cash
payments............................... 1,635 13,046 1,447 11,552 1,447 11,552 --
Common stock forfeited due to cessation
of employment.......................... (7,798) (20,124) (6,905) (17,818) (6,905) (17,818) --
Warrants issued in connection with
private placement units................ -- -- -- -- -- -- --
Repurchase of common stock............... (17,681) (6,910) (15,752) (6,119) (15,752) (6,119) --
Initial public offering of units, net
proceeds............................... 2,400,000 7,633,504 -- -- -- -- 1,622,222
Conversion of warrants................... -- -- -- -- -- -- 186,000
Conversions of certain related party
notes and associated accrued
interest............................... 7,072 28,448 6,260 24,596 6,260 24,596 --
Conversion of debentures and associated
accrued interest....................... 321,099 1,284,397 -- -- -- -- 272,934
Exercise of over-allotment option........ 360,000 1,128,947 -- -- -- -- 239,901
Net loss................................. -- -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1995.................. 4,501,899 15,436,178 1,256,549 4,769,820 1,256,549 4,769,820 2,321,057
Common stock issued for investment in
Mattan................................. 200,000 881,010 -- -- -- -- --
Exercise of stock options................ 304 188 269 58 269 58 --
Increase in unrealized holding gain on
short-term investments................. -- -- -- -- -- -- --
Net loss................................. -- -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1996.................. 4,702,203 16,317,376 1,256,818 4,769,878 1,256,818 4,769,878 2,321,057
Common stock and B warrants issued in
connection with secondary public
offering............................... 2,403,500 9,363,298 -- -- -- -- --
Common stock issued in connection with
the formation of the Data.Site joint
venture................................ 159,787 1,200,000 -- -- -- -- --
Exercise of stock options and warrants... 48,351 249,774 360 -- 360 -- (25,729)
Stock options issued to Advisory Board
members, clinical evaluators and
medical directors...................... -- 190,001 -- -- -- -- --
Decrease in unrealized holding gain on
short-term investments................. -- -- -- -- -- -- --
Net loss................................. -- -- -- -- -- -- --
---------- ----------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1997.................. 7,313,841 $27,320,449 1,257,178 $4,769,878 1,257,178 $4,769,878 $2,295,328
---------- ----------- ---------- ---------- ---------- ---------- ----------
---------- ----------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
COMMON UNREALIZED
CLASS B STOCK HOLDING ACCUMULATED
WARRANTS WARRANTS GAIN DEFICIT TOTAL
---------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994.................. $ -- $ 192,130 $ -- $(9,055,034) $ 6,022,174
Exercise of common stock options......... -- -- -- -- 5,010
Common stock issued in lieu of cash
payments............................... -- -- -- -- 36,150
Common stock forfeited due to cessation
of employment.......................... -- -- -- -- (55,760)
Warrants issued in connection with
private placement units................ -- 186,000 -- -- 186,000
Repurchase of common stock............... -- -- -- -- (19,148)
Initial public offering of units, net
proceeds............................... 286,274 -- -- -- 9,542,000
Conversion of warrants................... -- (186,000) -- -- --
Conversions of certain related party
notes and associated accrued
interest............................... -- -- -- -- 77,640
Conversion of debentures and associated
accrued interest....................... 48,165 -- -- -- 1,605,496
Exercise of over-allotment option........ 42,335 -- -- -- 1,411,183
Net loss................................. -- -- -- (3,808,485) (3,808,485)
---------- --------- ----------- ------------- -----------
Balance at March 31, 1995.................. 376,774 192,130 -- (12,863,519) 15,002,260
Common stock issued for investment in
Mattan................................. -- -- -- -- 881,010
Exercise of stock options................ -- -- -- -- 304
Increase in unrealized holding gain on
short-term investments................. -- -- 3,666,367 -- 3,666,367
Net loss................................. -- -- -- (5,752,895) (5,752,895)
---------- --------- ----------- ------------- -----------
Balance at March 31, 1996.................. 376,774 192,130 3,666,367 (18,616,414) 13,797,046
Common stock and B warrants issued in
connection with secondary public
offering............................... 1,037,514 -- -- -- 10,400,812
Common stock issued in connection with
the formation of the Data.Site joint
venture................................ -- -- -- -- 1,200,000
Exercise of stock options and warrants... 76,530 -- -- -- 300,575
Stock options issued to Advisory Board
members, clinical evaluators and
medical directors...................... -- -- -- -- 190,001
Decrease in unrealized holding gain on
short-term investments................. -- -- (3,666,367) -- (3,666,367)
Net loss................................. -- -- -- (5,590,357) (5,590,357)
---------- --------- ----------- ------------- -----------
Balance at March 31, 1997.................. $1,490,818 $ 192,130 $ -- $(24,206,771) $16,631,710
---------- --------- ----------- ------------- -----------
---------- --------- ----------- ------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................. $(5,590,357) $(5,752,895) $(3,808,485)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 841,467 814,401 812,196
Write off of investment in Mattan Corporation........................ 881,010 -- --
Acquired in-process research and development......................... 250,000 -- --
Stock options issued to Advisory Board members....................... 190,001 -- --
Termination of strategic alliance with IBC........................... 125,000 -- --
Provision (reversal) of allowance for doubtful accounts receivable... 177,515 (151,751) --
Issuance of stock and stock options in lieu of payment for
services........................................................... -- -- 36,150
Extraordinary gain from extinguishment of debt....................... -- -- (381,730)
Amortization of debt discount........................................ -- -- 119,230
Common stock forfeited upon cessation of employment.................. -- -- (55,760)
Changes in operating assets and liabilities:
Accounts receivable................................................ (1,382,560) (92,716) 142,591
Inventories........................................................ (779,277) (14,665) (21,880)
Prepaid expenses and other current assets.......................... (351,438) (110,565) 137,224
Accounts payable................................................... (272,769) 594,654 (411,197)
Accrued liabilities................................................ 319,936 (598,847) 28,907
----------- ----------- -----------
Net cash used in operating activities.................................... (5,591,472) (5,312,384) (3,402,754)
INVESTING ACTIVITIES
Purchase of short-term investments....................................... (3,968,288) -- --
Patent expenditures...................................................... (178,139) (195,971) (204,838)
Acquisition of Data.Site................................................. (96,028) -- --
Purchase of property and equipment....................................... (24,477) (219,723) (45,785)
Note receivable pursuant to strategic alliance with IBC.................. -- (125,000) --
----------- ----------- -----------
Net cash used in investing activities.................................... (4,266,932) (540,694) (250,623)
FINANCING ACTIVITIES
Proceeds from equity offerings........................................... 10,400,812 -- 10,958,193
Net borrowings under line of credit...................................... 800,000 -- --
Proceeds from exercise of stock options and warrants..................... 300,575 304 --
Principle payments on note payable and capital lease obligations......... (454,836) -- (3,126,195)
Increase in restricted cash.............................................. (1,050,000) -- --
Proceeds from issuance of notes payable.................................. -- -- 1,519,000
Proceeds from issuance of common stock warrants.......................... -- -- 186,000
Repurchase of common stock............................................... -- -- (19,148)
Repurchase of mandatorily redeemable warrants............................ -- -- (285,000)
----------- ----------- -----------
Net cash provided by financing activities................................ 9,996,551 304 9,232,850
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents..................... 138,147 (5,852,774) 5,579,473
Cash and cash equivalents at beginning of year........................... 35,463 5,888,237 308,764
----------- ----------- -----------
Cash and cash equivalents at end of year................................. $ 173,610 $ 35,463 $ 5,888,237
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest................................................... $ 115,283 $ 52,129 $ 550,962
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION AND NATURE OF OPERATIONS
Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and
commenced operations in August 1991 after acquiring substantially all of the
assets and certain liabilities of Pfizer Laser Systems (Pfizer), a division of
Pfizer Hospital Products Group, Inc. The Company designs, develops, manufactures
and markets several lines of lasers for surgical and other medical purposes,
laser waveguides and fiber optic devices, disposables and associated accessory
products for the medical and dental market. The accompanying consolidated
financial statements include the accounts of the Company and its 51% owned
subsidiary Data.Site, LLC which is a joint venture established on January 31,
1997. All intercompany transactions and balances have been eliminated.
The Company has suffered recurring losses from operations and may continue
to incur losses for the foreseeable future due to the significant costs
anticipated to be incurred in connection with manufacturing, marketing and
distributing its laser products. In addition, the Company intends to conduct
continuing research and development activities, including regulatory submittals
and clinical trials to develop additional applications for its laser technology.
The Company operates in a highly competitive environment and is subject to all
of the risks inherent in a new business enterprise. In October 1996, the Company
completed a public offering of its securities which generated net proceeds
aggregating $10.4 million. The Company believes that the proceeds of this
offering and anticipated proceeds from the exercise of outstanding warrants and
options to acquire the Company's Class A common stock will be sufficient to meet
its working capital requirements through at least fiscal 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are recognized when products are shipped to customers.
SHORT-TERM INVESTMENTS AND RESTRICTED CASH
The Company invests excess cash in United States Treasury securities and
commercial paper generally with maturities of less than one year. Short-term
investments with a maturity of less than three months when purchased are
classified as cash equivalents. Investments with maturities in excess of three
months are presented as short-term investments in the accompanying financial
statements. Pursuant to Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company's
short-term investments are classified as available-for-sale and are reported at
fair market value with unrealized gains and losses reflected as an adjustment to
shareholders' equity. There were no material unrealized gains or losses at March
31, 1997.
Restricted cash consists primarily of certificates of deposits held to
secure borrowings under the Company's line of credit.
CONCENTRATION OF CREDIT RISK AND FOREIGN SALES
The Company generates revenues principally from sales in the medical field.
As a result, the Company's accounts receivable are concentrated primarily in
this industry. In addition, sales to one customer represented 10% of the
Company's sales in fiscal 1996 and 11% to a different customer in fiscal 1995.
Sales in foreign countries accounted for approximately 25%, 40% and 63% of the
Company's total sales in fiscal 1997, 1996 and 1995, respectively. These foreign
sales related almost entirely to sales in Asia and Europe.
31
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Generally, letters of credit are obtained
on international sales. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations.
LONG LIVED ASSETS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121). The adoption of SFAS No. 121
had no impact on the Company's financial position or results of operations.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market,
and are comprised of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 1,583,460 $ 938,560
Work-in-progress.................................................. 101,802 276,998
Finished goods.................................................... 1,279,370 969,797
------------ ------------
$ 2,964,632 $ 2,185,355
------------ ------------
------------ ------------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for replacements and
improvements are capitalized and expenditures for repairs and maintenance are
charged to operating expense as incurred.
Property and equipment consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Machinery, equipment, molds and tooling........................... $ 1,041,574 $ 1,032,188
Furniture, fixtures and office equipment.......................... 596,347 433,286
Software.......................................................... 250,000 --
------------ ------------
1,887,921 1,465,474
Less accumulated depreciation..................................... 1,106,976 971,532
------------ ------------
$ 780,945 $ 493,942
------------ ------------
------------ ------------
</TABLE>
Depreciation of furniture, machinery and equipment is calculated on a
straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment....................... 5-10 years
Furniture and fixtures........................ 10 years
Software...................................... 3 years
Leasehold improvements........................ Shorter of estimated useful
life or term of lease
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of patents and technology rights,
goodwill and license agreements. The costs assigned to acquired intangible
assets, partially based upon independent appraisals, are being amortized on a
straight-line basis over the estimated useful lives of the assets ranging from 2
to 15 years.
32
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Patents and technology rights..................................... $ 9,581,230 $ 9,413,088
Goodwill.......................................................... 1,042,279 --
License agreements................................................ 265,000 255,000
Other............................................................. -- 201,000
------------ ------------
10,888,509 9,869,088
Less accumulated amortization..................................... 3,013,481 2,515,626
------------ ------------
$ 7,875,028 $ 7,353,462
------------ ------------
------------ ------------
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. A substantial
portion of the Company's research and development expense is related to
developing new products, improving existing products or processes, and clinical
research programs.
The Company enters into agreements with certain doctors to exchange a
portion of a product's sales price for services related to the completion of
certain portions of clinical studies necessary for obtaining product approval
from the U.S. Food and Drug Administration. Typically, the amounts consist of a
portion of the product sales price which is equal to the cost of the services to
be rendered by the doctor. Pursuant to the agreements, in the event the doctor
is unable to complete the agreed upon clinical study, the doctor is required to
remit a cash payment for the entire amount. The amounts are capitalized as
prepaid research and development expense and are amortized upon completion of
certain milestones of the clinical study. These studies are generally completed
within one year. Research and development expenses included in prepaid expenses
totaled $405,000 and $204,000 at March 31, 1997 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with statement of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109), ACCOUNTING
FOR INCOME TAXES. SFAS 109 requires the liability method of accounting for
income taxes. This method mandates the recognition of deferred tax liabilities
and assets for expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities.
STATEMENTS OF CASH FLOWS
The Company invests its excess cash in money market funds. The Company
considers all highly liquid investments with an original maturity of three
months or less and money market funds to be cash equivalents.
Significant noncash investing and financing activities excluded from the
accompanying statements of cash flows are as follows:
In fiscal 1996, the Company issued 200,000 shares of Class A common stock in
connection with the acquisition of 1,150,000 shares of Mattan Corporation's
common stock. The value of the Mattan Corporation common stock shares was
$881,010 on the date of the transaction.
Concurrent with the completion of the Company's initial public offering,
certain notes payable to shareholders totaling $66,500 and convertible
debentures totaling $1,500,000, plus related accrued
33
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interest, were converted into 7,072 shares of Class A common stock and 6,260
shares of each Class E-1 and E-2 common stock, and 321,099 Units,
respectively.
In fiscal 1997, the Company issued 159,787 shares of Class A common stock
valued at $1,200,000 in connection with its acquisition of Data.Site.
NET LOSS PER SHARE
Net loss per share was computed based on the weighted average number of the
Company's common shares outstanding during fiscal 1997 and 1996 and excludes all
shares of Class E-1 and Class E-2 common stock, outstanding or subject to
option, because all such shares of stock are subject to escrow and the
conditions for the release of shares from escrow have not been satisfied. Common
stock equivalents were not considered in the net loss per share calculation
because the effect would be antidilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per common share was computed based on the weighted
average number of the Company's common shares outstanding during the fiscal year
ended March 31, 1995 after giving retroactive adjustment for the
recapitalization and the conversion of the Company's debentures into units which
occurred upon completion of the Company's initial public offering. The effect on
pro forma net loss per common share of the conversion of the Company's
debentures was to reduce historical net loss by $67,995 and to increase weighted
average shares outstanding by 321,099 shares for fiscal year ended March 31,
1995. Class E-1 and E-2 common stock shares were excluded from the pro forma net
loss per share calculation because the conditions for release of shares from
escrow have not been satisfied. Other common stock equivalents were not
considered in the pro forma net loss per share calculation because the effect on
the pro forma net loss per share would be antidilutive. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, all stock options and
warrants granted and common shares issued within one year of the Company's
initial public offering and not in escrow have been included as outstanding for
the six months ended September 30, 1994 (the date of the most recent financial
statements included in the Company's initial public offering prospectus) using
the treasury stock method.
EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE was issued and is effective for interim and annual periods
ending after December 15, 1997. The statement requires presentation of both
basic and diluted earnings per share. As of the result of the Company's net
loss, basic and diluted loss per share will not differ materially from the per
share amounts in the accompanying financial statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock option grants. Options
granted to consultants and other non-employees are accounted for under the fair
value method in accordance with Statement of Financial Accounting Standards No
123, ACCOUNTING FOR STOCK BASED COMPENSATION.
34
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Significant estimates and assumptions include inventory valuation and the
realizability of certain intangible assets. The Company's inventory and
intangibles largely relate to technologies which have yet to gain wide spread
market acceptance. Management believes no loss will be incurred on the
disposition of its inventory and that the remaining economic life of the
Company's tangible assets is reasonable. If wide spread market acceptance of the
Company's products is not achieved, the carrying amount of inventory and
intangible assets could be materially affected.
BASIS OF PRESENTATION
Certain prior year amounts have been reclassified in order to conform with
the current year presentation.
3. STRATEGIC ALLIANCES
In December 1995, the Company entered into a strategic marketing alliance
with Mattan Corporation (Mattan), a Canadian Corporation, whose stock was
publicly traded on the Alberta Stock Exchange. The strategic marketing alliance
agreement (the Agreement) stipulates that the Company would supply all laser
equipment and associated disposables for any laser surgery centers to be
designed and opened by Mattan in Canada and the United States. These surgery
centers would be operated under the name of Medical Laser Institute of America
(MLIA). In connection with entering into the Agreement, the Company issued
200,000 shares of the Company's Class A common stock with a fair market value of
$881,000 for 1,150,000 shares of Mattan's common stock. The Company accounted
for this investment as an available-for-sale security pursuant to SFAS No. 115.
At March 31, 1996, the fair value of this investment totaled approximately
$4,547,377 and the related unrealized holding gain totaled approximately
$3,666,367. As a result of the halting of trading of Mattan stock and ongoing
reorganization activities, the fair market value of the investment was zero at
March 31, 1997 and accordingly, the Company wrote off its investment.
In October 1995, the Company entered into a strategic business alliance
(Strategic Alliance) with International Biolaser Corporation (IBC). This
Strategic Alliance specified that the Company would manufacture IBC's CO2 and
argon lasers and that such products would be jointly marketed by the two
companies. Pursuant to the agreement, the Company advanced $125,000 to IBC in
exchange for a convertible note payable due in October 1997, bearing interest at
10% per annum and secured by substantially all of IBC's intangible assets. This
note payable is convertible, at the Company's sole option, into an 80% ownership
interest in IBC only after IBC has repaid certain pre-existing indebtedness. IBC
and the Company terminated the Strategic Alliance in August 1996. In settlement
of the Strategic Alliance, the Company obtained IBC's argon MOD laser
proprietary rights, intellectual property and technology in exchange for a
guaranty of $201,000 of IBC's outstanding indebtedness. As of March 31, 1997,
the Company wrote-off the $331,740 carrying value of its advances and payments
made under the guarantee on behalf of IBC due to the uncertainty regarding its
realizability.
35
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. JOINT VENTURE
Effective January 31, 1997, the Company entered into a joint venture with
Refractive Surgical Services, LLC (RSS), a Kansas City based company engaged in
the development of certain medical outcomes software. Under this joint venture,
the Company and RSS formed Data.Site. LLC, ("Data.Site"). Data.Site acquired and
assumed substantially all of the assets and liabilities of RSS. The Company
acquired a 51 percent interest in Data.Site, which was accounted for under the
purchase method of accounting, and issued 159,787 shares of its Class A common
stock to RSS. In connection with the acquisition the Company recorded goodwill
in the amount of $1,042,279. The Company is obligated to pay an additional
$300,000 to the shareholders of RSS in the form of common stock or cash, at the
option of the Company, if Data.Site's gross revenues equal or exceed $1,500,000
for the year ending December 31, 1997. The Company is also obligated to fund
Data.Site's operations with up to an additional $1,000,000 in cash or equivalent
services during the two-year period ending January 31, 1999.
5. GRANTS
In September 1995, the Company obtained a Small Business Innovative Research
Grant totaling approximately $750,000 for the study of laser emulsification.
Pursuant to the terms of the grant, the Company is eligible to receive
reimbursement for research and development costs incurred in connection with the
laser emulsification study up to $750,000 upon the achievement of certain
milestones, as defined. During fiscal 1997 and 1996, the Company received
approximately $450,000 and $250,000 under the grants, respectively. The amounts
received under the grant were offset against research and development costs
incurred in the study.
6. LINE OF CREDIT
The Company has a line of credit agreement with a bank which provides for
borrowings of up to $1,000,000. As of March 31, 1997, total borrowings under
this agreement were $800,000, bearing interest at the bank's prime rate (8.50%
at March 31, 1997). Borrowings under the agreement are secured by a certificate
of deposit. The agreement matures on February 12, 1998.
7. NOTES PAYABLE AND EXTRAORDINARY GAIN
Pursuant to an agreement between the Company and Pfizer, the Company paid
$1,386,195 of the notes payable to Pfizer immediately subsequent to the closing
of the Company's fiscal 1995 initial public offering and Pfizer forgave $650,000
of the total indebtedness. The remaining balance of $481,195, bearing interest
at 10% per annum at March 31, 1996, and related accrued interest were payable in
quarterly installments. This remaining balance was paid in full upon the closing
of the Company's fiscal 1997 public offering.
In June 1994, notes payable to third parties of $1,500,000 were converted
into convertible debentures. The debentures and related accrued interest were
converted into 321,099 Units (see footnote 10) concurrent with the closing of
the initial public offering. Also concurrent with the close of the offering,
notes payable to shareholders totaling $66,500 plus related accrued interest
were converted into 7,072 shares of Class A Common Stock and 6,260 shares each
of Class E-1 and E-2 common stock.
In August 1994, the Company completed a private placement of debt units,
whereby $1,550,000 of notes payable bearing interest at 10% per annum (the
Bridge Notes) and warrants to purchase 1,085,000 shares of Class A common stock
were issued. In connection with this private placement, the Company incurred
placement costs of $201,500 and issued the notes at a discount totaling
$186,000. These notes payable were paid in full in December 1994.
36
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the debt forgiven by Pfizer and the extinguishment of the
bridge notes, the Company recognized a net extraordinary gain on extinguishment
of debt totaling $381,730 in fiscal 1995.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its facilities and certain equipment under noncancellable
operating leases. Total rental expense for operating leases was $296,000,
$348,000 and $387,000 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively. At March 31, 1997, future minimum lease payments under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
1998.............................................................. $ 257,000
<S> <C>
1999.............................................................. 258,000
2000.............................................................. 249,000
2001.............................................................. 188,000
---------
$ 952,000
---------
---------
</TABLE>
Pursuant to the Company's facility lease, effective January 1997, the
Company becomes guarantor of a lease agreement between the Company's lessor and
a third party lessee. The guaranteed future minimum lease payments relating to
the third party are $112,000, and $86,000 for the years ended March 31, 1998 and
1999, respectively.
LITIGATION
The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), as a supplier of certain fiber optics that expires in the fiscal year
ending March 31, 2002. The agreement requires the supplier to sell exclusively
to the Company fiberoptics for medical and dental applications as long as the
Company purchases defined minimum amounts.
In March 1994, the Company initiated litigation against IFS. The Company's
complaint alleges that IFS and two of its officers misrepresented IFS' ability
to supply optical fibers, and that IFS breached its supply agreement and certain
warranties. In April 1994, IFS filed a cross-complaint alleging breach of
contact and intentional interference with prospective economic advantage,
seeking declaratory relief that the contract has been terminated and that IFS is
free to market its fiber optics to others. In July 1994, Coherent, Inc., a major
shareholder of IFS and a manufacturer of medical lasers which employ IFS optical
fibers, joined the lawsuit for the express purpose of defending their rights to
the IFS optical fibers. In May 1995, the Company instituted litigation
concerning this dispute in Orange County, California Superior Court against
Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual
employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the
events involved in the federal action against IFS took place and while
Westinghouse owned a substantial minority interest in IFS. The complaint charges
that Coherent conspired with IFS in the wrongful conduct which is the subject of
the federal lawsuit and interfered with the Company's contracts and relations
with IFS and with prospective contracts and advantageous economic relations with
third parties. The complaint asserts that Westinghouse is liable for its
employee's wrongful acts as an IFS executive while acting within the scope of
his employment at Westinghouse. The lawsuit seeks injunctive relief and
compensatory damages. In October 1995 the federal action was stayed by order of
the court in favor of the California state court action, in which the pleadings
have been amended to include all claims asserted by the Company in the federal
action. No trial date has been set.
37
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is involved in various disputes and other lawsuits from time to
time arising from its normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of the IFS litigation, disputes
and other lawsuits may adversely affect the Company, however, it is the opinion
of management, that the outcome of such matters will not have a material adverse
impact on the Company's financial position, results of operations, or cash
flows.
9. INCOME TAXES
The Company has incurred operating losses since its inception and as a
result, no provision for or benefit from income tax has been recorded.
Deferred tax assets consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Tax operating loss carryforwards................................ $ 7,540,050 $ 6,033,150
Inventory and receivable reserves and related temporary
differences................................................... 1,051,030 708,404
Depreciation and amortization................................... 598,817 141,077
Research and development credit carryforwards................... 429,686 597,683
Accruals not currently deductible............................... 126,693 105,767
------------- -------------
Total deferred tax assets....................................... 9,746,276 7,586,081
Valuation allowance for deferred tax assets..................... (9,746,276) (7,586,081)
------------- -------------
Net deferred taxes.............................................. $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company has approximately $20.4 million of federal net operating loss
carryforwards at March 31, 1997, which will begin to expire in 2006. A valuation
allowance has been established for the entire deferred tax asset related to
those net operating losses.
The Tax Reform Act of 1986 contains provisions which could substantially
limit the availability of the net operating loss carryforwards if there is a
greater than 50% change in ownership during a three year period. As a result of
the Company's public offerings the Company experienced an ownership change of
more than 50%, resulting in a limitation on the utilization of their net
operating loss carryforwards. The limitation is based on the value of the
Company on the date that the change in ownership occurred. The ultimate
realization of the loss carryforwards is dependent on the future profitability
of the Company.
10. SHAREHOLDERS' EQUITY
INITIAL AND SECONDARY PUBLIC OFFERINGS
On December 7, 1994, the Company completed an initial public offering of
2,400,000 Units of the Company's securities, each unit consisting of one share
of Class A common stock, one redeemable Class A warrant and one redeemable Class
B warrant (the Units). The Company realized net proceeds of $9,542,000 from this
offering. Each Class A warrant consists of the right to purchase one share of
Class A common stock and one Class B warrant through November 30, 1999 at an
exercise price of $6.50. Each Class B warrant consists of the right to purchase
one share of Class A common stock at an exercise price of $8.00. The Company has
the right to redeem the Class A and Class B warrants after November 30, 1997 at
a price of $.05 per warrant subject to certain conditions regarding the bid
price of the Class A common
38
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
stock. On January 12, 1995, the underwriter in the initial public offering
exercised its over allotment option to purchase 360,000 Units at the public
offering price, resulting in additional net proceeds of $1,411,000.
On October 18, 1996, the Company completed a public offering of 11,000 Units
of the Company's securities, each Unit consisting of 190 shares of Class A
common stock and 95 redeemable Class B warrants (the "Units"). The Company
realized net proceeds of $10,402,000 from this offering and the related exercise
of the underwriters overallotment option. Each Class B warrant consists of the
right to purchase one share of Class A common stock through November 30, 1999 at
an exercise price of $8.00.
STOCK OPTIONS
The Company has adopted several stock option plans that authorize the
granting of options to employees, officers and/or consultants to purchase shares
of the Company's Class A common stock. The stock option plans are administered
by the Board of Directors or a committee appointed by the Board of Directors,
which determines the terms of the options, including the exercise price, the
number of shares subject to option and the exercisability of the option. The
options are generally granted at the fair market value of the shares underlying
the options at the date of the grant and expire within ten years of the grant
date.
In addition to options granted pursuant to the stock option plans, the
Company has issued options to purchase shares of the Company's Class A common
stock to certain members of the Board of Directors, consultants and former notes
payable holders.
Effective December 30, 1993, the Company issued warrants under the 1993
Limited Warrant Plan to purchase 50,872 shares of common stock, with an exercise
price of $8.85 per share for services rendered by consultants in connection with
the acquisition of technology rights. In January 1995, the warrant holders
exercised their right to receive a cash payment of $285,000, an amount equal to
the liability owed to the consultants on the date of issuance, in exchange for
cancellation of the warrants.
The Company has elected to follow APB Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related Interpretations in accounting for its employee
stock option grants. Accordingly, no compensation expense has been recognized
for its employee stock option awards and its employee stock purchase plan
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant. The Company recognized
expense related to grants of options to non-employees in accordance with the
fair value provision of SFAS No. 123. Such expense was $190,001 and none during
fiscal 1997 and 1996, respectively. FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, requires pro forma information regarding net income
(loss) and net income (loss) per share using compensation that would have been
incurred if the Company had accounted for its employee stock options under the
fair value method of that Statement. The fair value of options granted have been
estimated at the date of grant using a Black-Scholes option pricing model using
the following assumptions:
<TABLE>
<CAPTION>
Risk free interest rate.......................................... 6.0%
<S> <C>
Stock volatility factor.......................................... 0.580
Weighted average expected option life............................ 4 years
Expected dividend yield.......................................... 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
compensation expense used in determining the pro forma
39
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
information may not be indicative of such expense in future periods as the 1997
and 1996 amounts are based only on option grants after December 15, 1994. Pro
forma information is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Pro forma net loss.............................................. $ (6,593,000) $ (6,135,000)
Pro forma net loss per share.................................... $ (1.13) $ (1.35)
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended March 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year............ 1,423,949 $ 5.58 788,157 $ 6.14 734,646 $ 9.14
Granted................................... 1,042,756 6.16 704,700 4.89 621,815 5.01
Exercised................................. (1,899) 1.00 (1,722) 1.00 (3,067) 1.03
Forfeited................................. (156,757) 10.53 (67,186) 4.96 (565,237) 8.81
---------- ---------- ----------
Outstanding--end of year.................. 2,308,049 5.51 1,423,949 5.58 788,157 6.14
---------- ----------- ---------- ----- ---------- -----
---------- ----------- ---------- ----- ---------- -----
Exercisable at end of year................ 775,629 $ 5.18 782,999 $ 6.15 758,157 $ 6.19
---------- ----------- ---------- ----- ---------- -----
---------- ----------- ---------- ----- ---------- -----
Weighted-average fair value of options
granted during the year................. $ 3.44 $ 2.46 $ 2.53
----------- ----- -----
----------- ----- -----
</TABLE>
The weighted average remaining contractual life of options as of March 31,
1997 was as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------
----------------------------------------------------------------
WEIGHTED-
NUMBER OF WEIGHTED-AVERAGE WEIGHTED AVERAGE
SHARES REMAINING CONTRACTUAL AVERAGE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- ---------------------------------------- ----------- --------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.00................................... 28,438 1.7 $ 1.00 28,438 $ 1.00
$4.50 - $8.85........................... 2,255,921 9.0 5.51 723,501 5.16
Greater than $10.00..................... 23,690 6.8 10.73 23,690 10.73
</TABLE>
CLASS E-1 AND CLASS E-2 COMMON STOCK
The Company's Class E-1 and Class E-2 common stock is held in escrow, is not
transferable, can be voted and will be converted into Class A common stock only
upon the occurrence of specified events. All of the Class E-1 common stock will
be automatically converted into Class A common stock in the event that the
Company's net income before provision for income taxes, as defined, exceeds
certain amounts. These amounts were originally $6,850,000, $8,425,000,
$9,900,000 for the fiscal years ending March 31, 1998 through 2000,
respectively, but these amounts will be increased in future fiscal years in
proportion to increases in the weighted average number of shares of common stock
outstanding (as defined) in the relevant year, as compared to the number of
shares outstanding immediately after the Company's initial public offering. In
addition, the Class E-1 common stock will be converted if the closing price, as
defined, of the Company's Class A common stock shall average in excess of $19.25
for any 30 consecutive trading
40
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
days during the period May 1, 1996 to November 30, 1997. If none of the above
events occur, the Class E-1 common stock will be canceled on June 30, 2000. All
of the Class E-2 common stock will be automatically converted into Class A
common stock in the event that: (1) the Company's net income before provision
for income taxes, as defined, amounts to at least $14,750,000, $20,475,000 or
$26,750,000 for the years ending March 31, 1998 through 2000, respectively,
(which amounts shall be adjusted in the same manner as those for the Class E-1
common stock) or (2) the closing price, as defined, of the Company's Class A
common stock shall average in excess of $24.00 for any 30 consecutive trading
days during the period May 1, 1996 to November 30, 1997. If none of the above
events occur, the Class E-2 common stock will be canceled on June 30, 2000.
The Company will, in the event of the release of the Class E-1 and Class E-2
common stock, recognize during the period in which the earnings thresholds are
met or such minimum bid prices are achieved, a substantial noncash charge to
earnings equal to the fair value of such shares on the date of their release,
which would have the effect of significantly increasing the Company's loss or
reducing or eliminating earnings, if any, at such time.
11. EMPLOYEE BENEFIT PLAN
The Company adopted a Defined Contribution 401(k) Profit Sharing Plan,
effective January 1, 1997 covering substantially all of its employees. The Plan
permits eligible employees to contribute a portion of their compensation to the
Plan, on a tax deferred basis. The Company may make matching contributions, in
amounts determined by the Company's Board of Directors. The Company's
contributions will be in the form of shares of the Company's common stock.
During 1997, no amounts were contributed by the Company to the Plan.
12. SUBSEQUENT EVENT
ACQUISITION OF EYESYS TECHNOLOGIES, INC.
On April 24, 1997, the Company entered into an Agreement and Plan of Merger,
pursuant to which it will acquire EyeSys Technologies, Inc. ("EyeSys").
Consummation of the transaction is subject to satisfaction of certain
conditions. In connection with the merger, the Company will issue, to certain
EyeSys creditors, shareholders, option holders and warrant holders, common stock
having a value of $10,600,000, as well as options to purchase 165,000 shares of
the Company's common stock which have a deemed value of $495,000. If EyeSys
enters into certain license agreements related to its technology within 90 days
of closing, the Company may be required to issue additional common stock or
options to purchase common stock pursuant to the following formula: the Company
shall issue securities with a value equal to 78% of the first $1,500,000 of
license fees and 50% of additional license fees received prior to April 24,
1998.
41
<PAGE>
PREMIER LASER SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS/
BEGINNING RECOVERIES BALANCE
OF AND AT END OF
DESCRIPTION PERIOD ADDITIONS WRITE-OFFS OTHER* PERIOD
- ---------------------------------------------- ----------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful accounts
receivable................................ $ 154,677 $ 177,515 $ (119,054) $ 174,125 $ 387,263
Inventory reserves.......................... 950,325 252,999 -- -- 1,203,324
1996
Allowance for doubtful accounts
receivable................................ $ 306,428 $ 254,962 $ (406,713) $ -- $ 154,677
Inventory reserves.......................... 699,269 838,968 (587,912) -- 950,325
1995
Allowance for doubtful accounts
receivable................................ $ 574,106 $ 220,453 $ (488,131) $ -- $ 306,428
Inventory reserves.......................... 540,987 158,282 -- -- 699,269
</TABLE>
- ------------------------
* Allowance for Data.Site
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 1, 1997, the Company filed a Current Report on Form 8-K, reporting
a change in its certified accountant. Reference is hereby made to such Current
Report for further discussion of this matter.
43
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company and their ages as of
June 2, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Colette Cozean, Ph.D............................... 39 Director, Chairman of the Board, Chief Executive
Officer, President and Director of Research
T. Daniel Caruso, Jr............................... 54 Senior Vice President, Sales and Marketing
Ronald E. Higgins.................................. 55 Vice President, Regulatory Affairs and Quality
Assurance, and Secretary
Michael L. Hiebert................................. 34 Vice President, Finance and Chief Financial Officer
Richard Roemer..................................... 63 Vice President, Operations and Industrial Lasers
Patrick J. Day..................................... 70 Director(1)
Grace Ching-Hsin Lin............................... 47 Director(1)(2)
G. Lynn Powell, D.D.S.............................. 55 Director(2)
E. Donald Shapiro.................................. 65 Director(1)(2)
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next Annual Meeting of Shareholders or
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The business experience, principal occupations and employment, as well as
periods of service, of each of the directors and executive officers of the
Company during at least the last five (5) years are set forth below.
DIRECTORS AND OFFICERS
COLETTE COZEAN, PH.D. is a founder of the Company and has been Chairman of
the Board of Directors, President and Director of Research of the Company since
it began operations in August 1991 and became the Chief Executive Officer in
1994. From April 1987 to August 1991, Dr. Cozean served as Director of Research
and Development, Regulatory Affairs and Clinical Programs at Pfizer Laser and in
such capacities managed the development of the laser technologies which were
acquired by the Company from Pfizer Laser. Prior to April 1987, Dr. Cozean held
various research positions at Baxter Edwards, a division of Baxter Healthcare
Corporation ("Baxter"), and American Technology and Ventures, a division of
American Hospital Supply Company ("American Hospital"). Baxter and American
Hospital are manufacturers and suppliers of advanced medical products. Dr.
Cozean holds several patents, has published many articles and has served as a
member of the National Institutes of Health grant review committee. Dr. Cozean
holds a Ph.D. in biomedical engineering and an M.S. in Electrical Engineering
from Ohio State University, a B.S. in biomedical engineering from the University
of Southern California, and a B.A. in physical sciences from Westmont College.
T. DANIEL CARUSO, JR. has been Vice President, Sales and Marketing of the
Company since July 1992 and became a Senior Vice President in May 1996. From
July 1989 to April 1992, Mr. Caruso was Vice President, Sales and Marketing at
Hycor Biomedical, a laboratory diagnostics company. From March 1988 to July
1989, Mr. Caruso was President and Chief Executive Officer of Physicians Home
Infusion Care, a
44
<PAGE>
home health care company. Mr. Caruso has a B.S. in Biology and Chemistry and an
M.B.A. in marketing from the University of Southern California.
RONALD E. HIGGINS is a founder, Vice President, Regulatory Affairs and
Quality Assurance and Secretary of the Company, a position he has held since
January 1995. From the founding of the Company in August 1991 to January 1995,
Mr. Higgins was Vice President, Operations. From September 1989 to August 1991,
Mr. Higgins was Manager of Regulatory Affairs and Quality Assurance at Pfizer
Laser. From January 1987 to September 1989, Mr. Higgins was Director of
Regulatory Affairs at Cardio Pulmonics, a medical device company. Mr. Higgins
holds a B.S. in Zoology from the University of Utah and has completed post
graduate work in the areas of biochemistry, educational training, regulatory
affairs, manufacturing and engineering.
MICHAEL L. HIEBERT has been the Company's Vice President, Finance and Chief
Financial Officer since November 5, 1996. Prior to joining the Company, Mr.
Hiebert was the controller and director of management information systems and
business analysis of Urethane Technologies, Inc., a plastics manufacturer, which
position he held from 1994 to 1996. From 1992 to 1994, Mr. Hiebert was Vice
President, Finance and Administration of Active Organics, Inc., a cosmetics
manufacturer, and from 1987 to 1992 he was an accounting manager with the
general engineering firm of C. A. Rasmussen, Inc.
RICHARD ROEMER has been Vice President, Operations and Industrial Lasers of
the Company since February 1995. From 1994 to 1995, Mr. Roemer was an
independent consultant for the Company. From 1988 to 1994, Mr. Roemer was a
consultant to and general manager of California Labs, JMED, Inc. and Pineridge
Capital, which are manufacturers of laser-based medical products. Prior to 1988,
Mr. Roemer founded the laser group of Mells Griot and served as the Chief
Operating Officer of Hughes Aircraft Corporation. Mr. Roemer holds a B.S. degree
in Mechanical Engineering from Rutgers University.
PATRICK J. DAY has served as a director of the Company since August 1991.
Mr. Day is a Certified Public Accountant and owns a CPA firm which he
established in 1967. He has served as a director for several organizations
including the First Presbyterian Church of Hollywood and many private companies.
Mr. Day is the father of Dr. Cozean, the Company's Chairman of the Board, Chief
Executive Officer and President. Mr. Day has a B.A. in accounting from the
University of Idaho.
GRACE CHING-HSIN LIN has served as a director of the Company since February
1992, representing a group of original investors in the Company. Ms. Lin has
been an agent providing real estate consulting services for Security Trust
Realty since April 1988 and an owner of South Pacific Investment, an investment
management company, since 1989.
G. LYNN POWELL, D.D.S. Dr. Powell joined the Board of Directors in January
1997. Dr. Powell has been on the faculty at the University of Utah since 1982,
where he currently serves as the Assistant Dean for Dental Education in the
School of Medicine and Professor in the Department of Pathology. He is a patent
holder who has performed extensive research in the field of dentistry serving as
primary investigator on several funded grants and is author or co-author of over
45 papers in journals, a majority of which relate to the use of lasers in
dentistry. He serves as a reviewer for three dental and laser journals, has
lectured nationally as well as internationally and routinely presents his work
at research meetings. Dr. Powell is the current President of the International
Society for Lasers in Dentistry. Dr. Powell received his D.D.S. from the
University of Washington and was on the full time faculty in Restorative
Dentistry at that institution for ten (10) years.
E. DONALD SHAPIRO joined the Board of Directors in August 1994. Since 1983,
Mr. Shapiro has served as the Joseph Solomon Distinguished Professor of Law at
New York Law School where he served as both Dean and Professor of Law from 1973
to 1983. He is Supernumerary Fellow of St. Cross College at Oxford University,
England. Mr. Shapiro received a J.D. degree at Harvard Law School. He currently
serves on the Boards of Directors for several public companies including Loral
Space and Communications, Ltd., Eyecare Products PLC, Kranzco Realty Trust,
Group Health Incorporated, Vasomedical Corporation, MacroChem Corporation,
United Industrial, Telepad, Inc. and Food Entertainment, Inc. He also serves on
45
<PAGE>
the Board of Directors of Bank Leumi NY. Mr. Shapiro is special counsel to the
law firm of Herzfeld and Rubin, which firm is representing the Company in the
Fiber Litigation described above under "Business-- Legal Proceedings." Mr.
Shapiro is not a partner of such firm and receives no compensation calculated by
reference to such firm's profits.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, and the regulations
thereunder, require the Company's directors, executive officers and persons who
own more than 10% of a registered class of the Company's equity securities to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company, and to furnish the Company with copies of all Section 16(a)
forms they file.
During the most recent fiscal year ended March 31, 1997, G. Lynn Powell,
D.D.S., a director of the Company, failed to file on a timely basis an Initial
Statement of Beneficial Ownership of Securities on Form 3.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the two (2) fiscal years ended March 31, 1996 and
1997, all other Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid to
the Company's Chief Executive Officer and each other executive officer of the
Company who received an annual salary and bonus of more than $100,000 for
services rendered to the Company during the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION(1) --------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------------------------- ----------- ---------- --------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D, President, ............ 1997 $ 151,064 -- 217,500 $ 32,300(2)
Chief Executive Officer and 1996 $ 112,000 -- 140,000 $ 19,800(3)
Director of Research 1995 $ 97,500 $ 20,000 358,650 $ 4,800(4)
T. Daniel Caruso, Jr. ....................... 1997 $ 105,625 $ 10,000 109,500 $ --
Senior Vice President, 1996 $ 90,625 $ 10,000 95,000 $ --
Sales and Marketing -- $ -- $ -- -- $ --
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the named persons did not exceed the lesser of either $50,000 or 10% of
the total annual salary reported for such person. The Company has agreed to
enter into Termination Agreements with the above executive officers which
will provide, when executed, that in the event of a termination of
employment following a change in control of the Company, as defined in such
agreement, the named executive officer will receive (i) a lump sum cash
payment equal to two times the highest annual level of total cash
compensation paid to that officer during the three (3) calendar years prior
to the termination; (ii) immediate vesting of all previously granted stock
options; and (iii) continuing health benefits for a period of twenty-four
(24) months. The Company has also entered into Employment Agreements with
each of the named persons which provide for two to four (4) months of
severance benefits upon their termination of employment. Based upon salary
levels as of June 5, 1997, such severance benefits range from approximately
$36,668 to $55,000 for each of the named persons.
46
<PAGE>
(2) Represents the full amount of premiums paid by the Company ($27,500) for a
split-dollar life insurance policy in the amount of $2 million on the life
of Dr. Cozean and an auto allowance of $4,800.
(3) Represents the full amount of premiums paid by the Company ($15,000) for a
split-dollar life insurance policy in the amount of $2 million on the life
of Dr. Cozean and an auto allowance for Dr. Cozean ($4,800).
(4) Represents an auto allowance for Dr. Cozean.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted to the named executive officers during the fiscal year ended March 31,
1997. This information includes hypothetical potential gains from stock options
granted in fiscal 1997. These hypothetical gains are based entirely on assumed
annual growth rates of 5% and 10% in the value of the Company's Common Stock
price over the 10 year life of the stock options granted in 1997. These assumed
rates of growth were selected by the Securities and Exchange Commission for
illustration purposes only, and are not intended to predict future stock prices,
which will depend upon market conditions and the Company's future performance
and prospects.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SHARES OF OPTIONS PRICE APPRECIATION FOR
COMMON STOCK GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES DURING BASE PRICE EXPIRATION ------------------------
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE(1) DATE 5%($) 10%($)
- ------------------------- --------------- --------------------- ------------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D..... 217,500(2) 38% $ 6.125 2007 $ 837,805 $ 2,123,163
T. Daniel Caruso, Jr..... 109,500(3) 19% $ 6.125 2007 $ 421,792 $ 1,068,903
</TABLE>
- ------------------------
(1) The options were granted at an exercise price at least equal to the fair
market value of the Class A Common Stock on the date of grant. The exercise
price may be paid by delivery of cash or already owned shares, subject to
certain conditions.
(2) Such options vest in three equal annual installments commencing March 31,
1998.
(3) Such options vest in three equal annual installments commencing March 31,
1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information regarding stock options
exercised by the named executive officers during the fiscal year ended March 31,
1997, as well as the number of exercisable and unexercisable in-the-money stock
options and their values at fiscal year-end. An option is in-the-money if the
fair market value for the underlying securities exceeds the exercise price of
the option.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS AT MARCH 31, 1997 AT MARCH 31, 1997(A)
ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------------- ------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D.............. 0 $ 0 141,730 574,420 $ 97,115 $ 204,710
T. Daniel Caruso, Jr.............. 0 $ 0 37,530 179,500 $ 20,000 $ 37,500
</TABLE>
- ------------------------
(A) Represents the Nasdaq closing price of underlying securities at fiscal year
end, minus the exercise price of the options.
47
<PAGE>
DIRECTOR COMPENSATION
All directors are elected annually and hold office until the next Annual
Meeting of Shareholders and until their successors are duly elected and
qualified. The Company pays to all nonemployee directors $1,000 per Board
meeting attended, $1,000 per committee meeting attended which is not in
conjunction with a Board meeting, $500 per committee meeting attended in
conjunction with a Board meeting, and $500 per telephonic Board or committee
meeting. Directors are also reimbursed for their out-of-pocket expenses incurred
in attending meetings of the Board of Directors and its committees. Mr. Shapiro
also receives a fee of $1,000 per month as compensation for additional
consulting services relating to the Company's pending litigation matter and to
new business issues.
The Company may also periodically award options or warrants to its
directors, under its existing stock option plans and otherwise. The Company's
outstanding Stock Option Plans include: (i) the 1995 Stock Option Plan which
provides for the granting of "incentive stock options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock
Options"), and nonstatutory options; (ii) the 1996 Stock Option Plan which also
provides for the granting of Incentive Stock Options and nonstatutory stock
options; (iii) the February 1996 Stock Option Plan which provides for the
granting of nonstatutory stock options, and (iv) the 1997 Stock Option Plan,
described below.
The Company's 1997 Stock Option Plan (the "1997 Plan") authorizes the
Company to grant options to purchase shares of the Company's Class A Common
Stock, no par value, to selected officers, directors, key employees and other
providers of service to the Company, with the aggregate number of shares to be
delivered upon exercise not to exceed 1,500,000.
The 1997 Plan terminates in February 2007. Options granted under the 1997
plan will have a term not to exceed ten (10) years and an exercise price in an
amount determined by the Board of Directors or the committee administering the
Plan. As of June 11, 1997, options to purchase an aggregate of 1,033,000 shares
of the Company's Class A Common Stock had been issued under the 1997 Plan to the
Company's directors and executive officers, at an exercise price of $6.125 per
share.
The Company's Articles of Incorporation and indemnification agreements
entered into between the Company and certain of the Company's directors and
officers require the Company to indemnify such officers and directors to the
fullest extent permitted by applicable law against liabilities incurred in
connection with their duties as officers and directors of the Company. Such
indemnification rights may extend to liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended March 31, 1997, the members of the Compensation
Committee were Grace Ching-Hsin Lin, G. Lynn Powell, D.D.S. and E. Donald
Shapiro, all of whom are non-employee directors of the Company. No member of the
Compensation Committee has a relationship that would constitute an interlocking
relationship with executive officers and directors of another entity.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors hereby submits its
report concerning the compensation of the Company's executive officers,
including the Chief Executive Officer. The Compensation Committee is responsible
for setting and administering the compensation policies of the Company with
respect to its executive officers.
The Company's executive compensation program is designed to align executive
compensation with the Company's business strategy and performance. The goals of
the executive compensation program are:
48
<PAGE>
(i) to attract and retain key executives critical to the success of the Company;
(ii) to provide levels of compensation which are competitive with other entities
in the industry of similar size; and (iii) to motivate executives to enhance
long-term shareholder value by building appropriate ownership in the Company.
The annual compensation has been considered for the executive officers,
including Dr. Colette Cozean, the Company's President and Chief Executive
Officer, including base salaries, coupled with stock options and other
incentives. Base salaries are the fixed component of the executive officers'
compensation package. Salaries are set and adjusted based upon competitive
standards and individual performance.
The award of any bonuses is based upon the performance of the Company during
the prior year and the contribution of each individual executive officer to the
Company's performance. Among the factors (the "Performance Factors") which the
Committee has established to assess the Company's overall performance are: the
Company's performance against budget and targets for sales, expenses and
revenue, and the successful implementation of both short and long-term corporate
strategies for enhancing shareholder value (e.g. strategic acquisitions,
divestitures, facilities expansion, productivity, improvements, etc.) and
product development along with technical advances as well as new patents.
A substantial portion of the compensation of executive officers is based
upon the award of stock options which rely on increases in the value of the
Company's Common Stock. The issuance of options is intended to encourage such
employees to establish a meaningful, long-term ownership interest in the Company
consistent with the interests of the Company's shareholders. Under the Company's
stock option plans, options are granted from time to time to certain officers,
directors and key employees of the Company and its subsidiaries at the fair
market value of the Company's Common Stock at the time of grant. Because the
compensation element of options is dependent on increases over time in the
market value of such shares, stock options represent compensation that is tied
to the Company's long-term performance.
The Committee has reviewed the 1997 base salaries of each of the executive
officers and is of the opinion that such salaries are not at all unreasonable in
view of those paid by the Company's competitors of a similar size. The Committee
also reviewed the stock options awarded in 1997 and is of the opinion that the
option awards are reasonable in view of the officers' individual performance and
positions with the Company.
The Committee has also reviewed Dr. Cozean's base salary for 1997 and is of
the opinion that her salary is not unreasonable in view of those paid to Chief
Executive Officers of the Company's competitors of similar size. Dr. Cozean
received options for the purchase of 217,500 shares of the Company's common
stock all at prices equaling the Company's then current trading price, subject
to a three (3) year vesting schedule, for her past and anticipated services to
the Company, which the Committee believes to be reasonable and appropriate in
light of her individual performance and that of the Company during 1997 based
upon the performance factors discussed above. Dr. Cozean was not paid any cash
bonus for 1997.
COMPENSATION COMMITTEE:
E. Donald Shapiro
Grace Ching-Hsin Lin
G. Lynn Powell, D.D.S.
49
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Class A Common Stock, based on its market price, with
the cumulative total return of companies on the Nasdaq Stock Market (U.S. common
stocks) and the Hambrecht & Quist Technology Index, assuming reinvestment of
dividends, for the period beginning December 1, 1994 through the Company's
fiscal year ended March 31, 1997. The Company's Class A Common Stock was
initially offered to the public on November 30, 1994. This graph assumes that
the value of the investment in the Company's Class A Common Stock and each of
the comparison groups was $100 on December 1, 1994.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PREMIER LASER NASDAQ STOCK HAMBRECHT &
<S> <C> <C> <C>
Systems, Inc. Market (US) Quist Technology
12/01/94 $100.00 $100.00 $100.00
3/31/95 $80.00 $109.00 $115.00
3/31/96 $172.50 $148.00 $156.00
3/31/97 $110.00 $165.00 $181.00
</TABLE>
<TABLE>
<CAPTION>
12/1/94 3/31/95 3/31/96 3/31/97
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Premier Laser Systems, Inc............................................ $ 100.00 $ 80.00 $ 172.50 $ 110.00
NASDAQ Stock Market (US).............................................. $ 100.00 $ 109.00 $ 148.00 $ 165.00
Hambrecht & Quist Technology Index.................................... $ 100.00 $ 115.00 $ 156.00 $ 181.00
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of June 11, 1997,
regarding the beneficial ownership of the Company's Common Stock by: (i) all
persons known by the Company to beneficially own more than 5% of the Company's
Common Stock, (ii) each director and executive officer of the Company, and (iii)
all directors and executive officers as a group. The following table treats the
Common Stock, the Class E-1 Common Stock and the Class E-2 Common Stock as a
single class.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP STOCK
- --------------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Colette Cozean, Ph.D.(2)................................................... 318,185 2.4%
Patrick J. Day(3).......................................................... 242,981 1.9%
E. Donald Shapiro(4)....................................................... 40,000 *
Ronald E. Higgins(5)....................................................... 107,820 *
Grace Ching-Hsin Lin(6).................................................... 62,801 *
T. Daniel Caruso, Jr.(7)................................................... 78,052 *
Michael L. Hiebert(8)...................................................... 18,000 *
Richard Roemer(9).......................................................... 5,000 *
G. Lynn Powell, D.D.S.(10)................................................. 31,501 *
All directors and executive officers as a group (9 persons)(10)............ 904,340 6.8%
</TABLE>
- ------------------------
* Less than 1%.
50
<PAGE>
(1) The address of each of Dr. Cozean, Ms. Lin and Messrs. Day, Caruso, Hiebert,
Higgins, Shapiro and Roemer is 3 Morgan, Irvine, California 92618. Unless
otherwise noted, the Company believes that all persons named in the table
have sole investment and voting power with respect to all shares of Class A
Common Stock beneficially owned by such person, such shares, subject to
community property laws where applicable.
(2) Includes 49,144 shares of Class A Common Stock, 43,514 shares of Class E-1
Common Stock and 43,514 shares of Class E-2 Common Stock held by Dr. Cozean
and 1,594 shares of Class A Common Stock, 1,412 shares of Class E-1 Common
Stock and 1,412 shares of Class E-2 Common Stock held by Dr. Cozean as
custodian for her two minor children. Also includes 177,595 shares of Class
A Common Stock subject to options exercisable within sixty (60) days.
(3) Includes 54,263 shares of Class A Common Stock, 48,047 shares of Class E-1
Common Stock and 48,047 shares of Class E-2 Common Stock. Also includes
58,992 shares of Class A Common Stock, 16,816 shares of Class E-1 Common
Stock and 16,816 shares of Class E-2 Common Stock subject to warrants and
options exercisable within sixty (60) days.
(4) Includes 40,000 shares of Class A Common Stock subject to Class A Warrants
and other warrants and options exercisable within sixty (60) days.
(5) Includes 24,400 shares of Class A Common Stock, 30,460 shares of Class E-1
Common Stock and 30,460 shares of Class E-2 Common Stock. Also includes
22,500 shares of Class A Common Stock subject to options exercisable within
sixty (60) days.
(6) Includes 6,330 shares of Class A Common Stock, 5,605 shares of Class E-1
Common Stock and 5,605 shares of Class E-2 Common Stock held by Linco
Investments, a limited partnership in which Ms. Lin's husband serves as a
general partner, and 1,899 shares of Class A Common Stock, 1,681 shares of
Class E-1 Common Stock and 1,681 shares of Class E-2 Common Stock held by
the pension plan for Ms. Lin's husband. Also includes 40,000 shares of Class
A Common Stock subject to warrants exercisable within sixty (60) days.
(7) Includes 13,722 shares of Common Stock, 12,150 shares of Class E-1 Common
Stock and 12,150 shares of Class E-2 Common Stock. Also includes 32,022
shares of Class A Common Stock, 4,004 shares of Class E-1 Common Stock and
4,004 shares of Class E-2 Common Stock subject to options exercisable within
sixty (60) days.
(8) Includes 18,000 shares of Class A Common Stock subject to warrants and
options exercisable within sixty (60) days.
(9) Includes 5,000 shares of Class A Common Stock subject to warrants and
options exercisable within sixty (60) days.
(10) Includes 31,501 shares of Class A Common Stock subject to warrants and
options exercisable within sixty (60) days.
(11) Includes 151,352 shares of Class A Common Stock, 142,869 shares of Class
E-1 Common Stock and 142,869 shares of Class E-2 Common Stock. Also includes
425,610 shares of Class A Common Stock, 20,820 shares of Class E-1 Common
Stock and 20,820 shares of Class E-2 Common Stock subject to warrants and
options exercisable within sixty (60) days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Neither the Company nor any of its directors, nominees, executive officers
or beneficial owners of more than five percent of the outstanding Common Stock,
or any immediate family member of the foregoing, are, or during fiscal 1997 at
any time, were, or are proposed to be, parties to, or have a direct or indirect
material interest in, any relationships or transactions, or series of related
transactions, described in Item 404 of Regulation S-K promulgated by the
Securities and Exchange Commission.
51
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE IN
ANNUAL REPORT
ON FORM 10-K/A
---------------
<S> <C>
(a) The following documents are filed as part of this Annual Report on Form 10-K/A:
(1) Report of Ernst & Young LLP, Independent Auditors............................ 25
Report of Price Waterhouse LLP, Independent Accountants...................... 26
Consolidated Balance Sheets at March 31, 1997 and 1996....................... 27
Consolidated Statements of Operations for the Years Ended March 31, 1997,
1996 and 1995.............................................................. 28
Consolidated Statements of Shareholders' Equity for the years ended March 31,
1997, 1996 and 1995........................................................ 29
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997,
1996 and 1995.............................................................. 30
Notes to Consolidated Financial Statements................................... 31
(2) Financial Statements Schedules
Schedule II--Valuation and Qualifying Accounts for the Years Ended March
1997, 1996 and 1995........................................................ 42
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)............ 52
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of State on
November 23, 1994. (incorporated herein by this reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB for the Quarter ended December 31, 1994)
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex
Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.2 Assignment Agreement dated July 27, 1992 between the Company and Michael Colvard, M.D.
(incorporated herein by this reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical
Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-83984).
+10.4 Lead Generation/Distribution Agreement dated March 17, 1994 between the Company and Burkhart
Dental Supply Company (incorporated herein by this reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
10.5 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit
10.12 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.6 Letter of Intent between the Company and Richard Leaderman, D.D.S., together with related
Patent Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994
(incorporated herein by this reference to Exhibit 10.13 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
+10.7 Exclusive Marketing Agreement dated July 26, 1994 between the Company, Proclosure, Inc. and
Nippon Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.8 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to
the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.9 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and
Pfizer Hospital Products Group, Inc., as amended (incorporated herein by this reference to
Exhibit 10.26 to the Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.10 Form of Warrant Agreement (including forms of Class A and Class B Warrant Certificates)
(incorporated herein by this reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.11 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit
4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.12 Form of Finder's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.13 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of
Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to
the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
10.14 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by
this reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984).
10.15 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer
Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this
reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2,
Registration Number 33-83984).
10.16 Letter agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke
University, together with patent assignment as filed in the U.S. Patent and Trademark Office
on October 23, 1993 (incorporated herein by this reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form SB-2, Registration Number 33-83984).
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
10.17 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company
(incorporated herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996).
10.18 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys
Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser
Corporation, together with related Promissory Note dated October 19, 1995 payable to
Registrant in the original principal amount of $125,000, and Security Agreement dated
October 19, 1995 between the Registrant and International Biolaser Corporation (incorporated
herein by this reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996).
10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd.,
658997 Alberta Ltd. and Mattan Corporation (incorporated herein by this reference to Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1995).
10.21 Purchasing Agreement dated December 20, 1995 between Registrant and Mattan Corporation
(incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-QSB for the quarter ended December 31, 1995).
10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy,
D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.23 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services,
Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.24 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.25 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics
International (incorporated herein by this reference to Exhibit 10.31 to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.26 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean
(granting option to purchase 358,650 shares of Registrant's Common Stock) (incorporated
herein by this reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996).
10.27 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive
Officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1996).
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
10.28 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and
form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit
10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31,
1996).
10.29 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.30 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
10.31 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together
with Schedule to Loan Agreement dated June 3, 1996 (incorporated herein by this reference to
Exhibit 10.36 to the Registrant's Registration Statement on Form SB-2 Registration No.
333-04219).
10.32 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank
(incorporated herein by this reference to Exhibit 10.37 to the Registrant's Registration
Statement on Form SB-2 Registration No. 333-04219).
10.33 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated
herein by this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form
SB-2 Registration No. 333-04219).
10.34 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley
Bank (incorporated herein by this reference to Exhibit 10.39 to the Registrant's
Registration Statement on Form SB-2 Registration No. 333-04219).
10.35 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank
(incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration
Statement on Form SB-2 Registration No. 333-04219).
10.36 Agreement dated August 12, 1996 between the Registrant and Circuit Tree Medical, Inc.
(incorporated herein by this reference to Exhibit 10.42 to the Registrant's Registration
Statement on Form SB-2 Registration No. 333-04219).
10.37 Amendment to Loan Agreement together with Schedule, dated February 13, 1997, between the
Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37
to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997).
10.38 Pledge Agreement dated February 13, 1997 between the Registrant and Silicon Valley Bank
(incorporated herein by this reference to Exhibit 10.38 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997).
10.39 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site
(incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997).
10.40 Operating Agreement of Data.Site dated January 31, 1997 (incorporated herein by this reference
to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997).
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
10.41 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition
of Delaware, Inc. and EyeSys Technologies, Inc. (incorporated herein by this reference to
Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March
31, 1997).
21 Subsidiaries*
23.1 Consent of Ernst & Young LLP.*
23.2 Consent of Price Waterhouse LLP.*
27 Financial Data Schedule (incorporated herein by this reference to Exhibit 27 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997).
</TABLE>
- ------------------------
* Filed herewith.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
(b) Reports on Form 8-K. During the last quarter of the period covered
by this report, on March 1, 1997, the Company filed a Current Report on Form
8-K, reporting a change in its public accountant. On March 18, 1997, the
Company filed an amendment to its Current Report on Form 8-K/A for the
purpose of filing a letter by its former accountants confirming the
information contained in the Form 8-K.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PREMIER LASER SYSTEMS, INC.
By: /s/ COLETTE COZEAN
-----------------------------------------
Colette Cozean, Ph.D.,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Dated: June 2, 1997
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.
NAME TITLE DATE
------------------------- -------------------------- -------------------
Chief Executive Officer,
By: /s/ COLETTE COZEAN President (Principal
------------------------- Executive Officer), Dated: June 2, 1997
Colette Cozean, Ph.D. Director
By: /s/ PATRICK J. DAY
------------------------- Director Dated: June 4, 1997
Patrick J. Day
By: /s/ GRACE CHING-HSIN
LIN
------------------------- Director Dated: June 4, 1997
Grace Ching-Hsin Lin
By: /s/ E. DONALD SHAPIRO
------------------------- Director Dated: June 4, 1997
E. Donald Shapiro
Chief Financial Officer
By: /s/ MICHAEL L. HIEBERT (Principal Financial
------------------------- Officer and Principal Dated: June 2, 1997
Michael L. Hiebert Accounting Officer)
By: /s/ G. LYNN POWELL
------------------------- Director Dated: June 3, 1997
G. Lynn Powell, D.D.S.
57
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EXHIBIT INDEX
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EXHIBIT NO.
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3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of State on
November 23, 1994. (incorporated herein by this reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB for the Quarter ended December 31, 1994).............................
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984)...................................................
10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex
Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).........................
10.2 Assignment Agreement dated July 27, 1992 between the Company and Michael Colvard, M.D. (incorporated
herein by this reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)...........................................................................
10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering,
Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984)...................................................
+10.4 Lead Generation/Distribution Agreement dated March 17, 1994 between the Company and Burkhart Dental
Supply Company (incorporated herein by this reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-83984)......................................
10.5 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit 10.12
to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)..................
10.6 Letter of Intent between the Company and Richard Leaderman, D.D.S., together with related Patent
Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994 (incorporated
herein by this reference to Exhibit 10.13 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)...........................................................................
+10.7 Exclusive Marketing Agreement dated July 26, 1994 between the Company, Proclosure, Inc. and Nippon
Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-83984)......................................
10.8 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).........................
10.9 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer
Hospital Products Group, Inc., as amended (incorporated herein by this reference to Exhibit 10.26 to
the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).....................
10.10 Form of Warrant Agreement (including forms of Class A and Class B Warrant Certificates) (incorporated
herein by this reference to Exhibit 4.1 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984)...........................................................................
10.11 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to
the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).....................
10.12 Form of Finder's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.3 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).........................
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EXHIBIT NO.
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10.13 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of
Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).........................
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10.14 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by this
reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2, Registration No.
33-83984)............................................................................................
10.15 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital
Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to
Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number
33-83984)............................................................................................
10.16 Letter agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke University,
together with patent assignment as filed in the U.S. Patent and Trademark Office on October 23, 1993
(incorporated herein by this reference to Exhibit 10.8 to the Registrant's Registration Statement on
Form SB-2, Registration Number 33-83984).............................................................
10.17 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company (incorporated
herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1996)....................................................................
10.18 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical,
Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996)................................................
10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser
Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in
the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the
Registrant and International Biolaser Corporation (incorporated herein by this reference to Exhibit
10.24 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).....
10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997
Alberta Ltd. and Mattan Corporation (incorporated herein by this reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995)................
10.21 Purchasing Agreement dated December 20, 1995 between Registrant and Mattan Corporation (incorporated
herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1995).....................................................................
10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S.
(incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1996).....................................................
10.23 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc.
and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)...............................
10.24 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)..................
10.25 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics
International (incorporated herein by this reference to Exhibit 10.31 to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1996)......................................
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EXHIBIT NO.
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10.26 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting
option to purchase 358,650 shares of Registrant's Common Stock) (incorporated herein by this
reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1996)......................................................................................
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10.27 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive
Officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996)................................................
10.28 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form
of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996)....................
10.29 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)..................
10.30 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)...............................
10.31 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with
Schedule to Loan Agreement dated June 3, 1996 (incorporated herein by this reference to Exhibit 10.36
to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219)..................
10.32 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated
herein by this reference to Exhibit 10.37 to the Registrant's Registration Statement on Form SB-2
Registration No. 333-04219)..........................................................................
10.33 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated herein by
this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form SB-2 Registration
No. 333-04219).......................................................................................
10.34 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank
(incorporated herein by this reference to Exhibit 10.39 to the Registrant's Registration Statement on
Form SB-2 Registration No. 333-04219)................................................................
10.35 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank
(incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration Statement on
Form SB-2 Registration No. 333-04219)................................................................
10.36 Agreement dated August 12, 1996 between the Registrant and Circuit Tree Medical, Inc. (incorporated
herein by this reference to Exhibit 10.42 to the Registrant's Registration Statement on Form SB-2
Registration No. 333-04219).
10.37 Amendment to Loan Agreement together with Schedule, dated February 13, 1997, between the Registrant
and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997).................................
10.38 Pledge Agreement dated February 13, 1997 between the Registrant and Silicon Valley Bank (incorporated
herein by this reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997)....................................................................
10.39 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site
(incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1997).......................................................
10.40 Operating Agreement of Data.Site dated January 31, 1997 (incorporated herein by this reference to
Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31,
1997)................................................................................................
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EXHIBIT NO.
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10.41 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition of
Delaware, Inc. and EyeSys Technologies, Inc. (incorporated herein by this reference to Exhibit 10.41
to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997).............
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21 Subsidiaries*
23.1 Consent of Ernst & Young LLP*........................................................................
23.2 Consent of Price Waterhouse LLP*.....................................................................
27 Financial Data Schedule (incorporated herein by this reference to Exhibit 27 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1997)
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+ Confidential treatment has been granted with respect to portions of this
Exhibit.
+ Incorporated by reference herein.
* Filed herewith.
61
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EXHIBIT 21
Subsidiaries
Data.Site, LLC, a California limited liability company
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-1680) pertaining to the 1995 Stock Option Plan of Premier
Laser Systems, Inc. and related Prospectus and in the Registration Statement
(Form S-8 No. 333-27151) pertaining to the February 1996 Stock Option Plan of
Premier Laser Systems, Inc. and related Prospectus of our report dated May 1,
1997, with respect to the consolidated financial statements and schedule of
Premier Laser Systems, Inc. included in Amendment No. 1 to its Annual Report
(Form 10-K) for the year ended March 31, 1997.
ERNST & YOUNG LLP
Orange County, California
June 17, 1997
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-01680 and 333-27151) of Premier Laser Systems,
Inc. of our report dated May 17, 1996 appearing on page 26 of this Amendment No.
1 to Form 10-K. We also consent to the application of such report to the
Financial Statement Schedule for the two years ended March 31, 1996 listed in
the accompanying index when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 17, 1997
