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As Filed with the Securities and Exchange Commission on August 5, 1999
Registration No. 333-78655
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Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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PREMIER LASER SYSTEMS, INC.
(Exact name of registrant as specified in charter)
California 3845 33-0472684
(State or other jurisdiction (I.R.S. Employer (Primary Standard Industrial
of incorporation or Classification Code Identification No.)
organization) Number)
---------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
Colette Cozean, Ph.D.
Chief Executive Officer
3 Morgan
Irvine, California 92618
(949) 859-0656
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
THOMAS G. BROCKINGTON, ESQ.
NATALIE DUNDAS, ESQ.
RUTAN & TUCKER, LLP
611 Anton Boulevard, Suite 1400
Costa Mesa, California 92626
(714) 641-5100
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
Pursuant to Rule 416, there are also being registered such additional
securities as may become issuable pursuant to the antidilution provisions of
the warrants and debentures, as described herein.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
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Subject to Completion August 5, 1999
PREMIER LASER SYSTEMS, INC.
4,278,146 Shares
Class A Common Stock
This prospectus relates to shares of our common stock which are being
offered by the selling shareholders.
The price of the common stock offered by the selling shareholders may vary,
depending on market conditions. We will not receive any of the proceeds from
the sale of the shares by the selling shareholders.
There is an existing market for these shares. Our common stock is listed on
the Nasdaq National Market System under the symbol "PLSIA." The last reported
sales price on August 3, 1999 was $1.81 per share.
This investment involves risk. See "Risk Factors" beginning on page 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
August , 1999
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. Neither we nor the selling shareholders are
offering to sell, or seeking offers to buy, shares of common stock in
jurisdictions where offers and sales are not permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of our common stock. In this prospectus, when we refer to "Premier," we
mean Premier Laser Systems, Inc. and when we use the words "we," "us" and
"our," we mean Premier Laser Systems, Inc., its wholly owned subsidiary EyeSys-
Premier, Inc., and its majority owned subsidiary Ophthalmic Imaging Systems,
Inc., except where context requires otherwise. The term "OIS" refers in this
prospectus to Ophthalmic Imaging Systems, Inc., and the term "EyeSys" refers to
EyeSys-Premier, Inc.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUMMARY......................................................... 2
RISK FACTORS............................................................... 4
USE OF PROCEEDS............................................................ 11
PRICE RANGE OF CLASS A COMMON STOCK AND CLASS B WARRANTS................... 11
DIVIDEND POLICY............................................................ 12
DILUTION................................................................... 13
SELECTED FINANCIAL DATA.................................................... 14
BUSINESS................................................................... 24
MANAGEMENT................................................................. 43
EXECUTIVE COMPENSATION..................................................... 46
CERTAIN TRANSACTIONS....................................................... 49
PRINCIPAL AND SELLING SHAREHOLDERS......................................... 50
DESCRIPTION OF CAPITAL STOCK............................................... 53
SHARES ELIGIBLE FOR FUTURE SALE............................................ 57
PLAN OF DISTRIBUTION....................................................... 58
LEGAL MATTERS.............................................................. 59
EXPERTS.................................................................... 59
WHERE YOU CAN FIND MORE INFORMATION........................................ 59
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
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"Premier Laser Systems," "EyeSys Premier," "EyeSys Technologies,"
"Centauri," "Aurora," "Arago," "Orion," "Sirius," "Pegasus," "Polaris," "MOD,"
"Dentalaser," "Arcturus," "Vista," "WinStation," "Digital Fundus Imager,"
"Digital Slit Lamp," "TouchTIP," "AngleTIPS," "Altair," "Dermium," "The SAFE
Systems," "LTM," "Laser Tissue Melding," and "Proclosure" are federally
registered trademarks of Premier. All other trademarks and trade names referred
to in this prospectus are the property of their respective owners.
1
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully. This prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act of 1934 which involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this prospectus.
Our Business:
We develop and manufacture medical laser systems, ophthalmic diagnostic
systems and related equipment. Our primary focus is on the dental and
ophthalmic markets. In the dental market, we sell our laser systems to dentists
and periodontists for cavity preparation, the treatment of gum disease,
composite curing and teeth whitening. In the ophthalmic market, we market our
laser systems and diagnostic products to ophthalmologists for use in cataract
removal procedures, skin procedures and eyelid surgery. We are conducting
clinical trials on the use of our laser systems for cavity prevention
procedures, lens emulsification in cataract procedures and tissue melding.
Our ophthalmic diagnostic products include a noninvasive imaging system that
permits ophthalmologists and optometrists to evaluate corneal diseases, plan
for eye surgery procedures and fit contact lenses. Our majority owned
subsidiary, OIS, sells several digital imaging systems that are primarily used
to image the retina in order to diagnose and monitor diseases of the eye.
Our Strategy:
Our strategy is to seek to increase our market penetration in the dental,
ophthalmic and surgical markets by:
. expanding our marketing and distribution efforts
. creating market awareness through increased publicity and the education
of dentists and physicians
. pursuing clearances for additional laser applications
. capitalizing on disposable aftermarket related products
. expanding domestically and internationally through strategic alliances or
acquisitions of companies with additional distribution channels,
complementary products or an international presence.
Our Marketing:
We market our dental and ophthalmic products through an in-house sales
force of 10 persons, a network of manufacturer's representatives, domestic
distributors, educational courses and through our attendance at trade shows. In
international markets, we sell our products through international distributors.
Our History:
Premier Laser Systems, Inc. was created in 1991 to acquire a division of
Pfizer, Pfizer Laser Systems, which had developed earlier versions of our
technology. We introduced a dental laser system in 1992, and an ophthalmic
laser system in 1993. We completed our initial public offering in 1994, and
received the first FDA clearance for dental hard tissue procedures in May 1997.
In September 1997 we acquired EyeSys, which has developed and now markets
diagnostic systems used in ophthalmic procedures.
2
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THE OFFERING
Our authorized and outstanding capital stock includes Class A Common Stock,
which is publicly traded and Class E-1 and E-2 Common Stock, which are not
publicly traded. All references to our "common stock" in this prospectus mean
our Class A Common Stock, unless the context otherwise requires. On May 17,
1999, we sold to two private investors $4,000,000 principal amount of 6%
Secured Convertible Debentures due 2002, and warrants to purchase 60,000 shares
of our common stock. In connection with this transaction,we issued to persons
that facilitated the transaction additional warrants to purchase 40,000 shares
of our common stock. In this prospectus, we refer to all of these warrants as
the "warrants." The common stock that is being offered for resale under this
prospectus is the common stock issuable upon the conversion of the convertible
debentures sold by us in May 1999, and the exercise of the warrants, in
accordance with their terms.
Type of security............. Class A Common Stock(1)
Shares to be offered......... 4,278,146
Common stock to be
outstanding after the
offering(1)............ 19,239,582
The Nasdaq Stock Market
National Market symbol...... PLSIA
- --------
(1) Based on shares outstanding on August 3, 1999. Excludes:
. 7,591,760 shares of Class A Common Stock issuable upon exercise of Class
B Warrants
. approximately 4,320,000 shares of Class A Common Stock issuable upon
exercise of other warrants and stock options
. 2,250,000 shares of Class A Common Stock reserved for issuance upon the
settlement of certain class action lawsuits
. 1,257,461 shares of Class E-1 Common Stock and 1,257,461 shares of Class
E-2 Common Stock, which are convertible into Class A Common Stock upon
the occurrence of specified conditions. See "Description of Capital
Stock--Class E Common Stock."
3
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RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, together with all the other information included in this
prospectus, before you decide whether to purchase shares of our common stock.
There are risks associated with forward-looking statements made by us and
actual results may differ
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You
should read statements that contain these words carefully because they:
.discuss our future expectations
.contain projections of our future results of operations or of our financial
condition
.state other "forward-looking" information
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, results of
operations and financial condition.
Risks Related to our Business
We have incurred net losses since inception and expect future losses
We incurred net losses of approximately $79,451,000 from April 1, 1995
through March 31, 1999, and approximately $28,961,000 for the year ended March
31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately
$92,315,000. We expect to continue to incur net losses until product sales
generate sufficient revenues to fund our continuing operations. We may fail to
achieve significant revenues from sales or achieve or sustain profitability.
If we do not become profitable we may not be able to sustain our operations
Our ability to achieve profitability in the future will depend in part on
our ability to continue to successfully develop clinical applications, obtain
regulatory approvals for our products and sell these products on a wide scale.
These risks apply to both our laser products and our ophthalmic diagnostic
products. In turn, our future sales and profitability depend in part on our
ability to demonstrate to dentists, ophthalmologists, optometrists and other
physicians the potential cost and performance advantages of our laser systems,
diagnostic products and other products over traditional methods of treatment
and over competitive products. To date, commercial sales of our lasers and
diagnostic products have been limited. We do not know if these products can be
successfully commercialized on a broad basis.
Our products may not be accepted by the medical or dental community or by
patients. The acceptance of dental lasers may be adversely affected by their
high cost, concerns by patients and dentists relating to their safety and
efficacy, and the substantial market acceptance and penetration of alternative
dental tools such as the dental drill. Current economic pressure may make
doctors and dentists reluctant to purchase substantial capital equipment or
invest in new technology. We currently have a limited sales force and will need
to hire additional sales and marketing personnel to increase the general
acceptance of our products. Of all the factors impacting our profitability, the
failure of our products to achieve broad market acceptance would have the
greatest negative impact on our business, financial condition and results of
operations and our profitability.
4
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We are involved in pending litigation and a regulatory investigation and may
be adversely affected by an adverse outcome in the lawsuit or by the costs
of defending this lawsuit
We have been sued in a number of related securities class action matters,
generally relating to allegations of misrepresentations during the period from
May 7, 1997 to April 15, 1998. In addition, the Securities and Exchange
Commission has commenced an investigation of our practices and procedures
relating to revenue recognition issues and related matters. The costs of our
continuing defense of the litigation matters and responses to the regulatory
investigations, including accounting and legal fees as well as management time
and effort, will be substantial, and we expect these costs to materially and
adversely affect our results of operations until these matters are resolved. We
do not know when these matters will be resolved. The Securities and Exchange
Commission has delayed any further proceedings in connection with its
investigation of us until September 1999. We have reached an agreement in
principle to settle this litigation and recorded an expense in the quarter
ended December 31, 1998, relating to this settlement. In the quarter ended
March 31, 1999, we recorded an additional expense of $250,000 to cover
continuing legal fees incurred in connection with this settlement. However,
this settlement is subject to several conditions, and it is possible that it
may not be completed, in which case the litigation would continue. An adverse
judgment entered in this litigation could materially and adversely affect our
business and results of operations.
In addition, the Securities and Exchange Commission is empowered to assess
substantial penalties against us in connection with its findings in the pending
investigation. The imposition of any of these penalties could materially and
adversely affect our business, financial condition and results of operations.
We may have difficulty integrating the OIS business
We acquired a majority of the outstanding common stock of OIS in 1998. In
March 1999, we agreed to manufacture OIS's products on an outsourcing basis. In
addition, Premier has made a proposal to acquire the remaining outstanding
stock of OIS, although no agreement has been reached regarding this
acquisition. We are not sure if the synergies of the two entities will allow us
to reduce expenses in such a way as to make OIS profitable. In addition,
members of our management will have to continue to expend time and effort on
new activities relating to the OIS operations, which will detract from their
time available to attend to our other activities. We cannot assure you that the
expenses or dislocations that we may suffer as a result of the coordination of
these businesses will not be material.
We are dependent on a small number of suppliers the loss of which could
adversely affect our business
We purchase some of the raw materials, components and subassemblies included
in our products from a limited group of qualified suppliers and do not maintain
long-term supply contracts with any of our key suppliers. Our Arago laser
product is manufactured for us by one supplier, LaserMed, Inc. While we believe
that alternative suppliers could be found for all of our components and
products, we cannot assure you that any supplier could be replaced in a timely
manner. Any interruption in the supply of key components could materially harm
our ability to manufacture our products and our business, financial condition
and results of operations.
Some of the components used by OIS are manufactured by a sole vendor,
including Foresight Imaging for its prism card and Kodak for its 12 bit camera.
These components are subject to rapid innovation and obsolescence. The
discontinuance of the manufacturing of these components may require us to
redesign some of the hardware and software used in our products to accommodate
a replacement component. We cannot assure your that such an event would not
prove costly or cause a disruption in sales of corneal topography and digital
imaging systems.
Our foreign sales are subject to risks
A substantial portion of our sales are made in foreign markets. The primary
risks to which we are exposed due to our foreign sales are the difficulty and
expense of maintaining foreign sales distribution channels, political and
economic instability in foreign markets and governmental quotas and other
regulations.
5
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The regulation of medical devices worldwide also continues to develop, and
it is possible that new laws or regulations could be enacted which would have
an adverse effect on our business. In addition, we may experience additional
difficulties in providing prompt and cost effective service of our medical
lasers in foreign countries. We do not carry insurance against these risks. The
occurrence of any one or more of these events may individually or in the
aggregate have a material adverse effect upon our business, financial condition
and results of operations.
If we cannot adapt to technological advances, our products may become
technologically obsolete and our business could be harmed
The markets in which our medical products compete are subject to rapid
technological change as well as the potential development of alternative
surgical techniques or new pharmaceutical products. These changes could render
our products uncompetitive or obsolete. We will be required to invest in
research and development to attempt to maintain and enhance our existing
products and develop new products. We do not know if our research and
development efforts will result in the introduction of new products or product
improvements.
If we are unable to protect our patents and proprietary technology we may not
be able to compete effectively
Our success will depend in part on our ability to obtain patent protection
for products and processes, to preserve our trade secrets and to operate
without infringing the proprietary rights of third parties. While we hold a
number of U.S. and foreign patents and have other patent applications pending
in the United States and foreign countries, we cannot assure you that any
additional patents will be issued, that the scope of any patent protection will
exclude competitors or that any of our patents will be held valid if
subsequently challenged. Further, other companies may independently develop
similar products, duplicate our products or design products that circumvent our
patents. We are aware of certain patents which, along with other patents that
may exist or be granted in the future, could restrict our right to market some
of our technologies without a license, including, among others, patents
relating to our lens emulsification product and ophthalmic probes for the
Er:YAG laser.
In the past, we have received allegations that some of our laser products
infringe on other patents. There has been significant patent litigation in the
medical laser industry. Adverse determinations in litigation or other patent
proceedings to which we may become a party could subject us to significant
legal judgments or other liabilities to third parties and could require us to
seek licenses from third parties that may or may not be economically viable. We
cannot assure you that any licenses required under these or any other patents
or proprietary rights would be available on terms acceptable to us. If we do
not obtain these licenses, we could encounter delays in product introductions
while we attempt to design around these patents, or we could find that the
development, manufacture or sale of products requiring such licenses could be
enjoined.
We also rely upon unpatented trade secrets, and we cannot assure you that
others will not independently develop or otherwise acquire substantially
equivalent trade secrets. In addition, at each balance sheet date, we are
required to review the value of our intangible assets based on various factors,
such as changes in technology. Any adjustment downward in the value of our
intangible assets may result in a write-off of the intangible asset and a
substantial charge to earnings, which would adversely affect our operating
results in the future.
Our business is subject to governmental regulation which imposes significant
costs on us and if not complied with could lead to the assessment of penalties
Our products are regulated as medical devices by the Federal Drug
Administration. As such, these devices require either Section 510(k) premarket
clearance or approval of a premarket approval application by the FDA prior to
commercialization. Satisfaction of regulatory requirements is expensive and may
take several years to complete. We cannot assure you that further clinical
trials of our medical products or of any future products will be successfully
completed or, if they are completed, that any requisite FDA or foreign
governmental approvals will be obtained.
6
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FDA or other governmental approvals of products we may develop in the
future may require substantial filing fees which could limit the number of
applications we seek and may entail limitations on the indicated uses for
which our products may be marketed. In 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. Also, we have
made modifications to some of our existing products which we do not believe
require the submission of a new 510(k) notification to the FDA. However, we
cannot assure you that the FDA would agree with our determination. If the FDA
did not agree with our determination, they could require us to cease marketing
one or more of the modified devices until the devices have been cleared.
We are also required to adhere to a wide variety of other regulations
governing the operation of our business. Noncompliance with state, local,
federal or foreign requirements can result in serious penalties that could
harm our business.
The loss of Dr. Cozean or any of our other key professionals could adversely
affect our business, including our ability to develop and market our products
We depend to a considerable degree on a limited number of key personnel,
including Colette Cozean, Ph.D., our Chairman of the Board, President, Chief
Executive Officer and Director of Research. Dr. Cozean is also an inventor of
a number of our patented technologies. During our limited operating history,
many key responsibilities have been assigned to a relatively small number of
individuals. The loss of Dr. Cozean's services or those of other key members
of management could harm our business. We carry key person life insurance in
excess of $3 million on Dr. Cozean. Our success will also depend, among other
factors, on the successful recruitment and retention of qualified technical
and other personnel.
If we fail to compete successfully, our revenues and operating results will
be adversely affected
We are, and will continue to be, subject to intense competition in our
targeted markets, principally from businesses providing other traditional
surgical and nonsurgical treatments, including existing and developing
technologies, and competitive products. Many of our competitors have
substantially greater financial, marketing and manufacturing resources and
experience than us. Furthermore, we expect that other companies will enter the
laser market, particularly as medical lasers gain increasing market
acceptance. Significant competitive factors which will affect future sales in
the marketplace include regulatory approvals, performance, pricing and general
market acceptance.
The ophthalmic diagnostic market is also highly competitive. There are many
companies engaged in this market, some with significantly greater resources
than ours. Our competitors may be able to develop technologies, procedures or
products that are more effective or economical than ours, or that would render
our products obsolete or noncompetitive.
To continue to remain competitive, we must develop new software and
hardware meeting the needs of ophthalmologists and optometrists. Our future
revenues will depend, in part, on our ability to develop and commercialize
these new products as well as on the success of development and
commercialization efforts of our competitors.
A successful product liability claim asserted against us due to a defect in
one of our products in excess of our insurance coverage would harm our
business
The sale of our medical products involves the inherent risk of product
liability claims against us. We currently maintain product liability insurance
coverage in the amount of $5 million per occurrence and $5 million in the
aggregate, but this insurance is expensive, subject to various coverage
exclusions and may not be obtainable in the future on terms acceptable to us.
We do not know whether claims against us arising with
7
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respect to our products will be successfully defended or that our insurance
will be sufficient to cover liabilities arising from these claims. A successful
claim against us in excess of our insurance coverage could materially harm our
business.
There is uncertainty relating to third party reimbursement which is critical
to market acceptance of our products
Our laser systems and other products are generally purchased by physicians,
dentists and surgical centers which then bill various third party payors, such
as government programs and private insurance plans, for the procedures
conducted using these products. Third-party payors carefully review and are
increasingly challenging the prices charged for medical products and services,
and scrutinizing whether to cover new products and evaluating the level of
reimbursement for covered products. While we believe that the laser procedures
using our products have generally been reimbursed, payors may deny coverage and
reimbursement for our products if they determine that the device was not
reasonable and necessary for the purpose for which it was used, was
investigational or not cost-effective. As a result, we cannot assure you that
reimbursement from third party payors for these procedures will be available or
if available, that reimbursement will not be limited. If third party
reimbursement of these procedures is not available, it will be more difficult
for us to sell our products on a profitable basis. Moreover, we are unable to
predict what legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the
future, or what effect such legislation or regulation may have on us.
We are exposed to risks relating to health care reform
Several states and the United States government are investigating a variety
of alternatives to reform the health care delivery system and further reduce
and control health care spending. These reform efforts include proposals to
limit spending on health care items and services, limit coverage for new
technology and limit or control the price health care providers and drug and
device manufacturers may charge for their services and products. If adopted and
implemented, such reforms could have a material adverse effect on our business,
financial condition and results of operations.
If we experience problems with Year 2000 compliance our operations may be
disrupted
Many existing computer programs use only two digits to identify the year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. As a result, any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in system failure or
miscalculations, causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We are heavily dependent upon the proper functioning of our own computer and
data-dependent systems. This includes, but it not limited to, our
support/administrative and operational/production systems. Any failure or
malfunctioning on the part of these or other systems could harm our business in
ways that we currently do not know and cannot discern, quantify or otherwise
anticipate. In addition, if our key vendors experience Year 2000 compliance
issues, then our business could be harmed. Due to the interrelated nature of
international commerce, if there is a failure in Year 2000 compliance by us or
one of our direct or indirect business partners, we could suffer major
disruptions in our ability to call on customers, obtain orders from customers,
obtain parts from suppliers, manufacture products for sale, ship products to
our customers, or receive payment for our sales.
We have not developed a formal assessment of all potential impacts of the
Year 2000. We design, manufacture and sell medical products which contain
computer chips and we utilize software developed by other companies. While our
engineers are developing new software which they expect to complete by August
1999, there can be no assurance that their efforts will be successful. We rely
on external business partners. As such, there can be no assurance that our
business will not be negatively affected by Year 2000 problems experienced by
these business partners.
8
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Risks Related to this Offering
The market price of our stock may fluctuate due to changes in revenue and
operating results
Due to the relatively high sales price of our products and low sales unit
volume, minor timing differences in receipt of customer orders have produced
and could continue to produce significant fluctuations in quarterly results. In
addition, if anticipated sales and shipments in any quarter do not occur when
expected, expenditures and inventory levels could be disproportionately high,
and our operating results for that quarter, and potentially for future
quarters, would be adversely affected. Quarterly results may also fluctuate
based on a variety of other factors. The important factors which may cause our
quarterly results to fluctuate are seasonality and production delays. During
the past four fiscal quarters, our net loss has fluctuated from a low of $2.6
million to a high of $11.7 million. Such fluctuations may cause our stock price
to decline and adversely affect our ability to raise additional capital.
If we are unable to secure additional financing in the future, we will have to
delay or halt our product development programs
In the future, we will require substantial additional funds for research and
development programs, preclinical and clinical testing, development of our
sales and distribution force, operating expenses, regulatory processes and
manufacturing and marketing programs. Our capital requirements may vary, and
will depend on both internal and external factors. Internal factors affecting
our capital requirements include:
. the progress of research and development programs
. results of preclinical and clinical testing
. the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights
. developments and changes in our existing research
. licensing and other relationships
. the terms of any new collaborative, licensing and other arrangements that
we may establish.
. the amount of legal, accounting and administrative costs incurred in
connection with pending litigation
External factors affecting our capital requirements include:
. competing technological and market developments
. the time and cost involved in obtaining regulatory approvals
We believe that our available short-term assets and investment income will be
sufficient to meet our operating expenses and capital expenditures through the
current fiscal year. We do not know if additional financing will be available
when needed, or if it is available, if it will be available on acceptable
terms. Insufficient funds may prevent us from implementing our business
strategy or may require us to delay, scale back or eliminate research and
product development programs or to license to third parties rights to
commercialize products or technologies that we would otherwise seek to develop
internally.
Our stock price is volatile
The market price of our common stock is very volatile, and our common stock
therefore may not be a suitable investment for those who seek stable investment
prices over the short or long term. Our common stock was first publicly traded
in December 1994 and has had last reported closing sale prices ranging from a
low of $1.78 per share in August 1999 to a high of $14.00 per share in May
1997. The market price of our common stock could continue to fluctuate
substantially due to a variety of risk factors, including those described
elsewhere in this prospectus. The market price for our common stock may also be
affected by our ability to
9
<PAGE>
meet analysts' expectations. Any failure to meet these expectations, even
slightly, could have an adverse effect on the market price of our common
stock. In addition, the market prices of securities issued by many companies
may change for reasons unrelated to the operating performance of these
companies. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted against the company. If similar litigation were instituted against
us, it could result in substantial costs and a diversion of our management's
attention and resources, which could have an adverse effect on our business,
results of operations and financial condition.
A significant number of shares are eligible for sale, and if sold, these
shares may create excess supply in the market causing our stock price to
decline
Sales of a substantial number of our shares of common stock in the public
market could adversely affect the market price for our common stock. At this
time, approximately 7.6 million shares of our common stock are issuable upon
the full exercise of our outstanding Class B Warrants, and over 6.4 million
shares of our common stock are issuable upon exercise of other outstanding
warrants and options and conversion of outstanding debentures. The existence
of these outstanding warrants and options could adversely affect our ability
to obtain future financing. We have also reserved 2,250,000 shares of our
common stock for issuance in connection with the proposed settlement of
outstanding litigation. The consummation of this settlement will require
satisfaction of a number of conditions, and we cannot assure you that the
settlement will be completed.
The price which we may receive for our common stock issued upon exercise of
outstanding options and warrants will likely be less than the market price of
our common stock at the time these options and warrants are exercised.
Moreover, the holders of the options and warrants might be expected to
exercise them at a time when we would, in all likelihood, be able to obtain
needed capital by a new offering of our securities on terms more favorable
than those provided for by the options and warrants.
Our preferred stock may delay or prevent a takeover of our company possibly
preventing you from obtaining higher share prices
Our articles of incorporation authorize the issuance of 8,850,000 shares of
"blank check" preferred stock, which will have terms as may be determined from
time to time by the board of directors. Accordingly, the board of directors is
empowered, without shareholder approval, to issue preferred stock with terms
which could adversely affect the rights of the holders of the common stock.
The preferred stock could also be utilized, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of Premier.
This could have the effect of preventing others from seeking to acquire your
shares in transactions at premium prices.
In March 1998, we adopted a Shareholder Rights Plan, which entitles certain
of our shareholders to purchase our Series A Junior Participating Preferred
Stock. These rights are not exercisable until the acquisition by a person or
affiliated group of 15% or more of the outstanding shares of our common stock,
or the commencement or announcement of a tender offer or exchange offer which
would result in the acquisition of 15% or more of our outstanding shares. Upon
request, we will provide you with a copy of the Shareholder Rights Plan. The
Shareholder Rights Plan may have the effect of discouraging, delaying or
preventing a change of control of Premier.
Short selling of our common stock could adversely affect our stock price
If a significant number of shares of common stock which are issued upon
conversion of the debentures and payment of interest thereon are then sold in
the market, the price of our common stock could be depressed due to the
presence of these additional shares in the market. This downward pressure
could encourage short sales of common stock by the selling shareholders or
others. By increasing the number of shares offered for sale, material amounts
of short selling could place further downward pressure on the market price of
the common stock.
10
<PAGE>
USE OF PROCEEDS
The selling securityholders are not obligated to convert the debentures or
exercise the warrants. No payments are required to be made upon the conversion
of the debentures. If all of the warrants are exercised, the proceeds to us
would be approximately $313,500.
The net proceeds from the offering of convertible debentures in May 1999
were approximately $3.7 million. Of this amount, $2 million is being held in
escrow until this registration statement is declared effective, at which time
it will be released to us. Approximately $750,000 of the net proceeds received
to date has been paid to various suppliers. The balance of the net proceeds
received to date has been added to our working capital. This balance, together
with the $2 million to be received once this registration statement is declared
effective, will be used for general corporate purposes, including increased
sales and marketing efforts and the development and manufacture of new
products.
We intend to use the net proceeds from the exercise of the warrants, if any,
for general corporate purposes and working capital to support anticipated
growth, including research and development programs and continuing development
of a distributor network.
PRICE RANGE OF CLASS A COMMON STOCK AND CLASS B WARRANTS
Our Class A Common Stock and Class B Warrants trade on the Nasdaq National
Market System under the symbols PLSIA and PLSIZ, respectively. At August 3,
1999, the approximate number of holders of record of our Class A Common Stock
were 781 and were 31 for our Class B Warrants. We also have outstanding
Class E-1 Common Stock and Class E-2 Common Stock, for which there is no
market. The number of record holders of Class E-1 Common Stock and Class E-2
Common Stock at August 3, 1999 was 323.
Prior to January 6, 1998, Premier had Class A Warrants outstanding which
were listed on the Nasdaq Stock Market National Market under the symbol
"PLSIW," and "Units," each consisting of one share of Class A Common Stock, one
Class A Warrant and one Class B Warrant, which were listed on the Nasdaq Stock
Market SmallCap Market. We redeemed the Class A Warrants under the terms of the
Warrant Agreement on January 6, 1998, and as a result there have been no
outstanding Class A Warrants or Units since that date.
The following table sets forth the price range of the high and low closing
sale prices per share of Class A Common Stock and Class B Warrants for the
calendar quarters indicated.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Warrants
---------------- ---------------
Low High Low High
------- -------- ------- -------
<S> <C> <C> <C> <C>
1997
First Quarter............................ 5 3/16 8 1/8 27/32 1 11/16
Second Quarter........................... 5 1/4 14 3/4 5 3/4
Third Quarter............................ 8 1/2 11 17/32 2 5/16 3 27/32
Fourth Quarter........................... 7 3/16 10 1/2 1 3/16 3
1998
First Quarter............................ 7 11/16 11 11/16 1 5/8 3 7/8
Second Quarter(1)........................ 4 3/16 10 7/16 25/32 2 7/8
Third Quarter(1)......................... -- -- -- --
Fourth Quarter(1)........................ 1 7/8 4 7/16 1/8 13/16
1999
First Quarter............................ 1 15/16 4 3/16 5/32 1/2
Second Quarter........................... 2 1/16 3 3/8 5/32 11/32
Third Quarter (through August 4, 1999)... 1 25/32 2 3/16 1/8 5/32
</TABLE>
- --------
(1) From May 26, 1998 to October 22, 1998, the trading in our Class A Common
Stock and Class B Warrants was suspended by the Nasdaq Stock Market.
11
<PAGE>
On August 4, 1999, the last reported sale price as reported by The Nasdaq
Stock Market for our Class A Common Stock was $1.7813 and the last reported
sale price for our Class B Warrants was $0.0125. The majority of the
outstanding shares of our Class A Common Stock are held of record by nominee
holders on behalf of an unknown number of ultimate beneficial owners.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
for the foreseeable future we intend to follow a policy of retaining all of our
earnings, if any, to finance the development and continued expansion of our
business. We cannot assure you that we will ever pay cash dividends. Any future
decisions concerning the payment of dividends will depend upon our financial
condition, results of operations and any other factors that the board of
directors deems relevant.
12
<PAGE>
DILUTION
The following discussion and table treats the Class A Common Stock, the
Class E-1 Common Stock and the Class E-2 Common Stock as a single class.
As of March 31, 1999, we had a net tangible book value of $133,000, or $0.01
per share of common stock. Net tangible book value per share represents the
amount of total tangible assets less the amount of our total liabilities,
divided by the number of shares of common stock outstanding. After giving
effect to the issuance and conversion of the debentures and exercise of the
warrants, our adjusted pro forma net tangible book value as of March 31, 1999
would have been $4,075,000, or $0.19 per share of common stock. This amount
represents an immediate increase in pro forma net tangible book value of $0.18
per share to our existing shareholders and an immediate dilution to the persons
converting the debentures and exercising the warrants of approximately $1.53
per share. Dilution is determined by subtracting pro forma net tangible book
value per share of common stock after this offering from the price paid by new
investors for a share of our common stock. The following table illustrates this
dilution on a per share basis and assumes that all of the warrants will be
exercised:
<TABLE>
<S> <C> <C>
Assumed average price per share(1)....................................... $1.72
Net tangible book value per share before exercise................ $0.01
Increase per share attributable to the conversion of the
debentures and exercise of the warrants......................... $0.18
Pro forma net tangible book value per share after conversion and
exercise................................................................ $0.19
-----
Dilution of net tangible book value...................................... $1.53
=====
</TABLE>
- --------
(1) The debentures are convertible into common stock under a formula based on
the closing bid price of the common stock during the twenty day period
prior to the date of conversion. Accordingly, the conversion price for the
debentures will fluctuate on a daily basis. As of August 4, 1999, this
formula yielded a conversion price of $1.595 per share, and at that date
the debentures would have been convertible into 2,507,837 shares of common
stock. The assumed average price per share equals the total amount that
would be received upon conversion of the debentures and exercise of the
warrants, divided by this assumed number of shares into which the
debentures would have been convertible plus the number of shares issuable
upon exercise of the warrants.
13
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following table contains selected consolidated financial data of Premier
and is qualified by the more detailed financial statements and related notes of
Premier included herein. The balance sheet and statement of operations data for
the periods ended March 31, 1996, 1997, 1998, and 1999 have been derived from
our financial statements, audited by Haskell & White LLP, independent
accountants. As described in Note 3 to the consolidated financial statements
and under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Premier completed several business
acquisitions during the two years ended March 31, 1998 and discontinued the
operations of one subsidiary at the end of the fiscal year ended March 31,
1999. The proforma results of operations resulting from the acquisitions and
the effects of the discontinued operations are also described in Note 3. As a
result of these acquisitions and the discontinued operations, statement of
operations data and per share data for the historical periods presented may not
be indicative of Premier's future results of operations or financial condition.
The following information should be read in conjunction with Premier's
financial statements and related notes and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- --------- -------- --------
(Restated)
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Statement of
Operations Data:
Net sales.................... $ 1,249 $ 1,704 $ 5,091 $ 9,886 $ 13,971
Cost of sales................ 1,298 3,324 3,649 17,234 13,405
------- ------- ------- -------- --------
Gross profit (loss).......... (49) (1,620) 1,442 (7,348) 566
Selling and marketing
expenses.................... 1,036 1,309 2,415 5,113 7,930
Research and development
expenses.................... 1,036 1,214 1,563 3,088 4,165
General and administrative
expenses.................... 1,747 1,709 1,853 3,700 6,625
Shareholder litigation
settlement expense.......... -- -- -- -- 8,082
Write-off of investment...... -- -- 881 -- --
Termination of strategic
alliance with IBC........... -- -- 331 -- --
In process research and
development acquired in
acquisitions................ -- -- 250 12,800 --
Merger related and
integration costs........... -- -- -- 7,617 --
------- ------- ------- -------- --------
Loss from operations......... (3,868) (5,852) (5,851) (39,666) (26,236)
Interest income (expense),
net......................... (322) 99 15 1,074 203
Minority interest in loss of
consolidated subsidiary..... -- -- 60 274 1,764
Discontinued operations...... -- -- (197) (446) (4,692)
Extraordinary gains.......... 382 -- -- -- --
------- ------- ------- -------- --------
Net loss..................... $(3,808) $(5,753) $(5,973) $(38,764) $(28,961)
======= ======= ======= ======== ========
Selected Per Share Data:
Loss per share before
discontinued operations and
extraordinary item(1)....... $ (1.59) $ (1.26) $ (.99) $ (3.35) $ (1.56)
Discontinued operations...... -- -- (.03) (.04) (.30)
Extraordinary gain from
extinguishment of
indebtedness................ .15 -- -- -- --
------- ------- ------- -------- --------
Net loss per share........... $ (1.44) $ (1.26) $ (1.02) $ (3.39) $ (1.86)
======= ======= ======= ======== ========
Weighted average shares
outstanding(1)(2)........... 2,585 4,557 5,833 11,444 15,531
Selected Balance Sheet Data:
Cash and cash equivalents.... $ 5,888 $ 35 $ 174 $ 9,723 $ 889
Working capital (deficit).... 6,756 5,818 7,526 19,017 (1,363)
Total assets................. 16,884 15,675 21,079 47,708 19,276
Long-Term debt............... -- -- -- -- --
Shareholders' equity......... 15,002 13,797 16,249 31,456 9,303
</TABLE>
14
<PAGE>
- --------
(1) The effect on net loss per common share of the conversion of Premier's
debentures was to reduce historical net loss by $67,995 and to increase
weighted average shares outstanding by 321,099 shares for the fiscal year
ended March 31, 1995. Net loss per common share was computed based on the
weighted average number of our common shares outstanding during the fiscal
year ended March 31, 1995 after giving retroactive adjustment for
recapitalization and conversion of debentures outstanding prior to our
initial public offering into Units upon completion of that initial public
offering.
(2) Does not include shares of Class E-1 or Class E-2 Common Stock, which are
subject to cancellation in certain circumstances.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Read the following discussion together with the financial statements and
related notes included elsewhere in this prospectus. The results discussed
below are not necessarily indicative of the results to be expected in any
future periods. This discussion contains forward-looking statements based on
current expectations and which involve risks and uncertainties. Actual results
and the timing of certain events may differ significantly from those projected
in these forward-looking statements due to a number of factors, including those
set forth herein, in the section entitled "Risk Factors" and elsewhere in this
prospectus.
General
Premier develops, manufactures and markets several lines of proprietary
medical lasers, fiber optic delivery systems, diagnostic imaging systems and
associated products for a variety of dental, ophthalmic and surgical
applications. Premier commenced operations in August 1991, after acquiring
substantially all of the assets of Pfizer Laser Systems, a division of Pfizer
HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets we acquired
included the proprietary rights to a broad base of laser and fiber optic
technologies developed by Pfizer Laser Systems. This acquisition was led by our
current Chief Executive Officer.
While we have received FDA clearance to market laser products covering a
variety of medical applications, to date we have focused our research,
development and marketing efforts on a limited number of products or
applications. These applications principally consist of specific dental and
more recently, ophthalmic applications. As future resources permit, we may
introduce products for applications for which we already have all necessary
approvals or may seek strategic alliances to develop, market and distribute
these products.
We have recorded operating losses in each of the fiscal years since our
formation, resulting in large part from substantial sales and marketing and
general and administrative expenses, business acquisition costs and costs
incurred in research and development activities and in obtaining regulatory
approvals. Although sales increased significantly during fiscal 1998, operating
results worsened due to the impacts of expensed business acquisition costs and
a failed distribution agreement.
As discussed in Note 6 to the accompanying financial statements, Premier and
several of our officers and directors have been named in a number of securities
class action lawsuits which allege violations of the Securities Exchange Act or
the California Corporations Code. We have also been named in a shareholders'
derivative action. Any significant uninsured judgment or settlement amount
associated with these claims would seriously affect our ability to satisfy our
working capital requirements.
Results of Operations
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Our net sales increased 41% to $13,971,000 for the year ended March 31, 1999
("fiscal 1999") from $9,886,000 for the year ended March 31, 1998 ("fiscal
1998"). This increase was primarily attributable to sales of ophthalmic
products manufactured both by us, and by our 51%-owned subsidiary, Ophthalmic
Imaging Systems, whose sales for fiscal 1999 were $6,300,000. Our fiscal 1998
net sales included only two months of sales by OIS, or $356,000. Sales for
EyeSys products were approximately $2,094,000 for fiscal 1999 as compared to
$1,037,000 for the last six months of fiscal 1998, following Premier's
acquisition of EyeSys in September 1997. Although we believe that market
opportunities are very large, and order rates in both eye-care and dental
products have recently been increasing, future sales trends will depend in part
on whether we are able to establish distributor relationships for our dental
and other products. We do not know if we will be able to successfully establish
such relationships. Moreover, our ability to fill future orders will depend in
part on the availability of components, among other things. We have recently
experienced difficulties in obtaining components from some suppliers.
16
<PAGE>
A portion of our sales are made in foreign markets, principally Argentina,
Canada, Italy, Japan and Taiwan. International sales were $1,537,000, or 11% of
total sales, in fiscal 1999, as compared to $1,285,000 or 13% of total sales,
in fiscal 1998. These sales involve no currency risk, since they are made in
U.S. dollars, but do involve a higher collection risk than domestic sales. We
attempt to reduce the collection risk of international sales by requiring the
customer to provide a letter of credit in certain circumstances, and reviewing
each customer's financial stability before extending credit.
Cost of sales decreased 22% to $13,405,000 in fiscal 1999 from $17,234,000
in fiscal 1998. The majority of the decrease is due to the difference between
inventory reserves of $5,704,000 recognized during fiscal 1998 and reserves for
additional excess inventory quantities of $2,300,000 recognized during fiscal
1999. Also contributing to the reduction in cost of sales were lower warranty
service costs and a decrease in materials scrap expense. Offsetting this
reduction were the inclusion of a full year of OIS cost of sales as well as
higher manufacturing expenses associated with excess manufacturing capacity
during fiscal 1999. Cost of sales were $3,738,000 in fiscal 1999 as compared
with $243,000 for two months in fiscal 1998.
Selling and marketing expenses increased 55% to $7,930,000 in fiscal 1999
from $5,113,000 in fiscal 1998. Approximately one-half of the increase was
attributable to the selling and marketing expense of OIS which was $1,842,000
in fiscal 1999 as compared to $203,000 for only two months in fiscal 1998.
Other factors which contributed to the increase during fiscal 1999 include
substantial growth in trade show and advertising expense associated with our
dental and ophthalmic product offerings, as well as increased use of
professional advisory services.
Research and development expenses increased 35% to $4,165,000 in fiscal 1999
from $3,087,000 in fiscal 1998. Approximately three-fourths of the increase was
due to the inclusion of research and development expenses of OIS which were
$932,000 in fiscal 1999 as compared to $60,000 in the final two months in
fiscal 1998. Expenses for professional services included in research and
development increased by 166% to $500,426 in fiscal 1999 from $188,046 in
fiscal 1998. Expenses for outside services increased 525% to $300,727 in fiscal
1999 from $48,068. Expenses for consulting services increased 146% to $745,136
from $302,185. The balance of the increase was due to increased compensation
expense resulting from personnel additions which increased 47% to $1,832,402 in
fiscal 1999 from $1,241,931 in fiscal 1998.
During the year ended March 31, 1999, we recorded net stock option
recoveries in the amount of $842,692 relating to terminated stock options that
were originally granted in the prior year to an investment banking firm and to
consultants and physicians affiliated with Eyesys.
General and administrative expenses increased 79% to $6,625,000 in fiscal
1999 from $3,700,000 in fiscal 1998. Approximately one-third of the increase
was attributable to the general and administrative expense of OIS, which was
included for only two months in fiscal 1998. Legal and accounting fees
increased substantially during fiscal 1999 as compared to fiscal 1998, rising
by approximately $324,000, and $387,000 respectively. These increases resulted
from the resignation of our former auditors and the resulting need to have
audits performed for two fiscal years, as well as class action litigation and
SEC/Nasdaq inquiries that arose during the quarter ended June 30, 1998. Also
contributing to the increases in fiscal 1999 as compared to fiscal 1998 were an
increase in our provision for bad debts of $694,000 and an increase in
compensation expense of $401,000. Compensation expense was increased due to
changes in upper management, where more experienced personnel were hired to
focus efforts on core business operating issues.
17
<PAGE>
We have amended our accounts receivable allowance over time to adjust
expected collectibility, given our collection history and the continued aging
of specific receivables. At March 31, 1999, our allowance as a percentage of
accounts receivable was 60% as a number of balances are in excess of one year
old. The following chart reflects period to period changes in our accounts
receivable allowances.
<TABLE>
<CAPTION>
March 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable........................ $3,340,075 $6,177,737 $1,718,312
Allowance.................................. $1,997,158 $1,224,845 $ 613,623
Net accounts receivable.................... $1,342,917 $4,952,892 $1,052,312
Allowance as % of accounts receivable...... 60% 20% 36%
</TABLE>
On November 18, 1998, we reached an agreement in principle with lead
plaintiffs and their counsel to settle certain class and derivative action
lawsuits which allege violations of the Securities Exchange Act or the
California Corporations Code . The plaintiffs seek damages on behalf of classes
of investors who purchased our stock between May 7, 1997 and April 15, 1998.
Under the terms of the agreement in principle, in exchange for a release of all
claims, we would pay 2,250,000 shares of common stock and $4,600,000 in cash.
The cash portion of the settlement would be paid by our insurance carrier.
Completion of the settlement is subject to the execution of the final
settlement agreement, court approval and certain other conditions. In
accordance with the terms of the agreement in principle to settle class and
derivative actions, we established a reserve during the third quarter of fiscal
1999 for the future issuance of 2,250,000 shares of common stock. The shares
were valued at a price of $3.31 per share which was the closing price of our
stock on November 18, 1998, the effective date of the proposed settlement
agreement. We have included approximately $634,000 of associated legal and
professional fees in this reserve for fiscal 1999, but have not included in the
reserve approximately $4,600,000 in cash that would be paid by our insurers.
In fiscal 1998 we recognized $12,800,000 for in process research and
development and $7,617,000 in merger and integration costs related to the
acquisitions of 51% ownership in OIS and 100% of EyeSys Technologies, Inc. No
business acquisitions have occurred during fiscal 1999.
Net interest income decreased by 81% to $203,000 for fiscal 1999 as compared
to $1,073,000 for fiscal 1998. The decline in interest income reflects a
decrease in excess cash flow available for us to invest during fiscal 1999. The
decrease in cash flow was primarily due to increased operating expenses and
higher working capital requirements.
Approximately $700,000 of the Company's consolidated losses were
attributable to the minority shareholder interest of OIS. However 100% of this
loss was absorbed by us due to the capital deficiency position of OIS.
In March 1999, the board of directors of Data.Site adopted a plan to
discontinue its operations. Accordingly, Data.Site's net loss for the year
ended March 31, 1999 in the amount of approximately $4,692,000 has been
presented on a separate line item in the statements of operations and
comprehensive loss. The statements of operations and comprehensive loss for
fiscal years 1998 and 1997 have been reclassified to present the net losses of
Data.Site as discontinued operations. Approximately $2,927,000 of our
consolidated losses during fiscal year 1999 related to Data.Site. Of this
amount, $534,000 could not be allocated to the minority interest due to the
capital deficiency position of Data.Site and was, therefore, absorbed by us.
On March 31, 1999, Data.Site laid off all of its employees with the
exception of one programmer and its President. The President is responsible for
all shut down operations, including the transfer of data back to customers and
the sale of assets and intellectual property. The programmer was responsible
for keeping the Data.Site system operational until all of the data had been
transferred to the appropriate customers. In May 1999, all of Data.Site's
operations ceased.
18
<PAGE>
The only income from Data.Site's operations received by Premier after March
31, 1999 was from the sale of the intellectual property and other assets of the
Company. Expenses incurred by us after March 31, 1999, have included phones,
shipping costs, computer lease costs and salaries.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
Net sales increased 94% to $9,885,000 for the year ended March 31, 1998
("fiscal 1998") from $5,091,000 for the year ended March 31, 1997 ("fiscal
1997") . This increase was primarily attributable to an increase in sales to
the dental market including sales resulting from the introduction of the Er:YAG
laser for cavity preparation and ophthalmic sales from the EyeSys product line
during the latter half of fiscal 1998. Dental sales during the last two
quarters of fiscal 1998 were adversely affected by an impasse reached with
dental distributor Henry Schein, Inc. over the nature of a relationship between
the parties initiated with a letter of intent executed in December 1997. We
believed that Henry Schein obligated itself to accept an initial shipment of
product, and that the relationship was being expanded. Henry Schein
subsequently notified us that it did not agree with our understanding of the
terms of the relationship. Sales during the last two quarters of fiscal 1997
were also adversely affected by a disruption in our supply of Arago argon laser
and vendor supply problems with our Multi-Operatory Dentalaser argon laser.
International sales were $1,285,000, or 13% of total sales, in fiscal 1998
as compared to $1,273,000, or 25% of total sales, in fiscal 1997.
Cost of sales increased 372% to $17,234,000 in fiscal 1998 from $3,649,000
in fiscal 1997, due to an increase in sales, additional inventory reserves of
$5,704,000, substantially higher warranty costs, and start-up and training
expenses associated with Er:YAG laser and fiber and EyeSys product
manufacturing. The additional inventory reserves are primarily associated with
excess inventory purchase commitments we made (approximately $2,601,000),
reserves recorded for excess, slow-moving, obsolete and off-site inventories
(approximately $2,603,000), and merchandise returned by Henry Schein, Inc., a
distributor of dental equipment and supplies, under a disputed distribution
agreement (approximately $500,000). Pursuant to this disputed relationship, we
shipped this distributor merchandise with an approximate sales value of
$2,400,000, and such merchandise was subsequently returned to us. We did not
receive any payments in connection with this transaction and we have terminated
this business relationship. A significant portion of the reserves recorded for
purchase commitments and excess inventories related to products manufactured
and components ordered in anticipation of filling orders for the distribution
by Henry Schien, Inc.
Selling and marketing expenses increased 112% to $5,113,000 in fiscal 1998
from $2,415,000 in fiscal 1997. This increase was primarily attributable to
significant increases in marketing personnel, introduction of the Er:YAG laser,
increased commissions and associated selling expenses, and from consolidation
of the expenses of new subsidiaries.
Research and development expenses increased 98% to $3,087,000 in fiscal 1998
from $1,563,000 in fiscal 1997. This increase resulted primarily from increases
in Premier's research and development personnel, an additional $510,000 of
clinical trial costs and associated samples, travel expenditures for Premier
and EyeSys, and $710,000 of expense for all other new subsidiaries. The expense
in fiscal 1997 was offset by a $450,000 payment received by Premier under a
Small Business Innovative Research grant. We also recognized $225,000 and
$190,000 as a research and development expense from the issuance of stock
options to clinical evaluators and medical directors in fiscal 1998 and fiscal
1997 respectively.
General and administrative expenses increased 100% to $3,700,000 in fiscal
1998 from $1,853,000 in fiscal 1997. This increase was partially due to
$459,000 of expenses from new subsidiaries, $400,000 for litigation expense
related to a supply agreement for optical fibers, and $250,000 for issuance of
stock options.
19
<PAGE>
Net interest income increased to $1,073,000 in fiscal 1998 from $15,000 in
fiscal 1997. This increase reflected our higher cash balances following the
completion of our secondary offering in October 1996 and the exercise of
outstanding warrants in January 1998. The net proceeds from these capital stock
transactions were $10,401,000 from the secondary offering and $41,735,000 from
the warrant exercises.
In fiscal 1998, Premier expensed $12,800,000 for in process research and
development related to the acquisitions of 51% ownership in OIS and 100% of
Eyesys. In connection with the Eyesys acquisition, Premier obtained an
independent third-party appraisal which estimated the value of the purchased
in-process research and development to be $10,200,000 as of the acquisition
date. The research and development projects acquired by Premier included (i)
System 2000 v.4, (ii) 20/20 Handheld Topographer, (iii) Innovative Corneal
Topography Checkerboard, (iv) Spatial Resolved Refratometry, (v) Sun 100 B,
(vi) Sun CW and (vii) CWL Cards. Of these projects, the System 2000 and the
20/20 Handheld Topographer, marketed as the Vista, are now being sold in the
market. In connection with the acquisition of a majority interest in OIS,
Premier obtained an independent appraisal which estimated the value of the
purchased in-process research and development as of the acquisition date to be
$2,600,000. The in-process research and development projects included: (i)
future angiography products, (ii) glaucoma-scope products, (iii) reading center
products, and (iv) digital fundus imager. Of these projects, the digital fundus
imager is the only product which has been sold in the market.
In fiscal 1998, Premier expensed $7,617,100 in merger and integration costs
related to the acquisitions of 51% ownership in OIS and 100% of EyeSys. Merger
and integration costs are primarily comprised of goodwill write-offs
($3,640,400), accrued compensation, relocation costs and related stay bonuses
($1,279,700), issuance of stock options in accordance with the EyeSys
acquisition agreement ($1,110,900) and other related liabilities such as legal,
accounting and investment banker fees (aggregating $1,586,100). Goodwill was
written off in each acquisition due to the uncertainty as to its
recoverability. Premier commenced its integration efforts relating to EyeSys in
October 1997 following the acquisition and completed the integration by the end
of fiscal 1998. Approximately $180,000 of losses were attributable to the
minority shareholder interest of OIS. However 100% of the loss was absorbed by
Premier due to the capital deficiency position of OIS. We recorded $349,000 of
losses attributable to our minority shareholder interest of Data.Site compared
with $60,000 during 1997.
In summary, the operating results for 1998 were negatively impacted by
$20,417,000 of acquisition expenses (including $16,500,000 of non-cash costs),
$5,704,000 of inventory write-downs, $1,100,000 of warranty cost, $480,000 of
non-cash stock option expense, bad debt expense of $385,000, and litigation
costs of $400,000.
Liquidity and Capital Resources
Our operations have been financed through the proceeds from the sale of our
equity securities, including an initial public offering in December 1994, and a
secondary public offering in October 1996, the exercise of publicly traded
warrants and stock options, revenues from operations, and proceeds from a Small
Business Innovative Research Grant. Further, in May of 1999, we received $2
million in gross proceeds from a private offering and sale of convertible
debentures and will receive an additional $2 million in gross proceeds from
this financing upon the effectiveness of this registration statement. The net
proceeds of this financing will be used for working capital requirements. In
connection with this financing, we granted to the lenders a security interest
in substantially all of our assets, including without limitation our patents
and other intellectual property.
Our principal capital requirements include the financing of inventory,
accounts receivable, research and development activities, the development of
ophthalmic, dental and surgical sales forces, the development of marketing
programs and the acquisition and/or licensing of patents.
At March 31, 1999, we had unrestricted cash and short-term investments of
$889,000 and a working capital deficit of $1,363,000. The decrease in cash and
short-term investments since March 31, 1998 was primarily the result of the
losses during fiscal 1999, increased by working capital changes during the
period, including the continued receipt of inventory purchases commitments that
had been made during the prior fiscal
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year. Cash flow during fiscal 1997 and 1998 was positive as the net result of
cash proceeds from equity offerings and exercise of stock options and warrants,
reduced by operating requirements and investing activities associated with new
business acquisitions.
Our future capital requirements will depend on many factors, including:
. the progress of our research and development activities
. the scope and results of pre-clinical studies and clinical trials
. the costs and timing of regulatory approvals
. the rate of technology advances
. competitive conditions within the medical laser industry
. the maintenance of manufacturing capacity
. the outcome of the class action lawsuits
. the establishment of collaborative marketing and other relationships
which may either involve cash infusions to us, or require additional cash
from us.
We do not currently have, and are not seeking a credit facility to replace
our former credit agreement which expired in September 1988. Our ability to
meet our working capital needs through the remainder of fiscal 2000 and
thereafter will depend on our ability to achieve sales targets, profitability
and a positive cash flow from operations. We cannot assure you, however, that
we will be able to achieve sales targets, profitable operations or a positive
cash flow from operations.
As disclosed in Note 10 to the Consolidated Financial Statements, we raised
$4 million in gross proceeds from a private offering of convertible debentures
in May 1999, of which $2 million has been funded and of which the second
$2 million becomes available upon the effectiveness of the registration
statement of which this prospectus is a part. Based on our projections of
sales, cost of sales and expenses and expected manufacturing efficiencies due
to our assumption of the manufacturing of OIS's product, we believe that once
we are able to draw the second $2 million from this offering, we will have
sufficient working capital for the balance of fiscal 2000. It should be noted
however, that our projections involve significantly higher levels of sales than
have been experienced in the past. Although we believe that these sales levels
are achievable due to the expected introduction of six new products in the
third and fourth calendar quarters of 1999, these sales levels will be
dependent on many circumstances outside our control, including whether these
new products will be accepted by the market, and the availability of components
to manufacture these products.
Furthermore, any significant uninsured settlement or judgment associated
with the class action litigation would materially adversely affect our ability
to satisfy our working capital requirements. If additional capital is required,
we would consider several financing alternatives including the issuance of
securities, licensing of technology and marketing rights, and/or bank
financing. We cannot assure you that we would be successful in obtaining
additional financing.
At March 31, 1999, we had net operating loss carryforwards for federal
income tax purposes totaling approximately $55 million 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 our net operating loss carryforwards to offset future income may
be limited.
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Government Grants
We have 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 remaining $50,000 of the grant can be drawn upon
the achievement of specified criteria.
Year 2000 Issues
We are currently in the final phase of identifying and evaluating the
potential impacts of the Year 2000 on our systems. We are evaluating the
following issues:
. State of readiness
. Costs to address Year 2000 issues
. Risk assessment
. Contingency plan
The following is a description of the process we have established and which
we intend to follow to minimize our Year 2000 risk exposure:
State of readiness. In September 1998, we upgraded our accounting system to
a release that is Year 2000 compliant. In addition, we have sent out letters to
substantially all of our suppliers requesting assurances of Year 2000
compliance. We have received from a majority of these suppliers written
assurances of compliance. In addition, we have received documentation in the
form of information published on websites stating that the systems of our major
vendors are either Year 2000 compliant or that these systems will be Year 2000
compliant by the end of the third quarter of 1999 with the exception of one
vendor that has assured us of its compliance by November 1999.
Cost to address Year 2000 issues. To date we have expended approximately
$75,000 in connection with our evaluation and upgrades of systems and
approximately $5,000 in contacting our vendors and suppliers to ensure
compliance. These costs are included in selling, general and administrative
expense in the consolidated statements of operations. All costs related to Year
2000 issues are paid from cash flows from operations.
We anticipate that future expenditures for necessary remediation of which we
are not yet aware and for implementation of additional contingency plans will
cost approximately $30,000. These expenditures will be recorded as selling,
general and administrative expense as incurred.
Risk assessment. Based on the findings of our engineers, we believe that the
impact of Year 2000 issues on our internal operations will be minimal. Our
laser products are not date sensitive. Some of our diagnostic products contain
date sensitive databases, however, the costs of software modification are not
expected to be material.
We have had difficulty estimating the impact of Year 2000 noncompliance by
outside parties with whom we transact business. We are currently in the process
of surveying our vendors and suppliers to ascertain their Year 2000 readiness.
Because we have not yet completed this survey, we are not in a position at this
time accurately to ascertain the degree of compliance by vendors and suppliers
with whom we conduct business.
Contingency plan. Because we have not completed our testing and assessment
procedures, we have not developed any plans for likely scenarios involving Year
2000 failures. If, when testing and assessment is complete, it appears
reasonably likely that such a Year 2000 failure may occur, management intends
to develop appropriate plans to deal with such contingencies. If we are
unsuccessful in developing or implementing a plan to correct possible Year 2000
failures, or if we fail properly to anticipate a Year 2000 failure in our
technology,
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we may experience disruptions in operations. Our projections of the most
serious disruptions which could occur include:
. the loss of approximately two months' net revenue of $4,000,000 if we
experience difficulties in obtaining components and products from our
suppliers who are experiencing disruptions due to Year 2000 risks,
resulting in the loss of sales because of failure to ship products on a
timely basis. We would, however, expect eventually to be able to recover
a significant portion of this revenue once measures were implemented to
correct problems resulting from the Year 2000.
. the inability to collect receivables if any of the accounting systems of
our clients experience a Year 2000 failure.
Seasonality
To date, our 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.
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BUSINESS
Overview
Premier 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. In addition, through
EyeSys, we develop, manufacture and market diagnostic systems which provide
ophthalmic practitioners with images of the shape and curvature of the human
cornea. Premier's majority owned subsidiary, OIS, is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems and
image enhancement and analysis software for use by practitioners in the ocular
health field. When referred to in the following discussion, the term "Premier"
refers to Premier Laser Systems, Inc. while references to "us," "our" and "we"
mean collectively Premier, EyeSys and OIS.
Premier commenced operations in August 1991 after acquiring substantially
all of the assets of Pfizer Laser Systems, a division of Pfizer HPG which is a
wholly-owned subsidiary of Pfizer, Inc. In 1993, Premier acquired from
Proclosure, Inc. technology, assets and proprietary rights relating to a laser
system for tissue fusion, and completed its initial public offering of
securities in 1994. In September 1997, Premier acquired EyeSys in exchange for
cash and securities. Premier acquired a majority of the outstanding common
stock of OIS in several transactions commencing in October 1997 and ending in
February 1998. As of this date, Premier remains a majority shareholder of OIS.
OIS held its annual shareholders' meeting on January 18, 1999. At that meeting,
Premier's proposed slate of board of directors was elected. On March 7, 1999,
Premier and OIS entered into a Letter Agreement under which Premier committed
to undertake OIS's manufacturing operations.
Premier has made a proposal to the OIS board of directors under which
Premier would acquire the remaining shares of OIS not already owned by Premier.
This proposal was rejected, but additional discussions for such a transaction
may occur in the future.
Laser Business
Our 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 in some cases, 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. We currently market certain
of these lasers for dentistry, ophthalmology and surgery.
Although we have received more than 100 clearances from the FDA in multiple
specialty areas to market our laser products for a variety of medical
applications, due to limited financial resources we have initially focused our
marketing efforts on dental lasers which we believe have the most promise for
commercial success. We initiated marketing efforts in ophthalmology in 1997. As
resources permit, we plan to commence marketing efforts with respect to other
medical applications which we believe may also be commercially viable. In
addition, we have several new submittals with the FDA which we believe will be
evaluated within the next 12 months, including our submittals concerning the
use of lasers in connection with cataract surgery, cavity prevention and tissue
melding.
Corneal Topography Business
EyeSys designs, develops and markets a line of noninvasive diagnostic
imaging systems for use by ophthalmologists and optometrists in surgical
planning and evaluation, diagnosis of corneal diseases and contact lens
fitting. Founded in 1986, EyeSys has installed more than 3,500 systems.
The EyeSys System 2000 and Vista products each combine proprietary hardware
used for capturing an image and a personal computer to control the hardware and
to run the software. The output of these systems is a color-coded map of the
shape and curvature of the human cornea that vision care professionals can
easily interpret and utilize for treatments such as vision correction and
cataract surgery and corneal transplants, for diagnosis of astigmatisms and
corneal diseases, and for contact lens fitting and custom lens manufacturing.
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Ocular Imaging Business
OIS, which commenced business in 1986, is engaged in the business of
designing, manufacturing, and marketing digital imaging systems and image
enhancement and analysis software for use by practitioners in the ocular health
field. OIS's current flagship products are its digital imaging systems, the
WinStation 1024(TM) and WinStation 640(TM). These WinStation products are
targeted primarily at retinal specialists and general ophthalmologists. OIS's
WinStation systems are primarily used by ophthalmologists to perform a
diagnostic test of the blood flow in the patient's retina. This procedure is
used to diagnose and monitor diseases and provide important information in
making treatment decisions. OIS also recently showed a digital fundus imager,
which provides similar diagnostic capabilities, except that it provides a
continuous image rather than a single frame image, and it will be sold at a
lower price. In addition, OIS plans to market a Digital Slit Lamp which will be
used to obtain live motion images of the surface of the eye.
OIS has experienced operating losses for each fiscal year since its initial
public offering in 1992. OIS expects to continue to incur operating losses for
the foreseeable future and while a goal of the combined ophthalmic businesses
is to achieve profitability through consolidation, we cannot assure you that
OIS will be able to achieve or sustain significant revenues or profitability in
the future.
Market Overview
Dental and Periodontal Laser Market
The current market for laser equipment in dental procedures is comprised of
hard and soft tissue procedures, composite curing and teeth whitening.
Hard Tissue Procedures, including Cavity Preparation. Potential dental laser
applications for procedures on teeth, also known as hard tissue procedures,
include pit and fissure sealing, etching, caries removal and cavity
preparation. Based on user feedback from our clinical sites, we believe 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, our
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 these
procedures. We commenced marketing of the Er:YAG laser for these procedures
shortly after receipt of FDA clearance.
Soft Tissue. The dental laser can be used for selected 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 we have clearance to market six
lasers for soft tissue dental procedures, including the Aurora diode laser and
Centauri Er:YAG laser, we focus our marketing efforts on our Aurora diode laser
in this area. The Aurora also is the only diode laser with clearance for
procedures involving removal of the pulp of the tooth.
Composite Curing. Composites are rapidly replacing gold and silver fillings
as the material of choice for restoration of cavities, because they more
closely match the color of teeth and because gold and silver fillings have
drawn increasing worldwide concern over safety due to the toxic gases which may
be released when they 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 frequently result
in a stronger restoration than composites cured by traditional curing lights.
Our argon lasers can also be used to cure the resins used in placing veneers or
bonding orthodontic brackets. Our Arago and MOD argon lasers have received FDA
clearance for use in these applications.
Teeth Whitening. A large number of dentists use 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. Our MOD and Arago lasers have been
cleared to market for this procedure.
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Cavity Prevention. We are currently conducting research and initiating
clinical trials to use our lasers for cavity prevention applications. Our
clinical trials are at an early stage and we cannot assure you that FDA
clearance will be obtained for these applications.
Ophthalmic Laser and Diagnostic Market
Because of the importance of the cornea to visual performance, virtually all
ophthalmologists and optometrists have historically used a measuring instrument
known as a keratometer to quantify corneal curvature, in a procedure called
keratometry. This instrument obtains only four measurement points, therefore it
cannot accurately measure asymmetrical curvatures. A more precise instrument,
called a corneal topographer, was developed to measure the curvature of the
front of the eye.
Applications of this device include:
. important applications in selecting the appropriate procedure for each
refractive patient, preoperative surgical planning, postoperative
evaluation and patient follow-up
. improved pre-surgical planning for removal of a cloudy lens in cataract
surgery, improved assessment and correction of surgically induced
astigmatism, which is the most frequent complication caused by
intraocular lens surgery, potentially improved calculation of implanted
intraocular lens power, and support of combination cataract/refractive
surgical procedures
. improved surgical outcomes in corneal transplants allowing the
practitioner to evaluate surgical technique and adjust postoperative
treatment
. analysis and diagnosis of astigmatism and various corneal diseases
. several applications in contact lens fitting and manufacturing
The WinStation market consists of current owners of fundus cameras and
anticipated purchasers of fundus cameras suitable for interfacing with the
OIS's digital imaging system products. A fundus camera is a camera that
produces photographs of the retina of the eye.
Retinal specialists who number approximately 3,000 in the U.S., comprise the
primary target market for digital angiography systems, which allow the
visualization of blood flow in the retina. For the past two years OIS digital
imaging system sales have been driven in this segment to a large extent by a
procedure known as indocyanine green angiography. This new diagnostic test
procedure yields new clinically significant information that is helpful in the
treatment of patients with macular degeneration, a leading cause of blindness
which afflicts over 13 million people in the U.S. This procedure can only be
performed using a digital imaging system. OIS introduced a digital fundus
imager and a Digital Slit Lamp which will allow full motion video of the eye at
a relatively low cost.
The total available market for diagnostic ophthalmic equipment consists of
16,000 ophthalmologists in the United States, 100,000 additional
ophthalmologists in international markets and 36,000 optometrists in the United
States.
Following diagnostic procedures, laser systems have been used for the
treatment of eye disorders for many years and are widely accepted in the
ophthalmic community. Lasers have traditionally been sold for extra-ocular
procedures and procedures in the back of the eye. We do not promote our lasers
for these markets, which we believe are approaching saturation, but instead
focus on intraocular, refractive/vision correction and aesthetic procedures
including anterior capsulotomy, cataract removal, glaucoma treatment, corneal
sculpting and cosmetic or aesthetic skin procedures. We have developed the
Centauri Er:YAG laser which is capable of performing all of these procedures,
which previously typically have been performed by several different types of
medical lasers. To date, however, the Centauri laser has only been cleared for
some of these procedures. A summary of the procedures for which the Centauri
laser has been cleared appears under "Products--Laser Products."
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Cataract Removal Procedures. We believe 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. Our 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. We have also completed Phase
II clinical trials on the Centauri laser for the breakup of the cataract
itself, as an alternative to the emulsification of the cataract by ultrasonic
energy. We believe that this patented technology for use in cataract removal
may provide an easier and safer method.
Treatment of Glaucoma. Glaucoma, a disease of the eye characterized by
increased 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 a pathway into the eye in order to relieve pressure in the eye. This
procedure, which may be repeated periodically, can be performed under local
anesthesia with a self closing incision on an outpatient basis. We are
currently conducting clinical trials prior to seeking clearance to market our
Centauri Er:YAG laser for several alternative techniques for this procedure. We
do not know whether the FDA will grant clearance these techniques, however.
Corneal Sculpting. We believe that FDA 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, a
procedure in which the laser is used to sculpt the cornea of the eye to a
desired curvature to correct nearsightedness, farsightedness or astigmatism. We
plan to seek approval to market the Centauri laser for corneal sculpting and
have initiated studies in preparation for regulatory submittal for this
application. We do not know whether the FDA will grant clearance for this
procedure, however.
Aesthetic Surgical Procedures. We have received clearance for the use of our
lasers in selected aesthetic procedures such as skin resurfacing and eyelid
surgery. We plan to begin marketing some of these products for aesthetic
applications during the current year.
Surgical Laser 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 our products are cleared to market in a number of
specialty areas within the surgical market, we have specifically targeted
tissue melding, also known as tissue fusion, and aesthetic applications within
the surgical market.
Tissue Melding. We believe 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. Along with our strategic partner, we have conducted animal tests
to support regulatory submittals for the use of our Polaris Nd:YAG laser in the
areas of arteries, veins, blood vessels and ducts, and are currently conducting
clinical studies for skin and hypospadias. We have also completed clinical
trials for vasovasotomy, which is the reversal of vasectomies. These trials
demonstrated a success rate of approximately 89%. We are 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. We have
clearance for Phase II clinical trials for skin closure following mastectomies
and eyelid surgery at five clinical sites. Artery and vein melding has been
tested in animals by our strategic partner in preparation for clinical studies.
Aesthetic Surgical Procedures. The market for aesthetic surgery is growing
rapidly worldwide. We have a number of approvals for lasers to be used in
aesthetic applications and will devote further efforts in the future to
entering into and capitalizing on this market.
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We have regulatory clearance to market our products for a variety of
additional applications, including in urology, orthopedics, gynecology,
gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In
areas where our technology is not being fully utilized, we may seek agreements
to supply our products under private label for other manufacturers or may enter
into strategic alliances to develop and market our lasers for other
applications.
Products
Laser Products
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.
Our lasers often use 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 or scanners
which are used on a disposable or limited reuse basis, and which we expect will
provide a recurring revenue stream. Our strategy is to target specific
applications in the dental, ophthalmic and surgical markets, where we believe
that our technology and products have competitive strengths.
Our line of portable lasers is specifically designed for use in outpatient
surgical centers and medical offices. We believe that our 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, we have designed a
laser system that:
. is modularly designed and uses similar components for multiple laser
systems thereby reducing their overall cost
. 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
. can be easily moved from the office to surgical centers because of its
compact size and limited voltage requirements
Our Er:YAG lasers are currently priced from $37,000 to $126,000 and our
Nd:YAG lasers are currently priced from $25,000 to $80,000. Our diode lasers
are currently priced from $22,000 to $35,000 and our argon lasers are priced
from $5,500 to $22,000. The prices of lasers within these ranges depend upon
each model's power capability and the features offered.
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The following table presents, in summary form, our principal lasers and
delivery systems, the principal applications for which we intend to use them,
and the FDA status of these products.
<TABLE>
<CAPTION>
Product Medical Application FDA Regulatory Status
---------------------- --------------------------------- ---------------------
<C> <S> <C>
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 and Laser Lens
Emulsification.................. Clinical Trials
Corneal Sculpting................ Clinical Trials
General Surgery, Neurosurgery,
Orthopedics, Gastrointestinal
and Genitourinary Procedures,
Urology, Gynecology and
Oral Surgery.................... 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--Hygiene.................. Cleared to market
Dental--Endodontics.............. 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 and Arago (argon) Dental--Composite Curing......... Cleared to market
Dental--Teeth Whitening.......... Cleared to market
</TABLE>
Centauri ER:YAG Laser. Our 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 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 we have invested
heavily in the technology to develop fibers which can handle adequate power. In
the past, we experienced difficulties with our supplier of these fibers. We now
obtain our fibers from Saphikon, with which we have experienced no supply
problems. In addition, we have secured an alternate source of the fibers from
Galileo, a Massachusetts based company. See "--Manufacturing and Materials" and
"Legal Proceedings."
Polaris 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.
This laser also uses our disposable unique TouchTIPS, AngleTIPS and
sculptured fibers. By using the Polaris laser with TouchTIPS, the surgeon is
allowed direct contact with tissue and the tactile feeling of the scalpel or
other surgical instruments. We believe that the availability of these
technologies permits the use of a lower power laser system.
With the exception of Japan, China and Taiwan, we hold the proprietary
rights, including several patents, to manufacture and sell the Polaris laser, a
1.32 micron Nd:YAG laser, together with specialized software and delivery
systems, for tissue melding. We are developing the Polaris laser for use in
cosmetic skin closures, vascular surgeries and minimally invasive surgical
procedures normally performed with sutures and staples.
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Although the use of the Polaris laser for tissue melding is still in the
clinical trial stage, and no clearance for this application has been received,
we believe 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 our first semiconductor laser
and is the first truly portable diode laser designed for dentistry. The Aurora
diode laser replaced the 20 watt Pegasus laser for periodontal procedures, and
is approximately one-fourth the size and one-half of the cost of that system.
The diode wavelength is absorbed by blood and 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. We believe 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 are gas lasers which have
been cleared to market in dentistry to accelerate the composite curing process.
Composites are rapidly replacing gold and silver fillings as the material of
choice for the restoration of cavities. The argon wavelength penetrates through
the composite and has been shown to frequently result in a stronger restoration
than composites cured by traditional curing lights. Our 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. We
cannot assure you that the use of the argon laser for teeth whitening will
become a widely accepted practice in the dental industry. We plan to bundle our
lasers with light activated whitening materials and co-market these products
with the manufacturers of these materials. We are currently manufacturing the
MOD lasers in-house. The Arago laser is currently being supplied by LaserMed,
Inc. a third party manufacturer.
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Other Lasers. We have developed other solid state pulsed lasers including
the Sirius .532 Nd:YAG laser, Pegasus Nd:YAG, Orion Ho:YAG laser and the
Arcturus alexandrite:YAG laser, and other applications for our existing lasers,
but are not actively marketing these lasers at the present time. The following
table briefly describes additional lasers owned by us which we do not currently
market, and the principal applications for which we have clearance to market
these lasers.
<TABLE>
<CAPTION>
Product Medical Application FDA Regulatory Status
--------------------------- --------------------------- ---------------------
<C> <S> <C>
Altair (CO\\2\\) Orthopedics General and
Plastic Surgery,
Dermatology, Podiatry Ear,
Nose and Throat,
Gynecology Pulmonary
Procedures; Neurosurgery
and Ophthalmology......... 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 20W) Dental--Soft Tissue........ Cleared to market
Dental--Endodontics........ 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 (.532(m) 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>
Laser Delivery Systems and Disposable Products
While each laser system we market consists of a laser and an integral fiber,
the fibers and other products, such as tubing sets and tips, are used by
surgeons on a disposable or limited reuse basis for each clinical procedure. We
believe that expansion into this market could provide us with a recurring
revenue stream.
Corneal Topography Products
EyeSys 2000 Corneal Analysis System. The EyeSys System 2000 corneal
topography instrument and associated Microsoft Windows(C) based software is
targeted at refractive surgeons, general ophthalmologists and optometrists for
diagnostic, surgical and contact lens fitting applications. The primary
function of the instrument is to position a patient for corneal image capture,
acquire the image of reflected rings and send the image to a personal computer
for further processing. The System 2000 is modular and we market it as a
proprietary computer peripheral and software. The System 2000 hardware
interfaces to the computer via a parallel port connection, allowing EyeSys to
unbundle the computer, monitor, printer, tables and other third party items.
This can significantly lower the price to the customer by allowing physicians
to utilize hardware they already own.
Last year we introduced what we believe to be the smallest hand-held
topography system currently available. The Vista(TM) incorporates much of the
same reliable and accurate software as the System 2000, but its portability
facilitates its use in the operating room or by the optometrist.
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Ocular Imaging Products
OIS currently offers two products to the ophthalmic market: the WinStation
640 and the WinStation 1024 and intends to commence sales of a digital fundus
imager and a Digital Slit Lamp within the next couple of months. OIS's
WinStation systems are used by ophthalmologists to produce images of blood
vessels within the eye. Whereas the traditional methods of obtaining these
images utilize photographic film which requires special processing and
printing, the WinStation systems allow for immediate diagnosis and treatment of
the patient.
The WinStation products enable the ophthalmologist to perform indocyanine
green ("ICG") angiography. ICG angiography is a new diagnostic test procedure
which is yielding new clinically significant information that is helpful in the
treatment of patients with macular degeneration, a leading cause of blindness
afflicting over 13 million people in the U.S. ICG angiography, used for
approximately 10-20% of patient angiography, is a dye procedure that can only
be performed using a digital imaging system.
OIS also recently showed a digital fundus imager, which provides similar
diagnostic capabilities, except that it provides a continuous image rather than
a single frame image and it will be sold at a lower price. Another of OIS's
imaging products, the Digital Slit Lamp, allows the ophthalmologist to obtain
full motion video images of the surface of the eye.
Marketing, Sales and Service
We market our products to the dental market in the United States directly to
dentists through our direct sales force consisting of two area sales managers,
manufacturer's representative network consisting of approximately 15
manufacturer's representatives or companies and our distributor network. The
dental market includes approximately 129,000 practicing dentists in the United
States. We believe that in order to reach this market we must expand our U.S.
distribution capabilities. We market our products primarily through
conventions, educational courses, direct mail, telemarketing and other dental
training programs. Through an active program of educational courses and
preceptorships, we have trained dentists in many countries during the past two
years using industry recognized dentists and periodontists.
We market our products in the ophthalmic market jointly with OIS through a
sales manager and five territory managers who focus their efforts on key
ophthalmologists worldwide. We plan to expand our ophthalmic sales force both
by enlarging our domestic sales force, either internally or through acquisition
or distribution, by acquiring or engaging additional international
manufacturing representatives, and by having existing international
distributors carry our full product line. In 1997, EyeSys entered into an
agreement with Marco Ophthalmic Inc. under which that company was appointed as
a nonexclusive distributor in the United States of the System 2000 and the
exclusive distributor of the Vista portable corneal topography system for a
three-year period following commercialization of that system. Sales and
marketing efforts for ophthalmic products are managed out of Sacramento,
California.
In the surgical market, we intend 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. We have recently terminated
our relationship with Azwell, Inc., formerly known as Nippon Shoji Kaisha,
Ltd., and intend to seek a replacement alliance relationship.
We have entered into distribution agreements with distributors in many
countries for sales of our dental and ophthalmic products. In fiscal year ended
March 31, 1999, foreign sales accounted for approximately 11% of our total
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." We typically grant exclusive distribution rights in
select territories to our distributors who usually must maintain agreed upon
distribution minimums in order to retain their exclusive rights. These
agreements are managed by three directors of distribution marketing and sales
for the Pacific Rim; Europe, the Middle East and Africa; and Canada and South
America.
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No customer accounted for more than 10% of our net sales, on a consolidated
basis, in fiscal 1999 or fiscal 1998. During fiscal 1997, three customers each
accounted for more than 10% of the sales of EyeSys: Marco accounted for 13% of
sales, Newtech accounted for 14% of sales and Vistatek accounted for 15% of
sales.
We seek to create a group of loyal customers by focusing on customer
service, quality and reliability. In addition to our educational courses, we
perform a complete installation of our products and train the customers' staff
in its proper use. Educational videos and papers are available upon request. We
conduct service training courses for the representatives of our distributors.
Prior to shipping, every product is subjected to an extensive battery of
quality control tests. We generally provide a one year warranty with all
products and extended warranties are available at an additional cost. If
service is required, a product owner is either sent a loaner product by
overnight carrier, returns his product for service 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 product to us. We have
experienced and may continue to experience difficulties in providing prompt and
cost-effective service for our products internationally. We are working to
improve the service training of our international distributors.
Competition
We are, and will continue to be, subject to competition in our 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, we compete 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, we face
competition principally from:
. traditional surgical treatments using a tearing needle in anterior
capsulotomy
. phacoemulsification, an ultrasound device used to break up cataracts in
cataract removal procedures;
. corrective eyewear, such as eyeglasses and contact lenses, and surgical
treatments for refractive disorders using either an excimer laser or a
scalpel
. 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 other lasers.
The medical laser industry in particular is also subject to intense
competition and rapid technological change. There are approximately 30
competitors in different sectors of the medical laser industry. We believe 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.
We believe that for many applications, our patented or patent pending
methods and fiberoptic delivery systems provide clinical benefits over other
currently known technologies and our competitors' laser products.
EyeSys' primary competitors in the corneal topography market are Tomey
Technology, Alcon Surgical, Inc., a subsidiary of Nestle, Humphrey Instruments,
a subsidiary of Carl Zeiss, and Orbtek, a subsidiary of Bausch and Lomb.
Competition for products that can diagnose and evaluate eye disease is
intense and is expected to increase. We are aware of three primary OIS
competitors in the U.S.: Topcon, Humphrey Instruments and Tomey Technology.
Four other companies are known to have systems in the international market,
each with lesser market penetration.
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We believe that our ability to compete successfully against traditional
treatments, competitive laser systems and treatments that may be developed in
the future will depend on our ability to create and maintain advanced
technology, develop proprietary products, obtain required regulatory approvals
and clearances for our products, attract and retain scientific personnel,
obtain patent or other proprietary protection for our products and
technologies, and manufacture and successfully market products either alone or
through other parties. Some of our competitors have substantially greater
financial, technical and marketing resources than us. We cannot assure you that
this competition will not adversely affect our results of operations or our
ability to maintain or increase market share.
Seasonality
To date, our 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. We expect that this seasonality will continue
indefinitely.
Research and Development
Laser Business
In the past three fiscal years (1997-1999), Premier has invested in excess
of $8.8 million in company-sponsored research and development programs. This
amount is net of approximately $450,000 received under a Small Business
Innovative Research Grant in fiscal 1997 and excludes a $12.9 million noncash
charge for in-process research and development related to acquisitions in
fiscal 1997 and 1998. We received approximately $250,000 in additional SBIR
research grants prior to 1997. 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.
Our current research is focused on expanding the clinical applications of
our existing products, reducing the size and cost of current laser systems,
developing custom delivery systems and developing new innovative products. For
our laser products, our in-house research and development efforts have focused
on the development of a systems approach 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 our
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.
Corneal Topography Business
EyeSys' research and development efforts are focused on further development
of corneal topography systems, advanced applications software development,
internationalization of software, minimization, simplification and optimization
of the instrument and development of the next generation ophthalmic
instrumentation.
Ocular Imaging Business
OIS intends to devote significant resources to the development of
telemedicine/managed care applications, the improvement of optics, new fundus
camera interfaces for a green dye, software development (including the
continued enhancement of WinStation), hardware optimization, and the
patient/doctor interface. OIS's research and development expenditures in the
year ended August 31, 1998 were $866,745 and in the year ended August 31, 1997,
were $1,070,192.
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Patents and Patent Applications
Patent protection is an important part of our business strategy, and our
success depends, in part, on our ability to maintain patents and trade secret
protection and on our ability to operate without infringing on the rights of
third parties. We have sought to protect our 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. We
focus our efforts on filing only for those patents which we believe will
provide us with key defensible features instead of filing for all potential
minor device features. In the United States, we hold 33 patents and have an
additional 24 pending patent applications, including divisional applications.
In addition, we hold 23 foreign patents and have at least 44 foreign patent
applications. These patents expire at various times over the next six to 16
years. We also have a nonexclusive license to a number of basic laser
technologies which are commonly licensed on such basis in the laser industry.
OIS holds one patent covering one of its products.
We cannot assure you that our patents or trademarks would be upheld if
challenged, or that competitors might not develop similar or superior processes
or products outside the protection of any patents issued to us. In addition, we
cannot assure you that we will have the financial or other resources necessary
to enforce or defend a patent or trademark infringement or proprietary rights
violation action. The extent of intellectual property protection afforded by
the laws of foreign countries for our products varies significantly from
country to country. Although we currently carry insurance that might cover some
of the amounts we could be liable for in patent litigation, if our products
infringe patents, trademarks or proprietary rights of others, we could become
liable for damages, which also could have a material adverse effect on us.
We are aware of various patents which, along with other patents that may
exist or be granted in the future, could restrict our right to market some of
our technologies without a license, including, without limitation, patents
relating to our lens emulsification product and ophthalmic probes for our
Er:YAG laser. In the past, we have received allegations that certain of our
laser products infringe other patents. There has been significant patent
litigation in the medical and medical device laser industry. Adverse
determinations in litigation or other patent proceedings in which we may become
a party could subject us to significant legal judgments or liabilities to third
parties, and could require us to seek licenses from third parties. We cannot
assure you that any licenses required under these or any other patents or
proprietary rights would be available on terms acceptable to us, if at all. If
we do not obtain these licenses, we could encounter delays in product
introductions while we attempt to design around these patents, or we could find
that the development, manufacture or sale of products requiring such licenses
could be enjoined.
We also rely on unpatented proprietary technology, trade secrets and know-
how. Certain components of some of our products are proprietary and constitute
trade secrets, but others are purchased from third parties. There is no
assurance that other parties will not independently develop substantially
equivalent proprietary information or techniques, or gain access to our trade
secrets in other ways, or disclose this technology, or that we can meaningfully
protect our rights to our unpatented trade secrets.
We seek to protect our unpatented proprietary technology, in part, through
proprietary confidentiality and nondisclosure agreements with employees,
consultants and other parties. We cannot assure you that proprietary
information agreements with employees, consultants and others will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known to or independently developed by
competitors.
Government Regulation
FDA Regulation
The products that we manufacture are regulated as medical devices by the FDA
under the Food, Drug and Cosmetics Act (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. Under the FDC Act and the applicable
regulations, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution, and promotion of medical devices.
Noncompliance with
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<PAGE>
applicable requirements can result in a variety of serious penalties. The FDA
also has the authority to request recall, repair, replacement or refund of the
cost of any device which we manufacture or distribute.
The FDA classifies medical devices in commercial distribution into one of
three classes: Class I, II or III. 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, such as
labeling, premarket notification and adherence to applicable requirements for
Good Manufacturing Practices, known as "GMP's." Class II devices are subject to
general and special controls, such as 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. Class III devices include, for example, life-
sustaining, life-supporting and implantable devices, or new devices which have
been found not to be substantially equivalent to legally marketed devices. Our
laser and diagnostic products typically are classified as Class II devices, but
the FDA may classify some indications or technologies into Class III and
require a premarket approval application. OIS's products are classified as
Class II devices which require, among other things, annual registration,
listing of devices, good manufacturing practices and labeling, and prohibition
against misbranding and adulteration.
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 premarket approval application, that manufacturer or
distributor may seek FDA 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 premarket approval application 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. We cannot assure you
that some of our products will not require the more rigorous and time consuming
premarket approval application process, including laser uses for vasovasotomy
or other tissue melding procedures, cavity prevention, 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 premarket approval application, and the device presents a
"significant risk," the manufacturer or the distributor of the devices will
have to file an application for an investigational device exemption ("IDE")
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, human clinical trials
may begin at a specific number of investigational sites with a specific number
of patients, as approved by the FDA. The FDA does not approve all IDE's that
are submitted. Even if an IDE is approved, the FDA may determine that the data
derived from these studies do not 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 that this 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 Institutional Review Board, 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 three to 12 months or longer for a
510(k). If a premarket approval application 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
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<PAGE>
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 premarket approval application.
Devices are cleared by 510(k) or approved by premarket approval application
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 some cases 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.
We cannot assure you that we will be able to obtain necessary regulatory
approvals or clearances for our products on a timely basis or at all, and
delays in receipt of or failure to receive these 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 our business, financial condition and results of operations. FDA or
other governmental approvals of products we develop in the future may require
substantial filing fees which could limit the number of applications we seek
and may entail limitations on the indicated uses for which such products may be
marketed. In 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
We have 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); 1.32 micron Nd:YAG (two models: 15W, 25W); .532 micron
Nd:YAG (one model); Argon (three models); diode (four models); Nd:YAG/Er:YAG
combination laser (one model). Each of these lasers has clearances in multiple
specialty areas. We have also received 510(k) clearance to market a scanner,
sculptured fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and
focusing tips for all cleared wavelengths of our lasers. If a device for which
we have 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. We have made modifications to certain of our products
which we believe do not require the submission of new 510(k) notifications.
However, we cannot assure you that the FDA will agree with our determinations.
If they did not, they could require us to discontinue marketing one or more of
the modified devices until they have been cleared. There also can be no
assurance that any FDA clearance of modifications would be granted should
clearance be necessary.
OIS has received 510(k) clearance for its digital angiography products and
Digital Slit Lamp, and EyeSys has received 510(k) clearance for its System 2000
and Vista corneal topography systems.
We are currently conducting preclinical animal studies and clinical trials,
both under approved IDEs and as nonsignificant risk studies. We do not know if
the results of any of these clinical studies will be successful or if the FDA
will require us to discontinue any of these studies in the interest of the
public health or due to any violations of the FDA's IDE regulations. We cannot
assure you that we will receive approval from the FDA to conduct any of the
significant risk studies for which we seek IDE approval, or that the FDA will
not disagree with our determination that any of its studies are "nonsignificant
risk" studies and require us to obtain approval of an IDE before the study can
continue.
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Additional Regulatory Requirements
Any products manufactured or distributed by us under a 510(k) premarket
clearance notification or premarket approval application are or will be subject
to pervasive and continuing regulation by the FDA. The FDC Act also requires us
to manufacture our products in registered establishments and in accordance with
current GMP regulations, which include testing, control and documentation
requirements. We must also comply with Medical Device Reporting 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. Our facilities in the United States
are periodically inspected by the FDA. The FDA may require postmarketing
surveillance with respect to our products. The export of medical devices is
also regulated in some instances.
All lasers that we manufacture are regulated under 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 under 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.
In addition, the use of our products may be regulated by various state
agencies. For instance, we are required to register as a medical device
manufacturer with various state agencies. In addition to being subject to
inspection by the FDA, we also will be routinely inspected by the State of
California for compliance with GMP regulations and other requirements.
Although we believe that we currently comply in all material respects and
will continue to comply with the applicable regulations regarding the
manufacture and sale of medical devices, these regulations may change
periodically and depend heavily on administrative interpretations. OIS has
recently outsourced its manufacturing operations to Premier, and therefore OIS
also depends on Premier's continuing compliance with these regulations.
It is possible that future changes in law, regulations, review guidelines or
administrative interpretations by the FDA or other regulatory bodies, with
possible retroactive effect, could adversely affect our business, financial
condition and results of operations. In addition to the foregoing, we are
governed by 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 we will not be required to incur
significant costs to comply with these laws and regulations in the future, or
that these laws or regulations will not have a material adverse effect upon our
ability to conduct business.
Furthermore, the introduction of our products in foreign countries often
requires obtaining foreign regulatory clearances, and additional safety and
effectiveness standards are required in various other countries. We believe
that only a limited number of foreign countries currently have extensive
regulatory requirements. These countries include the European Union countries,
Canada, Mexico and Japan. Domestic manufacturing locations of American
companies doing business in some 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 we will be attempting to obtain the necessary regulatory
approvals, we expect to market our products on a limited basis in other
countries that do not require regulatory approval. We cannot assure you that
our 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
this approval in the future.
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Manufacturing and Materials
Manufacturing of our products consists of component assembly and systems
integration of electronic, mechanical and optical components and modules. Our
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. We believe that our customized tooling and automated
systems improve quality and manufacturing reliability resulting in lower
overall manufacturing costs. We believe that these systems will allow us to
expand production rapidly.
Recently, in order to reduce manufacturing costs by taking advantage of
unused manufacturing capacity, OIS outsourced the assembly of its products to
Premier.
We purchase some of the raw materials, components and subassemblies included
in our products and OIS's products from a limited group of qualified suppliers
and do not maintain long-term supply contracts with any of our key suppliers.
While multiple sources of supply exist for most critical components used in our
laser, corneal topography and fiberoptic delivery systems, the disruption or
termination of these sources could prevent us from being able to ship products,
which would materially harm our business. 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. We have in the past experienced, and may
continue to experience, shortages in raw materials and supplies. For example,
in the past, we experienced difficulties with our supplier of fibers for our
Centauri Er:YAG laser, however, we have since secured new sources for these
fibers. See: "Business--Products--Centauri Er:YAG Laser." As a result of such
supply problems, we incurred expenses resulting from delays in obtaining FDA
approval while we changed fiber chemistry, and from the cost of developing and
qualifying the new fiber. In addition, we have incurred expenses resulting from
a business strategy of providing fibers to our customers free of charge to
address complaints about fiber quality and availability.
We own the molds used to produce some of the proprietary parts of the
devices. We also design and develop the software necessary for the operation of
our laser systems. We design and assemble our own fiberoptic delivery systems
and laser accessory equipment such as laser carts and associated disposable
supplies. We believe that our manufacturing practices comply with GMP
regulations.
Backlog of Orders
We typically ship to order and therefore have no material backlog.
Product Liability and Insurance
Since our products are intended for use in the treatment of human medical
conditions, we are subject to an inherent risk of product liability and other
liability claims which may involve significant claims and defense costs. We
currently have 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 includes various coverage exclusions, and in the
future may not be available in acceptable amounts, on acceptable terms, or at
all. Although we do not have any outstanding product liability claims, in the
event we were to be held liable for damages exceeding the limits of our
insurance coverage or outside of the scope of our coverage, our business and
results of operations could be materially adversely affected. Our reputation
and business could also be adversely affected by product liability claims,
regardless of their merit or eventual outcome.
Employees
As of August 3, 1999, Premier (including EyeSys, but excluding OIS) employed
79 people, 2 of whom are employed on a part-time basis. Twenty four employees
perform sales, marketing and customer support activities. The remaining
employees perform manufacturing, financial, administration, regulatory,
research and
39
<PAGE>
development and quality control activities. We have no collective bargaining
agreements covering any of our employees, have never experienced any material
labor disruption, and are unaware of any current efforts or plans to organize
our employees. We also engage the services of many independent contractors and
temporary personnel. We believe that our relationship with our employees is
good.
OIS Employees
As of August 3, 1999, OIS had 26 employees, 23 of which were full time
employees. These include 12 persons engaged in sales, marketing and customer
support activities. OIS also engages the services of consultants from time to
time to assist it on specific projects in the area of research and development,
software development, regulatory affairs, and product services. These
consultants periodically engage contract engineers as independent consultants
for specific projects. OIS has no collective bargaining agreements covering any
of its employees, has never experienced any material labor disruption, and is
unaware of any current efforts or plans to organize its employees. OIS
considers its relationship with its employees to be good.
Legal Proceedings
Lease Litigation
In February 1999, we were sued by Telephone Real Estate Equity Trust, Inc.,
a company that had leased office space to EyeSys, under a lease that has now
terminated. The case is pending in the District Court of Harris County, Texas.
The former lessor contends that EyeSys did not validly exercise its rights to
terminate the lease, and that it is therefore liable for approximately $250,000
in damages, which represents the balance of the payments due under the lease.
This case is presently in the discovery stage. We intend to vigorously defend
this case.
Optical Fiber Litigation
In March 1994, we 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 us for our ER:YAG laser. Two of IFS's senior officers are also named as
defendants. Our complaint in this matter alleges that IFS and two of its
officers made misrepresentations to us and that IFS breached its agreement to
supply fibers and warranties concerning the quality of the fiber to be
provided. We are seeking damages and an injunction requiring IFS to subcontract
the production of optical fiber to a third party, as provided in the supply
agreement. In April 1994, IFS filed a general denial and a cross-complaint
against us 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. We have filed an answer to the complaint, denying
the allegations and asserting several affirmative defenses.
IFS has agreed to license certain fiber technologies, to which we claim
exclusive license rights, to Coherent, Inc., a competitor of ours. 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 our original agreement with IFS applies only to a specific type of
optical fiber. We have answered this complaint. We have reached an agreement in
principle with IFS to settle the litigation between us and are in the process
of preparing a written settlement agreement. Although we are hopeful that the
formal settlement agreement will be successfully negotiated, we cannot assure
you that the agreement will actually be completed. The settlement agreement
under discussion does not terminate the litigation as between Premier and
Coherent.
40
<PAGE>
In May 1995, we instituted litigation concerning this dispute in the Orange
County, California Superior Court against Coherent, Westinghouse Electric
Corporation 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 our 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 us 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 our claims against Coherent. As
a result, the claims that were the subject of the granted demurrer have been
dismissed, subject to our right to appeal. We appealed these decisions as they
related to Westinghouse and the Westinghouse employee, however the Court of
Appeals affirmed the state court's decision. No trial date has been set as to
the remaining outstanding causes of action.
Securities Class Action
On May 1, 1998, a class action suit (the "Valenti Litigation") was commenced
in the United States District of Court for the Central District of California
under the federal securities laws on behalf of purchasers of our securities
during the period from February 12, 1998 through April 15, 1998. The complaint
alleges that Premier and certain of our officers and directors violated the
federal securities laws by issuing false and misleading statements and omitting
material facts regarding our financial results and operations during such
period. Among other things, the complaint alleges that the defendants
materially misstated our financial results for the fiscal quarter ended
December 31, 1997 by overstating our revenues and profitability. The complaint
also alleges that we misstated the nature of our legal and business
relationship with a distributor, Henry Schein, Inc. and that as a result of
such misstatements, the plaintiff suffered damages as a result of a decrease in
the market price of our publicly traded securities.
After the filing of this complaint, a number of similar complaints were also
filed in the United States District Court for the Central District of
California, seeking certification as class actions, and covering class periods
commencing as early as May 7, 1997. These complaints alleged facts similar to
those described above with respect to the Valenti Litigation, as well as
allegations that we artificially inflated the price of our outstanding publicly
traded securities as a result of misrepresentations relating to the market and
prospects for sale of our Centauri ER:YAG laser. The alleged misstatements
include statements concerning the expected number of sales for this laser, the
number of orders received, the projected market size for the laser and the
resulting positive effect on our profitability. All of the above described
complaints seek monetary damages in unspecified amounts, together with
attorneys fees, interest, costs and related remedies. All of these class action
lawsuits have now been consolidated into a single action.
We have also been named as a nominal defendant in a shareholder derivative
lawsuit filed in the Orange County, California Superior Court, in a case
captioned Eskeland vs. Cozean, et al . The complaint was filed by a shareholder
of ours, on behalf of Premier, against some of our current and former officers
and directors, including Colette Cozean, Michael Hiebert, Richard Roemer,
Ronald Higgins, Patrick Day, Grace Ching-Hsin Lin, G. Lynn Powell, and E.
Donald Shapiro. The complaint alleges, among other things, that these persons
violated their fiduciary duty to Premier by exposing Premier to liability under
the securities laws, failing to ensure that Premier maintained adequate
accounting controls, and related alleged actions and omissions. Although
Premier is a named defendant, the lawsuit seeks to recover damages from the
individual defendants on behalf of Premier. Accordingly, it is not clear
whether Premier will have any liability or incur any material loss as a result
of being named as a defendant in this matter.
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<PAGE>
Premier has reached an agreement in principle with lead plaintiffs and their
counsel to settle these lawsuits. In exchange for the release of all claims
against Premier and its officers and directors, this agreement would require
Premier to issue to the defendants an aggregate of 2,250,000 shares of its
common stock and requires Premier's insurance carrier to pay $4.6 million in
cash. This agreement is not final, however, and is subject to several
conditions, including the approval by the court and execution of a final
settlement agreement.
Investigations and Other Matters
We have been notified that the Securities and Exchange Commission has
instituted an investigation concerning matters pertaining to our revenue
reporting practices, and related management issues. We are cooperating with the
Securities and Exchange Commission in connection with this investigation. This
investigation, we believe, generally relates to whether Premier, in Securities
and Exchange Commission filings and press releases issued prior to the end of
the 1998 fiscal year, properly recognized revenues for transactions occurring
during fiscal 1997, and at interim periods in fiscal 1998. To date, the
Securities and Exchange Commission has not indicated that it is seeking to
impose any penalties on Premier or that it is made any specific findings with
respect to our accounting practices.
In May 1998, the Nasdaq Stock Market suspended the trading of our securities
and notified us that they intended to delist these securities. We appealed this
proposed action, and in October 1998 our appeal was granted. Trading of our
securities on the Nasdaq Stock Market National Market recommenced on October
22, 1998.
We are also 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,
securities class actions, disputes and other lawsuits may adversely affect us.
OIS Litigation
On or about September 18, 1998, OIS received from WSC a notice of an alleged
trademark infringement. WSC is the owner of a federal trademark registration
for WINSTATION and sells personal computers and related equipment under that
name. For several years, OIS has used the "OIS WinStation" trademark for its
ocular digital imaging systems. Because OIS's products are relatively expensive
medical devices sold in a narrow specialty market channel to highly educated
consumers, OIS does not believe there is any likelihood of confusion between
the products of the two companies. OIS also believes that another word or words
could be substituted for its use of "WinStation," if necessary, without
material adverse impact on its marketing efforts. For these reasons, OIS
believes the infringement allegations can be resolved without a material
adverse impact on it. However, there can be no assurance that WSC will not take
legal action, and that such action, if taken, would not potentially have a
material adverse affect on OIS.
On or about August 17, 1997, OIS was advised that J.B. Oxford & Company, one
of several market makers in OIS's common shares which trade over the counter on
the Nasdaq Stock Market Small-Cap Market, was being investigated by the SEC.
OIS is cooperating with the Securities and Exchange Commission investigation of
J.B. Oxford & Company. OIS does not believe that it is a subject of these
Securities and Exchange Commission inquiries.
42
<PAGE>
MANAGEMENT
Management of the Company
Our executive officers and directors as of August 3, 1999 were as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- ------------------------------------
<C> <C> <S>
Colette Cozean, Ph.D. ............ 41 Chairman, Chief Executive Officer(1)
President and Director of Research
Jeffrey A. Anderson............... 32 Vice President, Regulatory Affairs
and Quality Assurance
Tom Hazen......................... 57 Executive Vice President, Operations
Robert V. Mahoney................. 57 Chief Financial Officer, Executive
Vice President, Finance
Judith A. McCall.................. 58 Vice President, Human Resources,
Administration and Special Projects
and Secretary
Lawrence D. Ashcroft(2)(3)........ 70 Director
Patrick J. Day.................... 72 Director
Fredric J. Feldman, Ph.D.(2)(3)... 59 Director
John Hunkeler, M.D., F.A.C.S.(2).. 57 Director
G. Lynn Powell, D.D.S.(2)......... 58 Director
Lewis H. Stanton(3)............... 45 Director
</TABLE>
- --------
(1) We are presently in the process of seeking additional management personnel,
including a new Chief Executive Officer. Under our current plans, if we are
able to hire a new Chief Executive Officer, Dr. Cozean will retain her
position as Director of Research and Chairman.
(2) Member of the compensation committee.
(3) Member of the audit 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 following provides information concerning the business experience,
principal occupations and employment, as well as periods of service, of each of
our directors and executive officers during at least the last five (5) years.
Colette Cozean, Ph.D. is a founder of Premier and has been its Chairman of
the Board of Directors, President and Director of Research since it commenced
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 Systems,
a division of Pfizer Hospital Products Group, Inc. and in these capacities
managed the development of the laser technologies which we acquired from Pfizer
Laser Systems. Prior to April 1987, Dr. Cozean held various research positions
at Baxter Edwards, a division of Baxter Healthcare Corporation, and American
Technology and Ventures, a division of American Hospital Supply Company. Baxter
Healthcare Corporation and American Hospital Supply Company 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 received a Ph.D. in
biomedical engineering and a 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.
Jeffrey A. Anderson has been Vice President, Regulatory Affairs and Quality
Assurance since September 1997 when he joined Premier. Prior to that time and
since November 1995, Mr. Anderson had served as Regulatory Affairs Manager of
Medtronic. From December 1993 to November 1995, Mr. Anderson served as
Regulatory Affairs Specialist of Sybron Dental Specialties and from December
1991 to December 1993, he served as Regulatory Affairs/Quality Assurance
Manager of Laser Medical Technology, Inc. Mr. Anderson received a B.S. in
Physics from California State University Fullerton.
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<PAGE>
Tom Hazen has been the Executive Vice President, Operations of Premier since
October 1997. Prior to joining Premier and since 1992, Mr. Hazen served as Vice
President of Operations of Imagyn Medical, Inc. In addition, Mr. Hazen has
served in various executive offices with several companies in the medical field
specializing in product development and manufacturing. These positions include
Vice President Operations at MICA Technology Services in Buffalo Grove,
Illinois and President and Chief Executive Officer of California based Dolphin
Imaging Systems. Mr. Hazen received a BSME degree from the University of
Arizona and a MBA from UCLA.
Robert V. Mahoney joined Premier in December 1998 as the Chief Accounting
Officer, and became Chief Financial Officer and Executive Vice PresidentFinance
in January 1999. Before then and since February 1997, Mr. Mahoney served as
Director, Strategy and New Ventures of Tandem Computers, Inc. From August 1996
until November 1996, Mr. Mahoney was an employee of Superstill Technology, Inc.
Before his employment at Superstill Technology, from January 1996 until July
1996, Mr. Mahoney served as the Chief Financial Officer and Senior Vice
President, Finance of Interactive Network, Inc. Mr. Mahoney received a MBA from
Stanford University and holds a B.S. in Public Policy from the United States
Air Force Academy.
Judith A. McCall has been with Premier since April 1993 and became Vice
President, Human Resources, Administration and Special Projects and Secretary
in January 1998. For the past three years, Ms. McCall has headed our human
resources department. Prior to joining Premier, Ms. McCall held various senior
operations and administrative positions with firms in Southern California and
served as Director of Training and Development for API Security. Ms. McCall
received a M.A. in Marriage, Family and Child Psychology from Azusa Pacific
College in Azusa, California and a B.A. in Christian Education from St. Andrews
Presbyterian College in Lauringburg, North Carolina.
Lawrence D. Ashcroft joined the board of directors in January 1999. Mr.
Ashcroft has held a number of senior management and directorial posts in both
the United States and Europe. Before his retirement, from 1988 to 1995, Mr.
Ashcroft served as Chairman of the Board of Directors of Cardiopet, Inc., a
company which specialized in reading animal electrocardiograms worldwide via
telephone. Mr. Ashcroft currently serves on the board of directors of Leading
Edge Technologies and is a non-executive director of Tatatech Inc., Westergaard
Broadcasting Inc. and Comstock and Madison Systems Inc.
Patrick J. Day has served as a director of Premier since August 1991. Mr.
Day is a Certified Public Accountant and owns a CPA firm which he established
in 1967. Mr. Day 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, our Chairman of the Board and President. Mr. Day
received a B.A. in accounting from the University of Idaho.
Fredric J. Feldman, Ph.D. joined the board of directors in December 1998.
Dr. Feldman has been a consultant to start up healthcare companies, investment
banks and venture capital groups since 1992. Before and during that period, Dr.
Feldman served as Chief Executive Officer of Biex, Inc., a company specializing
in womens' health; as Chief Executive Officer and Chairman of the Board of
Directors of Oncogenetics, Inc., a cancer diagnostics company; and as President
and Chief Executive Officer of Microgenics Corporation, a biotechnology
company. Currently, Dr. Feldman serves as a director for Ostex International,
Inc., SangStat Medical Corporation and Orthologic Corp. and several private
companies. Dr. Feldman received a Ph.D. in Analytical Chemistry and a M.S. in
Inorganic Chemistry from the University of Maryland and a B.S. in Chemistry
from the City University of New York.
John D. Hunkeler, M.D., F.A.C.S. joined the board of directors in December
1998. Dr. Hunkeler is a board certified ophthalmologist who has been in private
practice in Kansas City, Missouri since 1973. He is also a professor and
Chairman of the Department of Ophthalmology at the University of Kansas Medical
Center, the President of Hunkeler Eye Centers and the former President of the
American Society of Cataract and Refractive Surgery. Dr. Hunkeler is the former
Medical Director and Vice President of the Kansas City Eye Bank. Dr. Hunkeler
holds a B.A. from Harvard College and received his medical degree from the
University of Kansas in 1967.
44
<PAGE>
G. Lynn Powell, D.D.S. 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 years.
Lewis H. Stanton joined the board of directors in December 1998. Mr. Stanton
has been the Executive Vice President, Chief Operating Officer and Chief
Financial Officer of MAI Systems Corporation since he joined that company in
1997. From 1996 until he joined MAI Systems in 1997, Mr. Stanton was the
President of Stanton & Associates, a consulting company. From September 1996
until January 1997, Mr. Stanton served as acting Chief Executive Officer of
Worldwide Networks, Inc., an Internet access provider. From 1988 until 1996,
Mr. Stanton served as Chief Financial Officer of Data Analysis Inc., the parent
company of Investor's Business Daily, a national daily newspaper; William
O'Neal & Co. Inc., an institutional research firm and database company; and
other companies. From 1976 until 1988, Mr. Stanton was with the international
accounting firm Arthur Andersen & Co., specializing in financial services. Mr.
Stanton is a member of the AICPA and was chair of the California Society of
CPAs, Los Angeles, Members in Industry Committee for four years.
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. We pay 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. In addition, we
reimburse directors for their out-of-pocket expenses incurred in attending
meetings of the board of directors and its committees. During the fiscal year
ended March 31, 1999, Dr. Powell received a cash bonus of $5,000 for his
efforts in obtaining FDA clearance for endodontic applications. We may also
periodically award options or warrants to our directors, under our existing
stock option plans and otherwise.
Our articles of incorporation and indemnification agreements entered into
between us and some of our directors and officers require us to indemnify these
officers and directors to the fullest extent permitted by applicable law
against liabilities incurred in connection with their duties as officers and
directors of Premier. These 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 Premier, we have been advised that in the opinion of the
Commission this indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning compensation paid to
our Chief Executive Officer and each other executive officer of Premier who
received an annual salary and bonus of more than $100,000 for services rendered
to us during the fiscal year ended March 31, 1999.
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
-------------------
Annual
Compensation(1) Securities
Fiscal ------------------- Underlying Stock All Other
Name and Principal Position Year Salary Bonus Options Compensation
--------------------------- ------ ------ -------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Colette Cozean, President, 1999 $250,000 $ 25,000 -0- $38,950(2)
Chief Executive Officer and 1998 $165,000 $100,000 1,000,000 $16,704(3)
Director of Research................ 1997 $151,064 $ -- 217,500 $32,300(4)
Tom Hazen Executive Vice
President, Operations............... 1999 $150,000 $ 20,000 -0- --
</TABLE>
- --------
(1) Excludes perquisite 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 the person shown above.
(2) Represents $32,500 of premiums incurred by Premier for a split-dollar life
insurance policy in the amount of $2 million on the life of Dr. Cozean and
an auto allowance of $6,450.
(3) Represents $5,000 of premiums paid by Premier for a split-dollar life
insurance policy in the amount of $2 million on the life of Dr. Cozean and
an auto allowance of $11,704.
(4) Represents $27,500 of premiums paid by Premier 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.
Employment Contracts
Dr. Cozean and Mr. Hazen are employed pursuant to arrangements which provide
for severance payments upon the termination of their employment. Under these
arrangements, Dr. Cozean would presently be entitled to a severance payment of
approximately $83,334 upon termination of employment, and Mr. Hazen would be
entitled to approximately $37,500 upon termination of his employment. These
employment arrangements are otherwise "at will" arrangements.
Dr. Cozean and Mr. Hazen have also entered into Termination Agreements with
the Company, under which they would be paid an amount equal to two times his or
her highest annual cash compensation during the preceding three calendar years
if, following a change in control of the Company, their employment was
terminated other than for cause, their pay, bonus, title or responsibilities
was reduced or other adverse employment actions were taken. For purposes of
this Agreement, a change in control includes among other things the acquisition
by any person of 25% or more of the voting power of the Company's outstanding
securities, there is a change in the composition of the majority of the members
of the Board of Directors under circumstances described in the agreement, or
the Company ceases to exist following a merger or consolidation.
Options Granted in Last Fiscal Year
During the fiscal year ended March 31, 1999, Premier did not grant any stock
options to either of the executive officers named in the Summary Compensation
Table above.
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<PAGE>
Aggregated Option Exercises and Fiscal Year-End Option Values
The following table provides information regarding stock options exercised
by the named executive officers during the fiscal year ended March 31, 1999, 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>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares March 31, 1999 March 31, 1999(1)
Acquired Value ------------------------- -------------------------
on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Colette Cozean, Ph.D. .. 0 0 1,043,650/1,716,150 $0/$0
Tom Hazen .............. 0 0 50,000/150,000 $0/$0
</TABLE>
- --------
(1) Represents the Nasdaq Stock Market last sale price of underlying securities
at fiscal year end, minus the exercise price of the options.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended March 31, 1999, the members of the compensation
committee were Dr. Feldman, Dr. Hunkeler, Dr. Powell and Mr. Ashcroft, all of
whom are non-employee directors of Premier. 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 (the "Committee")
establishes the compensation level for the Company's Chief Executive Officer
("CEO") and other executive officers based upon the Committee's discretion,
taking into account factors it deems appropriate, such as competitive factors,
attainment of established Company financial performance criteria and individual
performance goals and the implementation of key strategic programs and
products.
The Compensation Committee believes that the compensation programs for the
Company's executive officers should reflect the Company's performance and the
value created for the Company's shareholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contributions to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
The Compensation Committee's policy is to provide the Company's executive
officers with compensation opportunities that are based upon their personal
performance, the financial performance of the Company and their contribution to
that performance, and that are competitive enough to attract and retain highly
skilled individuals. Compensation for the CEO for fiscal 1999, as reported
above, was based on the Committee's analysis of the Company's financial
performance and achievement of strategic objectives, and the CEO's contribution
to this performance and these achievements.
The Company's policy is not to disclose target levels with respect to
specific quantitative or qualitative performance-related factors, or factors
considered to involve confidential business information, because their
disclosure would have an adverse effect on the Company.
Qualification of compensation under Section 162(m) of the Internal Revenue
Code requires that compensation be "performance based" and that the
shareholders of the Company approve the material terms of the compensation
plan. The Company can deduct compensation paid (or deemed paid) to each named
executive officer in the tax year concerned to the maximum amount of $1,000,000
unless additional compensation qualifies for deductibility under Section
162(m).
47
<PAGE>
Based on its review of all of the factors described above, the Committee has
determined that salaries for the Company's executive officers will be
maintained at their fiscal 1999 levels, except that Jeff Anderson, our Vice-
President, Regulatory Affairs and Quality Assurance, received a 33% raise. All
amounts paid or accrued during fiscal 1999 under the above described plans and
programs are included in the tables above.
COMPENSATION COMMITTEE
Fredric J. Feldman, Ph.D., Chairman
Lawrence D. Ashcroft
John D. Hunkeler, M.D., F.A.C.S.
G. Lynn Powell, D.D.S.
Comparison of Cumulative Total Return on One or More Companies, Peer Groups,
Industry Indexes and/or Broad Markets
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------------------------------------
11/30/94 3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Company/Index/Market
Premier Laser Systems......... 100.00 80.00 172.50 110.00 210.00 46.88
Electromedical Equipment...... 100.00 116.74 190.35 171.13 242.41 302.03
NASDAQ Market Index........... 100.00 103.04 138.60 155.06 234.33 306.23
</TABLE>
Note: Base price date is 11/30/94.
48
<PAGE>
CERTAIN TRANSACTIONS
On April 3, 1999, the board of directors extended the expiration date of an
option to purchase 4,522 shares of common stock until April 22, 2000. The
options had previously been granted to T. Daniel Caruso (a former executive
officer of Premier who passed away in October 1998) and were subsequently
inherited by his widow.
In January 1999, we granted options to purchase 40,000 shares of common
stock to four newly elected directors: Mr. Ashcroft, Dr. Feldman, Dr. Hunkeler
and Mr. Stanton. All of these options vest over four years beginning on March
31, 1999. These options have an exercise price of $2.00 per share, the fair
market value of our common stock on the date of grant. In January 1999, we also
granted an option to purchase 225,000 shares of common stock to Mr. Robert
Mahoney, our Chief Financial Officer. This option has an exercise price of
$1.906 per share, the fair market value on the date of the grant.
In fiscal 1998, we issued options to purchase the following numbers of
shares to our directors: (1) Colette Cozean--1,000,000 shares vesting over 5
years; (2) Patrick J. Day, Grace Ching-Hsin Lin, G. Lynn Powell, and E. Donald
Shapiro--40,000 shares each vesting over 4 years. All of these options have an
exercise price of $7.98 per share, the fair market value of our common stock on
the date of grant. In addition to the above, Mr. Shapiro and Dr. Powell were
each granted options to purchase 30,000 shares at $10.31 per share vesting over
3 years in connection with services rendered by them. All of the above options
have a term of ten years.
In fiscal 1997 we issued options to purchase the following numbers of shares
to our officers and directors: (1) Colette Cozean--217,500 shares, vesting over
3 years; (2) each of Patrick J. Day, Grace Lin and E. Donald Shapiro--40,000
shares vesting over 4 years; (3) G. Lynn Powell--62,500 shares vesting over 8
years; (4) Michael Hiebert--72,000 shares vesting over 4 years; and (5) Judith
McCall--60,000 shares vesting over 3 years. All of these options had an
exercise price of $6.125 per share.
On February 21, 1998, the board of directors extended the terms of two
warrants which it had previously granted to Patrick J. Day, one of our
directors, as follows:
Before our initial public offering in 1994, we issued to Mr. Day a warrant
to purchase 9,044 shares of Class A Common Stock, 8,008 shares of Class E-1
Common Stock and 8,008 shares of Class E-2 Common Stock at an aggregate
exercise price of $100,000. This warrant initially provided for an expiration
date of August 7, 1996. The board extended the expiration of this warrant on
May 20, 1996 until March 31, 1997, again on February 21, 1997 until March 31,
1998, and again in February 1998 until August 7, 2000.
We have also previously granted to Mr. Day another warrant to purchase 9,948
shares of Class A Common Stock, 8,008 shares of Class E-1 Common Stock and
8,008 shares of Class E-2 Common Stock at an aggregate exercise price of
$9,948. This warrant initially provided for an expiration date of April 26,
1998. In February 1998, the board extended the term of this warrant for an
additional two years expiring on April 26, 2000.
49
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information as of August 3, 1999, regarding the
beneficial ownership of our common stock by: (1) all persons known by us to
beneficially own more than 5% of our common stock, (2) each of our directors
and executive officers, (3) all directors and executive officers as a group,
and (4) the selling shareholders. 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>
Shares
Beneficially
Amount and Owned After
Nature of Percent of Offering(12)
Name and Address of Beneficial Common Shares Being -----------------
Beneficial Owner(1) Ownership Stock Offered(11) Number Percent
- ------------------- ---------- ---------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Colette Cozean,
Ph.D.(2)............... 1,187,145 6.4% 0 1,187,145 6.4%
Patrick J. Day(3)....... 269,993 1.6% 0 269,993 1.5%
G. Lynn Powell,
D.D.S.(4).............. 91,501 * 0 91,501 *
Lawrence D.
Ashcroft(5)............ 10,000 * 0 10,000 *
Fredric J. Feldman,
Ph.D.(5)............... 10,000 * 0 10,000 *
John D. Hunkeler, M.D.,
F.A.C.S.(5)............ 10,000 * 0 10,000 *
Lewis H. Stanton(5)..... 10,000 * 0 10,000 *
Robert V. Mahoney(6).... 17,308 * 0 17,308 *
Tom Hazen(7)............ 52,006 * 0 52,006 *
Jeffrey Anderson(8)..... 42,551 * 0 42,551 *
Judith A. McCall(9)..... 85,696 * 0 85,696 *
All directors and
executive officers as a
group
(11 persons)(10)....... 1,796,140 9.5% 0 1,796,140 9.4%
<CAPTION>
Selling Shareholders
- --------------------
<S> <C> <C> <C> <C> <C>
Strong River
Investments,
Inc.(13)(14)........... 833,856 4.999%(16) 2,119,073 0 0%
Herkimer LLC(13)(15).... 833,856 4.999%(16) 2,119,073 0 0%
Wharton Capital
Partners, Ltd.......... 20,000 * 20,000 0 0%
The Olmstead Group,
LLC.................... 10,000 * 10,000 0 0%
I.F. Bodkin............. 10,000 * 10,000 0 0%
</TABLE>
- --------
* Less than 1%.
(1) The address of each of the individuals listed (other than the selling
shareholders) is 3 Morgan, Irvine, California 92618. Unless otherwise
noted, we believe 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, subject to community property laws where
applicable.
(2) Includes 52,049 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 1,043,650 of Class A
Common Stock subject to options exercisable within 60 days.
(3) Includes 54,263 shares of Class A Common Stock, 24,023 shares of Class E-1
Common Stock and 24,023 shares of Class E-2 Common Stock. Also includes
133,992 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 60 days.
(4) Includes 91,501 shares of Class A Common Stock subject to warrants and
options exercisable within 60 days.
(5) Consists of 10,000 shares of Class A Common Stock subject to options
exercisable within the next 60 days.
50
<PAGE>
(6) Consists of 17,308 shares of Class A Common Stock subject to options
exercisable within 60 days.
(7) Includes 2,006 shares of Class A Common Stock and 50,000 shares of Class A
Common Stock subject to options exercisable within 60 days.
(8) Includes 885 shares of Class A Common Stock and 41,666 shares of Class A
Common Stock subject to options exercisable within 60 days.
(9) Includes 1,339 shares of Class A Common Stock and 84,357 shares of Class A
Common Stock subject to options exercisable within 60 days.
(10) Includes 112,136 shares of Class A Common Stock, 68,949 shares of Class E-
1 Common Stock and 68,949 shares of Class E-2 Common Stock. Also includes
1,502,474 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 60 days.
(11) We will not receive any of the proceeds from the sale of these securities.
Except as described below, there are no material relationships between any
of the selling shareholders and us, nor have any such material
relationships existed within the past three years.
(12) Assumes resale of all shares of common stock offered hereby.
(13) The debentures are convertible into common stock at a rate equal to the
lowest of:
. $3.135;
. the lowest exercise price, after the issuance of the debentures, of
Premier's publicly traded Class B Warrants; or
. 90% of the average of the three lowest closing bid prices for the common
stock during the 20 trading days immediately preceding the conversion
date.
However, the debentures may not be converted into common stock, nor may
the holder receive shares in payment of interest, if the debenture holder
and any affiliate would, as a result, beneficially own more than 4.999% of
Premier's issued and outstanding shares of common stock, except that this
limitation could be waived by the holder by giving 75 days' prior notice
to Premier. Further, as a separate restriction, a holder may not convert
the debentures into common stock, nor may the holder receive shares in
payment of interest, if as a result, he together with his affiliates would
beneficially own in excess of 9.999% of Premier's issued and outstanding
common stock, except that this provision can also be waived by the holder
by giving 75 days' prior notice to Premier. Finally, Premier may not issue
upon conversion in excess of 2,992,287 shares of common stock (subject to
adjustment) if the common stock is then listed for trading on the Nasdaq
National Market or the Nasdaq Small Cap Market and Premier has not
obtained shareholder approval for such issuance.
The number of shares of common stock listed as beneficially owned by each
selling shareholder represents the number of shares of common stock
issuable to such selling shareholder (i) subject to the conversion
limitations set forth above, upon conversion of such selling shareholder's
portion of the principal amount of the debentures at an assumed conversion
price of $2.2594 (which price will fluctuate from time to time based on
changes in the market price of the common stock and provisions in the
formula for determining the conversion price), and (ii) upon exercise of
the warrant issued to such selling shareholder in conjunction with the
sale of debentures for the purchase of 30,000 shares of common stock.
Since the number of shares of common stock issuable upon conversion of the
debentures and as payment of interest thereon is dependent in part upon
the market price of the common stock prior to a conversion, the actual
number of shares of common stock that will then be issued in respect of
such conversions or interest payments, and consequently the number of
shares of common stock that will then be beneficially owned by a selling
shareholder, will fluctuate daily and cannot be determined at this time.
51
<PAGE>
The number of shares being offered by the selling shareholders represents
(i) 200% of the shares of common stock issuable to the selling shareholders
upon conversion of the debentures and as payment of interest thereunder,
and (ii) the shares of common stock issuable to selling shareholders upon
exercise of the warrants issued to the selling shareholders. Since the
number of shares of common stock issuable upon conversion of the debentures
and as payment of interest thereon is dependent in part upon the market
price of the common stock prior to a conversion, the actual number of
shares of common stock that will then be issued in respect of such
conversions or interest payments and, consequently, offered for sale under
this registration statement, cannot be determined at this time. Premier has
contractually agreed to include herein 4,238,146 shares of common stock
issuable upon conversion of the debentures, payment of interest thereunder
and exercise of the warrants issued to the selling shareholders.
(14) Enright Holding Corp. of which Mr. Avi Vigder is managing director has
voting and investment control over the shares beneficially owned by Strong
River Investments, Inc.
(15) Navigator Management Ltd. of which Mr. David Sims is a director has voting
and investment control over the shares beneficially owned by Herkimer LLC.
(16) Without regard to the 4.999% and 9.999% conversion limitations contained
in the debentures and at an assumed conversion price of $2.2594, the
maximum number of shares into which the debentures are convertible would
be 885,191 shares, representing 5.6% of the common stock outstanding for
each of Strong River Investments, Inc. and Herkimer LLC.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and selected provisions of
our articles of incorporation and bylaws is a summary and is qualified in its
entirety by the terms of our articles of incorporation and bylaws, copies of
which have been filed with the Securities and Exchange Commission as exhibits
to the registration statement of which this prospectus is a part.
Common Stock
Premier is authorized to issue 35,600,000 shares of common stock, no par
value, 2,200,000 shares of Class E-1 Common Stock, no par value, and 2,200,000
shares of Class E-2 Common Stock. The common stock, Class E-1 Common Stock and
the Class E-2 Common Stock have equal voting rights and are entitled to share
equally in dividends when, as and if declared by the board of directors. See
"Dividend Policy." Shareholders have no preemptive rights and no right to
convert their common stock into any other securities. The holders of common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders, except that holders of common stock
are entitled to cumulative voting with respect to the election of directors
upon giving notice as required by law. In cumulative voting, the holders of
common stock are entitled to cast for each share held the number of votes equal
to the number of directors to be elected. In the event of a liquidation,
dissolution or winding up of Premier, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding preferred stock. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares are, and all shares to be sold and issued as contemplated by
this prospectus will be, fully paid and nonassessable and legally issued. The
board of directors is authorized to issue additional shares of common stock
within the limits authorized by our charter and without shareholder action. As
of August 3, 1999, there were 14,961,436 shares of common stock outstanding
held by approximately 781 holders of record.
Class E Common Stock
As of August 3, 1999, there were outstanding 1,257,461 shares of Class E-1
Common Stock and 1,257,461 shares of Class E-2 Common Stock, held by
approximately 323 holders of record. The Class E-1 Common Stock and Class E-2
Common Stock is not transferrable but may be voted, and each share will
automatically convert into one share of Class A Common Stock and be released to
the owners thereof upon the achievement of the objectives described below. On
June 30, 2000, all shares of these securities which have not been converted
into Class A Common Stock will be cancelled. This arrangement was required by
the representative of the underwriters for our initial public offering.
All of the shares of Class E-1 Common Stock will be automatically converted
into Class A Common Stock if our net income before provision for income taxes,
including earnings from joint ventures, distribution agreements and licensing
agreements, but exclusive of any other earnings that are classified as an
extraordinary item, and exclusive of any charges to income that may result from
the conversion of the Class E-1 Common Stock and Class E-2 Common Stock into
common stock amounts to at least $26,343,900 for the fiscal year ending March
31, 2000. This amount is based on the number of shares of common stock
currently outstanding or deemed outstanding, and is subject to adjustment based
on the weighted average number of shares outstanding during fiscal 2000.
All of the shares of Class E-2 Common Stock will be automatically converted
into Class A Common Stock if our net income before provision for income taxes,
calculated in the manner described above, amounts to at least $71,181,750
during the fiscal year ending March 31, 2000. This amount is based on the
number of shares of common stock currently outstanding or deemed outstanding,
and is subject to adjustment based on the weighted average number of shares
outstanding during fiscal 2000.
53
<PAGE>
Any money, securities, rights or property distributed in respect of the
Class E-1 Common Stock and Class E-2 Common Stock, including any property
distributed as dividends or in connection with any stock split, merger,
recapitalization, dissolution or total or partial liquidation of Premier, shall
be held by Premier in escrow until conversion of these shares. If the
conditions for conversion of the Class E-1 and Class E-2 Common Stock are not
attained, these shares, as well as any dividends or other distributions made
with respect to these shares, will be cancelled. The earnings levels set forth
above were determined by negotiation between us and the representative of the
underwriter in our initial public offering and should not be construed to imply
or predict any level of future earnings. We do not know if these levels will be
attained.
Preferred Stock
Our articles of incorporation provide that our authorized preferred stock
consists of 20,000,000 shares, no value. There are no shares of our preferred
stock presently outstanding, however, previously we had an aggregate of
11,150,000 shares of preferred stock issued and outstanding, which shares were
subsequently converted into common stock. The board of directors has the
authority, without further action by the shareholders, to issue from time to
time up to 8,850,000 additional shares of preferred stock in one or more series
and to fix the terms, applicable to each series of preferred stock. The purpose
of authorizing the board of directors to determine such terms is to eliminate
delays associated with a shareholder vote on specific issuances. The issuance
of the preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, reduce
the voting power of the holders of common stock and under certain circumstances
could make it more difficult for a third party to gain control of Premier. The
issuance of preferred stock could also reduce the amounts otherwise available
for distribution to the holders of the common stock by creating more series of
preferred stock with distribution or liquidation preferences senior to the
common stock. We have no present plan to issue any shares of preferred stock.
Redeemable Class B Warrants
We have outstanding redeemable Class B Warrants which are currently listed
on the Nasdaq Stock Market National Market. The Class B Warrants are in fully
registrable form under a Warrant Agreement between us and American Stock
Transfer and Trust Company, and are evidenced by warrant certificates. These
warrants may be exercised upon surrender of the warrant certificate on or
before the expiration date or earlier redemption date, accompanied by payment
of the full exercise price for the number of shares with respect to which the
warrants are being exercised. Holders of the warrants do not have any voting or
other rights of a shareholder of Premier. Upon notice to the holders of the
warrants, we have the right to unilaterally reduce the exercise price or extend
the expiration date of the warrants. The warrants provide for the adjustment of
the exercise price and for a change in the number of shares issuable upon
exercise to protect the holders of the warrants against dilution in the event
of a stock dividend, stock split, combination or reclassification of the common
stock or upon issuance of additional shares of common stock at prices lower
than the market price then in effect other than issuances upon exercise of
options granted to our employees, directors and consultants.
Each Class B Warrant entitles the registered holder to purchase one share of
common stock at an exercise price of $7.90 per share at any time before
November 30, 1999. As of August 3, 1999, there were outstanding 7,591,760 Class
B Warrants held by 31 holders of record. We have a right to redeem all of the
Class B Warrants at a price of $.05 per Class B Warrant upon not less than 30
days' prior written notice at any time, provided that before any such
redemption can take place, the last sale price of the common stock in the over-
the-counter market shall have averaged in excess of $11.20 per share for 30
consecutive business days ending within 15 days before the date of the notice
of redemption. During the 30-day notice period, a holder shall have the option
to exercise his Class B Warrants.
54
<PAGE>
Shareholder Rights
On April 14, 1998, we paid a dividend of one preferred share purchase right
on each outstanding share of our common stock. These rights entitle the holder
to purchase from Premier one one-hundredth of a share of Series A Junior
Participating Preferred Stock, no par value of Premier at a price of $50 per
one one-hundredth of a preferred share, subject to adjustment. These rights are
not exercisable until the acquisition by a person or affiliated group of 15% or
more of the outstanding shares of our common stock, or the commencement or
announcement of a tender offer or exchange offer which would result in the
acquisition of 15% or more of our outstanding shares. These rights expire on
April 13, 2008, unless extended or unless the rights are redeemed or exchanged
by Premier before the expiration date. The preferred shares purchasable upon
exercise of the rights will not be redeemable. These shares will be entitled to
a minimum preferential quarterly dividend payment of $1.00 per share but will
be entitled to an aggregate dividend of 100 times the dividend declared per
common share. In the event of a liquidation, the holders of the preferred
shares purchasable upon exercise of the rights will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per common share. Each of these
preferred shares will have 100 votes and will vote together with the common
shares. Additionally, in the event of any merger, consolidation or other
transaction in which common shares are exchanged, each of these preferred
shares will be entitled to receive 100 times the amount received per common
share. Until the rights are exercised, the holders will have no rights as a
shareholder of Premier, including, without limitation, the to vote or receive a
dividend.
Limitation of Liability of Directors and Indemnification of Directors and
Officers
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by California law. We are also empowered under our
bylaws to enter into indemnification contracts with our directors and officers,
among others, and to purchase insurance on behalf of any person we are required
or permitted to indemnify. Under this provision, we have entered into indemnity
agreements with each of our directors and executive officers and selected key
consultants.
In addition, our articles of incorporation provide that, to the fullest
extent permitted by California law, our directors will not be liable for
monetary damages for breach of the directors' fiduciary duty of care to Premier
or our shareholders. This provision does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of nonmonetary relief would remain available under California law. Each
director will continue to be subject to liability for breach of the director's
duty of loyalty to Premier, for:
. acts or omissions involving intentional misconduct or knowing and
culpable violations of law
. acts or omissions that the director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director
. any transaction from which the director derived an improper personal
benefit
. acts or omissions involving a reckless disregard for the director's duty
to or our shareholders when the director was aware or should have been
aware of a risk of serious injury to Premier or its shareholders
. acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to Premier or our
shareholders
. improper transaction between the director and Premier
. improper distributions to shareholders and loans to directors and
officers or
. acts or omissions by the director as an officer
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
55
<PAGE>
Premier is currently engaged in class action litigation in which certain
current and former directors are seeking indemnification, and for which Premier
has agreed to provide indemnification. See "Business--Legal Proceedings."
We believe the foregoing provisions are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Premier's directors, officers and controlling persons under
the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Transfer and Warrant Agent
The transfer and warrant agent for Premier's securities is American Stock
Transfer & Trust Company, New York, New York.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, Premier will have 19,239,582 shares of
common stock, which excludes 7,591,760 shares of Class A Common Stock issuable
upon exercise of outstanding Class B Warrants and approximately 4,320,000
shares of common stock issuable upon exercise of other outstanding stock
options. The 4,278,146 shares sold by the selling shareholders in this offering
will be freely tradeable without restriction or further registration under the
Securities Act, unless held by an "affiliate" of Premier within the meaning of
Rule 144 adopted under the Securities Act. Any such affiliate would be subject
to the resale limitations of Rule 144.
Sales of a substantial number of shares of common stock in the public market
could adversely affect the market price for the common stock. The existence of
the outstanding warrants and options to purchase Premier's Class A Common Stock
could adversely affect our ability to obtain future financing. We have also
reserved 2,250,000 shares for issuance in connection with the proposed
settlement of outstanding litigation. The consummation of this settlement is
subject to a number of conditions, and we cannot assure you that the settlement
will be completed.
The price which we may receive for the common stock issued upon exercise of
such options and warrants will likely be less than the market price of the
common stock at the time such options and warrants are exercised. Moreover, the
holders of the options and warrants might be expected to exercise them at a
time when we would, in all likelihood, be able to obtain needed capital by a
new offering of our securities on terms more favorable than those provided for
by the options and warrants.
57
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of our common stock on any stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed
or negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
. ordinary brokerage transactions and transactions in which the broker-
dealer solicits purchasers
. block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction
. purchases by a broker-dealer as principal and resale by the broker-dealer
for its account
. an exchange distribution in accordance with the rules of the applicable
exchange
. privately negotiated transactions
. short sales
. broker-dealers may agree with the selling shareholders to sell a
specified number of shares at a stipulated price per share
. a combination of any of these methods of sale
. any other method permitted by applicable law
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling shareholders may also engage in short sales against the box,
puts and calls and other transactions in securities of Premier or derivatives
of Premier securities and may sell or deliver shares in connection with these
trades. The selling shareholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling shareholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers engaged by the selling shareholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling shareholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with these sales. In such event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
Premier is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling shareholders. Premier has agreed to indemnify the selling shareholders
against specified losses, claims, damages and liabilities, including
liabilities under the Securities Act.
58
<PAGE>
LEGAL MATTERS
The validity of the shares offered by this Prospectus has been passed upon
for Premier by Rutan & Tucker, LLP of Costa Mesa, California.
EXPERTS
The consolidated financial statements as of March 31, 1999 and 1998, and for
each of the three years in the period ended March 31, 1999 included in this
prospectus, and the related financial statement schedule included elsewhere in
the registration statement, have been audited by Haskell & White LLP,
independent auditors, as stated in their report appearing herein, and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1 under the Securities Act
with respect to the shares offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and its
exhibits and schedules. For further information with respect to Premier and the
shares offered by this prospectus, please refer to the registration statement,
and its exhibits and schedules. Statements contained in this prospectus
concerning the content of any contract or other document referred to are not
necessarily complete, and, in each instance, if such contract or documents is
filed as an exhibit, we refer you to the copy of such contract or document
filed as an exhibit to the registration statement. Each statement is qualified
in all respects by such reference to such exhibit. A copy of the registration
statement, and its exhibits and schedules, may be inspected without charge at
the public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048, and copies of all or any part of the registration
statement may be obtained from such offices upon the payment of the fees
prescribed by the Commission. The public may obtain information on the
operation of the Commission's public facilities by calling 1 (800) SEC-0330.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is
www.sec.gov.
Premier intends to furnish its shareholders with annual reports containing
audited financial statements.
Premier's recent Securities and Exchange Commission reports may also be
accessed through Premier's Web site at www.premierlaser.com.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Haskell & White LLP, Independent Auditors................... F-2
Consolidated Balance Sheets at March 31, 1999 and 1998................ F-3
Consolidated Statements of Operations and Comprehensive Loss for the
Years Ended March 31, 1999, 1998 and 1997............................ F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 1999, 1998 and 1997........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended March 31,
1999, 1998 and 1997.................................................. F-7
Notes to Consolidated Financial Statements............................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Premier Laser Systems, Inc.
We have audited the accompanying consolidated balance sheets of Premier
Laser Systems, Inc. (the Company) as of March 31, 1999 and 1998, and the
related consolidated statements of operations and comprehensive loss,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 1999. Our audits also included the financial schedule of
valuation and qualifying accounts for each of the years ended March 31, 1999,
1998 and 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2, the Company has restated its previously issued 1997
consolidated financial statements.
In our opinion, the 1999, 1998, and 1997 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company as of March 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999, 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.
HASKELL & WHITE LLP
Newport Beach, California
June 9, 1999
F-2
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 888,767 $ 9,722,514
Short-term investments........................... -- 9,666,918
Restricted cash.................................. 50,000 2,150,000
Accounts receivable, net of allowance for
doubtful accounts and sales returns of
$1,997,158 and $1,224,845, respectively......... 1,342,917 4,952,892
Inventories, net................................. 5,797,054 4,482,698
Prepaid expenses and other current assets........ 531,459 2,528,996
------------ ------------
Total current assets.......................... 8,610,197 33,504,018
Property and equipment, net........................ 1,473,420 1,778,423
Intangible assets, net............................. 9,170,360 11,991,679
Other assets....................................... 21,953 434,300
------------ ------------
Total assets.................................. $ 19,275,930 $ 47,708,420
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................. $ 3,802,606 $ 6,536,044
Line of credit................................... 70,470 2,068,163
Accrued compensation and related costs........... 968,969 964,691
Accrued restructure costs........................ 785,980 1,620,224
Accrued integration costs........................ 663,087 834,960
Accrued warranty................................. 739,298 822,401
Due to joint venture partner..................... 549,194 --
Other accrued liabilities........................ 2,393,392 1,640,748
------------ ------------
Total current liabilities..................... 9,972,996 14,487,231
------------ ------------
Commitments and contingencies (Notes 5, 6, 9, and
10)
Minority interest.................................. -- 1,764,736
------------ ------------
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--16,962,278
including 2,250,000 subject to issuance for
shareholder litigation settlement at March 31,
1999, and 14,649,421 at March 31, 1998......... 90,354,340 83,546,913
Common stock, Class E-1, no par value:
Authorized shares--2,200,000
Issued and outstanding shares--1,257,461 at
March 31, 1999 and 1998........................ 4,769,878 4,769,878
Common stock, Class E-2, no par value:
Authorized shares--2,200,000
Issued and outstanding shares--1,257,461 at
March 31, 1999 and 1998........................ 4,769,878 4,769,878
Warrants and options............................. 1,723,842 1,723,842
Accumulated deficit.............................. (92,315,004) (63,354,058)
------------ ------------
Total shareholders' equity.................... 9,302,934 31,456,453
------------ ------------
Total liabilities and shareholders' equity.... $ 19,275,930 $ 47,708,420
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Year Ended March 31, 1999
---------------------------------------
1999 1998 1997
------------ ------------ -----------
(Restated)
<S> <C> <C> <C>
Net sales............................ $ 13,971,085 $ 9,885,569 $ 5,090,861
Cost of sales........................ 13,405,182 17,234,288 3,648,539
------------ ------------ -----------
Gross profit (loss)............ 565,903 (7,348,719) 1,442,322
Selling and marketing expenses....... 7,930,444 5,113,080 2,415,010
Research and development expenses.... 4,164,919 3,087,360 1,563,228
General and administrative expenses.. 6,625,247 3,699,541 1,852,948
Shareholder litigation settlement
expenses............................ 8,081,770 -- --
Write off of investment in Mattan
Corporation......................... -- -- 881,010
Termination of strategic alliance
with IBC............................ -- -- 331,740
In process research and development
acquired in connection with business
acquisitions........................ -- 12,800,000 250,000
Merger related and integration
costs............................... -- 7,616,924 --
------------ ------------ -----------
Loss from operations............. (26,236,477) (39,665,624) (5,851,614)
Interest income, net................. 202,877 1,073,493 15,493
Minority interest in loss of
consolidated subsidiaries........... 1,764,736 273,811 60,000
------------ ------------ -----------
Loss from continuing operations.. (24,268,864) (38,318,320) (5,776,121)
Loss from discontinued operations.... (4,692,082) (445,967) (197,236)
------------ ------------ -----------
Net loss............................. (28,960,946) (38,764,287) (5,973,357)
Items of other comprehensive income
(loss).............................. -- -- --
------------ ------------ -----------
Comprehensive loss................... $(28,960,946) $(38,764,287) $(5,973,357)
============ ============ ===========
Basic and diluted net loss per share:
Loss from continuing operations.... $ (1.56) $ (3.35) $ (.99)
Loss from discontinued operations.. (.30) (.04) (.03)
------------ ------------ -----------
Net loss per share................. $ (1.86) $ (3.39) $ (1.02)
============ ============ ===========
Weighted average number of shares
used in computation of basic and
diluted net loss per share.......... 15,531,400 11,444,123 5,833,326
============ ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<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,
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, medical
directors, and other
consultants........... -- 190,001 -- -- -- -- --
Decrease in unrealized
holding gain on short-
term investments...... -- -- -- -- -- -- --
Net loss for the year
(restated)............ -- -- -- -- -- -- --
---------- ----------- --------- ---------- --------- ---------- -----------
Balance at March 31,
1997 (restated)........ 7,313,841 27,320,449 1,257,178 4,769,878 1,257,178 4,769,878 2,295,328
Common stock and
options issued in
connection with
business
acquisitions.......... 1,065,266 11,757,426 -- -- -- -- --
Exercise of stock
options and warrants.. 6,270,314 43,989,418 283 -- 283 -- (2,295,328)
Stock options issued to
Advisory Board
members, clinical
evaluators, medical
directors, and other
consultants........... -- 479,620 -- -- -- -- --
Net loss for the year.. -- -- -- -- -- -- --
---------- ----------- --------- ---------- --------- ---------- -----------
Balance at March 31,
1998................... 14,649,421 83,546,913 1,257,461 4,769,878 1,257,461 4,769,878 --
Common stock reserved
for issuance in
connection with
litigation
settlement............ 2,250,000 7,447,500 -- -- -- -- --
Exercise of stock
options and warrants.. 62,857 202,619 -- -- -- -- --
Net stock option
recoveries from
consultants and
physicians............ -- (842,692) -- -- -- -- --
Net loss for the year.. -- -- -- -- -- -- --
---------- ----------- --------- ---------- --------- ---------- -----------
Balance at March 31,
1999................... 16,962,278 $90,354,340 1,257,461 $4,769,878 1,257,461 $4,769,878 $ --
========== =========== ========= ========== ========= ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Common Unrealized
Class B Stock Holdings Accumulated
Warrants Warrants Gains Deficit Total
---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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, medical
directors, and
other consultants..... -- -- -- -- 190,001
Decrease in unrealized
holding gain
on short-term
investments........... -- -- (3,666,367) -- (3,666,367)
Net loss for the year
(restated)............ -- -- -- (5,973,357) (5,973,357)
---------- -------- ---------- ------------ ------------
Balance at March 31,
1997 (restated)........ 1,490,818 192,130 -- (24,589,771) 16,248,710
Common stock and
options issued
in connection with
business
acquisitions.......... -- -- -- -- 11,757,426
Exercise of stock
options and
warrants.............. 40,894 -- -- -- 41,734,984
Stock options issued to
Advisory
Board members,
clinical
evaluators, medical
directors, and
other consultants..... -- -- -- -- 479,620
Net loss for the year.. -- -- -- (38,764,287) (38,764,287)
---------- -------- ---------- ------------ ------------
Balance at March 31,
1998................... 1,531,712 192,130 -- (63,354,058) 31,456,453
Common stock reserved
for
issuance in connection
with
litigation
settlement............ -- -- -- -- 7,447,500
Exercise of stock
options and
warrants.............. -- -- -- -- 202,619
Net stock option
recoveries from
consultants and
physicians............ -- -- -- -- (842,692)
Net loss for the year.. -- -- -- (28,960,946) (28,960,946)
---------- -------- ---------- ------------ ------------
Balance at March 31,
1999................... $1,531,712 $192,130 $ -- $(92,315,004) $ 9,302,934
========== ======== ========== ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31, 1999
---------------------------------------
1999 1998 1997
------------ ------------ -----------
(Restated)
<S> <C> <C> <C>
Operating Activities:
Net loss............................. $(28,960,946) $(38,764,287) $(5,973,357)
Adjustment to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 1,647,794 1,612,691 841,467
Stock reserved for issuance in
connection with shareholder
litigation settlement.............. 7,447,500 -- --
Loss on disposal of discontinued
operations......................... 3,511,460 -- --
Write off of investment in Mattan
Corporation........................ -- -- 881,010
Acquired in-process research and
development........................ -- 12,800,000 250,000
Minority interest in loss of
consolidated subsidiaries.......... (1,764,736) (273,811) (60,000)
Non-cash component of merger related
and integration costs.............. -- 2,332,238 --
Stock options issued to advisors and
consultants........................ (842,692) 479,620 190,001
Termination of strategic alliance
with IBC........................... -- -- 125,000
Changes in operating assets and
liabilities:
Accounts receivable................. 3,386,037 (1,977,906) (539,045)
Inventories......................... (1,316,339) 394,975 (1,099,277)
Prepaid expenses and other current
assets............................. 1,947,384 (1,505,104) (342,438)
Accounts payable.................... (1,736,100) 3,215,445 (361,678)
Accrued liabilities................. (1,353,466) 3,818,622 319,936
Change in operating assets and
liabilities of discontinued
operations......................... (276,926) (264,314) 176,909
------------ ------------ -----------
Net cash used in operating
activities........................ (18,311,030) (18,131,831) (5,591,472)
------------ ------------ -----------
Investing Activities:
Maturities (purchase) of short-term
investments......................... 9,666,918 (5,698,630) (3,968,288)
Patent and intangible expenditures... (110,151) (87,989) (178,139)
Business acquisitions................ -- (5,002,172) (96,028)
Purchase of property and equipment... (360,916) (514,827) (24,477)
Purchase of property, equipment, and
intangible assets of discontinued
operations.......................... (23,494) (373,467) --
Other................................ -- (410,179) --
------------ ------------ -----------
Net cash provided by (used in)
investing activities.............. 9,172,357 (12,087,264) (4,266,932)
------------ ------------ -----------
Financing Activities:
Proceeds from equity offerings....... -- -- 10,400,812
Net borrowings (repayments) under
line of credit...................... (1,997,693) (695,340) 800,000
Proceeds from exercise of stock
options warrants.................... 202,619 41,734,984 300,575
Decrease (increase) in restricted
cash................................ 2,100,000 (1,100,000) (1,050,000)
Other................................ -- (171,645) (454,836)
------------ ------------ -----------
Net cash provided by financing
activities........................ 304,926 39,767,999 9,996,551
------------ ------------ -----------
Net (decrease) increase in cash and
cash equivalents..................... (8,833,747) 9,548,904 138,147
Cash and cash equivalents at beginning
of period............................ 9,722,514 173,610 35,463
------------ ------------ -----------
Cash and cash equivalents at end of
period............................... $ 888,767 $ 9,722,514 $ 173,610
============ ============ ===========
Supplemental disclosures of cash flow
information
Cash paid for interest............... $ 124,011 $ 120,000 $ 115,283
============ ============ ===========
</TABLE>
Significant noncash investing and financing activities excluded from the
accompanying consolidated statements of cash flows are as follows:
In fiscal 1998 and 1997, the Company issued Class A common stock valued at
$11,757,426 and $1,200,000, respectively, in connection with business
acquisitions.
In fiscal 1999, the Company reserved for issuance 2,250,000 shares of Class A
common stock valued at $7,447,500 in connection with an agreement in principle
to settle a lawsuit (Note 6). In addition, the Company wrote-off $3,511,460 of
assets related to discontinued operations (Note 3).
See accompanying notes.
F-7
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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, disposables and associated accessory products for the medical and
dental market. The Company also designs, develops, manufactures and markets
digital imaging systems and image enhancement and analysis software for use by
practitioners in the ocular health field.
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. All significant 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 and imaging 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
technology. The Company operates in a highly competitive environment and is
subject to all of the risks inherent in a new business enterprise. Further, as
discussed in Note 6, the Company has been named in class action lawsuits
alleging violations of federal and state securities laws. In November 1998, the
Company reached an agreement in principle with lead plaintiffs and their
counsel to settle related matters. Any significant uninsured judgment or
settlement amount ultimately associated with the class action litigation would
significantly impact the Company's ability to satisfy its working capital
requirements. Management believes that the Company's present liquid assets will
be sufficient to meet its working capital requirements through at least fiscal
2000.
2. Summary of Significant Accounting Policies
Restatement of Amounts Previously Reported
The Company's independent auditors unexpectedly resigned during May 1998 and
withdrew their opinion on the Company's fiscal year 1997 financial statements.
Accordingly, the Company retained new auditors to re-examine the 1997 financial
statements. Because of the extended period of time that had passed since the
initial report was issued, a number of matters were identified of which the
Company was not aware when it initially issued the 1997 financial statements.
Although the Company believes that the initially issued 1997 financial
statements were not materially misstated in terms of net loss, total assets and
shareholders' equity, the statements have nonetheless been restated in the
interest of full disclosure.
The following is a summary of the impact of the restatement on the 1997
consolidated balance sheet.
<TABLE>
<S> <C>
1. Reduction of accounts receivable $ (440,000)
2. Additional allowance for doubtful accounts (226,000)
3. Revision to inventory valuation allowance 320,000
4. Reduction in prepaid expenses and other current assets (9,000)
5. Additional non-current assets contributed by Data.Site joint
venture partner 2,113,725
6. Additional accounts payable 88,000
7. Additional net loss (383,000)
</TABLE>
F-8
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the impact of the restatement on the 1997
consolidated statement of operations.
<TABLE>
<S> <C>
1. Reduction of previously reported sales, net of related cost
of sales...................................................... $(280,000)
2. Revision to inventory valuation allowances.................. 160,000
3. Additional bad debts expense................................ (313,000)
4. Minority interest in loss of consolidated subsidiary........ 60,000
5. Other, net.................................................. (10,000)
---------
Net increase in 1997 loss.................................... $(383,000)
=========
</TABLE>
The effects on the Company's previously issued 1997 financial statements are
summarized as follows:
<TABLE>
<CAPTION>
Previously Increase
Reported (Decrease) Restated
----------- ---------- -----------
<S> <C> <C> <C>
Consolidated balance sheet:
Current assets..................... $10,658,161 $ (355,000) $10,303,161
Other assets....................... 8,662,450 2,113,725 10,776,175
----------- ---------- -----------
Total assets..................... $19,320,611 $1,758,725 $21,079,336
=========== ========== ===========
Current liabilities................ $ 2,688,901 $ 88,000 $ 2,776,901
Minority interest.................. -- 2,053,725 2,053,725
Net shareholders' equity........... 16,631,710 (383,000) 16,248,710
----------- ---------- -----------
Total liabilities and
shareholders' equity............ $19,320,611 $1,758,725 $21,079,336
=========== ========== ===========
Consolidated statement of operations
and comprehensive loss:
Net sales.......................... $ 5,530,861 $ (440,000) $ 5,090,861
Cost of sales...................... 3,968,539 (320,000) 3,648,539
----------- ---------- -----------
Gross profit....................... 1,562,322 (120,000) 1,442,322
Selling and marketing expenses..... 2,406,010 9,000 2,415,010
General and administrative
expenses.......................... 1,538,948 314,000 1,852,948
All other expenses................. 3,025,978 -- 3,025,978
----------- ---------- -----------
Loss from continuing operations.... (5,408,614) (443,000) (5,851,614)
Interest income, net............... 15,493 -- 15,493
Minority interest in loss of
consolidated subsidiary........... -- 60,000 60,000
----------- ---------- -----------
Loss from continuing operations.... (5,393,121) (383,000) (5,776,121)
Loss from discontinued operations.. (197,236) -- (197,236)
----------- ---------- -----------
Net loss........................... (5,590,357) (383,000) (5,973,357)
Items of other comprehensive income
(loss)............................ -- -- --
----------- ---------- -----------
Comprehensive loss................. $(5,590,357) $ (383,000) $(5,973,357)
=========== ========== ===========
Basic and diluted net loss per
share:
Loss from continuing operations.. (.93) (.07) (.99)
Loss from discontinued
operations...................... (.03) -- (.03)
----------- ---------- -----------
Net loss per share................. $ (.96) $ (.07) $ (1.02)
=========== ========== ===========
</TABLE>
F-9
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue related to sales to end customers and to distributors are recognized
upon shipment. The Company's price to the purchaser is fixed at the date of
sale and the purchaser's obligation is not contingent on resale of related
merchandise. The Company does not have significant obligations for future
performance in connection with its sales. It is the Company's policy not to
accept sales returns, however, the Company may choose to accept returns on a
case-by-case basis. Allowances for sales returns are provided for based upon
previous experience and have historically been within management's
expectations.
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, 1999 or 1998.
Restricted cash consists of certificates of deposits held to secure
borrowings under the Company's line of credit, and is classified as a current
asset since it is collateral for a current liability.
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. Sales in foreign countries accounted for approximately 11%, 13%,
and 25% of the Company's total sales in fiscal 1999, 1998, and 1997,
respectively. These foreign sales related almost entirely to sales in Asia and
Europe.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on its accounts receivable, other than
the products being sold. Frequently, letters of credit are obtained for
international sales. The Company maintains allowances for estimated potential
credit losses.
Long Lived Assets
During the year ended March 31, 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"). This
statement requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. For the purposes of evaluating potential impairment, the Company's
assets are grouped by the entity to which they relate. Since adopting SFAS No.
121, the Company gives consideration to events or changes in circumstances for
each of its entities. No events occurred during the years ended March 31, 1999
or 1998 which resulted in the impairment of assets, except for the
discontinuance of operations of Data.Site, LLC which resulted in the write-offs
of various long-lived assets (Note 3).
F-10
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, and are comprised of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ -----------
<S> <C> <C>
Raw materials................................. $ 8,980,306 $ 5,980,793
Work-in-process............................... 756,122 1,313,974
Finished goods................................ 7,048,239 5,876,710
------------ -----------
16,784,667 13,171,477
Less reserve for slow moving inventories and
excess purchase commitments.................. (10,987,613) (8,688,779)
------------ -----------
$ 5,797,054 $ 4,482,698
============ ===========
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Expenditures for replacements
and improvements are capitalized while expenditures for repairs and
maintenance are charged to operating expense as incurred.
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Machinery, equipment, molds and tooling.......... $ 2,826,774 $ 1,948,560
Furniture, fixtures, and office equipment........ 2,277,443 3,004,906
Software......................................... 114,345 375,000
----------- -----------
5,218,562 5,328,466
Less accumulated depreciation.................... (3,745,142) (3,550,043)
----------- -----------
$ 1,473,420 $ 1,778,423
=========== ===========
</TABLE>
Depreciation of property and equipment is calculated on a straight-line
basis over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery, equipment, molds and tooling....... 5-10 years
Furniture, fixtures, and office equipment..... 10 years
Software...................................... 3 years
Leasehold improvements........................ Shorter of estimated useful
life or term of lease
</TABLE>
F-11
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Intangibles are comprised of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Patents and technology rights.................... $13,963,247 $13,062,710
Goodwill......................................... 249,172 2,839,570
License agreements............................... 110,000 110,000
----------- -----------
14,322,419 16,012,280
Less accumulated amortization.................... (5,152,059) (4,020,601)
----------- -----------
$ 9,170,360 $11,991,679
=========== ===========
</TABLE>
During the year ended March 31, 1999, the Company discontinued the
operations of its 51%-owned subsidiary Data.Site, LLC (Note 3). Accordingly,
the Company wrote-off all remaining unamortized goodwill amounting to
$2,604,251.
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.
From time to time, 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.
Advertising Expenses
The Company expenses advertising costs as they are incurred. Advertising
expenses aggregated $758,301, $628,410, and $143,608 in 1999, 1998, and 1997,
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. No credits for tax benefits have been recognized, since their
realization is not reasonably assured (see Note 7).
Statements of Cash Flows
The Company considers all highly liquid investments, including money market
accounts and mutual funds, with a maturity of three months or less when
acquired to be cash equivalents.
F-12
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
Net loss per share has been computed based on the weighted average number of
the Company's common shares outstanding during each presented period 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 those shares from escrow have not been
satisfied. Furthermore, common stock equivalents, such as stock options and
warrants, were not considered in the net loss per share calculation because the
effect would be antidilutive.
As discussed in Note 10, the Company issued convertible debentures in a
private placement subsequent to year-end.
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 (SFAS 123), Accounting for Stock Based Compensation.
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 inventories and
intangible assets largely relate to technologies which have yet to gain
widespread market acceptance. Inventory reserves have been established based
upon sales forecasts. The Company believes that no further losses will be
incurred on the disposition of its inventories and that the remaining economic
life of the Company's intangible assets is reasonable. If widespread market
acceptance of the Company's products is not achieved, the carrying amount of
inventories and intangible assets could be materially affected. Conversely,
better than expected sales could yield improved margins.
Recent Accounting Standards
In June 1997, the FASB issued SFAS No. 130 (SFAS No. 130), Reporting
Comprehensive Income. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in an entity's financial statements. This statement requires an
entity to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in-capital in the
equity section of a statement of financial position. The Company had no items
of other comprehensive income during fiscal years 1999, 1998 and 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
and Enterprise and Related Information. This statement requires public
enterprises to report financial and descriptive information about its
reportable operating segments and establishes standards for related disclosures
about product and services, geographic areas, and major customers. The Company
has not adopted the disclosure requirements of SFAS No. 131 as management
believes that the Company currently has only one reportable operating segment.
F-13
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to current year presentations.
3. Business Acquisitions and Dispositions
Data.Site, LLC
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, through the issuance of 159,787 shares of its
Class A common stock to RSS and a commitment to contribute $1,000,000 in cash
to Data.Site. The Company paid $900,000 and $100,000 in each of the years ended
March 31, 1998 and 1997, respectively. The 159,787 shares were valued at $7.53
per share, representing the average of the closing price of such common stock
during the 15 days immediately preceding the effective date of this
transaction. In connection with the acquisition, the Company recorded goodwill
in the amount of $2,893,179 and a minority interest of $2,113,725. The Company
has funded Data.Site's operations with advances of cash or equivalent services
in the aggregate amount of $2,036,452 through March 31, 1999. As of March 31,
1999 and 1998, RSS owed the Company $599,194 and $266,000, respectively, and
such amounts have been fully reserved.
In March 1999, Data.Site's Board of Directors adopted a plan to discontinue
its operations through the cessation of funding to Data.Site by the Company. As
a result, the Company has effectively phased out the operations of Data.Site.
As of March 31, 1999, Data.Site is no longer conducting business and has no
remaining employees and no material assets. The Company does not expect to
realize significant gains or losses upon the ultimate disposal of the assets of
Data.Site. As of March 31, 1999, Data.Site has trade accounts payable of
$238,862, amounts due to the Company of $537,258, and amounts due to the
minority interest shareholder of $549,194. During the fiscal year ended March
31, 1999, Data.Site incurred a net loss from operations of $4,692,082, which
includes impairment write-offs relating to unamortized goodwill and property
and equipment amounting to $2,604,251 and $240,905, respectively. Data.Site's
loss from operations has been segregated from the Company's continuing
operations and reported on a separate line item in the Consolidated Statements
of Operations and Comprehensive Loss for the year ended March 31, 1999.
The Consolidated Statements of Operations and Comprehensive Loss and cash
flows for the years ended March 31, 1998 and 1997, have been reclassified to
present Data.Site's operating results as discontinued operations.
Operating results from discontinued operations are as follows for the years
ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Net sales............................... $ 65,866 $ 532,272 $ --
Cost of sales........................... 256,344 160,002 --
----------- --------- ---------
(190,478) 372,270 --
Operating expenses...................... 4,501,604 818,237 (197,236)
----------- --------- ---------
$(4,692,082) $(445,967) $(197,236)
=========== ========= =========
</TABLE>
F-14
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
EyeSys Technologies, Inc.
On September 30, 1997, the Company acquired all of the equity interests of
EyeSys Technologies, Inc. (EyeSys), a manufacturer and distributor of a
specialized line of diagnostic ophthalmic equipment, for approximately $12.5
million, in the form of 1,236,668 shares of the Company's common stock
(including 319,684 shares held in an escrow account), and $470,000 in cash. The
common stock issued in this transaction was valued at $9.716 per share, the
market value at the time of the closing of the acquisition, as determined using
the average of closing prices over a 15-day period prior to the closing date.
The escrowed shares were placed in escrow in order to provide a source for
payment of claims that might be made by the Company relating to representations
and warranties made by EyeSys in the acquisition. These representations and
warranties generally related to the assets, liabilities, business and
operations of EyeSys. The escrow period has lapsed, but there is currently a
dispute between the Company and the former EyeSys shareholders concerning
whether these representations and warranties have been breached. The escrow
shares will be released to the Company and/or the former EyeSys shareholders
upon resolution of these claims. The resolution of these claims may be made
either through an agreement of the parties, an arbitration or other legal
processes. 216,761 of the escrowed shares have been excluded from the
determination of the purchase price, as such shares were deemed to be
"contingent consideration" under the provisions of APB No. 16. If and when they
are released, the allocation of the adjusted purchase price will be re-
assessed. Options to purchase 210,000 shares of the Company's common stock were
also issued in connection with the acquisition. These options were valued in
accordance with SFAS 123 and included in the acquisition cost. The acquisition
was accounted for as a purchase and the total acquisition cost was allocated
among net liabilities assumed ($2,183,429), patents ($2,600,000), and in
process research and development ($10,200,000). The patents are being amortized
over estimated useful lives ranging from 5 to 15 years. The Company obtained an
independent third-party appraisal to determine the value of the purchased in-
process research and development as of the acquisition date. In the opinion of
the appraiser, the estimated value of these projects was $10,200,000, which was
recorded as in-process research and development acquired in connection with
business acquisitions in the Consolidated Statements of Operations and
Comprehensive Loss. The research and development projects acquired by the
Company included (i) System 2000 V.4, (ii) 20/20 Handheld Topographer, (iii)
Innovative Corneal Topography Checkerboard, (iv) Spatial Resolved Refratometry,
(v) Sun 100 B, (vi) Sun CW, and (vii) CWL Cards. According to the valuation
report, material net cash flows are expected to commence in fiscal year 2000,
using the discounted cash flow method. Merger related and integration expenses
of $5,070,650 were also recorded as of the acquisition date. The merger related
and integration costs are primarily comprised of goodwill write-offs
($2,082,200), accrued compensation, relocation costs and related stay bonuses
($965,100), issuance of stock options in accordance with the EyeSys acquisition
agreement ($1,110,900) and other related liabilities, such as legal, accounting
and investment banker fees (aggregating $912,450). EyeSys has been consolidated
commencing with the acquisition date. Goodwill arising from the acquisition was
written-off as of the acquisition date due to uncertainty as to its
recoverability.
Ophthalmic Imaging Systems
During the final four months of fiscal 1998, the Company acquired a
controlling interest in Ophthalmic Imaging Systems (OIS) for $3.3 million in
cash. OIS is engaged in the business of designing, developing, manufacturing
and marketing digital imaging systems and image enhancement and analysis
software for use by practitioners in the ocular health field. Equity accounting
was used during the period in which the Company owned at least 20% but less
than 50% of the OIS stock (December 1997 through February 1998). Upon acquiring
a controlling interest in OIS, the Company had a 51% interest in OIS which it
held as of March 31, 1999 and 1998. Accordingly, OIS has been consolidated with
the Company in the accompanying financial statements. The OIS acquisition has
been accounted for as a purchase and the total acquisition cost was allocated
among net liabilities of OIS ($996,835), intangibles ($1,687,407) and in
process research and
F-15
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
development ($2,600,000). The Company obtained a preliminary independent
appraisal prepared by a "big five" accounting firm to determine the value of
the purchased in-process research and development as of the acquisition date.
As of the date of the valuation, in-process projects were comprised of the
following: (i) future angiography products; (ii) glaucoma-scope products; (iii)
reading center products; and (iv) digital fundus imager. The results of the
preliminary appraisal showed that the value of these projects was $2,600,000,
the full amount of which was recorded in the Consolidated Statement of
Operations and Comprehensive Loss.
As OIS has had continuous operating losses and has no demonstrated history
of profitability, intangible assets were written off immediately. Additionally,
the in-process research and development costs were charged to operations during
the year ended March 31, 1998. Merger related and integration expenses of
$2,546,450 were also recorded as of the date at which the controlling interest
was acquired. The merger related and integration costs are primarily comprised
of goodwill write-offs ($1,558,200), accrued compensation and related stay
bonuses ($314,600) and other related liabilities, such as legal, accounting and
investment banker fees (aggregating $673,650). The Company is in the process of
negotiating an agreement for the purchase of the minority interests of OIS.
The following unaudited pro forma condensed consolidated results of
operations for the years ended March 31, 1998 and 1997 give effect to the
EyeSys and OIS acquisitions as if they had occurred at the beginning of fiscal
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net sales....................................... $ 17,975,000 $12,637,846
Net loss........................................ (42,885,000) (9,739,364)
Net loss per share.............................. (3.58) (1.67)
</TABLE>
The unaudited pro forma information is not necessarily indicative of the
combined results of operations that would have occurred during the periods
presented nor for future results of operations.
The Company entered into a Stock Purchase Agreement, dated February 25,
1998, pursuant to which it agreed, subject to certain conditions, to commence
an exchange offer to acquire all of the outstanding common stock of OIS not
owned by the Company. This Stock Purchase Agreement was terminated as of August
21, 1998. In connection with this termination, the Company may be liable to pay
OIS a $500,000 break-up fee, which could be satisfied by the reduction of
indebtedness of OIS to the Company which arose after March 31, 1998. The
parties are currently negotiating various issues relating to the termination of
the Purchase Agreement and their future business relationship.
None of the in-process research and development costs acquired in fiscal
year 1998 had yet reached technological feasibility, and no alternative future
uses currently exist.
Other
During fiscal 1998, three other business acquisitions occurred. Total
consideration paid by the Company included cash of $350,000 shares of the
Company's common stock aggregating $200,000, and other consideration
aggregating $138,000. These business acquisitions were not individually or
collectively significant to the financial condition or operating results of the
Company.
4. Research Grant
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
F-16
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, the
Company received the final grant payment of approximately $450,000. Amounts
received under the grant were offset against research and development costs
incurred in the study.
5. Lines of Credit
The Company had a credit facility with a bank which provided for borrowings
of up to $2,100,000. As of March 31, 1998, total borrowings under this
agreement were $1,936,000, bearing interest at the bank's prime rate (8.50% at
March 31, 1998). Borrowings under the agreement were secured by a certificate
of deposit and were repaid in September 1998. The agreement expired in
September 1998.
The Company's OIS subsidiary has an account's receivable financing
agreement, which allows for advances of up to 80% of eligible receivables up to
$960,000. The financing agreement is subject to annual renewal in November of
each year, unless terminated by either party. As of March 31, 1999 and 1998,
$70,470 and $132,634 were outstanding under OIS's line of credit, respectively.
6. Commitments and Contingencies
Commitments
The Company leases its office and production facilities under a
noncancellable operating lease that expires in December 2000. Total rental
expense under operating leases was $331,247, $251,000, and $296,000 for the
fiscal years ended March 31, 1999, 1998, and 1997, respectively. At March 31,
1999, future minimum lease payments under noncancellable operating leases are
as follows:
<TABLE>
<S> <C>
2000................................................................ $245,412
2001................................................................ 187,866
--------
$433,278
========
</TABLE>
OIS has a month to month operating lease which requires minimum monthly
payments of $7,000.
IFS Litigation
The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), 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 fiber optics 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 contract 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
F-17
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 as they relate to Westinghouse
and the Westinghouse employee, 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.
Shareholders Litigation
The Company and certain of the officers and directors have been named in a
number of securities class action lawsuits which allege violations of the
Securities Exchange Act or the California Corporations Code. The plaintiffs
seek damages on behalf of classes of investors who purchased the Company's
stock between May 7, 1997 and April 15, 1998. The complaints allege that the
Company misled investors by failing to disclose material information and making
material misrepresentations regarding the Company's business operations and
projections. The Company has also been named in a shareholder derivative action
purportedly filed on its behalf against certain officers and directors arising
out of the same alleged acts. The Company has reached an agreement in principle
with lead plaintiffs and their counsel to settle the class and derivative
actions. Under the terms of the agreement in principle, in exchange for a
release of all claims, the Company would pay 2,250,000 shares of common stock
and $4,600,000 in cash. The cash portion of the settlement would be paid by the
Company's insurance carrier. Completion of the settlement is subject to
execution of the final settlement agreement, court approval and certain other
conditions. If the settlement is not completed, is not approved, or is not
consummated for any reason, the parties would continue to litigate the actions.
In accordance with the terms of the agreement in principle to settle class
and derivative actions, the Company established a reserve during the quarter
ended December 31, 1998 for the issuance of 2,250,000 shares of common stock.
These shares were valued at a price of $3.31 per share, which was the closing
price of the Company's stock on November 18, 1998, the effective date of the
proposed settlement agreement. The Company has also included approximately
$634,000 of associated legal and professional fees in this reserve, but has not
included in the reserve approximately $4,600,000 in cash that would be paid by
the Company's insurers.
The Company is involved in various other disputes and lawsuits arising from
its normal operations. The litigation process is inherently uncertain and it is
possible that the resolution of these disputes and other lawsuits may adversely
affect the Company. However, it is the opinion of management, that the outcome
of such other matters will not have a material adverse impact on the Company's
consolidated financial position, results of operations, or cash flows.
Employment Contracts
Certain of the Company's executive officers are employed pursuant to
arrangements which provide for severance payments upon the termination of their
employment.
F-18
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These officers have also entered into Termination Agreements with the
Company, under which they would be paid an amount equal to two times his or her
highest annual cash compensation during the preceding three calendar years if,
following a change in control of the Company, their employment was terminated
other than for cause, their pay, bonus, title or responsibilities was reduced
or other adverse employment actions were taken. For purposes of this Agreement,
a change in control includes among other things the acquisition by any person
of 25% or more of the voting power of the Company's outstanding securities,
there is a change in the composition of the majority of the members of the
Board of Directors under circumstances described in the agreement, or the
Company ceases to exist following a merger or consolidation.
Other
The Company has executed royalty agreements with certain parties that
require the payment of royalties upon the achievement of defined sales levels.
To date, no such royalty payments have been required pursuant to the royalty
agreements.
7. 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 comprised the following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Tax operating loss carryforwards............... $ 18,659,120 $ 14,502,970
Inventory and receivable reserves and related
temporary differences......................... 8,433,262 1,705,050
Depreciation and amortization.................. 1,139,454 890,215
Research and development credit carryforwards.. 539,630 424,494
Accruals not currently deductible.............. 3,623,530 193,255
------------ ------------
Total deferred tax assets...................... 32,394,996 17,715,984
Valuation allowance for deferred tax assets.... (32,394,996) (17,715,984)
------------ ------------
Net deferred taxes............................. $ -- $ --
============ ============
</TABLE>
The Company's income tax provision (benefit) for the years ended March 31,
1999, 1998, and 1997, differs from that computed at the federal statutory
corporate tax rate, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rate....................................... (34.0)% (34.0)% (34.0)%
Change in valuation allowance........................ 33.5 % 18.8 % 27.4 %
Merger and acquisition costs......................... -- % 3.7 % -- %
Purchased in-process research and development........ -- % 11.3 % 1.4 %
Write-off of investment.............................. -- % -- % 5.1 %
Other................................................ .5 % .2 % .1 %
------ ------ ------
Effective tax rate................................... -- % -- % -- %
====== ====== ======
</TABLE>
The Company has approximately $55 million of federal net operating loss
carryforwards at March 31, 1999 ($36 million for state purposes), which will
begin to expire in 2006. A valuation allowance has been established for the
entire deferred tax asset.
F-19
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. As of March 31, 1999, management estimates that
annual loss carryforward limitations aggregated approximately $2,000,000.
Further ownership changes may occur as a result of shares to be issued to
settle litigation (Note 6) or may occur as a result of the exercise of stock
options or issuance of stock to complete business combinations. 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 extent of limitations and the future profitability of the Company.
8. Shareholders' Equity
Initial and Secondary Public Offerings
On December 7, 1994, the Company completed an initial public offering of
2,760,000 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 $10,953,000
from this offering and the related exercise of the underwriters over allotment
option. Each Class A warrant consisted 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 stock.
On October 18, 1996, the Company completed a public offering of 11,000 Units
of the Company's securities. On November 6, 1996, the Company's underwriter
exercised its over allotment option, purchasing 1,650 additional Units of the
Company's securities. Each of the above Units consisted of 190 shares of Class
A common stock and 95 redeemable Class B warrants. The Company realized a
combined net proceeds of $10,401,000. 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.
During fiscal 1998, the Company received approximately $41,735,000 from the
exercise of options and warrants, and issued an additional 4,176,000 Class B
Warrants and 6,270,000 shares of Class A Common Stock. As a result of such
exercises, no Class A warrants remain outstanding.
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
options. The options are generally granted at the fair market value of the
shares underlying the options at the date of the grant and generally 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.
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
F-20
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
has been recognized for its employee stock option awards 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 recognizes expense related to grants of
options to non-employees in accordance with the fair value provisions of SFAS
No. 123. Such expenses (recoveries) aggregated $(842,692) in 1999, $1,590,524
in 1998 (which includes $1,110,904 of merger related and integration costs
associated with the EyeSys acquisition) and $190,001 in 1997. The recoveries
that were recorded in fiscal year 1999 were directly related to options
originally granted in fiscal 1998 to consultants who ultimately did not perform
in accordance in their respective arrangements. Accordingly, the Company never
issued any options to the consultants and related arrangements were terminated
in fiscal year 1999. The fair value of the options that was originally recorded
in fiscal year 1998 was reversed and recorded as recoveries in fiscal year
1999.
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
proforma 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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate........................... 5.50% 6.00% 6.00%
Stock volatility factor........................... 1.50 0.64 0.58
Weighted average expected option life............. 4 years 4 years 4 years
Expected dividend yield........................... 0% 0% 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 information ($2,049,615,
$1,947,458, and $974,469 for fiscal years 1999, 1998, and 1997, respectively)
may not be indicative of such expense in future periods as the 1997 amounts are
based only on option grants after December 15, 1994. Proforma information is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net loss................. $(31,853,753) $(40,711,745) $(6,947,826)
Pro forma net loss per share....... $ (2.05) $ (3.56) $ (1.19)
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended March 31 follows (excluding option grants that are subject
to shareholder approval):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
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................ 3,486,669 $6.84 2,308,049 $5.51 1,423,949 $ 5.58
Granted................. 1,729,000 7.40 1,899,500 9.22 1,042,756 6.16
Exercised............... (57,115) 4.69 (395,271) 6.20 (1,899) 1.00
Forfeited/cancelled..... (913,953) 8.00 (325,609) 8.40 (156,757) 10.53
--------- ----- --------- ----- --------- ------
Outstanding--end of
year................... 4,244,601 $6.85 3,486,669 $6.84 2,308,049 $ 5.51
========= ===== ========= ===== ========= ======
</TABLE>
The weighted average remaining contractual life of options as of March 31,
1999 was as follows:
F-21
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Number of Average Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices Outstanding Life Years Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00--$2.81............ 485,923 5 $ 2.10 122,230 $ 2.32
$4.50--$8.85............ 2,792,306 8 6.48 1,765,306 5.98
Greater than $9.00...... 966,372 9 10.29 486,537 10.46
--------- ---------
4,244,601 2,374,073
========= =========
</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. Such amount is $26,343,900 for the fiscal year ending March
31, 2000, and such amount will be increased in proportion to increases in the
weighted average number of shares of common stock outstanding (as defined)
during the relevant year, as compared to the number of shares outstanding
immediately after the Company's initial public offering. If the above event
does not 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 the Company's net income before provision for
income taxes, as defined, amounts to at least $71,181,750 for the year ending
March 31, 2000 (which amount shall be adjusted in the same manner as that for
the Class E-1 common stock). If the above event does not 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, 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.
9. 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 are in the form of shares of the Company's common
stock. During 1997, no amounts were contributed by the Company to the Plan.
During 1999 and 1998, 32,397 and 3,752 shares have been approved for
contribution by the Company, respectively.
10. Subsequent Events
In May 1999, the Company filed a registration statement to register
4,278,146 shares of its Class A common stock underlying convertible debentures
issued in a private placement. Upon filing the registration statement and other
certain documents, the Company received $2 million in the private transaction
and the Company expects to receive an additional $2 million on the effective
date of the registration statement.
F-22
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PREMIER LASER SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 1998 (RESTATED) AND 1997
<TABLE>
<CAPTION>
Deductions/
Balance at Recoveries Balance at
Beginning and end of
Description of period Additions Write-off Other * period
----------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful
accounts receivable.. $1,224,845 $1,079,566 $ (307,253) $ -- $ 1,997,158
Inventory reserves.... 8,688,779 4,194,523 (1,895,689) -- 10,987,613
1998
Allowance for doubtful
accounts receivable.. $ 613,263 $ 385,407 $ (149,801) $ 375,976 $ 1,224,845
Inventory reserves.... 1,203,324 5,704,455 -- 1,781,000 8,688,779
1997
Allowance for doubtful
accounts receivable.. $ 154,677 $ 403,515 $ (119,054) $ 174,125 $ 613,263
Inventory reserves.... 950,325 252,999 -- -- 1,203,324
</TABLE>
- --------
* Allowance amounts were recorded in connection with business acquisitions.
F-23
<PAGE>
Until , 1999 (25 days after the date of this prospectus) all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
It is estimated that the following expenses will be incurred in connection
with the proposed offering hereunder. All of such expenses will be borne by
Premier:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
Securities and Exchange Commission filing fee................... $ 3,121.98
Legal fees and expenses......................................... $ 80,000.00
Accounting fees and expenses.................................... $ 60,000.00
Blue sky fees and expenses (including counsel fees)............. $ 3,000.00
Printing expenses............................................... $ 5,000.00
Miscellaneous................................................... $ 20,000.00
-----------
TOTAL......................................................... $171,121.98
===========
</TABLE>
Item 14. Indemnification of Directors and Officers
The California General Corporation Law provides that California corporations
may include provisions in their articles of incorporation relieving directors
of monetary liability for breach of their fiduciary duty as directors, except
for the liability of a director resulting from (a) any transaction from which
the director derives an improper personal benefit, (b) acts or omissions
involving intentional misconduct or a knowing and culpable violation of law,
(c) acts or omissions that a director believes to be contrary to the best
interests of the registrant or its shareholders or that involves the absence
of good faith on the party of the director (d) acts or omissions constituting
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the registrant or its shareholders, (e) acts or omissions
showing a reckless disregard for the director's duty to the registrant or its
shareholders in circumstances in which the director was aware or should have
been aware, in the ordinary course of performing a director's duties, of a
risk of serious injury to the registrant or its shareholders, (f) any improper
transaction between a director and the registrant in which the director has a
material financial interest, or (g) the making of an illegal distribution to
shareholders or an illegal loan or guaranty. The registrant's articles of
incorporation provide that the registrant's directors are not liable to the
registrant or its shareholders for monetary damages for breach of their
fiduciary duties to the fullest extent permitted by California law.
The inclusion of the above provision in the articles of incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefitted the registrant and
its shareholders. At present, there is no litigation or proceeding pending
involving a director of the registrant as to which indemnification is being
sought, nor is the registrant aware of any threatened litigation that may
result in claims for indemnification by any director.
The registrant's articles of incorporation provide that the registrant is
authorized to indemnify its directors and officers to the fullest extent
permitted by California law, including circumstances in which indemnification
is otherwise discretionary under California law. The registrant has entered
into indemnification agreements with certain of its directors and officers
that require the registrant to indemnify such directors and officers to the
fullest extent permitted by law. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the registrant, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since May 15, 1996, Premier has sold the following unregistered securities:
1. On May 17, 1999, the Registrant sold to two private investors $4,000,000
principal amount of Secured Convertible Debentures due 2002, together with
options to purchase an aggregate of 60,000 shares of the Registrant's Class A
Common Stock. The purchase price for these securities was $4,000,000. There
was no underwriter for this transaction, but the Registrant paid to a
placement agent a commission of $200,000, and issued to that agent warrants to
purchase 40,000 shares of the Registrant's Class A Common Stock. These
securities were sold to accredited investors, without general advertising or
solicitation, and were exempt from registration under the Securities Act
pursuant to Rule 506.
2. On September 5, 1997, the Registrant issued an aggregate of 20,625 shares
of its Class A Common Stock to CRS-USA, Inc., a Nevada corporation, in
connection with the acquisition of the assets of that corporation. There were
no underwriters for this transaction. The assets consisted principally of
office equipment and intellectual property having an estimated value of
approximately $328,000. The Registrant also paid cash consideration in
connection with the acquisition. These securities were exempt from
registration under the Securities Act pursuant to Section 4(2) of the Act.
3. On January 31, 1997, the Registrant issued 159,787 shares of Class A
Common Stock to RSS, LLC, in connection with the formation of a joint venture
between the Registrant and such purchaser. The consideration received by the
Registrant consisted of an undivided interest in intangible assets held by the
purchaser. The estimated value of this undivided interest was $2,575,000.
There was no underwriter for this transaction. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
4. In June 1996 the Registrant issued to Silicon Valley Bank options to
purchase 9,756 shares of the Registrant's Class A Common Stock, at $10.25 per
share, as partial consideration for debt financing made available by Silicon
Valley Bank. The estimated value of this undivided interest was $50,300. The
purchaser was an accredited investor, and the issuance of these securities was
exempt from registration pursuant to Rule 506 under the Securities Act.
5. In April 1997, the Registrant issued options to purchase 325,000 shares
of Class A Common Stock, at $6.50 per share, to an investment banking firm, in
consideration of investment banking services provided to Premier. The value of
these services cannot be accurately estimated, although the Company believes
they had a value in excess of $214,500. There was no underwriter in this
transaction, and the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
6. In April 1997, the Registrant issued options to purchase 150,000 shares
of Class A Common Stock, at $9.875 per share, to an investment banking firm,
in consideration of investment banking services provided to Premier. The value
of these services cannot be accurately estimated, although the Company
believes they had a value in excess of $78,000. There was no underwriter in
this transaction, and the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
7. In July 1997, the Registrant issued options to purchase 150,000 shares of
Class A Common Stock, at $10.9375 per share, to an investment banking firm, in
consideration of investment banking services provided to Premier. The value of
these services cannot be accurately estimated, although the Company believes
they had a value in excess of $261,000. There was no underwriter in this
transaction, and the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of April 24, 1997 among the
Registrant, EyeSys Technologies, Inc. and Premier Acquisition of
Delaware, Inc. (incorporated herein by this reference to Exhibit 2.1
to the Registrant's Registration Statement on Form S-4, Registration
No. 33-29573).
2.2 First Amendment to Agreement and Plan of Merger dated as of August 6,
1997, among the Registrant, EyeSys Technologies, Inc. and Premier
Acquisition of Delaware, Inc. (incorporated herein by this reference
to Exhibit 2.2 to the Registrant's Current Report of Form 8-K filed
October 15, 1997).
2.3 Second Amendment to Agreement and Plan of Merger dated as of September
16, 1997 among the Registrant, EyeSys Technologies, Inc. and Premier
Acquisition of Delaware, Inc., EyeSys Technologies, Inc. and Premier
Acquisition of Delaware, Inc. (incorporated herein by this reference
to Exhibit 2.3 to the Registrant's Current Report on Form 8-K filed
October 15, 1997).
2.4 Stock Purchase Agreement dated February 25, 1998 between the
Registrant and Ophthalmic Imaging Systems (incorporated herein by
this reference to Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed March 9, 1998).
2.5 Purchase Agreement dated February 25, 1998 between the Registrant and
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated
herein by this reference to Exhibit 99.4 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
2.6 Purchase Agreement dated February 25, 1998 between the Registrant and
Stanley Chang, M.D. (incorporated herein by this reference to Exhibit
99.8 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
2.7 Purchase Agreement dated February 25, 1998 between the Registrant and
J.B. Oxford & Company (incorporated herein by this reference to
Exhibit 99.12 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
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).
4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser
Systems, Inc. and American Stock Transfer and Trust Company acting as
rights agent (incorporated herein by this reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K filed April 2, 1998).
5.1 Opinion of Rutan & Tucker, LLP.
10.1 Letter Agreement and Patent License Agreement dated August 29, 1991
among the Registrant, Patlex Corporation and Gordon Gould
(incorporated herein by this reference to Exhibit 1.1 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.2 Assignment Agreement dated July 27, 1992 between the Registrant 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 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).
10.4 Letter of Intent between the Registrant 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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.5 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).
10.6 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).
10.7 Form of Warrant Agreement (including forms of 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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 No.
33-83984).
10.12 Industrial Lease dated December 6, 1995 between the Registrant and The
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).
10.13 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).
10.14 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).
10.15 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-KSB for the fiscal year ended
March 31, 1996).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.21 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. 33-04219).
10.22 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).
10.23 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).
10.24 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).
10.27 1997 Stock Option, together with form of Nonqualified Stock Option
Agreement (incorporated herein by the reference to Exhibit 10.33 to
the Registrant's Annual Report on Form 10-K filed August 26, 1998).
10.28 1998 Stock Option Plan (incorporated herein by this reference to
Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed
August 26, 1998).
10.29 Rights Agreement dated March 31, 1998 between the Registrant and
American Stock Transfer and Trust Company (incorporated herein by
this reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed April 2, 1998).
10.30 Secured Convertible Debenture Purchase Agreement dated May 17, 1999
between the Registrant and the investors signatory thereto.
(Incorporated by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999).
10.31 Registration Rights Agreement dated May 17, 1999 between the
Registrant and the investors signatory thereto. (Incorporated by
reference to Exhibit 10.29 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1999).
10.32 Warrant dated May 17, 1999 issued by the Registrant to certain
investors. (Incorporated by reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999).
10.33 Intellectual Property Security Agreement dated May 17, 1999 between
the Registrant and the secured parties signatory thereto.
(Incorporated by reference to Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999).
10.34 Security Agreement dated May 17, 1999 between the Registrant and the
secured parties signatory thereto. (Incorporated by reference to
Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999).
10.35 Form of 6% Secured Convertible Debenture dated May 17, 1999 issued by
the Registrant to certain investors. (Incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999).
16 Letter dated June 11, 1998 from Ernst & Young, LLP (incorporated
herein by this reference to Exhibit 16 to the Registrant's Current
Report on Form 8-K filed June 1, 1998, and as amended June 15, 1998).
21 Subsidiaries (incorporated herein by this reference to Exhibit 21 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998).
23.1 Consent of Haskell & White LLP.*
27 Financial Data Schedule (omitted because all information has been
previously filed).
99.1 Form of Class D Warrant (OIS transaction) (incorporated herein by this
reference to Exhibit 99.3 to the Registrant's Current Report on From
8-K filed March 9, 1998).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
99.2 Class D Warrant dated February 25, 1998 issued by the Registrant to
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS
transaction) (incorporated herein by this reference to Exhibit 99.6
to the Registrant's Current Report on Form 8-K filed March 9, 1998).
99.3 Registration Rights Agreement dated February 25, 1998 issued by the
Registrant and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
(OIS transaction) (incorporated herein by this reference to Exhibit
997 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
99.4 Class D Warrant dated February 25, 1998 issued by the Registrant to
Stanley Chang, M.D. (OIS transaction) (incorporated herein by this
reference to Exhibit 99.10 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.5 Registration Rights Agreement dated February 25, 1998 issued by
Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated
herein by this reference to Exhibit 99.11 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
99.6 Class D Warrant dated February 25, 1998 issued by the Registrant to
J.B. Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.14 to the Registrant's Current Report on From
8-K filed March 9, 1998).
99.7 Registration Rights Agreement dated February 25, 1998 between the
Registrant and J. B. Oxford & Company (OIS transaction) (incorporated
herein by this reference to Exhibit 99.18 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
99.8+ Agreement dated July 23, 1997 between Nidek Co., Ltd. and EyeSys
Technologies, Inc. (incorporated herein by this reference to Exhibit
99.1 to the Registrant's Registration Statement on Form S-4
Registration No. 333-29573).
99.9+ Exclusive Distribution Agreement dated June 2, 1997 between EyeSys
Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by
this reference to Exhibit 99.3 to the Registrant's Registration
Statement on Form S-4 Registration No. 333-29573).
</TABLE>
- --------
* Filed herewith.
+Confidential treatment has been granted with respect to portions of this
Exhibit.
(b) Financial Statement Schedules.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) Include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registration
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
II-6
<PAGE>
(2) That for the purpose of determining liability under the Securities
Act of 1933, the registration will treat each post-effective amendment as a
new registration statement of the securities offered, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form or prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(5) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registration has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registration will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
California, on August 4, 1999.
By: /s/ Colette Cozean
_________________________________
Colette Cozean, Ph.D.
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Colette Cozean Chief Executive Officer and August 4, 1999
____________________________________ Director (Principal
Colette Cozean, Ph.D. Executive Officer)
/s/ Robert V. Mahoney Executive Vice President, August 4, 1999
____________________________________ Finance and Chief Financial
Robert V. Mahoney Officer (Principal
Financial and Accounting
Officer)
* Director August 4, 1999
____________________________________
Lawrence D. Ashcroft
* Director August 4, 1999
____________________________________
Patrick J. Day
* Director August 4, 1999
____________________________________
Fredric J. Feldman
* Director August 4, 1999
____________________________________
John Hunkeler, M.D.
* Director August 4, 1999
____________________________________
G. Lynn Powell
* Director August 4, 1999
____________________________________
Lewis H. Stanton
</TABLE>
/s/ Colette Cozean
* By:________________________________
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of April 24, 1997 among the
Registrant, EyeSys Technologies, Inc. and Premier Acquisition of
Delaware, Inc. (incorporated herein by this reference to Exhibit 2.1
to the Registrant's Registration Statement on Form S-4, Registration
No. 33-29573).
2.2 First Amendment to Agreement and Plan of Merger dated as of August 6,
1997, among the Registrant, EyeSys Technologies, Inc. and Premier
Acquisition of Delaware, Inc. (incorporated herein by this reference
to Exhibit 2.2 to the Registrant's Current Report of Form 8-K filed
October 15, 1997).
2.3 Second Amendment to Agreement and Plan of Merger dated as of September
16, 1997 among the Registrant, EyeSys Technologies, Inc. and Premier
Acquisition of Delaware, Inc., EyeSys Technologies, Inc. and Premier
Acquisition of Delaware, Inc. (incorporated herein by this reference
to Exhibit 2.3 to the Registrant's Current Report on Form 8-K filed
October 15, 1997).
2.4 Stock Purchase Agreement dated February 25, 1998 between the
Registrant and Ophthalmic Imaging Systems (incorporated herein by
this reference to Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed March 9, 1998).
2.5 Purchase Agreement dated February 25, 1998 between the Registrant and
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated
herein by this reference to Exhibit 99.4 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
2.6 Purchase Agreement dated February 25, 1998 between the Registrant and
Stanley Chang, M.D. (incorporated herein by this reference to Exhibit
99.8 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
2.7 Purchase Agreement dated February 25, 1998 between the Registrant and
J.B. Oxford & Company (incorporated herein by this reference to
Exhibit 99.12 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
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).
4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser
Systems, Inc. and American Stock Transfer and Trust Company acting as
rights agent (incorporated herein by this reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K filed April 2, 1998).
5.1 Opinion of Rutan & Tucker, LLP.
10.1 Letter Agreement and Patent License Agreement dated August 29, 1991
among the Registrant, Patlex Corporation and Gordon Gould
(incorporated herein by this reference to Exhibit 1.1 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.2 Assignment Agreement dated July 27, 1992 between the Registrant 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 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).
10.4 Letter of Intent between the Registrant 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.5 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).
10.6 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).
10.7 Form of Warrant Agreement (including forms of 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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 No.
33-83984).
10.12 Industrial Lease dated December 6, 1995 between the Registrant and The
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).
10.13 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).
10.14 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).
10.15 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-KSB for the fiscal year ended
March 31, 1996).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.21 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. 33-04219).
10.22 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).
10.23 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).
10.24 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).
10.27 1997 Stock Option, together with form of Nonqualified Stock Option
Agreement (incorporated herein by this reference to Exhibit 10.33 to
the Registrant's Annual Report on Form 10-K filed August 26, 1998).
10.28 1998 Stock Option Plan (incorporated herein by this reference to
Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed
August 26, 1998).
10.29 Rights Agreement dated March 31, 1998 between the Registrant and
American Stock Transfer and Trust Company (incorporated herein by
this reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed April 2, 1998).
10.30 Secured Convertible Debenture Purchase Agreement dated May 17, 1999
between the Registrant and the investors signatory thereto.
(Incorporated by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999).
10.31 Registration Rights Agreement dated May 17, 1999 between the
Registrant and the investors signatory thereto. (Incorporated by
reference to Exhibit 10.29 to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1999).
10.32 Warrant dated May 17, 1999 issued by the Registrant to certain
investors. (Incorporated by reference to Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999).
10.33 Intellectual Property Security Agreement dated May 17, 1999 between
the Registrant and the secured parties signatory thereto.
(Incorporated by reference to Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1999).
10.34 Security Agreement dated May 17, 1999 between the Registrant and the
secured parties signatory thereto. (Incorporated by reference to
Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999).
10.35 Form of 6% Secured Convertible Debenture dated May 17, 1999 issued by
the Registrant to certain investors. (Incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1999).
16 Letter dated June 11, 1998 from Ernst & Young, LLP (incorporated
herein by this reference to Exhibit 16 to the Registrant's Current
Report on Form 8-K filed June 1, 1998, and as amended June 15, 1998).
21 Subsidiaries (incorporated herein by this reference to Exhibit 21 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998).
23.1 Consent of Haskell & White LLP.*
27 Financial Data Schedule (omitted because all information has been
previously filed).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
99.1 Form of Class D Warrant (OIS transaction) (incorporated herein by this
reference to Exhibit 99.3 to the Registrant's Current Report on From
8-K filed March 9, 1998).
99.2 Class D Warrant dated February 25, 1998 issued by the Registrant to
Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS
transaction) (incorporated herein by this reference to Exhibit 99.6
to the Registrant's Current Report on Form 8-K filed March 9, 1998).
99.3 Registration Rights Agreement dated February 25, 1998 issued by the
Registrant and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
(OIS transaction) (incorporated herein by this reference to Exhibit
997 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
99.4 Class D Warrant dated February 25, 1998 issued by the Registrant to
Stanley Chang, M.D. (OIS transaction) (incorporated herein by this
reference to Exhibit 99.10 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.5 Registration Rights Agreement dated February 25, 1998 issued by
Registrant to Stanley Chang, M..D. (OIS transaction) (incorporated
herein by this reference to Exhibit 99.11 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
99.6 Class D Warrant dated February 25, 1998 issued by the Registrant to
J.B. Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.14 to the Registrant's Current Report on From
8-K filed March 9, 1998).
99.7 Registration Rights Agreement dated February 25, 1998 between the
Registrant and J. B. Oxford & Company (OIS transaction) (incorporated
herein by this reference to Exhibit 99.18 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
99.8+ Agreement dated July 23, 1997 between Nidek Co., Ltd. and EyeSys
Technologies, Inc. (incorporated herein by this reference to Exhibit
99.1 to the Registrant's Registration Statement on Form S-4
Registration No. 333-29573).
99.9+ Exclusive Distribution Agreement dated June 2, 1997 between EyeSys
Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by
this reference to Exhibit 99.3 to the Registrant's Registration
Statement on Form S-4 Registration No. 333-29573).
</TABLE>
- --------
* Filed herewith.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-78655 of Premier Laser Systems, Inc. on Form S-1 of our report dated June
9, 1999, appearing in the prospectus, which is part of this Registration
Statement, and of our report dated June 9, 1999 relating to the consolidated
financial statement schedule appearing elsewhere in this Registration
Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
Haskell & White LLP
Newport Beach, California
August 4, 1999
