<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13966
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Premier Laser Systems, Inc.
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(Exact name of registrant as specified in its charter)
California 33-0476284
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 Morgan, Irvine, California, 92618
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(Address of principal executive offices)
(949) 859-0656
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(Registrant's telephone number, including area code)
---------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
--*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan
confirmed by a court.
Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (November 11,1999):
Class A Common Stock: 16,060,022 Shares
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Class E-1 Common Stock: 1,257,461 Shares
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Class E-2 Common Stock: 1,257,461 Shares
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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PREMIER LASER SYSTEMS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept 30 ,1999 March 31,1999
(Unaudited)
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ASSETS Restated
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<S> <C> <C>
Current assets:
Cash & cash equivalents $ 321,684 $ 888,767
Restricted cash 1,598,706 50,000
Accounts receivable-net of allowance for doubtful accounts & 748,059 1,342,917
sales returns of $1,956,473 & $1,997,158 respectively
Prepaid expenses and other current assets 760,674 531,459
Inventories, net 6,619,830 6,977,104
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Total current assets 10,048,953 9,790,247
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Property & equipment , net 1,278,901 1,473,420
Intangibles assets, net 10,607,215 11,278,560
Other assets, net 263,184 21,953
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Total assets $ 22,198,253 $ 22,564,180
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LIABILITIES & SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 3,846,467 $ 3,802,606
Line of credit - 70,470
Accrued compensation & related costs 999,741 968,969
Accrued restructure costs 410,980 410,980
Accrued integration costs 663,088 663,087
Accrued warranty 672,658 739,298
Due to joint venture partner 549,194 549,194
Accrued purchase commitments 1,180,050 1,180,050
Unearned revenue 747,633 678,086
Other accrued liabilities 2,174,483 2,090,306
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Total current liabilities 11,244,295 11,153,046
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Long term liabilities:
Convertible debentures, net (6% convertible debentures at $3,200,000 2,947,222 -
less $252,778 unamortized beneficial conversion discount)
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Total long term liabilities 2,947,222 -
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Total liabilities 14,191,517 11,153,046
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 90,645,135 89,354,340
Issued & outstanding shares - 17,635,739 including
2,250,000 subject to issuance for shareholder litigation settlement at
September 30,1999 and 16,859,355 including 2,250,000
subject to issuance for shareholder litigation settlement as of March 31,1999
Common stock - Class E-1, no par value: Authorized Shares - 2,200,000: Issued 4,769,878 4,769,878
and Outstanding Shares --1,257,461 at September 30,1999 and March 31,1999
Common stock - Class E-2, no par value: Authorized Shares - 2,200,000 4,769,878 4,769,878
Issued and outstanding shares -- 1,257,461 at September 30,1999 & March 31,1999
Warrants and options 1,723,842 1,723,842
Additional paid-in-capital 400,000 -
Accumulated deficit (94,301,996) (89,206,804)
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Total shareholders' equity 8,006,736 11,411,134
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Total liabilities & shareholders' equity $ 22,198,253 $ 22,564,180
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</TABLE>
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PREMIER LASER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Sept 30, Six months ended Sept 30,
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1999 1998 1999 1998
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Restated Restated
<S> <C> <C> <C> <C>
Net sales $ 3,026,809 $ 3,325,335 $ 6,685,141 $ 6,806,671
Cost of sales 1,904,322 3,513,878 4,172,855 6,971,302
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Gross profit (loss) 1,122,487 (188,543) 2,512,286 (164,631)
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Operating expenses:
Selling and marketing expenses 1,193,231 1,870,587 2,594,171 4,070,162
Research and development expenses 1,247,517 1,458,871 2,451,266 2,647,912
General and administrative expenses 1,273,093 2,117,293 2,393,935 3,830,918
Reduction of previously recorded prof. fees - - (350,000) -
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Total operating expenses 3,713,841 5,446,751 7,089,372 10,548,992
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Loss from operations (2,591,354) (5,635,294) (4,577,086) (10,713,623)
Interest expense (income) 410,459 (10,135) 520,595 (56,704)
Minority Interest in (loss) income of consolidated subsidiaries - 36,421 - (168,145)
Income tax expense (2,488) - (2,488) -
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Net loss and comprehensive loss $ (2,999,325) $ (5,661,580) $ (5,095,193) $(10,488,774)
============= ============= ============= =============
Loss per share $ (0.20) $ (0.39) $ (0.34) $ (0.71)
============= ============= ============= =============
Weighted average number of shares used
in computation of basic and diluted net loss
per share 15,045,611 14,686,844 14,878,944 14,675,426
============= ============= ============= =============
</TABLE>
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Sept 30,
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1999 1998
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Restated
<S> <C> <C>
Operating activities
Net loss $ (5,095,193) $(10,488,774)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,097,936 1,101,481
Interest penalty on debenture 200,000
Amortization of beneficial conversion discount 147,222 -
Stock- based compensation 230,000 230,000
Minority interest in loss of consolidated subisdiary - (168,145)
Changes in operating assets & liabilities:
Accounts receivable 594,858 2,091,348
Inventories 357,274 (3,497,175)
Prepaid expenses & other current assets (470,446) 860,886
Accounts payable 43,861 (2,466,501)
Unearned revenue 69,547 -
Accrued liabilities 48,310 (1,672,905)
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Net cash used in operating activities (2,776,631) (14,009,785)
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Investing activities
Maturity of short term investments - 5,261,372
Purchase of property & equipment (171,276) (803,452)
Other - (233,041)
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Net cash (used in) provided by investing activities (171,276) 4,224,879
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Financing activities
Proceeds from convertible debenture 4,000,000 -
Net (repayments) borrowings under line of credit (70,470) (1,845,192)
(Increase) decrease in restricted cash (1,548,706) 2,100,000
Proceeds from exercise of stock options & warrants - 216,425
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Net cash provided by financing activities 2,380,824 471,233
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Net decrease in cash & cash equivalents (567,083) (9,313,673)
Cash & cash equivalents at beginning of period 888,767 9,722,514
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Cash & cash equivalents at end of period $ 321,684 $ 408,841
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</TABLE>
<PAGE>
NOTE 1: General
In our opinion, the accompanying unaudited condensed consolidated
financial statements include all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of our financial
position at September 30, 1999 and the results of operations and cash flows for
the six months ended September 30, 1999 and 1998. Although we believe the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Results of operations for
interim periods are not necessarily indicative of results of operations to be
expected for the full year.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Premier Laser Systems, Inc. and its wholly and majority
owned subsidiaries. All significant intercompany transactions and balances have
been eliminated.
The financial information in this quarterly report should be read in
conjunction with the March 31, 1999 consolidated financial statements and notes
thereto included in our Annual Report filed on Form 10-K/A for the fiscal year
ending March 31, 1999.
As a result of inquiries made by the staff of the United States
Securities and Exchange Commission, the Company, in October 1999, amended its
Annual Report on Form 10-K for the year ended March 31, 1999. In so doing, the
Company restated its financial statements for the years ended March 31, 1999 and
1998 to adjust its accounting for the September 1997 acquisition of 100% of
EyeSys Technologies, Inc. and the February 1998 acquisition of 51% of Ophthalmic
Imaging Systems. Further, the restatements reflected reclassifications to
eliminate the original separate reporting of the March 31, 1999 cessation of
Data.Site LLC's operations as "discontinued operations" in the consolidated
statements of operations and comprehensive loss and cash flows. The consolidated
financial statements were revised from those originally presented for the
cumulative and corresponding effects of the restatements made in the
consolidated financial statements for all periods through and including June 30,
1999.
NOTE 2: Litigation
We entered into an agreement with Infrared Fiber Systems, Inc. (IFS),
as a supplier of certain fiber optics, that expires in the fiscal year ending
March 31, 2002. The agreement requires the supplier to sell exclusively to us
fiber optics for medical and dental applications as long as we purchased defined
minimum amounts.
In March 1994, we initiated litigation against IFS. Our 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 its rights to
the IFS optical fibers. In May 1995, we 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
<PAGE>
owned a substantial minority interest in IFS. The complaint charges that
Coherent conspired with IFS in the wrongful conduct which is the subject of the
federal lawsuit and interfered with 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 demurrers have been
dismissed, subject to our right to appeal. We appealed these decisions as they
related to Westinghouse and Westinghouse employees, 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.
Shareholders' Litigation
We and certain 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. The plaintiffs seek
damages on behalf of classes of investors who purchased our stock between May 7,
1997 and April 15, 1998. The complaints allege that we misled investors by
failing to disclose material information and making material misrepresentations
regarding our business operations and projections. We have also been named in a
shareholder derivative action purportedly filed on our behalf against certain of
our officers and directors arising out of the same alleged acts. We have reached
an agreement in principal 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 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. If for any reason, the
proposed settlement is not consummated, and the plaintiffs obtain a judgment,
our business may be adversely affected.
In accordance with the terms of the agreement in principle to settle
class and derivative actions, we 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
our stock on November 18,1998, the effective date of the proposed settlement
agreement. We have also included approximately $884,000 of associated legal and
professional fees in this reserve, but have not included in the reserve
approximately $4,600,000 in cash that would be paid by our insurers, as the
Company's insurers have deposited the cash portion of the settlement into an
escrow account for direct payment to the plaintiffs upon final completion and
approval of the settlement agreement.
We are involved in various other disputes and lawsuits arising from our
normal operations. The litigation process in inherently uncertain and it is
possible that the resolution of these disputes and other lawsuits may adversely
affect us. However, in our opinion, the outcome of these matters will not have a
material adverse impact on our financial position, results of operations or cash
flows.
<PAGE>
NOTE 3: Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, and are comprised of the following:
September March
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30, 1999 31, 1999
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Raw materials............................. $ 8,252,638 $ 8,980,306
Work-in-process........................... 1,175,765 756,122
Finished goods............................ 7,383,265 7,048,239
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16,811,668 16,784,667
Less reserve for slow moving and excess
inventories............................ (10,191,838) (9,807,563)
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$ 6,619,830 $ 6,977,104
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NOTE 4: Convertible Debentures
In May 1999, we filed a registration statement to register 4,278,146
shares of our Class A common stock underlying convertible debentures issued in a
private placement. As part of the private placement, as amended, we agreed to
pay liquidated damages of $100,000 per month or partial month if the
registration statement covering the shares of Class A common stock underlying
the convertible debentures was not declared effective by August 15, 1999. The
registration statement was declared effective on October 12, 1999 , resulting in
liquidated damages of $200,000, which is included in interest expense and has
been added to the original principal amount of the debentures. To date, we have
received $4.0 million in gross proceeds in the private transaction. In September
1999, $1,000,000 of our convertible debentures, and the accrued interest
thereon, was converted into 673,461 shares of our Class A common stock.
NOTE 5: Subsequent Events
In October 1999, $1,410,000 of our convertible debentures, and the
accrued interest thereon, was converted into 787,270 shares of our Class A
common stock.
We currently own 51% of OIS. On October 22, we entered into a merger
agreement with OIS, pursuant to which we will acquire the 49 percent of the
outstanding shares of OIS not presently owned by us. Under the terms of the
Merger Agreement, shareholders of OIS would receive 0.8 shares of our common
stock for each share of OIS common stock owned by the shareholder. The merger is
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subject to approval by the shareholders of OIS ( including approval of a
majority of the OIS stock not owned by us) and to other customary closing
conditions as specified in the Merger Agreement. OIS entered into a series B
Preferred Stock Purchase Agreement with us ("the "Stock Purchase Agreement")
pursuant to which OIS agreed to sell shares of OIS Series B Preferred Stock (
the "Series B Preferred Stock") at the price of $25.00 per share with each such
share carrying the voting power of 1,000 shares of OIS common stock. OIS becomes
obligated to sell 50 shares of the Series B Preferred Stock for every 50,000
shares of OIS common stock issued under OIS common stock options. We intend to
purchase any such shares by canceling indebtedness of OIS to us. Given our
present 51% ownership interest in OIS, we consolidate the financial position and
operations of OIS. Therefore, if the acquisition is consummated, there will not
be any impact on our financial position or operations resulting from the
consolidation of OIS. However, there will likely be a material impact on our
financial position and operations resulting from recording the acquisition
purchase price and the related allocation of this purchase price to in-process
research and development projects, goodwill, or other intangible assets. The
impact of the potential acquisition on our financial position and operations is
not presently determinable as the acquisition purchase price has not determined
and we have not yet analyzed the fair market value of OIS' in process research
and development projects and intangible assets.
NOTE 6: Contingent Liability of Subsidiary
Consolidated results of operations do not include any charges related
to a contingent liability for sales taxes payable at the Company's OIS
subsidiary in an amount which will be calculated on the basis of numerous
probabilities that might, in the least favorable combination, reach $1.3
million.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
Results of Operations
Our consolidated net sales for the quarter ended September 30,1999 (
the "1999 Quarter") and six months ended September 30, 1999 (the "1999 Period")
decreased by 9% to $3,026,806 from $3,325,335 for the quarter ended September
30,1998 ( the "1998 Quarter") and by 1.8% to $6,685,141 from $6,806,671 for the
six month period ended September 30, 1998 (the "1998 Period"). Sales for OIS
decreased to $1,391,178 in the 1999 Quarter from $1,748,691 in the 1998 Quarter.
Cost of sales decreased 45.8% to $1,904,322 for the 1999 Quarter as
compared to $3,513,878 for the 1998 Quarter, and decreased 41% to $4,172,855 for
the 1999 Period from $6,971,302 during the 1998 period. In the quarter ended
September 30,1998, significant inventory reserves were recognized in connection
with the return of merchandise from Henry Shein Inc., a dental products
distributor. In addition, in the quarter ended September 30, 1998, we recognized
reserves for additional excess inventory that were not recognized during the
1999 Period.
Selling & Marketing expenses decreased 36.2% to $1,193,231 for the 1999
Quarter as compared to $1,870,587 for the 1998 Quarter, and decreased 36.3% to
$2,594,171 for the 1999 Period from $4,070,162 during the 1998 period. These
decreases were accomplished by reducing funds spent on advertising and
promotional marketing, professional services, trade show expenses, travel
expenses and salaries. The reductions were made in response to cash constraints
and the need to focus our selling and marketing efforts in the most productive
areas.
Research & development expenses decreased 14.5% to $1,247,517 for the 1999
Quarter as compared to $1,458,871 for the 1998 Quarter, and decreased 7.4% to
$2,451,266 for the 1999 Period from $2,647,912 during the 1998 period. This
decrease was accomplished by reducing salary expense, professional services and
samples. There has been no significant change in the status of our acquired in
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process research and development projects since that reported in our 10-K/A for
the year ended March 31, 1999.
General and administrative expenses decreased 39.9% to $2,117,293 for the
1999 Quarter as compared to $1,273,093 for the 1998 Quarter, and decreased 46.6%
to $2,043,935( including reduction of previously recorded professional fees of
$350,000) for the 1999 Period from $3,830,918 during the 1998 Period. We were
able to accomplish these reductions by decreasing our accounting and outside
services expense. Our legal expense also decreased substantially as we had
previously reached agreement in principle to settle the shareholder lawsuits
originally filed in the 1998 Quarter. In addition, we scaled back our public
relations efforts in the 1999 Quarter due to cash constraints.
In connection with the acquisition of OIS by Premier, OIS previously
recorded approximately $400,000 in professional fees and expenses owing to a
financial advisor. In May 1999, OIS reached an agreement with a financial
advisor to reduce the aggregate amount of professional fees and expenses
previously recorded to $50,000. Accordingly, the reduction of $350,000 in fees
and expenses during the six months ended September 30, 1999 is reflected in the
consolidated statements of operations and comprehensive loss as a separate
component of the loss from operations.
Total operating expense decreased 31.8% to $3,713,841 for the 1999 Quarter
as compared to $5,446,751 for the 1998 Quarter, and decreased 32.8% to
$7,089,372 for the 1999 Period to $10,548,992 during the 1998 period.
Net interest expense increased to $410,459 for the 1999 Quarter as compared
to $10,135 net interest income for the 1998 Quarter. Net interest expense
increased to $420,595 for the 1999 Period from $56,704 net interest income in
the 1998 Period. This increase was partially due to an increase in interest
expense at OIS which increased from $20,778 in the 1998 Quarter to $38,580 in
the 1999 Quarter. The balance of the increase was due to interest associated
with the $4,000,000 convertible debt offering which we completed in May 1999,
together with amortization of the related conversion benefit debt issuance costs
and liquidated damages.
We reported a net loss of $2,999,325 or $.20 per share in the 1999 Quarter,
down from a net loss of $5,661,580 or $.39 per share in the 1998 Quarter. We
reported a net loss of $5,095,193 or $.34 in the 1999 Period, down from a net
loss of $10,488,774 or $.71 per share in the 1998 Period.
Consolidated results of operations do not include any charges related to a
contingent liability for sales taxes payable at the Company's OIS subsidiary in
an amount which will be calculated on the basis of numerous probabilities that
might, in the least favorable combination, reach $1.3 million.
Liquidity and Capital Resources
At September 30, 1999, we had unrestricted cash and short-term
investments of a $321,684 and a working capital deficit of $1,195,342 as
compared to $888,767 of unrestricted cash and short term investments and a
working capital deficit of $1,362,799 at March 31, 1999. The decrease in our
cash is the result of slower cash receipts due to lower sales. Accounts
receivable (net ) totaled $748,059 on September 30,1999 as compared to
$1,342,917 at March 31, 1999, a decrease of $594,858. Inventories aggregated at
$6,619,830 at September 30,1999 as compared to $6,977,104 at March 31,1999 which
represents a 5% decrease or $357,274.
Other assets increased to $263,184 at September 30, 1999 from $21,953
at March 31, 1999. This increase was attributed to transaction costs associated
with securing $4,000,000 in convertible debentures in a private transaction.
Accounts payable increased $43,861 to $3,846,467 at September 30, 1999
as compared to $3,802,606 at March 31,1999 a result of slower payments to
<PAGE>
vendors for the 1999 Quarter. Accrued liabilities increased $48,319 to
$6,101,000 at September 30, 1999 from $6,052,691 at March 31, 1999. Long term
debt increased to $3,200,000 at September 30, 1999, exclusive of related
beneficial conversion features. The increase was due to issuing $4,000,000 of
convertible debentures to private investors as well as converting $1,000,000
into equity and the addition of $200,000 in principal for liquidated damages.
Our restricted cash increased by $1,548,706 in the 1999 Period. These funds,
which were received in connection with the issuance of the debentures, were
being held in escrow pending the effectiveness of a registration statement. In
October 1999, the related registration statement was declared effective and
funds were released to us.
At March 31, 1999, we had net operating loss carry forwards for federal
income tax purposes totaling approximately $56 million which will begin to
expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which may
limit the net operating loss carry forwards available for use in any given year
if certain events occur, including significant changes in stock ownership.
Utilization of the our net operating loss carry forwards to offset future income
may be limited.
Our future capital requirements will depend on many factors, including
the progress of our research and development activities, the scope and results
of preclinical studies and clinical trials, the costs and timing of regulatory
approvals, the rate of technology advances by us, competitive conditions within
the medical laser industry, the establishment of manufacturing capacity, the
outcome of the class action lawsuits and 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
presently seeking a credit facility to replace our former credit agreement which
expired in September 1998. Our ability to meet our working capital needs will be
dependent on our ability to achieve a positive cash flow from operations and
profitable operations. We have achieved increased cash collections during the
last six months and we have reduced cash used in operations through the
implementation of disciplined departmental budgets, reduced head count and
tighter monitoring of expenditures.
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
<PAGE>
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 had 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 and comprehensive loss. All
costs related to Year 2000 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 between $30,000-$200,000. 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 to accurately 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, we may experience disruptions in operations. Our projections of the
most significant disruption 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 compliance problems.
* the inability to collect receivables in a timely manner if any of the
accounting systems of our customers 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
No Disclosure Required.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Securities Class Action
On May 1, 1998, a class action suit (the "Valenti Litigation") was
commenced in the United States District Court for the Central District of
California pursuant to 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 we 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 have
also been 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. Such 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. 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 certain of our officers and
directors, including Colette Cozean, Michael Hiebert, Richard Roemer, Ronald
Higgins, Patrick Day, Grace Chin-Hsin Lin, G. Lynn Powell, and E. Donald
Shapiro. The complaint alleges, among other things, that such persons violated
their fiduciary duty to us by exposing us to liability under the securities
laws, failing to ensure that the we maintained adequate accounting controls, and
related alleged actions and omissions. Although we are a named defendant, the
lawsuit seeks to recover damages from the individual defendants on behalf of us.
Accordingly, it is not clear whether we have any liability or will incur any
material loss as a result of being named as a defendant in this matter.
Premier has reached an agreement in principle with lead plaintiffs and
their counsel to settle lawsuits.
<PAGE>
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
("SEC") has instituted an investigation concerning matters pertaining to our
revenue reporting practices, and related management issues. We are cooperating
with the SEC in connection with this investigation. This investigation, we
believe, generally relates to whether we, in SEC 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 SEC has not indicated that it is seeking to impose any
penalties on us or that it has 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 our 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 our normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of any of such litigation, as
well as the matters described above, 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.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
<PAGE>
During the quarter ended September 30, 1999, we issued an aggregate of
673,461 shares of Class A common stock to an investor upon conversion of
$1,000,000 principal amount of convertible debentures owned by the investor. The
purchasers were private investment funds. The Company previously paid
commissions in connection with the issuance of the debentures, but paid no new
commissions in connection with the conversion of the debentures. The issuance of
Class A common stock described above was exempt from registration under the
Securities Act of 1933 pursuant to section 3(a)(9) of such act.
Item 3. Defaults Upon Senior Securities.
--------------------------------
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Not Applicable.
Item 5. Other Information.
------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K: During the quarter ended September 30, 1999, the
Company did not file with the Securities and Exchange Commission any current
Report on Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PREMIER LASER SYSTEMS, INC.
Dated: November 12, 1999 By: /s/ Colette Cozean
-----------------------------------------
Colette Cozean, Chief Executive Officer
(duly authorized officer)
Dated: November 12, 1999 By: /s/ Robert V. Mahoney
-----------------------------------------
Robert V. Mahoney, Chief Financial Officer
and Executive Vice-President , Finance (Principal
financial and accounting officer)
(duly authorized officer)
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