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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended March 31, 1999.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ___________ to ____________.
Commission file number 0-25242
PREMIER LASER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0472684
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3 MORGAN, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (949) 859-0656
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock and Class B Warrants
-----------------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act or
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No |_|
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the registrant's voting stock held by
nonaffiliates was approximately $45,636,917 on October 5, 1999, based upon the
closing sale price of such stock on October 5, 1999.
Number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of October 5, 1999:
Class A Common Stock: 15,634,897 Shares
Class E-1 Common Stock: 1,257,461 Shares
Class E-2 Common Stock: 1,257,461 Shares
DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following
documents if incorporated by reference, and the part of the Form 10- K/A (e.g.,
Part I, Part II, etc.) into which the document is incorporated: (1) any annual
report to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933:
None.
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PART I
ITEM 1. BUSINESS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS AND INFORMATION RELATING TO PREMIER LASER SYSTEMS, INC. (THE
"COMPANY" OR "PREMIER") THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. SUCH
FORWARD-LOOKING STATEMENTS ARE PRINCIPALLY CONTAINED IN THE SECTIONS "BUSINESS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND INCLUDE, WITHOUT LIMITATION, OUR EXPECTATIONS AND ESTIMATES AS
TO OUR BUSINESS OPERATIONS, INCLUDING THE INTRODUCTION OF NEW PRODUCTS, AND
FUTURE FINANCIAL PERFORMANCE, INCLUDING GROWTH IN REVENUES AND NET INCOME AND
CASH FLOWS. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS ANNUAL REPORT, THE
WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "PLANS," "INTENDS" AND
SIMILAR EXPRESSIONS, AS THEY RELATE TO US OR OUR MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS
OF OUR MANAGEMENT, WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISK FACTORS DESCRIBED IN
THIS ANNUAL REPORT.
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.
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' manufacturing operations.
Premier is in discussions to acquire the remaining outstanding shares
of common stock of OIS, other than those already owned by it. Completion of this
acquisition is subject to a number of conditions, including completion and
execution of a final acquisition agreement and approval by the holders of a
majority of the outstanding shares of OIS common stock, excluding shares held by
Premier. We cannot assure you that these conditions will be satisfied or that
this transaction will be completed.
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.
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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.
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 began marketing a Digital Fundus
Imager and a Digital Slit Lamp. The Digital Fundus Imager provides similar
diagnostic capabilities to the WinStation products, except that it provides a
continuous image rather than a single frame image and it will be sold at a lower
price. The Digital Slit Lamp allows the eye care practitioner to obtain full
motion video 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
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marketing of the Er:YAG laser for these procedures shortly after receipt of FDA
clearance. In September 1999, we introduced the next generation of this product,
the Centauri XL(TM).
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. In August 1999, we received FDA 510(K)
clearance to market our BluLaze(TM) product, a solid-state technology light
delivery system for composite curing and teeth whitening. We began marketing the
product in September 1999.
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 , Arago and BluLaze products
have been cleared to market for this procedure.
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:
o important applications in selecting the appropriate procedure for
each refractive patient, preoperative surgical planning,
postoperative evaluation and patient follow-up
o improved pre-surgical planning for removal of a cloudy lens in
cataract surgery, assess and correct surgically induced
astigmatism, which is the most frequent complication caused by
intraocular lens surgery, potentially improve the calculation of
the implanted intraocular lens power, and support combination
cataract/refractive surgical procedures
o improved surgical outcomes in corneal transplants allowing the
practitioner to evaluate surgical technique and adjust
postoperative treatment
o analysis and diagnosis of astigmatism and various corneal diseases
o several applications in contact lens fitting and manufacturing
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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 the 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 recently began marketing 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."
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 for 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.
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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.
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
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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:
o is modularly designed and uses similar components for multiple laser
systems thereby reducing their overall cost
o 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
o 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 $29,500 to $126,000 and our
Nd:YAG lasers are currently priced from $25,000 to $80,000. Our diode lasers are
currently priced from $10,000 to $35,000 and our argon lasers are priced from
$5,500 to $22,000. Our recently introduced BluLaze product is priced at $5,000.
The prices of lasers within these ranges depend upon each model's power
capability and the features offered.
The following table presents, in summary form, 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
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<S> <C> <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, 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 (1.32u Tissue Melding............................................ Clinical trials
Nd:YAG)
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 Dental--Composite Curing.................................. Cleared to market
(argon), and BluLaze
Dental--Teeth Whitening................................... Cleared to market
</TABLE>
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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. 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 CO2 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 AND BLULAZE. The Arago and the MOD are gas
lasers . The BluLaze is a solid-state light delivery system. All three products
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 and
BluLaze(TM) light penetrate through the composite and have 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 lasers and BluLaze(TM) have also been 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. These
products have been shown to facilitate the use of these light activated
bleaching materials 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 and BluLaze(TM) have been cleared to market for this procedure. We
cannot assure you that the use of the argon laser or BluLaze(TM) for teeth
whitening will become a widely accepted practice in the dental industry. We plan
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to bundle our products with light activated whitening materials and co-market
these products with the manufacturers of these materials. We are currently
manufacturing the MOD lasers and BluLaze(TM) in-house. The Arago laser is
currently being supplied by LaserMed, Inc., a third party manufacturer.
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
- -------------------------------- -------------------------------------------------- ------------------------
<S> <C> <C>
Altair (CO2) Orthopedics General and Plastic Surgery,
Dermatology, Podiatry Ear, Nose and Throat,
Gynecology Pulmonary Procedures;
Neurosurgery and Ophthalmology....................... Cleared to market
Pegasus (Nd YAG) General Surgery, Urology, Gastrointestinal
40W/60W 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) Oral, Arthroscopic and General Surgery,
100W Gastroenterology, Gastrointestinal and
Genitourinary Procedures, Pulmonary
Procedures, Gynecology, Neurosurgery and
Ophthalmology........................................ Cleared to market
Sirius (.532u 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 Various specialties.................................. Cleared to market
(Combination)
</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
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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.
OCULAR IMAGING PRODUCTS
OIS currently offers three products to the ophthalmic market: the
WinStation 640 , the WinStation 1024 and the Digital Fundus Imager, and intends
to commence sales of 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 began marketing a Digital Fundus Imager and a Digital
Slit Lamp. The Digital Fundus Imager provides similar diagnostic capabilities to
the WinStation products, except that it provides a continuous image rather than
a single fram image, and it will be sold at a lower price. The Digital Slit Lamp
allows the eyecare practitioner to obtain full motion video 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 five area
sales managers, a 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 six 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.
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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.
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' CO2,
argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, we face competition
principally from:
o traditional surgical treatments using a tearing needle in anterior
capsulotomy
o phacoemulsification, an ultrasound device used to break up cataracts in
cataract removal procedures;
o corrective eyewear such as eyeglasses and contact lenses and surgical
treatments for refractive disorders using either an excimer laser or a
scalpel
o 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.
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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.
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, Premier has invested in excess of $8.8
million in company-sponsored research and development programs.
Company-sponsored research and development expense was $1.5 million for fiscal
1997, $3.1 million for fiscal 1998 and $4.2 million for fiscal 1999. These
amounts are net of approximately $450,000 received under a Small Business
Innovative Research Grant in fiscal 1997 and exclude $13.1 million of noncash
charges for in-process research and development related to acquisitions in
fiscal 1998 and 1997. We received approximately $250,000 in additional Small
Business Innovative 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 CO2
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.
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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.
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 34 patents and have an additional 23
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 these 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 otherwise 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.
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GOVERNMENT REGULATION
FDA REGULATION
The products that we manufacture are regulated as medical devices by
the FDA under the Food, Drug and Cosmetics 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 Food, Drug and Cosmetics Act and the
applicable regulations, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution, and promotion of medical devices.
Noncompliance with 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
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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 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: CO2 (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 (five 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 and BluLaze(TM). 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.
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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.
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 required 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
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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.
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 has 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 lasers, 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 September 30, 1999, Premier (including EyeSys, but excluding OIS)
employed 79 people, 5 of whom are employed on a part-time basis. None of these
employees are represented by a union. Twenty employees perform sales, marketing
and customer support activities. The remaining employees perform manufacturing,
financial, administration, regulatory, research and development and quality
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control activities. We also engage the services of many independent contractors
and temporary personnel. 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
consider our relationship with our employees to be good.
OIS EMPLOYEES
As of September 30, 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.
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 or
incorporated by reference in this report, 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 report 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:
o discuss our future expectations
o contain projections of our future results of operations or of our
financial condition
o 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 report, 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
report 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 IN THE PAST AND EXPECT TO INCUR FUTURE LOSSES WHICH
MAY NEGATIVELY IMPACT OUR ABILITY TO SUSTAIN OUR OPERATIONS
We incurred net losses of approximately $76,343,000 from April 1, 1995
through March 31, 1999, and approximately $30,841,000 for the fiscal year ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of
approximately $89,207,000. 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. 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.
THE HIGH COST OF DENTAL LASERS, SAFETY AND EFFICACY CONCERNS OF DENTISTS AND
PATIENTS AND THE SUBSTANTIAL MARKET ACCEPTANCE OF DENTAL DRILLS MAY PREVENT US
FROM ACHIEVING THE BROAD MARKET ACCEPTANCE WHICH IS NECESSARY FOR OUR
SUCCESS
Our products may not be accepted by the medical or dental community or
by patients. We do not know if these products can be successfully commercialized
on a broad basis. 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. 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. 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.
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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.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE THE OIS BUSINESS WITH OUR OTHER
OPERATIONS, WE MAY INCUR SUBSTANTIAL AND UNANTICIPATED EXPENSES AND OPERATING
INEFFICIENCIES
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, we are in discussions to acquire the remaining outstanding
stock of OIS. 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.
BECAUSE SOME OF THE COMPONENTS WE USE ARE NOT WIDELY AVAILABLE, THERE IS A RISK
THAT WE MAY NOT ALWAYS BE ABLE TO OBTAIN THESE COMPONENTS, WHICH COULD PREVENT
US FROM FILLING ORDERS ON TIME AND REDUCE OUR SALES
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. 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. In addition, our
Arago laser product is manufactured for us by one supplier, LaserMed, Inc.
Further, our 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. 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.
IN ORDER TO CONTINUE TO SELL OUR PRODUCTS IN FOREIGN MARKETS, WE MUST DEVELOP
AND MAINTAIN FOREIGN SALES DISTRIBUTION CHANNELS AND MANAGE POLITICAL AND
ECONOMIC INSTABILITY IN FOREIGN MARKETS AND DEAL WITH GOVERNMENTAL QUOTAS AND
OTHER REGULATIONS
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.
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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 PRODUCT SALES COULD SIGNIFICANTLY DECLINE
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.
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.
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IN OUR BUSINESS, WE COULD BECOME INVOLVED IN PATENT AND INTELLECTUAL PROPERTY
LITIGATION, IN WHICH AN ADVERSE DETERMINATION COULD SUBJECT US TO SIGNIFICANT
LIABILITIES AND RESTRICT OUR MANUFACTURING RIGHTS
In the past, we have received allegations that some of our laser and
diagnostic products infringe on other patents. There has been significant patent
litigation in the medical device 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.
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 United States Food
& 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.
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.
THE INTENSE COMPETITION WE FACE COULD RESULT IN REDUCED SALES AND DOWNWARD
PRESSURE ON THE PRICES OF OUR PRODUCTS
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 us. 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.
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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 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.
THE COVERAGE AND SPENDING LIMITATIONS CONTAINED IN HEALTH CARE REFORM PROPOSALS
WOULD, IF ADOPTED, REDUCE DEMAND FOR OUR PRODUCTS
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.
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Risks Related to this Offering
CHANGES IN REVENUE AND OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF OUR STOCK
TO FLUCTUATE, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL
CAPITAL
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 $2.1 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:
o the progress of research and development programs
o results of preclinical and clinical testing
o the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights
o developments and changes in our existing research
o licensing and other relationships
o the terms of any new collaborative, licensing and other
arrangements that we may establish
o the amount of legal, accounting and administrative costs
incurred in connection with pending litigation
External factors affecting our capital requirements include:
o the time and cost involved in obtaining regulatory approvals
o competing technological and market developments
We believe that our available short-term assets and investment income
will be sufficient to meet our operating expenses and capital expenditures
through the next 12 months. 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.
THE VOLATILITY OF OUR STOCK PRICE MAKES THESE SECURITIES RISKY FOR THOSE SEEKING
A STABLE INVESTMENT
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 $1.38 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 factors, including those described
elsewhere in this report.
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The market price for our common stock may also be affected by our
ability to 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 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.
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ITEM 2. PROPERTIES.
EXECUTIVE OFFICES AND MANUFACTURING FACILITIES
We lease approximately 41,000 square feet in one facility in Irvine,
California pursuant to a lease which expires in December 2000. This facility
contains our executive offices, service center and manufacturing space. While we
believe that our manufacturing and administrative facilities are adequate to
satisfy our needs through at least 2000, we may need to lease additional clean
room facilities in the future.
OIS FACILITIES
OIS leases, under a triple net lease, approximately 9,675 square feet
of office, manufacturing, and warehouse space in Sacramento, California under a
month-to-month arrangement, and leases approximately 200 square feet of space
for a sales office in Simsbury, Connecticut.
ITEM 3. 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. A judgment against us in this case could have a material
adverse effect on our business.
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. However, if IFS prevails
in its claims under its cross complaint, the judgment could have a material
adverse effect on our business.
IFS has agreed to license certain fiber technologies, to which we claim
exclusive license rights, to Coherent, Inc. ("Coherent"), 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.
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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.
Premier has reached a 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 requires
Premier to issue to the defendants an aggregate of 2,250,000 shares of its
common stock and requires Premier's insurance carrier would 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, then our business may be
adversely affected.
26
<PAGE>
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. However, the Securities and Exchange
Commission is empowered to seek a number of different penalties which if
successfully asserted, could materially and adversely affect our business.
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 have a material
adverse effect on our operations and financial condition.
OIS LITIGATION
On September 6, 1996, a former employee of OIS filed an action in
Superior Court in the County of Sacramento, California against OIS by alleging
that he was wrongfully terminated by OIS in retaliation for filing a grievance
against a co-employee for harassment and creation of a hostile work environment.
The suit seeks, among other things, lost wages, $150,000 in compensatory
damages, and punitive damages. OIS believes that this action is without merit
and intends to defend this action vigorously.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on February 26, 1999, at
which meeting our shareholders were asked to consider and vote upon (1) the
election of directors and (2) the 1998 Stock Option Plan. At such meeting the
shareholders elected the following individuals as directors:
Shares Voting
----------------------------
Director For Against
-------- --- -------
Colette Cozean, Ph.D. 13,618,155 310,472
Patrick J. Day 13,617,505 311,122
G. Lynn Powell, D.D.S. 13,624,584 304,043
Lawrence D. Ashcroft 13,624,151 304,476
Fredric J. Feldman, Ph.D. 13,623,584 305,043
John D. Hunkeler, M.D. 13,621,829 306,798
Lewis H. Stanton 13,623,584 305,043
Such individuals were elected to serve as directors until the next
annual meeting of shareholders and until their successors are elected and
qualified. Also at such meeting the shareholders approved the 1998 Stock Option
Plan with 3,057,512 votes for the proposal, 1,196,639 votes against and 153,885
votes abstaining.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A Common Stock and Class B Warrants are listed on the Nasdaq
National Market under the symbols "PLSIA" and "PLSIZ," respectively. At October
5, 1999, the approximate number of holders of record of our Class A Common Stock
were 778 and were 30 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 and Class E-2 Common Stock at October 5,
1999 was 323. Prior to January 6, 1998, we had Class A Warrants outstanding
which were listed on the Nasdaq National Market and the symbol "PLSIW," and
"Units," each consisting of one share of Class A Common Stock, one Class A
Warrant and one Class B Warrant, were listed on the Nasdaq 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.
Trading of our Class A Common Stock and Class B Warrants was suspended
by the Nasdaq Stock Market on May 26, 1998, when our former auditors withdrew
their audit opinion on the 1997 fiscal year. Trading of our securities on the
Nasdaq Stock Market National Market recommenced on October 22, 1998.
The following table sets forth the price range of the high and low
closing sale prices per share of our 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 1/8 11/32
Third Quarter ........................................ 1 3/8 4 1/32 9/32
Fourth Quarter (through October 5, 1999).............. 2 15/16 3 1/32 1/8 1/8
- --------------------
</TABLE>
(1) From May 26, 198 to October 22, 1998, the trading in our Class A Common
Stock and Class B Warrants was suspended by the Nasdaq Stock Market.
On May 22, 1998, the last day prior to suspension of trading, the last
reported sale price for our Common Stock and Class B Warrants on the Nasdaq
National Market was $4 3/16 and $13/16, respectively.
We have not paid dividends and do not anticipate declaring dividends on
our Common Stock in the foreseeable future.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table contains certain selected consolidated financial
data of Premier and is qualified by the more detailed financial statements and
notes thereto 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 ceased 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 ceased 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 thereto included herein and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- --------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF
OPERATIONS DATA:
Net sales.............................. $ 1,249 $ 1,704 $ 5,091 $ 10,418 $ 14,037
Cost of sales.......................... 1,298 3,324 3,649 17,942 13,662
--------- --------- --------- --------- ---------
Gross profit (loss).................... (49) (1,620) 1,442 (7,524) 375
Selling and marketing expenses......... 1,036 1,309 2,415 5,398 8,230
Research and development
expenses............................... 1,036 1,214 1,563 3,379 4,974
General and administrative
expenses............................... 1,747 1,709 2,050 5,461 9,891
Shareholder litigation settlement
expense ............................ -- -- -- -- 8,082
Write-off of investment................ -- -- 881 -- --
Termination of strategic alliance
with IBC............................. -- -- 331 -- --
In process research and develop-
ment acquired in acquisitions........ -- -- 250 12,800 --
Asset impairment charges............... -- -- -- 228 241
--------- --------- --------- --------- ---------
Loss from operations................... (3,868) (5,852) (6,048) (34,790) (31,043)
Interest income (expense), net ....... (322) 99 15 1,073 203
Extraordinary gains .................. 382 -- -- -- --
--------- --------- --------- --------- ---------
Net loss ............................. $ (3,808) $ (5,753) $ (6,033) $(33,717) $(30,840)
========= ========= ========= ========= =========
SELECTED PER SHARE DATA:
Loss per share before
extraordinary item(1)................ $ (1.59) $ (1.26) $ (1.03) $ (2.95) $ (2.11)
Extraordinary gain from
extinguishment of indebtedness....... .15 -- -- -- --
--------- --------- --------- --------- ---------
Net loss per share..................... $ (1.44) $ (1.26) $ (1.03) $ (2.95) $ (2.11)
========= ========= ========= ========= =========
Weighted average shares
outstanding(1)(2).................... 2,585 4,557 5,833 11,444 14,601
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
----- ----- ---- ---- ----
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
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 18,966 51,421 22,564
Long-term debt....................... -- -- -- -- --
Shareholders' equity................. 15,002 13,797 16,189 34,334 11,411
</TABLE>
(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 our 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. 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 REPORT.
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.
We currently own 51% of OIS. We are in discussions to acquire the
balance of the OIS shares that we do not presently own. No agreements have yet
been reached. 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 of OIS. The impact of the potential acquisition on our
financial position and operations is not presently determinable as the
acquisition purchase price has not been determined and we have not yet analyzed
the fair market value of OIS' in-process research and development projects and
intangible assets.
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
30
<PAGE>
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 35% to $14,037,000 for the year ended March 31,
1999 ("fiscal 1999") from $10,418,000 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.
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 12% 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 24% to $13,661,000 in fiscal 1999 from
$17,942,000 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 , a decrease in materials scrap expense
and a one-time charge to cost of sales of $548,000 relating to the acquisition
of obsolete inventories from EyeSys in fiscal 1998. 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 at OIS were $3,738,000 in fiscal 1999 as compared
with $243,000 for two months in fiscal 1998.
Selling and marketing expenses increased 53% to $8,230,000 in fiscal
1999 from $5,398,000 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 47% to $4,974,000 in fiscal
1999 from $3,379,000 in fiscal 1998. Approximately 58% 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.
General and administrative expenses increased 81% to $9,892,000 in
fiscal 1999 from $5,461,000 in fiscal 1998. Approximately 30% of the increase
was attributable to the general and administrative expense of OIS,
which was included for only two months in fiscal 1998. Legal fees 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. In fiscal 1998, there were
$1,813,000 of unusual charges related to acquisitions. These charges did not
occur in fiscal 1999.
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.
31
<PAGE>
March 31,
1999 1998 1997
---------------- ---------------- ----------------
Accounts receivable $ 3,340,075 $ 6,177,737 $ 1,718,312
Allowance $ 1,997,158 $ 1,224,845 $ 613,623
Net accounts
receivabe $ 1,342,917 $ 4,952,892 $ 1,052,312
Allowance as % of
accounts receivable 60% 20% 36%
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, as our 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.
In fiscal 1998 we recognized $12,800,000 for in process research and
development related to the acquisitions of 51% ownership in OIS and 100% of
EyeSys . No business acquisitions have occurred during fiscal 1999.
In March 1999, the board of directors of Data.Site adopted a plan to
discontinue its operations. As a result, we have effectively phased out the
operations of Data.Site; therefore, the amortization period of the goodwill
originally recorded in the acquisition of our interest in Data.Site was
accelerated to reduce the balance of the goodwill to zero as of March 31, 1999.
Additionally, we recognized asset impairment charges of $241,000 during the year
ended March 31, 1999 related to certain of Data.Site's property and equipment.
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.
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 Data.Site. Expenses incurred by us after March 31, 1999, have included
phones, shipping costs, computer lease costs and salaries.
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 our consolidated losses for fiscal 1999 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.
As a result of the above factors, we recognized a net loss of
$30,841,000 for fiscal 1999, or a $2.11 net loss per share as compared to a net
loss of $33,716,000 for fiscal 1998, or a net loss of $2.95 per share.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1997
Net sales increased 105% to $10,418,000 for 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 the Arago argon laser and vendor supply problems with our
Multi-Operatory Dentalaser argon laser.
32
<PAGE>
Sales from the United States to customers located in foreign markets
were $1,285,000, or 12% of total sales, in fiscal 1998 as compared to
$1,273,000, or 25% of total sales, in fiscal 1997.
Cost of sales increased 392% to $17,942,000 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, 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 distribution by Henry
Schein. Additionally, we recorded a one-time charge to cost of sales amounting
to $548,000 that related to obsolete inventories that we acquired from EyeSys in
fiscal 1998.
Selling and marketing expenses increased 124% to $5,398,000 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 116% to $3,379,000 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 166% to $5,461,000 in
fiscal 1998 from $2,050,000 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. We also recorded nonrecurring general and administrative expenses
that were associated with our acquisition of EyeSys and OIS in fiscal 1998. Such
costs included salaries and travel related expenses associated with the
individuals responsible for the transition and integration of the Eyesys
business ($830,000), related to moving and storage costs ($183,000) and other
costs ($200,000). In addition, subsequent to the closing of the EyeSys
acquisition, we determined that certain adjustments were required to properly
reflect the EyeSys opening balance sheet. Accordingly, we recorded general and
administrative expenses of $350,000 that related to license fees previously
received by EyeSys for which we believe it is probable that such fees will be
contested, and $250,000 that related to receivables acquired from EyeSys that we
consider to be uncollectible.
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. In connection with the acquisition of a majority interest in OIS,
Premier's management estimated the value of the purchased in-process research
and development as of the acquisition date to be $2,600,000.
In connection with the acquisition of EyeSys Technologies, Inc., we
acquired the following projects: (i) the System 2000 v.4; (ii) the 20/20
Handheld Topographer; (iii) the Innovative Corneal Topography Checkerboard; and
(iv) Spatial Resolved Refractometry. There were three other projects under way
at EyeSys which were based on technologies we elected not to pursue. In
connection with the acquisition of a majority interest in OIS, we acquired the
following projects: (i) future angiography projects to upgrade the existing
WinStation product line; (ii) a Glaucoma-Scope(R) modification project; (iii) a
reading center project; and (iv) a Digital Fundus Imager project. When these
projects were acquired, discounted cash flow analyses were performed by
management to place values on these projects. The analyses were each done as a
group and did not place values on each individual project.
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The System 2000 v.4 project was designed to produce a follow-on product
to the then existing System 2000 product. At the date we acquired EyeSys, the
project was in the final testing and product release preparation stage.
Continued testing, software duplication and documentation were needed to
complete the project. At the acquisition date, we expected to complete this
project and introduce the follow-on version of the System 2000 in early 1998.
The project was actually completed and new product was shipped in January 1998.
The 20/20 Handheld Topographer project was designed to produce a
handheld device to complement the System 2000. At the time we acquired EyeSys,
this project was in the prototyping phase. Tooling was under construction. In
order to complete the project, we needed to develop the required software,
finish product testing and transfer the product to manufacturing. At the time of
acquisition, we expected to complete this work toward the end of calendar year
1997 and ship product in early 1998. The project was actually completed in
February 1998 and the first product was shipped in March 1998.
The Innovative Corneal Topography Checkerboard project was designed to
produce a better way of performing corneal topography. At the time we acquired
EyeSys, this project was an ongoing research and development effort. Most of the
algorithms for checker detection and twist angle display had been developed.
Some early clinical trials had also been conducted. At the time of the
acquisition of EyeSys, this project was considered basic research. No specific
time frame had been established for the completion of the project and no
specific product had been designed which would incorporate the technology under
development. Subsequent to the acquisition, we have continued the development of
this technology. It has been combined with the Spatial Resolved Refractometry
project discussed below, and both of these technologies will be incorporated
into a product that we expect to introduce in the spring of 2000.
The Spatial Resolved Refractometry project was designed to develop a
new type of instrument to assess total eye refraction error spatially. At the
time of the acquisition of EyeSys, significant simulation and breadboard level
prototyping had been completed. This project also did not have a specific time
frame for completion, nor had a specific product been designed around this
project. Subsequent to the acquisition, we have continued to develop this
technology and have combined it with the Innovative Corneal Topography
Checkerboard project described above. Both of these technologies will be
incorporated into a product that we expect to introduce in the spring of 2000.
The angiography projects that we acquired in the OIS acquisition were
designed to provide upgrades to the existing OIS line of digital imaging
systems. The upgrades included a transition to the Windows NT operating system
and an upgrade from an 8-bit to a 12-bit camera to provide improved contrast for
enhanced image quality. At the time of the acquisition, alpha site testing was
underway. There remained to be completed beta site testing and release of the
project to manufacturing. The expected date of completion of the project was the
first quarter of calendar year 1998. Development efforts were actually completed
in the second quarter of 1998. We had expected to introduce products
incorporating these development efforts in the first quarter of 1998. These
products were actually introduced in the second quarter of 1998.
The Glaucoma-Scope project acquired in the OIS acquisition was designed
to enhance and improve the existing OIS Glaucoma-Scope product. At the
acquisition date, analysis, software development and clinical testing were
underway. It was expected that these development efforts would be completed in
the fourth quarter of calendar year 1998 and that the new product would be
introduced in the second quarter of 1999. In late 1998, OIS elected not to
pursue these efforts due to resource constraints and the market's continuing
concerns regarding Medicare reimbursement for procedures that would be performed
using this equipment.
The Reading Center project acquired in the OIS acquisition was designed
to provide documentation services for electronically transmitted digital images
acquired at remote locations. At the time of the acquisition, software
development was underway. Development efforts were expected to be completed in
the fourth quarter of calendar year 1998, and the concept was scheduled to be
introduced at the Annual Fall Meeting of the American Academy of Ophthalmology
in 1998. During the OIS fiscal year ended August 1998, OIS redefined the scope
and significantly down scaled the operation of its Reading Center to support
research and development efforts surrounding existing OIS products. OIS has
recently discontinued the operation of the Reading Center due to market
acceptance reasons.
Neither Premier nor OIS has a project cost accounting system. As such,
we are unable to provide specific information as to the timing and amount of
spending for each specific project. These projects have been developed by the
research and development teams of the respective companies without regard to the
segregation of specific projects from each other.
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When we acquired EyeSys, we acquired several patents in countries
outside the United States covering the use of Absolute Scale for Corneal
Topography. These patents expire in 2012. We also acquired a United States
patent covering a Method and Apparatus for Variable Block Size Interpolative
Coding of Images. This patent expires in 2013. We also acquired a pending United
States patent covering a Method of Corneal Analysis Using a Checkerboard Placido
Apparatus. This patent has subsequently been granted and it will expire in 2016.
We also acquired patents pending in countries outside the United States covering
a Multicamera Corneal Analysis System. These patents are still pending. The
entire patent portfolio of EyeSys was valued at $2,600,000 and was capitalized
at the time of acquisition.
In connection with the acquisitions of EyeSys and OIS we capitalized
goodwill of $400,000 and $2,600,000 and established an initial life of five
years. Our estimate of the useful life is based on factors such as the relative
development stage of in-process projects acquired, the potential for
technological obsolescence, and industry competition.
We commenced our integration efforts relating to EyeSys in October 1997
following the acquisition and largely completed the integration by the end of
fiscal 1998. Because we have not yet been able to acquire the remaining
ownership interest in OIS, we did not begin integrating OIS operations until the
end of fiscal 1999.
During fiscal 1998, and subsequent to the EyeSys acquisition closing
date, we determined that certain fixed assets acquired from EyeSys were
obsolete. Accordingly, we recorded an asset impairment charge of $228,000
related to these fixed assets.
Approximately $180,000 of losses were attributable to the minority
shareholder interest of OIS for fiscal 1998. However 100% of the loss was
absorbed by Premier due to the capital deficiency position of OIS. Losses
attributable to the minority shareholder of Data.Site were $349,000 and $60,000
for fiscal 1998 and 1997. However, Premier absorbed 100% of these losses due to
the capital deficiency position of Data.Site.
In summary, the operating results for 1998 were negatively impacted by
$12,800,000 of in process research and development charges,$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 $2.5
million in gross proceeds from a private offering and sale of convertible
debentures and will receive an additional $1.5 million in gross proceeds from
this financing upon the effectiveness of a registration statement on Form S-1
which has been filed with the SEC. 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 June 30, 1999, we had unrestricted cash and short-term investments
of $1,016,000 and working capital of $939,000 as compared to $889,000 of
unrestricted cash and short-term investments and a working capital deficit of
$1,363,000 at March 31, 1999. The improvement in our cash and working capital
positions is primarily the result of the $2 million of funds received in May
1999 combined with our efforts to control costs and manage cash flow.
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 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.
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Our future capital requirements will depend on many factors, including:
o the progress of our research and development activities
o the scope and results of pre-clinical studies and clinical trials
o the costs and timing of regulatory approvals
o the rate of technology advances
o competitive conditions within the medical laser industry
o the maintenance of manufacturing capacity
o the outcome of the class action lawsuits
o 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 have, and are not currently seeking, a credit facility to
replace our former credit agreement which expired in September 1998. Until we
achieve sustainable profitability and positive cash flow through increased sales
and cost containment, we remain dependent upon our ability to obtain outside
financing through the issuance of either debt or equity instruments. 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.
Should the projected level of sales and profitability not materialize,
we will experience a shortfall in cash flow from operations and will have to
seek outside sources of liquidity to fund our operations. These sources could
include additions to long term debt, new bank or other short-term debt, or
equity financing. To date, we have not commenced the exploration of these
alternatives.
If we find that we need additional capital and we are unable to raise
funds from the possible sources listed above, we may be able to extend the
period for which available funds would be adequate by deferring the introduction
of various products and otherwise scaling back operations. If we are unable to
generate the required funds, our ability to meet our obligations and to continue
our operations would be adversely affected. Failure to generate required
resources and to achieve sustainable profitability would have an adverse affect
on our financial position, results of operations, cash flows and prospects.
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 $2.5 million has been funded. The remaining
$1.5 million becomes available to us upon the effectiveness of a registration
statement on Form S-1 which has been filed with the SEC. 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 $1.5 million balance 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 carry forward 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 carry forward available for use in any given year
if certain events occur, including significant changes in stock ownership.
Utilization of our net operating loss carry forward to offset future income may
be limited.
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GOVERNMENT GRANTS
We have been awarded a Small Business Innovative Research 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:
o State of readiness
o Costs to address Year 2000 issues
o Risk assessment
o 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, from our major vendors and business
partners, we have received documentation in the form of information published on
websites stating that their systems are either Year 2000 compliant or that their
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 our 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 between $30,000 and $200,000. These expenditures will be
recorded as operating 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, we may experience disruptions in our operations. Our one vendor who
will not be compliant until November 1999 can be easily replaced. Our
projections of the most serious disruptions which could occur include:
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o 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.
o the inability to collect receivables 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are included in Part IV, Item 14 of this Form 10- K/A and are presented
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 1, 1998, we filed a Current Report on Form 8-K, reporting a
change in our certifying accountant. This Current Report was amended on June 15,
1998. In connection with the resignation of our former accountants, there was a
disagreement between us and our former accountants concerning certain accounting
matters. Reference is hereby made to such Current Reports for further discussion
of this matter.
On June 22, 1998, we engaged the firm of Haskell & White LLP as our
certifying accountant. The engagement of Haskell & White LLP was reported in a
Current Report on Form 8-K filed June 26, 1998.
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PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
Our directors and executive officers and their ages as of October 5,
1999 are as follows:
<TABLE>
<CAPTION>
NAME Age Position
---- --- --------
<S> <C> <C>
Colette Cozean, Ph.D.(1)............... 41 Chairman, Chief Executive Officer(1), President
and Director of Research
Robert V. Mahoney...................... 57 Vice President, Finance and Chief Financial Officer
Tom Hazen.............................. 57 Executive Vice President, Operations
Judith A. McCall....................... 59 Vice President, Human Resources, Administration and
Special Projects and Secretary
Jeffrey A. Anderson.................... 33 Vice President, Regulatory Affairs and Quality Assurance
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 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 are set forth below.
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 an M.S. in Electrical Engineering from Ohio State
University, a B.S. in biomedical engineering from the University of Southern
California, and a B.A. in physical sciences from Westmont College.
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ROBERT V. MAHONEY joined Premier in December 1998 as the Chief
Accounting Officer, and became Chief Financial Officer and Executive Vice
President-Finance 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.
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 an
MBA from UCLA.
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.
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.
LAWRENCE D. ASHCROFT joined the board of directors in December 1998.
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
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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.
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. He is
currently the Chief Financial Officer and Executive Vice President of University
Access, Inc., a position he has held since August 1999. Mr. Stanton was the
Executive Vice President, Chief Operating Officer and Chief Financial Officer of
MAI Systems Corporation . 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, and the
regulations thereunder, require our directors, executive officers and persons
who own more than 10% of a registered class of our equity securities to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of our and other equity securities, and to
furnish us with copies of all Section 16(a) forms which they file.
During the fiscal year ended March 31, 1999, all reports required to be
filed pursuant to section 16(a) of the Exchange Act were filed on a timely
basis.
During the fiscal year ended March 31, 1998, Jeffrey A. Anderson, J.
Randy Alexander and Judith A. McCall, each one of our executive officers, failed
to file on a timely basis an Initial Statement of Beneficial Ownership of
Securities on Form 3. During the fiscal year ended March 31, 1998, Tom Hazen,
also an executive officer, and Patrick J. Day, one of our directors, failed to
file on a timely basis, a Statement of Changes of Beneficial Ownership on Form
4.
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To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the two (2) fiscal years ended March 31, 1999 and 1998, all
other Section 16(a) filing requirements applicable to our officers, directors
and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid
to our Chief Executive Officer and each other executive officer 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) -------------------
FISCAL ----------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- ---- ------ ----- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D., 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 1999 $150,000 $20,000 0 --
President, Operations
- ---------------------
</TABLE>
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the named persons did not exceed the lesser of either $50,000 or 10% of
the total annual salary reported for 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 us 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 us 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.
42
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
During the fiscal year ended March 31, 1999, we did not grant any stock
options to either of the executive officers named in the Summary Compensation
Table above.
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>
Value of
Number of Unexercised In-the-
Unexercised Options Money Options at
Shares at 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.
COMPENSATION COMMITTEE REPORT TO SHAREHOLDERS
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).
43
<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 VP,
Regulatory Affairs and Quality Assurance, received a 33% raise and Judy McCall,
our Vice President, Human Resources, Administration and Special Projects and
Secretary received an 18% 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.
44
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN ON ONE OR MORE COMPANIES, PEER GROUPS,
INDUSTRY INDEXES AND/OR BROAD MARKETS
[Data below represented as a graph here]
<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
Note: Base price date is 11/30/94.
</TABLE>
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of June 25,
1999, regarding the beneficial ownership of Premier's Common Stock by: (i) all
persons known by the Company to beneficially own more than 5% of the Company's
Common Stock, (ii) each director and executive officer of the Company, and (iii)
all directors and executive officers as a group. The following table treats the
Common Stock, the Class E-1 Common Stock and the Class E-2 Common Stock as a
single class.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Name and Address Beneficial Common
of Beneficial Owner(1) Ownership Stock
- ---------------------- ----------- -----
<S> <C> <C>
Colette Cozean, Ph.D.(2).......................... 1,187,145 6.4%
Patrick J. Day(3)................................. 269,933 1.5%
G. Lynn Powell, D.D.S.(4)......................... 91,501 *
Lawrence D. Ashcroft (5).......................... 10,000 *
Fredric J. Feldman, Ph.D.(5)...................... 10,000 *
John D. Hunkeler, M.D., F.A.C.S.(5)............... 10,000 *
Lewis H. Stanton (5).............................. 10,000 *
Robert V. Mahoney (6)............................. 17,308 *
Tom Hazen (7)..................................... 52,006 *
Jeffrey Anderson (8).............................. 42,551 *
Judith A. McCall(9)............................... 85,696 *
All directors and executive officers as
a group (11 persons)(10).......................... 1,786,140 9.4%
- ------------------
* Less than 1%.
</TABLE>
(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, such shares, 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.
(6) Consists of 17,308 shares of Class A Common Stock subject to options
exercisable within 60 days.
46
<PAGE>
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On April 3, 1999, our board of directors extended the expiration date
of an option to purchase 4,522 shares of common stock until April 22, 2000. On
August 27, 1999, the board of directors extended the expiration date of options
to purchase 101,500 shares of common stock until October 22, 2000. The options
had previously been granted to T. Daniel Caruso 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.
47
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page in
Annual Report
on Form 10-K/A
------------
<S> <C>
(a) The following documents are filed as part of this Annual
Report on Form 10-K/A .
(1) Report of Haskell & White LLP, Independent Auditors................................. F-2
Consolidated Balance Sheets at March 31, 1999 (restated) and 1998 (restated).........F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended March 31, 1999, (restated) 1998 (restated) and 1997 (restated)...F-4
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1999, (restated) 1998 (restated) and 1997 (restated).................F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999 (restated), 1998 (restated) and 1997 (restated).......................F-7
Notes to Consolidated Financial Statements...........................................F-9
(2) Financial Statements Schedules
Schedule II-Valuation and Qualifying Accounts for the Years
Ended March 1999, 1998 and 1997.....................................................F-27
Schedules not listed above have been omitted because
the information required to be set forth therein is
not applicable or is shown in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)...................................................................... 48
</TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
48
<PAGE>
Exhibit
- -------
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).
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).
10.5 Exclusive Marketing Agreement dated July 26, 1994 between the
Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.
(incorporated herein by this reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
49
<PAGE>
Exhibit
- -------
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 Registration Rights Agreement dated June 3, 1996 between the
Registrant and Silicon Valley Bank (incorporated herein by this
reference to Exhibit 10.39 to the Registrant's Registration
Statement on Form SB-2 Registration No. 333-04219).
10.21 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).
50
<PAGE>
Exhibit
- -------
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).
10.25 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).
10.26 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).
10.27 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).
10.28 Secured Convertible Debenture Purchase Agreement dated May 17,
1999 between the Registrant and the investors signatory thereto.
10.29 Registration Rights Agreement dated May 17, 1999 between the
Registrant and the investors signatory thereto.
10.30 Warrant dated May 17, 1999 issued by the Registrant to certain
investors.
10.31 Intellectual Property Security Agreement dated May 17, 1999
between the Registrant and the secured parties signatory thereto.
10.32 Security Agreement dated May 17, 1999 between the Registrant and
the secured parties signatory thereto.
10.33 Form of 6% Secured Convertible Debenture dated May 17, 1999 issued
by the Registrant to certain investors.
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.*
23.2 Consent of Eisenhauer & Co.*
27 Financial Data Schedule.*
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).
51
<PAGE>
Exhibit
- -------
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).
- --------------------
* Filed herewith.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
(b) Financial Statement Schedules.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREMIER LASER SYSTEMS, INC.
By: /s/ Colette Cozean
-------------------------------------
Colette Cozean, Ph.D.,
Chief Executive Officer and President
53
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
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).
55
<PAGE>
Exhibit
- -------
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).
10.5 Exclusive Marketing Agreement dated July 26, 1994 between the
Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.
(incorporated herein by this reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
56
<PAGE>
Exhibit
- -------
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 Registration Rights Agreement dated June 3, 1996 between the
Registrant and Silicon Valley Bank (incorporated herein by this
reference to Exhibit 10.39 to the Registrant's Registration
Statement on Form SB-2 Registration No. 333-04219).
10.21 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).
10.25 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).
57
<PAGE>
Exhibit
- -------
10.26 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).
10.27 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).
10.28 Secured Convertible Debenture Purchase Agreement dated May 17,
1999 between the Registrant and the investors signatory thereto.
10.29 Registration Rights Agreement dated May 17, 1999 between the
Registrant and the investors signatory thereto.
10.30 Warrant dated May 17, 1999 issued by the Registrant to certain
investors.
10.31 Intellectual Property Security Agreement dated May 17, 1999
between the Registrant and the secured parties signatory thereto.
10.32 Security Agreement dated May 17, 1999 between the Registrant and
the secured parties signatory thereto.
10.33 Form of 6% Secured Convertible Debenture dated May 17, 1999 issued
by the Registrant to certain investors.
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.*
23.2 Consent of Eisenhauer & Co.*
27 Financial Data Schedule.*
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).
58
<PAGE>
Exhibit
- -------
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).
- --------------------
* Filed herewith.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
59
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
Report of Haskell & White LLP, Independent Auditors F-2
Consolidated Balance Sheets at March 31, 1999 (Restated) and 1998 (Restated) F-3
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31,
1999 (Restated), 1998 (Restated), and 1997 (Restated) F-4
Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 1999 (Restated),
1998 (Restated), and 1997 (Restated) F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1999 (Restated), 1998
(Restated), and 1997 (Restated) F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
<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 1999,
1998 and 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, except for Notes 2, 3 and 8,
as to which the date is October 4, 1999
F-2
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31,
-------------------------------
1999 1998
------------- -------------
(RESTATED) (RESTATED)
ASSETS
-------------------------------------
<S> <C> <C>
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 6,977,104 7,083,526
Prepaid expenses and other current assets 531,459 2,528,996
------------- -------------
Total current assets 9,790,247 36,104,846
Property and equipment, net 1,473,420 1,778,423
Intangible assets, net 11,278,560 13,104,006
Other assets 21,953 434,300
------------- -------------
Total assets $ 22,564,180 $ 51,421,575
============= =============
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 acquisition costs 1,074,067 2,080,184
Accrued purchase commitments 1,180,050 2,600,828
Accrued warranty 739,298 822,401
Due to joint venture partner 549,194 --
Unearned revenue 678,085 461,832
Other accrued liabilities 2,090,307 1,553,916
------------- -------------
Total current liabilities 11,153,046 17,088,059
------------- -------------
Commitments and contingencies (Notes 5, 6, 9, and 10)
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--16,859,355 including 2,250,000
subject to issuance for shareholder litigation settlement at
March 31, 1999, and 14,546,498 at March 31, 1998 89,354,340 81,436,013
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 (89,206,804) (58,366,095)
------------- -------------
Total shareholders' equity 11,411,134 34,333,516
------------- -------------
Total liabilities and shareholders' equity $ 22,564,180 $ 51,421,575
============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
Net sales $ 14,036,951 $ 10,417,841 $ 5,090,861
Cost of sales 13,661,526 17,942,290 3,648,539
-------------- -------------- --------------
Gross profit (loss) 375,425 (7,524,449) 1,442,322
Selling and marketing expenses 8,229,967 5,398,162 2,415,010
Research and development expenses 4,974,470 3,378,600 1,563,228
General and administrative expenses 9,891,899 5,460,606 2,050,184
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
Asset impairment charges 240,905 228,000 --
-------------- -------------- --------------
Loss from operations (31,043,586) (34,789,817) (6,048,850)
Interest income (expense), net 202,877 1,073,493 15,493
-------------- -------------- --------------
Net loss (30,840,709) (33,716,324) (6,033,357)
Items of other comprehensive income (loss) -- -- --
-------------- -------------- --------------
Comprehensive loss $ (30,840,709) $ (33,716,324) $ (6,033,357)
============== ============== ==============
Basic and diluted net loss per share
Net loss per share $ (2.11) $ (2.95) $ (1.03)
============== ============== ==============
Weighted average number of shares used in
computation of basic and diluted net loss
per share 14,601,294 11,444,123 5,833,326
============== ============== ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999 (RESTATED), 1998 (RESTATED), AND 1997 (RESTATED)
<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 (restated) 962,343 9,646,526 -- -- -- -- --
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 (restated) -- -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- ------------- ------------
Balance at March 31, 1998 (restated) 14,546,498 81,436,013 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 -- -- -- -- --
Stock options issued to Advisory
Board members, clinical
Evaluators, medical directors,
and other consultants (restated) -- 268,208 -- -- -- -- --
Net loss for the year (restated) -- -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- ------------- ------------
Balance at March 31, 1999 (restated) 16,859,355 $ 89,354,340 1,257,461 $ 4,769,878 1,257,461 $ 4,769,878 $ --
============= ============= ============= ============= ============= ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 (RESTATED), 1998 (RESTATED), AND 1997 (RESTATED)
<CAPTION>
COMMON UNREALIZED ADDITIONAL
CLASS B STOCK HOLDINGS PAID-IN ACCUMULATED
WARRANTS WARRANTS GAINS CAPITAL DEFICIT TOTAL
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <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) -- -- -- -- (6,033,357) (6,033,357)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 1997 (restated) 1,490,818 192,130 -- -- (24,649,771) 16,188,710
Common stock and options issued in
connection with business
acquisitions (restated). -- -- -- -- -- 9,646,526
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 (restated) -- -- -- -- (33,716,324) (33,716,324)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 1998 (restated) 1,531,712 192,130 -- -- (58,366,095) 34,333,516
Common stock reserved for issuance
in connection with litigation
settlement. -- -- -- -- -- 7,447,500
Exercise of stock options and
wrrants -- -- -- -- -- 202,619
Stock options issued to Advisory
Board members, clinical
Evaluators, medical directors,
and other consultants (restated). -- -- -- -- -- 268,208
Net loss for the year (restated) -- -- -- -- (30,840,709) (30,840,709)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 1999 (restated) $ 1,531,712 $ 192,130 $ -- $ -- $(89,206,804) $ 11,411,134
============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
Operating Activities:
Net loss $ (30,840,709) $ (33,716,324) $ (6,033,357)
Adjustment to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,473,711 1,464,517 841,467
Stock reserved for issuance in connection with shareholder
litigation settlement 7,447,500 -- --
Asset impairment charges 2,845,156 -- --
Write off of investment in Mattan Corporation -- -- 881,010
Acquired in-process research and development -- 12,800,000 250,000
Stock options issued to advisors and consultants 268,208 479,620 190,001
Termination of strategic alliance with IBC -- -- 125,000
Changes in operating assets and liabilities:
Accounts receivable 3,609,976 (2,253,457) (539,045)
Inventories (2,496,389) (2,207,836) (1,099,277)
Prepaid expenses and other current assets 1,919,115 (1,555,257) (342,438)
Accounts payable (1,764,114) 2,190,093 (184,769)
Accrued liabilities and unearned revenue (169,233) 7,482,925 319,936
Other -- 236,516 --
-------------- -------------- --------------
Net cash used in operating activities (15,706,779) (15,079,203) (5,591,472)
-------------- -------------- --------------
Investing Activities:
Maturities of short-term investments 9,666,918 -- --
Purchases of short-term investments -- (5,698,630) (3,968,288)
Patent and intangible expenditures (2,714,402) (3,140,617) (178,139)
Business acquisitions -- (5,002,172) (96,028)
Purchase of property and equipment (384,410) (888,294) (24,477)
Other -- (410,179) --
-------------- -------------- --------------
Net cash provided by (used in) investing activities 6,568,106 (15,139,892) (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 and 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
$9,646,526 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).
See accompanying notes.
F-7
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Upon review and comment by the staff
of the United States Securities and Exchange Commission, the
restatements originally presented have been modified with respect to
the initial accounting for the acquisition of Data.Site and the assets
contributed by the minority joint venture partner. The summary effects
that follow have been revised to reflect the resolution of this matter.
The following is a summary of the impact of the restatement on the 1997
consolidated balance sheet.
<TABLE>
<CAPTION>
<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 accounts payable 88,000
----------
6. Additional net loss $(443,000)
==========
</TABLE>
F-8
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a summary of the impact of the restatement on the 1997
consolidated statement of operations and comprehensive loss.
<TABLE>
<CAPTION>
<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. Other, net (10,000)
----------
Net increase in 1997 loss $(443,000)
==========
</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 -- 8,662,450
------------- ------------- -------------
Total assets $ 19,320,611 $ (355,000) $ 18,965,611
============= ============= =============
Current liabilities $ 2,688,901 $ 88,000 $ 2,776,901
Net shareholders' equity 16,631,710 (443,000) 16,188,710
------------- ------------- -------------
Total liabilities and shareholders' equity $ 19,320,611 $ (355,000) $ 18,965,611
============= ============= =============
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 1,736,184 314,000 2,050,184
Other expenses 3,025,978 -- 3,025,978
------------- ------------- -------------
Loss from operations (5,605,850) (443,000) (6,048,850)
Interest income, net 15,493 -- 15,493
------------- ------------- -------------
Net loss (5,590,357) (443,000) (6,033,357)
--
Items of other comprehensive income (loss) -- --
------------- ------------- -------------
Comprehensive loss $ (5,590,357) $ (443,000) $ (6,033,357)
============= ============= =============
Net loss per share $ (.96) $ (1.03)
</TABLE>
As the result of inquiries made by the staff of the United States
Securities and Exchange Commission, the Company has restated its 1999
and 1998 consolidated financial statements. These restatements resulted
primarily from adjustments to the accounting for the acquisitions of
EyeSys Technologies, Inc. (EyeSys) and Ophthalmic Imaging Systems
(OIS). Additionally, the consolidated statements of operations and
comprehensive loss and cash flows reflect reclassifications to
eliminate the original separate reporting of the cessation of
Data.Sites LLC's (Data.Site) operations as "discontinued operations."
F-9
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a summary of the impact of the restatement on the 1998
consolidated balance sheet.
<TABLE>
<CAPTION>
<S> <C> <C>
1. Cumulative effect of adjustments to the 1997 balance sheet for the Data.Site
accounting, including:
a. Reduction of intangible assets (goodwill) recorded $(2,113,725)
b. Elimination of the minority interest liability 1,764,736
c. Accumulated deficit--1997 profit and loss impact of elimination of
the minority interest liability (60,000)
2. Reduction of EyeSys purchase price for shares of Series A Common Stock
held in escrow and stock options ultimately not issued in connection with
the acquisition (2,110,900)
3. Recording of goodwill resulting from EyeSys and OIS acquisitions, initially
recorded as fully impaired 3,052,628
4. Reduction of goodwill (258,155)
5. Amortization of goodwill, based on initial life of 5 years (84,731)
6. Reclassification of purchase commitments from inventory reserves to current
liabilities 2,600,828
7. Overall reduction of net loss for the year 5,047,963
The following is a summary of the impact of the restatement on the 1998
consolidated statement of operations and comprehensive loss.
1. Reduction of merger and integration costs related to the shares of Series A
Common Stock held in escrow and stock options ultimately not issued $(2,110,900)
2. Reduction of merger and integration costs for amounts capitalized as
goodwill in the EyeSys and OIS acquisitions (3,052,628)
3. Amortization expense recorded on goodwill 84,731
4. Reduction of goodwill (258,155)
5. Elimination of loss allocated to minority interest in Data.Site 288,989
------------
Net decrease in the 1998 loss $(5,047,963)
============
</TABLE>
F-10
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The effects of these restatements on the Company's previously issued
1998 financial statements are summarized as follows:
<TABLE>
<CAPTION>
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
------------- ------------- -------------
<S> <C> <C> <C>
Consolidated balance sheet:
Current assets $ 33,504,018 $ 2,600,828 $ 36,104,846
Other assets 14,204,402 1,112,327 15,316,729
------------- ------------- -------------
Total assets $ 47,708,420 $ 3,713,155 $ 51,421,575
============= ============= =============
Current liabilities $ 14,487,231 $2,600,828 $ 17,088,059
Minority interest 1,764,736 (1,764,736) --
Net shareholders' equity 31,456,453 2,877,063 34,333,516
------------- ------------- -------------
Total liabilities and shareholders' equity $ 47,708,420 $ 3,713,155 $ 51,421,575
============= ============= =============
Consolidated statement of operations and comprehensive
loss:
Net sales $ 9,885,569 $ 532,272 $ 10,417,841
Cost of sales 17,234,288 (708,002) 17,942,290
------------- ------------- -------------
Gross profit (7,348,719) (175,730) (7,524,449)
Selling and marketing expenses 5,113,080 285,082 5,398,162
Research and development 3,087,360 291,240 3,378,600
General and administrative expenses 3,699,541 1,761,065 5,460,606
In-process research and development 12,800,000 -- 12,800,000
Asset impairment charges -- 228,000 228,000
Merger and integration costs 7,616,924 (7,616,924) --
------------- ------------- -------------
Loss from operations (39,665,624) 4,875,807 (34,789,817)
Interest income, net 1,073,493 -- 1,073,493
Minority interest in loss 273,811 (273,811) --
------------- ------------- -------------
Loss from continuing operations (38,318,320) 4,601,996 (33,716,324)
Loss from discontinued operations (445,967) 445,967 --
------------- ------------- -------------
Net loss and comprehensive loss $(38,764,287) $ 5,047,963 $(33,716,324)
============== ============= =============
Basic and diluted loss per share:
Loss from continuing operations $ (3.35) $ (2.95)
Loss from discontinued operations (.04) --
------------- -------------
Net loss per share $ (3.39) $ (2.95)
============= =============
</TABLE>
F-11
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following is a summary of the impact of the restatement on the 1999
consolidated balance sheet.
<TABLE>
<CAPTION>
<S> <C> <C>
1. Cumulative effect of adjustments to the 1998 balance sheet for the Data.Site
accounting, including:
a. Reduction of intangible assets (goodwill) recorded $(2,113,725)
b. Elimination of the minority interest liability 1,764,736
2. Accumulated deficit--1998 and 1997 profit and loss impact of elimination of
the minority interest liability 348,989
3. Cumulative effect of adjustments to the 1998 balance sheet for the reduction of
EyeSys purchase price for shares of Series A Common Stock held in escrow
and stock options ultimately not issued in connection with the acquisition (2,110,900)
4. Cumulative effect of adjustments to the 1998 balance sheet for the recording of
goodwill resulting from EyeSys and OIS acquisitions, initially recorded as
fully impaired, net of amortization (2,967,897)
5. Cumulative effect of 1998 goodwill reduction (258,155)
6. Write-off of Data.Site minority interest liability 1,764,736
7. Reversal of EyeSys stock option recoveries 1,110,900
8. Reduction of Data.Site goodwill 1,634,104
9. Amortization of goodwill, based on initial life of 5 years 610,525
10. Reclassification of purchase commitments from inventory reserves to current
liabilities 1,180,050
11. Overall increase in net loss for the year 1,879,763
The following is a summary of the impact of the restatement on the 1999
consolidated statement of operations and comprehensive loss.
1. Reversal of EyeSys stock option recoveries $ 1,110,900
2. Amortization expense recorded on goodwill 610,525
3. Reduction of Data.Site goodwill (1,634,104)
4. Write-off of Data.Site minority interest liability 1,764,736
------------
Net increase in the 1999 loss $ 1,879,763
============
</TABLE>
F-12
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The effects of these restatements on the Company's previously issued
1999 financial statements are summarized as follows:
<TABLE>
<CAPTION>
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
------------- ------------- -------------
<S> <C> <C> <C>
Consolidated balance sheet:
Current assets $ 8,610,197 $ 1,180,050 $ 9,790,247
Other assets 10,665,733 2,108,200 12,773,933
------------- ------------- -------------
Total assets $ 19,275,930 $ 3,288,250 $ 22,564,180
============= ============= =============
Current liabilities $ 9,972,996 $ 1,180,050 $ 11,153,046
Net shareholders' equity 9,302,934 2,108,200 11,411,134
------------- ------------- -------------
Total liabilities and shareholders' equity $ 19,275,930 $ 3,288,250 $ 22,564,180
============= ============= =============
Consolidated statement of operations and comprehensive loss:
Net sales $ 13,971,085 $ 65,866 $ 14,036,951
Cost of sales 13,405,182 256,344 13,661,526
------------- ------------- -------------
Gross profit 565,903 (190,478) 375,425
Selling and marketing expenses 7,930,444 299,523 8,229,967
Research and development 4,164,919 809,551 4,974,470
General and administrative expenses 6,625,247 3,266,652 9,891,899
Shareholder litigation settlement expenses 8,081,770 -- 8,081,770
Asset impairment charges -- 240,905 240,905
------------- ------------- -------------
Loss from operations (26,236,477) (4,807,109) (31,043,586)
Interest income, net 202,877 -- 202,877
Minority interest in loss (1,764,736) 1,764,736 --
------------- ------------- -------------
Loss from continuing operations (24,268,864) (6,571,845) (30,840,709)
Loss from discontinued operations (4,692,082) 4,692,082 --
------------- ------------- -------------
Net loss and comprehensive loss $(28,960,946) $ (1,879,763) $(30,840,709)
============= ============= =============
Basic and diluted loss per share:
Loss from continuing operations $ (1.56) $ (1.99)
Loss from discontinued operations (.30) --
------------- -------------
Net loss per share $ (1.86) $ (1.99)
============= =============
</TABLE>
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.
F-13
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. Related asset impairment charges are presented on
a separate line item in the accompanying consolidated statements of
operations and comprehensive loss and are described in Note 3.
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 and excess
inventories (9,807,563) (6,087,951)
------------ ------------
$ 6,977,104 $ 7,083,526
============ ============
</TABLE>
F-14
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
During the year ended March 31, 1998, the Company recorded a one-time
charge to cost of sales aggregating $2,600,828 that related to
noncancellable purchase commitments for items deemed to be excess
inventories. As of March 31, 1999 and March 31, 1998, the remaining
accrued noncancellable purchase commitments aggregated $1,180,050 and
$2,600,828, respectively. Because the items required to be purchased by
the Company under these commitments have been deemed to be excess
inventories, the Company records an increase in gross inventories and a
corresponding increase in the reserve for slow moving and excess
inventories upon receipt of related items.
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>
<CAPTION>
<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>
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 4,036,628 4,036,628
License agreements 110,000 110,000
------------ -----------
18,109,875 17,209,338
Less accumulated amortization (6,831,315) (4,105,332)
------------ -----------
$11,278,560 $13,104,006
============ ============
</TABLE>
F-15
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
During the year ended March 31, 1999, the Company accelerated the
amortization of goodwill recorded in connection with its acquisition of
51% of Data.Site because of the Company's decision to cease its funding
of Data.Site (Note 3). As a result of this acceleration, the Data.Site
goodwill is fully amortized as of March 31, 1999.
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 for
the years ended March 31, 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.
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.
F-16
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 adopted the disclosure requirements of
SFAS No. 131, however, management believes that the Company currently
has only one reportable operating segment.
During each of the years ended March 31, 1999, 1998 and 1997, the
Company's revenues can be attributed to the following geographic
locations:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
United States $12,500,000 $ 9,133,000 $3,818,000
Foreign countries 1,537,000 1,285,000 1,273,000
------------ ------------ -----------
$14,037,000 $10,418,000 $5,091,000
============ ============ ===========
</TABLE>
Revenues attributed to an individual foreign country were not material
for each of the years ended March 31, 1999, 1998 and 1997. The Company
has no material assets located in foreign countries.
F-17
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
All of the Company's revenues in each of the years ended March 31,
1999, 1998 and 1997 related to sales of products for a variety of
dental, ophthalmic and surgical applications. It would be impracticable
for the Company to report revenues from sales of each product or groups
of similar products as the Company does not use such financial
information to produce its general-purpose financial statements. During
the years ended March 31, 1999, 1998 and 1997, no single external
customer accounted for 10 percent or more of the Company's revenues.
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
agreement with Refractive Surgical Services, LLC (RSS), a Kansas City,
Missouri based entity engaged in the development of certain medical
outcomes software. Pursuant to this joint venture agreement, the
Company and RSS formed Data.Site, LLC (Data.Site). RSS contributed
substantially all of its tangible and intangible assets and
substantially all of its liabilities to Data.Site. The Company then
acquired a 51 percent interest in Data.Site through the issuance of
159,787 shares of its Class A common stock to RSS valued at
approximately $1.2 million. These 159,787 shares were valued at $7.53
per share, which represented the average quoted closing price of the
Company's common stock over the 15-day period prior to the effective
date of this transaction. The Company also committed to contribute
$1,000,000 in cash to Data.Site. This commitment was satisfied through
cash payments made by the Company to Data.Site of $900,000 and $100,000
during the years ended March 31, 1998 and 1997, respectively. Data.Site
has been consolidated with the Company commencing with the effective
date of the acquisition.
In connection with this transaction, the Company also assumed net
liabilities of Data.Site aggregating $305,000 on the date of
acquisition. The Company incurred no material direct or indirect
acquisition costs in connection with this transaction.
The Data.Site acquisition was accounted for under the purchase method
of accounting. Accordingly, the total acquisition purchase price, as
detailed above, of approximately $1.5 million was allocated among
receivables from RSS ($266,000), purchased software ($250,000) and
goodwill ($984,000). The goodwill is being amortized over an estimated
useful life of 5 years, which considers factors such as expected
technical obsolescence and industry competition.
Through March 31, 1999, the Company has funded Data.Site's operations
with advances of cash or equivalent services in the aggregate amount of
$2,036,452. 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 only two 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 member of $549,194.
F-18
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
As a result of the decision to phase out the operations of Data.Site,
the amortization period of the goodwill recorded in the Data.Site
acquisition was accelerated to reduce the balance of the Data.Site
goodwill to $0 as of March 31, 1999. Additionally, the Company
recognized asset impairment charges of $240,905 during the year ended
March 31, 1999 related to certain of Data.Site's property and
equipment.
EYESYS TECHNOLOGIES, INC.
On September 30, 1997, the Company closed its acquisition of 100% of
the equity interests of EyeSys Technologies, Inc. (EyeSys), a
manufacturer and distributor of a specialized line of diagnostic
ophthalmic equipment. The related purchase price consisted of 1,236,668
shares of the Company's common stock (including 319,684 shares held in
an escrow account), $470,000 in cash and options to purchase 210,000
shares of the Company's common stock. The common stock issued in this
transaction was valued at $9.716 per share. As provided in the related
purchase agreement, such amount was determined using average quoted
closing prices over the 15-day period prior to the acquisition 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, arbitration, or other legal process. The
319,684 escrowed shares have been excluded from the determination of
the acquisition 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. The estimated value of options to purchase 210,000
shares of the Company's common stock aggregated $214,500 and was
determined in accordance with SFAS 123. EyeSys has been consolidated
with the Company commencing with the acquisition date.
In connection with this transaction, the Company assumed net
liabilities of EyeSys in the amount of $2,183,489 on the acquisition
date. Additionally, under the provisions of EITF 94-3 and 95-3, the
Company recognized liabilities related to a noncancellable lease for
facilities previously utilized by EyeSys ($206,000) and employee
relocation costs ($187,000). As of March 31, 1999, the Company has
satisfied all relocation costs liabilities, but has not yet satisfied
the lease liability as the Company is attempting to negotiate a
settlement with the related landlord. Direct acquisition costs
associated with this transaction aggregated $1,035,845 and related
primarily to due diligence, legal, accounting, and closing costs. Such
amounts have been included in the purchase price of the acquisition.
The EyeSys acquisition was accounted for under the purchase method of
accounting. Accordingly, the total acquisition purchase price, as
detailed above, of approximately $13.2 million was allocated among
in-process research and development ($10,200,000) patents ($2,600,000)
and goodwill ($406,000). The acquired patents relate to developed
technologies for products generating revenue at the time of acquisition
and are being amortized over estimated useful lives up to 15 years. The
goodwill is being amortized over an estimated useful life of 5 years,
which considers factors such as expected technological obsolescence and
industry competition.
F-19
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (continued)
The Company obtained an independent third-party valuation report to
assist management in determining the value of the purchased in-process
research and development as of the acquisition date. The estimated
value of these projects was determined to be $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. In determining the estimated value of these
projects, the valuation report used the discounted cash flow method and
a 40% discount rate. The research and development projects acquired by
the Company, each related project's estimated percent complete at the
acquisition date, and the estimated timing of the commencement of cash
flows for each acquired project on the acquisition date are included in
the following table.
<TABLE>
<CAPTION>
ESTIMATE
PERCENT INITIAL EXPECTATION
ACQUIRED PROJECT: COMPLETE: OF CASH FLOWS:
----------------- ---------- --------------
<S> <C> <C>
System 2000 v.4 50% 1997
20/20 Handheld Topographer 85% 1997
Innovative Corneal Topography Checkerboard 75% 1998
Spatial Resolved Refractometry 100% 1998
</TABLE>
In addition to these in-process research and development projects,
there were three other projects under way at EyeSys, which were based
on technologies that the Company elected not to pursue.
Other costs incurred by the Company that related to the EyeSys
acquisition aggregated $2,540,585 and these costs were excluded from
the acquisition purchase price as they were not considered direct
acquisition costs in accordance with APB No. 16. Such costs included
salaries and travel related expenses associated with the individuals
responsible for the transition and integration of the EyeSys business
($830,000), related moving and storage costs ($135,000) and other costs
($200,000). These amounts are included in general and administrative
expenses in the accompanying consolidated statements of operations and
comprehensive loss. In addition, subsequent to the closing of the
EyeSys acquisition, the Company determined that certain adjustments
were required to properly reflect the EyeSys opening balance sheet.
Accordingly, the Company recorded general and administrative expenses
of $350,000 that related to license fees previously received by EyeSys
for which management believes it is probable that such fees will be
contested, and $250,000 that related to receivables acquired from
EyeSys that are considered uncollectible. The Company also recorded a
charge to cost of sales aggregating $548,000 that related to obsolete
inventories acquired from EyeSys, and an asset impairment charge of
$228,000 related to fixed assets acquired from EyeSys.
As of March 31, 1999 and 1998, the Company has accrued direct and
indirect acquisition costs of $785,980 and $1,620,224, respectively,
and such amounts are included in the accompanying consolidated balance
sheets. The major components of the liability that remains as of March
31, 1999 include potential refund of certain license fees ($350,000), a
noncancellable lease liability ($206,000) and legal fees ($150,000).
At the time of the acquisition of EyeSys, management recognized that
there were several major steps that had to be taken to integrate the
operations of EyeSys. These included:
o Shutting down the manufacturing operations of EyeSys and
moving that function to the Company's facility in Irvine,
California. This involved terminating the lease on an EyeSys
facility in Houston, Texas and terminating the EyeSys
employees engaged in manufacturing. The key employees involved
in this function were given a three-month pay package to
assist in the transition. This occurred in the first three
months following the acquisition.
o Relocating the marketing and sales function and the research
and development function to the Company's facility in Irvine
within the first three months following acquisition. This
involved moving one person in research and development and one
person in sales and marketing from Texas to California.
F-20
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (continued)
o Relocating the general and administrative functions from Texas
to California within the first three months following
acquisition. This involved retaining one EyeSys employee for a
several month period to assist in the transition.
With the exception of terminating the lease on the EyeSys Houston
facility, all of these actions were completed by March 31, 1998. The
Company is currently in a dispute with the landlord of the Houston
facility concerning the termination of the Houston lease.
In November 1998, EyeSys' corporate name was changed to EyeSys-Premier,
Inc.
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 and 24,734 shares of the Company's common stock valued
at $245,064. The common stock issued in this transaction was valued at
$9.908 per share. As provided in the related purchase agreement, such
amount was determined using average quoted closing prices over the
15-day period prior to the acquisition closing date. 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 consolidated
financial statements since February 1998.
In connection with this transaction, the Company assumed net
liabilities of OIS in the amount of $761,063 on the acquisition date.
Additionally, under the provisions of EITF 95-3, the Company recognized
liabilities related to "stay" bonuses for certain key OIS employees
that aggregated $266,600. As of March 31, 1999, the Company has
satisfied $150,000 of these liabilities and the remaining amounts are
expected to be satisfied when the functions performed by these key OIS
employees are integrated with the Company. Direct acquisition costs
associated with this transaction aggregated $673,650 and related
primarily to investment banker fees, due diligence, legal and
accounting costs. Such amounts have been included in the purchase price
of the acquisition.
The OIS acquisition has been accounted for under the purchase method of
accounting. Accordingly, the total acquisition purchase price, as
detailed above, of approximately $5.2 million was allocated among
in-process research and development ($2,600,000) and goodwill
($2,646,000). The goodwill is being amortized over an estimated useful
life of 5 years, which considers factors such as expected technological
obsolescence and industry competition.
F-21
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (continued)
The Company's management was responsible for the allocation of a
portion of the purchase price to in-process research and development.
The estimated value of these projects was determined to be $2,600,000,
which was recorded as in-process research and development acquired in
connection with business acquisitions in the consolidated statements of
operations and comprehensive loss. In determining the estimated value
of these projects, management used the discounted cash flow method and
a 25% discount rate. The research and development projects acquired by
the Company, each related project's estimated percent complete at the
acquisition date, and the estimated timing of the commencement of cash
flows for each acquired project on the acquisition date are included in
the following table.
<TABLE>
<CAPTION>
ESTIMATE INITIAL EXPECTATION
ACQUIRED PROJECT: PERCENT COMPLETE: OF CASH FLOWS:
----------------- ----------------- --------------
<S> <C> <C>
Future Angiography Products 85% 1999
Glaucoma-Scope(R)Modification Products 50% 2000
Digital Fundus Imager 80% 1999
</TABLE>
In addition to these in-process research and development projects,
there was one other project under way at OIS, which was based on
technologies that the Company elected not to pursue.
Other costs incurred by the Company that related to the OIS acquisition
aggregated $48,000 and these costs were excluded from the acquisition
purchase price as they were not considered direct acquisition costs in
accordance with APB No. 16. Such costs were primarily comprised of
moving, shipping and storage costs, and are included in general and
administrative expenses in the accompanying consolidated statements of
operations and comprehensive loss.
As of March 31, 1999 and 1998, the Company has accrued direct and
indirect acquisition costs of $288,087 and $459,960, respectively, and
such amounts are included in the accompanying consolidated balance
sheets. The major components of the liability that remains as of March
31, 1999 include legal and professional fees ($150,000), "stay" bonuses
($116,600) and other costs ($21,400).
At the time of the acquisition of a majority interest in OIS in
February 1998, management recognized that there were several major
steps that had to be taken to integrate the operations of OIS. These
included:
o Completing the acquisition of the remaining 49% interest of
OIS. This was expected to occur within the following six to
nine months after the acquisition of 51% of OIS, but has not
yet occurred.
o Transferring the manufacturing function of OIS from
Sacramento, California to the Company's facility in Irvine,
California. This was expected to occur within three months
following the acquisition of the balance of OIS and would have
involved the layoff of approximately six people.
o Transferring the sales and marketing function of OIS,
including technical support and customer service, from
Sacramento to Irvine. This would have involved the integration
of the sales force of OIS with our ophthalmic sales force, the
transfer of one technical support person and the layoff of
approximately seven persons. These actions were scheduled to
occur within three months following the acquisition of the
remaining 49% interest of OIS.
o Transferring the research and development function of OIS from
Sacramento to Irvine within three months following the
acquisition of the balance of OIS. This would have involved
the layoff of one person.
F-22
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (continued)
o Transferring the general and administrative functions of OIS
from Sacramento to Irvine within three months following the
acquisition of the balance of OIS. This would have involved
the layoff of approximately three people.
o Closing down the Sacramento facility of OIS approximately
three to four months following the acquisition of the balance
of OIS.
Although the Company is in continuing discussions with OIS concerning
the acquisition of the balance of OIS, it has not yet reached such an
agreement. Accordingly, the steps mentioned above have not occurred in
their entirety. As of March 1999, the Company has become an OEM
manufacturer for OIS. The Company also has integrated the sales forces
of the two companies in early fiscal year 1999. In addition, the
Company and OIS have begun to jointly develop new products which are
now selling.
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:
1998 1997
------------- ------------
Net sales $ 17,975,000 $ 12,638,000
Net loss (37,837,000) (9,799,000)
Net loss per share (3.31) (1.68)
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 the Company's acquisition of the 49% minority
interest of OIS.
None of the in-process research and development projects acquired in
fiscal year 1998 had yet reached technological feasibility as of the
date of acquisition 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.
F-23
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 accounts 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 June 30, 1999, March 31, 1999 and 1998, $16,157, $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 $331,000, $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:
2000 $ 245,412
2001 187,866
----------
$ 433,278
==========
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.
F-24
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (continued)
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 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, 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.
F-25
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (continued)
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.
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 Premier Laser Systems, Inc. or
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>
F-26
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (continued)
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.
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%, Premier Laser
Systems, Inc 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.
F-27
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY (continued)
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 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 aggregated $268,208 in 1999, $479,624 in 1998 and $190,001 in
1997.
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 $(32,890,324) $(35,663,782) $ (7,007,826)
Pro forma net loss per share $ (2.25) $ (3.12) $ (1.20)
</TABLE>
F-28
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY (continued)
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 2,841,669 $ 6.44 2,308,049 $ 5.51 1,423,949 $ 5.58
Granted 1,729,000 7.40 1,254,500 8.58 1,042,756 6.16
Exercised (57,115) 4.69 (395,271) 6.20 (1,899) 1.00
Forfeited/cancelled (268,953) 6.61 (325,609) 8.40 (156,757) 10.53
----------- ------- ----------- ------- ----------- -------
Outstanding--end of year 4,244,601 $ 6.84 2,841,669 $ 6.44 2,308,049 $ 5.51
=========== ======= =========== ======= =========== =======
</TABLE>
The weighted average remaining contractual life of options as of March
31, 1999 was as follows:
<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
PREMIER LASER SYSTEMS, INC. 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.
F-29
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $2.5
million in the private transaction and the Company expects to receive
an additional $1.5 million on the effective date of the registration
statement.
In September 1999, $1,000,000 of the Company's convertible debentures,
and the accrued interest thereon, was converted into 673,461 shares of
the Company's Class A common stock (unaudited).
In connection with the acquisition of OIS by Premier (Note 3), OIS
previously recorded approximately $400,000 in professional fees and
expenses owing to a financial advisor. In May 1999, OIS reached an
agreement with this financial advisor to reduce the aggregate amount of
professional fees and expenses previously recorded in connection with
the acquisition to $50,000 (unaudited).
F-30
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999 (RESTATED), 1998 (RESTATED) AND 1997 (RESTATED)
<CAPTION>
DEDUCTIONS/
BALANCE AT RECOVERIES BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION 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 6,087,951 3,719,612 -- -- 9,807,563
1998
Allowance for doubtful accounts
receivable $ 613,263 $ 385,407 $(149,801) $ 375,976 $1,224,845
Inventory reserves 1,203,324 3,103,627 -- 1,781,000 6,087,951
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
* Allowance amounts were recorded in connection with business acquisitions.
</TABLE>
F-31
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-1680) pertaining to the 1995 Stock Option Plan of Premier Laser
Systems, Inc., and related Prospectus, the Registration Statement (Form S-8 No.
333-27151) pertaining to the February 1996 Stock Option Plan of Premier Laser
Systems, Inc., and related Prospectus, the Registration Statement (Form S-8 No.
333-48379) pertaining to the 1996 Stock Option Plan of Premier Laser Systems,
Inc., and related Prospectus, and the Registration Statement (Form S-8 No.
333-29497) pertaining to the 1997 Stock Option Plan of Premier Laser Systems,
Inc., and related Prospectus, of our report dated June 9, 1999, except for Notes
2, 3 and 8, as to which the date is October 4, 1999, with respect to the
consolidated financial statements and schedule of Premier Laser Systems, Inc.,
included in its Annual Report (Form 10-K/A) for the year ended March 31, 1999.
HASKELL & WHITE LLP
Newport Beach, California
October 5, 1999
Eisenhauer & Co.
Investment Banking
October 7, 1999
Premier Laser Systems, Inc.
Attn: Mr. Robert Mahoney
3 Morgan
Irvine, CA 92618
Dear Mr. Mahoney:
We hereby consent to the reference herein to our report captioned
Valuation of Patents and The Charge For Purchased Research and Development and
to the incorporation by reference of this Annual Report on Form 10-K/A into all
Registration Statements on Form S-8 previously filed by Premier Laser Systems,
Inc.
Sincerely,
EISENHAUER & CO.
By: /s/ Bruce Eisenhauer
Bruce Eisenhauer
Managing Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 888,767
<SECURITIES> 0
<RECEIVABLES> 3,340,075
<ALLOWANCES> (1,997,158)
<INVENTORY> 6,977,104
<CURRENT-ASSETS> 9,790,247
<PP&E> 5,218,562
<DEPRECIATION> (3,745,142)
<TOTAL-ASSETS> 22,564,180
<CURRENT-LIABILITIES> 11,153,046
<BONDS> 0
0
0
<COMMON> 98,894,096
<OTHER-SE> (87,482,962)
<TOTAL-LIABILITY-AND-EQUITY> 22,564,180
<SALES> 14,036,951
<TOTAL-REVENUES> 14,036,951
<CGS> 13,661,526
<TOTAL-COSTS> 13,661,526
<OTHER-EXPENSES> 31,419,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (202,877)
<INCOME-PRETAX> (30,840,709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,840,709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,840,709)
<EPS-BASIC> (2.11)
<EPS-DILUTED> (2.11)
</TABLE>
