FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission file number 0-13966 ------- Premier Laser Systems, Inc. --------------------------- (Exact name of registrant as specified in its charter) California 33-0476284 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3 Morgan, Irvine, California 92618 ----------------------------------- (Address of principal executive offices) (949) 859-0656 -------------- (Registrant's telephone number, including area code) ----------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [_] No [_] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (September 30, 1998): Class A Common Stock: 14,693,111 Shares ---------- Class E-1 Common Stock: 1,257,461 Shares --------- Class E-2 Common Stock: 1,257,461 Shares --------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements PREMIER LASER SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEET September 30, March 31, 1998 1998 ------------- ------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 408,841 $ 9,722,514 Short-term investments 4,405,546 9,666,918 Restricted cash 50,000 2,150,000 Accounts receivable, net of allowance for sales returns and doubtful accounts of $1,364,715 at September 30, 1998 and $1,169,164 at March 31, 1998 2,861,544 4,952,892 Inventories 7,979,873 4,482,698 Prepaid expenses and other current assets 1,668,110 2,528,996 ------------ ------------ Total current assets 17,373,914 33,504,018 Property and equipment, net 2,376,889 1,778,423 Intangibles, net 11,954,382 11,991,679 Other assets 42,948 434,300 ------------ ------------ Total assets $ 31,748,133 $ 47,708,420 ============ ============ Liabilities and shareholders' equity Current liabilities: Accounts payable $ 3,044,191 $ 5,510,692 Line of credit 222,971 2,068,163 Accrued compensation and related costs 584,173 964,691 Other current liabilities 4,651,298 5,943,685 ------------ ------------ Total current liabilities 8,502,633 14,487,231 ------------ ------------ Commitments and contingencies Minority interest 1,596,591 1,764,736 Shareholders' equity: Preferred stock, no par value: Authorized shares--8,850,000 Issued and outstanding shares--none - - Common stock, Class A, no par value: Authorized shares--35,600,000 Issued and outstanding shares--14,693,111 at September 30, 1998 and 14,649,421 at March 31, 1998 83,993,338 83,546,913 Common stock, Class E-1, no par value: Authorized shares--2,200,000 Issued and outstanding shares--1,257,461 at September 30, 1998 and March 31, 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 September 30, 1998 and March 31, 1998 4,769,878 4,769,878 Warrants and options 1,723,842 1,723,842 Accumulated deficit (73,608,027) (63,354,058) ------------ ------------ Total shareholders' equity 21,648,909 31,456,453 ------------ ------------ Total liabilities and shareholders' equity $ 31,748,133 $ 47,708,420 ============ ============ See notes to condensed consolidated financial statements -2- PREMIER LASER SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) Three Months Ended Six Months Ended September 30, September 30, ------------------------- -------------------------- 1998 1997 1998 1997 ----------- ------------ ------------ ------------ Net sales $ 3,325,335 $ 3,051,767 $ 6,806,671 $ 5,157,214 Cost of sales 3,513,878 1,789,463 6,971,302 3,085,443 ----------- ------------ ------------ ------------ Gross profit (loss) (188,543) 1,262,304 (164,631) 2,071,771 Selling and marketing expenses 1,870,587 894,309 4,070,162 1,709,332 Research and development expenses 1,458,871 669,573 2,647,912 1,183,072 General and administrative expenses 1,964,662 640,256 3,596,113 1,004,242 In-process research and development acquired in the EyeSys Technologies acquisition 9,200,000 9,200,000 Merger related and integration costs 2,146,912 2,146,912 ----------- ------------ ------------ ------------ Loss from operations (5,482,663) (12,288,746) (10,478,818) (13,171,787) Minority interest in (income) loss of consolidated subsidiary (36,421) - 168,145 Interest income (expense), net 10,135 331,736 56,704 501,522 ----------- ------------ ------------ ------------ Net loss (5,508,949) (11,957,010) (10,253,969) (12,670,265) Other comprehensive income ----------- ------------ ------------ ------------ Comprehensive loss $(5,508,949) $(11,957,010) $(10,253,969) $(12,670,265) =========== ============ ============ ============ Net loss per share $ (0.38) $ (1.11) $ (0.70) $ (1.30) =========== ============ ============ ============ Shares used in the computation of net loss per share 14,686,844 10,755,941 14,675,426 9,758,207 =========== ============ ============ ============ See notes to condensed consolidated financial statements -3- PREMIER LASER SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended September 30, ---------------------------- 1998 1997 ------------ ------------ Operating Activities Net loss $(10,253,969) $(12,670,265) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 866,676 487,913 Purchased research and development 9,200,000 Stock options issued to advisors and others 230,000 1,010,200 Minority interest in loss of consolidated subsidiary (168,145) Changes in operating assets and liabilities: Accounts receivable 2,091,348 (2,304,193) Inventories (3,497,175) (1,894,509) Prepaid expenses and other current assets 860,886 (1,992,773) Accounts payable (2,466,501) 905,973 Accrued liabilities (1,672,905) 1,267,218 ------------ ------------ Net cash used in operating activities (14,009,785) (5,990,436) Investing activities (Purchase) sale of short-term investments 5,261,372 (5,806,947) Restricted cash used to (secure) retire credit line 2,100,000 (1,100,000) Purchase of property and equipment (803,452) (126,197) Other (233,041) (79,411) ------------ ------------ Net cash provided (used) by investing activities 6,324,879 (7,112,555) Financing activities Net borrowings (repayments) under line of credit (1,845,192) (800,000) Proceeds from exercise of stock options and warrants 216,425 24,422,856 Other 9,874 ------------ ------------ Net cash provided (used) by financing activities (1,628,767) 23,632,730 Net increase (decrease) in cash and cash equivalents (9,313,673) 10,529,739 Cash and cash equivalents at beginning of period 9,722,514 173,610 ------------ ------------ Cash and cash equivalents at end of period $ 408,841 $ 10,703,349 ============ ============ Supplemental disclosure of non cash activities (business acquisition): Fair value of tangible assets $9,154,500 Purchased research and development 9,200,000 Liabilities assumed (5,869,500) Stock issued (12,015,000) ------------ ------------ Cash paid $ 0 $ 470,000 ============ ============ See notes to condensed unaudited financial statements -4- PREMIER LASER SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED NOTE 1: General In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position of the Company at September 30, 1998 and the results of operations and cash flows for the three and six month periods ended September 30, 1998 and 1997. Although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for interim periods are not necessarily indicative of results of operations to be expected for the full year. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The financial information in this quarterly report should be read in conjunction with the March 31, 1998 consolidated financial statements and notes thereto included in the Company's Annual Report filed on Form 10-K (as amended) for the fiscal year ended March 31, 1998. 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 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 new business enterprises. The Company's ability to meet its working capital needs will be dependent on its ability to achieve sales targets, profitability, and a positive cash flow from operations. The Company believes that its present liquid assets and cash to be generated by sales of its inventories (including substantial amounts of reserved inventory) will be sufficient to meet its working capital requirements through at least March 31, 1999. Any significant uninsured settlement or judgment associated with the class action litigation (see Note 2) would seriously affect the Company's ability to satisfy its working capital requirements. NOTE 2: Litigation The Company entered into an agreement with Infrared Fiber Systems, Inc. (IFS), as a supplier of certain fiber optics, that expires in the fiscal year ending March 31, 2002. The agreement requires the supplier to sell exclusively to the Company fiber optics for medical and dental applications as long as the Company purchases defined minimum amounts. 5 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. The Company and certain of its 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. Although the Company intends to vigorously defend itself in the actions, the ultimate outcome is uncertain and no provision for any settlement has been reflected in the accompanying financial statements. Any significant adverse resolution of the actions would seriously impact the Company's financial condition. The Company maintains insurance coverage for these types of actions and has filed claims with the carrier. The policy has a limit of $5 million and a $250,000 deductible amount. The Company is involved in various other disputes and lawsuits arising from its normal operations. The litigation process in 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 matters will not have a material adverse impact on the 6 Company's financial position, results of operations or cash flows. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations. --------------------- Results of Operations The Company's net sales for the quarter and six months ended September 30, 1998 (the "1998 Periods") increased by 9% to $3,325,000 for the quarter and by 32% to $6,807,000 for the six month period as compared to the quarter and six month periods ended September 30, 1997 (the "1997 Periods"). The increases were attributable to the sales generated by Ophthalmic Imaging Systems (OIS), and EyeSys Technologies, Inc. (EyeSys), which were acquired between September 30, 1997 and February 28, 1998, offset by declining sales of dental products following the Company's disagreement with a national distributor of dental products (on whom the Company had previously relied to distribute certain of its products). Cost of sales increased 96% to $3,514,000 during the three months ended September 30, 1998 and 126% to $6,971,000 during the six months ended September 30, 1998 from $1,789,000 and $3,085,000 during the corresponding 1997 Periods. These increases were attributable to the higher sales levels and under- absorption of manufacturing personnel and overhead costs at the Company's Irvine facility, as well as higher costs for product warranties and associated customer support. Spending controls, which began to take effect during the three months ended September 30, 1998, were more than offset by a $580,000 reserve for additional excess inventory quantities recorded during that period, resulting in a higher cost of sales percentage than reported for the first quarter of the year. Selling and marketing expenses increased 109% to $1,871,000 during the three months ended September 30, 1998 and 138% to $4,070,000 during the six months ended September 30, 1998 from $894,000 and $1,709,000 reported for the corresponding 1997 Periods. Selling and marketing expenses of OIS (which were not included in the 1997 Periods), accounted for approximately one-half of the increases. Other factors which contributed to the increases during the 1998 Periods included the resumption of direct sales activities for dental products and a $180,000 bad debt provision during the second quarter for two specific accounts. Dental products' selling and marketing expenses for the three months ended September 30, 1998 were lower than those reported for the first quarter due to the lower level of trade show activity that typically occurs during the summer months. Research and development expenses increased 117% to $1,459,000 during the three months ended September 30, 1998 and 124% to $2,648,000 during the six month ended September 30, 1998 as compared to those same periods of the prior year. Research and development expenses of OIS accounted for approximately one- fourth of the increases. The balance of the increases arose from personnel additions, outside services, and component costs associated with new product development (both dental and ophthalmic products) at the Company's Irvine facility. General and administrative expenses increased 207% to $1,965,000 during the three months ended September 30, 1998 and 258% to $3,596,000 during the six months ended September 30, 1998 from $640,000 and $1,004,000 reported for the corresponding 1997 Periods. Approximately one- 7 third of the increases resulted from the OIS acquisition. Legal and accounting fees totaled almost $800,000 and $1,000,000 during the 1998 Periods as compared to less than $100,000 and $150,000 during the corresponding 1997 Periods. These increases ensued from the resignation of the Company's 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. Increases in accounting, human resources, and other administrative personnel at the Company's Irvine facility also contributed to the increases during the 1998 Periods. During the three months ended September 30, 1997, the Company acquired EyeSys Technologies and wrote-off $9,200,000 of in-process research and development and $2,147,000 of merger related and integration costs. No business acquisitions have occurred during the 1998 Periods. Net interest income decreased to $10,000 and $57,000 during the 1998 Periods from $332,000 and $502,000 recognized during the prior year periods. These declines reflecting the decreased cash available for the Company to invest, following the declines in sales levels for laser products, the higher operating expenses discussed above, business acquisitions, and inventory increases. Liquidity and Capital Resources The Company's operations have been financed through the proceeds from the sale of the Company's equity securities, including an initial public offering in December 1994, 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. The Company's principal capital requirements include the financing of inventory, accounts receivable, research and development activities, the development of an ophthalmic and a surgical sales force, the development of marketing programs and the acquisition and/or licensing of patents. At September 30, 1998, the Company had unrestricted cash and short-term investments of $4,814,000 and its working capital was $8,871,000. The decrease in cash and short-term investments since March 31, 1998 was primarily the result of the losses for the 1998 Periods, 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 the 1997 Periods was positive as the net result of capital stock transactions, reduced by operating requirements and investing activities. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development activities, the scope and results of preclinical studies and clinical trials, the costs and timing of regulatory approvals, the rate of technology advances by the Company, competitive conditions within the medical laser industry, the maintenance of manufacturing capacity, the outcome of the class action lawsuits and the establishment of collaborative marketing and other relationships which may either involve cash infusions to the Company, or require additional cash from the Company. The Company's ability to meet its working 8 capital needs will be dependent on its ability to achieve sales targets, profitability and a positive cash flow from operations. No assurance can be given that the Company will be able to achieve sales targets, profitable operations or a positive cash flow from operations. The Company believes that its present liquid assets and cash to be generated by sales of its inventories (including substantial amounts of reserved inventory) will be sufficient to meet its working capital requirements through at least March 31, 1999. Any significant uninsured settlement or judgment associated with the class action litigation would seriously affect the Company's ability to satisfy its working capital requirements. If additional capital is required, the Company would explore several financing alternatives including stock issuances, licensing of technology and marketing rights, and/or bank financing. There can be no assurances that the Company would be successful in obtaining additional financing. Year 2000 Issues During the quarter ended September 30, 1998, the Company upgraded its computerized accounting system to a release that is compliant with Year 2000 dating sensitivities. The costs of this upgrade were minimal. The Company has not prepared a formal assessment of the internal and external Year 2000 issues that would have a significant impact on its products. The Company's laser products are not date sensitive. Diagnostic products, on the other hand, contain date sensitive data bases. The Company's internal software engineers are developing a plan to have a test version of the new software available by mid-1999. The costs of software modification are not expected to be material. Any diagnostic products currently in the market that are covered by a warranty will be upgraded at no charge to the customer. The Company plans to charge upgrade fees for previously sold products that are outside of the warranty period. The Company expects that its existing warranty reserves will be adequate to absorb the upgrade costs. Seasonality To date, the Company's revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows in these quarters, significantly reduced sales during the summer and the effect of year end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. Item 3. Quantitative and Qualitative Disclosures about Market Risk. ----------------------------------------------------------- No disclosure required. PART II. OTHER INFORMATION Item 1. Legal Proceedings. ------------------ 9 Securities Class Action On May 1, 1998, a class action suit (the "Valenti Litigation") was commenced in the United States District Court for the Central District of California pursuant to federal securities laws on behalf of purchasers of the Company's securities during the period from February 12, 1998 through April 15, 1998. The complaint alleges that the Company and certain of its officers and directors violated the federal securities laws by issuing false and misleading statements and omitting material facts regarding the Company's financial results and operations during such period. Among other things, the complaint alleges that the defendants materially misstated the Company's financial results for the fiscal quarter ended December 31, 1997 and that as a result of such misstatements, the plaintiff suffered damages as a result of a decrease in the market price of the Company's publicly traded securities. After the filing of such complaint, a number of similar complaints have also been filed in the United States District Court for the Central District of California, and the California Superior Court for the County of Orange, seeking certification as class actions, and covering class periods commencing as early as May 7, 1997. Such complaints alleged facts similar to those described above with respect to the Valenti Litigation, as well as allegations that the Company artificially inflated the price of its outstanding publicly traded securities as a result of misrepresentations relating to the market and prospects for sale of its Centauri Er:YAG laser. All of the above described complaints seek monetary damages in unspecified amounts, together with attorneys' fees, interest, costs and related remedies. The Company has been successful in having all of such securities class actions lawsuits consolidated into a single action in the federal court and a single action in the state court. The Company has 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 the Company, on behalf of the Company, against certain of the Company's officers and directors, including Colette Cozean, Michael Hiebert, Richard Roemer, Ronald Higgins, Patrick Day, Grace Chin-Hsin Lin, G. Lynn Powell, and E. Donald Shapiro. The complaint alleges, among other things, that such persons violated their fiduciary duty to the Company by exposing the Company to liability under the securities laws, failing to ensure that the Company maintained adequate accounting controls, and related alleged actions and omissions. Although the Company is a named defendant, the lawsuit seeks to recover damages from the individual defendants on behalf of the Company. Accordingly, it is not clear whether the Company will have any liability or incur any material loss as a result of being named as a defendant in this matter. Investigations and Other Matters The Company has been the subject of recent Securities and Exchange Commission ("SEC") and Nasdaq Stock Market investigations concerning matters pertaining to the Company's revenue reporting practices, and related management issues. The Company has cooperated with both the SEC and the Nasdaq in connection with both of these investigations. These investigations, the Company believes, generally relate to whether the Company, in SEC filings and press releases issued prior to 10 the end of the 1998 fiscal year, properly recognized revenues for transactions occurring during fiscal 1997, and during interim periods of fiscal 1998. To date, the SEC has not indicated that it is seeking to impose any penalties on the Company or that it has made any specific finding with respect to the Company's accounting practices. In July 1998, the Nasdaq Stock Market notified the Company of a proposed delisting of the Company's securities from the Nasdaq Stock Market. The Company filed an appeal of this proposed action and attended a hearing on September 17, 1998. On October 21, 1998 the Company received notification that the Nasdaq Listing Qualifications Panel had determined that the trading of the Company's stock and warrants would resume, effective October 22, 1998. That notification indicated that the decision of the panel was subject to later review by the Nasdaq Listing and Hearing Review Council. The Company is 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 any of such litigation, as well as the matters described above, may adversely affect the Company. Item 2. Changes in Securities. ---------------------- Not applicable. Item 3. Defaults Upon Senior Securities. -------------------------------- Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- Not Applicable. Item 5. Other Information. ------------------ None. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits: 27 Financial Data Schedule (filed herewith) (b) Reports on Form 8-K: None. 11 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIER LASER SYSTEMS, INC. Dated: November 16, 1998 By: /s/ COLETTE COZEAN ----------------------------------------- Colette Cozean, Chief Executive Officer (duly authorized officer) Dated: November 16, 1998 By: /s/ CHARLES J. OLSON ----------------------------------------- Charles J. Olson, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 12