U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
(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.
The sole purpose of this Amendment No. 2 to the Annual Report on Form 10-K/A of
Premier Laser Systems, Inc. is to provide updated financial statements and
report of the registrant's independent accountants, as set forth below.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item,
as amended, are included in Part IV, Item 14 of this Form 10-K/A and are
presented beginning on page F-1.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page in
Annual Report
on Form 10-K/A
------------
(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)......................................................................
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).
Exhibit
- -------
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).
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).
Exhibit
- -------
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).
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).
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. (previously filed)
23.2 Consent of Eisenhauer & Co. (previously filed)
27 Financial Data Schedule. (previously filed)
99.1 Form of Class D Warrant (OIS transaction) (incorporated herein by
this reference to Exhibit 99.3 to the Registrant's Current Report
on From 8-K filed March 9, 1998).
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.
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/ Michael Quinn
-------------------------------------
Michael Quinn
Chief Executive Officer and President
PREMIER LASER SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
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
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.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has an accumulated deficit, cash flow difficulties and, in
February 2000, laid-off a substantial portion of its employees. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
HASKELL & WHITE LLP
Irvine, California
June 9, 1999, except for Notes 2, 3 and 8,
as to which the date is October 4, 1999
and the fourth paragraph of Note 1,
as to which the date is February 17, 2000
F-2
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
-------------------------------
1999 1998
------------- -------------
(RESTATED) (RESTATED)
ASSETS
-------------------------------------
Current assets:
Cash and cash equivalents $ 888,767 $ 9,722,514
Short-term investments -- 9,666,918
Restricted cash 50,000 2,150,000
Accounts receivable, net of allowance for doubtful accounts and sales
returns of $1,997,158 and $1,224,845, respectively 1,342,917 4,952,892
Inventories, net 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
============= =============
See accompanying notes.
F-3
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED MARCH 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(RESTATED) (RESTATED) (RESTATED)
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
============== ============== ==============
See accompanying notes.
F-4
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999 (RESTATED), 1998 (RESTATED), AND 1997 (RESTATED)
COMMON STOCK COMMON STOCK COMMON STOCK
CLASS A CLASS E-1 CLASS E-2
--------------------------- --------------------------- --------------------------- CLASS A
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
------------- ------------- ------------- ------------- ------------- ------------- ------------
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 $ --
============= ============= ============= ============= ============= ============= ============
See accompanying notes.
F-5
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999 (RESTATED), 1998 (RESTATED), AND 1997 (RESTATED)
COMMON UNREALIZED ADDITIONAL
CLASS B STOCK HOLDINGS PAID-IN ACCUMULATED
WARRANTS WARRANTS GAINS CAPITAL DEFICIT TOTAL
------------- ------------- ------------- ------------- ------------- -------------
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
============= ============= ============= ============= ============= =============
See accompanying notes.
F-6
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
----------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(RESTATED) (RESTATED) (RESTATED)
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
============== ============== ==============
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
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF OPERATIONS AND LIQUIDITY
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.
As a result of the factors described above, the Company is experiencing
significant strains on its operating cash flow. On February 16, 2000,
the Company placed 54 of its 80 employees on temporary unpaid leave in
order to address its short term liquidity issues. These conditions
raise substantial doubt about the Company's ability to continue as a
going concern. In response to these matters, the Company's management
is seeking additional debt or equity financing. The Company may have to
pursue restructuring alternatives, as appropriate, including a possible
restructuring through the Bankruptcy Code. In February 2000, management
engaged the services of a consulting firm to assist in identifying and
assessing strategic and financial alternatives.
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.
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)
==========
F-8
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.
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)
==========
The effects on the Company's previously issued 1997 financial
statements are summarized as follows:
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
------------- ------------- -------------
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)
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
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.
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)
============
F-10
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:
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
------------- ------------- -------------
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)
============= =============
F-11
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.
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
============
F-12
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:
PREVIOUSLY INCREASE
REPORTED (DECREASE) RESTATED
------------- ------------- -------------
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)
============= =============
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
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:
MARCH 31, MARCH 31,
1999 1998
------------ ------------
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
============ ============
F-14
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:
MARCH 31, MARCH 31,
1999 1998
------------ ------------
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
============ ============
Depreciation of property and equipment is calculated on a straight-line
basis over the following estimated useful lives:
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
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:
MARCH 31, MARCH 31,
1999 1998
------------ -----------
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
============ ============
F-15
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
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:
1999 1998 1997
------------ ------------ -----------
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
============ ============ ===========
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
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
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
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.
ESTIMATE
PERCENT INITIAL EXPECTATION
ACQUIRED PROJECT: COMPLETE: OF CASH FLOWS:
----------------- ---------- --------------
System 2000 v.4 50% 1997
20/20 Handheld Topographer 85% 1997
Innovative Corneal Topography Checkerboard 75% 1998
Spatial Resolved Refractometry 100% 1998
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
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
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.
ESTIMATE INITIAL EXPECTATION
ACQUIRED PROJECT: PERCENT COMPLETE: OF CASH FLOWS:
----------------- ----------------- --------------
Future Angiography Products 85% 1999
Glaucoma-Scope(R)Modification Products 50% 2000
Digital Fundus Imager 80% 1999
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
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
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
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
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:
1999 1998
------------- -------------
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 $ -- $ --
============= =============
F-26
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:
1999 1998 1997
---------- ---------- ----------
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 -- % -- % -- %
========== ========== ==========
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
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:
1999 1998 1997
----------- ---------- ----------
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%
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:
1999 1998 1997
------------- ------------- -------------
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)
F-28
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):
1999 1998 1997
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ------- ----------- ------- ----------- -------
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
=========== ======= =========== ======= =========== =======
The weighted average remaining contractual life of options as of March
31, 1999 was as follows:
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE YEARS PRICE EXERCISABLE PRICE
------------------------ ----------- ---------- ------- ------------ -------
$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
=========== ============
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
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
PREMIER LASER SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999 (RESTATED), 1998 (RESTATED) AND 1997 (RESTATED)
DEDUCTIONS/
BALANCE AT RECOVERIES BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION PERIOD ADDITIONS WRITE-OFF OTHER * PERIOD
----------------------------- ------------ --------- ----------- ------- ----------
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.
F-31