U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 $32,019,546 on June 25, 1999, based upon the
closing sale price of such stock on June 25, 1999.
Number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of June 25, 1999:
Class A Common Stock: 14,961,436 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 (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.
PART I
ITEM 1. BUSINESS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS AND INFORMATION RELATING TO PREMIER LASER SYSTEMS, INC. (THE
"COMPANY" OR "PREMIER") THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. SUCH
FORWARD-LOOKING STATEMENTS ARE PRINCIPALLY CONTAINED IN THE SECTIONS "BUSINESS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND INCLUDE, WITHOUT LIMITATION, OUR EXPECTATIONS AND ESTIMATES AS
TO OUR BUSINESS OPERATIONS, INCLUDING THE INTRODUCTION OF NEW PRODUCTS, AND
FUTURE FINANCIAL PERFORMANCE, INCLUDING GROWTH IN REVENUES AND NET INCOME AND
CASH FLOWS. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS ANNUAL REPORT, THE
WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "PLANS," "INTENDS" AND
SIMILAR EXPRESSIONS, AS THEY RELATE TO US OR OUR MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS
OF OUR MANAGEMENT, WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISK FACTORS DESCRIBED IN
THIS ANNUAL REPORT.
BUSINESS
OVERVIEW
Premier develops, manufactures and markets several lines of proprietary
medical lasers, fiberoptic delivery systems and associated products for a
variety of dental, ophthalmic and surgical applications. In addition, through
EyeSys, we develop, manufacture and market diagnostic systems which provide
ophthalmic practitioners with images of the shape and curvature of the human
cornea. Premier's majority owned subsidiary, OIS, is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems and
image enhancement and analysis software for use by practitioners in the ocular
health field.
Premier commenced operations in August 1991 after acquiring
substantially all of the assets of Pfizer Laser Systems, a division of Pfizer
HPG which is a wholly-owned subsidiary of Pfizer, Inc. In 1993, Premier acquired
from Proclosure, Inc. technology, assets and proprietary rights relating to a
laser system for tissue fusion, and completed its initial public offering of
securities in 1994. In September 1997, Premier acquired EyeSys in exchange for
cash and securities. Premier acquired a majority of the outstanding common stock
of OIS in several transactions commencing in October 1997 and ending in February
1998. As of this date, Premier remains a majority shareholder of OIS. OIS held
its annual shareholders' meeting on January 18, 1999. At that meeting, Premier's
proposed slate of board of directors was elected. On March 7, 1999, Premier and
OIS entered into a Letter Agreement under which Premier committed to undertake
OIS' manufacturing operations.
Premier has made a proposal to the OIS board of directors under which
Premier would acquire the remaining shares of OIS not already owned by Premier.
This proposal was rejected, but additional discussions for such a transaction
may occur in the future.
LASER BUSINESS
Our lasers and related products use the controlled application of
thermal, acoustic and optical energy to allow the physician or dentist to
perform selected minimally invasive procedures which in some cases, compared to
conventional techniques not involving the use of lasers, vaporize or sever
tissue with minimal blood loss and scarring, increase patient comfort and reduce
patient treatment time and treatment costs. We currently market certain of these
lasers for dentistry, ophthalmology and surgery.
In our laser business, we participate in three market segments:
dentistry, ophthalmology and surgery. Some of our innovations include:
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o the first laser cleared for use on hard tissue (teeth) in dentistry
o the first diode laser in dentistry
o the first laser in clinical trials for cataract removal
o the first Erbium:YAG laser for smoothing of skin
o the first laser in clinical trials for tissue melding
Although we have received more than 100 clearances from the FDA in
multiple specialty areas to market our laser products for a variety of medical
applications, due to limited financial resources we have initially focused our
marketing efforts on dental lasers which we believe have the most promise for
commercial success. We initiated marketing efforts in ophthalmology in 1997. As
resources permit, we plan to commence marketing efforts with respect to other
medical applications which we believe may also be commercially viable.
CORNEAL TOPOGRAPHY BUSINESS
EyeSys designs, develops and markets a line of noninvasive diagnostic
imaging systems for use by ophthalmologists and optometrists in surgical
planning and evaluation, diagnosis of corneal diseases and contact lens fitting.
Founded in 1986, EyeSys has installed more than 3,500 systems.
The EyeSys System 2000 and Vista products each combine proprietary
hardware used for capturing an image and a personal computer to control the
hardware and to run the software. The output of these systems is a color- coded
map of the shape and curvature of the human cornea that vision care
professionals can easily interpret and utilize for treatments such as vision
correction and cataract surgery and corneal transplants, for diagnosis of
astigmatisms and corneal diseases, and for contact lens fitting and custom lens
manufacturing.
OCULAR IMAGING BUSINESS
OIS, which commenced business in 1986, is engaged in the business of
designing, manufacturing, and marketing digital imaging systems and image
enhancement and analysis software for use by practitioners in the ocular health
field. OIS's current flagship products are its digital imaging systems, the
WinStation 1024(TM) and WinStation 640(TM). These WinStation products are
targeted primarily at retinal specialists and general ophthalmologists. OIS's
WinStation systems are primarily used by ophthalmologists to perform a
diagnostic test of the blood flow in the patient's retina. This procedure is
used to diagnose and monitor diseases and provide important information in
making treatment decisions. OIS also recently showed a digital fundus imager,
which provides similar diagnostic capabilities, except that it provides a
continuous image rather than a single frame image, and it will be sold at a
lower price. In addition, OIS plans to market a Digital Slit Lamp which will be
used to obtain live motion images of the surface of the eye.
OIS has experienced operating losses for each fiscal year since its
initial public offering in 1992. OIS expects to continue to incur operating
losses for the foreseeable future and while a goal of the combined ophthalmic
businesses is to achieve profitability through consolidation, we cannot assure
you that OIS will be able to achieve or sustain significant revenues or
profitability in the future.
MARKET OVERVIEW
DENTAL AND PERIODONTAL LASER MARKET
The current market for laser equipment in dental procedures is
comprised of hard and soft tissue procedures, composite curing and teeth
whitening.
HARD TISSUE PROCEDURES, INCLUDING CAVITY PREPARATION. Potential dental
laser applications for procedures on teeth, also known as hard tissue
procedures, include pit and fissure sealing, etching, caries removal and cavity
preparation. Based on user feedback from our clinical sites, we believe that the
use of a laser in dentistry reduces the pain associated with various traditional
procedures performed with a dental drill. On May 7, 1997, our Er:YAG laser was
cleared to market for tooth etching, caries removal and cavity preparation. This
laser was the first to be cleared by the FDA for these procedures. We commenced
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marketing of the Er:YAG laser for these procedures shortly after receipt of FDA
clearance.
SOFT TISSUE. The dental laser can be used for selected periodontal
procedures and to treat early gum disease, postponing or in some cases
eliminating the need for conventional periodontal surgery and providing the
opportunity for overall cost savings. While we have clearance to market six
lasers for soft tissue dental procedures, including the Aurora diode laser and
Centauri Er:YAG laser, we focus our marketing efforts on our Aurora diode laser
in this area. The Aurora also is the only diode laser with clearance for
procedures involving removal of the pulp of the tooth.
COMPOSITE CURING. Composites are rapidly replacing gold and silver
fillings as the material of choice for restoration of cavities, because they
more closely match the color of teeth and because gold and silver fillings have
drawn increasing worldwide concern over safety due to the toxic gases which may
be released when they are removed from teeth. Composite fillings are typically
cured using a curing light which provides a broad spectrum of wavelengths. The
use of the argon laser for this application has been shown to frequently result
in a stronger restoration than composites cured by traditional curing lights.
Our argon lasers can also be used to cure the resins used in placing veneers or
bonding orthodontic brackets. Our Arago and MOD argon lasers have received FDA
clearance for use in these applications.
TEETH WHITENING. A large number of dentists use bleaching materials for
teeth whitening. These materials are traditionally applied at night over a six
to eight week period to whiten a patient's teeth while he or she sleeps. Lasers
have been shown to facilitate the use of these light sensitive materials in the
dentist's office by accelerating this process and resulting in an approximately
three shade change in less than one hour. Our MOD and Arago lasers have been
cleared to market for this procedure.
CAVITY PREVENTION. We are currently conducting research and initiating
clinical trials to use our lasers for cavity prevention applications. Our
clinical trials are at an early stage and we cannot assure you that FDA
clearance will be obtained for these applications.
OPHTHALMIC LASER AND DIAGNOSTIC MARKET
Because of the importance of the cornea to visual performance,
virtually all ophthalmologists and optometrists have historically used a
measuring instrument known as a keratometer to quantify corneal curvature, in a
procedure called keratometry. This instrument obtains only four measurement
points, therefore it cannot accurately measure asymmetrical curvatures. A more
precise instrument, called a corneal topographer, was developed to measure the
curvature of the front of the eye.
Applications of this device include:
o important applications in selecting the appropriate procedure for
each refractive patient, preoperative surgical planning,
postoperative evaluation and patient follow-up
o improved pre-surgical planning for removal of a cloudy lens in
cataract surgery, assess and correct surgically induced
astigmatism, which is the most frequent complication caused by
intraocular lens surgery, potentially improve the calculation of
the implanted intraocular lens power, and support combination
cataract/refractive surgical procedures
o improved surgical outcomes in corneal transplants allowing the
practitioner to evaluate surgical technique and adjust
postoperative treatment
o analysis and diagnosis of astigmatism and various corneal diseases
o several applications in contact lens fitting and manufacturing
4
The WinStation market consists of current owners of fundus cameras and
anticipated purchasers of fundus cameras suitable for interfacing with the OIS's
digital imaging system products. A fundus camera is a camera that produces
photographs of the retina of the eye.
Retinal specialists who number approximately 3,000 in the U.S.,
comprise the primary target market for digital angiography systems, which allow
the visualization of the blood flow in the retina. For the past two years OIS
digital imaging system sales have been driven in this segment to a large extent
by a procedure known as indocyanine green angiography. This new diagnostic test
procedure yields new clinically significant information that is helpful in the
treatment of patients with macular degeneration, a leading cause of blindness
which afflicts over 13 million people in the U.S. This procedure can only be
performed using a digital imaging system. OIS introduced a digital fundus imager
and Digital Slit Lamp which will allow full motion video of the eye at a
relatively low cost.
The total available market for diagnostic ophthalmic equipment consists
of 16,000 ophthalmologists in the United States, 100,000 additional
ophthalmologists in international markets and 36,000 optometrists in the United
States.
Following diagnostic procedures, laser systems have been used for the
treatment of eye disorders for many years and are widely accepted in the
ophthalmic community. Lasers have traditionally been sold for extra-ocular
procedures and procedures in the back of the eye. We do not promote our lasers
for these markets, which we believe are approaching saturation, but instead
focus on intraocular, refractive vision correction and aesthetic procedures
including anterior capsulotomy, cataract removal, glaucoma treatment, corneal
sculpting and cosmetic or aesthetic skin procedures. We have developed the
Centauri Er:YAG laser which is capable of performing all of these procedures,
which previously typically have been performed by several different types of
medical lasers. To date, however, the Centauri laser has only been cleared for
some of these procedures. A summary of the procedures for which the Centauri
laser has been cleared appears under "Products-Laser Products."
CATARACT REMOVAL PROCEDURES. We believe that no medical lasers have
been approved to date for cataract extraction procedures, and that medical
lasers may result in less trauma and inflammation than traditional surgical
methods, providing more comfort to the patient. Our Centauri Er:YAG laser has
been cleared to market for anterior capsulotomy, a procedure which opens the
capsule of the eye prior to the removal of the cataract. We have also completed
Phase II clinical trials on the Centauri laser for the breakup of the cataract
itself, as an alternative to the emulsification of the cataract by ultrasonic
energy. We believe that this patented technology for use in cataract removal may
provide an easier and safer method.
TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by
increased pressure within the eyeball and progressive loss of vision, has
traditionally been treated with drug therapy. When drug therapy is ineffective,
periodic invasive surgery may be required. In these cases, lasers may be used to
open a pathway into the eye in order to relieve pressure in the eye. This
procedure, which may be repeated periodically, can be performed under local
anesthesia with a self closing incision on an outpatient basis. We are currently
conducting clinical trials prior to seeking clearance to market our Centauri
Er:YAG laser for several alternative techniques for this procedure. We do not
know whether the FDA will grant clearance for these techniques, however.
CORNEAL SCULPTING. We believe that FDA approval of excimer lasers has
resulted in greater acceptance and recognition of laser refractive surgery in
the ophthalmic market. Medical lasers may be used for corneal sculpting, a
procedure in which the laser is used to sculpt the cornea of the eye to a
desired curvature to correct nearsightedness, farsightedness or astigmatism. We
plan to seek approval to market the Centauri laser for corneal sculpting and
have initiated studies in preparation for regulatory submittal for this
application. We do not know whether the FDA will grant clearance for this
procedure, however.
AESTHETIC SURGICAL PROCEDURES. We have received clearance for the use
of our lasers in selected aesthetic procedures such as skin resurfacing and
eyelid surgery. We plan to begin marketing some of these products for aesthetic
applications during the current year.
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SURGICAL LASER MARKET
Laser systems have been approved for and are currently being used in a
variety of surgical applications including orthopedics, neurosurgery, urology,
gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic
surgery. Although our products are cleared to market in a number of specialty
areas within the surgical market, we have specifically targeted tissue melding,
also known as tissue fusion, and aesthetic applications within the surgical
market.
TISSUE MELDING. We believe a significant number of wound closure
procedures may be addressed with surgical lasers in conjunction with or
independent of traditional sutures or staples. The clinically demonstrated
benefits of the use of surgical lasers for tissue melding, as compared to
sutures and staples, include fluid-static seals, immediate strength of the
closure and reduced surgical time. Along with our strategic partner, we have
conducted animal tests to support regulatory submittals for the use of our
Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts,
and are currently conducting clinical studies for skin and hypospadias. We have
also completed clinical trials for vasovasotomy, which is the reversal of
vasectomies. These trials demonstrated a success rate of approximately 89%. We
are also beginning Phase I clinical trials for the treatment of hypospadias, the
lengthening of the urethra to the end of the penis in infants, in which it is
anticipated that the laser's fluid-static seal may minimize post-surgical
complications such as the leakage of urine which results in secondary surgical
procedures. We have clearance for Phase II clinical trials for skin closure
following mastectomies and eyelid surgery at five clinical sites. Artery and
vein melding has been tested in animals by our strategic partner in preparation
for clinical studies.
AESTHETIC SURGICAL PROCEDURES. The market for aesthetic surgery is
growing rapidly worldwide. We have a number of approvals for lasers to be used
in aesthetic applications and will devote further efforts in the future to
entering into and capitalizing on this market.
We have regulatory clearance to market our products for a variety of
additional applications, including in urology, orthopedics, gynecology,
gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In
areas where our technology is not being fully utilized, we may seek agreements
to supply our products under private label for other manufacturers or may enter
into strategic alliances to develop and market our lasers for other
applications.
PRODUCTS
LASER PRODUCTS
The use of laser technology in dentistry, ophthalmology and surgery
involves the controlled application of laser light to hard or soft tissue
causing an optical, thermal, acoustic or plasma interaction with the tissue.
When applied to tissue, the laser light is partially absorbed. This process of
absorption converts the light to heat, which in turn alters the state of the
tissue. The degree of tissue absorption varies with the choice of wavelength and
is an important variable in the application of laser technology in treating
various tissues. The laser energy can also form a gas bubble in a water medium
which provides an acoustic cutting effect as it bursts.
Our lasers often use proprietary delivery systems to control the
relative proportions of acoustic, thermal and optical energy applied to tissue
resulting in enhanced cutting effects. These delivery systems include flexible
fiberoptics, waveguides, articulated arms and micromanipulators or scanners
which are used on a disposable or limited reuse basis, and which we expect will
provide a recurring revenue stream. Our strategy is to target specific
applications in the dental, ophthalmic and surgical markets, where we believe
that our technology and products have competitive strengths.
Our line of portable lasers is specifically designed for use in
outpatient surgical centers and medical offices. We believe that our lasers are
also well suited for the international market, particularly in facilities
6
with many surgical suites where easy transportation of equipment is necessary.
By employing techniques developed in the computer industry, we have designed a
laser system that:
o is modularly designed and uses similar components for multiple laser
systems thereby reducing their overall cost
o allows for efficient and inexpensive repair by replacing a board or
assembly in the field or through the mail, reducing the need for a
field service force
o can be easily moved from the office to surgical centers because of its
compact size and limited voltage requirements
Our Er:YAG lasers are currently priced from $37,000 to $126,000 and our Nd:YAG
lasers are currently priced from $25,000 to $80,000. Our diode lasers are
currently priced from $22,000 to $35,000 and our argon lasers are priced from
$5,500 to $22,000. The prices of lasers within these ranges depend upon each
model's power capability and the features offered.
The following table presents, in summary form, our principal lasers and
delivery systems, the principal applications for which we intend to use them,
and the FDA status of these products.
Product Medical Application FDA Regulatory Status
- --------------------- ------------------------------------------------------- -----------------------
Centauri (Er:YAG) Dental--Soft Tissue....................................... Cleared to market
Dental--Hard Tissue....................................... Cleared to market
Ophthalmology (e.g. Anterior Capsulotomy) ................ Cleared to market
Ab-externo and Ab-interno Sclerostomy, Laser Lens
Emulsification............................................ Clinical Trials
Corneal Sculpting......................................... Clinical Trials
General Surgery, Neurosurgery, Orthopedics,
Gastrointestinal and Genitourinary Procedures,
Urology, Gynecology and Oral Surgery...................... Cleared to market
Polaris (1.32u Tissue Melding............................................ Clinical trials
Nd:YAG)
General Surgery, Ophthalmology, Arthroscopic
Surgery, Gastrointestinal and Genitourinary
Procedures, Urology, Gynecology and Oral Surgery.......... Cleared to market
Aurora (diode) Dental--Soft Tissue....................................... Cleared to market
Dental-Hygiene............................................ Cleared to market
Dental-Endodontics........................................ Cleared to market
Dental and General Surgery, Ophthalmology,
Arthroscopic Surgery, Gastrointestinal and
Genitourinary Procedures, Urology, Dermatology,
Plastic Surgery, Podiatry, Neurosurgery,
Gynecology, Pulmonary Surgery and Oral Surgery............ Cleared to market
MOD and Arago Dental--Composite Curing.................................. Cleared to market
(argon)
Dental--Teeth Whitening................................... Cleared to market
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CENTAURI ER:YAG LASER. Our Centauri Er:YAG laser is a portable Er:YAG
pulsed solid state laser which generates high frequencies (up to 30Hz) at
relatively low peak power. These high frequencies allow faster cutting at lower
energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by water,
producing a cut similar to the scalpel. The Er:YAG wavelength is delivered
through a fiber optic delivery system which enables the beams to be focused and
angled. These fiberoptic catheters are difficult to produce and we have invested
heavily in the technology to develop fibers which can handle adequate power. We
have experienced difficulties in securing a consistent and reliable source for
these fibers in the past. We presently have two sources for these fibers. See
"--Manufacturing and Materials" and "Legal Proceedings."
POLARIS ND:YAG LASERS. The energy of Nd:YAG lasers is absorbed by blood
in tissue and as a result these systems are the preferred lasers to limit
bleeding during surgery and for procedures requiring fiberoptic delivery, such
as laparoscopic surgery. The Nd:YAG fiberoptic delivery system allows the
surgeon to perform surgery through small incisions, providing minimally invasive
surgery to patients and usually reducing treatment costs and the length of
hospital stays.
This laser also uses our disposable unique TouchTIPS, AngleTIPS and
sculptured fibers. By using the Polaris laser with TouchTIPS, the surgeon is
allowed direct contact with tissue and the tactile feeling of the scalpel or
other surgical instruments. We believe that the availability of these
technologies permits the use of a lower power laser system.
With the exception of Japan, China and Taiwan, we hold the proprietary
rights, including several patents, to manufacture and sell the Polaris laser, a
1.32 micron Nd:YAG laser, together with specialized software and delivery
systems, for tissue melding. We are developing the Polaris laser for use in
cosmetic skin closures, vascular surgeries and minimally invasive surgical
procedures normally performed with sutures and staples. Although the use of the
Polaris laser for tissue melding is still in the clinical trial stage, and no
clearance for this application has been received, we believe that tissue melding
offers clinical advantages over traditional sutures and staples including
fluid-static seals, immediate strength of the closure and reduced surgical time.
AURORA DIODE LASER. The Aurora diode laser is our first semiconductor
laser and is the first truly portable diode laser designed for dentistry. The
Aurora diode laser replaced the 20 watt Pegasus laser for periodontal
procedures, and is approximately one-fourth the size and one-half of the cost of
that system. The diode wavelength is absorbed by blood and pigmentation and has
been cleared for use in multiple specialties such as general surgery,
ophthalmology, urology and plastic surgery. The Aurora laser, which was
introduced for soft tissue dental applications in February 1996, is designed to
utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and
sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia.
The dental laser can also be used to treat early stage gum disease, postponing
or in some cases eliminating the need for periodontal surgery and providing the
opportunity for overall cost savings. We believe the Aurora laser compares
favorably with competitive products including pulsed Nd:YAG lasers, which cannot
produce the required laser settings for use with TouchTIPs, or in the new
technique for the treatment of periodontal disease, as well as with CO2 lasers,
which cannot be delivered through a fiber, and argon lasers, which tend to be
slower in cutting and may produce charring.
ARAGO AND MOD ARGON LASERS. The Arago and the MOD are gas lasers which
have been cleared to market in dentistry to accelerate the composite curing
process. Composites are rapidly replacing gold and silver fillings as the
material of choice for the restoration of cavities. The argon wavelength
penetrates through the composite and has been shown to frequently result in a
stronger restoration than composites cured by traditional curing lights. Our
argon lasers can also be used to cure the resins used in placing veneers or
bonding orthodontic brackets.
The argon laser can also be used to enhance teeth whitening procedures
using light activated bleaching materials which have traditionally been applied
at night over a six to eight week period. Lasers have been shown to facilitate
the use of these light activated products in a dentist's office by accelerating
this process and resulting in an approximately three shade change in less than
one hour. The argon laser has been cleared to market for this procedure. We
cannot assure you that the use of the argon laser for teeth whitening will
8
become a widely accepted practice in the dental industry. We plan to bundle our
lasers with light activated whitening materials and co-market these products
with the manufacturers of these materials. We are currently manufacturing the
MOD lasers in-house. The Arago laser is currently being supplied by a third
party manufacturer.
OTHER LASERS. We have developed other solid state pulsed lasers
including the Sirius .532 Nd:YAG laser, Pegasus Nd:YAG, Orion Ho:YAG laser and
the Arcturus alexandrite:YAG laser, and other applications for our existing
lasers, but are not actively marketing these lasers at the present time. The
following table briefly describes additional lasers owned by us which we do not
currently market, and the principal applications for which we have clearance to
market these lasers.
Product Medical Application FDA Regulatory Status
- -------------------------------- -------------------------------------------------- ------------------------
Altair (CO2) Orthopedics General and Plastic Surgery,
Dermatology, Podiatry Ear, Nose and Throat,
Gynecology Pulmonary Procedures;
Neurosurgery and Ophthalmology....................... Cleared to market
Pegasus (Nd YAG) General Surgery, Urology, Gastrointestinal
40W/60W Procedures, Pulmonary Procedures,
Gastroenterology, Gynecology and
Ophthalmology........................................ Cleared to market
Pegasus (Nd:YAG 20W) Dental-Soft Tissue................................... Cleared to market
Dental-Endodontics................................... Cleared to market
Pegasus (Nd:YAG) Oral, Arthroscopic and General Surgery,
100W Gastroenterology, Gastrointestinal and
Genitourinary Procedures, Pulmonary
Procedures, Gynecology, Neurosurgery and
Ophthalmology........................................ Cleared to market
Sirius (.532u Nd:YAG) Dermatology, General and Plastic Surgery,
Podiatry and Orthopedic Applications................. Cleared to market
Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and
Throat, Ophthalmology, Gastroenterology,
Pulmonary Procedures and Urology..................... Cleared to market
Er:YAG/Nd:YAG Various specialties.................................. Cleared to market
(Combination)
LASER DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS
While each laser system we market consists of a laser and an integral
fiber, the fibers and other products, such as tubing sets and tips, are used by
surgeons on a disposable or limited reuse basis for each clinical procedure. We
believe that expansion into this market could provide us with a recurring
revenue stream.
CORNEAL TOPOGRAPHY PRODUCTS
EYESYS 2000 CORNEAL ANALYSIS SYSTEM. The EyeSys System 2000 corneal
topography instrument and associated Microsoft Windows(C) based software is
targeted at refractive surgeons, general ophthalmologists and optometrists for
diagnostic, surgical and contact lens fitting applications. The primary function
of the instrument is to position a patient for corneal image capture, acquire
the image of reflected rings and send the image to a personal computer for
9
further processing. The System 2000 is modular and we market it as a proprietary
computer peripheral and software. The System 2000 hardware interfaces to the
computer via a parallel port connection, allowing EyeSys to unbundle the
computer, monitor, printer, tables and other third party items. This can
significantly lower the price to the customer by allowing physicians to utilize
hardware they already own.
Last year we introduced what we believe to be the smallest hand-held
topography system currently available. The Vista(TM) incorporates much of the
same reliable and accurate software as the System 2000, but its portability
facilitates its use in the operating room or by the optometrist.
OCULAR IMAGING PRODUCTS
OIS currently offers two products to the ophthalmic market: the
WinStation 640 and the WinStation 1024, and intends to commence sales of a
digital fundus imager and a Digital Slit Lamp within the next couple of months.
OIS's WinStation systems are used by ophthalmologists to produce images of blood
vessels within the eye. Whereas the traditional methods of obtaining these
images utilize photographic film which requires special processing and printing,
the WinStation systems allow for immediate diagnosis and treatment of the
patient.
The WinStation products enable the ophthalmologist to perform
indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test
procedure which is yielding new clinically significant information that is
helpful in the treatment of patients with macular degeneration, a leading cause
of blindness afflicting over 13 million people in the U.S. ICG angiography, used
for approximately 10-20% of patient angiography, is a dye procedure that can
only be performed using a digital imaging system.
OIS also recently showed a digital fundus imager, which provides
similar diagnostic capabilities, except that it provides a continuous image
rather than a single fram image, and it will be sold at a lower price. Another
of OIS's imaging products, the Digital Slit Lamp, will allow the ophthalmologist
to obtain full motion video images of the surface of the eye.
MARKETING, SALES AND SERVICE
We market our products to the dental market in the United States
directly to dentists through our direct sales force consisting of two area sales
managers, a manufacturer's representative network consisting of approximately 15
manufacturer's representatives or companies and our distributor network. The
dental market includes approximately 129,000 practicing dentists in the United
States. We believe that in order to reach this market we must expand our U.S.
distribution capabilities. We market our products primarily through conventions,
educational courses, direct mail, telemarketing and other dental training
programs. Through an active program of educational courses and preceptorships,
we have trained dentists in many countries during the past two years using
industry recognized dentists and periodontists.
We market our products in the ophthalmic market jointly with OIS
through a sales manager and six territory managers who focus their efforts on
key ophthalmologists worldwide. We plan to expand our ophthalmic sales force
both by enlarging our domestic sales force, either internally or through
acquisition or distribution, by acquiring or engaging additional international
manufacturing representatives, and by having existing international distributors
carry our full product line. In 1997, EyeSys entered into an agreement with
Marco Ophthalmic Inc. under which that company was appointed as a nonexclusive
distributor in the United States of the System 2000 and the exclusive
distributor of the Vista portable corneal topography system for a three-year
period following commercialization of that system. Sales and marketing efforts
for ophthalmic products are managed out of Sacramento, California.
In the surgical market, we intend to form strategic alliances in any
specialty area where the partner has an established presence in the market
selling to either the physician or the hospital. We have entered into such a
strategic alliance with Azwell, Inc. which is one of the leading suppliers of
sutures in the Pacific Rim. Under our Exclusive Marketing Agreement with Azwell,
Proclosure granted to Azwell, in exchange for a license fee, the exclusive
rights to market and distribute the Polaris Nd:YAG laser in Japan, China and
Taiwan. In addition, under this agreement we granted to Azwell an option to
manufacture the Polaris, which if exercised would require Azwell to pay us a
$1.5 million fee and royalties. Azwell has not yet indicated whether it intends
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to manufacture these products. We do not know if we will receive any payments
under this agreement.
We have entered into distribution agreements with distributors in many
countries for sales of our dental and ophthalmic products. We typically grant
exclusive distribution rights in select territories to our distributors who
usually must maintain agreed upon distribution minimums in order to retain their
exclusive rights. These agreements are managed by three directors of
distribution marketing and sales for the Pacific Rim; Europe, the Middle East
and Africa; and Canada and South America.
No customer accounted for more than 10% of our net sales, on a
consolidated basis, in fiscal 1999 or fiscal 1998. During fiscal 1997, three
customers each accounted for more than 10% of the sales of EyeSys: Marco
accounted for 13% of sales, Newtech accounted for 14% of sales and Vistatek
accounted for 15% of sales.
We seek to create a group of loyal customers by focusing on customer
service, quality and reliability. In addition to our educational courses, we
perform a complete installation of our products and train the customers' staff
in its proper use. Educational videos and papers are available upon request. We
conduct service training courses for the representatives of our distributors.
Prior to shipping, every product is subjected to an extensive battery of quality
control tests. We generally provide a one year warranty with all products and
extended warranties are available at an additional cost. If service is required,
a product owner is either sent a loaner product by overnight carrier, returns
his product for service or a service representative visits the owner to repair
the unit. International service is provided either by the foreign distributor or
by return of the product to us. We have experienced and may continue to
experience difficulties in providing prompt and cost-effective service for our
products internationally. We are working to improve the service training of our
international distributors.
COMPETITION
We are, and will continue to be, subject to competition in our targeted
markets, principally from businesses providing other traditional surgical and
nonsurgical treatments, including existing and developing technologies or
therapies, some of which include medical lasers manufactured by competitors. In
the dental market, we compete primarily with dental drills, traditional curing
lights and other existing technologies, and to a lesser extent competitors' CO2,
argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, we face competition
principally from:
o traditional surgical treatments using a tearing needle in anterior
capsulotomy
o phacoemulsification, an ultrasound device used to break up cataracts in
cataract removal procedures;
o corrective eyewear such as eyeglasses and contact lenses and surgical
treatments for refractive disorders using either an excimer laser or a
scalpel
o drug therapy or surgical treatment of glaucoma
In the surgical market, wound closure procedures are usually performed
using sutures and staples, and traditional cosmetic surgical procedures may be
performed with a scalpel or other lasers.
The medical laser industry in particular is also subject to intense
competition and rapid technological change. There are approximately 30
competitors in different sectors of the medical laser industry. We believe that
the principal competitive factors for medical laser products are the products'
technological capabilities, proven clinical ability, patent protection, price
and scope of regulatory approval, as well as industry expert endorsements.
We believe that for many applications, our patented or patent pending
methods and fiberoptic delivery systems provide clinical benefits over other
currently known technologies and our competitors' laser products.
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EyeSys' primary competitors in the corneal topography market are Tomey
Technology, Alcon Surgical, Inc., a subsidiary of Nestle, Humphrey Instruments,
a subsidiary of Carl Zeiss, and Orbtek, a subsidiary of Bausch and Lomb.
Competition for products that can diagnose and evaluate eye disease is
intense and is expected to increase. We are aware of three primary OIS
competitors in the U.S.: Topcon, Humphrey Instruments and Tomey Technology. Four
other companies are known to have systems in the international market, each with
lesser market penetration.
We believe that our ability to compete successfully against traditional
treatments, competitive laser systems and treatments that may be developed in
the future will depend on our ability to create and maintain advanced
technology, develop proprietary products, obtain required regulatory approvals
and clearances for our products, attract and retain scientific personnel, obtain
patent or other proprietary protection for our products and technologies, and
manufacture and successfully market products either alone or through other
parties. Some of our competitors have substantially greater financial, technical
and marketing resources than us. We cannot assure you that this competition will
not adversely affect our results of operations or our ability to maintain or
increase market share.
SEASONALITY
To date, our revenues have typically been significantly higher in the
second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter. We expect that this seasonality will continue
indefinitely.
RESEARCH AND DEVELOPMENT
LASER BUSINESS
In the past three fiscal years (1997-1999), Premier has invested in
excess of $8.8 million in research and development programs. This amount is net
of approximately $450,000 received under a Small Business Innovative Research
Grant in fiscal 1997 and excludes a $12.9 million noncash charge for in-process
research and development related to acquisitions in fiscal 1997 and 1998. This
investment in research and development has resulted in the development of 20
models of lasers, reusable accessories such as smoke evacuators and irrigation
aspiration systems, more than 1,000 types of custom delivery systems and
approximately 20 types of surgical tips and accessories.
Our current research is focused on expanding the clinical applications
of our existing products, reducing the size and cost of current laser systems,
developing custom delivery systems and developing new, innovative products. For
our laser products, our in-house research and development efforts have focused
on the development of a systems approach with proprietary delivery systems
designed to allow the laser to interact with tissue by a number of different
mechanisms (e.g., acoustic, ablative and thermal) for unique laser/tissue
effects. These disposable fiberoptic delivery systems, developed specifically
for niche surgical applications, demonstrate the principal focus of our research
efforts. Examples of patented or patent pending products resulting from these
research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO2
waveguides. Clinical research has also yielded several new surgical procedures.
CORNEAL TOPOGRAPHY BUSINESS
EyeSys' research and development efforts are focused on further
development of corneal topography systems, advanced applications software
development, internationalization of software, minimization, simplification and
optimization of the instrument and development of the next generation ophthalmic
instrumentation.
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OCULAR IMAGING BUSINESS
OIS intends to devote significant resources to the development of
telemedicine/managed care applications, the improvement of optics, new fundus
camera interfaces for a green dye, software development (including the continued
enhancement of WinStation), hardware optimization, and the patient/doctor
interface. OIS's research and development expenditures in the year ended August
31, 1998 were $866,745 and in the year ended August 31, 1997, were $1,070,192.
PATENTS AND PATENT APPLICATIONS
Patent protection is an important part of our business strategy, and
our success depends, in part, on our ability to maintain patents and trade
secret protection and on our ability to operate without infringing on the rights
of third parties. We have sought to protect our unique technologies and clinical
advances through the use of the patent process. Patent applications filed in the
United States are frequently also filed in selected foreign countries. We focus
our efforts on filing only for those patents which we believe will provide us
with key defensible features instead of filing for all potential minor device
features. In the United States, we hold 33 patents and have an additional 24
pending patent applications, including divisional applications. In addition, we
hold 23 foreign patents and have at least 44 foreign patent applications. We
also have a nonexclusive license to a number of basic laser technologies which
are commonly licensed on such basis in the laser industry. OIS holds one patent
covering one of its products.
We cannot assure you that our patents or trademarks would be upheld if
challenged, or that competitors might not develop similar or superior processes
or products outside the protection of any patents issued to us. In addition, we
cannot assure you that we will have the financial or other resources necessary
to enforce or defend a patent or trademark infringement or proprietary rights
violation action. Although we currently carry insurance that might cover some of
the amounts we could be liable for in patent litigation, if our products
infringe patents, trademarks or proprietary rights of others, we could become
liable for damages, which also could have a material adverse effect on us.
We are aware of various patents which, along with other patents that
may exist or be granted in the future, could restrict our right to market some
of our technologies without a license, including, without limitation, patents
relating to our lens emulsification product and ophthalmic probes for our Er:YAG
laser. In the past, we have received allegations that certain of our laser
products infringe other patents. There has been significant patent litigation in
the medical and medical device laser industry. Adverse determinations in
litigation or other patent proceedings in which we may become a party could
subject us to significant legal judgments or liabilities to third parties, and
could require us to seek licenses from third parties. We cannot assure you that
any licenses required under these or any other patents or proprietary rights
would be available on terms acceptable to us, if at all. If we do not obtain
these licenses, we could encounter delays in product introductions while we
attempt to design around these patents, or we could find that the development,
manufacture or sale of products requiring these licenses could be enjoined.
We also rely on unpatented proprietary technology, trade secrets and
know-how. Certain components of some of our products are proprietary and
constitute trade secrets, but others are purchased from third parties. There is
no assurance that other parties will not independently develop substantially
equivalent proprietary information or techniques, or otherwise gain access to
our trade secrets in other ways, or disclose this technology, or that we can
meaningfully protect our rights to our unpatented trade secrets.
We seek to protect our unpatented proprietary technology, in part,
through proprietary confidentiality and nondisclosure agreements with employees,
consultants and other parties. We cannot assure you that proprietary information
agreements with employees, consultants and others will not be breached, that we
would have adequate remedies for any breach or that our trade secrets will not
otherwise become known to or independently developed by competitors.
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GOVERNMENT REGULATION
FDA REGULATION
The products that we manufacture are regulated as medical devices by
the FDA under the Food, Drug and Cosmetics Act (the "FDC Act"). Satisfaction of
applicable regulatory requirements may take several years and requirements vary
substantially based upon the type, complexity and novelty of such devices as
well as the clinical procedure. Under the FDC Act and the applicable
regulations, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution, and promotion of medical devices.
Noncompliance with applicable requirements can result in a variety of serious
penalties. The FDA also has the authority to request recall, repair, replacement
or refund of the cost of any device which we manufacture or distribute.
The FDA classifies medical devices in commercial distribution into one
of three classes: Class I, II or III. This classification is based on the
controls the FDA deems necessary to reasonably ensure the safety and
effectiveness of medical devices. Class I devices are subject to general
control, such as labeling, premarket notification and adherence to applicable
requirements for Good Manufacturing Practices, known as "GMP's." Class II
devices are subject to general and special controls, such as performance
standards, postmarket surveillance, patient registries, and FDA guidelines.
Generally, Class III devices are those which must receive premarket approval by
the FDA to ensure their safety and effectiveness. Class III devices include, for
example, life-sustaining, life-supporting and implantable devices, or new
devices which have been found not to be substantially equivalent to legally
marketed devices. Our laser and diagnostic products typically are classified as
Class II devices, but the FDA may classify some indications or technologies into
Class III and require a premarket approval application. OIS's products are
classified as Class II devices which require, among other things, annual
registration, listing of devices, good manufacturing practices and labeling, and
prohibition against misbranding and adulteration.
If a manufacturer or distributor of a medical device can establish that
a proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a pre-1976 Class III medical device for which the
FDA has not called for a premarket approval application, that manufacturer or
distributor may seek FDA clearance for the device by filing a Section 510(k)
premarket notification. If a manufacturer or distributor of a medical device
cannot establish that a proposed device is substantially equivalent to another
legally marketed device, the manufacturer or distributor will have to seek
premarket approval for the proposed device. A 510(k) notification and the claim
of substantial equivalence will likely have to be supported by various types of
data and materials, possibly including test results or the results of clinical
studies in humans. A premarket approval application would have to be submitted
and be supported by extensive data, including preclinical and clinical study
data, to prove the safety and effectiveness of the device. We cannot assure you
that some of our products will not require the more rigorous and time consuming
premarket approval application process, including laser uses for vasovasotomy
or other tissue melding procedures, cavity prevention, cosmetic surgery,
sclerostomy and lens emulsification, among others.
If human clinical studies of a proposed device are required, whether
for a 510(k) or a premarket approval application, and the device presents a
"significant risk," the manufacturer or the distributor of the devices will have
to file an application for an investigational device exemption ("IDE") with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards, human clinical trials may begin at
a specific number of investigational sites with a specific number of patients,
as approved by the FDA. The FDA does not approve all IDE's that are submitted.
Even if an IDE is approved, the FDA may determine that the data derived from
these studies do not support the safety and efficacy of the device or warrant
the continuation of clinical studies. Sponsors of clinical studies are permitted
to charge for those devices distributed in the course of the study, provided
that this compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Clinical studies of nonsignificant risk
devices may be performed without prior FDA approval, but various regulatory
14
requirements still apply, including the requirement for approval by an
Institutional Review Board, conduct of the study according to applicable
portions of the IDE regulations, and prohibitions against commercialization of
an investigational device.
The manufacturer or distributor may not place the device into
interstate commerce until an order is issued by the FDA granting premarket
clearance for the device. The FDA has no specific time limit by which it must
respond to a 510(k) premarket notification. The FDA has recently been requiring
more rigorous demonstration of substantial equivalence in connection with 510(k)
notifications and the review time can take three to 12 months or longer for a
510(k). If a premarket approval application submission is filed, the FDA has by
statute 180 days to review it; however, the review time is often extended
significantly by the FDA asking for more information or clarification of
information already provided in the submission. During the review period, an
advisory committee may also evaluate the application and provide recommendations
to the FDA as to whether the device should be approved. In addition, the FDA
will inspect the manufacturing facility to ensure compliance with the FDA's good
manufacturing practice requirements prior to approval of a premarket approval
application.
Devices are cleared by 510(k) or approved by premarket approval
application only for the specific intended uses claimed in the submission and
agreed to by the FDA. Labeling and promotional activities are also subject to
scrutiny by the FDA and, in some cases, by the Federal Trade Commission.
Marketing or promotion of products for medical applications other than those
that are cleared or approved could lead to enforcement action by the FDA.
We cannot assure you that we will be able to obtain necessary
regulatory approvals or clearances for our products on a timely basis or at all,
and delays in receipt of or failure to receive these approvals or clearances,
the loss of previously received approvals or clearances, limitations on intended
use imposed as a condition of such approvals or clearances, or failure to comply
with existing or future requirements would have a material adverse effect on our
business, financial condition and results of operations. FDA or other
governmental approvals of products we develop in the future may require
substantial filing fees which could limit the number of applications we seek and
may entail limitations on the indicated uses for which such products may be
marketed. In addition, approved or cleared products may be subject to additional
testing and surveillance programs required by the FDA and other regulatory
agencies, and product approvals and clearances could be withdrawn for failure to
comply with regulatory standards or by the occurrence of unforeseen problems
following initial marketing.
REGULATORY STATUS OF PRODUCTS
We have received 510(k) clearance to market the following lasers in an
aggregate of more than 100 specialty areas: CO2 (four models: 10W, 20W, 35W,
65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two
models); 1.32 micron Nd:YAG (two models: 15W, 25W); .532 micron Nd:YAG (one
model); Argon (three models); diode (four models); Nd:YAG/Er:YAG combination
laser (one model). Each of these lasers has clearances in multiple specialty
areas. We have also received 510(k) clearance to market a scanner, sculptured
fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips
for all cleared wavelengths of our lasers. If a device for which we have already
received 510(k) premarket clearance is changed or modified in design,
components, method of manufacture or intended use, such that the safety or
effectiveness of the device could be significantly affected, a new 510(k)
premarket notification is required before the modified device can be marketed in
the United States. We have made modifications to certain of our products which
we believe do not require the submission of new 510(k) notifications. However,
we cannot assure you that the FDA will agree with our determinations. If they
did not, they could require us to discontinue marketing one or more of the
modified devices until they have been cleared. There also can be no assurance
that any FDA clearance of modifications would be granted should clearance be
necessary.
OIS has received 510(k) clearance for its digital angiography products
and Digital Slit Lamp, and EyeSys has received 510(k) clearance for its System
2000 and Vista corneal topography systems.
15
We are currently conducting preclinical animal studies and clinical
trials, both under approved IDEs and as nonsignificant risk studies. We do not
know if the results of any of these clinical studies will be successful or if
the FDA will require us to discontinue any of these studies in the interest of
the public health or due to any violations of the FDA's IDE regulations. We
cannot assure you that we will receive approval from the FDA to conduct any of
the significant risk studies for which we seek IDE approval, or that the FDA
will not disagree with our determination that any of its studies are
"nonsignificant risk" studies and require us to obtain approval of an IDE before
the study can continue.
ADDITIONAL REGULATORY REQUIREMENTS
Any products manufactured or distributed by us under a 510(k) premarket
clearance notification or premarket approval application are or will be subject
to pervasive and continuing regulation by the FDA. The FDC Act also requires us
to manufacture our products in registered establishments and in accordance with
current GMP regulations, which include testing, control and documentation
requirements. We must also comply with Medical Device Reporting requirements
that a firm report to the FDA any incident in which its product may have caused
or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, would be likely to cause or
contribute to a death or serious injury. Our facilities in the United States are
periodically inspected by the FDA. The FDA may require postmarketing
surveillance with respect to our products. The export of medical devices is also
regulated in some instances.
All lasers that we manufacture are required under the Radiation Control
for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users under a performance standard, and to comply with labeling and
certification requirements. Various warning labels must be affixed to the laser,
depending on the class of the product under the performance standard.
In addition, the use of our products may be regulated by various state
agencies. For instance, we are required to register as a medical device
manufacturer with various state agencies. In addition to being subject to
inspection by the FDA, we also will be routinely inspected by the State of
California for compliance with GMP regulations and other requirements.
Although we believe that we currently comply in all material respects
and will continue to comply with the applicable regulations regarding the
manufacture and sale of medical devices, these regulations may change
periodically and depend heavily on administrative interpretations. OIS has
recently outsourced its manufacturing operations to Premier, and therefore OIS
also depends on Premier's continuing compliance with these regulations.
It is possible that future changes in law, regulations, review
guidelines or administrative interpretations by the FDA or other regulatory
bodies, with possible retroactive effect, could adversely affect our business,
financial condition and results of operations. In addition to the foregoing, we
are governed by numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that we will not be required to incur
significant costs to comply with these laws and regulations in the future, or
that these laws or regulations will not have a material adverse effect upon our
ability to conduct business.
Furthermore, the introduction of our products in foreign countries
often requires obtaining foreign regulatory clearances, and additional safety
and effectiveness standards are required in various other countries. We believe
that only a limited number of foreign countries currently have extensive
regulatory requirements. These countries include the European Union countries,
Canada, Mexico and Japan. Domestic manufacturing locations of American companies
doing business in some foreign countries, including European Union countries,
may be subject to inspection. The time required for regulatory approval in
foreign countries varies and can take a number of years. During the period in
which we will be attempting to obtain the necessary regulatory approvals, we
16
expect to market our products on a limited basis in other countries that do not
require regulatory approval. We cannot assure you that our products will be
cleared or approved by the FDA or other governmental agencies for additional
applications in the United States or in other countries or that countries that
do not now require regulatory approval will not require this approval in the
future.
MANUFACTURING AND MATERIALS
Manufacturing of our products consists of component assembly and
systems integration of electronic, mechanical and optical components and
modules. Our product costs are principally related to the purchase of raw
materials while labor and overhead have been reduced due to the use of
customized tooling and automated test systems. We believe that our customized
tooling and automated systems improve quality and manufacturing reliability
resulting in lower overall manufacturing costs. We believe that these systems
will allow us to expand production rapidly.
Recently, OIS has outsourced the assembly of its products to Premier.
We purchase some of the raw materials, components and subassemblies
included in our products and OIS's products from a limited group of qualified
suppliers and do not maintain long-term supply contracts with any of our key
suppliers. While multiple sources of supply exist for most critical components
used in our laser, corneal topography and fiberoptic delivery systems, the
disruption or termination of these sources could prevent us from being able to
ship products, which would materially harm our business. Vendor delays or
quality problems could also result in production delays of up to six months as
several components have long production lead times. These long lead times, as
well as the need for demonstration units, require a significant portion of
working capital to fund inventory growth. We have in the past experienced, and
may continue to experience, shortages in raw materials and supplies.
We own the molds used to produce some of the proprietary parts of the
devices. We also design and develop the software necessary for the operation of
our laser systems. We design and assemble our own fiberoptic delivery systems
and laser accessory equipment such as laser carts and associated disposable
supplies. We believe that our manufacturing practices comply with GMP
regulations.
BACKLOG OF ORDERS
We typically ship to order and therefore have no material backlog.
PRODUCT LIABILITY AND INSURANCE
Since our products are intended for use in the treatment of human
medical conditions, we are subject to an inherent risk of product liability and
other liability claims which may involve significant claims and defense costs.
We currently have product liability insurance with coverage limits of $5.0
million per occurrence and $5.0 million in the aggregate per year. Product
liability insurance is expensive and includes various coverage exclusions, and
in the future may not be available in acceptable amounts, on acceptable terms,
or at all. Although we do not have any outstanding product liability claims, in
the event we were to be held liable for damages exceeding the limits of our
insurance coverage or outside of the scope of our coverage, our business and
results of operations could be materially adversely affected. Our reputation and
business could also be adversely affected by product liability claims,
regardless of their merit or eventual outcome.
EMPLOYEES
As of June 25, 1999, Premier (including EyeSys, but excluding OIS)
employed 75 people, 2 of whom are employed on a part-time basis. None of these
employees are represented by a union. Twenty employees perform sales, marketing
and customer support activities. The remaining employees perform manufacturing,
financial, administration, regulatory, research and development and quality
17
control activities. We also engage the services of many independent contractors
and temporary personnel. We have no collective bargaining agreements covering
any of our employees, have never experienced any material labor disruption, and
are unaware of any current efforts or plans to organize our employees. We
consider our relationship with our employees to be good.
OIS EMPLOYEES
As of June 25, 1999, OIS had 26 employees, 24 of which were full time
employees. These include 12 persons engaged in sales, marketing and customer
support activities. OIS also engages the services of consultants from time to
time to assist it on specific projects in the area of research and development,
software development, regulatory affairs, and product services. These
consultants periodically engage contract engineers as independent consultants
for specific projects.
RISK FACTORS
Before you invest in our common stock, you should be aware that there
are various risks, including those described below. You should carefully
consider these risk factors, together with all the other information included or
incorporated by reference in this report, before you decide whether to purchase
shares of our common stock.
Some of the information in this report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You should
read statements that contain these words carefully because they (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our financial condition; or (3) state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this report could
have a material adverse effect on our business, results of operations and
financial condition.
WE HAVE INCURRED NET LOSSES SINCE INCEPTION AND EXPECT FUTURE LOSSES
We incurred net losses of approximately $79,451,000 from April 1, 1995
through March 31, 1999, and approximately $28,961,000 for the fiscal year ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of
approximately $92,315,000. We expect to continue to incur net losses until
product sales generate sufficient revenues to fund our continuing operations.
WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY
Our ability to achieve profitability in the future will depend in part
on our ability to continue to successfully develop clinical applications, obtain
regulatory approvals for our products and sell these products on a wide scale.
These risks apply to both our laser products and our ophthalmic diagnostic
products. In turn, our future sales and profitability depend in part on our
ability to demonstrate to dentists, ophthalmologists, optometrists and other
physicians the potential cost and performance advantages of our laser systems,
diagnostic products and other products over traditional methods of treatment and
over competitive products. To date, commercial sales of our lasers and
diagnostic products have been limited, and we do not know if these products can
be successfully commercialized on a broad basis.
Our products may not be accepted by the medical or dental community or
by patients. The acceptance of dental lasers may be adversely affected by their
high cost, concerns by patients and dentists relating to their safety and
efficacy, and the substantial market acceptance and penetration of alternative
dental tools such as the dental drill. Current economic pressure may make
18
doctors and dentists reluctant to purchase substantial capital equipment or
invest in new technology. We currently have a limited sales force and will need
to hire additional sales and marketing personnel to increase the general
acceptance of our products. The failure of our products to achieve broad market
acceptance would injure our business, financial condition and results of
operations.
WE ARE INVOLVED IN PENDING LITIGATION AND A REGULATORY INVESTIGATION
We have been sued in a number of related securities class action
matters, generally relating to allegations of misrepresentations during the
period May 7, 1997 to April 15, 1998. In addition, the Securities and Exchange
Commission has commenced an investigation of our practices and procedures
relating to revenue recognition issues and related matters. The costs of our
continuing defense of the litigation matters and responses to the regulatory
investigations, including accounting and legal fees as well as management time
and effort, will be substantial, and we expect these costs to materially and
adversely affect our results of operations for the foreseeable future. We have
reached an agreement in principle to settle this litigation and recorded an
expense in the quarter ended December 31, 1998, relating to this settlement.
However, this settlement is subject to several conditions, and it is possible
that it may not be completed, in which case the litigation would continue. An
adverse judgment entered in this litigation could materially and adversely
affect our business and results of operations.
In addition, the Securities and Exchange Commission is empowered to
assess substantial penalties against us in connection with its findings in the
pending investigation. The imposition of any of these penalties could materially
and adversely affect our business, financial condition and results of
operations.
WE MAY HAVE DIFFICULTY INTEGRATING THE OIS BUSINESS
We acquired a majority of the outstanding common stock of OIS in 1998,
and in March 1999 we agreed to manufacture OIS's products on an outsourcing
basis. In addition, Premier has offered to acquire the remaining outstanding
stock of OIS, however, no agreement has been reached regarding such acquisition.
We are not sure if the synergies of the two entities will allow us to reduce
expenses in such a way as to make OIS profitable. In addition, members of our
management will have to continue to expend time and effort on new activities
relating to the OIS operations, which will detract from their time available to
attend to our other activities. We cannot assure you that the expenses or
dislocations that we may suffer as a result of the coordination of these
businesses will not be material.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS
We purchase some of the raw materials, components and subassemblies
included in our products from a limited group of qualified suppliers and do not
maintain long-term supply contracts with any of our key suppliers. While we
believe that alternative suppliers could be found for all of our components, we
cannot assure you that any supplier could be replaced in a timely manner. Any
interruption in the supply of key components could materially harm our ability
to manufacture our products and our business, financial condition and results of
operations.
Some of the components used by EyeSys and OIS are manufactured by a
sole vendor. These components are subject to rapid innovation and obsolescence.
The discontinuance of the manufacturing of these components may require us to
redesign some of the hardware and software used in our products to accommodate a
replacement component. We cannot assure your that such an event would not prove
costly or cause a disruption in sales of corneal topography and digital imaging
systems.
OUR FOREIGN SALES ARE SUBJECT TO RISKS
A substantial portion of our sales are made in foreign markets. Foreign
sales expose us to risks, including:
19
o the difficulty and expense of maintaining foreign sales
distribution channels
o barriers to trade
o potential fluctuations in foreign currency exchange rates
o political and economic instability in the foreign market
o availability of suitable export financing
o difficulty in collecting accounts receivable
o tariff regulations
o governmental quotas and other regulations
o shipping delays
o foreign taxes
o export licensing requirements
The regulation of medical devices worldwide also continues to develop,
and it is possible that new laws or regulations could be enacted which would
have an adverse effect on our business. In addition, we may experience
additional difficulties in providing prompt and cost effective service of our
medical lasers in foreign countries. We do not carry insurance against these
risks. The occurrence of any one or more of these events may individually or in
the aggregate have a material adverse effect upon our business, financial
condition and results of operations.
OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE
The markets in which our medical products compete are subject to rapid
technological change as well as the potential development of alternative
surgical techniques or new pharmaceutical products. These changes could render
our products uncompetitive or obsolete. We will be required to invest in
research and development to attempt to maintain and enhance our existing
products and develop new products. We do not know if our research and
development efforts will result in the introduction of new products or product
improvements.
WE ARE DEPENDENT ON PATENTS AND PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain patent
protection for products and processes, to preserve our trade secrets and to
operate without infringing the proprietary rights of third parties. While we
hold a number of U.S. and foreign patents and have other patent applications
pending in the United States and foreign countries, we cannot assure you that
any additional patents will be issued, that the scope of any patent protection
will exclude competitors or that any of our patents will be held valid if
subsequently challenged. Further, other companies may independently develop
similar products, duplicate our products or design products that circumvent our
patents. We are aware of certain patents which, along with other patents that
may exist or be granted in the future, could restrict our right to market some
of our technologies without a license, including, among others, patents relating
to our lens emulsification product and ophthalmic probes for the Er:YAG laser.
In the past, we have received allegations that some of our laser
products infringe on other patents. There has been significant patent litigation
in the medical laser industry. Adverse determinations in litigation or other
patent proceedings to which we may become a party could subject us to
significant legal judgments or other liabilities to third parties and could
require us to seek licenses from third parties that may or may not be
economically viable. We cannot assure you that any licenses required under these
or any other patents or proprietary rights would be available on terms
acceptable to us. If we do not obtain these licenses, we could encounter delays
in product introductions while we attempt to design around these patents, or we
could find that the development, manufacture or sale of products requiring these
licenses could be enjoined.
We also rely upon unpatented trade secrets, and we cannot assure you
that others will not independently develop or otherwise acquire substantially
equivalent trade secrets. In addition, at each balance sheet date, we are
required to review the value of our intangible assets based on various factors,
such as changes in technology. Any adjustment downward in the value of our
intangible assets may result in a write-off of the intangible asset and a
20
substantial charge to earnings, which would adversely affect our operating
results in the future.
OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION
Our products are regulated as medical devices by the Federal Drug
Administration. As such, these devices require either Section 510(k) premarket
clearance or approval of a premarket approval application by the FDA prior to
commercialization. Satisfaction of regulatory requirements is expensive and may
take several years to complete. We cannot assure you that further clinical
trials of our medical products or of any future products will be successfully
completed or, if they are completed, that any requisite FDA or foreign
governmental approvals will be obtained.
FDA or other governmental approvals of products we may develop in the
future may require substantial filing fees which could limit the number of
applications we seek and may entail limitations on the indicated uses for which
our products may be marketed. In addition, approved or cleared products may be
subject to additional testing and surveillance programs required by the FDA and
other regulatory agencies, and product approvals and clearances could be
withdrawn for failure to comply with regulatory standards or by the occurrence
of unforeseen problems following initial marketing. Also, we have made
modifications to some of our existing products which we do not believe require
the submission of a new 510(k) notification to the FDA. However, we cannot
assure you that the FDA would agree with our determination. If the FDA did not
agree with our determination, they could require us to cease marketing one or
more of the modified devices until the devices have been cleared.
We are also required to adhere to a wide variety of other regulations
governing the operation of our business. Noncompliance with state, local,
federal or foreign requirements can result in serious penalties that could harm
our business.
WE ARE DEPENDENT ON KEY PERSONNEL
We depend to a considerable degree on a limited number of key
personnel, including Colette Cozean, Ph.D., our Chairman of the Board,
President, Chief Executive Officer and Director of Research. Dr. Cozean is also
an inventor of a number of our patented technologies. During our limited
operating history, many key responsibilities have been assigned to a relatively
small number of individuals. The loss of Dr. Cozean's services or those of other
key members of management could harm our business. We carry key person life
insurance in excess of $3 million on Dr. Cozean. Our success will also depend,
among other factors, on the successful recruitment and retention of qualified
technical and other personnel.
OUR BUSINESS IS HIGHLY COMPETITIVE
We are, and will continue to be, subject to intense competition in our
targeted markets, principally from businesses providing other traditional
surgical and nonsurgical treatments, including existing and developing
technologies, and competitive products. Many of our competitors have
substantially greater financial, marketing and manufacturing resources and
experience than us. Furthermore, we expect that other companies will enter the
laser market, particularly as medical lasers gain increasing market acceptance.
Significant competitive factors which will affect future sales in the
marketplace include regulatory approvals, performance, pricing and general
market acceptance.
The ophthalmic diagnostic market is also highly competitive. There are
many companies engaged in this market, some with significantly greater resources
than us. Our competitors may be able to develop technologies, procedures or
products that are more effective or economical than ours, or that would render
our products obsolete or noncompetitive.
To continue to remain competitive, we must develop new software and
hardware meeting the needs of ophthalmologists and optometrists. Our future
revenues will depend, in part, on our ability to develop and commercialize these
21
new products as well as on the success of development and commercialization
efforts of our competitors.
OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE
Due to the relatively high sales price of our products and low sales
unit volume, minor timing differences in receipt of customer orders have
produced and could continue to produce significant fluctuations in quarterly
results. In addition, if anticipated sales and shipments in any quarter do not
occur when expected, expenditures and inventory levels could be
disproportionately high, and our operating results for that quarter, and
potentially for future quarters, would be adversely affected. Quarterly results
may also fluctuate based on a variety of other factors, such as:
o seasonality
o production delays
o product mix
o cancellation or rescheduling of orders
o new product announcements by competitors
o receipt of FDA clearances or approvals by us or our competitors
o notices of product suspension or recall
o our ability to manage product transitions
o sales prices
o market conditions
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
In the future, we will require substantial additional funds for
research and development programs, preclinical and clinical testing, development
of our sales and distribution force, operating expenses, regulatory processes
and manufacturing and marketing programs. Our capital requirements may vary, and
will depend on numerous factors, including:
o the progress of research and development programs
o results of preclinical and clinical testing
o the time and cost involved in obtaining regulatory approvals
o the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights
o competing technological and market developments
o developments and changes in our existing research
o licensing and other relationships
o the terms of any new collaborative, licensing and other
arrangements that we may establish
o the amount of legal, accounting and administrative costs
incurred in connection with pending litigation
We believe that our available short-term assets and investment income will be
sufficient to meet our operating expenses and capital expenditures through the
next 12 months. We do not know if additional financing will be available when
needed, or if it is available, if it will be available on acceptable terms.
Insufficient funds may prevent us from implementing our business strategy or may
require us to delay, scale back or eliminate research and product development
programs or to license to third parties rights to commercialize products or
technologies that we would otherwise seek to develop our self.
OUR STOCK PRICE IS VOLATILE
Our common stock was first publicly traded in December 1994 and has had
last reported closing sale prices ranging from a low of $1.875 per share to a
high of $14.00 per share. The market price of our common stock could continue to
fluctuate substantially due to a variety of factors, including:
22
o quarterly fluctuations in results of operations
o the commencement of or major developments in litigation
o announcement of key developments or new products by competitors
o changes in regulatory environment or market conditions affecting
the medical laser industry
o developments with respect to patents or proprietary rights
o announcement and market acceptance of acquisitions
o changes in earnings estimates by analysts
o press coverage of favorable or unfavorable developments in our
business
o loss of key personnel
o changes in accounting principles or policies
o sales of common stock by existing stockholders
o economic and political conditions
The market price for our common stock may also be affected by our
ability to meet analysts' expectations. Any failure to meet these expectations,
even slightly, could have an adverse effect on the market price of our common
stock. In addition, the market prices of securities issued by many companies may
change for reasons unrelated to the operating performance of these companies. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
the company. If similar litigation were instituted against us, it could result
in substantial costs and a diversion of our management's attention and
resources, which could have an adverse effect on our business, results of
operations and financial condition.
DEFECTS IN OUR PRODUCTS WOULD HARM OUR BUSINESS
The sale of our medical products involves the inherent risk of product
liability claims against us. We currently maintain product liability insurance
coverage in the amount of $5 million per occurrence and $5 million in the
aggregate, but this insurance is expensive, subject to various coverage
exclusions and may not be obtainable in the future on terms acceptable to us. We
do not know whether claims against us arising with respect to our products will
be successfully defended or that our insurance will be sufficient to cover
liabilities arising from these claims. A successful claim against us in excess
of our insurance coverage could materially harm our business.
THERE ARE LIMITATIONS ON THIRD PARTY REIMBURSEMENT FOR OUR PRODUCTS
Our laser systems and other products are generally purchased by
physicians, dentists and surgical centers which then bill various third party
payors, such as government programs and private insurance plans, for the
procedures conducted using these products. Third-party payors carefully review
and are increasingly challenging the prices charged for medical products and
services, and scrutinizing whether to cover new products and evaluating the
level of reimbursement for covered products. While we believe that the laser
procedures using our products have generally been reimbursed, payors may deny
coverage and reimbursement for our products if they determine that the device
was not reasonable and necessary for the purpose for which it was used, was
investigational or not cost-effective. As a result, we cannot assure you that
reimbursement from third party payors for these procedures will be available or
if available, that reimbursement will not be limited. If third party
reimbursement of these procedures is not available, it will be more difficult
for us to sell our products on a profitable basis. Moreover, we are unable to
predict what legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation may have on us.
UNCERTAINTIES REGARDING HEALTH CARE REFORM
Several states and the United States government are investigating a
variety of alternatives to reform the health care delivery system and further
reduce and control health care spending. These reform efforts include proposals
to limit spending on health care items and services, limit coverage for new
technology and limit or control the price health care providers and drug and
device manufacturers may charge for their services and products. If adopted and
23
implemented, such reforms could have a material adverse effect on our business,
financial condition and results of operations.
A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE, AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE
Sales of a substantial number of our shares of common stock in the
public market could adversely affect the market price for our common stock. At
this time, approximately 7.6 million shares of our common stock are issuable
upon the full exercise of our outstanding Class B Warrants, and over 6.4 million
shares of our common stock are issuable upon exercise of other outstanding
warrants and options and conversion of outstanding debentures. The existence of
these outstanding warrants and options could adversely affect our ability to
obtain future financing. We have also reserved 2,250,000 shares of our common
stock for issuance in connection with the proposed settlement of outstanding
litigation. The consummation of this settlement will require satisfaction of a
number of conditions, and we cannot assure you that the settlement will be
completed.
The price which we may receive for our common stock issued upon
exercise of outstanding options and warrants will likely be less than the market
price of our common stock at the time these options and warrants are exercised.
Moreover, the holders of the options and warrants might be expected to exercise
them at a time when we would, in all likelihood, be able to obtain needed
capital by a new offering of our securities on terms more favorable than those
provided for by the options and warrants.
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY
Our articles of incorporation authorize the issuance of 8,850,000
shares of "blank check" preferred stock, which will have terms as may be
determined from time to time by the board of directors. Accordingly, the board
of directors is empowered, without stockholder approval, to issue preferred
stock with terms which could adversely affect the rights of the holders of the
common stock. The preferred stock could also be utilized as a method of
discouraging, delaying or preventing a change in control of Premier.
In March 1998, we adopted a Shareholder Rights Plan, which entitles
certain of our shareholders to purchase our Series A Junior Participating
Preferred Stock. These rights are not exercisable until the acquisition by a
person or affiliated group of 15% or more of the outstanding shares of our
common stock, or the commencement or announcement of a tender offer or exchange
offer which would result in the acquisition of 15% or more of our outstanding
shares. Upon request, we will provide you with a copy of the Shareholder Rights
Plan. The Shareholder Rights Plan may have the effect of discouraging, delaying
or preventing a change of control of Premier.
SHORT SELLING OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE
Downward pressure on the market price of the common stock may result
from sales of common stock issued upon conversion of the debentures and payment
of interest thereon. This downward pressure could encourage short sales of
common stock by the selling shareholders or others. Material amounts of short
selling could place further downward pressure on the market price of the common
stock.
UNCERTAINTIES REGARDING THE YEAR 2000 ISSUE
We have not developed a formal assessment of all potential impacts of
the year 2000. We design, manufacture and sell medical products which contain
computer chips and we utilize software developed by other companies. While our
engineers are developing new software which they expect to complete by mid-
1999, there can be no assurance that their efforts will be successful. We rely
on external business partners. As such, there can be no assurance that our
business will not be negatively affected by year 2000 problems experienced by
these business partners.
24
ITEM 2. PROPERTIES.
EXECUTIVE OFFICES AND MANUFACTURING FACILITIES
We lease approximately 41,000 square feet in one facility in Irvine,
California pursuant to a lease which expires in December 2000. This facility
contains our executive offices, service center and manufacturing space. While we
believe that our manufacturing and administrative facilities are adequate to
satisfy our needs through at least 2000, we may need to lease additional clean
room facilities in the future.
OIS FACILITIES
OIS leases, under a triple net lease, approximately 9,675 square feet
of office, manufacturing, and warehouse space in Sacramento, California under a
month-to-month arrangement, and leases approximately 200 square feet of space
for a sales office in Simsbury, Connecticut.
ITEM 3. LEGAL PROCEEDINGS.
LEASE LITIGATION
In February 1999, we were sued by Telephone Real Estate Equity Trust,
Inc., a company that had leased office space to EyeSys, under a lease that has
now terminated. The case is pending in the District Court of Harris County,
Texas. The former lessor contends that EyeSys did not validly exercise its
rights to terminate the lease, and that it is therefore liable for amounts
specified in the lease. This case is presently in the discovery stage. We intend
to vigorously defend this case.
OPTICAL FIBER LITIGATION
In March 1994, we instituted litigation (the "Fiber Litigation") in the
U.S. District Court, Central District of California, against Infrared Fiber
Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical
fiber to us for our ER:YAG laser. Two of IFS's senior officers are also named as
defendants. Our complaint in this matter alleges that IFS and two of its
officers made misrepresentations to us and that IFS breached its agreement to
supply fibers and warranties concerning the quality of the fiber to be provided.
We are seeking damages and an injunction requiring IFS to subcontract the
production of optical fiber to a third party, as provided in the supply
agreement. In April 1994, IFS filed a general denial and a cross-complaint
against us alleging breach of contract and intentional interference with
prospective economic advantage, seeking compensatory damages "in excess of
$500,000," punitive damages and a judicial declaration that the contract has
been terminated and that IFS is free to market its fibers to others. In
September 1996, IFS filed a new cross-complaint alleging the same causes of
action and seeking substantially the same relief in the Orange County California
Superior Court. We have filed an answer to the complaint, denying the
allegations and asserting several affirmative defenses.
IFS has agreed to license certain fiber technologies, to which we claim
exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of ours.
Coherent joined the above federal litigation on behalf of IFS, seeking a
declaration that IFS had the legal right to enter into this license and supply
the fiber covered by that agreement, and then subsequently filed a new complaint
in the Orange County California Superior Court for declaratory relief, seeking
an order that our original agreement with IFS applies only to a specific type of
optical fiber. We have answered this complaint. We have reached an agreement in
principle with IFS to settle the litigation between us and are in the process of
preparing a written settlement agreement. Although we are hopeful that the
formal settlement agreement will be successfully negotiated, we cannot assure
you that the agreement will actually be completed. The settlement agreement
under discussion does not terminate the litigation as between Premier and
Coherent.
In May 1995, we instituted litigation concerning this dispute in the
Orange County, California Superior Court against Coherent, Westinghouse Electric
Corporation ('Westinghouse") and an individual employee of Westinghouse who was
25
an officer of IFS from 1986 to 1993, when the events involved in the federal
action against IFS took place and while Westinghouse owned a substantial
minority interest in IFS. The complaint charges that Coherent conspired with IFS
in the wrongful conduct which is the subject of the federal lawsuit described
above and interfered with our contracts and relations with IFS and with
prospective contracts and advantageous economic relations with third parties.
The complaint asserts that Westinghouse is liable for its employee's wrongful
acts as an IFS executive while acting within the scope of his employment at
Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In
October 1995, the federal action was stayed by order of the court in favor of
the California state court action, in which the pleadings have been amended to
include all claims asserted by us in the federal action.
In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of our claims against Coherent. As a
result, the claims that were the subject of the granted demurrer have been
dismissed, subject to our right to appeal. We appealed these decisions as they
related to Westinghouse and the Westinghouse employee, however, the Court of
Appeals affirmed the state court's decision. No trial date has been set as to
the remaining outstanding causes of action.
SECURITIES CLASS ACTION
On May 1, 1998, a class action suit (the "Valenti Litigation") was
commenced in the United States District of Court for the Central District of
California under the federal securities laws on behalf of purchasers of our
securities during the period from February 12, 1998 through April 15, 1998. The
complaint alleges that Premier and certain of our officers and directors
violated the federal securities laws by issuing false and misleading statements
and omitting material facts regarding our financial results and operations
during such period. Among other things, the complaint alleges that the
defendants materially misstated our financial results for the fiscal quarter
ended December 31, 1997 and that as a result of such misstatements, the
plaintiff suffered damages as a result of a decrease in the market price of our
publicly traded securities.
After the filing of this complaint, a number of similar complaints were
also filed in the United States District Court for the Central District of
California, seeking certification as class actions, and covering class periods
commencing as early as May 7, 1997. These complaints alleged facts similar to
those described above with respect to the Valenti Litigation, as well as
allegations that we artificially inflated the price of our outstanding publicly
traded securities as a result of misrepresentations relating to the market and
prospects for sale of our Centauri ER:YAG laser. All of the above described
complaints seek monetary damages in unspecified amounts, together with attorneys
fees, interest, costs and related remedies. All of these class action lawsuits
have now been consolidated into a single action.
We have also been named as a nominal defendant in a shareholder
derivative lawsuit filed in the Orange County, California Superior Court, in a
case captioned Eskeland vs. Cozean, et al. The complaint was filed by a
shareholder of ours, on behalf of Premier, against some of our current and
former officers and directors, including Colette Cozean, Michael Hiebert,
Richard Roemer, Ronald Higgins, Patrick Day, Grace Ching-Hsin Lin, G. Lynn
Powell, and E. Donald Shapiro. The complaint alleges, among other things, that
these persons violated their fiduciary duty to Premier by exposing Premier to
liability under the securities laws, failing to ensure that Premier maintained
adequate accounting controls, and related alleged actions and omissions.
Although Premier is a named defendant, the lawsuit seeks to recover damages from
the individual defendants on behalf of Premier. Accordingly, it is not clear
whether Premier will have any liability or incur any material loss as a result
of being named as a defendant in this matter.
Premier has reached a agreement in principle with lead plaintiffs and
their counsel to settle these lawsuits. In exchange for the release of all
claims against Premier and its officers and directors, this agreement requires
Premier to issue to the defendants an aggregate of 2,250,000 shares of its
common stock and requires Premier's insurance carrier would pay $4.6 million in
cash. This agreement is not final, however, and is subject to several
conditions, including the approval by the court and execution of a final
settlement agreement.
INVESTIGATIONS AND OTHER MATTERS
We have been notified that the Securities and Exchange Commission has
instituted an investigation concerning matters pertaining to our revenue
reporting practices, and related management issues. We are cooperating with the
Securities and Exchange Commission in connection with this investigation. This
investigation, we believe, generally relates to whether Premier, in Securities
and Exchange Commission filings and press releases issued prior to the end of
the 1998 fiscal year, properly recognized revenues for transactions occurring
26
during fiscal 1997, and at interim periods in fiscal 1998. To date, the
Securities and Exchange Commission has not indicated that it is seeking to
impose any penalties on Premier or that it is made any specific findings with
respect to our accounting practices.
In May 1998, the Nasdaq Stock Market suspended the trading of our
securities and notified us that they intended to delist these securities. We
appealed this proposed action, and in October 1998 our appeal was granted.
Trading of our securities on the Nasdaq Stock Market National Market recommenced
on October 22, 1998.
We are also involved in various disputes and other lawsuits from time
to time arising from its normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of the IFS litigation,
securities class actions, disputes and other lawsuits may adversely affect us.
OIS LITIGATION
On September 6, 1996, a former employee of OIS filed an action in
Superior Court in the County of Sacramento, California against OIS by alleging
that he was wrongfully terminated by OIS in retaliation for filing a grievance
against a co-employee for harassment and creation of a hostile work environment.
The suit seeks, among other things, lost wages, $150,000 in compensatory
damages, and punitive damages. OIS believes that this action is without merit
and intends to defend this action vigorously.
On or about August 17, 1997, OIS was advised that J.B. Oxford &
Company, one of several market makers in OIS's common shares which trade over
the counter on the Nasdaq Stock Market Small-Cap Market, was being investigated
by the SEC. OIS is cooperating with the Securities and Exchange Commission
investigation of J.B. Oxford & Company. OIS does not believe that it is a
subject of these Securities and Exchange Commission inquiries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on February 26, 1999, at
which meeting our shareholders were asked to consider and vote upon (1) the
election of directors and (2) the 1998 Stock Option Plan. At such meeting the
shareholders elected the following individuals as directors:
Shares Voting
----------------------------
Director For Against
-------- --- -------
Colette Cozean, Ph.D. 13,618,155 310,472
Patrick J. Day 13,617,505 311,122
G. Lynn Powell, D.D.S. 13,624,584 304,043
Lawrence D. Ashcroft 13,624,151 304,476
Fredric J. Feldman, Ph.D. 13,623,584 305,043
John D. Hunkeler, M.D. 13,621,829 306,798
Lewis H. Stanton 13,623,584 305,043
Such individuals were elected to serve as directors until the next
annual meeting of shareholders and until their successors are elected and
qualified. Also at such meeting the shareholders approved the 1998 Stock Option
Plan with 3,057,512 votes for the proposal, 1,196,639 votes against and 153,885
votes abstaining.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A Common Stock and Class B Warrants are listed on the Nasdaq
National Market under the symbols "PLSIA" and "PLSIZ," respectively. Prior to
January 6, 1998, we had Class A Warrants outstanding which were listed on the
Nasdaq National Market and the symbol "PLSIW," and "Units," each consisting of
one share of Class A Common Stock, one Class A Warrant and one Class B Warrant,
were listed on the Nasdaq SmallCap Market. The Class A Warrants were redeemed by
us pursuant to the terms of the Warrant Agreement on January 6, 1998, and as a
result there have been no outstanding Class A Warrants or Units since that date.
Trading of our Class A Common Stock and Class B Warrants was suspended
by the Nasdaq Stock Market on May 26, 1998, when our former auditors withdrew
their audit opinion on the 1997 fiscal year. Trading of our securities on the
Nasdaq Stock Market National Market recommenced on October 22, 1998.
The following table sets forth, for the calendar quarters indicated,
the high and low closing sale prices per share of our Common Stock and Class B
Warrants as reported on the Nasdaq National Market.
Class A Class B
Common Stock Warrants
-------------------- --------------------
Low High Low High
--- ---- --- ----
1997:
First Quarter ........................................ 5 3/16 8 1/8 27/32 1 11/16
Second Quarter ....................................... 5 1/4 14 3/4 5 3/4
Third Quarter ........................................ 8 1/2 11 17/32 2 5/16 3 27/32
Fourth Quarter ...................................... 7 3/16 10 1/2 1 3/16 3
1998:
First Quarter......................................... 7 11/16 11 11/16 1 5/8 3 7/8
Second Quarter(1)..................................... 4 3/16 10 7/16 25/32 2 7/8
Third Quarter(1)...................................... -- -- -- --
Fourth Quarter(1)..................................... 1 7/8 4 7/16 1/8 13/16
1999:
First Quarter......................................... 1 15/16 4 3/16 5/32 1/2
Second Quarter (through June 25, 1999)................ 2 1/16 3 3/8 1/8 11/32
- --------------------
(1) From May 26, 198 to October 22, 1998, the trading in our Class A Common
Stock and Class B Warrants was suspended by the Nasdaq Stock Market.
On May 22, 1998, the last day prior to suspension of trading, the last
reported sale price for our Common Stock and Class B Warrants on the Nasdaq
National Market was $4 3/16 and $13/16, respectively. As of June 25, 1999, the
approximate number of holders of record of our Common Stock, Class B Warrants,
Class E-1 Common Stock and Class E-2 Common Stock were 790, 31, 323 and 323,
respectively. There is no public market for our Class E-1 and Class E-2 Common
Stock.
We have not paid dividends and does not anticipate declaring dividends
on our Common Stock in the foreseeable future.
28
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table contains certain selected consolidated financial
data of Premier and is qualified by the more detailed financial statements and
notes thereto of Premier included herein. The balance sheet and statement of
operations data for the periods ended March 31, 1996, 1997, 1998 and 1999 have
been derived from our financial statements, audited by Haskell & White LLP,
independent accountants. The balance sheet and statement of operations data for
the period ended March 31, 1995 has been derived from our financial statements,
audited by Price Waterhouse, LLP, independent accountants. The following
information should be read in conjunction with Premier's financial statements
and related notes thereto included herein and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- --------
(RESTATED)
(IN THOUSANDS)
SELECTED STATEMENT OF
OPERATIONS DATA:
Net sales.............................. $ 1,249 $ 1,704 $ 5,091 $ 9,886 $ 13,971
Cost of sales.......................... 1,298 3,324 3,649 17,234 13,405
--------- --------- --------- --------- ---------
Gross profit (loss).................... (49) (1,620) 1,442 (7,348) 566
Selling and marketing expenses......... 1,036 1,309 2,415 5,113 7,930
Research and development 1,036 1,214 1,563 3,088 4,165
expenses...............................
General and administrative 1,747 1,709 1,853 3,700 6,625
expenses...............................
Shareholder litigation settlement
expense ............................ -- -- -- -- 8,082
Write-off of investment................ -- -- 881 -- --
Termination of strategic alliance
with IBC............................. -- -- 331 -- --
In process research and develop-
ment acquired in acquisitions........ -- -- 250 12,800 --
Merger related and integration
costs............................... -- -- -- 7,617 --
--------- --------- --------- --------- ---------
Loss from operations................... (3,868) (5,852) (5,851) (39,666) (26,236)
Interest income (expense), net ....... (322) 99 15 1,074 203
Minority interest in loss of
consolidated subsidiary.............. -- -- 60 274 1,764
Discontinued operations................ -- -- (197) (446) (4,692)
Extraordinary gains .................. 382 -- -- -- --
--------- --------- --------- --------- ---------
Net loss ............................. (3,808) (5,753) (5,973) (38,764) (28,961)
Other comprehensive income ........... -- -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive loss..................... $ (3,808) $ (5,753) $ (5,973) $(38,764) $(28,961)
========= ========= ========= ========= =========
SELECTED PER SHARE DATA:
Loss per share before discontinued
operations and extraordinary item(2). $ (1.59) $ (1.26) $ (.99) $ (3.35) $ (1.56)
Discontinued operations................ -- -- (.03) (.04) (.30)
Extraordinary gain from
extinguishment of indebtedness....... 15 -- -- -- --
--------- --------- --------- --------- ---------
Net loss per share(1).................. $ (1.44) $ (1.26) $ (1.02) $ (3.39) $ (1.86)
========= ========= ========= ========= =========
Weighted average shares
outstanding(2)....................... 2,585 4,557 5,833 11,444 15,531
29
AT MARCH 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
----- ----- ---- ---- ----
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 5,888 $ 35 $ 174 $ 9,723 $ 889
Working capital (deficit)............ 6,756 5,18 7,526 19,017 (1,363)
Total assets......................... 16,884 15,675 21,079 47,708 19,276
Long-term debt....................... -- -- -- -- --
Shareholders' equity................. 15,002 13,797 16,249 31,456 9,303
(1) The effect on net loss per common share of the conversion of Premier's
debentures was to reduce historical net loss by $67,995 and to increase
weighted average shares outstanding by 321,099 shares for the fiscal year
ended March 31, 1995. Net loss per common share was computed based on the
weighted average number of our common shares outstanding during the fiscal
year ended March 31, 1995 after giving retroactive adjustment for
recapitalization and conversion of debentures outstanding prior to our
initial public offering into Units upon completion of our initial public
offering.
(2) Does not include shares of Class E-1 or Class E-2 Common Stock, which are
subject to cancellation in certain circumstances.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THE RESULTS DISCUSSED BELOW
ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN ANY FUTURE
PERIODS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT
EXPECTATIONS AND WHICH INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND THE
TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THESE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
HEREIN, IN THE SECTION ENTITLED "RISK FACTORS" AND ELSEWHERE IN THIS REPORT.
GENERAL
Premier develops, manufactures and markets several lines of proprietary
medical lasers, fiber optic delivery systems, diagnostic imaging systems and
associated products for a variety of dental, ophthalmic and surgical
applications. Premier commenced operations in August 1991, after acquiring
substantially all of the assets of Pfizer Laser Systems, a division of Pfizer
HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets we acquired
included the proprietary rights to a broad base of laser and fiber optic
technologies developed by Pfizer Laser Systems. This acquisition was led by our
current Chief Executive Officer.
While we have received FDA clearance to market laser products covering
a variety of medical applications, to date we have focused our research,
development and marketing efforts on a limited number of products or
applications. These applications principally consist of specific dental and more
recently, ophthalmic applications. As future resources permit, we may introduce
products for applications for which we already have all necessary approvals or
may seek strategic alliances to develop, market and distribute these products.
We have recorded operating losses in each of the fiscal years since our
formation, resulting in large part from substantial sales and marketing and
general and administrative expenses, business acquisition costs and costs
incurred in research and development activities and in obtaining regulatory
approvals. Although sales increased significantly during fiscal 1998, operating
results worsened due to the impacts of expensed business acquisition costs and a
failed distribution agreement.
As discussed in Note 6 to the accompanying financial statements,
Premier and several of our officers and directors have been named in a number of
securities class action lawsuits which allege violations of the Securities
30
Exchange Act or the California Corporations Code. We have also been named in a
shareholders' derivative action. Any significant uninsured judgment or
settlement amount associated with these claims would seriously affect our
ability to satisfy our working capital requirements.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1998
Our net sales increased 41% to $13,971,000 for the year ended March 31,
1999 ("fiscal 1999") from $9,886,000 for the year ended March 31, 1998 ("fiscal
1998"). This increase was primarily attributable to sales of ophthalmic products
manufactured both by us, and by our 51%-owned subsidiary, Ophthalmic Imaging
Systems. Our fiscal 1998 net sales included only two months of sales by OIS.
Cost of sales decreased 22% to $13,405,000 in fiscal 1999 from
$17,234,000 in fiscal 1998. The majority of the decrease is due to the
difference between inventory reserves of $7,500,000 recognized during fiscal
1998 associated with the failure of a relationship with dental distributor Henry
Schein, Inc., and reserves for additional excess inventory quantities of
$2,300,000 recognized during fiscal 1999. Also contributing to the reduction in
cost of sales were lower warranty service costs and a decrease in materials
scrap expense. Offsetting this reduction were the inclusion of a full year of
OIS cost of sales as well as higher manufacturing expenses associated with
excess manufacturing capacity during fiscal 1999.
Selling and marketing expenses increased 55% to $7,930,000 in fiscal
1999 from $5,113,000 in fiscal 1998. Approximately one-half of the increase was
attributable to the selling and marketing expense of OIS, which was included for
only two months in fiscal 1998. Other factors which contributed to the increase
during fiscal 1999 include substantial growth in trade show and advertising
expense associated with our dental and ophthalmic product offerings, as well as
increased use of professional advisory services.
Research and development expenses increased 35% to $4,165,000 in fiscal
1999 from $3,087,000 in fiscal 1998. Approximately three-fourths of the increase
was due to the inclusion of research and development expenses of OIS which were
included for only two months in fiscal 1998. The balance of the increase was due
to personnel additions, increased clinical costs, and higher consulting services
associated with new product development. Substantially offsetting the increase
in research and development expense during fiscal 1999 was a reduction in
compensation expense for stock options granted to consultants and other
non-employees during fiscal 1998 which were subsequently terminated.
General and administrative expenses increased 79% to $6,625,000 in
fiscal 1999 from $3,700,000 in fiscal 1998. Approximately one-third of the
increase was attributable to the general and administrative expense of OIS,
which was included for only two months in fiscal 1998. Legal and accounting fees
increased substantially during fiscal 1999 as compared to fiscal 1998, rising by
approximately $324,000, and $387,000 respectively. These increases resulted from
the resignation of our former auditors and the resulting need to have audits
performed for two fiscal years, as well as class action litigation and
SEC/Nasdaq inquiries that arose during the quarter ended June 30, 1998. Also
contributing to the increases in fiscal 1999 as compared to fiscal 1998, were an
increase in our provision for bad debts of $405,000 and an increase in
compensation expense of $401,000.
On November 18, 1998, we reached an agreement in principle with lead
plaintiffs and their counsel to settle certain class and derivative action
lawsuits which allege violations of the Securities Exchange Act or the
California Corporations Code . The plaintiffs seek damages on behalf of classes
of investors who purchased our stock between May 7, 1997 and April 15, 1998.
Under the terms of the agreement in principle, in exchange for a release of all
claims, we would pay 2,250,000 shares of common stock and $4,600,000 in cash.
The cash portion of the settlement would be paid by our insurance carrier.
Completion of the settlement is subject to the execution of the final settlement
agreement, court approval and certain other conditions. In accordance with the
terms of the agreement in principle to settle class and derivative actions, we
established a reserve during the third quarter of fiscal 1999 for the future
issuance of 2,250,000 shares of common stock. The shares were valued at a price
of $3.31 per share which was the closing price of our stock on November 18,
1998, the effective date of the proposed settlement agreement. We have included
31
approximately $634,000 of associated legal and professional fees in this reserve
for fiscal 1999, but have not included in the reserve approximately $4,600,000
in cash that would be paid by our insurers.
In fiscal 1998 we recognized $12,800,000 for in process research and
development and $7,617,000 in merger and integration costs related to the
acquisitions of 51% ownership in OIS and 100% of EyeSys Technologies, Inc. No
business acquisitions have occurred during fiscal 1999.
Net interest income decreased by 81% to $203,000 for fiscal 1999 as
compared to $1,073,000 for fiscal 1998. The decline in interest income reflects
a decrease in excess cash flow available for us to invest during fiscal 1999.
The decrease in cash flow was primarily due to increased operating expenses and
higher working capital requirements.
Approximately $700,000 of the Company's consolidated losses were
attributable to the minority shareholder interest of OIS. However 100% of this
loss was absorbed by us due to the capital deficiency position of OIS.
In March 1999, the board of directors of Data.Site, adopted a plan to
discontinue its operations. Accordingly, the results of Data.Site's operations,
plus the write-off of $3,511,000 in unamortized goodwill, capitalized software
development costs, and equipment have been segregated from continuing operations
and reported on a separate line item on the statement of operations and
comprehensive loss for fiscal 1999. The statement of operations for fiscal 1998
and fiscal 1997 have been reclassified to present Data.Site's operating results
as discontinued operations. Approximately $2,200,000 of the Company's
consolidated losses during fiscal 1999 were attributable to the minority
interest of Data.Site. Of this amount $400,000 could not be attributed to the
minority interest due to the capital deficiency position of Data.Site and was
therefore absorbed by us.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1997
Net sales increased 94% to $9,885,000 for the year ended March 31, 1998
("fiscal 1998") from $5,091,000 for the year ended March 31, 1997 ("fiscal
1997"). This increase was primarily attributable to an increase in sales to the
dental market including sales resulting from the introduction of the Er:YAG
laser for cavity preparation and ophthalmic sales from the EyeSys product line
during the latter half of fiscal 1998. Dental sales during the last two quarters
of fiscal 1998 were adversely affected by an impasse reached with dental
distributor Henry Schein, Inc. over the nature of a relationship between the
parties initiated with a letter of intent executed in December 1997. We believed
that Henry Schein obligated itself to accept an initial shipment of product, and
that the relationship was being expanded. Henry Schein subsequently notified us
that it did not agree with our understanding of the terms of the relationship.
Sales during the last two quarters of fiscal 1997 were also adversely affected
by a disruption in our supply of Arago argon laser and vendor supply problems
with our Multi-Operatory Dentalaser argon laser.
Cost of sales increased 372% to $17,234,000 in fiscal 1998 from
$3,649,000 in fiscal 1997, due to an increase in sales, excess inventory
reserves of $7,500,000 associated with the failure of the Henry Schein
relationship, substantially higher warranty costs, and start-up and training
expenses associated with Er:YAG laser and fiber and EyeSys product manufacture.
Selling and marketing expenses increased 112% to $5,113,000 in fiscal
1998 from $2,415,000 in fiscal 1997. This increase was primarily attributable to
significant increases in marketing personnel, introduction of the Er:YAG laser,
increased commissions and associated selling expenses, and from consolidation of
the expenses of new subsidiaries.
32
Research and development expenses increased 98% to $3,087,000 in
fiscal 1998 from $1,563,000 in fiscal 1997. This increase resulted primarily
from increases in Premier's research and development personnel, an additional
$510,000 of clinical trial costs and associated samples, travel expenditures for
Premier and EyeSys, and $710,000 of expense for all other new subsidiaries. The
expense in fiscal 1997 was offset by a $450,000 payment received by Premier
under a Small Business Innovative Research grant. We also recognized $225,000
and $190,000 as a research and development expense from the issuance of stock
options to clinical evaluators and medical directors in fiscal 1998 and fiscal
1997 respectively.
General and administrative expenses increased 100% to $3,700,000 in
fiscal 1998 from $1,853,000 in fiscal 1997. This increase was partially due to
$459,000 of expenses from new subsidiaries, $400,000 for litigation expense
related to a supply agreement for optical fibers, and $250,000 for issuance of
stock options.
Net interest income increased to $1,073,000 in fiscal 1998 from $15,000
in fiscal 1997. This increase reflected our higher cash balances following the
completion of our secondary offering in October 1996 and the exercise of
outstanding warrants in January 1998. The net proceeds from these capital stock
transactions were $10,401,000 from the secondary offering and $41,735,000 from
the warrant exercises.
In fiscal 1998, Premier expensed $12,800,000 for in process research
and development and $7,617,000 in merger and integration costs related to the
acquisitions of 51% ownership in OIS and 100% of EyeSys. Approximately $180,000
of losses were attributable to the minority shareholder interest of OIS. However
100% of the loss was absorbed by Premier due to the capital deficiency position
of OIS. We recorded $349,000 of losses attributable to our minority shareholder
interest of Data.Site compared with $60,000 during 1997.
In summary, the operating results for 1998 were negatively impacted by
$20,417,000 of acquisition expenses (including $16,500,000 of non-cash costs),
$7,500,000 of inventory write-downs, $1,100,000 of warranty cost, $480,000 of
non-cash stock option expense, bad debt expense of $600,000, and litigation
costs of $400,000.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed through the proceeds from the sale of
our equity securities, including an initial public offering in December 1994,
and a secondary public offering in October 1996, the exercise of publicly traded
warrants and stock options, revenues from operations, and proceeds from a Small
Business Innovative Research Grant. Further, in May of 1999, we received $2
million in gross proceeds from a private offering and sale of convertible
debentures and will receive an additional $2 million in gross proceeds from this
financing upon the effectiveness of this registration statement. The net
proceeds of this financing will be used for working capital requirements. In
connection with this financing, we granted to the lenders a security interest in
substantially all of our assets, including without limitation our patents and
other intellectual property.
Our principal capital requirements include the financing of inventory,
accounts receivable, research and development activities, the development of
ophthalmic, dental and surgical sales forces, the development of marketing
programs and the acquisition and/or licensing of patents.
At March 31, 1999, we had unrestricted cash and short-term investments
of $889,000 and a working capital deficit of $1,363,000. The decrease in cash
and short-term investments since March 31, 1998 was primarily the result of the
losses during fiscal 1999, increased by working capital changes during the
period, including the continued receipt of inventory purchases commitments that
had been made during the prior fiscal year. Cash flow during fiscal 1997 and
1998 was positive as the net result of cash proceeds from equity offerings and
exercise of stock options and warrants, reduced by operating requirements and
investing activities associated with new business acquisitions.
33
Our future capital requirements will depend on many factors, including:
o the progress of our research and development activities
o the scope and results of pre-clinical studies and clinical trials
o the costs and timing of regulatory approvals
o the rate of technology advances
o competitive conditions within the medical laser industry
o the maintenance of manufacturing capacity
o the outcome of the class action lawsuits
o the establishment of collaborative marketing and other relationships
which may either involve cash infusions to us, or require additional
cash from us.
Our ability to meet our working capital needs will depend on our
ability to achieve sales targets, profitability and a positive cash flow from
operations. We cannot assure you that we will be able to achieve sales targets,
profitable operations or a positive cash flow from operations.
We believe that our present liquid assets and cash to be generated
through the operation of our business will be sufficient to meet our working
capital requirements through at least March 31, 2000. Any significant uninsured
settlement or judgment associated with the class action litigation would
materially adversely affect our ability to satisfy our working capital
requirements. If additional capital is required, we would consider several
financing alternatives including the issuance of securities, licensing of
technology and marketing rights, and/or bank financing. We cannot assure you
that we would be successful in obtaining additional financing.
At March 31, 1999, we had net operating loss carryforwards for federal
income tax purposes totaling approximately $55 million which will begin to
expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which may
limit the net operating loss carryforwards available for use in any given year
if certain events occur, including significant changes in stock ownership.
Utilization of our net operating loss carryforwards to offset future income may
be limited.
GOVERNMENT GRANTS
We have been awarded a SBIR grant for approximately $750,000 for the
study of laser cataract emulsification. Substantially all of this grant has been
drawn for such purposes. The remaining $50,000 of the grant can be drawn upon
the achievement of specified criteria.
YEAR 2000 ISSUES
During the quarter ended September 30, 1998, we upgraded our
computerized accounting system to a release that is compliant with Year 2000
dating sensitivities. The costs of this upgrade were minimal. We have not
prepared a formal assessment of the internal and external Year 2000 issues that
would have a significant impact on our products. Our laser products are not date
sensitive. Diagnostic products, on the other hand, contain date sensitive data
bases. Our software engineers are developing new software to be available by
mid-1999 which will address the Year 2000 dating issues. The costs of software
modification are not expected to be material. Any diagnostic products currently
in the market that are covered by a warranty will be upgraded at no charge to
the customer at an insignificant cost to the company. We plan to charge upgrade
fees for previously sold products that are outside of the warranty period. We
expect that our existing warranty reserves will be adequate to absorb the
upgrade costs.
34
SEASONALITY
To date, our revenues have typically been significantly higher in the
second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year-end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are included in Part IV, Item 14 of this Form 10-K and are presented beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 1, 1998, we filed a Current Report on Form 8-K, reporting a
change in our certifying accountant. This Current Report was amended on June 15,
1998. In connection with the resignation of our former accountants, there was a
disagreement between us and our former accountants concerning certain accounting
matters. Reference is hereby made to such Current Reports for further discussion
of this matter.
On June 22, 1998, we engaged the firm of Haskell & White LLP as our
certifying accountant. The engagement of Haskell & White LLP was reported in a
Current Report on Form 8-K filed June 26, 1998.
35
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
Our directors and executive officers and their ages as of March 31,
1999 are as follows:
NAME Age Position
---- --- --------
Colette Cozean, Ph.D.(1)............... 41 Chairman of the Board, Chief Executive Officer, President
and Director
Robert V. Mahoney...................... 57 Vice President, Finance and Chief Financial Officer
Tom Hazen.............................. 57 Executive Vice President, Operations
Judith A. McCall....................... 58 Vice President, Human Resources, Administration and
Special Projects and Secretary
Jeffrey A. Anderson.................... 32 Vice President, Regulatory Affairs and Quality Assurance
Lawrence D. Ashcroft(2)(3)............. 70 Director
Patrick J. Day......................... 72 Director
Fredric J. Feldman, Ph.D.(2)(3)........ 59 Director
John Hunkeler, M.D., F.A.C.S.(2)....... 57 Director
G. Lynn Powell, D.D.S.(2).............. 57 Director
Lewis H Stanton(3)..................... 45 Director
- ----------------------------
(1) We are presently in the process of seeking additional management personnel,
including a new Chief Executive Officer. Under our current plans, if we are
able to hire a new Chief Executive Officer, Dr. Cozean will retain her
positions as Director of Research and Chairman.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
All directors hold office until the next Annual Meeting of Shareholders
or the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The business experience, principal occupations and employment, as well
as periods of service, of each of our directors and executive officers during at
least the last five (5) years are set forth below.
COLETTE COZEAN, PH.D. is a founder of Premier and has been its Chairman
of the Board of Directors, President and Director of Research since it commenced
operations in August 1991 and became the Chief Executive Officer in 1994. From
April 1987 to August 1991, Dr. Cozean served as Director of Research and
Development, Regulatory Affairs and Clinical Programs at Pfizer Laser Systems, a
division of Pfizer Hospital Products Group, Inc. and in these capacities managed
the development of the laser technologies which we acquired from Pfizer Laser
Systems. Prior to April 1987, Dr. Cozean held various research positions at
Baxter Edwards, a division of Baxter Healthcare Corporation, and American
Technology and Ventures, a division of American Hospital Supply Company. Baxter
Healthcare Corporation and American Hospital Supply Company are manufacturers
and suppliers of advanced medical products. Dr. Cozean holds several patents,
has published many articles and has served as a member of the National
Institutes of Health grant review committee. Dr. Cozean received a Ph.D. in
biomedical engineering and an M.S. in Electrical Engineering from Ohio State
University, a B.S. in biomedical engineering from the University of Southern
California, and a B.A. in physical sciences from Westmont College.
36
JEFFREY A. ANDERSON has been Vice President, Regulatory Affairs and
Quality Assurance since September 1997 when he joined Premier. Prior to that
time and since November 1995, Mr. Anderson had served as Regulatory Affairs
Manager of Medtronic. From December 1993 to November 1995, Mr. Anderson served
as Regulatory Affairs Specialist of Sybron Dental Specialties and from December
1991 to December 1993, he served as Regulatory Affairs/Quality Assurance Manager
of Laser Medical Technology, Inc. Mr. Anderson received a B.S. in Physics from
California State University Fullerton.
TOM HAZEN has been the Executive Vice President, Operations of Premier
since October 1997. Prior to joining Premier and since 1992, Mr. Hazen served as
Vice President of Operations of Imagyn Medical, Inc. In addition, Mr. Hazen has
served in various executive offices with several companies in the medical field
specializing in product development and manufacturing. These positions include
Vice President Operations at MICA Technology Services in Buffalo Grove, Illinois
and President and Chief Executive Officer of California based Dolphin Imaging
Systems. Mr. Hazen received a BSME degree from the University of Arizona and an
MBA from UCLA.
ROBERT V. MAHONEY joined Premier in December 1998 as the Chief
Accounting Officer, and became Chief Financial Officer and Executive Vice
President-Finance in January 1999. Before then and since February 1997, Mr.
Mahoney served as Director, Strategy and New Ventures of Tandem Computers, Inc.
From August 1996 until November 1996, Mr. Mahoney was an employee of Superstill
Technology, Inc. Before his employment at Superstill Technology, from January
1996 until July 1996, Mr. Mahoney served as the Chief Financial Officer and
Senior Vice President, Finance of Interactive Network, Inc. Mr. Mahoney received
a MBA from Stanford University and holds a B.S. in Public Policy from the United
States Air Force Academy.
JUDITH A. MCCALL has been with Premier since April 1993 and became Vice
President, Human Resources, Administration and Special Projects and Secretary in
January 1998. For the past three years, Ms. McCall has headed our human
resources department. Prior to joining Premier, Ms. McCall held various senior
operations and administrative positions with firms in Southern California and
served as Director of Training and Development for API Security. Ms. McCall
received a M.A. in Marriage, Family and Child Psychology from Azusa Pacific
College in Azusa, California and a B.A. in Christian Education from St. Andrews
Presbyterian College in Lauringburg, North Carolina.
LAWRENCE D. ASHCROFT joined the board of directors in December 1998.
Mr. Ashcroft has held a number of senior management and directorial posts in
both the United States and Europe. Before his retirement, from 1988 to 1995, Mr.
Ashcroft served as Chairman of the Board of Directors of Cardiopet, Inc., a
company which specialized in reading animal electrocardiograms worldwide via
telephone. Mr. Ashcroft currently serves on the board of directors of Leading
Edge Technologies and is a non-executive director of Tatatech Inc., Westergaard
Broadcasting Inc. and Comstock and Madison Systems Inc.
PATRICK J. DAY has served as a director of Premier since August 1991.
Mr. Day is a Certified Public Accountant and owns a CPA firm which he
established in 1967. Mr. Day has served as a director for several organizations
including the First Presbyterian Church of Hollywood and many private companies.
Mr. Day is the father of Dr. Cozean, our Chairman of the Board and President.
Mr. Day received a B.A. in accounting from the University of Idaho.
FREDRIC J. FELDMAN, PH.D. joined the board of directors in December
1998. Dr. Feldman has been a consultant to start up healthcare companies,
investment banks and venture capital groups since 1992. Before and during that
period, Dr. Feldman served as Chief Executive Officer of Biex, Inc., a company
specializing in womens' health; as Chief Executive Officer and Chairman of the
Board of Directors of Oncogenetics, Inc., a cancer diagnostics company; and as
President and Chief Executive Officer of Microgenics Corporation, a
biotechnology company. Currently, Dr. Feldman serves as a director for Ostex
37
International, Inc., SangStat Medical Corporation and Orthologic Corp. and
several private companies. Dr. Feldman received a Ph.D. in Analytical Chemistry
and a M.S. in Inorganic Chemistry from the University of Maryland and a B.S. in
Chemistry from the City University of New York.
JOHN D. HUNKELER, M.D., F.A.C.S. joined the board of directors in
December 1998. Dr. Hunkeler is a board certified ophthalmologist who has been in
private practice in Kansas City, Missouri since 1973. He is also a professor and
Chairman of the Department of Ophthalmology at the University of Kansas Medical
Center, the President of Hunkeler Eye Centers and the former President of the
American Society of Cataract and Refractive Surgery. Dr. Hunkeler is the former
Medical Director and Vice President of the Kansas City Eye Bank. Dr. Hunkeler
holds a B.A. from Harvard College and received his medical degree from the
University of Kansas in 1967.
G. LYNN POWELL, D.D.S. joined the board of directors in January 1997.
Dr. Powell has been on the faculty at the University of Utah since 1982, where
he currently serves as the Assistant Dean for Dental Education in the School of
Medicine and Professor in the Department of Pathology. He is a patent holder who
has performed extensive research in the field of dentistry serving as primary
investigator on several funded grants and is author or co-author of over 45
papers in journals, a majority of which relate to the use of lasers in
dentistry. He serves as a reviewer for three dental and laser journals, has
lectured nationally as well as internationally, and routinely presents his work
at research meetings. Dr. Powell is the current President of the International
Society for Lasers in Dentistry. Dr. Powell received his D.D.S. from the
University of Washington and was on the full time faculty in Restorative
Dentistry at that institution for ten years.
LEWIS H. STANTON joined the board of directors in December 1998. Mr.
Stanton has been the Executive Vice President, Chief Operating Officer and Chief
Financial Officer of MAI Systems Corporation since he joined that company in
1997. From 1996 until he joined MAI Systems in 1997, Mr. Stanton was the
President of Stanton & Associates, a consulting company. From September 1996
until January 1997, Mr. Stanton served as acting Chief Executive Officer of
Worldwide Networks, Inc., an Internet access provider. From 1988 until 1996, Mr.
Stanton served as Chief Financial Officer of Data Analysis Inc., the parent
company of Investor's Business Daily, a national daily newspaper; William O'Neal
& Co. Inc., an institutional research firm and database company; and other
companies. From 1976 until 1988, Mr. Stanton was with the international
accounting firm Arthur Andersen & Co., specializing in financial services. Mr.
Stanton is a member of the AICPA and was chair of the California Society of
CPAs, Los Angeles, Members in Industry Committee for four years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, and the
regulations thereunder, require our directors, executive officers and persons
who own more than 10% of a registered class of our equity securities to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of our and other equity securities, and to
furnish us with copies of all Section 16(a) forms which they file.
During the fiscal year ended March 31, 1999, all reports required to be
filed pursuant to section 16(a) of the Exchange Act were filed on a timely
basis.
During the fiscal year ended March 31, 1998, Jeffrey A. Anderson, J.
Randy Alexander and Judith A. McCall, each one of our executive officers, failed
to file on a timely basis an Initial Statement of Beneficial Ownership of
Securities on Form 3. During the fiscal year ended March 31, 1998, Tom Hazen,
also an executive officer, and Patrick J. Day, one of our directors, failed to
file on a timely basis, a Statement of Changes of Beneficial Ownership on Form
4.
38
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the two (2) fiscal years ended March 31, 1999 and 1998, all
other Section 16(a) filing requirements applicable to our officers, directors
and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid
to our Chief Executive Officer and each other executive officer who received an
annual salary and bonus of more than $100,000 for services rendered to us during
the fiscal year ended March 31, 1998.
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION(1) -------------------
FISCAL ----------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
--------------------------- ---- ------ ----- ------------------ ------------
Colette Cozean, Ph.D., President, 1999 $250,000 $25,000 0 $38,950(2)
Chief Executive Officer and 1998 $165,000 $100,000 1,000,000 $16,704(3)
Director of Research 1997 $151,064 -- 217,500 $32,300(4)
Tom Hazen, Executive Vice 1999 $150,000 $20,000 0 --
President, Operations
- ---------------------
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the named persons did not exceed the lesser of either $50,000 or 10% of
the total annual salary reported for the person shown above. We have
entered into Termination Agreements with the above executive officers which
provide that in the event of a termination of employment following a change
in control of Premier, as defined in this agreement, the named executive
officer will receive (i) a lump sum cash payment equal to two times the
highest annual level of total cash compensation paid to that officer during
the three (3) calendar years prior to the termination; (ii) immediate
vesting of all previously granted stock options; and (iii) continuing
health benefits for a period of twenty-four (24) months. We have also
entered into Employment Agreements with each of the named persons which
provide for two to four (4) months of severance benefits upon their
termination of employment. Based upon salary levels as of March 31, 1999,
these severance benefits would be approximately $83,334 for Dr. Cozean and
$37,500 for Mr. Hazen.
(2) Represents $32,500 of premiums incurred by us for a split-dollar life
insurance policy in the amount of $2 million on the life of Dr. Cozean and
an auto allowance of $6,450.
(3) Represents $5,000 of premiums paid by us for a split-dollar life insurance
policy in the amount of $2 million on the life of Dr. Cozean and an auto
allowance of $11,704.
(4) Represents $27,500 of premiums paid by us for a split-dollar life insurance
policy in the amount of $2 million on the life of Dr. Cozean and an auto
allowance of $4,800.
OPTIONS GRANTED IN LAST FISCAL YEAR
During the fiscal year ended March 31, 1999, we did not grant any stock
options to either of the executive officers named in the Summary Compensation
Table above.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information regarding stock options
exercised by the named executive officers during the fiscal year ended March 31,
1999, as well as the number of exercisable and unexercisable in-the-money stock
options and their values at fiscal year-end. An option is in-the-money if the
fair market value for the underlying securities exceeds the exercise price of
the option.
39
Value of
Number of Unexercised In-the-
Unexercised Options Money Options at
Shares at March 31, 1999 March 31, 1999(1)
Acquired Value -------------------- --------------------
on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
----------- -------- ------------------------- -------------------------
Colette Cozean, Ph.D.............. 0 0 1,043,650/1,716,150 $0/$0
Tom Hazen ........................ 0 0 50,000/150,000 $0/$0
- --------------------
(1) Represents the Nasdaq Stock Market last sale price of underlying
securities at fiscal year end, minus the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended March 31, 1999, the members of the
compensation committee were Dr. Feldman, Dr. Hunkeler, Dr. Powell and Mr.
Ashcroft, all of whom are non-employee directors of Premier. No member of the
compensation committee has a relationship that would constitute an interlocking
relationship with executive officers and directors of another entity.
COMPENSATION COMMITTEE REPORT TO SHAREHOLDERS
The Compensation Committee of the Board of Directors (the "Committee")
establishes the compensation level for the Company's Chief Executive Officer
("CEO") and other executive officers based upon the Committee's discretion,
taking into account factors it deems appropriate, such as competitive factors,
attainment of established Company financial performance criteria and individual
performance goals and the implementation of key strategic programs and products.
The Compensation Committee believes that the compensation programs for
the Company's executive officers should reflect the Company's performance and
the value created for the Company's shareholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contributions to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
The Compensation Committee's policy is to provide the Company's
executive officers with compensation opportunities that are based upon their
personal performance, the financial performance of the Company and their
contribution to that performance, and that are competitive enough to attract and
retain highly skilled individuals. Compensation for the CEO for fiscal 1999, as
reported above, was based on the Committee's analysis of the Company's financial
performance and achievement of strategic objectives, and the CEO's contribution
to this performance and these achievements.
The Company's policy is not to disclose target levels with respect to
specific quantitative or qualitative performance-related factors, or factors
considered to involve confidential business information, because their
disclosure would have an adverse effect on the Company.
Qualification of compensation under Section 162(m) of the Internal
Revenue Code requires that compensation be "performance based" and that the
shareholders of the Company approve the material terms of the compensation plan.
The Company can deduct compensation paid (or deemed paid) to each named
executive officer in the tax year concerned to the maximum amount of $1,000,000
unless additional compensation qualifies for deductibility under Section 162(m).
40
Based on its review of all of the factors described above, the
Committee has determined that salaries for the Company's executive officers will
be maintained at their fiscal 1999 levels except that Jeff Anderson, our VP,
Regulatory Affairs and Quality Assurance, received a 33% raise. All amounts paid
or accrued during fiscal 1999 under the above described plans and programs are
included in the tables above.
COMPENSATION COMMITTEE:
Fredric J. Feldman, Ph.D., Chairman
Lawrence D. Ashcroft
John D. Hunkeler, M.D., F.A.C.S.
G. Lynn Powell, D.D.S.
41
COMPARISON OF CUMULATIVE TOTAL RETURN ON ONE OR MORE COMPANIES, PEER GROUPS,
INDUSTRY INDEXES AND/OR BROAD MARKETS
[Data below represented as a graph here]
FISCAL YEAR ENDING
---------------------------------------------------------------------------------
11/30/94 3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
-------- ------- ------- ------- ------- -------
COMPANY/INDEX/MARKET
Premier Laser Systems 100.00 80.00 172.50 110.00 210.00 46.88
Electromedical Equipment 100.00 116.74 190.35 171.13 242.41 302.03
NASDAQ Market Index 100.00 103.04 138.60 155.06 234.33 306.23
Note: Base price date is 11/30/94.
42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of June 25,
1999, regarding the beneficial ownership of the Company's Common Stock by: (i)
all persons known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each director and executive officer of the Company,
and (iii) all directors and executive officers as a group. The following table
treats the Common Stock, the Class E-1 Common Stock and the Class E-2 Common
Stock as a single class.
Amount and
Nature of Percent of
Name and Address Beneficial Common
of Beneficial Owner(1) Ownership Stock
- ---------------------- ----------- -----
Colette Cozean, Ph.D.(2).......................... 1,187,145 6.4%
Patrick J. Day(3)................................. 269,933 1.5%
G. Lynn Powell, D.D.S.(4)......................... 91,501 *
Lawrence D. Ashcroft (5).......................... 10,000 *
Fredric J. Feldman, Ph.D.(5)...................... 10,000 *
John D. Hunkeler, M.D., F.A.C.S.(5)............... 10,000 *
Lewis H. Stanton (5).............................. 10,000 *
Robert V. Mahoney (6)............................. 17,308 *
Tom Hazen (7)..................................... 52,006 *
Jeffrey Anderson (8).............................. 42,551 *
Judith A. McCall(9)............................... 85,696 *
All directors and executive officers as
a group (11 persons)(10).......................... 1,786,140 9.4%
- ------------------
* Less than 1%.
(1) The address of each of the individuals listed (other than the selling
shareholders) is 3 Morgan, Irvine, California 92618. Unless otherwise
noted, we believe that all persons named in the table have sole
investment and voting power with respect to all shares of Class A Common
Stock beneficially owned by such person, such shares, subject to
community property laws where applicable.
(2) Includes 52,049 shares of Class A Common Stock, 43,514 shares of Class
E-1 Common Stock and 43,514 shares of Class E-2 Common Stock held by Dr.
Cozean and 1,594 shares of Class A Common Stock, 1,412 shares of Class
E-1 Common Stock and 1,412 shares of Class E-2 Common Stock held by Dr.
Cozean as custodian for her two minor children. Also includes 1,043,650
of Class A Common Stock subject to options exercisable within 60 days.
(3) Includes 54,263 shares of Class A Common Stock, 24,023 shares of Class
E-1 Common Stock and 24,023 shares of Class E-2 Common Stock. Also
includes 133,992 shares of Class A Common Stock, 16,816 shares of Class
E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to
warrants and options exercisable within 60 days.
(4) Includes 91,501 shares of Class A Common Stock subject to warrants and
options exercisable within 60 days.
(5) Consists of 10,000 shares of Class A Common Stock subject to options
exercisable within the next 60 days.
(6) Consists of 17,308 shares of Class A Common Stock subject to options
exercisable within 60 days.
43
(7) Includes 2,006 shares of Class A Common Stock and 50,000 shares of Class
A Common Stock subject to options exercisable within 60 days.
(8) Includes 885 shares of Class A Common Stock and 41,666 shares of Class A
Common Stock subject to options exercisable within 60 days.
(9) Includes 1,339 shares of Class A Common Stock and 84,357 shares of Class
A Common Stock subject to options exercisable within 60 days.
(10) Includes 112,136 shares of Class A Common Stock, 68,949 shares of Class
E-1 Common Stock and 68,949 shares of Class E-2 Common Stock. Also
includes 1,502,474 shares of Class A Common Stock, 16,816 shares of Class
E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to
warrants and options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On April 3, 1999, our board of directors extended the expiration date
of an option to purchase 4,522 shares of common stock until April 22, 2000. The
options had previously been granted to T. Daniel Caruso and were subsequently
inherited by his widow.
In December 1998, we granted options to purchase 40,000 shares of
common stock to three newly elected directors: Dr. Feldman, Dr. Hunkeler and Mr.
Stanton. In January 1999, we granted an option to purchase 40,000 shares of
common stock to Mr. Ashcroft when he came on the board. All of these options
vest over four years beginning on March 31, 1999. These options have an exercise
price of $2.00 per share, the fair market value of our common stock on the date
of grant. In January 1999, we also granted an option to purchase 225,000 shares
of common stock with an exercise price of $1.906 per share to Mr. Robert
Mahoney, our Chief Financial Officer.
In fiscal 1998, we issued options to purchase the following numbers of
shares to certain of its directors: (1) Colette Cozean - 1,000,000 shares
vesting over 5 years; (2) Patrick J. Day, Grace Ching - Hsin Lin, G. Lynn
Powell, and E. Donald Shapiro - 40,000 shares each vesting over 4 years. All of
these options have an exercise price of $7.98 per share, the fair market value
of our common stock on the date of grant. In addition to the above, Mr. Shapiro
and Dr. Powell were each granted options to purchase 30,000 shares at $10.31 per
share vesting over 3 years in connection with services rendered by them. All of
the above options have a term of ten years.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page in
Annual Report
on Form 10-K
------------
(a) The following documents are filed as part of this Annual
Report on Form 10-K.
(1) Report of Haskell & White LLP, Independent Auditors................................. F-2
Consolidated Balance Sheets at March 31, 1999 and 1998...............................F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended March 31, 1999, 1998 and 1997....................................F-4
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1999, 1998 and 1997..................................................F-5
44
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997........................................................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)...................................................................... 45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger dated as of April 24, 1997 among the
Registrant, EyeSys Technologies, Inc. and Premier Acquisition of
Delaware, Inc. (incorporated herein by this reference to Exhibit
2.1 to the Registrant's Registration Statement on Form S-4,
Registration No. 33-29573).
2.2 First Amendment to Agreement and Plan of Merger dated as of August
6, 1997, among the Registrant, EyeSys Technologies, Inc. and
Premier Acquisition of Delaware, Inc. (incorporated herein by this
reference to Exhibit 2.2 to the Registrant's Current Report of
Form 8-K filed October 15, 1997).
2.3 Second Amendment to Agreement and Plan of Merger dated as of
September 16, 1997 among the Registrant, EyeSys Technologies, Inc.
and Premier Acquisition of Delaware, Inc., EyeSys Technologies,
Inc. and Premier Acquisition of Delaware, Inc. (incorporated
herein by this reference to Exhibit 2.3 to the Registrant's
Current Report on Form 8-K filed October 15, 1997).
2.4 Stock Purchase Agreement dated February 25, 1998 between the
Registrant and Ophthalmic Imaging Systems (incorporated herein by
this reference to Exhibit 99.1 to the Registrant's Current Report
on Form 8-K filed March 9, 1998).
2.5 Purchase Agreement dated February 25, 1998 between the Registrant
and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
(incorporated herein by this reference to Exhibit 99.4 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
2.6 Purchase Agreement dated February 25, 1998 between the Registrant
and Stanley Chang, M.D. (incorporated herein by this reference to
Exhibit 99.8 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
45
Exhibit
- -------
2.7 Purchase Agreement dated February 25, 1998 between the Registrant
and J.B. Oxford & Company (incorporated herein by this reference
to Exhibit 99.12 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
3.1 Amended and Restated Articles of Incorporation filed with the
California Secretary of state on November 23, 1994 (incorporated
herein by this reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31,
1994).
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to
the Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser
Systems, Inc. and American Stock Transfer and Trust Company acting
as rights agent (incorporated herein by this reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed April 2,
1998).
10.1 Letter Agreement and Patent License Agreement dated August 29,
1991 among the Registrant, Patlex Corporation and Gordon Gould
(incorporated herein by this reference to Exhibit 1.1 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.2 Assignment Agreement dated July 27, 1992 between the Registrant
and Michael Colvard, M.D. (incorporated herein by this reference
to Exhibit 10.2 to the Registrant's Registration Statement on Form
SB-2, Registration No. 33-83984).
10.3 Form of International Distribution Agreement (incorporated herein
by this reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-83984).
10.4 Letter of Intent between the Registrant and Richard Leaderman,
D.D.S., together with related Patent Assignments as filed in the
U.S. Patent and Trademark Office on February 22, 1994
(incorporated herein by this reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.5 Exclusive Marketing Agreement dated July 26, 1994 between the
Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.
(incorporated herein by this reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.6 Form of Indemnification Agreement (incorporated herein by this
reference to Exhibit 10.23 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.7 Purchase/Supply Agreement dated January 13, 1987 between Infrared
Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as
amended (incorporated herein by this reference to Exhibit 10.26 to
the Registrant's Registration Statement on Form SB-2, Registration
No. 33- 83984).
10.8 Form of Warrant Agreement (including forms of Class B Warrant
Certificates) (incorporated herein by this reference to Exhibit
4.1 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984).
10.9 Form of Underwriter's Unit Purchase Option (incorporated herein by
this reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
46
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).
47
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.*
27 Financial Data Schedule.*
99.1 Form of Class D Warrant (OIS transaction) (incorporated herein by
this reference to Exhibit 99.3 to the Registrant's Current Report
on From 8-K filed March 9, 1998).
48
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.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREMIER LASER SYSTEMS, INC.
By: /s/ Colette Cozean
-------------------------------------
Colette Cozean, Ph.D.,
Chief Executive Officer and President
50
POWER OF ATTORNEY
We, the undersigned officers and directors of Premier Laser Systems,
Inc., do hereby constitute and appoint Colette Cozean, Ph.D., and Robert V.
Mahoney, and each of them, our true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Report, and to file the same, with exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby, ratifying and confirming all that each of
said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
- --------------------------- -------------------------------- ---------------
/S/ COLETTE COZEAN PH. D. Chairman of the Board, President June 26, 1999
- --------------------------- and Chief Executive Officer
Colette Cozean, Ph.D. (Principal Executive Officer)
/S/ ROBERT V. MAHONEY Executive Vice President, Finance June 26, 1999
- --------------------------- and Chief Financial Officer
Robert V. Mahoney (Principal Financial Officer and
Principal Accounting Officer)
/S/ LAWRENCE D. ASHCROFT Director June 26, 1999
- ---------------------------
Lawrence D. Ashcroft
/S/ PATRICK J. DAY Director June 25, 1999
- ---------------------------
Patrick J. Day
/S/ FREDRIC J. FELDMAN, PH.D. Director June 26, 1999
- ---------------------------
Fredric J. Feldman, Ph. D.
Director _________, 1999
- ---------------------------
John Hunkeler, M.D.
/S/ G. LYNN POWELL, D.D.S. Director June 28, 1999
- ---------------------------
G. Lynn Powell, D.D.S.
/S/ LEWIS H. STANTON Director June 28, 1999
- ---------------------------
Lewis H. Stanton
51
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-2
Consolidated Balance Sheets at March 31, 1999 and 1998 F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended March 31, 1999, 1998, and 1997 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 1999, 1998, and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998, and 1997 F-7
Notes to Consolidated Financial Statements F-9
F-1
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 listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Company has restated its previously issued 1997
consolidated financial statements.
In our opinion, the 1999, 1998, and 1997 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company as of March 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
HASKELL & WHITE LLP
Newport Beach, California
June 9, 1999
F-2
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
------------------------------------
ASSETS 1999 1998
--------------- ---------------
Current assets:
Cash and cash equivalents $ 888,767 $ 9,722,514
Short-term investments - 9,666,918
Restricted cash 50,000 2,150,000
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $1,997,158 and
$1,224,845, respectively 1,342,917 4,952,892
Inventories, net 5,797,054 4,482,698
Prepaid expenses and other current assets 531,459 2,528,996
--------------- ---------------
Total current assets 8,610,197 33,504,018
Property and equipment, net 1,473,420 1,778,423
Intangible assets, net 9,170,360 11,991,679
Other assets 21,953 434,300
--------------- ---------------
Total assets $ 19,275,930 $ 47,708,420
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,802,606 $ 5,510,692
Line of credit 70,470 2,068,163
Accrued compensation and related costs 968,969 964,691
Other accrued liabilities 5,130,951 5,943,685
--------------- ---------------
Total current liabilities 9,972,996 14,487,231
--------------- ---------------
Commitments and contingencies (Notes 5, 6, 9, and 10)
Minority interest - 1,764,736
--------------- ---------------
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 8,850,000
Issued and outstanding shares - none - -
Common stock, Class A, no par value:
Authorized shares - 35,600,000
Issued and outstanding shares - 16,962,278 including
2,250,000 subject to issuance for shareholder
litigation settlement at March 31, 1999, and
14,649,421 at March 31, 1998 90,354,340 83,546,913
Common stock, Class E-1, no par value:
Authorized shares - 2,200,000
Issued and outstanding shares - 1,257,461
at March 31, 1999 and 1998 4,769,878 4,769,878
Common stock, Class E-2, no par value:
Authorized shares - 2,200,000
Issued and outstanding shares - 1,257,461
at March 31, 1999 and 1998 4,769,878 4,769,878
Warrants and options 1,723,842 1,723,842
Accumulated deficit (92,315,004) (63,354,058)
--------------- ---------------
Total shareholders' equity 9,302,934 31,456,453
--------------- ---------------
Total liabilities and shareholders' equity $ 19,275,930 $ 47,708,420
=============== ===============
See accompanying notes.
F-3
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1999 1998 1997
(Restated)
----------------- ----------------- ------------------
Net sales $ 13,971,085 $ 9,885,569 $ 5,090,861
Cost of sales 13,405,182 17,234,288 3,648,539
----------------- ----------------- ------------------
Gross profit (loss) 565,903 (7,348,719) 1,442,322
Selling and marketing expenses 7,930,444 5,113,080 2,415,010
Research and development expenses 4,164,919 3,087,360 1,563,228
General and administrative expenses 6,625,247 3,699,541 1,852,948
Shareholder litigation settlement expenses 8,081,770 - -
Write off of investment in Mattan
Corporation - - 881,010
Termination of strategic alliance with
IBC - - 331,740
In process research and development
acquired in connection with business
acquisitions - 12,800,000 250,000
Merger related and integration costs - 7,616,924 -
----------------- ----------------- ------------------
Loss from operations (26,236,477) (39,665,624) (5,851,614)
Interest income, net 202,877 1,073,493 15,493
Minority interest in loss of consolidated
subsidiaries 1,764,736 273,811 60,000
----------------- ----------------- ------------------
Loss from continuing operations (24,268,864) (38,318,320) (5,776,121)
----------------- ----------------- ------------------
Discontinued operations:
Loss from discontinued operations (1,180,622) (445,967) (197,236)
Loss on disposal of discontinued
operations (3,511,460) - -
----------------- ----------------- ------------------
(4,692,082) (445,967) (197,236)
----------------- ----------------- ------------------
Net loss (28,960,946) (38,764,287) (5,973,357)
Items of other comprehensive
income (loss) - - -
----------------- ----------------- ------------------
Comprehensive loss $ (28,960,946) $ (38,764,287) $ (5,973,357)
================= ================= ==================
Basic and diluted net loss per share:
Loss from continuing operations $ (1.56) $ (3.35) $ (.99)
Loss from discontinued operations (.30) (.04) (.03)
----------------- ----------------- ------------------
Net loss per share $ (1.86) $ (3.39) $ (1.02)
================= ================= ==================
Weighted average number of shares used
in computation of basic and diluted net
loss per share 15,531,400 11,444,123 5,833,326
================= ================= ==================
See Accompanying notes.
F-4
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
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 1,065,266 11,757,426 - - - - -
Exercise of stock options and
warrants 6,270,314 43,989,418 283 - 283 - (2,295,328)
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - 479,620 - - - - -
Net loss for the year - - - - - - -
---------- ------------ --------- ----------- --------- ----------- -----------
Balance at March 31, 1998 14,649,421 83,546,913 1,257,461 4,769,878 1,257,461 4,769,878 -
Common stock reserved for issuance
in connection with litigation
settlement 2,250,000 7,447,500 - - - - -
Exercise of stock options and
warrants 62,857 202,619 - - - - -
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - (842,692) - - - - -
Net loss for the year - - - - - - -
---------- ------------ --------- ----------- --------- ----------- -----------
Balance at March 31, 1999 16,962,278 $ 90,354,340 1,257,461 $ 4,769,878 1,257,461 $ 4,769,878 $ -
========== ============ ========= =========== ========= =========== ===========
See accompanying notes.
F-5
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
Common Unrealized
Class B Stock Holdings Accumulated
Warrants Warrants Gains 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) - - - (5,973,357) (5,973,357)
------------ ------------ -------------- -------------- --------------
Balance at March 31, 1997 (restated) 1,490,818 192,130 - (24,589,771) 16,248,710
Common stock and options issued in
connection with business acquisitions - - - - 11,757,426
Exercise of stock options and
warrants 40,894 - - - 41,734,984
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - - - - 479,620
Net loss for the year - - - (38,764,287) (38,764,287)
------------ ------------ -------------- -------------- --------------
Balance at March 31, 1998 1,531,712 192,130 - (63,354,058) 31,456,453
Common stock reserved for issuance
in connection with litigation
settlement - - - - 7,447,500
Exercise of stock options and
warrants - - - - 202,619
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors and other
consultants - - - - (842,692)
Net loss for the year - - - (28,960,946) (28,960,946)
------------ ------------ -------------- -------------- --------------
Balance at March 31, 1999 $ 1,531,712 $ 192,130 $ - $ (92,315,004) $ 9,302,934
=========== ============ ============== ============== ==============
See accompanying notes.
F-6
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1999 1998 1997
(Restated)
Operating Activities:
Net loss $ (28,960,946) $ (38,764,287) $ (5,973,357)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,647,794 1,612,691 841,467
Stock issued in connection with
shareholder litigation settlement 7,447,500 - -
Loss on disposal of discontinued operations 3,511,460 - -
Write off of investment in Mattan
Corporation - - 881,010
Acquired in-process research and
development - 12,800,000 250,000
Minority interest in loss of consolidated
subsidiaries (1,764,736) (273,811) (60,000)
Non-cash component of merger related
and integration costs - 2,332,238 -
Stock options issued to advisors and
consultants (842,692) 479,620 190,001
Termination of strategic alliance with IBC - - 125,000
Changes in operating assets and liabilities:
Accounts receivable 3,386,037 (1,977,906) (539,045)
Inventories (1,316,339) 394,975 (1,099,277)
Prepaid expenses and other current
assets 1,947,384 (1,505,104) (342,438)
Accounts payable (1,736,100) 2,190,093 (361,678)
Accrued liabilities (1,353,466) 4,843,974 319,936
Change in operating assets and
liabilities of discontinued operations (276,926) (264,314) 176,909
------------------ ----------------- -------------------
Net cash used in operating activities (18,311,030) (18,131,831) (5,591,472)
------------------ ----------------- -------------------
Investing Activities:
Sale (purchase) of short-term investments 9,666,918 (5,698,630) (3,968,288)
Patent and intangible expenditures (110,151) (87,989) (178,139)
Business acquisitions - (5,002,172) (96,028)
Purchase of property and equipment (360,916) (514,827) (24,477)
Purchase of property, equipment, and
intangible assets of discontinued
operations (23,494) (373,467) -
Other - (410,179) -
------------------ ----------------- -------------------
Net cash provided by (used in) investing
activities 9,172,357 (12,087,264) (4,266,932)
------------------ ----------------- -------------------
See accompanying notes.
F-7
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
Financing Activities:
Proceeds from equity offerings - - 10,400,812
Net borrowings (repayments) under
line of credit (1,997,693) (695,340) 800,000
Proceeds from exercise of stock options
warrants 202,619 41,734,984 300,575
Decrease (increase) in restricted cash 2,100,000 (1,100,000) (1,050,000)
Other - (171,645) (454,836)
----------------- ----------------- ------------------
Net cash provided by financing activities 304,926 39,767,999 9,996,551
----------------- ----------------- ------------------
Net (decrease) increase in cash
and cash equivalents (8,833,747) 9,548,904 138,147
Cash and cash equivalents at
beginning of period 9,722,514 173,610 35,463
----------------- ----------------- ------------------
Cash and cash equivalents at
end of period $ 888,767 $ 9,722,514 $ 173,610
================= ================= ==================
Supplemental disclosures of cash
flow information
Cash paid for interest $ 124,011 $ 120,000 $ 115,283
================= ================ ==================
Significant noncash investing and financing activities excluded from the
accompanying consolidated statements of cash flows are as follows:
In fiscal 1998 and 1997, the Company issued Class A common stock valued at
$11,757,426 and $1,200,000, respectively, in connection with business
acquisitions.
In fiscal 1999, the Company reserved for issuance 2,250,000 shares of Class A
common stock valued at $7,447,500 in connection with an agreement in principle
to settle a lawsuit (Note 6). In addition, the Company wrote-off $3,511,460 of
assets related to discontinued operations (Note 3).
See accompanying notes.
F-8
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION AND NATURE OF OPERATIONS
Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and
commenced operations in August 1991 after acquiring substantially all of
the assets and certain liabilities of Pfizer Laser Systems (Pfizer), a
division of Pfizer Hospital Products Group, Inc. The Company designs,
develops, manufactures and markets several lines of lasers for surgical and
other medical purposes, disposables and associated accessory products for
the medical and dental market. The Company also designs, develops,
manufactures and markets digital imaging systems and image enhancement and
analysis software for use by practitioners in the ocular health field.
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
The Company has suffered recurring losses from operations and may continue
to incur losses for the foreseeable future due to the significant costs
anticipated to be incurred in connection with manufacturing, marketing and
distributing its laser and imaging products. In addition, the Company
intends to conduct continuing research and development activities,
including regulatory submittals and clinical trials to develop additional
applications for its technology. The Company operates in a highly
competitive environment and is subject to all of the risks inherent in a
new business enterprise. Further, as discussed in Note 6, the Company has
been named in class action lawsuits alleging violations of federal and
state securities laws. In November 1998, the Company reached an agreement
in principle with lead plaintiffs and their counsel to settle related
matters. Any significant uninsured judgment or settlement amount ultimately
associated with the class action litigation would significantly impact the
Company's ability to satisfy its working capital requirements. Management
believes that the Company's present liquid assets will be sufficient to
meet its working capital requirements through at least fiscal 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED
The Company's independent auditors unexpectedly resigned during May 1998
and withdrew their opinion on the Company's fiscal year 1997 financial
statements. Accordingly, the Company retained new auditors to re-examine
the 1997 financial statements. Because of the extended period of time that
had passed since the initial report was issued, a number of matters were
identified of which the Company was not aware when it initially issued the
1997 financial statements. Although the Company believes that the initially
issued 1997 financial statements were not materially misstated in terms of
net loss, total assets and shareholders' equity, the statements have
nonetheless been restated in the interest of full disclosure.
F-9
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED (CONTINUED)
The following is a summary of the impact of the restatement on the 1997
consolidated statement of operations.
1. Reduction of previously reported sales, net of related
cost of sales $ (280,000)
2. Revision to inventory valuation allowances 160,000
3. Additional bad debts expense (313,000)
4. Minority interest in loss of consolidated subsidiary 60,000
5. Other, net (10,000)
-----------
Net increase in 1997 loss $ (383,000)
===========
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 2,113,725 10,776,175
---------------- ----------------- ------------------
Total assets $ 19,320,611 $ 1,758,725 $ 21,079,336
================ ================= ==================
Current liabilities $ 2,688,901 $ 88,000 $ 2,776,901
Minority interest - 2,053,725 2,053,725
Net shareholders' equity 16,631,710 (383,000) 16,248,710
---------------- ----------------- ------------------
Total liabilities and
shareholders' equity $ 19,320,611 $ 1,758,725 $ 21,079,336
================ ================= ==================
Consolidated statement of
operations and comprehensive loss:
Net sales $ 5,530,861 $ (440,000) $ 5,090,861
Cost of sales 3,968,539 (320,000) 3,648,539
---------------- ----------------- ------------------
Gross profit 1,562,322 (120,000) 1,442,322
Selling and marketing
expenses 2,406,010 9,000 2,415,010
General and administrative
expenses 1,538,948 314,000 1,852,948
All other expenses 3,025,978 - 3,025,978
---------------- ----------------- ------------------
Loss from continuing operations (5,408,614) (443,000) (5,851,614)
Interest income, net 15,493 - 15,493
Minority interest in loss of
consolidated subsidiary - 60,000 60,000
---------------- ----------------- ------------------
Loss from continuing operations $ (5,393,121) $ (383,000) $ (5,776,121)
Loss from discontinued operations (197,236) - (197,236)
---------------- ----------------- ------------------
F-10
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED (CONTINUED)
Previously Increase
Reported (Decrease) Restated
---------------- ----------------- ------------------
Net loss $ (5,590,357) $ (383,000) $ (5,973,357)
================ ================= ==================
Items of other comprehensive
income (loss) - - -
---------------- ----------------- ------------------
Comprehensive loss $ (5,590,357) $ (383,000) $ (5,973,357)
================ ================= ==================
Basic and diluted net loss per share:
Loss from continuing operations (.93) (.07) (.99)
Loss from discontinued
operations (.03) - (.03)
---------------- ----------------- -----------------
Net loss per share $ (.96) $ (.07) $ (1.02)
================ ================= =================
REVENUE RECOGNITION
Revenues are generally recognized when products are shipped to customers.
Allowances for returns are provided for based upon actual experience and
identified risks.
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.
F-11
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND FOREIGN SALES (CONTINUED)
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
In fiscal 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). No events occurred
during the years ended March 31, 1999 or 1998 which resulted in an
impairment of assets, except for the discontinuance of operations of
Data.Site, LLC which resulted in the write-off of various long-lived assets
(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
inventories and excess
purchase commitments (10,987,613) (8,688,779)
---------------- ----------------
$ 5,797,054 $ 4,482,698
================ ================
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.
F-12
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
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 249,172 2,839,570
License agreements 110,000 110,000
--------------- ----------------
14,322,419 16,012,280
Less accumulated amortization (5,152,059) (4,020,601)
--------------- ----------------
$ 9,170,360 $ 11,991,679
=============== ================
F-13
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
During the year ended March 31, 1999, the Company discontinued the
operations of its 51%-owned subsidiary Data.Site, LLC (Note 3).
Accordingly, the Company wrote-off all remaining unamortized goodwill
amounting to $2,604,251.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. A substantial
portion of the Company's research and development expense is related to
developing new products, improving existing products or processes, and
clinical research programs.
From time to time, the Company enters into agreements with certain doctors
to exchange a portion of a product's sales price for services related to
the completion of certain portions of clinical studies necessary for
obtaining product approval from the U.S. Food and Drug Administration.
Typically, the amounts consist of a portion of the product sales price
which is equal to the cost of the services to be rendered by the doctor.
Pursuant to the agreements, in the event the doctor is unable to complete
the agreed upon clinical study, the doctor is required to remit a cash
payment for the entire amount.
ADVERTISING EXPENSES
The Company expenses advertising costs as they are incurred. Advertising
expenses aggregated $758,301, $628,410, and $143,608 in 1999, 1998, and
1997, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with statement of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
Accounting for Income Taxes. SFAS 109 requires the liability method of
accounting for income taxes. No credits for tax benefits have been
recognized, since their realization is not reasonably assured (see Note 7).
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments, including money market
accounts and mutual funds, with a maturity of three months or less when
acquired to be cash equivalents.
F-14
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share has been computed based on the weighted average number
of the Company's common shares outstanding during each presented period and
excludes all shares of Class E-1 and Class E-2 common stock, outstanding or
subject to option, because all such shares of stock are subject to escrow
and the conditions for the release of those shares from escrow have not
been satisfied. Furthermore, common stock equivalents, such as stock
options and warrants, were not considered in the net loss per share
calculation because the effect would be antidilutive.
As discussed in Note 10, the Company issued convertible debentures in a
private placement subsequent to year-end.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations, in accounting for its employee stock option grants.
Options granted to consultants and other non-employees are accounted for
under the fair value method in accordance with Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based
Compensation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Significant estimates and assumptions include inventory valuation and the
realizability of certain intangible assets. The Company's inventories and
intangible assets largely relate to technologies which have yet to gain
widespread market acceptance. Inventory reserves have been established
based upon sales forecasts. The Company believes that no further losses
will be incurred on the disposition of its inventories and that the
remaining economic life of the Company's intangible assets is reasonable.
If widespread market acceptance of the Company's products is not achieved,
the carrying amount of inventories and intangible assets could be
materially affected. Conversely, better than expected sales could yield
improved margins.
F-15
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130 (SFAS No. 130), Reporting
Comprehensive Income. This statement establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in an entity's financial statements. This statement
requires an entity to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
The Company had no items of other comprehensive income during fiscal years
1999, 1998 and 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
and Enterprise and Related Information. This statement requires public
enterprises to report financial and descriptive information about its
reportable operating segments and establishes standards for related
disclosures about product and services, geographic areas, and major
customers. The Company has not adopted the disclosure requirements of SFAS
No. 131 as management believes that the Company currently has only one
reportable operating segment.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
DATA.SITE, LLC
Effective January 31, 1997, the Company entered into a joint venture with
Refractive Surgical Services, LLC (RSS), a Kansas City based company
engaged in the development of certain medical outcomes software. Under this
joint venture, the Company and RSS formed Data.Site, LLC (Data.Site).
Data.Site acquired and assumed substantially all of the assets and
liabilities of RSS. The Company acquired a 51 percent interest in
Data.Site, which was accounted for under the purchase method of accounting,
and issued 159,787 shares of its Class A common stock to RSS. In connection
with the acquisition, the Company recorded goodwill in the amount of
$2,893,179 and a minority interest of $2,113,725. The Company has funded
Data.Site's operations with advances of cash or equivalent services in the
aggregate amount of $2,036,452 through March 31, 1999. As of March 31, 1999
and 1998, RSS owed the Company $599,194 and $266,000, respectively, and
such amounts have been fully reserved.
In March 1999, Data.Site's Board of Directors adopted a plan to discontinue
its operations. Accordingly, the operating results of Data.Site's
operations, including the write-off of unamortized goodwill of $2,604,251,
capitalized software of $666,304 and property and equipment of $240,905,
have been segregated from continuing operations and reported on a separate
line item on the statement of operations and comprehensive loss for the
year ended March 31, 1999.
The consolidated statements of operations and comprehensive loss and cash
flows for the years ended March 31, 1998 and 1997, have been reclassified
to present Data.Site's operating results as discontinued operations.
F-16
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
DATA.SITE, LLC (CONTINUED)
Operating results from discontinued operations are as follows for the years
ended March 31:
1999 1998 1997
---------------- ---------------- ----------------
Net sales $ 65,866 $ 532,272 $ -
Cost of sales 256,344 160,002 -
---------------- ---------------- ----------------
(190,478) 372,270 -
Operating expenses 990,144 818,237 (197,236)
---------------- ---------------- ----------------
$ (1,180,622) $ (445,967) $ (197,236)
================ ================ ================
EYESYS TECHNOLOGIES, INC.
On September 30, 1997, the Company acquired all of the equity interests of
EyeSys Technologies, Inc. (EyeSys), a manufacturer and distributor of a
specialized line of diagnostic ophthalmic equipment, for approximately
$12.5 million, in the form of 1,236,668 shares of the Company's common
stock (including 319,684 shares held in an escrow account pending the
outcome of certain warranties to be determined at the end of 12 and 18
months), and $470,000 in cash. 216,761 of the escrowed shares have been
excluded from the determination of the purchase price. If and when they are
released, the allocation of the adjusted purchase price will be
re-assessed. Options to purchase 210,000 shares of the Company's common
stock were also issued in connection with the acquisition. These options
were valued in accordance with SFAS 123 and included in the acquisition
cost. The acquisition was accounted for as a purchase and the total
acquisition cost was allocated among net liabilities assumed ($2,183,429),
intangibles ($2,600,000), and in process research and development
($10,200,000). Merger related and integration expenses of $2,147,224 were
also recorded as of the acquisition date. EyeSys has been consolidated
commencing with the acquisition date. Goodwill arising from the acquisition
($2,298,784) was written-off as of the acquisition date due to uncertainty
as to its recoverability.
F-17
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
OPHTHALMIC IMAGING SYSTEMS
During the final four months of fiscal 1998, the Company acquired a
controlling interest in Ophthalmic Imaging Systems ("OIS") for $3.3 million
in cash. OIS is engaged in the business of designing, developing,
manufacturing and marketing digital imaging systems and image enhancement
and analysis software for use by practitioners in the ocular health field.
Equity accounting was used during the period in which the Company owned at
least 20% but less than 50% of the OIS stock (December 1997 through
February 1998). Commencing with the date at which the controlling interest
was acquired (late February 1998), OIS has been consolidated with the
Company in the accompanying financial statements. The OIS acquisition has
been accounted for as a purchase and the total acquisition cost was
allocated among net liabilities of OIS ($996,835), intangibles ($1,687,407)
and in process research and development ($2,600,000). Merger related and
integration expenses of $1,687,407 were also recorded as of the date at
which the controlling interest was acquired. The Company is in the process
of negotiating an agreement for the purchase of the minority interests of
OIS.
The following unaudited pro forma consolidated results of operations for
the year ended March 31, 1998 give effect to the EyeSys and OIS
acquisitions as if they had occurred at the beginning of fiscal 1998:
Net sales $ 17,975,000
Net loss (42,885,000)
Net loss per share (3.58)
The unaudited pro forma information is not necessarily indicative of the
combined results of operations that would have occurred during the periods
presented nor for future results of operations.
The Company entered into a Stock Purchase Agreement, dated February 25,
1998, pursuant to which it agreed, subject to certain conditions, to
commence an exchange offer to acquire all of the outstanding common stock
of OIS not owned by the Company. This Stock Purchase Agreement was
terminated as of August 21, 1998. In connection with this termination, the
Company may be liable to pay OIS a $500,000 break-up fee, which could be
satisfied by the reduction of indebtedness of OIS to the Company which
arose after March 31, 1998. The parties are currently negotiating various
issues relating to the termination of the Purchase Agreement and their
future business relationship.
OTHER
During fiscal 1998, three other business acquisitions occurred, which were
not individually or collectively significant to the financial condition or
operating results of the Company.
F-18
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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 account's receivable financing
agreement, which allows for advances of up to 80% of eligible receivables
up to $960,000. The financing agreement is subject to annual renewal in
November of each year, unless terminated by either party. As of March 31,
1999 and 1998, $70,470 and $132,634 were outstanding under OIS's line of
credit, respectively.
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its office and production facilities under a
noncancellable operating lease that expires in December 2000. Total rental
expense under operating leases was $331,247, $251,000, and $296,000 for the
fiscal years ended March 31, 1999, 1998, and 1997, respectively. At March
31, 1999, future minimum lease payments under noncancellable operating
leases are as follows:
2000 $ 245,412
2001 187,866
-----------
$ 433,278
===========
OIS has a month to month operating lease which requires minimum monthly
payments of $7,000.
F-19
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
IFS LITIGATION
The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), a supplier of certain fiber optics, that expires in the fiscal year
ending March 31, 2002. The agreement requires the supplier to sell
exclusively to the Company fiber optics for medical and dental applications
as long as the Company purchases defined minimum amounts.
In March 1994, the Company initiated litigation against IFS. The Company's
complaint alleges that IFS and two of its officers misrepresented IFS'
ability to supply optical fibers, and that IFS breached its supply
agreement and certain warranties. In April 1994, IFS filed a
cross-complaint alleging breach of contract and intentional interference
with prospective economic advantage, seeking declaratory relief that the
contract has been terminated and that IFS is free to market its fiber
optics to others. In July 1994, Coherent, Inc., a major shareholder of IFS
and a manufacturer of medical lasers which employ IFS optical fibers,
joined the lawsuit for the express purpose of defending their rights to the
IFS optical fibers. In May 1995, the Company instituted litigation
concerning this dispute in Orange County, California Superior Court against
Coherent, Westinghouse Electric Corporation (Westinghouse) and an
individual employee of Westinghouse, who was an officer of IFS from 1986 to
1993, when the events involved in the federal action against IFS took place
and while Westinghouse owned a 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.
F-20
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SHAREHOLDERS LITIGATION
The Company and certain of the officers and directors have been named in a
number of securities class action lawsuits which allege violations of the
Securities Exchange Act or the California Corporations Code. The plaintiffs
seek damages on behalf of classes of investors who purchased the Company's
stock between May 7, 1997 and April 15, 1998. The complaints allege that
the Company misled investors by failing to disclose material information
and making material misrepresentations regarding the Company's business
operations and projections. The Company has also been named in a
shareholder derivative action purportedly filed on its behalf against
certain officers and directors arising out of the same alleged acts. The
Company has reached an agreement in principle with lead plaintiffs and
their counsel to settle the class and derivative actions. Under the terms
of the agreement in principle, in exchange for a release of all claims, the
Company would pay 2,250,000 shares of common stock and $4,600,000 in cash.
The cash portion of the settlement would be paid by the Company's insurance
carrier. Completion of the settlement is subject to execution of the final
settlement agreement, court approval and certain other conditions. If the
settlement is not completed, is not approved, or is not consummated for any
reason, the parties would continue to litigate the actions.
In accordance with the terms of the agreement in principle to settle class
and derivative actions, the Company established a reserve during the
quarter ended December 31, 1998 for the issuance of 2,250,000 shares of
common stock. These shares were valued at a price of $3.31 per share, which
was the closing price of the Company's stock on November 18, 1998, the
effective date of the proposed settlement agreement. The Company has also
included approximately $634,000 of associated legal and professional fees
in this reserve, but has not included in the reserve approximately
$4,600,000 in cash that would be paid by the Company's insurers.
The Company is involved in various other disputes and lawsuits arising from
its normal operations. The litigation process is inherently uncertain and
it is possible that the resolution of these disputes and other lawsuits may
adversely affect the Company. However, it is the opinion of management,
that the outcome of such other matters will not have a material adverse
impact on the Company's consolidated financial position, results of
operations, or cash flows.
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.
F-21
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
7. INCOME TAXES (CONTINUED)
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 $ - $ -
================ ================
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%, resulting in a limitation on the
utilization of their net operating loss carryforwards. 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.
F-22
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. SHAREHOLDERS' EQUITY (CONTINUED)
On October 18, 1996, the Company completed a public offering of 11,000
Units of the Company's securities, each Unit consisting of 190 shares of
Class A common stock and 95 redeemable Class B warrants (the Units). The
Company realized net proceeds of $10,401,000 from this offering and the
related exercise of the underwriters over allotment option. Each Class B
warrant consists of the right to purchase one share of Class A common stock
through November 30, 1999 at an exercise price of $8.00.
During fiscal 1998, the Company received approximately $41,735,000 from the
exercise of options and warrants, and issued an additional 4,176,000 Class
B Warrants and 6,270,000 shares of Class A Common Stock. As a result of
such exercises, no Class A warrants remain outstanding.
STOCK OPTIONS
The Company has adopted several stock option plans that authorize the
granting of options to employees, officers and/or consultants to purchase
shares of the Company's Class A common stock. The stock option plans are
administered by the Board of Directors or a committee appointed by the
Board of Directors, which determines the terms of the options, including
the exercise price, the number of shares subject to option and the
exercisability of the options. The options are generally granted at the
fair market value of the shares underlying the options at the date of the
grant and generally expire within ten years of the grant date.
In addition to options granted pursuant to the stock option plans, the
Company has issued options to purchase shares of the Company's Class A
common stock to certain members of the Board of Directors, consultants and
former notes payable holders.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations in accounting for its
employee stock option grants. Accordingly, no compensation expense has been
recognized for its employee stock option awards because the exercise price
of the Company's stock options equals the market price of the underlying
stock on the date of grant. The Company recognizes expense related to
grants of options to non-employees in accordance with the fair value
provisions of SFAS No. 123. Such expenses (recoveries) aggregated
$(842,692) in 1999, $1,590,524 in 1998 (which includes $1,110,904 of merger
related and integration costs associated with the EyeSys acquisition) and
$190,001 in 1997.
F-23
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. SHAREHOLDERS' EQUITY (CONTINUED)
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 $ (31,853,753) $ (40,711,745) $ (6,947,826)
Pro forma net loss per share $ (2.05) $ (3.56) $ (1.19)
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 3,486,669 $ 6.84 2,308,049 $ 5.51 1,423,949 $ 5.58
Granted 1,729,000 7.40 1,899,500 9.22 1,042,756 6.16
Exercised (57,115) 4.69 (395,271) 6.20 (1,899) 1.00
Forfeited/cancelled (913,953) 8.00 (325,609) 8.40 (156,757) 10.53
------------ -------- ----------- --------- ------------ -------
Outstanding end of
year 4,244,601 $ 6.85 3,486,669 $ 6.84 2,308,049 $ 5.51
============ ======== =========== ========= ============ =======
F-24
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted average remaining contractual life of options as of March 31,
1999 was as follows:
Weighted
Average Weighted Weighted
Number of Contractual Average Average
Options Life Exercise Options Exercise
Range of Exercise Prices Outstanding 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 Class E-1
common stock will be automatically converted into Class A common stock in
the event that the Company's net income before provision for income taxes,
as defined, exceeds certain amounts. Such amount is $26,343,900 for the
fiscal year ending March 31, 2000, and such amount will be increased in
proportion to increases in the weighted average number of shares of common
stock outstanding (as defined) during the relevant year, as compared to the
number of shares outstanding immediately after the Company's initial public
offering. If the above event does not occur, the Class E-1 common stock
will be canceled on June 30, 2000. All of the Class E-2 common stock will
be automatically converted into Class A common stock in the event that the
Company's net income before provision for income taxes, as defined, amounts
to at least $71,181,750 for the year ending March 31, 2000 (which amount
shall be adjusted in the same manner as that for the Class E-1 common
stock). If the above event does not occur, the Class E-2 common stock will
be canceled on June 30, 2000.
The Company will, in the event of the release of the Class E-1 and Class E-
2 common stock, recognize during the period in which the earnings
thresholds are met, a substantial noncash charge to earnings equal to the
fair value of such shares on the date of their release, which would have
the effect of significantly increasing the Company's loss or reducing or
eliminating earnings, if any, at such time.
9. EMPLOYEE BENEFIT PLAN
The Company adopted a Defined Contribution 401(k) Profit Sharing Plan,
effective January 1, 1997, covering substantially all of its employees. The
Plan permits eligible employees to contribute a portion of their
compensation to the Plan, on a tax deferred basis. The Company may make
matching contributions, in amounts determined by the Company's Board of
Directors. The Company's contributions are in the form of shares of the
Company's common stock. During 1997, no amounts were contributed by the
Company to the Plan. During 1999 and 1998, 32,397 and 3,752 shares have
been approved for contribution by the Company, respectively.
10. SUBSEQUENT EVENTS
In May 1999, the Company filed a registration statement to register
4,278,146 shares of its Class A common stock underlying convertible
debentures issued in a private placement. Upon filing the registration
statement and other certain documents, the Company received $2 million in
the private transaction and the Company expects to receive an additional $2
million on the effective date of the registration statement.
F-25
PREMIER LASER SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 1998 (RESTATED) AND 1997
Deductions/
Balance at Recoveries Balance
Beginning and at end of
Description of 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 8,688,779 2,298,834 - - 10,987,613
1998
Allowance for doubtful
accounts receivable $ 613,263 $ 385,407 $ (149,801) $ 375,976 $ 1,224,845
Inventory reserves 1,203,324 5,704,455 - 1,781,000 8,688,779
1997
Allowance for doubtful
accounts receivable $ 154,677 $ 403,515 $ (119,054) $ 174,125 $ 613,263
Inventory reserves 950,325 252,999 - - 1,203,324
* Allowance amounts added in connection with business acquisitions.
F-26