-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GCo1tZTOAVqEPBraNseR8kpXJkm5GLsUYPqg9iVI6h5TgPHNl1+787qUgUh+pony boKsXeJVGIa0kRtRvGT5rA== 0000912057-97-020664.txt : 19970619 0000912057-97-020664.hdr.sgml : 19970619 ACCESSION NUMBER: 0000912057-97-020664 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970618 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER LASER SYSTEMS INC CENTRAL INDEX KEY: 0000878543 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330476284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-25242 FILM NUMBER: 97625890 BUSINESS ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92718 MAIL ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92677 10-K/A 1 10K/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A AMENDMENT NO. 1 (MARK ONE) /X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1997. / / 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 92718 (Address of principal executive (Zip Code) offices)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (714) 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, Class A Warrants, Class B Warrants, Units (each comprised of one share of Class A Common Stock, one Class A Warrant and one Class B Warrant) (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 $103,504,753 on May 19, 1997, based upon the closing sale price of such stock. Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of May 19, 1997: Class A Common Stock: 9,260,671 Shares Class E-1 Common Stock: 1,257,178 Shares Class E-2 Common Stock: 1,257,178 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. OVERVIEW Premier Laser Systems, Inc. (the "Company," or "Registrant") 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. The Company is currently in the process of acquiring EyeSys Technologies, Inc. ("EyeSys"), which is a leading developer and supplier of corneal topography (diagnostic imaging) systems with an installed base of more than 3,500 systems worldwide. The Company's majority-owned Data.Site joint venture ("Data.Site") assists physicians and researchers with ophthalmic data collection and outcomes analysis for specific procedures. The Company's 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, 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. To date, the Company has received clearance to market 20 models of medical lasers, which are covered by 20 U.S. patents, 14 pending U.S patent applications, 13 foreign patents and 44 pending foreign patents. The Company currently markets certain of these lasers for dentistry, ophthalmology and surgery. The Company commenced operations in August 1991 after acquiring substantially all of the assets of Pfizer Laser, a division of Pfizer Hospital Products Group ("Pfizer HPG") which is a wholly-owned subsidiary of Pfizer, Inc. The Company acquired from Proclosure, Inc. ("Proclosure") certain technology, assets and proprietary rights relating to a laser system for tissue fusion in 1993, and completed its initial public offering of securities in 1994. In 1997, it formed a joint venture, named "Data.Site," with Kansas City-based Refractive Surgical Services for the purpose of providing data collection and outcomes analysis and in April 1997 entered into an agreement to acquire EyeSys. Completion of the EyeSys transaction is subject to the satisfaction of several conditions including approval by the EyeSys shareholders. The Company participates in three market segments: dentistry, ophthalmology and surgery. The Company's innovations include: the first laser cleared for use on hard tissue (teeth) in dentistry, the first diode laser in dentistry, the first laser for cataract emulsification, the first Erbium:YAG laser for ablation of skin and the first laser in clinical trials for tissue melding. Although the Company has received more than 100 clearances from the United States Food and Drug Administration (the "FDA") in multiple specialty areas to market its laser products for a variety of medical applications, due to limited financial resources the Company has initially focused its marketing efforts on dental lasers which the Company believes have the most promise for commercial success. The Company plans to initiate marketing efforts in ophthalmology in calendar 1997. The level of future marketing efforts is partially dependent upon the receipt of future financing. As resources permit, the Company plans to commence marketing efforts with respect to other medical applications which it believes may also be commercially successful. MARKET OVERVIEW 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. The Company often uses its 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 which are used on a disposable or limited reuse basis, and which the Company expects will provide a 2 recurring revenue stream for the Company. The Company's strategy is to target specific applications in the dental, ophthalmic and surgical markets, where management believes that the Company's technology and products have competitive strengths. DENTAL AND PERIODONTAL MARKET The current market for laser equipment in dental procedures is comprised of soft tissue procedures, composite curing and teeth whitening. The Company has recently received FDA clearance to market its Er:YAG laser for hard tissue and cavity preparation procedures, and is in the process of implementing its marketing plans to address this market. SOFT TISSUE. The dental laser can be used for certain 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 the Company has clearance to market six lasers (including the Aurora diode laser and Centauri Er:YAG laser) for soft tissue dental procedures, the Company focuses its marketing efforts on its Aurora diode laser in this area. COMPOSITE CURING. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for restoration of cavities, because they more closely match the color of teeth and because amalgams have drawn increasing worldwide concern over safety due to the toxic gases which may be released when the amalgams 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 result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or bond orthodontic brackets. The Company's Arago and MOD argon lasers have received FDA clearance for use in these applications. TEETH WHITENING. A large number of dentists use light accelerated 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. The Company's MOD laser has been cleared to market for this procedure. HARD TISSUE (CAVITY PREPARATION). Potential dental laser applications for hard tissue procedures (i.e., procedures on teeth) include pit and fissure sealing, etching, caries removal and cavity preparation. Based on user feedback from the Company's clinical sites, the Company believes 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, the Company's 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 such procedures. CAVITY PREVENTION. The Company is currently conducting research and is initiating clinical trials to use its lasers for cavity prevention applications. The Company's clinical trials are at an early stage and there can be no assurances that FDA clearance will be obtained for these applications. OPHTHALMIC MARKET Laser systems have been used for the treatment of eye disorders for many years and are widely accepted in the ophthalmic community. The original and most widely accepted use of laser systems in ophthalmology has been for posterior capsulotomy. The Company does not promote its lasers for this market, which it believes is approaching saturation, but instead focuses on intraocular procedures including anterior capsulotomy, cataract removal, glaucoma treatment, corneal sculpting and occuloplastic or cosmetic procedures. The Company has developed the Centauri Er:YAG laser which is capable of performing all of these procedures, which are typically performed by several different types of medical lasers. To date, however, the Centauri laser has only been cleared for use in anterior capsulotomies and certain cosmetic procedures. 3 CATARACT REMOVAL PROCEDURES. The Company believes 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. The Company's 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. The Company is also currently conducting clinical trials on the Centauri laser for lens emulsification (the removal of the cataract itself), as an alternative to phacoemulsification (the breakup of the cataract by ultrasonic energy). The Company believes that this patented technology for use in lens emulsification may provide an easier and safer method of cataract removal. TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by increased intraocular 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 the sclera and relieve pressure in the eye. This procedure, which must be repeated periodically, can be performed under local anesthesia with a self closing incision on an outpatient basis. The Company is currently conducting clinical trials prior to seeking clearance to market its Centauri Er:YAG laser for this procedure. If clearance is obtained, concerning which there can be no assurance, the Company's Er:YAG laser could provide a viable alternative to the traditional invasive surgical procedures. CORNEAL SCULPTING. The Company believes that the recent 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 (photorefractive keratectomy), a procedure in which the laser is used to sculpt the cornea of the eye to a desired curvature to correct the myopia, hyperopia or astigmatism. The Company plans to seek approval to market the Centauri laser for corneal sculpting and has initiated animal studies for this application. No assurance can be given, however, that approval will be given for this application. SURGICAL 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 the Company's products are cleared to market in a number of specialty areas within the surgical market, the Company has specifically targeted tissue melding (tissue fusion) and cosmetic applications within the surgical market. TISSUE MELDING. The Company believes 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. The Company and its strategic partner have conducted animal tests to support IDE submittals for the use of the Company's Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts, and are currently conducting clinical studies for skin and hypospadias. The Company has also completed clinical trials for vasovasotomy (reversal of vasectomies) which demonstrated a success rate of approximately 89%. The Company is 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. The Company has clearance for Phase II clinical trials for skin closure following mastectomies and eyelid surgery at five clinical sites. Artery and vein anastomosis is being tested in animals by the Company's strategic partner in Japan in preparation for clinical studies. COSMETIC SURGICAL PROCEDURES. The market for cosmetic surgery is growing rapidly worldwide. The Company has a number of approvals for lasers to be used in cosmetic applications and will devote further efforts in the future to entering into and capitalizing on this market. 4 The Company has regulatory clearance to market its products for a variety of additional applications, including in urology, orthopedics, gynecology, gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In areas where the Company's technology is not being fully utilized, the Company may seek agreements to supply its products under private label for other manufacturers or may enter into strategic alliances to develop and market the Company's lasers for other applications. LASER PRODUCTS The Company's line of portable lasers are specifically designed for use in outpatient surgical centers and medical offices. The Company believes that its lasers are also well suited for the international market, particularly in facilities with many surgical suites where easy transportation of equipment is necessary. By employing techniques developed in the computer industry, the Company has designed a laser system that (i) is modularly designed and uses similar components for multiple laser systems thereby reducing their overall cost, (ii) 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, and (iii) can be easily moved from the office to surgical centers because of its compact size and limited voltage requirements. The Company's Er:YAG lasers are currently priced from $39,000 to $126,000 and its Nd:YAG lasers are currently priced from $25,000 to $80,000. The Company's diode lasers are currently priced from $22,000 to $35,000 and its argon laser is priced from $8,000 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, the Company's principal lasers and delivery systems, the principal applications for which the Company intends to use them, and the FDA status of such 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............................................ Preclinical animal studies General Surgery, Neurosurgery, Orthopedics, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery...................................................... Cleared to market Pegasus (Nd:YAG) 20W Dental--Soft Tissue.......................................... Cleared to market Polaris (1.32m Nd:YAG) Tissue Melding............................................... Clinical trials 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 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 (argon) Dental--Composite Curing..................................... Cleared to market Dental--Teeth Whitening...................................... Cleared to market
CENTAURI ER:YAG LASER The Company's 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 5 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 the Company has invested heavily in the technology to develop fibers which can handle adequate power. The Company had experienced difficulties in securing a consistent source for these fibers in the past. It has procured two sources for these fibers. See "--Manufacturing and Materials" and "Legal Proceedings." The Company's Centauri Er:YAG laser has many potential applications in different medical specialties, including cutting hard tissue such as bone and teeth, which could replace or minimize the use of noisy, high speed dental hand drills, and removing ocular structures or performing microsurgery with minimal thermal damage. Although until recently marketed only for soft tissue dental procedures and anterior capsulotomy, the Centauri laser also has received FDA clearance to market for hard tissue dental procedures. This laser also has received FDA clearances to market for hemostasis, excision and vaporization of tissues in ophthalmology, general surgery, neurosurgery, orthopedics, gastroenterology, urology, gynecology and oral surgery. See "--Government Regulation." The Centauri laser is highly effective in cataract ophthalmic procedures because its wavelength is at the peak of the water absorption spectrum and water comprises greater than sixty percent of ophthalmic tissues. Therefore, the Centauri laser can emulsify cataracts, surgically excise tissue in the treatment of glaucoma and can precisely remove layers of cornea similarly to an excimer laser. This system, which currently is cleared for anterior capsulotomy and other procedures in ophthalmology, is estimated to be available for approximately one-third the price of refractive excimer lasers currently on the market and requires substantially lower maintenance costs than excimer lasers (an estimated $10,000 per year as compared to approximately $70,000). In addition, the multipurpose Centauri Er:YAG laser is completely portable and does not emit any toxic gases or cause any potential mutagenic effect which may result from the use of the excimer laser. The Company has recently introduced what it believes to be the industry's first fully-integrated Er:YAG laser system for ophthalmic procedures. The new system incorporates the Centauri Er:YAG laser and provides the option of either a bi-manual or coaxial, uni-manual handpiece to accommodate an individual physician's technique. The Company has also recently introduced a new irrigation aspiration product for use in conjunction with the Centauri system, which integrates with the laser in performing the cataract removal procedures, and includes proprietary vacuum monitoring connectors that create a sterile aspiration line. While animal studies have been encouraging, there can be no assurance that the FDA will approve the use of the Company's Centauri laser for corneal sculpting, or that the laser will work effectively in clinical trials. Clinical trials are estimated to continue for two to five years before approval can be sought in the United States. There are several patents pending on this technology and application, although no assurances can be given that these patents will be approved or approved with the current claims. POLARIS AND PEGASUS 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. The Company manufactures a variety of continuous wave solid state Nd:YAG lasers which are designed for use in dentistry and a number of medical specialties. The Company received its first FDA clearance to market a continuous wave Nd:YAG laser system for dental (soft tissue) applications and introduced its 20 watt dental Pegasus Nd:YAG laser in February 1992 (which has in large part been superseded by the Company's newer diode laser system). The Company also manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have FDA clearance to market for various applications and procedures in general surgery, urology, gastrointestinal procedures, pulmonary procedures, gastroenterology, gynecology and ophthalmology. 6 These lasers also utilize the Company's disposable unique TouchTIPS, AngleTIPS and sculptured fibers. By using the Pegasus laser with TouchTIPS, the surgeon is allowed direct contact with tissue and the tactile feeling of the scalpel or other surgical instruments. The Company believes that the availability of these technologies permits the use of lower power laser systems (20W in dental, 40-60W in surgery). The Company holds the proprietary rights, including several patents, to manufacture and sell the Polaris laser, a 1.32 micron Nd:YAG laser (except in Japan, China and Taiwan), together with specialized software and delivery systems, for tissue melding. The Company is 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 development stage, and no clearance for this application has been received, the Company believes 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 the Company's first semiconductor laser and is the first truly portable diode laser designed for dentistry. The Aurora diode laser replaces the 20 watt Pegasus laser for periodontal procedures, and is one-fourth the size and one-half of the cost of that system. The diode wavelength is absorbed by blood in 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. The Company believes 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 CO(2) 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 (Multi Operatory Dentalaser) are gas lasers which have been cleared to market in dentistry to accelerate the composite curing process. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for the restoration of cavities. The argon wavelength penetrates through the composite and has been shown to result in a stronger restoration than composites cured by traditional curing lights. The Company's 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. No assurance may be given that the use of the argon laser for teeth whitening will become a widely accepted practice in the dental industry. The Company plans to bundle its lasers with light activated whitening materials and co-market these products with the manufacturers of these materials. The Company is currently manufacturing the MOD lasers in-house and has experienced some minor problems with the supply of components required for such production. The Company's supplier of components for its Arago laser previously ceased shipments causing the Company to temporarily cease production of these lasers. By September 1997, the Company intends to commence the in-house manufacture of the Arago lasers. 7 OTHER LASERS The Company has developed other solid state pulsed lasers including the Sirius .532 Nd:YAG laser, Orion Ho:YAG laser and the Arcturus alexandrite:YAG laser, and other applications for its existing lasers, but is not actively marketing these lasers at the present time. The following table sets forth in summary form, certain additional lasers owned by the Company which are not currently marketed by the Company, and the principal applications for which the Company has clearance to market such lasers.
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS - ---------------------------- ------------------------------------------------------------- --------------------- Altair (CO(2)) and a CO(2) Orthopedics, General and Plastic Surgery, Dermatology, laser acquired from Pfizer Podiatry, Ear, Nose and Throat, Gynecology, Pulmonary HPG Procedures; Neurosurgery and Ophthalmology................... Cleared to market Dental--Soft Tissue.......................................... Cleared to market Pegasus (Nd:YAG) 40W/60W General Surgery, Urology, Gastrointestinal Procedures, Pulmonary Procedures, Gastroenterology, Gynecology and Ophthalmology................................................ Cleared to market Pegasus (Nd:YAG) 100W Oral, Arthroscopic and General Surgery, Gastroenterology, Gastrointestinal and Genitourinary Procedures, Pulmonary Procedures, Gynecology, Neurosurgery and Ophthalmology....... Cleared to market Sirius (.532m 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 combination Various specialties.......................................... Cleared to market
DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS An integral part of any laser system is the means of delivering laser light to the target tissue. Delivery systems commonly employed in laser surgery include flexible fiberoptics, waveguides, articulated arms and micromanipulators. The Company's proprietary delivery systems control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting efforts. Flexible fibers are a preferred method of delivery for most clinical procedures, but until recently were only available for Nd:YAG and argon lasers. The end of a fiber may be shaped or used with a detachable tip to control the mechanism of laser/tissue interaction, to give a tactile feel, to provide certain mechanical effects and to angle or focus the laser beam. The Company has also been granted a perpetual paid-up license to manufacture, use and sell flexible waveguides to deliver CO(2) energy pursuant to the Assignment and Modification Agreement dated July 26, 1991 among the Company, Pfizer HPG and Medical Laser Technologies Limited. While each laser system marketed by the Company consists of a laser and an integral fiber, these fibers and other products, such as tubing sets, are used by surgeons on a disposable or limited reuse basis for each clinical procedure. The Company believes that expansion into this market could provide it with a recurring revenue stream. The Company manufactures a variety of fiberoptic delivery systems, sculpted fiberoptic probes, optical tips (AngleTIPS and TouchTIPS), waveguides and catheters which are designed for single-patient use. The patented connectors and need for product sterility encourage the users of the Company's lasers to purchase only products which are compatible with this system. The Company believes it can sell these products on a custom basis to hospital administrators for other surgical laser systems at a significant discount to competitors' published prices, while maintaining gross margins through vertical 8 integration and the extensive use of molds and tooling. The Company also assembles and distributes a full line of laser accessories, including glasses, goggles, laser signs and smoke evacuators. MARKETING, SALES AND SERVICE MARKETING AND SALES The Company markets its products to the dental market in the United States directly to dentists and periodontists through its direct sales force consisting of five area sales managers and its distributor and manufacturer's representative network consisting of approximately 20 people. The Company markets its products primarily through conventions, educational courses, direct mail, telemarketing and other dental training programs. In March 1994, the Company entered into a sales and marketing arrangement for its dental lasers with Burkhart Dental Supply Company, a member of the American Dental Cooperative, Inc., which is one of the largest distributors of dental equipment and supplies in the United States. This agreement is terminable by either party at any time. If this strategic alliance is successful, the Company believes this relationship may be expanded to the other members of the American Dental Cooperative, Inc. which markets dental products to a significant number of the approximately 129,000 practicing dentists in the United States. Such alliance is expected to assist the Company's marketing of the Centauri laser for hard tissue applications. Through an active program of educational courses and preceptorships, the Company has trained dentists in many countries during the past year using industry recognized dentists and periodontists. The Company markets its products in the ophthalmic market through two direct sales managers who focus their efforts on key ophthalmologists worldwide. The Company has entered into distribution agreements with distributors in many countries in preparation for market introduction of the Centauri laser. The Company grants exclusive distribution rights in select territories to its distributors who must maintain certain distribution minimums in order to retain their exclusive rights. The Company plans to expand its ophthalmic sales force both by enlarging its domestic sales force, either internally or through acquisition, and by acquiring or engaging additional international manufacturing representatives. The Company has recently entered into an agreement to acquire the operations and assets of EyeSys in preparation of the establishment of increased international distribution. See "--Overview." In the surgical market, the Company intends 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. The Company has entered into such a strategic alliance with Nippon Shoji Kaisha, Ltd. ("NSK"), which is one of the leading suppliers of sutures in the Pacific Rim pursuant to an Exclusive Marketing Agreement. Under this agreement, Proclosure granted to NSK, 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 the Company granted to NSK an option to manufacture the Polaris, which if exercised would require NSK to pay the Company a $1.5 million fee and royalties. NSK has not yet indicated whether it intends to manufacture these products. There can be no assurance that the Company will receive any payments under this agreement. No customer accounted for more than 10% of net sales in fiscal 1997. Sales in fiscal 1996 to one customer, Rockford Industries, Inc., a leasing company, accounted for approximately 10% of the Company's net sales for that year. Sales in fiscal 1995 to LaserSight Centers, Inc., accounted for approximately 11% of the Company's net sales for that year. 9 CUSTOMER SERVICE AND SUPPORT The Company is seeking to create a group of loyal customers by focusing on customer service, quality and reliability. In addition to its educational courses, the Company performs a complete installation of its lasers and trains the customers' staff in its proper use. Educational videos and papers are available upon request. The Company conducts service training courses for the representatives of its distributors. Prior to shipping, every laser is subjected to an extensive battery of quality control tests. The Company generally provides a one year warranty with all lasers and extended warranties are available at an additional cost. The Company ordinarily provides service within one business day to all of its customers in the United States. An owner is either sent a loaner laser by overnight carrier 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 laser to the Company. The Company has experienced and may continue to experience difficulties in providing prompt and cost-effective service of its medical lasers in foreign countries. COMPETITION The Company is and will continue to be subject to competition in its 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, the Company competes primarily with dental drills, traditional curing lights and other existing technologies, and to a lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, the Company is subject to competition principally from (i) traditional surgical treatments using a tearing needle in anterior capsulotomy, (ii) phacoemulsification, an ultrasound device used to break up cataracts in cataract removal procedures, (iii) corrective eyewear (such as eyeglasses and contact lenses) and surgical treatments for refractive disorders such as photorefractive keratectomy which is typically performed with an excimer laser and radial keratotomy which is performed with a scalpel, and (vi) 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 a CO(2) laser. The Company believes that for many applications its patented or patent pending methods and fiberoptic delivery systems provide clinical benefits over other currently known technologies and competitors' laser products. The medical laser industry in particular is also subject to intense competition and rapid technological changes. The Company believes that there are approximately 30 competitors in different sectors of the medical laser industry. The Company believes 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. Many conventional laser systems target one particular application, while the Company's Er:YAG system is designed to perform in multiple therapeutic applications. The Company's self-contained units are significantly smaller than competitive surgical models, have internal cooling devices and are powered primarily by dedicated readily available 110 volt lines instead of the 220 volt lines used by most surgical solid state lasers. The specialized menu-driven system software utilized in the Company's lasers also enhances safety and ease of use of the lasers. The Company believes that its ability to compete successfully against traditional treatments, competitive laser systems and treatments that may be developed in the future will depend on its ability to create and maintain advanced technology, develop proprietary products, obtain required regulatory approvals and clearances for its products, attract and retain scientific personnel, obtain patent or other proprietary protection for its products and technologies, and manufacture and successfully market products either alone or through other parties. Certain of the Company's competitors have substantially greater financial, technical and marketing resources than the Company. There can be no assurance that such competition will not adversely affect the Company's results of operations or its ability to maintain or increase market share. 10 SEASONALITY To date, the Company's revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows in these quarters, significantly reduced sales during the summer and the effect of year end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. Although revenues during the summer of 1996 did not follow this historical pattern, the Company expects that this seasonality will continue indefinitely. RESEARCH AND DEVELOPMENT In the past three fiscal years, the Company has invested approximately $4.5 million in research and development programs. The Company's research and development programs have capitalized on the research and development activities conducted by Pfizer Laser wherein that company identified key military and aerospace technologies and adapted these technologies to portable, efficient, solid-state laser products that were modular in nature. 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. In order to maintain its technological advantage, the Company must continue to invest in new product development. The Company seeks to augment its funding of research and development through government grants. The Company has been awarded a Phase II SBIR grant of $750,000, substantially all of which has been drawn to fund additional research and clinical trials regarding laser emulsification of cataracts. The Company has also applied for new Phase I research grants related to dentistry, orthopedics, tissue melding, and ophthalmology. No assurance can be given that the Company will be awarded any of these potential government grants. The Company's current research is focused on expanding the clinical applications of its existing products, reducing the size and cost of current laser systems, developing custom delivery systems and developing new innovative products. The Company's in-house research and development efforts have focused on the development of a systems approach to medical laser products 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 the Company's research efforts. Examples of patented or patent pending products resulting from these research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO(2) waveguides. Clinical research has also yielded several new surgical procedures. PATENTS AND PATENT APPLICATIONS Patent protection is an important part of the Company's business strategy, and the Company's success depends, in part, on its ability to maintain patents and trade secret protection and on its ability to operate without infringing on the rights of third parties. The Company has sought to protect its 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. The Company focuses its efforts on filing only for those patents which the Company believes will provide it with key defensible features instead of filing for all potential minor device features. In the United States, the Company holds 20 patents which expire at various times throughout approximately the next 7-17 years, and has an additional 14 pending patent applications, including divisional applications. In addition, the Company holds 13 foreign patents including two utility model patents and has at least 44 foreign patent applications. The Company also has a 11 nonexclusive license to a number of basic laser technologies which are commonly licensed on such basis in the laser industry. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve trade secrets and to operate without infringing the rights of others. The Company is aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict the Company's right to market certain of its technologies without a license, including, without limitation, patents relating to the Company's lens emulsification product and ophthalmic probes for its Er:YAG laser. In the past, the Company has received allegations that certain of the Company's laser products infringe other patents. There has been significant patent litigation in the medical industry in general, and in the medical laser industry in particular. Adverse determinations in litigation or other patent proceedings in which the Company may become a party could subject the Company to significant legal judgments or liabilities to third parties, and could require the Company to seek licenses from third parties that may or may not be economically viable. Patent and other intellectual property rights disputes often are settled through licensing arrangements. No assurance can be given that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. If the Company is found, in a legal proceeding, to have infringed the patents or other proprietary rights of others, it could be liable for significant damages. The Company also relies on unpatented trade secrets, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent trade secrets. GOVERNMENT REGULATION FDA REGULATION The lasers that are manufactured by the Company are regulated as medical devices by the FDA under 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. Pursuant to the FDC Act and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, denial or withdrawal of premarket clearance or approval for devices, recommendations by the FDA that the Company not be allowed to enter into government contracts, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The FDA classifies medical devices in commercial distribution into one of three classes: Class I, II or Ill. 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 (e.g., labeling, premarket notification and adherence to applicable requirements for Good Manufacturing Practices or cGMPs) and Class II devices are subject to general and special controls (e.g., 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 (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices). Lasers typically are classified as Class II devices, but the FDA may classify certain indications or technologies into Class III and require a premarket approval application ("PMA"). 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 PMA, the manufacturer or distributor may seek FDA 12 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 PMA 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. There can be no assurance that some of the Company's products will not require the more rigorous and time consuming PMA approval, including laser uses for vasovasotomy or other tissue melding procedures, cavity preparation, 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 PMA, and the device presents a "significant risk," the manufacturer or the distributor of the devices will have to file an IDE application 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 ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. Submission of an IDE does not give assurance that FDA will approve the IDE and, if it is approved, there can be no assurance that the FDA will determine that the data derived from these studies 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 such 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 requirements still apply, including the requirement for approval by an IRB, 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 four to 12 months or longer for a 510(k). If a PMA 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 PMA. Devices are cleared by 510(k) or approved by PMA 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 certain instances, 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. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for its products on a timely basis or at all, and delays in receipt of or failure to receive such 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 the Company's business, financial condition and results of operations. FDA or other governmental approvals of products developed by the Company in the future may require substantial filing fees which could limit the number of applications sought by the Company and may entail limitations on the indicated uses for which such products may be marketed. In 13 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 The Company has received 510(k) clearance to market the following lasers in an aggregate of more than 100 specialty areas: CO(2) (four models: 10W, 20W, 35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two models); 1.32m Nd:YAG (two models: 15W, 25W); .532m Nd:YAG (one model); Argon (two models); diode (four models); Nd:YAG/Er:YAG combination laser (one model). Each of these lasers has clearances in multiple specialty areas. The Company also has received 510(k) clearance to market sculptured fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared wavelengths of the Company's lasers as well as argon lasers. If a device for which the Company has 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. The Company has made modifications to certain of its products which the Company believes do not require the submission of new 510(k) notifications. However, there can be no assurance that the FDA will agree with the Company's determinations and not require the Company to discontinue marketing one or more of the modified devices until they have been cleared by the FDA. There also can be no assurance that any such clearance of modifications would be granted should clearance be necessary. The Company currently is conducting preclinical animal studies and clinical trials, both under approved IDEs and as nonsignificant risk studies. There can be no assurance that the results of any of these clinical studies will be successful or that the FDA will not require the Company to discontinue any of these studies in the interest of the public health or due to any violations of the FDA's IDE regulations. There can be no assurance that the Company will receive approval from the FDA to conduct any of the significant risk studies for which the Company seeks IDE approval, or that the FDA will not disagree with the Company's determination that any of its studies are "nonsignificant risk" studies and require the Company to obtain approval of an IDE before the study can continue. ADDITIONAL REGULATORY REQUIREMENTS Any products manufactured or distributed by the Company pursuant to a 510(k) premarket clearance notification or PMA are or will be subject to pervasive and continuing regulation by the FDA. The FDC Act also requires the Company to manufacture its products in registered establishments and in accordance with current cGMP regulations, which include testing, control and documentation requirements. The Company must also comply with Medical Device Reporting ("MDR") 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. The Company's facilities in the United States are subject to periodic inspections by the FDA. The FDA may require postmarketing surveillance with respect to the Company's products. The export of medical devices is also subject to regulation in certain instances. All lasers manufactured by the Company are subject to 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 pursuant to 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. 14 In addition, the use of the Company's products may be regulated by various state agencies. For instance, the Company is required to register as a medical device manufacturer with certain state agencies. In addition to being subject to inspection by the FDA, the Company also will be routinely inspected by the State of California for compliance with cGMP regulations and other requirements. Although the Company believes that it currently complies and will continue to comply with the applicable regulations regarding the manufacture and sale of medical devices, such regulations are always subject to change and depend heavily on administrative interpretations. There can be no assurance that future changes in law, regulations, review guidelines or administrative interpretations by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company's business, financial condition and results of operations. In addition to the foregoing, the Company is subject to 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 the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to conduct business. Furthermore, the introduction of the Company's products in foreign countries may require obtaining foreign regulatory clearances, and additional safety and effectiveness standards are required in certain other countries. The Company believes that only a limited number of foreign countries currently have extensive regulatory requirements. These countries include the European Union countries, France, Germany, Canada, Mexico and Japan. Domestic manufacturing locations of American companies doing business in certain 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 the Company will be attempting to obtain the necessary regulatory approvals, the Company expects to market its products on a limited basis in certain other countries that do not require regulatory approval. There can be no assurance that the Company's 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 such approval in the future. MANUFACTURING AND MATERIALS Manufacturing consists of component assembly and systems integration of electronic, mechanical and optical components and modules. The Company's 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. The Company believes that its customized tooling and automated systems improve quality and manufacturing reliability resulting in lower overall manufacturing costs. The Company believes that these systems will allow the Company to expand production rapidly. The Company purchases certain raw materials, components and subassemblies included in the Company's products from a limited group of qualified suppliers and does not maintain long-term supply contracts with any of its key suppliers. While multiple sources of supply exist for most critical components used in the laser and fiberoptic delivery systems, the disruption or termination of these sources could have a material adverse effect on the Company's business and results of operations. 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. The Company has in the past experienced and may continue to experience shortages in raw materials and certain supplies. The Company owns the molds used to produce certain proprietary parts of the devices. The Company also designs and develops the software necessary for the operation of its laser systems. The Company designs and assembles its own fiberoptic delivery systems and laser accessory equipment such as laser carts, 15 smoke evacuation devices and associated disposable supplies. The Company believes that its manufacturing practices are in accordance with cGMP regulations. BACKLOG OF ORDERS At the end of fiscal 1997, the Company had a backlog of orders of approximately $2,000,000, compared with the end of fiscal 1996 when the Company's backlog of orders was negligible. The Company's backlog of orders has increased substantially in both the dental and ophthalmic market segments during the first quarter of fiscal 1998. The Company expects to build and ship all of these orders within the current fiscal year. There can be no assurance that any of such orders will not be cancelled by the customer prior to shipment by the Company. PRODUCT LIABILITY AND INSURANCE Since the Company's products are intended for use in the treatment of human medical conditions, the Company is subject to an inherent risk of product liability and other liability claims which may involve significant claims and defense costs. The Company currently has 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 subject to various coverage exclusions, and in the future may not be available in acceptable amounts, on acceptable terms, or at all. Although the Company does not have any outstanding product liability claims, in the event the Company were to be held liable for damages exceeding the limits of its insurance coverage or outside of the scope of its coverage, the business and results of operations of the Company could be materially adversely affected. The Company's reputation and business could also be adversely affected by product liability claims, regardless of their merit or eventual outcome. EMPLOYEES As of May 15, 1997, the Company employed 47 people, 2 of whom are employed on a part-time basis. None of these employees are represented by a union. Eleven employees perform sales, marketing and customer support activities. The remaining employees perform manufacturing, financial, administration, regulatory, research and development and quality control activities. The Company also engages the services of many independent contractors and temporary personnel. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES. The Company leases approximately 28,000 square feet in one facility in Irvine, California pursuant to a lease which expires in December 2000. This facility contains the Company's executive offices, service center and manufacturing space. The Company is required to lease an additional 13,000 square feet in the same facility commencing in January 1999, or on such earlier date that the adjoining tenant's lease terminates. While the Company believes that its manufacturing and administrative facilities are adequate to satisfy the Company's needs through at least 2000, it may need to lease additional clean room facilities in the future. ITEM 3. LEGAL PROCEEDINGS. In March 1994, the Company 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 the Company for the Company's Er:YAG laser. Two of IFS's senior officers are also named as defendants. The Company's complaint in this matter alleges that IFS and two of its officers made misrepresentations to the Company and that IFS breached its agreement to supply fibers and certain warranties concerning the quality of the fiber to be provided. The Company is seeking damages and an injunction requiring IFS to subcontract the production of optical fiber to a third party, as provided 16 in the supply agreement. In April 1994, IFS filed a general denial and a cross-complaint against the Company 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. The Company has filed an answer to the complaint, denying the allegations and asserting several affirmative defenses. IFS has agreed to license certain fiber technologies, to which the Company claims exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of the Company. 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 the Company's original agreement with IFS applies only to a specific type of optical fiber. The Company has answered this complaint. In May 1995, the Company 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 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 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 and briefs have been submitted. No date has been set for a hearing of this appeal. No trial date has been set as to the remaining outstanding causes of action. The Company is 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, disputes and other lawsuits may adversely affect the Company. It is the opinion of management that the outcome of such matters will not have a material adverse impact on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's annual meeting of shareholders was held on March 31, 1997. Two matters were to be submitted to a vote of security holders at such meeting: the election of the Board of Directors and the approval and adoption of a Stock Option Plan. A quorum was not obtained and as a result, no vote was taken. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock, Class A Warrants and Class B Warrants are listed on the Nasdaq National Market under the symbols "PLSIA," "PLSIW" and "PLSIZ," respectively. Prior to May 1, 1995, such securities were listed on the Nasdaq SmallCap Market under the same symbols. The Company's Units currently trade on the Nasdaq SmallCap Market under the symbol "PLSIU." Each Unit consists of one share of Common Stock, one Class A Warrant and one Class B Warrant. The following table sets forth, for the quarters indicated, the high and low bid prices of the Company's securities on the Nasdaq SmallCap Market, and the high and low closing sale prices per share of the Common Stock, Class A Warrants and Class B Warrants on the Nasdaq National Market. These prices are as reported on the Nasdaq SmallCap Market through April 30, 1995, and as reported on the Nasdaq National Market (for Common Stock, Class A Warrants and Class B Warrants only) thereafter. The Units continue to trade on the Nasdaq SmallCap Market.
CLASS A COMMON STOCK CLASS A CLASS B WARRANTS WARRANTS ------------ ------------------------- ------------ HIGH LOW HIGH LOW HIGH ----- --- ----------- ----- ----- FISCAL YEAR ENDED MARCH 31, 1996: First Quarter*........................................ 63/4 33/4 25/16 63/64 3/4 Second Quarter........................................ 7 55/8 21/2 13/4 2 Third Quarter......................................... 61/8 5 31/8 11/2 23/8 Fourth Quarter........................................ 85/8 37/8 43/4 13/4 3 FISCAL YEAR ENDED MARCH 31, 1997: First Quarter......................................... 103/4 8 77/8 37/8 35/8 Second Quarter........................................ 9 61/8 57/8 3 23/4 Third Quarter......................................... 77/8 5 47/8 2 21/16 Fourth Quarter........................................ 81/8 53/16 49/16 2 111/16 UNITS ------------------------ LOW HIGH LOW ----- ------ ----- FISCAL YEAR ENDED MARCH 31, 1996: First Quarter*........................................ 25/32 101/8 53/4 Second Quarter........................................ 11/2 101/8 91/4 Third Quarter......................................... 13/8 101/8 83/4 Fourth Quarter........................................ 15/8 16 73/4 FISCAL YEAR ENDED MARCH 31, 1997: First Quarter......................................... 21/8 213/4 15 Second Quarter........................................ 13/8 171/2 101/4 Third Quarter......................................... 13/16 151/2 8 Fourth Quarter........................................ 27/32 1515/16 8
- ------------------------ * For April 1 through April 30, 1995, the high and low bid prices of the Common Stock, Class A Warrants and Class B Warrants were $5.00 and $3.50, $1.00 and $0.935, and $0.75 and $0.50, respectively. On January 31, 1997, the Company issued 159,787 shares of its Class A Common Stock to RSS, LLC, a Kansas limited liability company ("RSS") pursuant to a Joint Venture Agreement between the Company, RSS, LLC and Data.Site, LLC. Pursuant to this agreement, RSS transferred to the Company an undivided 30% interest in all of its intangible assets. The assets of RSS were ultimately transferred to Data.Site, in which the Company and RSS were issued a 51% and 49% interest, respectively. The Company's issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933. In March 1997, the Company granted options to purchase an aggregate of 1,033,000 shares of its Class A Common Stock to certain employees and directors pursuant to its 1997 Stock Option Plan. Such grants are not considered to be sales of securities under the federal securities laws. In addition, in June, 1996, in connection with its credit facility with Silicon Valley Bank (the "Credit Facility"), the Company issued to Silicon Valley Bank warrants to purchase up to 9,756 shares of Class A Common Stock at an exercise price of $10.25 per share. The Company's issuance of warrants in connection with its Credit Facility were exempt from registration under Section 4(2) of the Securities Act of 1933. On May 13, 1997, the last reported sale price for the Company's Common Stock, Class A Warrants and Class B Warrants on the Nasdaq National Market was $11.75, $9.25 and $3.94, respectively. The closing bid price for the Company's Units on the Nasdaq SmallCap Market as of May 14, 1997 was $21.50. As of May 15, 1997, the approximate number of holders of record of the Common Stock, Class A 18 Warrants, Class B Warrants, Class E-1 Common Stock and Class E-2 Common Stock were 247, 20, 18, 326 and 326, respectively. There is no public market for the Company's Class E-1 and Class E-2 Common Stock. ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA (HISTORICAL) The following table contains certain selected consolidated financial data of the Company and is qualified by the more detailed financial statements and notes thereto of the Company included herein. The balance sheet and statement of operations data for the periods ended March 31, 1994, 1995 and 1996, as well as statement of operations data for the nine months ended March 31, 1993, have been derived from the Company's financial statements, audited by Price Waterhouse LLP, independent accountants. The report of Price Waterhouse LLP with respect to such financial statements contains an explanatory paragraph that describes uncertainty as to the ability of the Company to continue as a going concern. The selected financial data for the year ended March 31, 1997 was derived from the Company's financial statements audited by Ernst & Young LLP. The following information should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
NINE MONTHS ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31, ------------ -------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------------ ----------- ----------- ----------- ----------- SELECTED STATEMENT OF OPERATIONS DATA: Net sales.................................... $1,527,457 $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 5,530,861 Cost of sales................................ 1,053,180 1,753,352 1,298,420 3,324,757 3,968,539 ------------ ----------- ----------- ----------- ----------- Gross profit (loss).......................... 474,277 325,983 (49,017) (1,620,367) 1,562,322 Selling and marketing expenses............... 1,261,571 1,087,461 1,035,863 1,308,767 2,406,010 Research and development expenses............ 647,810 678,279 1,035,705 1,213,471 1,563,228 General and administrative expenses.......... 574,676 1,322,888 1,747,090 1,709,327 1,736,184 Write-off of investment in Mattan............ -- -- -- -- 881,010 Termination of strategic alliance with IBC... -- -- -- -- 331,740 In-process research and development acquired in the Data.Site acquisition............... -- -- -- -- 250,000 ------------ ----------- ----------- ----------- ----------- Loss from operations......................... (2,009,780) (2,762,645) (3,867,675) (5,851,932) (5,605,850) Interest (expense) income.................... (201,697) (434,851) (322,540) 99,037 15,493 ------------ ----------- ----------- ----------- ----------- Loss before extraordinary items.............. (2,211,477) (3,197,496) (4,190,215) (5,752,895) (5,590,357) Extraordinary gain from extinguishment of indebtedness............................... -- -- 381,730 -- -- ------------ ----------- ----------- ----------- ----------- Net loss..................................... $(2,211,477) $(3,197,496) $(3,808,485) $(5,752,895) $(5,590,357) ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- -----------
19
NINE MONTHS ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31, ------------ -------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------------ ----------- ----------- ----------- ----------- SELECTED PER SHARE DATA: Loss per share before extraordinary item(2).................................... -- $ (2.45) $ (1.59) $ (1.26) $ (.96) Extraordinary gain from extinguishment of indebtedness -- .15 ------------ ----------- ----------- ----------- ----------- Net loss per share........................... -- $ (2.45) $ (1.44) $ (1.26) $ (.96) ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- Weighted average shares outstanding(3)....... -- 1,288,751 2,584,722 4,556,959 5,833,326 AT MARCH 31, ---------------------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------------ ----------- ----------- ----------- ----------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents(4)................. $ 308,764 $ 5,888,237 $ 35,463 $ 173,610 Working capital(4)........................... 1,287,587 6,756,149 5,818,492 8,018,616 Total assets(5).............................. 7,459,161 12,325,029 16,883,975 15,674,568 19,320,611 Long-term debt(5)............................ 1,564,507 4,303,890 -- -- 49,356 Shareholders' equity(4)...................... 6,022,174 15,002,260 13,797,046 16,631,710
- ------------------------------ (1) The Company changed its fiscal year end from June 30 to March 31, commencing with the fiscal year ended March 31, 1993. Accordingly, the fiscal year ended March 31, 1993 was a nine-month period. (2) The effect on net loss per common share of the conversion of the Company's debentures was to reduce historical net loss by $37,500 and $67,995 and to increase weighted average shares outstanding by 76,875 shares and 321,099 shares for the fiscal years ended March 31, 1994 and 1995, respectively. Net loss per common share was computed based on the weighted average number of the Company's common shares outstanding during the fiscal years ended March 31, 1995 and 1994 after giving retroactive adjustment for recapitalization and conversion of debentures into Units upon completion of the Company's initial public offering. (3) Does not include shares of Class E-1 or Class E-2 Common Stock, which are subject to cancellation in certain circumstances. (4) These amounts are unavailable at March 31, 1993. (5) Total assets and long-term debt amounts at March 31, 1993 are unaudited. Amounts for long-term debt at March 31, 1994 include $285,000 in mandatorily redeemable warrants. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion and analysis should be read in conjunction with the Company's Financial Statements and related notes thereto appearing elsewhere in this Report. This Report contains forward-looking statements including, without limitation, statements concerning future cost of sales, which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in these forward-looking statements. GENERAL The Company 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. The Company commenced operations in August 1991, after acquiring substantially all of the assets of Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets acquired by the Company included the proprietary rights to a broad base of laser and fiberoptic technologies developed by Pfizer Laser. This acquisition was led by the Company's current Chief Executive Officer. Since its formation and until its initial public offering in December 1994, the Company principally focused on, and its research and development activities related to, growing markets in dentistry, ophthalmology, cosmetic procedures and certain surgical specialties to be used in surgical centers and medical offices. To implement this strategy, the Company developed the Pegasus Nd:YAG dental laser system from existing technology and introduced this laser to the dental market in February 1992. In June 1993, the Company introduced the Centauri Er:YAG laser for ophthalmology and initiated clinical trials for hard 20 tissue procedures in dentistry. In December 1993, the Company acquired from Proclosure certain technology, assets and proprietary rights relating to a 1.32 Nd:YAG laser system for tissue melding. From its formation in 1991 through its initial public offering, the Company developed and received regulatory approvals for 15 models of lasers and sold certain of those products for soft tissue applications in dentistry and as part of clinical trials conducted by third parties. After the Company's initial public offering in December 1994 (the "IPO"), the Company increased its inventory, acquired the distribution rights to two new dental lasers and, in December 1995, expanded its dental sales force. In September and November 1995, the Company acquired rights to market and distribute the Arago and MOD argon lasers, respectively, for dental applications, and in February 1996, the Company introduced and began shipping its Aurora diode laser for soft tissue dental applications. The Company completed a secondary offering in October 1996. In 1997, it formed a joint venture named "Data.Site," with Kansas City-based Refractive Surgical Services for the purposes of providing ophthalmic data collection and outcomes analysis. In April 1997, the Company entered into an agreement to acquire EyeSys Technologies, Inc., which is a leading developer and supplier of corneal topography (diagnostic imaging) systems with an installed base of more than 3,500 systems worldwide. As of the date of this report, this transaction has not yet been completed. No assurance can be given that the transactions contemplated by such agreement will be consummated. While the Company has received FDA clearance to market laser products covering a variety of medical applications, to date the Company has focused its research, development and marketing efforts on a limited number of products or applications (principally specific dental and more recently, ophthalmic applications). As future resources permit, the Company may introduce certain products for applications for which it already has all necessary approvals or may seek strategic alliances to develop, market and distribute such products. The Company has recorded operating losses in each of the fiscal years since its formation, resulting principally from substantial costs incurred in research and development activities and obtaining regulatory approvals, together with the absence of significant revenues to date and limited commercial sales of its products. RESULTS OF OPERATIONS FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996 Net sales increased 225% to $5,531,000 for the year ended March 31, 1997 ("fiscal 1997") from $1,704,000 for the year ended March 31, 1996 ("fiscal 1996"). This increase was primarily attributable to an increase in sales to the dental market of the Aurora diode laser and argon lasers which were introduced in the latter half of fiscal 1996. Ophthalmic sales also increased significantly as the Er:YAG was purchased by key ophthalmic industry leaders in several countries. Sales during the last two quarters of fiscal 1997 were adversely affected by a disruption in the supply of the Company's Arago argon laser and vendor supply problems with the MOD argon laser. Cost of sales increased 19% to $3,969,000 in fiscal 1997 from $3,325,000 in fiscal 1996, due to an increase in sales. Selling and marketing expenses increased 84% to $2,406,000 in fiscal 1997 from $1,309,000 in fiscal 1996. This increase was primarily attributable to increased commissions and associated selling expenses, expenses associated with attendance at two ophthalmic shows and from the consolidation of the Company's expenses with those of Data.Site. Research and development expenses increased 29% to $1,563,000 in fiscal 1997 from $1,213,000 in fiscal 1996. This increase resulted primarily from increases in research and development personnel at the Company, partially offset by a $450,000 payment received by the Company under a Small Business 21 Innovative Research ("SBIR") grant. The Company also recognized $190,000 as a research and development expense from the issuance of stock options to clinical evaluators and medical directors. General and administrative expenses increased 2% to $1,736,000 in fiscal 1997 from $1,709,000 in fiscal 1996. This increase was partially due to $75,000 of additional expenses from the consolidation of Data.Site. Net interest income decreased to $15,000 in fiscal 1997 from $99,000 in fiscal 1996. This reduction reflected the Company's limited cash balances prior to the completion of its secondary offering in October 1996. In fiscal 1997, the Company wrote off its investment in Mattan of $881,000 when the Mattan shares ceased being traded on the public market. In addition, the Company expensed $250,000 of in-process research and development incurred in connection with the formation of Data.Site. During the year the Company also wrote off $332,000 as a settlement of its joint marketing relationship with International Biolaser Corporation ("IBC") since it is unlikely that IBC will repay its debt to the Company. FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995 Net sales increased 36% to $1,704,000 in fiscal 1996 from $1,249,000 for the year ended March 31, 1995 ("fiscal 1995"). This increase was primarily attributable to an increase of $723,000 in sales to the dental market, related principally to the introduction of three new products in the latter half of fiscal 1996, the Aurora diode laser, the Arago argon laser and the MOD argon laser. This increase was partially offset by a decrease in sales to the surgical market of approximately $200,000, largely due to a decline in the demand for the Company's 10 and 20 watt CO(2) lasers, which are nearing the end of their product life cycle. The Company has recently experienced supply difficulties with its Arago and MOD argon lasers. Cost of sales increased 156% to $3,325,000 in fiscal 1996 from $1,298,000 in fiscal 1995. This increase in the cost of sales was due primarily to (i) a write-down of approximately $848,000 principally attributed to the Company's CO(2) lasers and accessories obtained in the acquisition of Pfizer Laser, and Nd:YAG lasers and accessories, which lasers were developed prior to March 31, 1992 and are nearing the end of their product life cycle, (ii) the underabsorption of manufacturing costs due to low production volumes due in part to the unavailability of certain key components which require long lead-times for delivery, coupled with an increase in the number of manufacturing employees during fiscal 1996 from 12 to 17 employees resulting in an increase in payroll expense of approximately $280,000, and (iii) increased costs associated with higher sales volumes in fiscal 1996. Cost of sales for fiscal 1996 also included a fee of $122,000 to a third party pursuant to the Company's manufacturing arrangement relating to the MOD argon laser. Selling and marketing expenses increased 26% to $1,309,000 in fiscal 1996 from $1,036,000 in fiscal 1995. This increase was primarily attributable to marketing efforts related to the Company's dental products, which included a $219,000 expense related to the appointment of more than 25 new manufacturer's representatives during the third quarter, and associated expenses including training, promotional costs and commissions. Research and development expenses increased 17% to $1,213,000 in fiscal 1996 from $1,036,000 in fiscal 1995. This increase resulted primarily from increases in outside industrial and software design services of approximately $305,000, and expenses of approximately $196,000 associated with the development of new laser products. This increase was partially offset by a $175,000 reduction in clinical studies expense, due to the completion of the Company's dental hard tissue clinical trials and a $250,000 payment received by the Company under a SBIR grant. General and administrative expenses decreased 2% to $1,709,000 in fiscal 1996 from $1,747,000 in fiscal 1995. This decrease was the result of a reduction of legal expenses associated with the Fiber Litigation, partially offset by increases associated with becoming a public company. In 1995, the Company incurred legal expenses of approximately $400,000 in connection with the Fiber Litigation. Future legal 22 expenses related to the Fiber Litigation (not including out-of-pocket expenses) are expected to be limited in accordance with the Company's agreement with its legal counsel, although if the litigation is successful, counsel will be entitled to certain contingency fees. Net interest income increased to $99,000 in fiscal 1996 from net interest expense of $323,000 on fiscal 1995, reflecting the investment of the Company's remaining net proceeds from its IPO and the repayment in December 1994 of a significant portion of the Company's outstanding debt. Net loss increased 51% to $5,753,000 in fiscal 1996 from $3,808,000 in fiscal 1995. This increase was principally attributable to increases in cost of sales, selling and marketing expenses and research and development expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have been financed through the proceeds from the sale of the Company's equity securities, including an initial public offering in December 1994 and a secondary public offering in October 1996, revenues from operations and the proceeds from an SBIR grant. The Company's principal capital requirements include the financing of inventory, accounts receivable, research and development activities, the development of an ophthalmic and a surgical sales force, the development of marketing programs and the acquisition and/or licensing of patents. At March 31, 1997, the Company had cash and short-term investments of $5,192,000 and its working capital was $8,019,000. This represents an increase from March 31, 1996, when the Company had a minimal cash balance. The increase in cash and short-term investments was the result of the secondary offering of securities completed in October 1996. At March 31, 1997, the Company's indebtedness consisted of a $800,000 balance on its Silicon Valley line of credit, $57,000 in capital lease obligations and $24,000 in a note payable. The Company's Credit Facility with Silicon Valley Bank permits borrowings of up to $1,000,000. Borrowings under the Credit Facility are secured by a Certificate of Deposit pledged to Silicon Valley Bank by the Company pursuant to a Pledge Agreement and bear an interest rate equal to the prime rate of interest, as announced by Silicon Valley Bank, and are due and payable in February 1998. As of March 31, 1997, total borrowings under this agreement were $800,000. In connection with the Credit Facility, the Company issued to such lender warrants to purchase up to 9,756 shares of the Company's Class A Common Stock at an exercise price equal to $10.25 per share. At March 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes totaling approximately $20,400,000 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 the Company's net operating loss carryforwards to offset future income may be limited. From the end of fiscal 1997 through May 22, 1997, the Company has received approximately $19,108,000 from the exercise of approximately 1,401,000 Class A Warrants and approximately 1,251,000 Class B Warrants. As a result of such exercises, the Company has issued an additional 1,401,000 Class B Warrants and 2,652,000 shares of Class A Common Stock. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development activities, the scope and results of preclinical studies and clinical trials, the costs and timing of regulatory approvals, the rate of technology advances by the Company, competitive conditions within the medical laser industry, the establishment of manufacturing capacity and the establishment of collaborative marketing and other relationships which may either involve cash infusions to the Company, or require additional cash from the Company. The Company's ability to meet its working capital needs will be dependent on its ability to achieve a positive cash flow from operations and profitable operations, in addition to its ability to secure additional debt or equity financing. No assurance 23 can be given that the Company will be able to achieve a positive cash flow from operations, profitable operations or secure financing on acceptable terms. GOVERNMENT GRANTS The Company has 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 remainder of the grant can be drawn over the next six months upon the achievement of specified criteria. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements, including notes thereto, at March 31, 1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995 follow. 24 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Premier Laser Systems, Inc. We have audited the accompanying consolidated balance sheet of Premier Laser Systems, Inc. as of March 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Premier Laser Systems, Inc. at March 31, 1997, and the consolidated results of its operations and its cash flows for the year then ended 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. ERNST & YOUNG LLP Orange County, California May 1, 1997 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Shareholders of Premier Laser Systems, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Premier Laser Systems, Inc. at March 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP Costa Mesa, California May 17, 1996 26 PREMIER LASER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31 ---------------------------- 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 173,610 $ 35,463 Short-term investments........................................................... 3,968,288 4,547,377 Restricted cash.................................................................. 1,050,000 -- Accounts receivable, net of an allowance for doubtful accounts of $387,263 and $154,677 in 1997 and 1996, respectively........................................ 1,718,312 508,315 Inventories...................................................................... 2,964,632 2,185,355 Prepaid expenses and other current assets........................................ 783,319 419,504 ------------- ------------- Total current assets............................................................... 10,658,161 7,696,014 Property and equipment, net........................................................ 780,945 493,942 Intangible assets, net............................................................. 7,875,028 7,353,462 Other assets....................................................................... 6,477 131,150 ------------- ------------- Total assets....................................................................... $ 19,320,611 $ 15,674,568 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 1,217,256 $ 1,208,219 Line of credit..................................................................... 800,000 -- Notes payable to Pfizer............................................................ -- 481,195 Accrued compensation and related costs............................................. 318,000 96,132 Other accrued liabilities.......................................................... 272,369 91,976 Note payable and current portion of capital lease obligations...................... 31,920 -- ------------- ------------- Total current liabilities.......................................................... 2,639,545 1,877,522 Capital lease obligations, net of current portion.................................. 49,356 -- Commitments and contingencies 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--7,313,841 at March 31, 1997 and 4,702,203 at March 31, 1996............................................................... 27,320,449 16,317,376 Common stock, Class E-1, no par value: Authorized shares--2,200,000 Issued and outstanding shares--1,257,178 at March 31, 1997 and 1,256,818 at March 31, 1996............................................................... 4,769,878 4,769,878 Common stock, Class E-2, no par value: Authorized shares--2,200,000 Issued and outstanding shares--1,257,178 at March 31, 1997 and 1,256,818 at March 31, 1996............................................................... 4,769,878 4,769,878 Warrants and options............................................................. 3,978,276 2,889,961 Unrealized holding gain on short-term investments................................ -- 3,666,367 Accumulated deficit.............................................................. (24,206,771) (18,616,414) ------------- ------------- Total shareholders' equity......................................................... 16,631,710 13,797,046 ------------- ------------- Total liabilities and shareholders' equity......................................... $ 19,320,611 $ 15,674,568 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. 27 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31 ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Net sales............................................................ $ 5,530,861 $ 1,704,390 $ 1,249,403 Cost of sales........................................................ 3,968,539 3,324,757 1,298,420 ------------- ------------- ------------- Gross profit (loss).................................................. 1,562,322 (1,620,367) (49,017) Selling and marketing expenses....................................... 2,406,010 1,308,767 1,035,863 Research and development expenses.................................... 1,563,228 1,213,471 1,035,705 General and administrative expenses.................................. 1,736,184 1,709,327 1,747,090 Write off of investment in Mattan Corporation........................ 881,010 -- -- Termination of strategic alliance with IBC........................... 331,740 -- -- In-process research and development acquired in the Data.Site acquisition........................................................ 250,000 -- -- ------------- ------------- ------------- Loss from operations................................................. (5,605,850) (5,851,932) (3,867,675) Interest income (expense), net....................................... 15,493 99,037 (322,540) ------------- ------------- ------------- Loss before extraordinary item....................................... (5,590,357) (5,752,895) (4,190,215) Extraordinary gain from extinguishment of indebtedness............... -- -- 381,730 ------------- ------------- ------------- Net loss............................................................. $ (5,590,357) $ (5,752,895) $ (3,808,485) ------------- ------------- ------------- ------------- ------------- ------------- Net loss per share................................................... $ (0.96) $ (1.26) ------------- ------------- ------------- ------------- Shares used in the computation of net loss per share................. 5,833,326 4,556,959 ------------- ------------- ------------- ------------- Pro forma net loss per share (unaudited): Loss before extraordinary items.................................... $ (1.59) Extraordinary gain from extinguishment of indebtedness............. 0.15 ------------- Net loss........................................................... $ (1.44) ------------- ------------- Shares used in computation of pro forma net loss per share........... 2,584,722 ------------- -------------
SEE ACCOMPANYING NOTES. 28 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
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, 1994.................. 1,432,636 $ 5,372,022 1,268,488 $4,756,528 1,268,488 $4,756,528 $ -- Exercise of common stock options......... 4,936 2,848 3,011 1,081 3,011 1,081 -- Common stock issued in lieu of cash payments............................... 1,635 13,046 1,447 11,552 1,447 11,552 -- Common stock forfeited due to cessation of employment.......................... (7,798) (20,124) (6,905) (17,818) (6,905) (17,818) -- Warrants issued in connection with private placement units................ -- -- -- -- -- -- -- Repurchase of common stock............... (17,681) (6,910) (15,752) (6,119) (15,752) (6,119) -- Initial public offering of units, net proceeds............................... 2,400,000 7,633,504 -- -- -- -- 1,622,222 Conversion of warrants................... -- -- -- -- -- -- 186,000 Conversions of certain related party notes and associated accrued interest............................... 7,072 28,448 6,260 24,596 6,260 24,596 -- Conversion of debentures and associated accrued interest....................... 321,099 1,284,397 -- -- -- -- 272,934 Exercise of over-allotment option........ 360,000 1,128,947 -- -- -- -- 239,901 Net loss................................. -- -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1995.................. 4,501,899 15,436,178 1,256,549 4,769,820 1,256,549 4,769,820 2,321,057 Common stock issued for investment in Mattan................................. 200,000 881,010 -- -- -- -- -- Exercise of stock options................ 304 188 269 58 269 58 -- Increase in unrealized holding gain on short-term investments................. -- -- -- -- -- -- -- Net loss................................. -- -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- ---------- 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 and medical directors...................... -- 190,001 -- -- -- -- -- Decrease in unrealized holding gain on short-term investments................. -- -- -- -- -- -- -- Net loss................................. -- -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1997.................. 7,313,841 $27,320,449 1,257,178 $4,769,878 1,257,178 $4,769,878 $2,295,328 ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- COMMON UNREALIZED CLASS B STOCK HOLDING ACCUMULATED WARRANTS WARRANTS GAIN DEFICIT TOTAL ---------- --------- ----------- ------------- ----------- Balance at March 31, 1994.................. $ -- $ 192,130 $ -- $(9,055,034) $ 6,022,174 Exercise of common stock options......... -- -- -- -- 5,010 Common stock issued in lieu of cash payments............................... -- -- -- -- 36,150 Common stock forfeited due to cessation of employment.......................... -- -- -- -- (55,760) Warrants issued in connection with private placement units................ -- 186,000 -- -- 186,000 Repurchase of common stock............... -- -- -- -- (19,148) Initial public offering of units, net proceeds............................... 286,274 -- -- -- 9,542,000 Conversion of warrants................... -- (186,000) -- -- -- Conversions of certain related party notes and associated accrued interest............................... -- -- -- -- 77,640 Conversion of debentures and associated accrued interest....................... 48,165 -- -- -- 1,605,496 Exercise of over-allotment option........ 42,335 -- -- -- 1,411,183 Net loss................................. -- -- -- (3,808,485) (3,808,485) ---------- --------- ----------- ------------- ----------- Balance at March 31, 1995.................. 376,774 192,130 -- (12,863,519) 15,002,260 Common stock issued for investment in Mattan................................. -- -- -- -- 881,010 Exercise of stock options................ -- -- -- -- 304 Increase in unrealized holding gain on short-term investments................. -- -- 3,666,367 -- 3,666,367 Net loss................................. -- -- -- (5,752,895) (5,752,895) ---------- --------- ----------- ------------- ----------- 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 and medical directors...................... -- -- -- -- 190,001 Decrease in unrealized holding gain on short-term investments................. -- -- (3,666,367) -- (3,666,367) Net loss................................. -- -- -- (5,590,357) (5,590,357) ---------- --------- ----------- ------------- ----------- Balance at March 31, 1997.................. $1,490,818 $ 192,130 $ -- $(24,206,771) $16,631,710 ---------- --------- ----------- ------------- ----------- ---------- --------- ----------- ------------- -----------
SEE ACCOMPANYING NOTES. 29 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31 1997 1996 1995 ----------- ----------- ----------- OPERATING ACTIVITIES Net loss................................................................. $(5,590,357) $(5,752,895) $(3,808,485) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................................ 841,467 814,401 812,196 Write off of investment in Mattan Corporation........................ 881,010 -- -- Acquired in-process research and development......................... 250,000 -- -- Stock options issued to Advisory Board members....................... 190,001 -- -- Termination of strategic alliance with IBC........................... 125,000 -- -- Provision (reversal) of allowance for doubtful accounts receivable... 177,515 (151,751) -- Issuance of stock and stock options in lieu of payment for services........................................................... -- -- 36,150 Extraordinary gain from extinguishment of debt....................... -- -- (381,730) Amortization of debt discount........................................ -- -- 119,230 Common stock forfeited upon cessation of employment.................. -- -- (55,760) Changes in operating assets and liabilities: Accounts receivable................................................ (1,382,560) (92,716) 142,591 Inventories........................................................ (779,277) (14,665) (21,880) Prepaid expenses and other current assets.......................... (351,438) (110,565) 137,224 Accounts payable................................................... (272,769) 594,654 (411,197) Accrued liabilities................................................ 319,936 (598,847) 28,907 ----------- ----------- ----------- Net cash used in operating activities.................................... (5,591,472) (5,312,384) (3,402,754) INVESTING ACTIVITIES Purchase of short-term investments....................................... (3,968,288) -- -- Patent expenditures...................................................... (178,139) (195,971) (204,838) Acquisition of Data.Site................................................. (96,028) -- -- Purchase of property and equipment....................................... (24,477) (219,723) (45,785) Note receivable pursuant to strategic alliance with IBC.................. -- (125,000) -- ----------- ----------- ----------- Net cash used in investing activities.................................... (4,266,932) (540,694) (250,623) FINANCING ACTIVITIES Proceeds from equity offerings........................................... 10,400,812 -- 10,958,193 Net borrowings under line of credit...................................... 800,000 -- -- Proceeds from exercise of stock options and warrants..................... 300,575 304 -- Principle payments on note payable and capital lease obligations......... (454,836) -- (3,126,195) Increase in restricted cash.............................................. (1,050,000) -- -- Proceeds from issuance of notes payable.................................. -- -- 1,519,000 Proceeds from issuance of common stock warrants.......................... -- -- 186,000 Repurchase of common stock............................................... -- -- (19,148) Repurchase of mandatorily redeemable warrants............................ -- -- (285,000) ----------- ----------- ----------- Net cash provided by financing activities................................ 9,996,551 304 9,232,850 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents..................... 138,147 (5,852,774) 5,579,473 Cash and cash equivalents at beginning of year........................... 35,463 5,888,237 308,764 ----------- ----------- ----------- Cash and cash equivalents at end of year................................. $ 173,610 $ 35,463 $ 5,888,237 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest................................................... $ 115,283 $ 52,129 $ 550,962
SEE ACCOMPANYING NOTES. 30 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 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, laser waveguides and fiber optic devices, disposables and associated accessory products for the medical and dental market. The accompanying consolidated financial statements include the accounts of the Company and its 51% owned subsidiary Data.Site, LLC which is a joint venture established on January 31, 1997. All 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 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 laser technology. The Company operates in a highly competitive environment and is subject to all of the risks inherent in a new business enterprise. In October 1996, the Company completed a public offering of its securities which generated net proceeds aggregating $10.4 million. The Company believes that the proceeds of this offering and anticipated proceeds from the exercise of outstanding warrants and options to acquire the Company's Class A common stock will be sufficient to meet its working capital requirements through at least fiscal 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenues are recognized when products are shipped to customers. 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, 1997. Restricted cash consists primarily of certificates of deposits held to secure borrowings under the Company's line of credit. 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. In addition, sales to one customer represented 10% of the Company's sales in fiscal 1996 and 11% to a different customer in fiscal 1995. Sales in foreign countries accounted for approximately 25%, 40% and 63% of the Company's total sales in fiscal 1997, 1996 and 1995, respectively. These foreign sales related almost entirely to sales in Asia and Europe. 31 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Generally, letters of credit are obtained on international sales. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. 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). The adoption of SFAS No. 121 had no impact on the Company's financial position or results of operations. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and are comprised of the following at March 31:
1997 1996 ------------ ------------ Raw materials..................................................... $ 1,583,460 $ 938,560 Work-in-progress.................................................. 101,802 276,998 Finished goods.................................................... 1,279,370 969,797 ------------ ------------ $ 2,964,632 $ 2,185,355 ------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for replacements and improvements are capitalized and expenditures for repairs and maintenance are charged to operating expense as incurred. Property and equipment consist of the following at March 31:
1997 1996 ------------ ------------ Machinery, equipment, molds and tooling........................... $ 1,041,574 $ 1,032,188 Furniture, fixtures and office equipment.......................... 596,347 433,286 Software.......................................................... 250,000 -- ------------ ------------ 1,887,921 1,465,474 Less accumulated depreciation..................................... 1,106,976 971,532 ------------ ------------ $ 780,945 $ 493,942 ------------ ------------ ------------ ------------
Depreciation of furniture, machinery and equipment is calculated on a straight-line basis over the following estimated useful lives: Machinery and equipment....................... 5-10 years Furniture and fixtures........................ 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. 32 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Intangibles consist of the following at March 31:
1997 1996 ------------ ------------ Patents and technology rights..................................... $ 9,581,230 $ 9,413,088 Goodwill.......................................................... 1,042,279 -- License agreements................................................ 265,000 255,000 Other............................................................. -- 201,000 ------------ ------------ 10,888,509 9,869,088 Less accumulated amortization..................................... 3,013,481 2,515,626 ------------ ------------ $ 7,875,028 $ 7,353,462 ------------ ------------ ------------ ------------
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. 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. The amounts are capitalized as prepaid research and development expense and are amortized upon completion of certain milestones of the clinical study. These studies are generally completed within one year. Research and development expenses included in prepaid expenses totaled $405,000 and $204,000 at March 31, 1997 and 1996, 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. This method mandates the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. STATEMENTS OF CASH FLOWS The Company invests its excess cash in money market funds. The Company considers all highly liquid investments with an original maturity of three months or less and money market funds to be cash equivalents. Significant noncash investing and financing activities excluded from the accompanying statements of cash flows are as follows: In fiscal 1996, the Company issued 200,000 shares of Class A common stock in connection with the acquisition of 1,150,000 shares of Mattan Corporation's common stock. The value of the Mattan Corporation common stock shares was $881,010 on the date of the transaction. Concurrent with the completion of the Company's initial public offering, certain notes payable to shareholders totaling $66,500 and convertible debentures totaling $1,500,000, plus related accrued 33 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) interest, were converted into 7,072 shares of Class A common stock and 6,260 shares of each Class E-1 and E-2 common stock, and 321,099 Units, respectively. In fiscal 1997, the Company issued 159,787 shares of Class A common stock valued at $1,200,000 in connection with its acquisition of Data.Site. NET LOSS PER SHARE Net loss per share was computed based on the weighted average number of the Company's common shares outstanding during fiscal 1997 and 1996 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 shares from escrow have not been satisfied. Common stock equivalents were not considered in the net loss per share calculation because the effect would be antidilutive. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per common share was computed based on the weighted average number of the Company's common shares outstanding during the fiscal year ended March 31, 1995 after giving retroactive adjustment for the recapitalization and the conversion of the Company's debentures into units which occurred upon completion of the Company's initial public offering. The effect on pro forma net loss per common share of the conversion of the Company's debentures was to reduce historical net loss by $67,995 and to increase weighted average shares outstanding by 321,099 shares for fiscal year ended March 31, 1995. Class E-1 and E-2 common stock shares were excluded from the pro forma net loss per share calculation because the conditions for release of shares from escrow have not been satisfied. Other common stock equivalents were not considered in the pro forma net loss per share calculation because the effect on the pro forma net loss per share would be antidilutive. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock options and warrants granted and common shares issued within one year of the Company's initial public offering and not in escrow have been included as outstanding for the six months ended September 30, 1994 (the date of the most recent financial statements included in the Company's initial public offering prospectus) using the treasury stock method. EARNINGS PER SHARE In February 1997, Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE was issued and is effective for interim and annual periods ending after December 15, 1997. The statement requires presentation of both basic and diluted earnings per share. As of the result of the Company's net loss, basic and diluted loss per share will not differ materially from the per share amounts in the accompanying financial statements. 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, ACCOUNTING FOR STOCK BASED COMPENSATION. 34 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 inventory and intangibles largely relate to technologies which have yet to gain wide spread market acceptance. Management believes no loss will be incurred on the disposition of its inventory and that the remaining economic life of the Company's tangible assets is reasonable. If wide spread market acceptance of the Company's products is not achieved, the carrying amount of inventory and intangible assets could be materially affected. BASIS OF PRESENTATION Certain prior year amounts have been reclassified in order to conform with the current year presentation. 3. STRATEGIC ALLIANCES In December 1995, the Company entered into a strategic marketing alliance with Mattan Corporation (Mattan), a Canadian Corporation, whose stock was publicly traded on the Alberta Stock Exchange. The strategic marketing alliance agreement (the Agreement) stipulates that the Company would supply all laser equipment and associated disposables for any laser surgery centers to be designed and opened by Mattan in Canada and the United States. These surgery centers would be operated under the name of Medical Laser Institute of America (MLIA). In connection with entering into the Agreement, the Company issued 200,000 shares of the Company's Class A common stock with a fair market value of $881,000 for 1,150,000 shares of Mattan's common stock. The Company accounted for this investment as an available-for-sale security pursuant to SFAS No. 115. At March 31, 1996, the fair value of this investment totaled approximately $4,547,377 and the related unrealized holding gain totaled approximately $3,666,367. As a result of the halting of trading of Mattan stock and ongoing reorganization activities, the fair market value of the investment was zero at March 31, 1997 and accordingly, the Company wrote off its investment. In October 1995, the Company entered into a strategic business alliance (Strategic Alliance) with International Biolaser Corporation (IBC). This Strategic Alliance specified that the Company would manufacture IBC's CO2 and argon lasers and that such products would be jointly marketed by the two companies. Pursuant to the agreement, the Company advanced $125,000 to IBC in exchange for a convertible note payable due in October 1997, bearing interest at 10% per annum and secured by substantially all of IBC's intangible assets. This note payable is convertible, at the Company's sole option, into an 80% ownership interest in IBC only after IBC has repaid certain pre-existing indebtedness. IBC and the Company terminated the Strategic Alliance in August 1996. In settlement of the Strategic Alliance, the Company obtained IBC's argon MOD laser proprietary rights, intellectual property and technology in exchange for a guaranty of $201,000 of IBC's outstanding indebtedness. As of March 31, 1997, the Company wrote-off the $331,740 carrying value of its advances and payments made under the guarantee on behalf of IBC due to the uncertainty regarding its realizability. 35 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. JOINT VENTURE 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 $1,042,279. The Company is obligated to pay an additional $300,000 to the shareholders of RSS in the form of common stock or cash, at the option of the Company, if Data.Site's gross revenues equal or exceed $1,500,000 for the year ending December 31, 1997. The Company is also obligated to fund Data.Site's operations with up to an additional $1,000,000 in cash or equivalent services during the two-year period ending January 31, 1999. 5. GRANTS 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 and 1996, the Company received approximately $450,000 and $250,000 under the grants, respectively. The amounts received under the grant were offset against research and development costs incurred in the study. 6. LINE OF CREDIT The Company has a line of credit agreement with a bank which provides for borrowings of up to $1,000,000. As of March 31, 1997, total borrowings under this agreement were $800,000, bearing interest at the bank's prime rate (8.50% at March 31, 1997). Borrowings under the agreement are secured by a certificate of deposit. The agreement matures on February 12, 1998. 7. NOTES PAYABLE AND EXTRAORDINARY GAIN Pursuant to an agreement between the Company and Pfizer, the Company paid $1,386,195 of the notes payable to Pfizer immediately subsequent to the closing of the Company's fiscal 1995 initial public offering and Pfizer forgave $650,000 of the total indebtedness. The remaining balance of $481,195, bearing interest at 10% per annum at March 31, 1996, and related accrued interest were payable in quarterly installments. This remaining balance was paid in full upon the closing of the Company's fiscal 1997 public offering. In June 1994, notes payable to third parties of $1,500,000 were converted into convertible debentures. The debentures and related accrued interest were converted into 321,099 Units (see footnote 10) concurrent with the closing of the initial public offering. Also concurrent with the close of the offering, notes payable to shareholders totaling $66,500 plus related accrued interest were converted into 7,072 shares of Class A Common Stock and 6,260 shares each of Class E-1 and E-2 common stock. In August 1994, the Company completed a private placement of debt units, whereby $1,550,000 of notes payable bearing interest at 10% per annum (the Bridge Notes) and warrants to purchase 1,085,000 shares of Class A common stock were issued. In connection with this private placement, the Company incurred placement costs of $201,500 and issued the notes at a discount totaling $186,000. These notes payable were paid in full in December 1994. 36 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with the debt forgiven by Pfizer and the extinguishment of the bridge notes, the Company recognized a net extraordinary gain on extinguishment of debt totaling $381,730 in fiscal 1995. 8. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company leases its facilities and certain equipment under noncancellable operating leases. Total rental expense for operating leases was $296,000, $348,000 and $387,000 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. At March 31, 1997, future minimum lease payments under noncancellable operating leases are as follows:
1998.............................................................. $ 257,000 1999.............................................................. 258,000 2000.............................................................. 249,000 2001.............................................................. 188,000 --------- $ 952,000 --------- ---------
Pursuant to the Company's facility lease, effective January 1997, the Company becomes guarantor of a lease agreement between the Company's lessor and a third party lessee. The guaranteed future minimum lease payments relating to the third party are $112,000, and $86,000 for the years ended March 31, 1998 and 1999, respectively. LITIGATION The Company entered into an agreement with Infrared Fiber Systems, Inc. (IFS), as a supplier of certain fiber optics that expires in the fiscal year ending March 31, 2002. The agreement requires the supplier to sell exclusively to the Company fiberoptics 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 contact 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. No trial date has been set. 37 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is 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, disputes and other lawsuits may adversely affect the Company, however, it is the opinion of management, that the outcome of such matters will not have a material adverse impact on the Company's financial position, results of operations, or cash flows. 9. INCOME TAXES The Company has incurred operating losses since its inception and as a result, no provision for or benefit from income tax has been recorded. Deferred tax assets consist of the following at March 31:
1997 1996 ------------- ------------- Tax operating loss carryforwards................................ $ 7,540,050 $ 6,033,150 Inventory and receivable reserves and related temporary differences................................................... 1,051,030 708,404 Depreciation and amortization................................... 598,817 141,077 Research and development credit carryforwards................... 429,686 597,683 Accruals not currently deductible............................... 126,693 105,767 ------------- ------------- Total deferred tax assets....................................... 9,746,276 7,586,081 Valuation allowance for deferred tax assets..................... (9,746,276) (7,586,081) ------------- ------------- Net deferred taxes.............................................. $ -- $ -- ------------- ------------- ------------- -------------
The Company has approximately $20.4 million of federal net operating loss carryforwards at March 31, 1997, which will begin to expire in 2006. A valuation allowance has been established for the entire deferred tax asset related to those net operating losses. 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. 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 future profitability of the Company. 10. SHAREHOLDERS' EQUITY INITIAL AND SECONDARY PUBLIC OFFERINGS On December 7, 1994, the Company completed an initial public offering of 2,400,000 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 $9,542,000 from this offering. Each Class A warrant consists 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 38 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY (CONTINUED) stock. On January 12, 1995, the underwriter in the initial public offering exercised its over allotment option to purchase 360,000 Units at the public offering price, resulting in additional net proceeds of $1,411,000. 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 $10,402,000 from this offering and the related exercise of the underwriters overallotment 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. 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 option. The options are generally granted at the fair market value of the shares underlying the options at the date of the grant and 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. Effective December 30, 1993, the Company issued warrants under the 1993 Limited Warrant Plan to purchase 50,872 shares of common stock, with an exercise price of $8.85 per share for services rendered by consultants in connection with the acquisition of technology rights. In January 1995, the warrant holders exercised their right to receive a cash payment of $285,000, an amount equal to the liability owed to the consultants on the date of issuance, in exchange for cancellation of the warrants. 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 and its employee stock purchase plan 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 recognized expense related to grants of options to non-employees in accordance with the fair value provision of SFAS No. 123. Such expense was $190,001 and none during fiscal 1997 and 1996, respectively. FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires pro forma 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:
Risk free interest rate.......................................... 6.0% Stock volatility factor.......................................... 0.580 Weighted average expected option life............................ 4 years Expected dividend yield.......................................... 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 39 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY (CONTINUED) information may not be indicative of such expense in future periods as the 1997 and 1996 amounts are based only on option grants after December 15, 1994. Pro forma information is as follows:
1997 1996 ------------- ------------- Pro forma net loss.............................................. $ (6,593,000) $ (6,135,000) Pro forma net loss per share.................................... $ (1.13) $ (1.35)
A summary of the Company's stock option activity, and related information for the years ended March 31 follows:
1997 1996 1995 ----------------------- ----------------------- ----------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- ----------- ---------- ----------- ---------- ----------- Outstanding--beginning of year............ 1,423,949 $ 5.58 788,157 $ 6.14 734,646 $ 9.14 Granted................................... 1,042,756 6.16 704,700 4.89 621,815 5.01 Exercised................................. (1,899) 1.00 (1,722) 1.00 (3,067) 1.03 Forfeited................................. (156,757) 10.53 (67,186) 4.96 (565,237) 8.81 ---------- ---------- ---------- Outstanding--end of year.................. 2,308,049 5.51 1,423,949 5.58 788,157 6.14 ---------- ----------- ---------- ----- ---------- ----- ---------- ----------- ---------- ----- ---------- ----- Exercisable at end of year................ 775,629 $ 5.18 782,999 $ 6.15 758,157 $ 6.19 ---------- ----------- ---------- ----- ---------- ----- ---------- ----------- ---------- ----- ---------- ----- Weighted-average fair value of options granted during the year................. $ 3.44 $ 2.46 $ 2.53 ----------- ----- ----- ----------- ----- -----
The weighted average remaining contractual life of options as of March 31, 1997 was as follows:
OUTSTANDING EXERCISABLE ------------------------ ---------------------------------------------------------------- WEIGHTED- NUMBER OF WEIGHTED-AVERAGE WEIGHTED AVERAGE SHARES REMAINING CONTRACTUAL AVERAGE SHARES EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE - ---------------------------------------- ----------- --------------------- --------------- ----------- ----------- $1.00................................... 28,438 1.7 $ 1.00 28,438 $ 1.00 $4.50 - $8.85........................... 2,255,921 9.0 5.51 723,501 5.16 Greater than $10.00..................... 23,690 6.8 10.73 23,690 10.73
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. These amounts were originally $6,850,000, $8,425,000, $9,900,000 for the fiscal years ending March 31, 1998 through 2000, respectively, but these amounts will be increased in future fiscal years in proportion to increases in the weighted average number of shares of common stock outstanding (as defined) in the relevant year, as compared to the number of shares outstanding immediately after the Company's initial public offering. In addition, the Class E-1 common stock will be converted if the closing price, as defined, of the Company's Class A common stock shall average in excess of $19.25 for any 30 consecutive trading 40 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY (CONTINUED) days during the period May 1, 1996 to November 30, 1997. If none of the above events 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: (1) the Company's net income before provision for income taxes, as defined, amounts to at least $14,750,000, $20,475,000 or $26,750,000 for the years ending March 31, 1998 through 2000, respectively, (which amounts shall be adjusted in the same manner as those for the Class E-1 common stock) or (2) the closing price, as defined, of the Company's Class A common stock shall average in excess of $24.00 for any 30 consecutive trading days during the period May 1, 1996 to November 30, 1997. If none of the above events 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 or such minimum bid prices are achieved, 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. 11. 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 will be in the form of shares of the Company's common stock. During 1997, no amounts were contributed by the Company to the Plan. 12. SUBSEQUENT EVENT ACQUISITION OF EYESYS TECHNOLOGIES, INC. On April 24, 1997, the Company entered into an Agreement and Plan of Merger, pursuant to which it will acquire EyeSys Technologies, Inc. ("EyeSys"). Consummation of the transaction is subject to satisfaction of certain conditions. In connection with the merger, the Company will issue, to certain EyeSys creditors, shareholders, option holders and warrant holders, common stock having a value of $10,600,000, as well as options to purchase 165,000 shares of the Company's common stock which have a deemed value of $495,000. If EyeSys enters into certain license agreements related to its technology within 90 days of closing, the Company may be required to issue additional common stock or options to purchase common stock pursuant to the following formula: the Company shall issue securities with a value equal to 78% of the first $1,500,000 of license fees and 50% of additional license fees received prior to April 24, 1998. 41 PREMIER LASER SYSTEMS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1997, 1996 AND 1995
BALANCE AT DEDUCTIONS/ BEGINNING RECOVERIES BALANCE OF AND AT END OF DESCRIPTION PERIOD ADDITIONS WRITE-OFFS OTHER* PERIOD - ---------------------------------------------- ----------- ---------- ------------- ---------- ------------ 1997 Allowance for doubtful accounts receivable................................ $ 154,677 $ 177,515 $ (119,054) $ 174,125 $ 387,263 Inventory reserves.......................... 950,325 252,999 -- -- 1,203,324 1996 Allowance for doubtful accounts receivable................................ $ 306,428 $ 254,962 $ (406,713) $ -- $ 154,677 Inventory reserves.......................... 699,269 838,968 (587,912) -- 950,325 1995 Allowance for doubtful accounts receivable................................ $ 574,106 $ 220,453 $ (488,131) $ -- $ 306,428 Inventory reserves.......................... 540,987 158,282 -- -- 699,269
- ------------------------ * Allowance for Data.Site 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On March 1, 1997, the Company filed a Current Report on Form 8-K, reporting a change in its certified accountant. Reference is hereby made to such Current Report for further discussion of this matter. 43 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company and their ages as of June 2, 1997 are as follows:
NAME AGE POSITION - --------------------------------------------------- --- ------------------------------------------------------ Colette Cozean, Ph.D............................... 39 Director, Chairman of the Board, Chief Executive Officer, President and Director of Research T. Daniel Caruso, Jr............................... 54 Senior Vice President, Sales and Marketing Ronald E. Higgins.................................. 55 Vice President, Regulatory Affairs and Quality Assurance, and Secretary Michael L. Hiebert................................. 34 Vice President, Finance and Chief Financial Officer Richard Roemer..................................... 63 Vice President, Operations and Industrial Lasers Patrick J. Day..................................... 70 Director(1) Grace Ching-Hsin Lin............................... 47 Director(1)(2) G. Lynn Powell, D.D.S.............................. 55 Director(2) E. Donald Shapiro.................................. 65 Director(1)(2)
- ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation 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 the directors and executive officers of the Company during at least the last five (5) years are set forth below. DIRECTORS AND OFFICERS COLETTE COZEAN, PH.D. is a founder of the Company and has been Chairman of the Board of Directors, President and Director of Research of the Company since it began 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 and in such capacities managed the development of the laser technologies which were acquired by the Company from Pfizer Laser. Prior to April 1987, Dr. Cozean held various research positions at Baxter Edwards, a division of Baxter Healthcare Corporation ("Baxter"), and American Technology and Ventures, a division of American Hospital Supply Company ("American Hospital"). Baxter and American Hospital 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 holds 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. T. DANIEL CARUSO, JR. has been Vice President, Sales and Marketing of the Company since July 1992 and became a Senior Vice President in May 1996. From July 1989 to April 1992, Mr. Caruso was Vice President, Sales and Marketing at Hycor Biomedical, a laboratory diagnostics company. From March 1988 to July 1989, Mr. Caruso was President and Chief Executive Officer of Physicians Home Infusion Care, a 44 home health care company. Mr. Caruso has a B.S. in Biology and Chemistry and an M.B.A. in marketing from the University of Southern California. RONALD E. HIGGINS is a founder, Vice President, Regulatory Affairs and Quality Assurance and Secretary of the Company, a position he has held since January 1995. From the founding of the Company in August 1991 to January 1995, Mr. Higgins was Vice President, Operations. From September 1989 to August 1991, Mr. Higgins was Manager of Regulatory Affairs and Quality Assurance at Pfizer Laser. From January 1987 to September 1989, Mr. Higgins was Director of Regulatory Affairs at Cardio Pulmonics, a medical device company. Mr. Higgins holds a B.S. in Zoology from the University of Utah and has completed post graduate work in the areas of biochemistry, educational training, regulatory affairs, manufacturing and engineering. MICHAEL L. HIEBERT has been the Company's Vice President, Finance and Chief Financial Officer since November 5, 1996. Prior to joining the Company, Mr. Hiebert was the controller and director of management information systems and business analysis of Urethane Technologies, Inc., a plastics manufacturer, which position he held from 1994 to 1996. From 1992 to 1994, Mr. Hiebert was Vice President, Finance and Administration of Active Organics, Inc., a cosmetics manufacturer, and from 1987 to 1992 he was an accounting manager with the general engineering firm of C. A. Rasmussen, Inc. RICHARD ROEMER has been Vice President, Operations and Industrial Lasers of the Company since February 1995. From 1994 to 1995, Mr. Roemer was an independent consultant for the Company. From 1988 to 1994, Mr. Roemer was a consultant to and general manager of California Labs, JMED, Inc. and Pineridge Capital, which are manufacturers of laser-based medical products. Prior to 1988, Mr. Roemer founded the laser group of Mells Griot and served as the Chief Operating Officer of Hughes Aircraft Corporation. Mr. Roemer holds a B.S. degree in Mechanical Engineering from Rutgers University. PATRICK J. DAY has served as a director of the Company since August 1991. Mr. Day is a Certified Public Accountant and owns a CPA firm which he established in 1967. He 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, the Company's Chairman of the Board, Chief Executive Officer and President. Mr. Day has a B.A. in accounting from the University of Idaho. GRACE CHING-HSIN LIN has served as a director of the Company since February 1992, representing a group of original investors in the Company. Ms. Lin has been an agent providing real estate consulting services for Security Trust Realty since April 1988 and an owner of South Pacific Investment, an investment management company, since 1989. G. LYNN POWELL, D.D.S. Dr. Powell 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 (10) years. E. DONALD SHAPIRO joined the Board of Directors in August 1994. Since 1983, Mr. Shapiro has served as the Joseph Solomon Distinguished Professor of Law at New York Law School where he served as both Dean and Professor of Law from 1973 to 1983. He is Supernumerary Fellow of St. Cross College at Oxford University, England. Mr. Shapiro received a J.D. degree at Harvard Law School. He currently serves on the Boards of Directors for several public companies including Loral Space and Communications, Ltd., Eyecare Products PLC, Kranzco Realty Trust, Group Health Incorporated, Vasomedical Corporation, MacroChem Corporation, United Industrial, Telepad, Inc. and Food Entertainment, Inc. He also serves on 45 the Board of Directors of Bank Leumi NY. Mr. Shapiro is special counsel to the law firm of Herzfeld and Rubin, which firm is representing the Company in the Fiber Litigation described above under "Business-- Legal Proceedings." Mr. Shapiro is not a partner of such firm and receives no compensation calculated by reference to such firm's profits. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, and the regulations thereunder, require the Company's directors, executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company, and to furnish the Company with copies of all Section 16(a) forms they file. During the most recent fiscal year ended March 31, 1997, G. Lynn Powell, D.D.S., a director of the Company, failed to file on a timely basis an Initial Statement of Beneficial Ownership of Securities on Form 3. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the two (2) fiscal years ended March 31, 1996 and 1997, all other Section 16(a) filing requirements applicable to the Company's 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 the Company's Chief Executive Officer and each other executive officer of the Company who received an annual salary and bonus of more than $100,000 for services rendered to the Company during the fiscal year ended March 31, 1997.
LONG-TERM ANNUAL COMPENSATION AWARDS COMPENSATION(1) -------------------- --------------------- SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION - --------------------------------------------- ----------- ---------- --------- -------------------- ------------- Colette Cozean, Ph.D, President, ............ 1997 $ 151,064 -- 217,500 $ 32,300(2) Chief Executive Officer and 1996 $ 112,000 -- 140,000 $ 19,800(3) Director of Research 1995 $ 97,500 $ 20,000 358,650 $ 4,800(4) T. Daniel Caruso, Jr. ....................... 1997 $ 105,625 $ 10,000 109,500 $ -- Senior Vice President, 1996 $ 90,625 $ 10,000 95,000 $ -- Sales and Marketing -- $ -- $ -- -- $ --
- ------------------------ (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 such person. The Company has agreed to enter into Termination Agreements with the above executive officers which will provide, when executed, that in the event of a termination of employment following a change in control of the Company, as defined in such 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. The Company has 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 June 5, 1997, such severance benefits range from approximately $36,668 to $55,000 for each of the named persons. 46 (2) Represents the full amount of premiums paid by the Company ($27,500) 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. (3) Represents the full amount of premiums paid by the Company ($15,000) for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean and an auto allowance for Dr. Cozean ($4,800). (4) Represents an auto allowance for Dr. Cozean. OPTIONS GRANTED IN LAST FISCAL YEAR The following table sets forth certain information concerning stock options granted to the named executive officers during the fiscal year ended March 31, 1997. This information includes hypothetical potential gains from stock options granted in fiscal 1997. These hypothetical gains are based entirely on assumed annual growth rates of 5% and 10% in the value of the Company's Common Stock price over the 10 year life of the stock options granted in 1997. These assumed rates of growth were selected by the Securities and Exchange Commission for illustration purposes only, and are not intended to predict future stock prices, which will depend upon market conditions and the Company's future performance and prospects.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENT OF TOTAL RATES OF STOCK SHARES OF OPTIONS PRICE APPRECIATION FOR COMMON STOCK GRANTED TO EXERCISE OR OPTION TERM UNDERLYING EMPLOYEES DURING BASE PRICE EXPIRATION ------------------------ NAME OPTIONS GRANTED FISCAL YEAR PER SHARE(1) DATE 5%($) 10%($) - ------------------------- --------------- --------------------- ------------- ------------- ---------- ------------ Colette Cozean, Ph.D..... 217,500(2) 38% $ 6.125 2007 $ 837,805 $ 2,123,163 T. Daniel Caruso, Jr..... 109,500(3) 19% $ 6.125 2007 $ 421,792 $ 1,068,903
- ------------------------ (1) The options were granted at an exercise price at least equal to the fair market value of the Class A Common Stock on the date of grant. The exercise price may be paid by delivery of cash or already owned shares, subject to certain conditions. (2) Such options vest in three equal annual installments commencing March 31, 1998. (3) Such options vest in three equal annual installments commencing March 31, 1998. AGGREGATED OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES The following table sets forth certain information regarding stock options exercised by the named executive officers during the fiscal year ended March 31, 1997, 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.
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS SHARES ACQUIRED VALUE OPTIONS AT MARCH 31, 1997 AT MARCH 31, 1997(A) ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ----------------- ------------- -------------------------- -------------------------- Colette Cozean, Ph.D.............. 0 $ 0 141,730 574,420 $ 97,115 $ 204,710 T. Daniel Caruso, Jr.............. 0 $ 0 37,530 179,500 $ 20,000 $ 37,500
- ------------------------ (A) Represents the Nasdaq closing price of underlying securities at fiscal year end, minus the exercise price of the options. 47 DIRECTOR COMPENSATION All directors are elected annually and hold office until the next Annual Meeting of Shareholders and until their successors are duly elected and qualified. The Company pays to all nonemployee directors $1,000 per Board meeting attended, $1,000 per committee meeting attended which is not in conjunction with a Board meeting, $500 per committee meeting attended in conjunction with a Board meeting, and $500 per telephonic Board or committee meeting. Directors are also reimbursed for their out-of-pocket expenses incurred in attending meetings of the Board of Directors and its committees. Mr. Shapiro also receives a fee of $1,000 per month as compensation for additional consulting services relating to the Company's pending litigation matter and to new business issues. The Company may also periodically award options or warrants to its directors, under its existing stock option plans and otherwise. The Company's outstanding Stock Option Plans include: (i) the 1995 Stock Option Plan which provides for the granting of "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options"), and nonstatutory options; (ii) the 1996 Stock Option Plan which also provides for the granting of Incentive Stock Options and nonstatutory stock options; (iii) the February 1996 Stock Option Plan which provides for the granting of nonstatutory stock options, and (iv) the 1997 Stock Option Plan, described below. The Company's 1997 Stock Option Plan (the "1997 Plan") authorizes the Company to grant options to purchase shares of the Company's Class A Common Stock, no par value, to selected officers, directors, key employees and other providers of service to the Company, with the aggregate number of shares to be delivered upon exercise not to exceed 1,500,000. The 1997 Plan terminates in February 2007. Options granted under the 1997 plan will have a term not to exceed ten (10) years and an exercise price in an amount determined by the Board of Directors or the committee administering the Plan. As of June 11, 1997, options to purchase an aggregate of 1,033,000 shares of the Company's Class A Common Stock had been issued under the 1997 Plan to the Company's directors and executive officers, at an exercise price of $6.125 per share. The Company's Articles of Incorporation and indemnification agreements entered into between the Company and certain of the Company's directors and officers require the Company to indemnify such officers and directors to the fullest extent permitted by applicable law against liabilities incurred in connection with their duties as officers and directors of the Company. Such indemnification rights may extend to liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended March 31, 1997, the members of the Compensation Committee were Grace Ching-Hsin Lin, G. Lynn Powell, D.D.S. and E. Donald Shapiro, all of whom are non-employee directors of the Company. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors hereby submits its report concerning the compensation of the Company's executive officers, including the Chief Executive Officer. The Compensation Committee is responsible for setting and administering the compensation policies of the Company with respect to its executive officers. The Company's executive compensation program is designed to align executive compensation with the Company's business strategy and performance. The goals of the executive compensation program are: 48 (i) to attract and retain key executives critical to the success of the Company; (ii) to provide levels of compensation which are competitive with other entities in the industry of similar size; and (iii) to motivate executives to enhance long-term shareholder value by building appropriate ownership in the Company. The annual compensation has been considered for the executive officers, including Dr. Colette Cozean, the Company's President and Chief Executive Officer, including base salaries, coupled with stock options and other incentives. Base salaries are the fixed component of the executive officers' compensation package. Salaries are set and adjusted based upon competitive standards and individual performance. The award of any bonuses is based upon the performance of the Company during the prior year and the contribution of each individual executive officer to the Company's performance. Among the factors (the "Performance Factors") which the Committee has established to assess the Company's overall performance are: the Company's performance against budget and targets for sales, expenses and revenue, and the successful implementation of both short and long-term corporate strategies for enhancing shareholder value (e.g. strategic acquisitions, divestitures, facilities expansion, productivity, improvements, etc.) and product development along with technical advances as well as new patents. A substantial portion of the compensation of executive officers is based upon the award of stock options which rely on increases in the value of the Company's Common Stock. The issuance of options is intended to encourage such employees to establish a meaningful, long-term ownership interest in the Company consistent with the interests of the Company's shareholders. Under the Company's stock option plans, options are granted from time to time to certain officers, directors and key employees of the Company and its subsidiaries at the fair market value of the Company's Common Stock at the time of grant. Because the compensation element of options is dependent on increases over time in the market value of such shares, stock options represent compensation that is tied to the Company's long-term performance. The Committee has reviewed the 1997 base salaries of each of the executive officers and is of the opinion that such salaries are not at all unreasonable in view of those paid by the Company's competitors of a similar size. The Committee also reviewed the stock options awarded in 1997 and is of the opinion that the option awards are reasonable in view of the officers' individual performance and positions with the Company. The Committee has also reviewed Dr. Cozean's base salary for 1997 and is of the opinion that her salary is not unreasonable in view of those paid to Chief Executive Officers of the Company's competitors of similar size. Dr. Cozean received options for the purchase of 217,500 shares of the Company's common stock all at prices equaling the Company's then current trading price, subject to a three (3) year vesting schedule, for her past and anticipated services to the Company, which the Committee believes to be reasonable and appropriate in light of her individual performance and that of the Company during 1997 based upon the performance factors discussed above. Dr. Cozean was not paid any cash bonus for 1997. COMPENSATION COMMITTEE: E. Donald Shapiro Grace Ching-Hsin Lin G. Lynn Powell, D.D.S. 49 PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative total shareholder return on the Company's Class A Common Stock, based on its market price, with the cumulative total return of companies on the Nasdaq Stock Market (U.S. common stocks) and the Hambrecht & Quist Technology Index, assuming reinvestment of dividends, for the period beginning December 1, 1994 through the Company's fiscal year ended March 31, 1997. The Company's Class A Common Stock was initially offered to the public on November 30, 1994. This graph assumes that the value of the investment in the Company's Class A Common Stock and each of the comparison groups was $100 on December 1, 1994. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PREMIER LASER NASDAQ STOCK HAMBRECHT & Systems, Inc. Market (US) Quist Technology 12/01/94 $100.00 $100.00 $100.00 3/31/95 $80.00 $109.00 $115.00 3/31/96 $172.50 $148.00 $156.00 3/31/97 $110.00 $165.00 $181.00
12/1/94 3/31/95 3/31/96 3/31/97 --------- --------- --------- --------- Premier Laser Systems, Inc............................................ $ 100.00 $ 80.00 $ 172.50 $ 110.00 NASDAQ Stock Market (US).............................................. $ 100.00 $ 109.00 $ 148.00 $ 165.00 Hambrecht & Quist Technology Index.................................... $ 100.00 $ 115.00 $ 156.00 $ 181.00
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information as of June 11, 1997, 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 COMMON NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP STOCK - --------------------------------------------------------------------------- -------------------- ------------------- Colette Cozean, Ph.D.(2)................................................... 318,185 2.4% Patrick J. Day(3).......................................................... 242,981 1.9% E. Donald Shapiro(4)....................................................... 40,000 * Ronald E. Higgins(5)....................................................... 107,820 * Grace Ching-Hsin Lin(6).................................................... 62,801 * T. Daniel Caruso, Jr.(7)................................................... 78,052 * Michael L. Hiebert(8)...................................................... 18,000 * Richard Roemer(9).......................................................... 5,000 * G. Lynn Powell, D.D.S.(10)................................................. 31,501 * All directors and executive officers as a group (9 persons)(10)............ 904,340 6.8%
- ------------------------ * Less than 1%. 50 (1) The address of each of Dr. Cozean, Ms. Lin and Messrs. Day, Caruso, Hiebert, Higgins, Shapiro and Roemer is 3 Morgan, Irvine, California 92618. Unless otherwise noted, the Company believes 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 49,144 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 177,595 shares of Class A Common Stock subject to options exercisable within sixty (60) days. (3) Includes 54,263 shares of Class A Common Stock, 48,047 shares of Class E-1 Common Stock and 48,047 shares of Class E-2 Common Stock. Also includes 58,992 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 sixty (60) days. (4) Includes 40,000 shares of Class A Common Stock subject to Class A Warrants and other warrants and options exercisable within sixty (60) days. (5) Includes 24,400 shares of Class A Common Stock, 30,460 shares of Class E-1 Common Stock and 30,460 shares of Class E-2 Common Stock. Also includes 22,500 shares of Class A Common Stock subject to options exercisable within sixty (60) days. (6) Includes 6,330 shares of Class A Common Stock, 5,605 shares of Class E-1 Common Stock and 5,605 shares of Class E-2 Common Stock held by Linco Investments, a limited partnership in which Ms. Lin's husband serves as a general partner, and 1,899 shares of Class A Common Stock, 1,681 shares of Class E-1 Common Stock and 1,681 shares of Class E-2 Common Stock held by the pension plan for Ms. Lin's husband. Also includes 40,000 shares of Class A Common Stock subject to warrants exercisable within sixty (60) days. (7) Includes 13,722 shares of Common Stock, 12,150 shares of Class E-1 Common Stock and 12,150 shares of Class E-2 Common Stock. Also includes 32,022 shares of Class A Common Stock, 4,004 shares of Class E-1 Common Stock and 4,004 shares of Class E-2 Common Stock subject to options exercisable within sixty (60) days. (8) Includes 18,000 shares of Class A Common Stock subject to warrants and options exercisable within sixty (60) days. (9) Includes 5,000 shares of Class A Common Stock subject to warrants and options exercisable within sixty (60) days. (10) Includes 31,501 shares of Class A Common Stock subject to warrants and options exercisable within sixty (60) days. (11) Includes 151,352 shares of Class A Common Stock, 142,869 shares of Class E-1 Common Stock and 142,869 shares of Class E-2 Common Stock. Also includes 425,610 shares of Class A Common Stock, 20,820 shares of Class E-1 Common Stock and 20,820 shares of Class E-2 Common Stock subject to warrants and options exercisable within sixty (60) days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Neither the Company nor any of its directors, nominees, executive officers or beneficial owners of more than five percent of the outstanding Common Stock, or any immediate family member of the foregoing, are, or during fiscal 1997 at any time, were, or are proposed to be, parties to, or have a direct or indirect material interest in, any relationships or transactions, or series of related transactions, described in Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission. 51 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE IN ANNUAL REPORT ON FORM 10-K/A --------------- (a) The following documents are filed as part of this Annual Report on Form 10-K/A: (1) Report of Ernst & Young LLP, Independent Auditors............................ 25 Report of Price Waterhouse LLP, Independent Accountants...................... 26 Consolidated Balance Sheets at March 31, 1997 and 1996....................... 27 Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995.............................................................. 28 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1996 and 1995........................................................ 29 Consolidated Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and 1995.............................................................. 30 Notes to Consolidated Financial Statements................................... 31 (2) Financial Statements Schedules Schedule II--Valuation and Qualifying Accounts for the Years Ended March 1997, 1996 and 1995........................................................ 42 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)............ 52
EXHIBITS - ----------- 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). 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.2 Assignment Agreement dated July 27, 1992 between the Company 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 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). +10.4 Lead Generation/Distribution Agreement dated March 17, 1994 between the Company and Burkhart Dental Supply Company (incorporated herein by this reference to Exhibit 10.10 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
52
EXHIBITS - ----------- 10.5 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). 10.6 Letter of Intent between the Company 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). +10.7 Exclusive Marketing Agreement dated July 26, 1994 between the Company, 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). 10.8 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). 10.9 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). 10.10 Form of Warrant Agreement (including forms of Class A and 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). 10.11 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.12 Form of Finder's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.13 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). 10.14 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). 10.15 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984). 10.16 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 Number 33-83984).
53
EXHIBITS - ----------- 10.17 Industrial Lease dated December 6, 1995 between the Registrant and 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). 10.18 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the Registrant and International Biolaser Corporation (incorporated herein by this reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan Corporation (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995). 10.21 Purchasing Agreement dated December 20, 1995 between Registrant and Mattan Corporation (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995). 10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.23 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.24 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). 10.25 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics International (incorporated herein by this reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.26 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting option to purchase 358,650 shares of Registrant's Common Stock) (incorporated herein by this reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.27 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).
54
EXHIBITS - ----------- 10.28 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-K for the fiscal year ended March 31, 1996). 10.29 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). 10.30 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). 10.31 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with Schedule to Loan Agreement dated June 3, 1996 (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.32 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.33 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). 10.34 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). 10.35 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. 333-04219). 10.36 Agreement dated August 12, 1996 between the Registrant and Circuit Tree Medical, Inc. (incorporated herein by this reference to Exhibit 10.42 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.37 Amendment to Loan Agreement together with Schedule, dated February 13, 1997, between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.38 Pledge Agreement dated February 13, 1997 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.39 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997). 10.40 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).
55
EXHIBITS - ----------- 10.41 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). 21 Subsidiaries* 23.1 Consent of Ernst & Young LLP.* 23.2 Consent of Price Waterhouse LLP.* 27 Financial Data Schedule (incorporated herein by this reference to Exhibit 27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997).
- ------------------------ * Filed herewith. + Confidential treatment has been granted with respect to portions of this Exhibit. (b) Reports on Form 8-K. During the last quarter of the period covered by this report, on March 1, 1997, the Company filed a Current Report on Form 8-K, reporting a change in its public accountant. On March 18, 1997, the Company filed an amendment to its Current Report on Form 8-K/A for the purpose of filing a letter by its former accountants confirming the information contained in the Form 8-K. 56 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 Dated: June 2, 1997 Pursuant to the requirements of the Securities Exchange 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 ------------------------- -------------------------- ------------------- Chief Executive Officer, By: /s/ COLETTE COZEAN President (Principal ------------------------- Executive Officer), Dated: June 2, 1997 Colette Cozean, Ph.D. Director By: /s/ PATRICK J. DAY ------------------------- Director Dated: June 4, 1997 Patrick J. Day By: /s/ GRACE CHING-HSIN LIN ------------------------- Director Dated: June 4, 1997 Grace Ching-Hsin Lin By: /s/ E. DONALD SHAPIRO ------------------------- Director Dated: June 4, 1997 E. Donald Shapiro Chief Financial Officer By: /s/ MICHAEL L. HIEBERT (Principal Financial ------------------------- Officer and Principal Dated: June 2, 1997 Michael L. Hiebert Accounting Officer) By: /s/ G. LYNN POWELL ------------------------- Director Dated: June 3, 1997 G. Lynn Powell, D.D.S. 57 EXHIBIT INDEX
EXHIBIT NO. - ----------- 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)................................................... 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)......................... 10.2 Assignment Agreement dated July 27, 1992 between the Company 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 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)................................................... +10.4 Lead Generation/Distribution Agreement dated March 17, 1994 between the Company and Burkhart Dental Supply Company (incorporated herein by this reference to Exhibit 10.10 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)...................................... 10.5 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).................. 10.6 Letter of Intent between the Company 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)........................................................................... +10.7 Exclusive Marketing Agreement dated July 26, 1994 between the Company, 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)...................................... 10.8 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)......................... 10.9 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)..................... 10.10 Form of Warrant Agreement (including forms of Class A and 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)........................................................................... 10.11 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)..................... 10.12 Form of Finder's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).........................
58
EXHIBIT NO. - ----------- 10.13 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)......................... 10.14 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)............................................................................................ 10.15 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984)............................................................................................ 10.16 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 Number 33-83984)............................................................. 10.17 Industrial Lease dated December 6, 1995 between the Registrant and 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).................................................................... 10.18 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)................................................ 10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the Registrant and International Biolaser Corporation (incorporated herein by this reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)..... 10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan Corporation (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995)................ 10.21 Purchasing Agreement dated December 20, 1995 between Registrant and Mattan Corporation (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995)..................................................................... 10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)..................................................... 10.23 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)............................... 10.24 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).................. 10.25 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics International (incorporated herein by this reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)......................................
59
EXHIBIT NO. - ----------- 10.26 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting option to purchase 358,650 shares of Registrant's Common Stock) (incorporated herein by this reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)...................................................................................... 10.27 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)................................................ 10.28 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-K for the fiscal year ended March 31, 1996).................... 10.29 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).................. 10.30 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)............................... 10.31 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with Schedule to Loan Agreement dated June 3, 1996 (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219).................. 10.32 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219).......................................................................... 10.33 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)....................................................................................... 10.34 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)................................................................ 10.35 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. 333-04219)................................................................ 10.36 Agreement dated August 12, 1996 between the Registrant and Circuit Tree Medical, Inc. (incorporated herein by this reference to Exhibit 10.42 to the Registrant's Registration Statement on Form SB-2 Registration No. 333-04219). 10.37 Amendment to Loan Agreement together with Schedule, dated February 13, 1997, between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997)................................. 10.38 Pledge Agreement dated February 13, 1997 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997).................................................................... 10.39 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997)....................................................... 10.40 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)................................................................................................
60
EXHIBIT NO. - ----------- 10.41 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)............. 21 Subsidiaries* 23.1 Consent of Ernst & Young LLP*........................................................................ 23.2 Consent of Price Waterhouse LLP*..................................................................... 27 Financial Data Schedule (incorporated herein by this reference to Exhibit 27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997)
- ------------------------ + Confidential treatment has been granted with respect to portions of this Exhibit. + Incorporated by reference herein. * Filed herewith. 61 EX-21 2 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries Data.Site, LLC, a California limited liability company EX-23.1 3 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-1680) pertaining to the 1995 Stock Option Plan of Premier Laser Systems, Inc. and related Prospectus and in the Registration Statement (Form S-8 No. 333-27151) pertaining to the February 1996 Stock Option Plan of Premier Laser Systems, Inc. and related Prospectus of our report dated May 1, 1997, with respect to the consolidated financial statements and schedule of Premier Laser Systems, Inc. included in Amendment No. 1 to its Annual Report (Form 10-K) for the year ended March 31, 1997. ERNST & YOUNG LLP Orange County, California June 17, 1997 EX-23.2 4 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-01680 and 333-27151) of Premier Laser Systems, Inc. of our report dated May 17, 1996 appearing on page 26 of this Amendment No. 1 to Form 10-K. We also consent to the application of such report to the Financial Statement Schedule for the two years ended March 31, 1996 listed in the accompanying index when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report also included this schedule. PRICE WATERHOUSE LLP Costa Mesa, California June 17, 1997 -----END PRIVACY-ENHANCED MESSAGE-----