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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998.
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[_] 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
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PREMIER LASER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 33-0472684
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Morgan, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (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 and Class B Warrants
-----------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act or
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
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/A or any
amendment to this Form 10-K/A. [_]
The aggregate market value of the registrant's voting stock held by
nonaffiliates was approximately $61,878,491 on June 24, 1998, based upon the
closing sale price of such stock on May 22, 1998.
Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date:
As of June 24, 1998:
Class A Common Stock: 14,903,906 Shares
Class E-1 Common Stock: 1,257,499 Shares
Class E-2 Common Stock: 1,257,499 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
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PART I
Item 1. Business.
This Annual Report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. Such forward-looking statements are principally contained in the
sections "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and include, without limitation, the
Company's expectation and estimates as to the Company's business operations,
including the introduction of new products, and future financial performance,
including growth in revenues and net income and cash flows. In addition, in
those and other portions of this Annual Report, the words "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions,
as they relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company's management, with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Annual Report.
Overview
Premier Laser Systems, Inc. ("Premier") develops, manufactures and markets
several lines of proprietary medical lasers, fiberoptic delivery systems and
associated products for a variety of dental, ophthalmic and surgical
applications. In addition, through its wholly owned subsidiary, EyeSys
Technologies, Inc., a Delaware corporation, ("EyeSys"), Premier develops,
manufactures and markets corneal topography (diagnostic imaging) systems.
Premier's majority-owned Data.Site joint venture ("Data.Site") assists
physicians and researchers with ophthalmic data collection and outcomes analysis
for specific procedures. Premier's majority owned subsidiary, Ophthalmic Imaging
Systems, Inc., a California corporation ("OIS") is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems and
image enhancement and analysis software for use by practitioners in the ocular
health field. When referred to in the following discussion, the "Company" shall
include Premier Eyesys, Data.Site and OIS.
Premier 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. In
September 1997, Premier acquired EyeSys in exchange for cash and securities.
Premier acquired a majority of the outstanding common stock of OIS in several
transactions commencing in October 1997 and ending in February 1998. Premier
entered into a Stock Purchase Agreement, dated February 25, 1998, pursuant to
which it agreed, subject to certain conditions, to commence an exchange offer to
acquire all of the outstanding common stock of OIS not owned by Premier. This
Stock Purchase Agreement was terminated as of August 21, 1998. In connection
with this termination, Premier may be liable to pay OIS a $500,000 break-up fee,
which could be satisfied by the reduction of indebtedness of OIS to Premier
which arose after March 31, 1998. In addition, in purchasing 51% of OIS'
outstanding stock, Premier entered into an agreement with one of OIS' selling
shareholders which contemplates that Premier's purchase of approximately 10% of
OIS' outstanding shares will be rescinded if Premier does not complete the
exchange offer. If the rescission is implemented, Premier will own less than a
majority of the outstanding shares of OIS and would no longer include the
financial performance of OIS on a consolidated basis. In addition, as part of
the rescission, Premier would receive approximately $730,000 in cash. The
parties are currently negotiating various issues relating to the termination of
the Purchase Agreement and their future business relationship.
Laser Business
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 in some cases, compared to
conventional techniques not involving the use of lasers, vaporize or sever
tissue with minimal blood loss and scarring, increase patient comfort and reduce
patient treatment time and treatment costs.
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The Company currently markets certain of these lasers for dentistry,
ophthalmology and surgery.
In its laser business, 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 in clinical trials 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 initiated 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 viable.
Corneal Topography Business
Eyesys designs, develops and markets a line of noninvasive corneal
topography systems for use by ophthalmologists and optometrists in surgical
planning and evaluation, diagnosis of corneal pathologies and contact lens
fitting. Founded in 1986, Eyesys has installed more than 3,500 systems.
The Eyesys System 2000 combines proprietary hardware used for capturing an
image and a personal computer to control the hardware and to run the software.
The output of the Eyesys System 2000 is a color-coded map of the shape and
curvature of the human cornea that vision care professionals can easily
interpret and utilize for treatments such as refractive and cataract surgery and
corneal transplants, for diagnosis of astigmatisms and corneal pathology, and
for contact lens fitting and custom lens manufacturing.
Ocular Imaging Business
OIS, which commenced business in 1986, is engaged in the business of
designing, developing, manufacturing, and marketing digital imaging systems and
image enhancement and analysis software for use by practitioners in the ocular
health field.
Since its inception, OIS products have addressed primarily the needs of the
ophthalmic fluorescein angiography market, and more recently the indocyanine
green market. The current flagship products in the OIS's angiography line are
its digital imaging systems, the WinStation 1024(TM) and WinStation 640(TM).
These WinStation products are targeted primarily at retinal specialists and
general ophthalmologists. OIS's WinStation systems (640 and 1024 resolution)
are primarily used by ophthalmologists to perform a diagnostic test procedure
known as fluorescein angiography. This procedure is used to diagnose and
monitor pathology and provide important information in making treatment
decisions. Fluorescein angiography is performed by injecting a fluorescent dye
in the bloodstream. As the dye circulates through the blood vessels of the eye,
the WinStation system connected to a fundus camera takes detailed images of the
patient's retina. Quite often these images provide a "road map" for laser
treatment.
OIS has experienced operating losses for each fiscal year since its initial
public offering in 1992. OIS expects to continue to incur operating losses for
the foreseeable future and while a goal of the combined ophthalmic businesses is
to achieve profitability through consolidation, there can be no assurance that
OIS will be able to achieve or sustain significant revenues or profitability in
the future.
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Market Overview
Dental and Periodontal Laser Market
The current market for laser equipment in dental procedures is comprised of
hard and soft tissue procedures, composite curing and teeth whitening.
Hard Tissue (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. The Company
commenced marketing of the Er:YAG laser for these procedures shortly after
receipt of FDA clearance.
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 frequently 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 and Arago lasers have been cleared to market for this procedure.
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 Laser 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
refractive and aesthetic procedures including anterior capsulotomy, cataract
removal, glaucoma treatment, corneal sculpting and occuloplastic or aesthetic
procedures. The Company has developed the Centauri Er:YAG laser which is capable
of
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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.
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
has also completed Phase II 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 may 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 studies in
preparation for regulatory submittal for this application. No assurance can be
given, however, that approval will be given for this application.
Aesthetic Surgical Procedures. The Company has received clearance for the
use of its lasers in certain aesthetic procedures such as skin resurfacing and
eyelid surgery. It plans to begin marketing certain of these products for
aesthetic applications during the 1999 fiscal year.
Surgical Laser Market
Laser systems have been approved for and are currently being used in a
variety of surgical applications including orthopedics, neurosurgery, urology,
gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic
surgery. Although 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 aesthetic 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
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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.
Aesthetic Surgical Procedures. The market for aesthetic surgery is growing
rapidly worldwide. The Company has a number of approvals for lasers to be used
in aesthetic applications and will devote further efforts in the future to
entering into and capitalizing on this market.
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.
Corneal Topography Market
Because of the importance of the cornea to visual performance, virtually
all ophthalmologists and optometrists have historically used a measuring
instrument known as a keratometer to quantify corneal curvature. This
instrument obtains four measurement points reflected on a 3 millimeter diameter
circle on the cornea. Because of the small number of data points and other
limitations of this instrument, it cannot accurately measure asymmetrical
curvatures. This is clinically significant because, according to clinical
studies, more than one out of every three people suffers from asymmetric
refractive errors. While in the past the limitations of keratometry were
accepted since only symmetrical refractive errors were correctable with glasses
or contact lenses, this is no longer the case. Advanced contact lens designs
and refractive surgical procedures provide clinicians and patients with a
variety of optical solutions, even for asymmetrical errors, and require more
accurate information over a greater area of the cornea.
Applications of corneal topography technology include:
Refractive Surgery. More than 140 million Americans suffer from refractive
errors requiring them to wear glasses or contact lenses. Every year there are
an estimated 65-70 million patient visits to ophthalmologists and optometrists
in the U.S. which result in the purchase of over 60 million eyeglasses and
contact lenses. It is also estimated that over 40% of the world's population
suffers from refractive errors significant enough to require some form of
correction. Many industry analysts believe that emerging refractive surgery
techniques will be attractive to a significant number of these patients.
Corneal topography has important applications in selecting the appropriate
procedure for each patient, preoperative surgical planning, postoperative
evaluation and patient follow-up.
Cataract Surgery. Cataract surgery is a procedure involving removal of an
opacified natural crystalline lens, primarily in elderly patients. The evacuated
lens is replaced with an implant called an intraocular lens ("IOL"). Corneal
topography can help the surgeon improve pre-surgical planning, assess and
correct surgically induced astigmatism (which is the most frequent complication
caused by IOL surgery), potentially improve the calculation of the implanted IOL
power, and support combination cataract/refractive surgical procedures.
Corneal Transplants. Corneal topography provides important information for
other surgical procedures, including post operative evaluation of corneal
transplants. An increasing number of corneal transplants are performed using
corneal topography to provide for improved surgical outcomes by allowing the
practitioner to evaluate surgical technique and adjust postoperative treatment.
EyeSys estimates that approximately 50,000 corneal transplants are performed in
the U.S. each year.
Diagnosis of Astigmatism and Corneal Pathology. Corneal topography is a
valuable technology for the analysis and diagnosis of astigmatism and various
corneal pathologies, including keratoconus, pellucid marginal degeneration and
contact lens-induced corneal warpage. Because of the limitations of
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keratometers, many of these patients have pathology that cannot be accurately
measured by keratometry, the most widely used method of measuring corneal
curvature.
Contact Lens Fitting and Custom Lens Manufacturing. Corneal topography has
several applications in contact lens fitting and manufacturing, including (i)
identification of irregular and hard-to-fit corneas, (ii) detection of contact
lens induced corneal warpage, (iii) computerized selection of lenses and
evaluation of fit, (iv) custom designed contact lenses, and (v) verification of
lens parameters. The Company believes that the combination of an affordable
corneal topography system and applications software targeted at improving
contact lens fitting is particularly attractive to optometrists and general
ophthalmologists who currently fit contact lenses. The Company has developed a
software application, Pro-Fit, which utilizes the available corneal topography
data to recommend lenses which can be selected from a comprehensive worldwide
database of rigid gas permeable (RGP or "hard") and soft lenses. Clinical
testing of Pro-Fit shows that the use of this application software can yield
dispensable RGP prescriptions over 90% of the time providing for dramatic
improvements in the quality of contact lens fits and can result in a significant
saving of clinicians' time. Traditional RGP lens fitting, based on keratometer
readings, is often a trial and error process, consuming clinician or staff time
and can be uncomfortable for patients.
Ocular Imaging Systems Market
There are approximately 18,000 ophthalmologists in the United States and
28,000 ophthalmologists practicing medicine in countries outside the United
States. This group has been traditionally divided into two major groups: those
who specialize on the anterior segment (front of the eye), and those who
specialize on the posterior segment (back of the eye). Within these groups
there are several sub-specialties including medical retina, retina and vitreous,
glaucoma, neuro, plastics, pediatric, cataract, cornea and refractive surgery.
OIS's WinStation products are targeted primarily at the retina specialist and
general ophthalmologist.
The WinStation market consists of current fundus camera owners and
anticipated purchasers of fundus cameras suitable for interfacing with the OIS's
digital imaging system products. A fundus camera is a camera that produces
photographs of the retina of the eye. Presently there are over 8,500 mydriatic
fundus cameras in clinical use in the United States with an equal number in the
international market. New fundus camera sales fluctuate between 500 and 1,000
units per year. Of the total number of fundus cameras worldwide, approximately
12,000 are suitable to be interfaced with OIS digital imaging systems.
Currently there are six manufacturers of fundus cameras producing a total
of 17 models. OIS has successfully designed optical and electronic interfaces
to each of these cameras.
The primary target market for digital angiography systems is retinal
specialists who number approximately 3,000 in the U.S. For the past two years
OIS digital imaging system sales have been driven in this segment to a large
extent by indocyanine green ("ICG") angiography. ICG angiography is a new
diagnostic test procedure which is yielding new clinically significant
information that is helpful in the treatment of patients with macular
degeneration (a leading cause of blindness afflicting over 13 million people in
the U.S.). ICG angiography is a dye procedure that can only be performed using
a digital imaging system. While only used for 10-20% of patient angiography, it
has been the catalyst to digital imaging system purchases. Competition is
intense in the retinal community and those practices without ICG capability are
losing referral business from general ophthalmologists. The Company expects the
demand for digital angiography to continue as it is becoming a standard of care.
Surgical Outcomes Market
Data.Site surgical outcomes software is targeted to approximately 18,000
ophthalmologists in the United States who desire to monitor and improve their
surgical outcomes. Accessible through the internet, Data.Site is expanding into
the international marketplace and other clinical specialties. The Data.Site
software is currently being expanded to perform in conjunction with other
electronic medical records systems.
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Products
Laser Products
The use of laser technology in dentistry, ophthalmology and surgery
involves the controlled application of laser light to hard or soft tissue
causing an optical, thermal, acoustic or plasma interaction with the tissue.
When applied to tissue, the laser light is partially absorbed. This process of
absorption converts the light to heat, which in turn alters the state of the
tissue. The degree of tissue absorption varies with the choice of wavelength
and is an important variable in the application of laser technology in treating
various tissues. The laser energy can also form a gas bubble in a water medium
which provides an acoustic cutting effect as it bursts. 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 or scanners which are used on
a disposable or limited reuse basis, and which the Company expects will provide
a 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.
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 lasers are priced from
$5,500 to $22,000. The prices of lasers within these ranges depend upon each
model's power capability and the features offered.
The following table presents in summary form, 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.
<TABLE>
<CAPTION>
Product Medical Application FDA Regulatory Status
- -------------------- ------------------------------------------------ --------------------------
<S> <C> <C>
Centauri (Er:YAG) Dental--Soft Tissue............................. Cleared to market
Dental--Hard Tissue............................. Cleared to market
Ophthalmology (e.g. Anterior Capsulotomy) Cleared to market
Ab-externo and Ab-interno Sclerostomy, Laser
Lens Emulsification.............................
Corneal Sculpting............................... Preclinical animal studies
General Surgery, Neurosurgery, Orthopedics,
Gastrointestinal and Genitourinary Procedures,
Urology, Gynecology and Oral Surgery............ Cleared to market
Pegasus (Nd:YAG Dental--Soft Tissue............................. Cleared to Market
20W)
Polaris (1.32(units) Tissue Melding.................................. Clinical trials
Nd:YAG)
</TABLE>
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<TABLE>
<CAPTION>
Product Medical Application FDA Regulatory Status
- -------------------- ------------------------------------------------ --------------------------
<S> <C> <C>
General Surgery, Ophthalmology, Arthroscopic
Surgery, Gastrointestinal and Genitourinary
Procedures, Urology, Gynecology and Oral Cleared to market
Surgery.........................................
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 and Arago Dental--Composite Curing........................ Cleared to market
(argon)
Dental--Teeth Whitening......................... Cleared to market
</TABLE>
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 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 and
reliable 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. No assurance can be
given, however, that the use of the Er:YAG laser for hard and soft tissue
procedures will become a widely accepted practice in dentistry. 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 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 demonstrated this system with an
optional scanner for skin resurfacing.
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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.
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 approximately one-fourth the size and one-half of
the cost of that system. The diode wavelength is absorbed by blood and
pigmentation and has been cleared for use in multiple specialties such as
general surgery, ophthalmology, urology and plastic surgery. The Aurora laser,
which was introduced for soft tissue dental applications in February 1996, is
designed to utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS
and sculptured fibers, for soft tissue surgery with minimal bleeding or
anesthesia. The dental laser can also be used to treat early stage gum disease,
postponing or in some cases eliminating the need for periodontal surgery and
providing the opportunity for overall cost savings. 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).
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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 frequently 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. The Arago laser is currently being
supplied by a third party manufacturer on behalf of the Company.
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.
<TABLE>
<CAPTION>
Product Medical Application FDA Regulatory Status
- --------------------------------- -------------------------------------------- ---------------------
<S> <C> <C>
Altair (CO\\2\\) and a CO\\2\\ Orthopedics General and Plastic Surgery,
laser acquired from Pfizer HPG Dermatology, Podiatry Ear, Nose and Throat,
Gynecology Pulmonary Procedures;
Neurosurgery and Ophthalmology.............. Cleared to market
Pegasus (Nd YAG) General Surgery, Urology, Gastrointestinal
40W/60W Procedures, Pulmonary Procedures,
Gastroenterology, Gynecology and Cleared to market
Ophthalmology...............................
Pegasus (Nd:YAG) Oral, Arthroscopic and General Surgery,
100W Gastroenterology, Gastrointestinal and
Genitourinary Procedures, Pulmonary
Procedures, Gynecology, Neurosurgery and Cleared to market
Ophthalmology...............................
Sirius (.532(units) Nd:YAG) Dermatology, General and Plastic Surgery,
Podiatry and Orthopedic Applications........ Cleared to market
Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and
Throat, Ophthalmology, Gastroenterology,
Pulmonary Procedures and Urology............ Cleared to market
Er:YAG/Nd:YAG Various specialties......................... Cleared to market
(Combination)
</TABLE>
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Laser 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. With the diode laser, coupling efficiency between
the laser and fiber optic limits high powers being focused into small diameter
fibers. Fibers for Erbium lasers are less reliable and durable than standard
quartz fibers, which limits the number of procedures they may be used for. They
are also significantly more expensive than quartz fibers. 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 integration and the extensive use of molds and tooling. The
Company also assembles and/or distributes a full line of laser accessories,
including glasses, goggles, laser signs and smoke evacuators.
Corneal Topography Products
EyeSys 2000 Corneal Analysis System. The EyeSys System 2000 corneal
topography instrument and Microsoft Windows based software is targeted at
refractive surgeons, general ophthalmologists and optometrists for diagnostic,
surgical and contact lens fitting applications. The primary function of the
instrument is to position a patient for corneal image capture, acquire the image
of reflected rings and send the image to an Intel based personal computer for
further processing. The System 2000 is modular and is marketed as a proprietary
computer peripheral and software. The System 2000 hardware interfaces to the
computer via a parallel port connection, allowing EyeSys to unbundle the
computer, monitor, printer, tables and other third party items. This can
significantly lower the price to the customer by allowing physicians to utilize
hardware they already own. Customers that need to purchase nonproprietary
hardware are given the option of ordering through EyeSys or obtaining suitable
hardware on their own.
The EyeSys System 2000 software modules are Microsoft Windows applications
and include the following basic modules:
Patient Examination Software. This core application is the fundamental
software marketed by EyeSys and is required to perform corneal topography
examinations. It provides the control functions for EyeSys' System 2000
instrumentation as well as image processing and basic topographical mapping
capability.
Patient History Software. This application provides a database for patient
topographic and demographic data as well as the results of other tests performed
as part of an eye examination. This software includes the ability to compare
multiple corneal topography examinations for a patient allowing
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the clinician to monitor surgical and other corneal changes over time. Features
include the ability to digitally subtract multiple examinations, providing high
resolution analysis of corneal changes.
Advanced Diagnostic Software. This application provides software tools to
allow for diagnosing corneal pathologies and analyzing visual function. More
specifically, this package presents unique information on the cornea's
refractive power, aspherecity and optical surface distortion.
Pro-Fit Contact Lens Fitting Software. Pro-Fit utilizes the available
corneal topography data to recommend specific lenses which can be selected from
a comprehensive worldwide database of rigid gas permeable (RGP or "hard") and
soft lenses. This application also has been designed for the needs of foreign
markets, particularly for the European market where contact lens fitting methods
and practices differ from those in the United States.
At the American Academy of Ophthalmology the Company introduced what it
believes to be the smallest hand held topography system currently available. The
Vista(TM) incorporates much of the same reliable and accurate software as the
System 2000, but its portability facilitates its use in the operating room or by
the optometrist.
Ocular Imaging Products
OIS currently offers two products to the ophthalmic market: WinStation 640
and the WinStation 1024. Over the past 35 years fluorescein angiography has
been performed using photographic film which requires special processing and
printing. The WinStation systems allow for immediate diagnosis and treatment of
the patient. Images are automatically data based and are permanently stored on
optical laser disk or CD-ROM. OIS offers a variety of networking and printer
options to best fit the practice needs.
OIS's WinStation systems are also used by ophthalmologists to perform
indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test
procedure which is yielding new clinically significant information that is
helpful in the treatment of patients with macular degeneration (a leading cause
of blindness afflicting over 13 million people in the U.S.). ICG angiography,
used for approximately 10-20% of patient angiography, is a dye procedure that
can only be performed using a digital imaging system.
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<PAGE>
Other Products
OIS also developed the Glaucoma-Scope(R)(TM), designed for use by ocular
health providers that manage patients with glaucoma by providing a means for
comparing optic nerve head topography over a number of patient visits. While
OIS has sold Glaucoma-Scope(R)(TM) units in the past, it no longer actively
markets this product for sale.
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 seven area sales managers and its distributor and manufacturer's
representative network consisting of approximately ten manufacturer's
representatives and numerous international distributors. The Company markets its
products primarily through conventions, educational courses, direct mail,
telemarketing and other dental training programs. The dental market includes
approximately 129,000 practicing dentists in the United States. The Company
believes that in order to reach this market it must expand its U.S. distribution
capabilities. Accordingly, Premier signed a letter of intent in December 1997
with Henry Schein, Inc. However, a dispute has arisen between the companies
which makes the viability of this relationship uncertain.
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 a sales
manager and eight territory managers who focus their efforts on key
ophthalmologists worldwide. The Company has entered into distribution agreements
with distributors in many countries for sales of its diagnostic products and in
preparation for market introduction of the Centauri laser. The Company grants
exclusive distribution rights in select territories to its distributors who
usually 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, by
acquiring or engaging additional international manufacturing representatives,
and by having existing international distributors carry other of the companies
product lines. The Company's acquisition of EyeSys in September 1997 has aided,
and is expected to continue to aid, in the establishment of increased
international distribution, as EyeSys utilizes 55 distributors in 60 countries.
Sales, marketing and telemarketing efforts for ophthalmic products are managed
out of Sacramento, California.
On June 2, 1997, EyeSys entered into an agreement with Marco Ophthalmic
Inc. ("Marco") pursuant to which that company was appointed as a nonexclusive
distributor in the United States of the System 2000 and the exclusive
distributor of the Vista portable corneal topography system for a three-year
period following commercialization of that system.
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 by the Company (on a
consolidated basis) in fiscal 1998 or fiscal 1997. During calendar 1997, three
customers each accounted for more than 10% of the sales of EyeSys: Marco
Technologies accounted for 13% of sales, Newtech accounted for 14% of sales and
Vistatek accounted for 15% of sales.
14
<PAGE>
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
15
<PAGE>
installation of its products 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 product is subjected to an extensive battery of quality control
tests. The Company generally provides a one year warranty with all products and
extended warranties are available at an additional cost. If service is required,
a product owner is either sent a loaner product by overnight carrier, returns
his product for service or a service representative visits the owner to repair
the unit. International service is provided either by the foreign distributor or
by return of the product to the Company. The Company has experienced and may
continue to experience difficulties in providing prompt and cost-effective
service of its products. The Company is working to improve the service training
of its international distributors and U.S. technicians.
Competition
Laser Business
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 (iv) drug therapy
or surgical treatment of glaucoma. In the surgical market, wound closure
procedures are usually performed using sutures and staples, and traditional
cosmetic surgical procedures may be performed with a scalpel or other lasers.
The 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 change. 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.
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<PAGE>
Topography Business
EyeSys' primary competitors in the corneal topography market are Tomey
Technology ("Tomey"), Alcon Surgical, Inc., a subsidiary of Nestle ("Alcon"),
and Humphrey Instruments, a subsidiary of Carl Zeiss ("Humphrey").
Tomey, a Japanese ophthalmic diagnostic instrument manufacturer, has
historically been EyeSys' principal established competitor. Tomey initially
obtained worldwide marketing rights for the TMS-1 topography system from
Computed Anatomy, the product's developer, and subsequently purchased Computed
Anatomy. Computed Anatomy first introduced a placido disk based topography unit
at the 1987 American Academy of Ophthalmology ("AAO") meeting. The Tomey
instrument distinguishes itself with a small placido and a very short working
distance.
Alcon, by its 1993 acquisition of Visioptic Inc., became a competitor of
EyeSys, with considerable financial and marketing strength. Visioptic first
introduced its placido disc based topography system at the AAO in 1989. The
founder of Visioptic, Sami El Hage, OD, is a pioneer in three-dimensional
measurement of the cornea and holds several patents on both the EH-270 placido
ring based system and algorithms used in the device.
Humphrey, with its acquisition of the corneal topography business of
Optical Radiation Corporation (ORC), entered the corneal topography market at
the American Academy of Ophthalmology meeting in San Francisco in October 1994.
Humphrey has a strong international reputation in diagnostic instrumentation.
Other placido based instruments and other technologies such as those
produced by PAR and Orbtek are marketed or are under development by other
companies, although to date none of such companies has achieved appreciable
market share. EyeSys anticipates that it will encounter established competitors
as it enters new markets for ophthalmic instrumentation. Some of these
competitors may have greater financial, technical and marketing resources.
Ocular Imaging Business
The healthcare industry is characterized by extensive research and
development efforts and rapid technological change. Competition for products
that can diagnose and evaluate eye disease is intense and is expected to
increase. The Company is aware of two primary OIS competitors in the U.S. which
produce and are delivering digital fundus imaging systems, Topcon and Tomey.
Four other companies are known to have systems in the international market, each
with lesser market penetration.
Topcon is OIS's main competitor in the angiography market. Topcon
angiography products predominantly interface with Topcon fundus cameras while
OIS's systems interface with 17 different models or fundus cameras from a wide
variety of manufacturers.
Although OIS will continue to work to develop new and improved products,
many companies are engaged in research and development of new devices and
alternative methods to diagnose and evaluate eye disease. Introduction of such
devices and alternative methods could hinder OIS's ability to compete
effectively and could have a material adverse effect on its business, financial
condition and results of operations. Many of OIS's competitors and potential
competitors have substantially greater financial, manufacturing, marketing,
distribution and technical resources than OIS.
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
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<PAGE>
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
Laser Business
In the past three fiscal years, the Company (excluding EyeSys, Data.Site
and OIS) has invested in excess of $5.8 million in research and development
programs. This amount includes approximately $700,000 received under a Small
Business Innovative Research Grant in fiscal 1996 and 1997, however; it excludes
a $9.2 million non cash charge for in-process research and development related
to the EyeSys acquisition in fiscal 1998. 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
previously 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.
Corneal Topography Business
EyeSys' research and development efforts are focused on further development
of corneal topography systems, advanced applications software development,
internationalization of software, minimization, simplification and optimization
of the instrument and development of the next generation ophthalmic
instrumentation.
Ocular Imaging Business
OIS intends to devote significant resources to the development of
telemedicine/managed care applications, the improvement of optics, new fundus
camera interfaces for ICG, software development (including the continued
enhancement of WinStation), hardware optimization, and the patient/doctor
interface. OIS's research and development expenditures in the periods ended
August 31, 1997 and 1996, were $1,070,192 and $846,034, respectively.
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
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<PAGE>
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 33 patents which expire at
various times throughout approximately the next 6-17 years, and has an
additional 24 pending patent applications, including divisional applications.
In addition, the Company holds 23 foreign patents including two utility model
patents and has at least 44 foreign patent applications. The Company also has a
nonexclusive license to a number of basic laser technologies which are commonly
licensed on such basis in the laser industry. OIS holds one patent covering its
current products.
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. There can be no assurance that
the Company's patents or trademarks, if granted, would be upheld if challenged,
or that competitors might not develop similar or superior processes or products
outside the protection of any patents issued to the Company. In addition, there
can be no assurance that the Company will have the financial or other resources
necessary to enforce or defend a patent or trademark infringement or proprietary
rights violation action. Moreover, if its products infringe patents, trademarks
or proprietary rights of others, the Company could, under certain circumstances,
become liable for damages, which also could have a material adverse effect on
the Company.
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. These damages may be mitigated in some cases by
patent infringement insurance held by the Company.
The Company also relies on unpatented proprietary technology, trade secrets
and know-how. Certain components of the Company's products are largely
proprietary and constitute trade secrets, but others are purchased from third
parties. There is no assurance that other parties will not independently
develop substantially equivalent proprietary information or techniques, or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its rights to its
unpatented trade secrets.
The Company seeks to protect its unpatented proprietary technology, in
part, through proprietary confidentiality and nondisclosure agreements with
employees, consultants and other parties. The Company's confidentiality
agreements with its employees and consultants generally contain industry
standard provisions requiring such individuals to assign to the Company without
additional consideration any inventions conceived or reduced to practice by them
while employed or retained by the Company, subject to customary exceptions.
There can be no assurance that proprietary information agreements with
employees, consultants and others will not be breached, that the Company would
have adequate remedies
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<PAGE>
for any breach or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors.
Government Regulation
FDA Regulation
The products that are manufactured by the Company are regulated as medical
devices by the FDA under the Food, Drug and Cosmetics Act (the "FDC Act").
Satisfaction of applicable regulatory requirements may take several years and
requirements vary substantially based upon the type, complexity and novelty of
such devices as well as the clinical procedure. 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 "GMP's") 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). The Company's laser and
diagnostic products 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"). OIS's products are classified as Class
II devices (special controls) which require, among other things, annual
registration, listing of devices, good manufacturing practices and labeling, and
prohibition against misbranding and adulteration.
If a manufacturer or distributor of a medical device can establish that a
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a pre-1976 Class III medical device for which the
FDA has not called for a PMA, the manufacturer or distributor may seek FDA
clearance for the device by filing a Section 510(k) premarket notification. If
a manufacturer or distributor of a medical device cannot establish that a
proposed device is substantially equivalent to another legally marketed device,
the manufacturer or distributor will have to seek premarket approval for the
proposed device. A 510(k) notification and the claim of substantial equivalence
will likely have to be supported by various types of data and materials,
possibly including test results or the results of clinical studies in humans. A
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
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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 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); 1.32 micron Nd:YAG (two models: 15W, 25W); .532 micron Nd:YAG (one
model); Argon (three models); diode (two 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 a scanner,
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
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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.
OIS has received 510(k) clearance for its Glaucoma-Scope(R)(TM) and its
digital angiography product, and EyeSys has received 510(k) clearance for its
System 2000 and Vista corneal topography systems.
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 GMP 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.
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 GMP regulations and other requirements.
Although Premier believes that it currently complies in all material
respects 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. Premier plans to
integrate OIS's manufacturing operations under Premier's GMP practices and at
its facilities over the next several months. 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
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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 often 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, corneal topography 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
and associated disposable supplies. The Company believes that its manufacturing
practices are in accordance with GMP regulations.
OIS Manufacturing and Production
OIS is primarily a systems integrator with proprietary software, optical
interfaces, and electronic fundus camera interfaces. Certain components are
subcontracted to outside vendors and assembled at OIS. OIS inventories and
assembles components in a facility located in Sacramento, California. For
production of certain components of its products, OIS's manufacturing strategy
is to use subcontractors to minimize time and reduce capital requirements.
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OIS's product line is manufactured by assembling components purchased from
established outside quality vendors as well as certain components manufactured
by OIS. Proprietary components manufactured by OIS include interface circuit
boards for 17 fundus camera models, video optical interfaces including ICG and
live viewing options. The Glaucoma- Scope(R)(TM) optical head is also
manufactured by OIS.
As a systems integrator, a significant number of the major hardware
components in OIS's products are procured from sole source vendors. Whenever
possible, however, OIS seeks multiple vendor sources from which to procure its
components. As with any manufacturing concern dependent on subcontractors and
component suppliers, significant delays in receiving products or unexpected
vendor price increases could adversely affect OIS.
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 June 25, 1998, the Company (including EyeSys, but excluding Data.Site
and OIS) employed 102 people, 2 of whom are employed on a part-time basis. None
of these employees are represented by a union. Twenty-seven 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
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independent contractors and temporary personnel. The Company believes that its
relationship with its employees is good.
OIS and Data.Site Employees
As of June 23, 1998, OIS had 29 employees, and Data.Site had 13 employees,
all of which were full time employees. OIS also engages the services of
consultants from time to time to assist OIS on specific projects in the area of
research and development, software development, regulatory affairs, and product
services. These consultants periodically engage contract engineers as
independent consultants for specific projects. OIS has no collective bargaining
agreements covering any of its employees, has never experienced any material
labor disruption, and is unaware of any current efforts or plans to organize its
employees. OIS considers its relationship with its employees to be good.
RISK FACTORS
The Company's securities are highly speculative in nature and an investment
in such securities involves a high degree of risk. Prospective investors should
carefully consider, along with the other information contained in this Annual
Report, the following considerations and risks in evaluating an investment in
the Company.
Limited Operating History; Continuing Operating Losses
The Company was formed in July 1991 and has not generated significant
revenues to date. As of March 31, 1998, the Company had a substantial
accumulated deficit. The Company also had substantial operating losses for each
of the four fiscal years ended March 31, 1998, resulting principally from costs
incurred in research and development and other costs of operations. The Company
expects that operating losses will continue until such time as product sales
generate sufficient revenues to fund its continuing operations, as to which
there can be no assurance. The Company may incur losses for the foreseeable
future due to the significant costs associated with manufacturing, marketing and
distributing its laser products and due to continual research and development
activities which will be necessary to develop additional applications for the
Company's technology.
Uncertainties Concerning Future Profitability
The Company's ability to achieve profitability will depend, in part, on its
ability to continue to successfully develop clinical applications, obtain
regulatory approvals for its products and develop the capacity to manufacture
and market such products on a wide scale. There is no assurance that the
Company will be able to successfully make the transition from research and
development to manufacturing and selling commercial medical laser products on a
broad basis. While attempting to make this transition, the Company will be
subject to all risks inherent in a growing venture, including the need to
produce reliable products, develop marketing expertise and enlarge its sales
force.
Uncertain Market Acceptance
The Company's future sales are dependent, in part, on the Company's ability
to demonstrate to dentists, ophthalmologists and other physicians the potential
cost and performance advantages of its laser systems and other products over
traditional methods of treatment and over competitive products. To date,
commercial sales of the Company's lasers have been limited, and no assurance can
be given that these laser products can be successfully commercialized on a broad
basis. Lasers have not been widely used in dentistry and their use requires
training and expertise. The acceptance of dental lasers may be adversely
affected by their high cost, concerns by patients and dentists relating to their
safety and efficacy, and the substantial market acceptance and penetration of
alternative dental tools such as the dental drill. Current economic pressure
may make doctors and dentists reluctant to purchase substantial
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capital equipment or invest in new technology. The failure of medical lasers to
achieve broad market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations. No assurance
can be given that any of the Company's products will be accepted by the medical
or dental community or by patients, or that a significant market for the
Company's systems will be developed and sustained. The Company currently has a
limited sales force and will need to hire additional sales and marketing
personnel to increase the general acceptance of its products.
Pending Litigation and Regulatory Investigations
The Company is a defendant in a number of related securities class action
matters, generally relating to allegations of misrepresentations by the Company
during the period May 7, 1997 to April 15, 1998 (the "Class Action Litigation"),
as well as a shareholder derivative action. In addition, the SEC and Nasdaq
Stock Market have commenced investigations of the Company's practices and
procedures relating to revenue recognition issues and related matters. The
Company's defense of the litigation matters, and responses to the regulatory
investigations, will be expensive and time consuming to the Company's
management, and are expected to materially and adversely affect the Company's
results of operations for the foreseeable future. If an adverse judgement is
entered in the Class Action Litigation, or the Company settles such litigation,
such judgement or settlement could also materially and adversely affect the
Company's business and results of operations. In addition, the SEC and Nasdaq
Stock Market are empowered to assess substantial penalties against the Company,
in connection with their findings in the pending investigation. The Nasdaq Stock
Market is also empowered to take various actions relating to the listing of the
Company's securities on the Nasdaq Stock Market, and has notified the Company
that it proposes to delist the Company's securities from the Nasdaq Stock
Market. The Company has filed an appeal of this proposed action. The imposition
of any of such penalties could materially and adversely affect the Company's
business, financial condition and results of operations.
Possible Restatement of Financial Results
The Company, in conjunction with its independent accountants, is conducting
an analysis of its historical revenue recognition practices, including but not
limited to those employed in connection with its transactions with Henry Schein,
Inc. The period under review includes fiscal 1997 and fiscal 1998 including
interim periods. Upon completion of that analysis, the Company may determine
that it is appropriate to restate the financial statements in one or more of its
past SEC filings. If made, such restatements may involve a reduction in the
amount of revenue reported for such periods, increased reserves for accounts
receivable and slow moving and absolete inventory, together with corresponding
adjustments to net income or net loss and other items of the financial
statements. Such reductions may be material.
Suspension of Trading of Securities.
On May 26, 1998, following the withdrawal by the Company's former
accountant of its report on the Company's fiscal 1997 financial statements, the
Nasdaq Stock Market suspended trading of the Company's Class A Common Stock and
Class B Warrants, pending an investigation of certain of the Company's
accounting practices. Although the Company is cooperating with this
investigation, and has engaged new auditors for the purpose of certifying the
Company's 1997 and 1998 financial statements, no assurance can be given that the
Company will be able to meet any conditions that may be imposed by the Nasdaq
Stock Market in order for the suspension of trading to be terminated. Unless and
until the suspension is terminated or other arrangements are made for creating a
market for the Company's securities, such securities will continue to be highly
illiquid. The absence of a public trading market for the Company's securities
will materially and adversely affect the market value of such securities. In
addition, OIS's Common Stock is trading on the OTC "bulletin board," which
provides less liquidity than a listing on the Nasdaq Stock Market or an
exchange. To the Company's knowledge, OIS has no plans to apply for the listing
of its Common Stock on the Nasdaq Stock Market or an exchange.
Integration of Acquired Businesses
The Company acquired EyeSys in September 1997. The Company is still in the
process of integrating and coordinating the EyeSys business with the Company's
existing businesses. Although the Company believes that there are certain
synergies in the two lines of business, it may continue to incur expenses in
connection with its efforts to integrate the two businesses. In addition,
members of the Company's management will also have to continue to expend time
and effort on new activities relating to the EyeSys operations, which will
detract from their time available to attend to the Company's other activities.
No assurance can be given that the expenses or dislocations the may suffer or
incur as a result of the post-Merger coordination of these businesses will not
be material. Considerations similar to the above apply equally to the Company's
acquisition of a controlling interest in OIS.
The Company currently markets EyeSys' corneal topography and OIS digital
imaging products in a highly competitive market. Historically, EyeSys and OIS
have incurred substantial losses. The ability of these subsidiaries to achieve a
break even level of performance is dependent on the demand for its products as
well as maintaining sufficient research, development and sales and marketing
expenditures to meet the requirements of the market. There can be no assurance
that the revenues from these product lines will be sufficient to cover all of
the expenses related to such operations. If these subsidiaries are unable to
achieve a break-even cash flow performance, additional levels of capital will be
required.
Going Concern Report With Respect to EyeSys
EyeSys' independent auditors have included an explanatory paragraph in
their report covering EyeSys' financial statements for the year ended December
31, 1996, which paragraph emphasizes substantial doubt as to EyeSys' ability to
continue as a going concern. EyeSys' independent auditors cited the following
reasons for such explanatory paragraph: (i) EyeSys has reported net losses of
$4,164,998, $3,424,996 and $3,708,657 for the years ended December 31, 1996,
1995 and 1994, respectively, (ii) EyeSys was in default of several loan
covenants relating to its revolving lines of credit, and (iii) Eyesys has not
repaid such loan obligations within their respective terms.
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Dependence on Suppliers
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.
The disruption or termination of these sources could have a material adverse
effect on the Company's business and results of operations. For example, during
fiscal 1994, the Company's sole supplier of the specialized optic fiber required
for use in the Company's Er:YAG lasers ceased to provide this fiber to the
Company. While the Company has since qualified the new suppliers of this fiber,
the Company's inability to obtain sufficient quantities of this specialized
optical fiber had a material adverse effect on the volume of Er:YAG lasers the
Company was able to sell during fiscal 1994 and 1995. While the Company
believes that alternative suppliers could be found, there can be no assurance
that any supplier could be replaced in a timely manner. Any interruption in the
supply of other key components could have a material adverse effect on the
Company's ability to manufacture its products and on its business, financial
condition and results of operations.
Certain computer components used by EyeSys and OIS are manufactured by a
sole vendor. These components are subject to rapid innovation and obsolescence.
The discontinuance of the manufacturing of this chip may require the Company to
redesign certain hardware and software to accommodate a replacement component.
While in the past the Company has been successful in these redesign efforts,
there can be no assurance that such an event would not prove costly or cause a
disruption in sales of corneal topography and digital imaging systems.
Risks Applicable to Foreign Sales
Sales of the Company's products to foreign markets account for a
substantial portion of the Company's sales. Foreign sales expose the Company to
certain risks, including the difficulty and expense of maintaining foreign sales
distribution channels, barriers to trade, potential fluctuations in foreign
currency exchange rates, political and economic instability, availability of
suitable export financing, accounts receivable collections, tariff regulations,
quotas, shipping delays, foreign taxes, export licensing requirements and other
United States and foreign regulations that may apply to the export of medical
lasers. The regulation of medical devices worldwide also continues to develop,
and there can be no assurance that new laws or regulations will not have an
adverse effect on the Company. In addition, the Company may experience
additional difficulties in providing prompt and cost effective service of its
medical lasers in foreign countries. The Company does not carry insurance
against such risks. The occurrence of any one or more of these events may
individually or in the aggregate have a material adverse effect upon the
Company's business, financial condition and results of operations.
Risk of Technological Obsolescence
The markets in which the Company's medical products compete are subject to
rapid technological change as well as the potential development of alternative
surgical techniques or new pharmaceutical products. Such changes could render
the Company's products uncompetitive or obsolete. The Company will be required
to invest in research and development to attempt to maintain and enhance its
existing products and develop new products. No assurances can be given that
such research and development efforts will result in the introduction of new
products or product improvements.
Dependence on Patents and Proprietary Technology
The Company's success will depend in part on its ability to obtain patent
protection for products and processes, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. While the
Company holds a number of U.S. foreign patents and has other patent applications
pending in the United States and foreign countries, no assurance can be given
that any additional patents will be issued, that the scope of any patent
protection will exclude competitors or that any of the
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Company's patents will be held valid if subsequently challenged. Further, there
can be no assurance that others will not independently develop similar products,
duplicate the Company's products or design products that circumvent any patents
used by the Company. 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 the Er:YAG laser. In the past,
the Company has received allegations that certain of the Company's laser
products infringe other patents. American Dental Technologies ("ADT") recently
has asserted that an aspect of the delivery system of the Company's Er:YAG laser
infringes a patent held by ADT. 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 to
which the Company may become a party could subject the Company to significant
legal judgments or other 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 upon unpatented trade secrets, and
no assurance can be given that others will not independently develop or
otherwise acquire substantially equivalent trade secrets. In addition, at each
balance sheet date, the Company is required to review the value of its
intangible assets based on various factors, such as changes in technology. Any
adjustment downward in such value may result in a write-off of the intangible
asset and a substantial charge to earnings, thereby adversely affecting the
operating results of the Company in the future.
Need for FDA and Foreign Governmental Approvals; Government Regulation
The Company's products are regulated as medical devices by the FDA under
the the FDC Act. As such, these devices require either Section 510(k) premarket
clearance ("510(k)") or approval of a premarket approval application ("PMA") by
the FDA prior to commercialization. Satisfaction of applicable regulatory
requirements may take several years and varies substantially based upon the
type, complexity and novelty of such devices, as well as the clinical procedure.
Filings and governmental approvals may be required in foreign countries before
the devices can be marketed in these countries. There is no assurance that
further clinical trials of the Company's medical products or of any future
products will be successfully completed or, if they are completed, that any
requisite FDA or foreign governmental approvals will be obtained. FDA or other
governmental approvals of products 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 addition, approved or cleared products may be
subject to additional testing and surveillance programs required by the FDA and
other regulatory agencies, and product approvals and clearances could be
withdrawn for failure to comply with regulatory standards or by the occurrence
of unforeseen problems following initial marketing. Also, the Company has made
modifications to certain of its existing products which it does not believe
require the submission of a new 510(k) notification to the FDA. However, there
can be no assurance that the FDA would agree with the Company's determination
and not require the Company to discontinue marketing one or more of the modified
devices until they have been cleared by the FDA. The Company is also required to
adhere to applicable requirements for current Good Manufacturing Practices and
radiological health requirements, to engage in extensive record keeping and
reporting and to comply with the FDA's product labeling, promotional and
advertising requirements. Noncompliance with state, local, federal or foreign
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, delay, denial or
withdrawal of premarket clearance or approval of devices,
28
<PAGE>
recommendations by the FDA that the Company not be allowed to enter into
government contracts, and criminal prosecution, all of which would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's manufacturing facilities are subject to
periodic inspections by state and federal agencies, including the FDA, the
California Department of Health Services, and comparable agencies in other
countries.
Dependence on Key Personnel
The Company depends to a considerable degree on a limited number of key
personnel, including Colette Cozean, Ph.D., its Chairman of the Board,
President, Chief Executive Officer and Director of Research. Dr. Cozean is also
an inventor of a number of the Company's patented technologies. During the
Company's limited operating history, many key responsibilities within the
Company have been assigned to a relatively small number of individuals. The
loss of Dr. Cozean's services or those of certain other members of management
could adversely affect the Company. The Company carries key person life
insurance in excess of $3 million on Dr. Cozean. The Company has no employment
agreements with its key personnel. The success of the Company will also depend,
among other factors, on the successful recruitment and retention of qualified
technical and other personnel.
Highly Competitive Industry
The medical equipment industry is subject to intense competition and is
characterized by rapid technological change. 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, and competitive products. Many
of the Company's competitors have substantially greater financial, marketing and
manufacturing resources and experience than the Company. Furthermore, the
Company expects other companies will enter the laser market, particularly as
medical lasers gain increasing market acceptance. Significant competitive
factors which will affect future sales in the marketplace include regulatory
approvals, performance, pricing and general market acceptance.
The opthalmic diagnostic market is highly competitive. There are many
companies, both public and private, some with significantly greater resources
than the Company engaged in this market. These companies include Topcon, Alcon
Laboratories (a subsidiary of Nestle), Humphrey Instruments (a subsidiary of
Carl Zeiss), and Tomey Technology. There can be no assurances that the Company's
competitors will not succeed in developing technologies, procedures or products
that are more effective or economical than those marketed or being developed by
the Company or that would render the Company's products obsolete or
noncompetitive.
To continue to remain competitive, the Company must develop new software
and hardware meeting the needs of ophthalmologists and optometrists. The
Company's future revenues will depend, in part, on its ability to develop and
commercialize these new products as well as on the success of development and
commercialization efforts of its competitors.
Potential Fluctuations in Quarterly Operating Results
Due to the relatively high sales price of the Company's products and the
low sales unit volume, minor timing differences in receipt of customer orders
have produced and could continue to produce significant fluctuations in
quarterly results. In addition, if anticipated sales and shipments in any
quarter do not occur when expected, expenditures and inventory levels could be
disproportionately high, and the Company's operating results for that quarter,
and potentially for future quarters, would be adversely
29
<PAGE>
affected. Quarterly results may also fluctuate based on a variety of other
factors, such as seasonality, production delays, product mix, cancellation or
rescheduling of orders, new product announcements by competitors, receipt of FDA
clearances or approvals by the Company or its competitors, notices of product
suspension or recall, the Company's ability to manage product transitions, sales
prices and market conditions. In addition, if the Company expands or augments
its manufacturing capabilities in connection with the introduction of new
products, quarterly revenues and operating results are expected to fluctuate to
an even greater degree.
Uncertain Ability to Meet Capital Needs
The Company will require substantial additional funds for its research and
development programs, preclinical and clinical testing, development of its sales
and distribution force, operating expenses, regulatory processes and
manufacturing and marketing programs. The Company's capital requirements will
depend on numerous factors, including the progress of its research and
development programs, results of preclinical and clinical testing, the time and
cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, developments
and changes in the Company's existing research, licensing and other
relationships and the terms of any new collaborative, licensing and other
arrangements that the Company may establish. The Company believes its available
short-term assets and investment income will be sufficient to meet its operating
expenses and capital expenditures through the next 12 months. However, the
Company's cash requirements may vary materially from those now planned due to
potential future acquisitions, class action and patent litigation, the progress
of research and development programs, results of clinical testing, relationships
with strategic partners, if any, competitive and technological advances, the FDA
and foreign regulatory processes and other factors. There can be no assurance,
however, that additional financing will be available when needed, or if
available, will be available on acceptable terms. Insufficient funds may prevent
the Company from implementing its business strategy or may require the Company
to delay, scale back or eliminate certain of its research and product
development programs or to license to third parties rights to commercialize
products or technologies that the Company would otherwise seek to develop
itself.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Common Stock. In addition, the market price of the Common
Stock has been and is likely to be highly volatile. Factors such as
fluctuations in the Company's operating results, the commencement or major
developments in litigation, announcements of technological innovations or new
products by the Company or its competitors, FDA and international regulatory
actions, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or its
competitors, changes in health care policy in the United States and
internationally, changes in analysts' recommendations regarding the Company,
other medical companies or the medical laser industry generally and general
market conditions may have a significant effect on the market price of the
Company's Common Stock.
Product Liability Exposure
The sale of the Company's medical products involves the inherent risk of
product liability claims against the Company. The Company currently maintains
product liability insurance coverage in the amount of $5 million per occurrence
and $5 million in the aggregate, but such insurance is expensive, subject to
various coverage exclusions and may not be obtainable by the Company in the
future on terms acceptable to the Company. There can be no assurance that
claims against the Company arising with respect to its products will be
successfully defended or that the insurance carried by the Company will
30
<PAGE>
be sufficient to cover liabilities arising from such claims. A successful claim
against the Company in excess of the Company's insurance coverage could have a
material adverse effect on the Company.
Limitations on Third Party Reimbursement
The Company's laser systems and other products are generally purchased by
physicians, dentists and surgical centers which then bill various third party
payors, such as government programs and private insurance plans, for the
procedures conducted with these products. Third-party payors carefully review
and are increasingly challenging the prices charged for medical products and
services. Reimbursement rates from private companies vary depending on the
procedure performed, the third-party payor, the insurance plan and other
factors. Medicare reimburses hospitals a prospectively-determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians a prospectively-
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products. While the Company believes that the laser
procedures using its products have generally been reimbursed, payors may deny
coverage and reimbursement for the Company's products if they determine that the
device was not reasonable and necessary for the purpose for which used, was
investigational or not cost-effective. As a result, there can be no assurance
that reimbursement from third party payors for these procedures will be
available or if available, that reimbursement will not be limited, thereby
adversely affecting the Company's ability to sell its products on a profitable
basis. Moreover, the Company is unable to predict what legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislature
or regulation may have on the Company.
Uncertainties Regarding Health Care Reform
Several states and the United States government are investigating a variety
of alternatives to reform the health care delivery system and further reduce and
control health care spending. These reform efforts include proposals to limit
spending on health care items and services, limit coverage for new technology
and limit or control the price health care providers and drug and device
manufacturers may charge for their services and products. If adopted and
implemented, such reforms could have a material adverse effect on the Company's
business, financial condition and results of operations.
Shares Eligible for Future Sale; Effect of Outstanding Options and Warrants
Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price for the Common Stock.
Substantially all of the Company's shares of Common Stock outstanding as of the
date hereof are freely tradeable, subject to compliance with Rule 144
promulgated under the Securities Act. As of the date hereof, in excess of
7,000,000 shares of Common Stock are issuable upon the full exercise of the
Company's outstanding Class B Warrants, and in excess of five million shares of
Common Stock are issuable upon exercise of other outstanding warrants and
options. The existence of the Company's outstanding warrants and options could
adversely affect the Company's ability to obtain future financing. The price
which the Company may receive for the Common Stock issued upon exercise of such
options and warrants will likely be less than the market price of the Common
Stock at the time such options and warrants are exercised. Moreover, the holders
of the options and warrants might be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain needed capital by a new
offering of its securities on terms more favorable than those provided for by
the options and warrants.
31
<PAGE>
Potential Anti-Takeover Effects of Preferred Stock
The Company's Articles of Incorporation authorize the issuance of 8,850,000
shares of "blank check" preferred stock, which will have such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of the Common Stock. In the event of such
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company.
In March 1998 the Company adopted a Shareholder Rights Plan, pursuant to
which certain shareholders of the Company are entitled to purchase Series A
Junior Participating Preferred Stock of the Company at the price stated in the
plan. These rights are not exerciseable until certain events involving the
acquisition by a person or affiliated group of 15% or more of the Company's
outstanding shares of common stock, or the commencement or announcement of a
tender offer or exchange offer which would result in the acquisition of 15% or
more of the Company's outstanding shares. A copy of the Shareholder Rights Plan
is available from the Company. The Shareholder Rights Plan may have the effect
of discouraging, delaying or preventing a change of control of the Company.
Item 2. Properties.
Executive Offices and Manufacturing Facilities
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. The Company also leases an
additional 4,700 square foot facility in Irvine, under a lease that expires
October 31, 1998. 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.
OIS Facilities
OIS leases, under a triple net lease, approximately 13,875 square feet of
office, manufacturing, and warehouse space in Sacramento, California under a
lease which terminates June 30, 1998. After that date, OIS expects to continue
to occupy these premises under a month-to-month arrangement. Management believes
that its existing facilities are suitable and adequate to meet its current
needs.
Item 3. Legal Proceedings.
Fiber Litigation
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 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
32
<PAGE>
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. Premier and IFS have reached an agreement in principle to settle the
litigation between them and are in the process of preparing a written settlement
agreement. Although Premier is hopeful that the formal settlement agreement will
be successfully negotiated, no assurance can be given that the agreement will
actually be completed. The settlement agreement under discussion does not
terminate the litigation as between Premier and Coherent.
In May 1995, 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 as they relate to Westinghouse and the
Westinghouse employee, and briefs have been submitted. No date has been set for
a hearing of this appeal. No trial date has been set as to the remaining
outstanding causes of action.
Securities Class Action
On May 1, 1998, a class action suit (the "Valenti Litigation") was
commenced in the United States District of Court for the Central District of
California pursuant to federal securities laws on behalf of purchasers of the
Company's securities during the period from February 12, 1998 through April 15,
1998. The complaint alleges that the Company and certain of its officers and
directors violated the federal securities laws by issuing false and misleading
statements and omitting material facts regarding the Company's financial results
and operations during such period. Among other things, the complaint alleges
that the defendants materially misstated the Company's financial results for the
fiscal quarter ended December 31, 1998 and that as a result of such
misstatements, the plaintiff suffered damages as a result of a decrease in the
market price of the Company's publicly traded securities.
After the filing of such complaint, a number of similar complaints have
also been filed in the United States District Court for the Central District of
California, seeking certification as class actions, and covering class periods
commencing as early as May 7, 1997. Such complaints alleged facts similar to
those described above with respect to the Valenti Litigation, as well as
allegations that the Company artificially inflated the price of its outstanding
publicly traded securities as a result of misrepresentations relating to the
market and prospects for sale of its Centauri Er:YAG laser. All of the above
described complaints seek monetary damages in unspecified amounts, together with
attorneys fees, interest, costs and related remedies.
33
<PAGE>
The Company presently intends to seek to have all of such securities class
action lawsuits consolidated into a single action.
The Company has also been named as a nominal defendant in a shareholder
derivative lawsuit filed in the Orange County, California Superior Court, in a
case captioned Eskeland vs. Cozean, et al. The complaint was filed by a
-------------------
shareholder of the Company, on behalf of the Company, against certain of the
Company's officers and directors, including Colette Cozean, Michael Hiebert,
Richard Roemer, Ronald Higgins, Patrick Day, Grace Chin-Hsin Lin, G. Lynn
Powell, and E. Donald Shapiro. The complaint alleges, among other things, that
such persons violated their fiduciary duty to the Company by exposing the
Company to liability under the securities laws, failing to ensure that the
Company maintained adequate accounting controls, and related alleged actions and
omissions. Although the Company is a named defendant, the lawsuit seeks to
recover damages from the individual defendants on behalf of the Company.
Accordingly, it is not clear whether the Company will have any liability or
incur any material loss as a result of being named as a defendant in this
matter.
Investigations and Other Matters
The Company has been notified that the Securities and Exchange Commission
("SEC") and the Nasdaq Stock Market have instituted investigations concerning
matters pertaining to the Company's revenue reporting practices, and related
management issues. The Company is cooperating with both the SEC and the Nasdaq
Stock Market in connection with these investigations. These investigations, the
Company believes, generally relate to whether the Company, in SEC filings and
press releases issued prior to the end of the 1998 fiscal year, properly
recognized revenues for transactions occurring during fiscal 1997, and at
interim periods in fiscal 1998. To date, the SEC has not indicated that it is
seeking to impose any penalties on the Company or that it is made any specific
findings with respect to the Company's accounting practices. However, the Nasdaq
Stock Market has notified the Company that it intends to delist the Company's
securities from the Nasdaq Stock Market, as a result of the Company's failure to
file with the SEC a complete Annual Report on Form 10-K for the fiscal year
ended March 31, 1998, and as a result of concerns relating to its investigation
of the Company's accounting practices. The Company has filed an appeal of this
action.
The Company is also involved in various disputes and other lawsuits from
time to time arising from its normal operations. The litigation process is
inherently uncertain and it is possible that the resolution of the IFS
litigation, securities class actions, disputes and other lawsuits may adversely
affect the Company.
OIS Litigation
On September 6, 1996, an action was filed in Superior Court in the County
of Sacramento, California against OIS by a former employee alleging that such
employee was wrongfully terminated by OIS in retaliation for filing a grievance
against a co-employee for harassment and creation of a hostile work environment.
The suit, which is still pending, seeks, among other things, lost wages,
$150,000 in compensatory damages, and punitive damages. OIS believes that this
action is without merit and intends to defend this action vigorously.
On or about August 17, 1997, the Company was advised that JB Oxford &
Company ("JBO"), one of several market makers in OIS's common shares which trade
over the counter on the Nasdaq Small-Cap Market, was being investigated by the
SEC. In connection with this investigation, OIS, and Mr. Verdooner, in his
capacity as Chief Executive Officer of OIS, were served by the SEC with a
subpoena on or about August 18, 1997. These subpoenas require the submission to
the SEC of various documents, predominantly relating to JBO. OIS is cooperating
with the SEC investigation of JBO. OIS does not believe that it is a subject of
such SEC inquiries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters that were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report.
34
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock and Class B Warrants are listed on the
Nasdaq National Market under the symbols "PLSIA" and "PLSIZ," respectively.
Prior to January 6, 1998, Class A Warrants outstanding which were listed on the
Nasdaq National Market and the symbol "PLSIW," and "Units," each consisting of
one share of Class A Common Stock, one Class A Warrant and one Class B Warrant,
were listed on the Nasdaq SmallCap Market. The Class A Warrants were redeemed by
the Company pursuant to the terms of the Warrant Agreement on January 6, 1998,
and as a result there have no outstanding Class A Warrants or Units since that
date.
Trading of the Company's Class A Common Stock and Class B Warrants was
suspended by the Nasdaq Stock Market on May 26, 1998, when the Company's former
auditors withdrew their audit opinion on the 1997 fiscal year. The Company is
presently discussing with the Nasdaq Stock Market the conditions, if any, under
which such suspension may be terminated so that trading may resume.
The following table sets forth, for the quarters indicated, the high and
low closing sale prices per share of the Common Stock and Class B Warrants as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Warrants
------------------ ----------------
High Low High Low
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Fiscal Year Ended March, 31, 1997:
First Quarter........................ 10 3/4 8 3 5/8 2 1/8
Second Quarter....................... 9 6 1/8 2 3/4 1 3/8
Third Quarter........................ 7 7/8 5 2 1/16 13/16
Fourth Quarter....................... 8 1/8 5 3/16 1 11/16 27/32
Fiscal Year Ended March 31, 1998:
First Quarter........................ 14 5 1/4 5 3/4 3/4
Second Quarter....................... 11 17/32 8 1/2 3 27/32 2 5/16
Third Quarter........................ 10 3/8 7 3/16 3 1 3/16
Fourth Quarter....................... 11 11/16 7 11/16 3 7/8 1 5/8
</TABLE>
On May 22, 1998, the last day prior to suspension of trading, the last
reported sale price for the Company's Common Stock and Class B Warrants on the
Nasdaq National Market was $4 3/16 and $13/16, respectively. As of June 25,
1998, the approximate number of holders of record of the Common Stock, Class B
Warrants, Class E-1 Common Stock and Class E-2 Common Stock were 825, 32, 326
and 326, respectively. There is no public market for the Company's Class E-1 and
Class E-2 Common Stock.
The Company has not paid dividends and does not anticipate declaring
dividends on its Common Stock in the foreseeable future.
35
<PAGE>
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 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 years ended March 31, 1997 and 1998 were derived
from the Company's financial statements audited by Haskell & White 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
(Restated)
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS
DATA:
Net sales............................................. $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 5,090,861 $ 10,417,841
Cost of sales......................................... 1,753,352 1,298,420 3,324,757 3,648,539 17,394,290
----------- ----------- ----------- ----------- ------------
Gross profit (loss)..................................... 325,983 (49,017) (1,620,367) 1,442,322 (6,976,449)
Selling and marketing expenses........................ 1,087,461 1,035,863 1,308,767 2,415,010 5,398,162
Research and development expenses..................... 678,279 1,035,705 1,213,471 1,563,228 3,378,600
General and administrative expenses................... 1,322,888 1,747,090 1,709,327 2,050,184 3,941,456
Write-off of investment in Mattan..................... -- -- -- 881,010 --
Termination of strategic alliance with IBC............ -- -- -- 331,740 --
In-process research and development acquired
in connection with business acquisitions............ -- -- -- 250,000 12,800,000
Merger related and integration costs.................. -- -- -- -- 7,616,924
----------- ----------- ----------- ----------- ------------
Loss from operations.................................. (2,762,645) (3,867,675) (5,851,932) (6,048,850) (40,111,591)
Interest (expense) income............................. (434,851) (322,540) 99,037 15,493 1,073,493
Minority interest in loss of consolidated
subsidiary.......................................... -- -- -- 60,000 273,811
----------- ----------- ----------- ----------- ------------
Loss before extraordinary items........................ (3,197,496) (4,190,215) (5,752,895) (5,973,357) (38,764,287)
Extraordinary gain from extinguishment of indebtedness. -- 381,730 -- -- --
----------- ----------- ----------- ----------- ------------
Net loss................................................ $(3,197,496) $(3,808,485) $(5,752,895) $(5,973,357) $(38,764,287)
=======================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
Restated
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Loss per share before extraordinary item /1/..... $ (2.45) $ (1.59) $ (1.26) $ (1.02) $ (3.39)
Extraordinary gain from extinguishment of
indebtedness.................................... -- .15 -- -- --
----------- ----------- ----------- ----------- ------------
Net loss per share............................... $ (2.45) $ (1.44) $ (1.26) $ (1.02) $ (3.39)
=========== =========== =========== =========== ============
Weighted average shares outstanding/2/............ 1,288,751 2,584,722 4,556,959 5,833,326 11,444,123
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
Restated
----------- ----------- ----------- ----------- ------------
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 308,764 $ 5,888,237 $ 35,463 $ 173,610 $ 9,722,514
Working capital.................................. 1,287,587 6,756,149 5,818,492 7,526,260 19,016,787
Total assets..................................... 12,325,029 16,883,975 15,674,568 21,079,336 47,708,420
Long-term debt /3/............................... 4,303,890 -- -- -- --
Shareholders' equity............................. 6,022,174 15,002,260 13,797,046 16,248,710 31,456,453
</TABLE>
- -----------------
/1/ 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.
/2/ Does not include shares of Class E-1 or Class E-2 Common Stock,
which are subject to cancellation in certain circumstances.
/3/ Amounts for long-term debt at March 31, 1994 include $285,000 in
mandatorily redeemable warrants.
37
<PAGE>
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, fiber optic 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 fiber optic
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 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.
38
<PAGE>
In September 1997, the Company acquired 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. The Company
continued its expansion into diagnostic imaging by acquiring a controlling
interest (51%) in Ophthalmic Imaging Systems during the final four months of
fiscal 1998.
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. Although sales increased significantly during fiscal 1998, operating
results worsened due to the impacts of expensed business acquisition costs and a
failed distribution agreement.
As discussed in Note 6 to the accompanying financial statements, the
Company and certain of its officers and directors have been named in a number of
securities class action lawsuits which allege violations of the Securities
Exchange Act or the California Corporations Code. The Company has also been
named in a shareholders' derivative action. Any significant uninsured judgment
or settlement amount associated with these claims would seriously affect the
Company's ability to satisfy its working capital requirements.
The Company has not prepared a formal assessment of the internal and
external Year 2000 issues that would have a significant impact on its
computerized accounting systems and products. However, based upon a preliminary
review, management believes that the costs of upgrading the internal operating
systems will be minimal because a "third party, commercially available" software
package is used and an upgrade to a Year 2000 compliant release is planned for
fiscal year 1999. Additionally, the Company's laser products are not date
sensitive. Diagnostic products, on the other hand, contain date sensitive data
bases. The Company's internal software engineers are developing a plan to have a
test version of the new software available by mid-1999. The costs of software
modification are not expected to be material. Any diagnostic products currently
in the market that are covered by a warranty will be upgraded at no charge to
the customer. The Company plans to charge upgrade fees for previously sold
products that are outside of the warranty period. The Company expects that its
existing warranty reserves will be adequate to absorb the upgrade costs.
Results of Operations
Fiscal Year ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
Net sales increased 105% to $10,418,000 for the year ended March 31, 1998
("fiscal 1998") from $5,091,000 for the year ended March 31, 1997 ("fiscal
1997"). This increase was primarily attributable to an increase in sales to the
dental market including sales resulting from the introduction of the Er:YAG
laser for cavity preparation and ophthalmic sales from the EyeSys product line
during the latter half of fiscal 1998. Dental sales during the last two quarters
of fiscal 1998 were adversely affected by an impasse reached with dental
distributor Henry Schein, Inc. ("Schein") over the nature of a relationship
between the parties initiated with a letter of intent executed in December 1997.
The Company believed that Schein obligated itself to accept an initial shipment
of product, and that the relationship was being expanded. Schein subsequently
notified the Company that it did not agree with the Company's understanding of
the terms of the relationship. Sales during the last two quarters of fiscal 1997
were also 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 377% to $17,394,000 in fiscal 1998 from $3,649,000
in fiscal 1997, due to an increase in sales, excess inventory reserves of
$7,500,000 associated with the failure of the Schein relationship, substantially
higher warranty costs, and start-up and training expenses associated with Er:YAG
laser and fiber and EyeSys product manufacture.
Selling and marketing expenses increased 124% to $5,398,000 in fiscal 1998
from $2,415,000 in fiscal 1997. This increase was primarily attributable to
significant increases in marketing personnel, introduction of the Er:YAG laser,
increased commissions and associated selling expenses, and from consolidation of
the expenses of new subsidiaries.
Research and development ("R&D") expenses increased 116% to $3,379,000 in
fiscal 1998 from $1,563,000
39
<PAGE>
in fiscal 1997. This increase resulted primarily from increases in the Company's
research and development personnel, an additional $510,000 of clinical trial
costs and associated samples, travel expenditures for the Company including
EyeSys, and $710,000 of expense for all other new subsidiaries. The expense in
fiscal 1997 is offset by a $450,000 payment received by the Company under a
Small Business Innovative Research ("SBIR") grant. The Company also recognized
$225,000 and $190,000 as a research and development expense from the issuance of
stock options to clinical evaluators and medical directors in fiscal 1998 and
fiscal 1997 respectively.
General and administrative expenses increased 71% to $3,941,000 in fiscal
1998 from $2,050,000 in fiscal 1997. This increase was partially due to $459,000
of expenses from new subsidiaries, $400,000 for litigation expense related to
a supply agreement for optical fibers, and $250,000 for issuance of stock
options.
Net interest income increased to $1,073,000 in fiscal 1998 from $15,000 in
fiscal 1997. This increase reflected the Company's higher cash balances
following the completion of its secondary offering in October 1996 and warrant
call in January 1998 (the net proceeds from these capital stock transactions
were $10,401,000 and $41,735,000 respectively).
In fiscal 1998 the Company expensed $12,800,000 for in process R&D and
$7,065,000 in merger and integration costs related to acquisitions of 51%
ownership in Ophthalmic Imaging Systems (OIS) and 100% of EyeSys Technologies
(EyeSys). Approximately $180,000 of losses were attributable to the minority
shareholder interest of OIS. However 100% of the loss was absorbed by the
Company due to the capital deficiency position of OIS. The Company recorded
$349,000 of losses attributable to the minority shareholder interest of
Data.Site compared with $60,000 during 1997.
In summary, the operating results for 1998 were negatively impacted by
$19,900,000 of acquisition expenses (including $16,500,000 of non-cash costs),
$7,500,000 of inventory write-downs, $1,100,000 of warranty cost, $480,000 of
non-cash stock option expense, bad debt expense of $600,000, and litigation
costs of $400,000.
Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996
The Company's independent auditors unexpectedly resigned during May 1998
and withdrew their opinion on the Company's fiscal year 1997 financial
statements. Accordingly, it became necessary to retain new auditors to re-
examine the 1997 financial statements. Because of the extended period of time
that had passed since the issuance of the prior report, a number of matters were
identified of which the Company was not aware when it initially issued the 1997
financial statements. Although the Company believes that the initially issued
1997 financial statements were not materially misstated in terms of net loss,
total assets and shareholders' equity, the statements have nonetheless been
restated in the interest of full disclosure. The following discussion is based
upon the restated amounts.
Net sales increased 199% to $5,091,000 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 laser 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 10% to $3,649,000 in fiscal 1997 from $3,325,000 in
fiscal 1996, due to an increase in sales. Cost of sales as a percentage of net
sales decreased due to reduced material costs, manufacturing efficiencies, the
ability to spread fixed indirect costs over a larger revenue base, and favorable
warranty experience.
Selling and marketing expenses increased 85% to $2,415,000 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.
40
<PAGE>
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 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 20% to $2,050,000 in fiscal
1997 from $1,709,000 in fiscal 1996. This increase was the combined result of
higher bad debts expense and 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 fiscal year 1997 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been financed through the proceeds from the
sale of the Company's equity securities, including an initial public offering in
December 1994, a secondary public offering in October 1996, voluntary exercise
of warrants and a warrant call in January 1998, 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, 1998, the Company had unrestricted cash and short-term
investments totalling $19,389,000 and its working capital was $19,017,000
compared with $4,142,000 and $7,526,000 respectively, at March 31, 1997. These
increases resulted principally from the 1998 warrant call offset by cash used in
operations and costs of business acquisitions.
At March 31, 1998, the Company's indebtedness consisted of a $1,935,000
balance on its Silicon Valley Bank line of credit and $133,000 on the OIS
Imperial Bank line of credit.
41
<PAGE>
The Company's Credit Facility with Silicon Valley Bank permits borrowings of up
to $2,100,000. 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 on September 24, 1998.
In connection with the Credit Facility, the Company issued to the 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, 1998, the Company had net operating loss carryforwards for
federal income tax purposes totaling approximately $37.4 million which will
begin to expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions
which may limit the net operating loss carryforwards available for use in any
given year if certain events occur, including significant changes in stock
ownership. Utilization of the Company's net operating loss carryforwards to
offset future income may be limited.
During fiscal 1998, the Company received approximately $41,735,000 from the
exercise of options and warrants. As a result of such exercises, the Company
issued an additional 4,176,000 Class B Warrants and 6,270,000 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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements, including notes thereto, at March 31,
1998 and 1997 and for the years ended March 31, 1998, 1997 and 1996 follow.
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Premier Laser Systems, Inc.
We have audited the accompanying consolidated balance sheets of Premier
Laser Systems, Inc. as of March 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years then ended. Our audits 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Company has restated its previously issued 1997
consolidated financial statements.
In our opinion, the 1998 and 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, 1998 and 1997,
and the consolidated results of its operations and its cash flows for each of
the years 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.
HASKELL & WHITE LLP
Newport Beach, California
August 19, 1998
Except for Note 10
as to which the date is
August 26, 1998
43
<PAGE>
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
44
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
---------------------------
1998 1997
(Restated)
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 9,722,514 $ 173,610
Short-term investments........................ 9,666,918 3,968,288
Restricted cash............................... 2,150,000 1,050,000
Accounts receivable, net of an allowance for
doubtful accounts of $1,224,845 and $613,263
in 1998 and 1997, respectively............... 4,952,892 1,052,312
Inventories..................................... 4,482,698 3,284,632
Prepaid expenses and other current assets....... 2,528,996 774,319
------------ ------------
Total current assets............................ 33,504,018 10,303,161
Property and equipment, net..................... 1,778,423 780,945
Intangible assets, net.......................... 11,991,679 9,988,753
Other assets.................................... 434,300 6,477
------------ ------------
Total assets.................................... $ 47,708,420 $ 21,079,336
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 5,510,692 $ 1,305,256
Line of credit.................................. 2,068,163 800,000
Accrued compensation and related costs.......... 964,691 318,000
Other accrued liabilities....................... 5,943,685 353,645
------------ ------------
Total current liabilities....................... 14,487,231 2,776,901
Commitments and contingencies
Minority interest............................... 1,764,736 2,053,725
Shareholders' equity
Preferred stock, no par value:
Authorized shares--8,850,000
Issued and outstanding shares--none -- --
Common stock, Class A, no par value:
Authorized shares--35,600,000
Issued and outstanding shares - 14,649,421
at March 31, 1998 and 7,313,841 at
March 31, 1997.............................. 83,546,913 27,320,449
Common stock, Class E-1, no par value:
Authorized shares--2,200,000
Issued and outstanding shares - 1,257,461
at March 31, 1998 and 1,257,178 at
March 31, 1997.............................. 4,769,878 4,769,878
Common stock, Class E-2, no par value:
Authorized shares--2,200,000
Issued and outstanding shares - 1,257,461
at March 31, 1998 and 1,257,178 at
March 31, 1997.............................. 4,769,878 4,769,878
Warrants and options......................... 1,723,842 3,978,276
Accumulated deficit.......................... (63,354,058) (24,589,771)
------------ ------------
Total shareholders' equity...................... 31,456,453 16,248,710
------------ ------------
Total liabilities and shareholders' equity...... $ 47,708,420 $ 21,079,336
============ ============
</TABLE>
See accompanying notes.
45
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
YEAR ENDED MARCH 31
-------------------------------------------
1998 1997 1996
(Restated)
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.......................................... $ 10,417,841 $ 5,090,861 $ 1,704,390
Cost of sales...................................... 17,394,290 3,648,539 3,324,757
------------ ----------- -----------
Gross profit (loss)................................ (6,976,449) 1,442,322 (1,620,367)
Selling and marketing expenses..................... 5,398,162 2,415,010 1,308,767
Research and development expenses.................. 3,378,600 1,563,228 1,213,471
General and administrative expenses................ 3,941,456 2,050,184 1,709,327
Write off of investment in Mattan Corporation...... ---- 881,010 ----
Termination of strategic alliance with IBC......... ---- 331,740 ----
In-process research and development acquired in
connection with business acquisitions........... 12,800,000 250,000 ----
Merger related and integration costs............... 7,616,924 ---- ----
------------ ----------- -----------
Loss from operations............................... (40,111,591) (6,048,850) (5,851,932)
Interest income, net............................... 1,073,493 15,493 99,037
Minority interest in loss of consolidated
subsidiary...................................... 273,811 60,000
------------ ----------- -----------
Net loss........................................... $(38,764,287) $(5,973,357) $(5,752,895)
============ =========== ===========
Net loss per share, basic and diluted.............. $ (3.39) $ (1.02) $ (1.26)
============ =========== ===========
Shares used in computation of net loss per share... 11,444,123 5,833,326 4,556,959
============ =========== ===========
</TABLE>
See Accompanying Notes.
46
<PAGE>
Premier Laser Systems, Inc.
Consolidated Statements of Shareholders' Equity
For the years ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Common Stock Common Stock
Class A Class E-1 Class E-2
--------------------------- -------------------------- ------------------------ Class A
Shares Amount Shares Amount Shares Amount Warrants
------------ ----------- ----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 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 (restated).......... -- -- -- -- -- -- --
------------ ------------ ----------- ----------- ----------- ----------- -------------
Balance at March 31, 1997
(restated).................. 7,313,841 27,320,449 1,257,178 4,769,878 1,257,178 4,769,878 2,295,328
Common stock and options
issued in connection with
business acquisitions....... 1,065,266 11,757,426 -- -- -- -- --
Exercise of stock options and
warrants.................... 6,270,314 43,989,418 283 -- 283 -- (2,295,328)
Stock options issued to
Advisory Board members,
clinical evaluators, medical
directors and other
consultants................. -- 479,620 -- -- -- -- --
Net loss..................... -- -- -- -- -- -- --
------------ ------------ ----------- ----------- ----------- ----------- -------------
Balance at March 31, 1998.... 14,649,421 $ 83,546,913 1,257,461 $ 4,769,878 1,257,461 $ 4,769,878 $ --
============ ============ =========== =========== =========== =========== =============
See accompanying notes.
<CAPTION>
Common Unrealized
Class B Stock Holding Accumulated
Warrants Warrants Gains Deficit Total
----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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 (restated).......... -- -- -- (5,973,357) (5,973,357)
----------- ----------- ---------- ------------ -----------
Balance at March 31, 1997
(restated)................... 1,490,818 192,130 -- (24,589,771) 16,248,710
Common stock and options
issued in connection with
business acquisitions...... -- -- -- -- 11,757,426
Exercise of stock options
and warrants............... 40,894 -- -- -- 41,734,984
Stock options issued to
Advisory Board members,
clinical evaluators,
medical directors and
other consultants........... -- -- -- -- 479,620
Net loss..................... -- -- -- (38,764,287) (38,764,287)
----------- ----------- ---------- ------------ -----------
Balance at March 31, 1998.... $ 1,531,712 $ 192,130 $ -- ($63,354,058) $31,456,453
=========== =========== ========== ============ ===========
</TABLE>
See accompanying notes.
47
<PAGE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended March 31
1998 1997 1996
(Restated)
<S> <C> <C> <C>
Operating Activities
Net loss............................................................. $(38,764,287) $(5,973,357) $(5,752,895)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................................... 1,637,941 841,467 814,401
Write off of investment in Mattan Corporation.................... 881,010 --
Acquired in-process research and development..................... 12,800,000 250,000 --
Minority interest in loss of consolidated subsidiary............. (273,811) (60,000)
Non-cash component of merger related and integration costs....... 2,332,238
Stock options issued to Advisory Board members and consultants... 479,620 190,001 --
Termination of strategic alliance with IBC....................... -- 125,000 --
Changes in operating assets and liabilities:
Accounts receivable............................................. (2,253,457) (539,045) (244,467)
Inventories..................................................... 392,992 (1,099,277) (14,665)
Prepaid expenses and other current assets....................... (1,555,257) (342,438) (110,565)
Accounts payable................................................ 2,190,093 (184,769) 594,654
Accrued liabilities............................................. 4,882,097 319,936 (598,847)
------------ ----------- -----------
Net cash used in operating activities................................ (18,131,831) (5,591,472) (5,312,384)
------------ ----------- -----------
Investing Activities
Purchase of short-term investments................................... (5,698,630) (3,968,288) --
Patent expenditures.................................................. (87,989) (178,139) (195,971)
Business acquisitions................................................ (5,002,172) (96,028) --
Purchase of property and equipment................................... (888,294) (24,477) (219,723)
Note receivable pursuant to strategic alliance with IBC.............. -- -- (125,000)
Other................................................................ (410,179) -- --
------------ ----------- -----------
Net cash used in investing activities................................ (12,087,264) (4,266,932) (540,694)
------------ ----------- -----------
Financing Activities
Proceeds from equity offerings....................................... -- 10,400,812 --
Net borrowings (repayments) under line of credit..................... (695,340) 800,000 --
Proceeds from exercise of stock options and warrants................. 41,734,984 300,575 304
Increase in restricted cash.......................................... (1,100,000) (1,050,000) --
Other................................................................ (171,645) (454,836) --
------------ ----------- -----------
Net cash provided by financing activities............................ 39,767,999 9,996,551 304
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents................. 9,548,904 138,147 (5,852,774)
Cash and cash equivalents at beginning of year....................... 173,610 35,463 5,888,237
------------ ----------- -----------
Cash and cash equivalents at end of year............................. $ 9,722,514 $ 173,610 $ 35,463
============ =========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest............................................... $ 120,000 $ 115,283 $ 52,129
</TABLE>
See accompanying notes.
48
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements
March 31, 1998
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 Company also designs, develops,
manufactures and markets digital imaging systems and image enhancement and
analysis software for use by practitioners in the ocular health field. The
accompanying consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
The Company has suffered recurring losses from operations and may continue to
incur losses for the foreseeable future due to the significant costs anticipated
to be incurred in connection with manufacturing, marketing and distributing its
laser and imaging products. In addition, the Company intends to conduct
continuing research and development activities, including regulatory submittals
and clinical trials to develop additional applications for its technology. The
Company operates in a highly competitive environment and is subject to all of
the risks inherent in a new business enterprise. During 1996 the Company
completed a public offering of its securities which generated net proceeds
aggregating $10.4 million. Proceeds of $41,735,000 were generated by fiscal 1998
capital transactions. As discussed in Note 6, the Company has been named in
class action lawsuits alleging violations of federal and state securities laws.
The Company believes that its present liquid assets will be sufficient to meet
its working capital requirements through at least fiscal 1999. Any significant
uninsured judgment or settlement amount associated with the class action
litigation would seriously affect the Company's ability to satisfy its working
capital requirements.
2. Summary of Significant Accounting Policies
Restatement of Amounts Previously Reported
The Company's independent auditors unexpectedly resigned during May 1998 and
withdrew their opinion on the Company's fiscal year 1997 financial statements.
Accordingly, it became necessary to retain new auditors to re-examine the 1997
financial statements. Because of the extended period of time that had passed
since the initial report was issued, a number of matters were identified of
which the Company was not aware when it initially issued the 1997 financial
statements. Although the Company believes that the initially issued 1997
financial statements were not materially misstated in terms of net loss, total
assets and shareholders' equity, the statements have nonetheless been restated
in the interest of full disclosure.
The following is a summary of the impact of the restatement on the 1997
consolidated statement of operations.
<TABLE>
<S> <C>
1. Reduction of previously reported sales,
net of related cost of sales $(280,000)
2. Revision to inventory valuation allowances 160,000
3. Additional bad debts expense (313,000)
4. Minority interest in loss of consolidated
subsidiary 60,000
5. Other, net (10,000)
---------
Net increase in 1997 loss $(383,000)
=========
</TABLE>
The effects on the Company's previously issued 1997 financial statements are
summarized as follows:
<TABLE>
<CAPTION>
Previously Increase
Reported (Decrease) Restated
----------- ---------- -----------
<S> <C> <C> <C>
Consolidated balance sheet as of
March 31, 1997:
Current assets $10,658,161 $ (355,000) $10,303,161
Other assets 8,662,450 2,113,725 10,776,175
----------- ---------- -----------
Total assets $19,320,611 $1,758,725 $21,079,336
=========== ========== ===========
Current liabilities $ 2,688,901 $ 88,000 $ 2,776,901
Minority interest -- 2,053,725 2,053,725
Net shareholders' equity 16,631,710 (383,000) 16,248,710
----------- ---------- -----------
Total liabilities and shareholders'
equity $19,320,611 $1,758,725 $21,079,336
=========== ========== ===========
Consolidated Statement of Operations
Net sales $ 5,530,861 $ (440,000) $ 5,090,861
Cost of sales 3,968,539 (320,000) 3,648,539
----------- ---------- -----------
Gross profit 1,562,322 (120,000) 1,442,322
Selling and marketing expenses 2,406,010 9,000 2,415,010
General and administrative expenses 1,736,184 314,000 2,050,184
All other expenses 3,025,978 -- 3,025,978
----------- ---------- -----------
Loss from operations (5,605,850) (443,000) (6,048,850)
Interest income, net 15,493 -- 15,493
Minority interest in loss of
consolidated subsidiary -- 60,000 60,000
----------- ---------- -----------
Net loss $(5,590,357) $ (383,000) $(5,973,357)
=========== ========== ===========
Net loss per share $ (0.96) $ (0.07) $ (1.02)
=========== ========== ===========
</TABLE>
49
<PAGE>
Revenue Recognition
Revenues are recognized when products are shipped to customers. Allowances
for returns are provided based upon actual experience and identified risks.
Short-Term Investments and Restricted Cash
The Company invests excess cash in United States Treasury securities and
commercial paper generally with maturities of less than one year. Short-term
investments with a maturity of less than three months when purchased are
classified as cash equivalents. Investments with maturities in excess of three
months are presented as short-term investments in the accompanying financial
statements. Pursuant to Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company's
short-term investments are classified as available-for-sale and are reported at
fair market value with unrealized gains and losses reflected as an adjustment to
shareholders' equity. There were no material unrealized gains or losses at March
31, 1997 or 1998.
Restricted cash consists of certificates of deposits held to secure
borrowings under the Company's line of credit, and is classified as a current
asset since it is collateral for a current liability.
Concentration of Credit Risk and Foreign Sales
The Company generates revenues principally from sales in the medical field.
As a result, the Company's accounts receivable are concentrated primarily in
this industry. In addition, sales to one customer represented 10% of
50
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
the Company's sales in fiscal 1996. Sales in foreign countries accounted for
approximately 13%, 25% and 40% of the Company's total sales in fiscal 1998,
1997 and 1996, respectively. These foreign sales related almost entirely to
sales in Asia and Europe.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Generally, letters of credit are obtained
on international sales. The Company maintains reserves for potential credit
losses.
Long Lived Assets
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (SFAS No. 121). The adoption of SFAS No.
121 had no impact on the Company's financial position or results of operations
during 1997 or 1998.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market,
and are comprised of the following at March 31:
<TABLE>
<CAPTION>
3/31/98 3/31/97
------------ -----------
<S> <C> <C>
Raw materials......................... $ 5,980,793 $ 2,042,100
Work-in-process....................... 1,313,974 101,802
Finished goods........................ 5,876,710 2,344,054
----------- -----------
13,171,477 $ 4,487,956
Less: Reserve for slow-
moving inventory and excess
purchase commitments.................. (8,688,779) (1,203,324)
----------- -----------
$ 4,428,698 $ 3,284,632
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Machinery, equipment, molds and tooling.... $ 1,948,560 $ 1,041,574
Furniture, fixtures and office equipment... 3,004,906 596,347
Software................................... 375,000 250,000
----------- -----------
5,328,466 1,887,921
Less accumulated depreciation.............. (3,550,043) (1,106,976)
----------- -----------
$ 1,778,423 $ 780,945
=========== ===========
</TABLE>
51
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
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.
Intangibles consist of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Patents and technology rights... $13,062,710 $ 9,581,230
Goodwill........................ 2,839,570 3,156,004
License agreements.............. 110,000 265,000
----------- -----------
16,012,280 13,002,234
Less accumulated amortization... (4,020,601) (3,013,481)
----------- -----------
$11,991,679 $ 9,988,753
=========== ===========
</TABLE>
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 clinical testing expense and are amortized upon completion of certain
milestones of the clinical study. These studies are generally completed within
one year. Clinical testing expenses included in prepaid expenses totaled $6,000,
$405,000 and $204,000 at March 31, 1998, 1997 and 1996, respectively.
52
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company accounts for income taxes in accordance with statement of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109), Accounting
for Income Taxes. SFAS 109 requires the liability method of accounting for
income taxes. No credits for tax benefits have been recognized, since
realization of them is not reasonably assured. (See Note 7).
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 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 1998 and 1997, the Company issued Class A common stock valued at
$11,757,426 and $1,200,000 respectively, in connection with business
acquisitions.
Net Loss Per Share
Net loss per share has been computed based on the weighted average number of
the Company's common shares outstanding during each presented period and
excludes all shares of Class E-1 and Class E-2 common stock, outstanding or
subject to option, because all such shares of stock are subject to escrow and
the conditions for the release of 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.
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 do not differ materially from the per
share amounts previously reported for fiscal years 1997 and 1996.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock option grants. Options granted to consultants
and other non-employees are accounted for under the fair value method in
accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock Based Compensation.
53
<PAGE>
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 widespread
market acceptance. Inventory reserves have been established based upon sales
forecasts and the Company believes that no further losses 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. Conversely, better than expected
sales could yield improved margins.
Basis of Presentation
Certain prior year amounts have been reclassified in order to conform with
the current year presentation.
3. Business Acquisitions
Effective January 31, 1997, the Company entered into a joint venture with
Refractive Surgical Services, LLC (RSS), a Kansas City based company engaged in
the development of certain medical outcomes software. Under this joint venture,
the Company and RSS formed Data.Site. LLC, ("Data.Site"). Data.Site acquired and
assumed substantially all of the assets and liabilities of RSS. The Company
acquired a 51 percent interest in Data.Site, which was accounted for under the
purchase method of accounting, and issued 159,787 shares of its Class A common
stock to RSS. In connection with the acquisition the Company recorded goodwill
in the amount of $2,893,179 and a minority interest of $2,113,725. The Company
has funded Data.Site's operations with an additional $1,135,919 in cash or
equivalent services through March 31, 1998. As of March 31, 1998, RSS owed the
Company $266,000.
On September 30, 1997, the Company acquired all of the equity interests of
EyeSys Technologies, Inc. (EyeSys), a manufacturer and distributor of a
specialized line of diagnostic ophthalmic equipment, for approximately $12.5
million, in the form of 1,236,668 shares of the Company's common stock
(including 319,684 are being held in an escrow account pending the
outcome of certain warranties to be determined at the end of 12 and 18 months),
and $470,000 in cash. 216,761 of the escrowed shares have been excluded from the
determination of the purchase price. If and when they are released, the
allocation of the adjusted purchase price will be re-assessed. Options to
purchase 210,000 shares of the Company's common stock were also issued in
connection with the acquisition. These options were valued in accordance with
SFAS 123 and included in the acquisition cost. The acquisition was accounted for
as a purchase and the total acquisition cost allocated among net liabilities
assumed ($2,183,429), intangibles ($2,600,000), and in process research and
development ($9,200,000). Merger related and integration expenses ($2,147,224)
were also recorded as of the acquisition date. EyeSys has been consolidated
commencing with the acquisition date. Goodwill arising from the acquisition
($2,298,784) was written-off due to uncertainty as to its recoverability.
During the final four months of fiscal 1998 the Company acquired a
controlling interest in Ophthalmic Imaging Systems, Inc. ("OISI") for $3.3
million in cash. OISI is engaged in the business of designing, developing,
manufacturing and marketing digital imaging systems and image enhancement and
analysis software for use by practitioners in the ocular health field. Equity
accounting was used during the period in which the Company owned at least 20%
but less than 50% of the OISI stock (December 1997 through February 1998).
Commencing with the
54
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Business Acquisitions (Continued)
date at which the controlling interest was obtained (late February 1998), OISI
has been consolidated with the Company in the accompanying financial statements.
The OISI acquisition has been accounted for as a purchase and the total
acquisition cost allocated among net liabilities of OISI ($996,835), intangibles
($1,687,407) and in process research and development ($2,600,000). Merger
related and integration expenses of $1,687,407 were also recorded as of the date
at which the controlling interest was obtained. The Company is in the process of
negotiating an agreement for the purchase of the minority interests of OISI.
The following unaudited pro forma consolidated results of operations give
effect to the EyeSys and OISI acquisitions as if they had occurred at the
beginning of fiscal 1998 and 1997:
1998
------------
Net sales............................. $ 17,975,000
Net loss.............................. (42,885,000)
Net loss per share.................... (3.58)
The unaudited pro forma information is not necessarily indicative of the
combined results of operations that would have occurred during the periods
presented nor for future results of operations.
During fiscal 1998 three other business acquisitions occurred, which were not
individually or collectively significant to the financial condition or operating
results of the Company.
4. 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.
5. Lines of Credit
The Company has a credit facility with a bank which provides for borrowings
of up to $2,100,000. As of March 31, 1998, total borrowings under this agreement
were $1,936,000, bearing interest at the bank's prime rate (8.50% at March 31,
1998). Borrowings under the agreement are secured by a certificate of deposit.
The agreement expires in September 1998. The Company's OISI subsidiary has an
accounts receivable financing agreement which allows for advances of up to 80%
of eligible accounts, with a maximum limit of $960,000. As of March 31, 1998,
$132,634 was outstanding under that agreement.
55
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
56
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
6. Commitments and Contingencies
Commitments
The Company leases its facilities and certain equipment under noncancellable
operating leases. Total rental expense for operating leases was $251,000,
$296,000 and $348,000 for the fiscal years ended March 31, 1998, 1997 and 1996,
respectively. At March 31, 1998, future minimum lease payments under
noncancellable operating leases are as follows:
1999.................................... $ 238,644
2000.................................... 245,412
2001.................................... 187,866
----------
$ 671,922
==========
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 $86,000 for the year ended March 31, 1999.
Litigation
The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), as a supplier of certain fiber optics that expires in the fiscal year
ending March 31, 2002. The agreement requires the supplier to sell exclusively
to the Company fiber optics for medical and dental applications as long as the
Company purchases defined minimum amounts.
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.
In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of the Company's claims against
Coherent. As a result, the claims that were the subject of the granted demurrers
have been dismissed, subject to the Company's right to appeal. The Company has
filed an appeal of these decisions as they relate to Westinghouse and the
Westinghouse employee, and briefs have been submitted. No date has been set for
a hearing of this appeal. No trial date has been set as to the remaining
outstanding causes of action.
57
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
Litigation (Continued)
The Company and certain of the officers and directors have been named in a
number of securities class action lawsuits which allege violations of the
Securities Exchange Act or the California Corporations Code. The plaintiffs
seek damages on behalf of classes of investors who purchased the Company's stock
between May 7, 1997 and April 15, 1998. The complaints allege that the Company
misled investors by failing to disclose material information and making material
misrepresentations regarding the Company's business operations and projections.
The Company has also been named in a shareholder derivative action purportedly
filed on its behalf against certain officers and directors arising out of the
same alleged facts. Although the Company intends to vigorously defend itself in
the actions, the ultimate outcome is uncertain and no provision for any
settlement has been reflected in the accompanying financial statements. Any
significant adverse resolution of the actions would seriously impact the
Company's financial condition. The Company maintains insurance coverage for
these types of actions and has filed claims with the carrier. The policy has a
limit of $5 million and a $250,000 deductible amount.
The Company is involved in various other disputes and lawsuits arising from
its normal operations. The litigation process is inherently uncertain and it is
possible that the resolution of these disputes and other lawsuits may adversely
affect the Company, however, it is the opinion of management, that the outcome
of such other matters will not have a material adverse impact on the Company's
financial position, results of operations, or cash flows.
7. Income Taxes
The Company has incurred operating losses since its inception and as a
result, no provision for or benefit from income tax has been recorded.
Deferred tax assets consist of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Tax operating loss carryforwards.......................... $14,502,970 $ 7,116,277
Inventory and receivable reserves and related temporary
differences.............................................. 1,705,050 1,115,696
Depreciation and amortization............................. 890,215 705,293
Research and development credit carryforwards............. 424,494 349,494
Accruals not currently deductible......................... 193,255 70,687
----------- -----------
Total deferred tax assets................................. 17,715,984 9,357,447
Valuation allowance for deferred tax assets............... (17,715,984) (9,357,447)
----------- -----------
Net deferred taxes........................................ $ -- $ --
=========== ===========
</TABLE>
The Company has approximately $39 million of federal net operating loss
carryforwards at March 31, 1998 ($19 million for state purposes), which will
begin to expire in 2006. A valuation allowance has been established for the
entire deferred tax asset.
The Tax Reform Act of 1986 contains provisions which could substantially
limit the availability of the net operating loss carryforwards if there is a
greater than 50% change in ownership during a three year period. As a result of
the Company's public offerings the Company experienced an ownership change of
more than 50%, resulting in a limitation on the utilization of their net
operating loss carryforwards. The limitation is based on the value of the
58
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (Continued)
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.
8. 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 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 $10,401,000 from this offering and the related exercise
of the underwriters over allotment option. Each Class B warrant consists of the
right to purchase one share of Class A common stock through November 30, 1999 at
an exercise price of $8.00.
During fiscal 1998, the Company received approximately $41,735,000 from
the exercise of options and warrants. As a result of such exercises, the Company
issued an additional 4,176,000 Class B Warrants and 6,270,000 shares of Class A
Common Stock.
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.
59
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
Stock Options (Continued)
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 recognizes
expense related to grants of options to non-employees in accordance with the
fair value provision of SFAS No. 123. Such expense was $479,620 in 1998,
$190,001 in 1997 and none during 1996. Additional option expense of $1,110,904
was recorded in 1998 in connection with the EyeSys acquisition. That amount is
included in merger related and integration costs in the accompanying
consolidated statement of operations. 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:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Risk free interest rate................. 6.0% 6.0%
Stock volatility factor................. 0.64 0.58
Weighted average expected option life... 4 years 4 years
Expected dividend yield................. 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
compensation expense used in determining the pro forma information ($1,947,458,
$974,469, and $367,490 for fiscal years 1998, 1997 and 1996, respectively) 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. Proforma information is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net loss............. $(40,711,745) $(6,947,826) $(6,135,000)
Pro forma net loss per share... $ (3.56) $ (1.19) $ (1.35)
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended March 31 follows (excluding option grants that are subject to
shareholder approval):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year.......... 2,308,049 5.51 1,423,949 $ 5.58 788,157 $6.14
Granted................................. 1,899,500 9.22 1,042,756 6.16 704,700 4.89
Exercised............................... (395,271) 6.20 (1,899) 1.00 (1,722) 1.00
Forfeited............................... (325,609) 8.40 (156,757) 10.53 (67,186) 4.96
--------- --------- --------- ------ --------- -----
Outstanding--end of year................ 3,486,669 6.84 2,308,049 5.51 1,423,949 5.58
========= ========= ========= ====== ========= =====
Exercisable at end of year.............. 1,707,502 6.33 775,629 5.18 782,999 6.15
Weighted-average fair value of options
granted during the year............ $4.73 $ 2.98 $2.46
===== ====== =====
</TABLE>
60
<PAGE>
Premier Laser Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
Stock Options (Continued)
The weighted average remaining contractual life of options as of March 31, 1998
was as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------- ----------------------------
Weighted-Average Weighted-
Number of Remaining Weighted Average
Shares Contractual Life Average Exercise Shares Exercise
Range of Exercise Prices Outstanding (years) Price Exercisable Price
- ------------------------ ----------- ---------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.00....................... 26,038 5 $1.00 26,038 $1.00
$4.50 - $8.85............... 2,415,971 8 5.87 1,323,971 5.31
Greater than $10.00......... 1,044,660 9 10.24 357,493 10.53
</TABLE>
Class E-1 and Class E-2 Common Stock
The Company's Class E-1 and Class E-2 common stock is held in escrow, is
not transferable, can be voted and will be converted into Class A common stock
only upon the occurrence of specified events. All of the 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 $8,425,000 and $9,900,000 for the
fiscal years ending March 31, 1999 and 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
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.
9. Employee Benefit Plan
The Company adopted a Defined Contribution 401(k) Profit Sharing Plan,
effective January 1, 1997 covering substantially all of its employees. The Plan
permits eligible employees to contribute a portion of their compensation to the
Plan, on a tax deferred basis. The Company may make matching contributions, in
amounts determined by the Company's Board of Directors. The Company's
contributions are in the form of shares of the Company's common stock. During
1997, no amounts were contributed by the Company to the Plan. For 1998, 3,752
shares have been approved for contribution by the Company.
61
<PAGE>
10. Subsequent Event
Premier entered into a Stock Purchase Agreement, dated February 25, 1998,
pursuant to which it agreed, subject to certain conditions, to commence an
exchange offer to acquire all of the outstanding common stock of OIS not owned
by Premier. This Stock Purchase Agreement was terminated as of August 21, 1998.
In connection with this termination, Premier may be liable to pay OIS a $500,000
break-up fee, which could be satisfied by the reduction of indebtedness of OIS
to Premier which arose after March 31, 1998. In addition, in purchasing 51% of
OIS' outstanding stock, Premier entered into an agreement with one of OIS'
selling shareholders which contemplates that Premier's purchase of approximately
10% of OIS' outstanding shares will be rescinded if Premier does not complete
the exchange offer. If the rescission is implemented, Premier will own less than
a majority of the outstanding shares of OIS and would no longer include the
financial performance of OIS on a consolidated basis. In addition, as part of
the rescission, Premier would receive approximately $730,000 in cash. The
parties are currently negotiating various issues relating to the termination of
the Purchase Agreement and their future business relationship.
The consolidated balance sheet at March 31, 1998 includes current assets of
$1,897,000, total assets of $2,348,000, current liabilities of $3,320,000 and
accumulated deficit of $369,000, as a result of consolidating the assets and
liabilities of OIS. The consolidated statement of operations for the year ended
March 31, 1998, includes sales of $356,000 and net loss of $369,000 as a result
of consolidating the operations of OIS for the portion of the year for which
Premier owned a controlling interest in OIS.
62
<PAGE>
Schedule II--Valuation and Qualifying Accounts
Years ended March 31, 1998, 1997 (Restated) and 1996
<TABLE>
<CAPTION>
Balance at Deductions/ Balance
beginning Recoveries at end of
Description of period Additions and Write-offs Other* period
- ----------- ----------- --------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
1998
Allowance for doubtful accounts
receivable...................... $ 613,263 $385,407 $(149,801) $375,976 $1,224,845
Inventory reserves................ 1,203,324 5,704,455 -- 1,781,000 8,688,779
1997
Allowance for doubtful accounts
receivable...................... $ 154,677 $403,515 $(119,054) $174,125 $ 613,263
Inventory reserves................ 950,325 252,999 -- -- 1,203,324
1996
Allowance for doubtful accounts
receivable...................... $ 306,428 $254,962 $(406,713) $ -- $ 154,677
Inventory reserves................ 699,269 838,968 (587,912) -- 950,325
</TABLE>
- --------------------------
* Allowance amounts added in connection with business acquisitions.
63
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On June 1, 1998, the Company filed a Current Report on Form 8-K, reporting a
change in its certifying accountant. This Current Report was amended on June 15,
1998. In connection with the resignation of the Company's former accountants,
there was a disagreement between the Company and the former accountants
concerning certain accounting matters. Reference is hereby made to such Current
Reports for further discussion of this matter.
On June 22, 1998, the Company engaged the firm of Haskell & White LLP as its
certifying accountant. The engagement of Haskell & White LLP was reported in a
Current Report on Form 8-K filed June 26, 1998.
64
<PAGE>
PART III
Item 10. Directors and Officers of the Registrant.
The directors and executive officers of the Company and their ages as of
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Colette Cozean, Ph.D..... 40 Chairman of the Board, Chief Executive Officer,
President and Director
T. Daniel Caruso, Jr..... 55 Executive Vice President, Mergers and Acquisitions
Michael L. Hiebert (1)... 35 Vice President, Finance and Chief Financial Officer
Tom Hazen................ 56 Executive Vice President, Operations
J. Randy Alexander (2)... 53 Executive Vice President, Strategic Business
Judith A. McCall......... 57 Vice President, Human Resources, Administration and
Special Projects and Secretary
Jeffrey A. Anderson...... 31 Vice President, Regulatory Affairs and Quality Assurance
Patrick J. Day........... 71 Director (3)
Grace Ching-Hsin Lin..... 48 Director (3)(4)
G. Lynn Powell, D.D.S.... 57 Director (4)
E. Donald Shapiro........ 66 Director (3)(4)
</TABLE>
____________________
(1) Subsequent to March 31, 1998, Mr. Hiebert resigned as Vice President,
Finance and Chief Financial Officer.
(2) Subsequent to March 31, 1998, Mr. Alexander's employment with the Company
was terminated.
(3) Member of the Audit Committee.
(4) 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
65
<PAGE>
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. was appointed to the office of Executive Vice
President, Mergers and Acquisitions in April 1998. Prior to such time, Mr.
Caruso served as Senior Vice President of Sales and Marketing and from July 1992
to May 1996 served as Vice President, Sales and Marketing.
Michael L. Hiebert has been the Company's Vice President, Finance and Chief
Financial Officer since November 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.
Tom Hazen has been the Executive Vice President, Operations of the Company
since October 1997. Prior to joining the Company and since 1992, Mr. Hazen
served as Vice President of Operations of Imagyn Medical, Inc. In addition, Mr.
Hazen has served in various executive offices with several companies in the
medical field specializing in product development and manufacturing. Such
positions include Vice President Operations at MICA Technology Services in
Buffalo Grove, Illinois and President and Chief Executive Officer of California
based Dolphin Imaging Systems. Mr. Hazen received a BSME degree from the
University of Arizona and an MBA from UCLA.
J. Randy Alexander joined the Company in February 1998 as the Executive
Vice President, Strategic Business. Since 1989 and prior to joining the
Company, Mr. Alexander served in various positions with Chiron Vision, including
Vice President of Sales and Marketing, President of U.S. Operations and Senior
Vice President of Business and Technology Development. Mr. Alexander holds a
M.S. in Biological Sciences and a B.S. in Biological Sciences from Marshall
University in West Virginia.
Judith A. McCall has been with the Company since April 1993 and became Vice
President, Human Resources, Administration and Special Projects and Secretary in
January 1998. For the past three years, Ms. McCall has headed the Company's
human resources department. Prior to joining the Company, Ms. McCall held
various senior operations and administrative positions with firms in Southern
California and served as Director of Training and Development for API Security.
Ms. McCall received a M.A. in Marriage, Family and Child Psychology from Azusa
Pacific College in Azusa, California and a B.A. in Christian Education from St.
Andrews Presbyterian College in Laurinburg, North Carolina.
Jeffrey A. Anderson has been Vice President, Regulatory Affairs and Quality
Assurance since September 1997 when he joined the Company. Prior to such time
and since November 1995, Mr. Anderson had served as Regulatory Affairs Manager
of Medtronic. From December 1993 to November 1995, Mr. Anderson served as
Regulatory Affairs Specialist of Sybron Dental Specialties and from December
1991 to December 1993, he served as Regulatory Affairs/Quality Assurance Manager
of Laser Medical Technology, Inc. Mr. Anderson received a B.S. in Physics from
California State University Fullerton.
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
66
<PAGE>
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 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, 1998, Jeffrey A.
Anderson, J. Randy Alexander and Judith A. McCall, each an executive officer of
the Company, failed to file on a timely basis an Initial Statement of Beneficial
Ownership of Securities on Form 3. During the fiscal year ended March 31, 1998,
Tom Hazen, also an executive officer of the Company, and Patrick J. Day, a
director of the Company, failed to file on a timely basis a Statement of Changes
of Beneficial Ownership on Form 4.
During the 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.
All of the delinquent forms referred to above were subsequently filed
except the Form 4 of Mr. Day, which is expected to be filed within seven days of
the date of this report.
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, 1997 and
1998, all other Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than 10% beneficial owners were complied with.
67
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
Long-term
Compensation Awards
Annual Compensation/(1)/ -------------------
Fiscal ------------------------ Securities All Other
Name and Principal Position Year Salary Bonus Underlying Options Compensation
--------------------------- ------ ----------- ---------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D, President, 1998 $165,000 $100,000 1,000,000 $16,704/(2)/
Chief Executive Officer and 1997 $151,064 -- 217,500 $32,300/(3)/
Director of Research 1996 $112,000 -- 140,000 $19,800/(4)/
T. Daniel Caruso, Jr. 1998 $114,000 $ 14,500 -0- $ --
Senior Vice President, 1997 $105,625 $ 10,000 109,500 $ --
Sales and Marketing 1996 $ 90,625 $ 10,000 95,000 $ --
</TABLE>
_____________________
(1) Excludes perquisites and other personal benefits, securities and properties
otherwise categorized as salary or bonuses which in the aggregate, for each
of the named persons did not exceed the lesser of either $50,000 or 10% of
the total annual salary reported for 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 March 31, 1998, such severance benefits range from
approximately $36,668 to $55,000 for each of the named persons.
(2) Represents the full amount of premiums paid by the Company ($5,000) for a
split-dollar life insurance policy in the amount of $2 million on the life
of Dr. Cozean and an auto allowance of $11,704.
(3) 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.
(4) 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 ($4,800).
68
<PAGE>
Options Granted in Last Fiscal Year
The following table sets forth certain information concerning stock options
granted to the named executive officers during the fiscal year ended March 31,
1998. This information includes hypothetical potential gains from stock options
granted in fiscal 1998. These hypothetical gains are based entirely on assumed
annual growth rates of 5% and 10% in the value of the Company's Common Stock
price over the 10 year life of the stock options granted in 1998. These assumed
rates of growth were selected by the Securities and Exchange Commission for
illustration purposes only, and are not intended to predict future stock prices,
which will depend upon market conditions and the Company's future performance
and prospects.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Shares of Total Options of Stock Price Appreciation
Common Stock Granted to Exercise or for Option Term
Underlying Employees During Base Price Expiration ----------------------------
Name Options Granted Fiscal Year Per Share/(1)/ Date 5%($) 10%($)
- ------------------------ --------------- ----------------- -------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D. 1,000,000/(2)/ 57% $7.979 2,008 $618,213 $1,027,613
T. Daniel Caruso, Jr. 0 0% -- -- $ -- $ --
</TABLE>
____________________
(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 five 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,
1998, as well as the number of exercisable and unexercisable in-the-money stock
options and their values at fiscal year-end. An option is in-the-money if the
fair market value for the underlying securities exceeds the exercise price of
the option.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
Shares at March 31, 1998 at March 31, 1998/(1)/
Acquired Value ------------------------- -------------------------
on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Colette Cozean, Ph.D. 0 $0 341,730 1,374,420 $0 $0
T. Daniel Caruso, Jr. 0 $0 37,530 179,500 $0 $0
</TABLE>
____________________
(1) Represents the Nasdaq closing price of underlying securities at fiscal year
end, minus the exercise price of the options.
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 $3,000 per month as compensation for
additional consulting services relating to the Company's pending litigation
matter and to new business issues. During the fiscal year ended March 31, 1998,
Dr. Powell received a cash bonus of $15,000 for his efforts in obtaining FDA
clearance for hard tissue applications.
69
<PAGE>
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; (iv) the 1997 Stock Option Plan, which
provides for the granting of nonstatutory stock options; and (v) the 1998 Stock
Option Plan, described below.
The Company's 1998 Stock Option Plan (the "1998 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 (including non-employee
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 1998 Plan terminates in January 2008. Options granted under the
1998 plan will have a term not to exceed ten (10) years and an exercise price in
an amount determined by the committee administering the Plan. The plan is
subject to shareholder approval.
In fiscal 1998, the Company issued options to purchase the following
numbers of shares to its directors: (i) Colette Cozean - 1,000,000 shares
vesting over 5 years; (ii) Patrick J. Day, Grace Ching - Hsin Lin, G. Lynn
Powell, and E. Donald Shapiro - 40,000 shares each vesting over 4 years. All of
such options have an exercise price of $7.98, per share, the fair market value
of the Company's Common Stock on the date of grant. In addition to the above,
Mr. Shapiro and Dr. Powell were each granted options to purchase 30,000 shares
at $10.31 per share vesting over 3 years in connection with services rendered by
them to the Company. All of the above options have a term of ten years.
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, 1998, 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: (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.
70
<PAGE>
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. This year the Company also engaged Ernst
& Young, LLP to perform a survey of compensation packages for Chief Executive
Officers of comparable companies.
The award of any bonuses is based upon the performance of the Company
during the prior year as set forth in the Company's audited financial
statements, 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 fiscal 1998 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 fiscal 1998 and
is of the opinion that the option awards are reasonable in view of the officers'
individual performance and positions with the Company.
In February 1998 the Committee reviewed Dr. Cozean's base salary for 1998,
and concluded 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
was paid a cash bonus of $100,000 for 1998, in view of her contribution towards
the Company's receipt of FDA clearance for the use of a laser in hard tissue
procedures and other milestones achieved by the Company which were reported to
the Committee. Dr. Cozean also received options for the purchase of 1,000,000
shares of the Company's common stock all at prices equaling the Company's then
current trading price, subject to a five (5) year vesting schedule, for her past
and anticipated future services to the Company, which the Committee believes to
be reasonable and appropriate in light of her individual performance.
COMPENSATION COMMITTEE:
E. Donald Shapiro
Grace Ching-Hsin Lin
G. Lynn Powell, D.D.S.
71
<PAGE>
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 Surgical and Medical Instruments Index, assuming reinvestment of
dividends, for the period beginning December 1, 1994 through the Company's
fiscal year ended March 31, 1998. 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
<TABLE>
<S> <C> <C> <C> <C> <C>
11/30/94 3/31/95 3/29/96 3/31/97 3/31/98
--------- -------- -------- -------- --------
Premier Laser Systems, Inc......... $100.00 $ 80.00 $172.50 $110.00 $210.00
Surgical and Medical Instruments... $100.00 $119.05 $186.74 $190.53 $262.85
Nasdaq Market Index................ $100.00 $103.04 $138.60 $155.06 $234.33
</TABLE>
In the Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1997, the Company compared the cumulative total shareholder return on its
Common Stock to the Hambrecht & Quist Technology Index, instead of the Surgical
and Medical Instruments Index, as used this year. The Hambrecht & Quist
Technology Index was unavailable to the Company for purposes of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 31, 1998,
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.
72
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name and Address of Beneficial Owner/(1)/ Beneficial Ownership Common Stock
- -------------------------------------------- -------------------- -------------
<S> <C> <C>
Colette Cozean, Ph.D./(2)/.................. 625,685 4.2%
Patrick J. Day/(3)/......................... 257,981 1.7%
E. Donald Shapiro/(4)/...................... 50,000 *
Grace Ching-Hsin Lin/(5)/................... 72,801 *
T. Daniel Caruso, Jr./(6)/.................. 169,552 1.1%
Michael L. Hiebert/(7)/..................... 36,000 *
G. Lynn Powell, D.D.S./(8)/................. 41,501 *
Tom Hazen................................... 0 0%
J. Randy Alexander.......................... 0 0%
Jeffrey A. Anderson......................... 0 0%
Judith A. McCall/(9)/....................... 30,532 *
All directors and executive officers as a
group (11 persons)/(10)/................... 1,283,982 8.6%
</TABLE>
____________________
* Less than 1%.
(1) The address of each of Dr. Cozean, Ms. Lin, Ms. McCall, and Messrs. Day,
Caruso, Hiebert, Powell, Hazen, Alexander, Anderson and Shapiro 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 485,095 shares of Class
A Common Stock subject to options exercisable within sixty (60) days.
(3) Includes 49,263 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
78,992 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 50,000 shares of Class A Common Stock subject to warrants and
options exercisable within sixty (60) days.
(5) 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 50,000 shares of
Class A Common Stock subject to warrants exercisable within sixty (60)
days.
(6) 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 123,522
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.
(7) Includes 36,000 shares of Class A Common Stock subject to warrants and
options exercisable within sixty (60) days.
(8) Consists of 41,501 shares of Class A Common Stock subject to warrants and
options exercisable within sixty (60) days.
(9) Consists of 30,532 shares of Class A Common Stock subject to options
exercisable within sixty (60) days.
(10) Includes 121,952 shares of Class A Common Stock, 112,409 shares of Class E-
1 Common Stock and 112,409 shares of Class E-2 Common Stock. Also includes
895,572 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 warrants and
options exercisable within sixty (60) days.
73
<PAGE>
Item 13. Certain Relationships and Related Transactions.
On February 21, 1998, the Board of Directors of the Company extended the
terms of two warrants which it had previously granted to Patrick Day, a director
of the Company, as follows.
Prior to the Company's initial public offering in 1994, the Company issued
to Mr. Day a warrant to purchase 9,044 shares of Class A Common Stock, 8,008
shares of Class E-1 Common Stock and 8,008 shares of Class E-2 Common Stock at
an aggregate exercise price of $100,000. Such warrant initially provided for an
expiration date of August 7, 1996. The Board extended the expiration of this
warrant on May 20, 1996 until March 31, 1997, again on February 21, 1997 until
March 31, 1998, and again in February 1998 until August 7, 2000.
The Company has also previously granted to Mr. Day another warrant to
purchase 9,948 shares of Class A Common Stock, 8,808 shares of Class E-1 Common
Stock and 8,808 shares of Class E-2 Common Stock at an aggregate exercise price
of $9,948. This warrant initially provided for an expiration date of April 26,
1998. In February 1998, the Board extended the term of such warrant for an
additional two years expiring on April 26, 2000.
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 1998 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.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<CAPTION>
Page in
Annual Report
on Form 10-K/A
--------------
<S> <C>
(a) The following documents are filed as part of this Annual Report on
Form 10-K/A.
(1) Report of Haskell & White LLP, Independent Auditors...................43
Report of Price Waterhouse LLP, Independent Accountants...............44
Consolidated Balance Sheets at March 31, 1998 and 1997 (restated).....45
Consolidated Statements of Operations for the Years Ended March
31, 1998, 1997 (restated) and 1996....................................46
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1998, 1997 (restated) and 1996........................47
Consolidated Statements of Cash Flows for the Years Ended March
31, 1998, 1997 (restated) and 1996....................................48
Notes to Consolidated Financial Statements............................49
(2) Financial Statements Schedules
Schedule II-Valuation and Qualifying Accounts for the Years Ended
March 1998, 1997 and 1996.............................................63
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).....74
</TABLE>
Exhibits
- --------
2.1 Agreement and Plan of Merger dated as of April 24, 1997 among Premier
Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition of
Delaware, Inc. (incorporated herein by this reference to Exhibit 2.1 to
the Registrant's Registration Statement on Form S-4, Registration No. 33-
29573).
2.2 First Amendment to Agreement and Plan of Merger dated as of August 6,
1997, among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and
Premier Acquisition of Delaware,
74
<PAGE>
Exhibit
- -------
Inc. (incorporated herein by this reference to Exhibit 2.2 to the
Registrant's Current Report on Form 8-K filed October 15, 1997).
2.3 Second Amendment to Agreement and Plan of Merger dated as of September
16, 1997 among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and
Premier Acquisition of Delaware, Inc. (incorporated herein by this
reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K
filed October 15, 1997).
2.4 Stock Purchase Agreement dated February 25, 1998 between Premier Laser
Systems, Inc., and Ophthalmic Imaging Systems (incorporated herein by
this reference to Exhibit 99.1 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
2.5 Purchase Agreement dated February 25, 1998 between Registrant and Mark S
Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated herein by
this reference to Exhibit 99.4 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
2.6 Purchase Agreement dated February 25, 1998 between Registrant and Stanley
Chang, M.D. (incorporated herein by this reference to Exhibit 99.8 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
2.7 Purchase Agreement dated February 25, 1998 between Registrant and J.B.
Oxford & Company (incorporated herein by this reference to Exhibit 99.12
to the Registrant's Current Report on Form 8-K filed March 9, 1998).
3.1 Amended and Restated Articles of Incorporation filed with the California
Secretary of State on November 23, 1994. (incorporated herein by this
reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-
QSB for the Quarter ended December 31, 1994).
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-
83984).
4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser
Systems, Inc. and American Stock Transfer and Trust Company acting as
rights agent (incorporated herein by this reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K filed April 2, 1998).
10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among
the 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).
75
<PAGE>
Exhibit
- -------
10.4 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).
10.5 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).
+10.6 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).
10.7 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).
10.8 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).
10.9 Form of Warrant Agreement (including form of Class B Warrant
Certificates) (incorporated herein by this reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
76
<PAGE>
Exhibit
- -------
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 Loan Agreement dated September 24, 1997 between EyeSys Technologies,
Inc. and Silicon Valley Bank together with Schedule to Loan Agreement
dated September 30, 1997.*
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 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).
77
<PAGE>
Exhibit
- -------
10.30 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 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended March
31, 1997).
10.31 Loan Agreement dated September 24, 1997 between Silicon Valley Bank and
EyeSys Technologies, Inc. (incorporated herein by this reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed
November 14, 1997, as amended by Amendment filed November 26, 1997).
10.32 Third Party Security Agreement dated September 24, 1997, between Silicon
Valley Bank and Premier Laser Systems, Inc. (incorporated herein by this
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q filed November 14, 1997, as amended by Amendment filed November 26,
1997).
10.33 1997 Stock Option Plan, together with form of Nonqualified Stock Option
Agreement.*
10.34 1998 Stock Option Plan, together with form of Nonqualified Stock Option
Agreement and form of Incentive Stock Option Agreement.*
16 Letter dated June 11, 1998, from Ernest & Young, LLP (incorporated herein
by this reference to Exhibit 16 to the Registrant's Current Report on
Form 8-K filed June 1, 1998, as amended June 15, 1998).
21 Subsidiaries.
27 Financial Data Schedule.*
99.1 Form of Class C Warrant (OIS transaction) (incorporated herein by this
reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
99.2 Form of Class D Warrant (OIS transaction) (incorporated herein by this
reference to Exhibit 99.3 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
99.3 Class C Warrant dated February 25, 1998 issued by Registrant to Mark S.
Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction)
(incorporated herein by this reference to Exhibit 99.5 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
99.4 Class D Warrant dated February 25, 1998 issued by Premier to Mark S.
Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction)
(incorporated herein by this reference to Exhibit 99.6 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
99.5 Registration Rights Agreement dated February 25, 1998 issued by Premier
and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS
transaction) (incorporated herein by this reference to Exhibit 99.7 to
the Registrant's Current Report on Form 8-K filed March 9, 1998).
99.6 Class C Warrant dated February 25, 1998 issued by Registrant to Stanley
Chang, M.D. (OIS transaction) (incorporated herein by this reference to
Exhibit 99.9 to the Registrant's Current Report on Form 8-K filed March
9, 1998).
78
<PAGE>
Exhibit
- -------
99.7 Class D Warrant dated February 25, 1998 issued by Registrant to Stanley
Chang, M.D. (OIS transaction) (incorporated herein by this reference to
Exhibit 99.10 to the Registrant's Current Report on Form 8-K filed March
9, 1998).
99.8 Registration Rights Agreement dated February 25, 1998 issued by
Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated herein
by this reference to Exhibit 99.11 to the Registrant's Current Report on
Form 8-K filed March 9, 1998).
99.9 Class C Warrant dated February 25, 1998 issued by Registrant to J.B.
Oxford & Company (OIS transaction) (incorporated herein by this reference
to Exhibit 99.13 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
99.10 Class D Warrant dated February 25, 1998 issued by Registrant to J.B.
Oxford & Company (OIS transaction) (incorporated herein by this reference
to Exhibit 99.14 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
99.11 Series C Warrant Certificate dated November 21, 1995 issued by Ophthalmic
to J.B. Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.15 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
99.12 Consent to Transfer of Warrant dated February 25, 1998 issued by
Ophthalmic and Premier (OIS transaction) (incorporated herein by this
reference to Exhibit 99.16 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
99.13 Warrant Agreement dated November 31, 1995 between Ophthalmic and J.B.
Oxford & Company (OIS transaction) (incorporated herein by this reference
to Exhibit 99.17 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
99.14 Registration Rights Agreement dated February 25, 1998 between Premier
and J.B. Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.18 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
+99.15 Agreement dated July 23, 1997 between Nidek Co., Ltd. and Eyesys
Technologies, Inc. (incorporated herein by this reference to Exhibit 99.1
to the Registrant's Registration Statement on Form S-4 Registration No.
333-29573).
+99.16 Exclusive Distribution Agreement dated June 2, 1997 between Eyesys
Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by this
reference to Exhibit 99.3 to the Registrant's Registration Statement on
Form S-4 Registration No. 333-29573).
_____________________
* Filed herewith.
** Confidential treatment has been requested with respect to certain portions
of this Exhibit.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
(b) Reports on Form 8-K.
During the fourth quarter of the period covered by this report, the Company
filed one Current Report on Form 8-K (filed March 9, 1998). Such filing
reported the Company's acquisition of common stock and warrants of Ophthalmic
Imaging Systems ("OIS").
79
<PAGE>
Such Report included: Audited Balance Sheets of OIS as of August 31, 1997
and 1996, Audited Statements of Operations for the years ended August 31, 1997,
1996 and 1995, Audited Statements of Stockholders' Equity for the years ended
August 31, 1997, 1996 and 1995, and Statements of Cash Flows for the year ended
August 31, 1996, 1996 and 1995.
In addition, such report included Unaudited Financial Statements of OIS
consisting of a Condensed Balance Sheet as of November 30, 1997, Condensed
Statement of Operations for the three months ended November 30, 1997 and 1996,
and Condensed Statements of Cash Flows for the three months ended November 30,
1997 and 1996. Such financial statements also included Pro Forma Combined
Financial Statements for the combined companies required to be filed pursuant to
Form 8-K.
80
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PREMIER LASER SYSTEMS, INC.
By:/s/ COLETTE COZEAN
-----------------------------------------
Colette Cozean, Ph.D.,
Chief Executive Officer and President
81
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
- -------
2.1 Agreement and Plan of Merger dated as of April 24, 1997 among Premier
Laser Systems, Inc., EyeSys Technologies, Inc. and Premier Acquisition
of Delaware, Inc. (incorporated herein by this reference to Exhibit
2.1 to the Registrant's Registration Statement on Form S-4,
Registration No. 33-29573).
2.2 First Amendment to Agreement and Plan of Merger dated as of August 6,
1997, among Premier Laser Systems, Inc., EyeSys Technologies, Inc. and
Premier Acquisition of Delaware, Inc. (incorporated herein by this
reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-
K filed October 15, 1997).
2.3 Second Amendment to Agreement and Plan of Merger dated as of September
16, 1997 among Premier Laser Systems, Inc., EyeSys Technologies, Inc.
and Premier Acquisition of Delaware, Inc. (incorporated herein by this
reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-
K filed October 15, 1997).
2.4 Stock Purchase Agreement dated February 25, 1998 between Premier Laser
Systems, Inc., and Ophthalmic Imaging Systems (incorporated herein by
this reference to Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed March 9, 1998).
2.5 Purchase Agreement dated February 25, 1998 between Registrant and Mark
S Blumenkranz, M.D. and Recia Blumenkranz, M.D. (incorporated herein
by this reference to Exhibit 99.4 to the Registrant's Current Report
on Form 8-K filed March 9, 1998).
2.6 Purchase Agreement dated February 25, 1998 between Registrant and
Stanley Chang, M.D. (incorporated herein by this reference to Exhibit
99.8 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
2.7 Purchase Agreement dated February 25, 1998 between Registrant and J.B.
Oxford & Company (incorporated herein by this reference to Exhibit
99.12 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
3.1 Amended and Restated Articles of Incorporation filed with the
California Secretary of State on November 23, 1994. (incorporated
herein by this reference to Exhibit 4.8 to the Registrant's Quarterly
Report on Form 10-QSB for the Quarter ended December 31, 1994).
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form SB-2, Registration No. 33-
83984).
4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser
Systems, Inc. and American Stock Transfer and Trust Company acting as
rights agent (incorporated herein by this reference to Exhibit 4.1 to
the Registrant's Current Report on Form 8-K filed April 2, 1998).
10.1 Letter Agreement and Patent License Agreement dated August 29, 1991
among the 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).
82
<PAGE>
Exhibit
- -------
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 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).
10.5 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).
+10.6 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).
10.7 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).
10.8 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).
10.9 Form of Warrant Agreement (including forms of Class B Warrant
Certificates) (incorporated herein by this reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
83
<PAGE>
Exhibit
- -------
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 Loan Agreement dated September 24, 1997 between EyeSys Technologies,
Inc. and Silicon Valley Bank together with Schedule to Loan Agreement
dated September 30, 1997.*
10.25 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).
10.26 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).
10.27 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).
10.28 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).
84
<PAGE>
Exhibit
- -------
10.29 Operating Agreement of Data.Site dated January 31, 1997 (incorporated
herein by this reference to Exhibit 10.40 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997).
10.30 Agreement and Plan of Merger dated April 24, 1997 between the
Registrant, Premier Acquisition of Delaware, Inc. and EyeSys
Technologies, Inc. (incorporated herein by this reference to Exhibit
10.41 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended March 31, 1997).
10.31 Loan Agreement dated September 24, 1997 between Silicon Valley Bank
and EyeSys Technologies, Inc. (incorporated herein by this reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
filed November 14, 1997, as amended by Amendment filed November 26,
1997).
10.32 Third Party Security Agreement dated September 24, 1997, between
Silicon Valley Bank and Premier Laser Systems, Inc. (incorporated
herein by this reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q filed November 14, 1997, as amended by Amendment
filed November 26, 1997).
10.33 1997 Stock Option Plan, together with form of Nonqualified Stock
Option Agreement.*
10.34 1998 Stock Option Plan.*
16 Letter dated June 11, 1998 from Ernst & Young, LLP (incorporated
herein by this reference to Exhibit 16 to the Registrant's Current
Report on Form 8-K filed June 1, 1998, and as amended June 15, 1998).
21 Subsidiaries.
23.1 Consent of Haskell & White LLP.*
27 Financial Data Schedule.*
99.1 Form of Class C Warrant (OIS transaction) (incorporated herein by this
reference to Exhibit 99.2 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.2 Form of Class D Warrant (OIS transaction) (incorporated herein by this
reference to Exhibit 99.3 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.3 Class C Warrant dated February 25, 1998 issued by Registrant to Mark
S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction)
(incorporated herein by this reference to Exhibit 99.5 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
99.4 Class D Warrant dated February 25, 1998 issued by Premier to Mark S.
Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS transaction)
(incorporated herein by this reference to Exhibit 99.6 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
99.5 Registration Rights Agreement dated February 25, 1998 issued by
Premier and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS
transaction) (incorporated herein by this reference to Exhibit 99.7 to
the Registrant's Current Report on Form 8-K filed March 9, 1998).
85
<PAGE>
Exhibit
- -------
99.6 Class C Warrant dated February 25, 1998 issued by Registrant to
Stanley Chang, M.D. (OIS transaction) (incorporated herein by this
reference to Exhibit 99.9 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.7 Class D Warrant dated February 25, 1998 issued by Registrant to
Stanley Chang, M.D. (OIS transaction) (incorporated herein by this
reference to Exhibit 99.10 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.8 Registration Rights Agreement dated February 25, 1998 issued by
Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated
herein by this reference to Exhibit 99.11 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
99.9 Class C Warrant dated February 25, 1998 issued by Registrant to J.B.
Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.13 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.10 Class D Warrant dated February 25, 1998 issued by Registrant to J.B.
Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.14 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.11 Series C Warrant Certificate dated November 21, 1995 issued by
Ophthalmic to J.B. Oxford & Company (OIS transaction) (incorporated
herein by this reference to Exhibit 99.15 to the Registrant's Current
Report on Form 8-K filed March 9, 1998).
99.12 Consent to Transfer of Warrant dated February 25, 1998 issued by
Ophthalmic and Premier (OIS transaction) (incorporated herein by this
reference to Exhibit 99.16 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.13 Warrant Agreement dated November 31, 1995 between Ophthalmic and J.B.
Oxford & Company (OIS transaction) (incorporated herein by this
reference to Exhibit 99.17 to the Registrant's Current Report on Form
8-K filed March 9, 1998).
99.14 Registration Rights Agreement dated February 25, 1998 between Premier
and J.B. Oxford & Company (OIS transaction) (incorporated herein by
this reference to Exhibit 99.18 to the Registrant's Current Report on
Form 8-K filed March 9, 1998).
+99.15 Agreement dated July 23, 1997 between Nidek Co., Ltd. and Eyesys
Technologies, Inc. (incorporated herein by this reference to Exhibit
99.1 to the Registrant's Registration Statement on Form S-4
Registration No. 333-29573).
+99.16 Exclusive Distribution Agreement dated June 2, 1997 between Eyesys
Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein by
this reference to Exhibit 99.3 to the Registrant's Registration
Statement on Form S-4 Registration No. 333-29573).
________________________
* Filed herewith.
** Confidential treatment has been requested with respect to certain portions
of this Exhibit.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
86
<PAGE>
EXHIBIT 10.24
TABLE OF CONTENTS
Page
----
1 ACCOUNTING AND OTHER TERMS.............................................. 4
--------------------------
2 LOAN AND TERMS OF PAYMENT............................................... 4
-------------------------
2.1 Advances...................................................... 4
2.2 Interest Rate, Payments....................................... 4
2.3 Fees.......................................................... 5
3 CONDITIONS OF LOANS..................................................... 5
-------------------
3.1 Conditions Precedent to Initial Advance....................... 5
3.2 Conditions Precedent to all Advances.......................... 5
4 REPRESENTATIONS AND WARRANTIES.......................................... 5
------------------------------
4.1 Due Organization and Authorization............................ 5
4.2 Litigation.................................................... 5
4.3 No Material Adverse Change in Financial Statements............ 5
4.4 Solvency...................................................... 6
4.5 Regulatory Compliance......................................... 6
4.6 Subsidiaries.................................................. 6
4.7 Full Disclosure............................................... 6
5 AFFIRMATIVE COVENANTS................................................... 6
---------------------
5.1 Government Compliance......................................... 6
5.2 Taxes......................................................... 6
5.3 Insurance..................................................... 7
5.4 Primary Accounts.............................................. 7
6 NEGATIVE COVENANTS...................................................... 7
------------------
6.1 Changes in Business, Ownership, Management or Business
Locations..................................................... 7
6.2 Mergers or Acquisitions....................................... 7
6.3 Compliance.................................................... 7
7 EVENTS OF DEFAULT....................................................... 7
-----------------
7.1 Payment Default............................................... 7
7.2 Covenant Default.............................................. 7
7.3 Material Adverse Change....................................... 8
7.4 Insolvency.................................................... 8
7.5 Third Party Security Agreement................................ 8
7.6 Judgments..................................................... 8
7.7 Misrepresentations............................................ 8
8 BANK'S RIGHTS AND REMEDIES.............................................. 8
--------------------------
8.1 Rights and Remedies........................................... 8
8.2 Remedies Cumulative........................................... 8
8.3 Demand Waiver................................................. 8
9 NOTICES................................................................. 9
-------
10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER.............................. 9
------------------------------------------
2
<PAGE>
11 GENERAL PROVISIONS............................. 9
------------------
11.1 Successors and Assigns.................. 9
11.2 Indemnification......................... 9
11.3 Time of Essence......................... 9
11.4 Severability of Provision............... 9
11.5 Amendments in Writing, Integration...... 9
11.6 Counterparts............................ 10
11.7 Survival................................ 10
11.8 Confidentiality......................... 10
12 DEFINITIONS.................................... 10
-----------
12.1 Definitions............................. 10
3
<PAGE>
This LOAN AGREEMENT is dated September 24, 1997, between SILICON VALLEY
BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, CA 95054 with a
loan production office located at 18872 MacArthur Blvd, Ste. 100, Irvine,
California 92612 and EYESYS TECHNOLOGIES, INC. ("Borrower"), whose address is
2776 Bingle Road, Houston, Texas 77055 provides the terms on which Bank will
lend to Borrower and Borrower will repay Bank. The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in this
or any Loan Document. This Agreement shall be construed to impart upon Bank a
duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 ADVANCES.
Borrower will pay Bank the unpaid principal amount of all Advances and
interest on the unpaid principal amount of the Advances.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding the Committed Revolving Line.
Amounts borrowed under this Section may be repaid and reborrowed during the
term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit A. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other amounts due under this Agreement are
immediately payable.
2.2 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate equal to the Prime Rate. After an Event of Default
Obligations accrue interest at 5 percent above the rate effective immediately
before the Event of Default. The interest rate increases or decreases when the
Prime Rate changes. Interest is computed on a 360 day year for the actual
number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the 24th of each month. Bank may debit any of Borrower's deposit accounts
including Account Number 360062970 for principal and interest payments or any
amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's
Accounts. These debits are not a set-off. Payments received after 12:00 noon
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest accrue.
4
<PAGE>
2.3 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of $5,250 due
on the Closing Date: and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees
and expenses) incurred through and after the date of this Agreement, are payable
when due.
3 CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE.
Bank's obligation to make the initial Advance is subject to the condition
precedent that it receive the agreements, documents and fees it requires.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES.
Bank's obligations to make each Advance, including the initial Advance, is
subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 4 must be materially true
on the date of the Payment/Advance Form and on the effective date of each
Advance and no Event of Default may have occurred and be continuing, or result
from the Advance. Each Advance is Borrower's representation and warranty on that
date that the representations and warranties of Section 4 remain true.
4 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
4.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
4.2 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
4.3 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated
5
<PAGE>
results of operations. There has not been any material deterioration in
Borrower's consolidated financial condition since the date of the most recent
financial statements submitted to Bank.
4.4 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
4.5 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to all government authorities that are necessary to continue
its business as currently conducted.
4.6 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities.
4.7 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements misleading.
5. AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following:
5.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have each
Subsidiary comply, with all laws, ordinances and regulations to which it is
subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
5.2 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6
<PAGE>
5.3 INSURANCE.
Borrower will keep its business insured for risks and in amounts, as Bank
requests.
5.4 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts with
Bank.
6. NEGATIVE COVENANTS
------------------
Borrower will not do any of the following:
6.1 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business other
than the businesses currently engaged in by Borrower or have a material change
in its ownership of greater than 25%. Borrower will not, without at least 30
days prior written notice, relocate its chief executive office or add any new
offices or business locations.
6.2 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merger or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person (except that Borrower may merge or consolidate or be
acquired by Premier Laser Systems, Inc.) (ii) merge or consolidate a Subsidiary
into another Subsidiary or into Borrower.
6.3 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
7. EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
7.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations:
7.2 COVENANT DEFAULT.
If Borrower violates any covenant in Section 6 or does not perform or
observe any other material term, condition or covenant in this Agreement, any
Loan Documents, or in any agreement between Borrower and Bank and as to any
default under a term, condition or covenant that can be cured, has not cured the
default within 10 days after it occurs, or if the default cannot be cured within
10 days or cannot be cured after Borrower's attempts within 10 day period, and
the default may be cured within a reasonable time, then Borrower has an
additional period (of not more than 30 days) to attempt to cure the default.
During the additional time, the failure to cure the default is not an Event of
Default (but no Advances will be made during the cure period):
7
<PAGE>
7.3 MATERIAL ADVANCE CHANGE.
If the Bank determines, based upon information available to it and in the
exercise of its reasonable judgment, that there is a reasonable likelihood that
Borrower will fail to comply with one or more of the covenants set forth in
Section 5 during the next succeeding financial reporting period.
7.4 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Advances will be made before any
Insolvency Proceeding is dismissed):
7.5 THIRD PARTY SECURITY AGREEMENT.
If there occurs an Event of Default under the Third Party Security
Agreement;
7.6 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Advances
will be made before the judgment is stayed or satisfied); or
7.7 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
8 BANK'S RIGHTS AND REMEDIES
--------------------------
8.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 7.4 occurs all Obligations are immediately due and
payable without any action by Bank); and
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
8.2 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
by law, or in equity. Bank's exercise of one right or remedy is not an
election, and Bank's waiver of any Event of Default is not a continuing waiver.
Bank's delay is not a waiver, election, or acquiescence. No waiver is effective
unless signed by Bank and then is only effective for the specific instance and
purpose for which it was given.
8.3 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of
8
<PAGE>
accounts, documents, instruments, chattel paper, and guarantees held by Bank on
which Borrower is liable.
9 NOTICES
-------
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Orange County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
11 GENERAL PROVISIONS
------------------
11.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
11.2 INDEMNIFICATION
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demand, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
11.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
11.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
11.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing. This Agreement
represents the entire agreement about this subject matter, and supersedes prior
negotiations or agreements. All prior
9
<PAGE>
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.
11.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
11.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 11.2 to indemnify Bank will survive until all statutes
of limitations for actions that may be brought against Bank have run.
11.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing information.
12 DEFINITIONS
-----------
In this Agreement:
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including reasonable attorneys' fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including appeals or
insolvency Proceedings).
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"COLLATERAL" is the collateral defined in the Third Party Security
Agreement.
"COMMITTED REVOLVING LINE" is an Advance of up to $2,100,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as
10
<PAGE>
an obligation directly or indirectly guaranteed, endorsed, co-made, discounted
or sold with recourse by that Person, or for which that Person is directly or
indirectly liable; (ii) any obligations for undrawn letters of credit for the
account of that Person; and (iii) all obligations from any interest rate,
currency or commodity swap agreement, interest rate cap or collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates for commodity prices; but
"Contingent Obligation" does not include endorsements in the ordinary course of
business. The amount of a Contingent Obligation is the stated or determined
amount of the primary obligation for which the Contingent Obligation is made or,
if not determinable, the maximum reasonably anticipated liability for it
determined by the Person in good faith; but the amount may not exceed the
maximum of the obligations under the guarantee or other arrangement.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"LOAN DOCUMENTS" are, collectively, this Agreement, the Third Party
Security Agreement, any note, or notes or guaranties executed by Borrower,
Pledgor or guarantor, and any other present or future agreement between Borrower
and/or for the benefit of Bank in connection with this Agreement, all as
amended, extended or restated.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
exchange contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"PERSON" in any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PLEDGOR" is Premier Laser Systems, Inc. as defined in Third Party
Security Agreement.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is September 24, 1998.
"SCHEDULE" is any attached schedule of exceptions.
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
11
<PAGE>
"Third Party Security Agreement" is that Third Party Security Agreement of
every date between Pledgor and Bank.
BORROWER:
EYESYS TECHNOLOGIES, INC.
By: /s/ MICHAEL HIEBERT
-----------------------------
Title: CFO
--------------------------
BANK:
SILICON VALLEY BANK
By: /s/ ROBERT ANDERSON
-----------------------------
Title: AVP
--------------------------
12
<PAGE>
CORPORATE BORROWING RESOLUTION
BORROWER: EYESYS TECHNOLOGIES, INC. BANK: SILICON VALLEY BANK
2776 BINGLE ROAD 18872 MACARTHUR BLVD, STE. 100
HOUSTON, TX 77055 IRVINE, CA 92812
I, the undersigned Secretary or Assistant Secretary of EYESYS TECHNOLOGIES, INC.
("Borrower"), HEREBY CERTIFY that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held,
at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that any one (1) of the following named officers, employees, or
agents of Borrower, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
Michael Hiebert Secretary and CFO /s/ MICHAEL N. HIEBERT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
acting for and on behalf of Borrower and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should be
borrowed.
Execute Loan Documents. To execute and deliver to Bank the loan documents
of Borrower, on Bank's terms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.
Grant Security. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank.
Negotiate Items. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in which Borrower may have an interest, and
other to receive cash for the same or to cause such proceeds to be credited
to the account of Borrower with Bank, or to cause such other disposition of
the proceeds derived therefrom as they may deem advisable.
Letters of Credit. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
<PAGE>
Foreign Exchange Contracts. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount
as, in the judgment of the officer or officers herein authorized.
Issue Warrants. To issue warrants to purchase Borrower's capital stock, for
such class, series and number, and on such terms, as an officer of Borrower
shall deem appropriate.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Corporation and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that they are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on September 24, 1997 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
x /s/ MICHAEL N. HEIBERT
-------------------------------------
Secretary or Assistant Secretary
x
-------------------------------------
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
2
<PAGE>
THIRD PARTY SECURITY AGREEMENT
<PAGE>
This THIRD PARTY SECURITY AGREEMENT is entered into as of September 24,
1997, by and between SILICON VALLEY BANK ("Bank") and Premier Laser Systems,
Inc. ("Pledgor")
RECITALS
--------
EYESYS TECHNOLOGIES, INC. ("Borrower") wishes to borrow money from time to
time from Bank pursuant to a Loan and Security Agreement of even date (the "Loan
Agreement"). Bank has agreed to enter into the Loan Agreement, provided Pledgor
secures the payment and performance obligations under the Loan Agreement in
accordance with the terms of this Agreement.
AGREEMENT
---------
The parties agree as follows:
1. CREATION OF SECURITY INTEREST
-----------------------------
1.1 Grant of Security Interest. Pledgor grants to Bank a continuing
--------------------------
security interest in the property described in Exhibit A attached hereto (the
---------
"Collateral") in order to secure prompt repayment of any and all obligations and
in order to secure prompt performance by Borrower of each of its covenants and
duties under the Loan Agreement, as amended from time to time, and any other
agreements entered into between Bank and Borrower (the "Loan Documents"). Such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a hold on the deposit account pledged as
Collateral.
1.2 Delivery of Additional Documentation Required. Pledgor shall
---------------------------------------------
from time to time execute and deliver to Bank, documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
2. REPRESENTATIONS AND WARRANTIES
------------------------------
Pledgor represents and warrants as follows:
2.1 Due Organization and Qualification. Pledgor is a corporation
----------------------------------
duly existing and in good standing under the laws of its state of incorporation
and qualified and licensed to do business in, and is in good standing in, any
state in which the conduct of its business or its ownership of property
requires that it be so qualified.
2.2 Due Authorization; No Conflict. The execution, delivery, and
------------------------------
performance of this Agreement are within Pledgor's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Pledgor's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Pledgor is a party or by which Pledgor is bound.
2.3 No Prior Encumbrances. Pledgor has good and indefeasible title
---------------------
to the Collateral, free and clear of any liens, security interests, or other
encumbrances.
3. AFFIRMATIVE COVENANTS
---------------------
Pledgor covenants and agrees that, until payment in full of all
outstanding Obligations under the Loan Agreement and this Agreement, and for so
long as Bank may have any commitment to make an Advance under the Loan
Agreement, Pledgor shall do all of the following.
1
<PAGE>
3.1 Good Standing. Pledgor shall maintain its corporate existence and
-------------
its good standing in its jurisdiction of incorporation and maintain
qualification in each jurisdiction in which the failure to so qualify could have
a material adverse effect on Pledgor's business. Pledgor shall maintain in force
all licenses, approvals and agreements, the loss of which could have a material
adverse effect on Pledgor's business.
3.2 Government Compliance. Pledgor shall comply with all statutes,
---------------------
laws, ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a material adverse effect on Pledgor's
business.
4. NEGATIVE COVENANTS
------------------
Pledgor covenants and agrees that until payment in full of all
outstanding Obligations under the Loan Agreement and this Agreement, Pledgor
will not do any of the following:
4.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
------------
of (collectively, a "Transfer"), all or any part of the Collateral other than:
(i) Transfers in the ordinary course of business; (ii) Transfers of non-
exclusive licenses and similar arrangements for the use of the Collateral; or
(iii) Transfers of worn-out or obsolete Equipment.
4.2 Change in Business Location. Without thirty (30) days prior
---------------------------
written notification to Bank, relocate its chief executive office.
4.3 Encumbrances. Create, incur, assume or suffer to exist any
------------
security interest, lien or encumbrance with respect to the collateral.
5. EVENTS OF DEFAULT
-----------------
Any one or more of the following events shall constitute an Event of
Default by Pledgor under this Agreement:
5.1 Loan Documents. If an Event of Default occurs under any of the
--------------
Loan Documents;
5.2 Covenant Default. If Pledgor fails or neglects to perform, keep,
----------------
or observe any material term, provision, condition, covenant, or agreement
contained in this Agreement.
5.3 Attachment. If any portion of the Collateral is made the subject
----------
of a lien, security interest or other encumbrance, or is attached, seized,
subjected to a writ or distress warrant, or is levied upon, or comes into the
possession of any trustee, receiver or person acting in a similar capacity and
such attachment, seizure, writ or distress warrant or levy has not been removed,
discharged or rescinded within ten (10) days, or if Pledgor is enjoined,
restrained, or in any way prevented by court order from continuing to conduct
all or any material part of its business affairs.
5.4 Misrepresentations. If any material misrepresentation or material
------------------
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.
6. BANK'S RIGHTS AND REMEDIES
--------------------------
6.1 Rights and Remedies. Upon the occurrence and during the
-------------------
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Pledgor:
(a) Exercise all rights available to it under the California
Uniform Commercial Code and applicable law;
2
<PAGE>
(b) Set off and apply to the obligations any and all (i)
balances and deposits of Pledgor held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Pledgor held by Bank; and
(c) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Pledgor's premises) as Bank
determines is commercially reasonable.
6.2 Remedies Cumulative. Bank's rights and remedies under this
-------------------
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Pledgor's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it.
6.3 Demand; Protest. Pledgor waives demand, protest, notice of
---------------
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Pledgor may in any way be liable.
7. NOTICES
-------
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by certified mail, postage
prepaid, return receipt requested, or by prepaid telefacsimile to Pledgor or to
Bank, as the case may be, as its addresses set forth below:
If to Pledgor: Premier Laser Systems, Inc.
3 Morgan
Irvine, CA 92618
Attn:
-------------------------
FAX:
-------------------------
If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn:
-------------------------
FAX:
-------------------------
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
8. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law. Each of Pledgor and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Orange,
State of California. Pledgor AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY
OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THERIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS
3
<PAGE>
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL
9. GENERAL PROVISIONS
------------------
9.1 Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
-------- -------
may be assigned by Pledgor without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Pledgor to sell, transfer, negotiate, or
grant participations in all or any part of, or any interest in Bank's
obligations, rights and benefits hereunder.
9.2 Indemnification. Pledgor shall defend, indemnify and hold
---------------
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Pledgor whether under this Agreement, or otherwise
(including without limitation reasonable attorneys fees and expenses), except
for losses caused by Bank's gross negligence or willful misconduct.
9.3 Time of Essence. Time is of the essence for the performance of
---------------
all obligations set forth in this Agreement.
9.4 Severability of Provisions. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
9.5 Amendments in Writing Integration. This Agreement cannot be
---------------------------------
changed or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
9.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
9.7 Survival. All covenants, representations and warranties made in
--------
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Pledgor to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in this Agreement shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
9.8 Amendment of Loan Documents. Pledgor authorizes Bank, without
---------------------------
notice or demand and without affecting its liability hereunder, from time to
time to (a) renew, extend, or otherwise change the terms of the Loan Documents
or any part thereof; (b) take and hold security for the payment of the Loan
Documents, and exchange, enforce, waive and release any such security; and (c)
apply such security and direct the order or manner of sale thereof as Bank in
its sole discretion may determine.
9.9 Pledgor Waivers. Pledgor waives any right to require Bank to (a)
---------------
proceed against Borrower, any other guarantor or any other person; (b) proceed
against or exhaust any security held from Borrower; (c) marshal any assets of
Borrower; or (d) pursue any other remedy in Bank's power whatsoever. Bank may,
at its election, exercise or decline or fail to exercise any right or remedy it
may have against Borrower or any security held by Bank, including without
limitation the right to foreclose upon any such security by judicial or
nonjudicial sale, without affecting or impairing in any way the liability of
Pledgor hereunder. Pledgor waives any defense arising by reason of any
disability or other defense of Borrower or by reason of the cessation from any
cause whatsoever of the liability of Borrower. Pledgor waives any setoff,
defense or counterclaim that Borrower may have against Bank. Pledgor waives any
defense arising out of the absence, impairment or loss of any right of
reimbursement or subrogation or any other rights against Borrower. Pledgor shall
have no right of subrogation or reimbursement, contribution or other rights
against Borrower, and Pledgor waives any right to enforce any remedy that Bank
4
<PAGE>
now has or may hereafter have against Borrower. Pledgor waives all rights to
participate in any security now or security now or hereafter held by Bank by
Bank. Pledgor waives all presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor, and notices
of acceptance of this Pledge Agreement and of the existence, creation, or
incurring of new or additional indebtedness. Pledgor assumes the responsibility
for being and keeping itself informed of the financial condition of Borrower and
of all other circumstances bearing upon the risk of nonpayment of any
indebtedness or nonperformance of any obligation of Borrower, warrants to Bank
that it will keep so informed, and agrees that absent a request for particular
information by Pledgor, Bank shall have no duty to advise Pledgor of information
known to Bank regarding such condition or any such circumstances. Pledgor waives
the benefits of California Civil Code sections 2809, 2810, 2819, 2845, 2847,
2848, 2849, 2850, 2899, and 3433.
9.10 Borrower Insolvency. If Borrower becomes insolvent or is adjudicated
-------------------
bankrupt or files a petition for reorganization, arrangement, composition or
similar relief under any present or future provision of Unites States Bankruptcy
Code, or if such a petition is filed against Borrower, and in any such
proceeding some or all of any indebtedness or obligations under the Loan
Documents are terminated or rejected or any obligation of Borrower is modified
or abrogated, or if Borrower's obligations are otherwise avoided for
insolvency, bankruptcy or any similar reason, Pledgor agrees that Pledgor's
liability hereunder shall not thereby be affected or modified and such liability
shall continue in full force and effect as if no such action or proceeding had
occurred. This Agreement shall continue to be effective or be reinstated, as the
case may be, if any payment must be returned by Bank upon the insolvency,
bankruptcy or reorganization of Borrower, Pledgor, any other person, or
otherwise, as though such payment had not been made.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
PLEDGOR:
PREMIER LASER SYSTEMS, INC.
BY: /s/ MICHAEL HIEBERT
------------------------
Title: CFO
------------------------
By:
------------------------
Title:
------------------------
BANK:
SILICON VALLEY BANK
By: /s/ ROBERT ANDERSON
------------------------
Title: AVP
------------------------
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
PLEDGOR:
PREMIER LASER SYSTEMS, INC.
By:
--------------------------
Title:
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By: Colette Cozean
--------------------------
Title: CEO
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BANK:
SILICON VALLEY BANK
By:
--------------------------
Title:
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6
<PAGE>
EXHIBIT 10.33
1997 STOCK OPTION PLAN
OF
PREMIER LASER SYSTEMS, INC.
ARTICLE I
GENERAL PROVISIONS
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1.1 Purpose. Premier Laser Systems, Inc. (the "Company") proposes to grant
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to selected officers, directors (whether or not they are employees), key
employees (including officers and directors who are employees) of the Company
(hereinafter referred to as "Eligible Optionees") and to key persons performing
------------------
services as independent contractors and not as employees or members of the Board
of Directors ("Eligible Consultants") options to purchase shares of Class A
--------------------
common stock, no par value, of the Company ("Common Stock") for the purposes of
------------
(i) furnishing to such Eligible Optionees and Eligible Consultants incentives to
improve operations and increase profits of the Company, (ii) encouraging such
Eligible Optionees to accept or continue employment or affiliation with the
Company and its subsidiaries, and (iii) encouraging Eligible Consultants to
begin or continue providing services to the Company. Such options will be
granted pursuant to the plan herein set forth, which shall be known as the 1997
Stock Option Plan of Premier Laser Systems, Inc. (herein referred to as the
"Plan").
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Eligible Optionees and Eligible Consultants who are granted options pursuant
to the Plan are sometimes collectively referred to herein as "Optionees."
---------
1.2 Shares Subject to the Plan. Subject to adjustment as provided in
--------------------------
Section 1.4 and Section 1.10.3 (the "Adjustment Provisions"), the aggregate
- ----------- -------------- ---------------------
number of shares of Common Stock to be delivered upon exercise of all options
granted under the Plan shall not exceed 1,500,000 shares. The shares of Common
Stock issuable upon exercise of options granted under the Plan may be authorized
and unissued shares or reacquired shares. In the event the number of shares to
be delivered upon the exercise in full of any option granted under the Plan is
reduced for any reason whatsoever or in the event any option granted under the
Plan for any reason shall expire or shall terminate unexercised as to all or any
shares covered thereby, the number of shares no longer subject to any such
option shall thereupon be released from such option and shall thereafter be
available to be re-optioned under the Plan. The Board of Directors (the
"Board"), the Compensation Committee of the Board or such other committee of the
-----
Board which shall succeed to the functions and responsibilities of the
Compensation Committee shall have the authority to effect, at any time and from
time to time, (i) the repricing of any outstanding options under the Plan,
and/or (ii) with the consent of the affected holders of options, the
cancellation of any outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan pursuant to terms consistent
therewith, covering the same or different numbers of shares of stock. For
purposes hereof, the term "Committee" shall refer to either the full Board, if
---------
the full Board is administering this Plan, or to the committee appointed by the
Board to administer this Plan. Shares issued pursuant to the exercise of
options granted under the Plan shall be fully paid and nonassessable.
1.3 Administration of the Plan. Subject to the provisions of the Plan, the
--------------------------
Committee shall have the authority to (a) determine the provisions of the
options to be granted under the Plan, (b) interpret the Plan and all options
granted under the Plan, (c) adopt, amend or rescind such rules as it deems
necessary for the proper administration of the Plan, (d) make all other
determinations necessary or advisable for the administration of the Plan, and
(e) correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any option granted under the Plan in the manner and to the extent
that the Committee deems desirable to carry the Plan or any option into effect.
The Board of Directors shall have
<PAGE>
the power to add or remove members of the Committee from time to time, to fill
vacancies thereon arising by resignation, death, removal, or otherwise, and
shall designate a chairman from among the members of the Committee, which
chairman shall preside at all meetings of the Committee. Meetings shall be held
at such times and places as shall be determined by the Committee. A majority of
the members of the Committee shall constitute a quorum for the transaction of
business, and the vote of a majority of those members present at any meeting
shall decide any question brought before that meeting. The actions of the
Committee in exercising all of the rights, powers and authorities set out in the
Plan, when performed in good faith and in its sole judgment, shall be final and
conclusive.
The Committee shall consist of at least two members of the Board of
Directors. The members of the Committee shall be solely "outside directors,"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code") and applicable interpretive authority thereunder (including
----
the transitional rules of Proposed Treasury Regulation Section 1.162-27).
1.4 Amendment and Discontinuance of the Plan. The Board of Directors may
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amend, suspend or terminate the Plan.
1.5 Granting of Options to Employees. The Committee shall have authority to
--------------------------------
grant, prior to the expiration date of the Plan, to Eligible Optionees and
Eligible Consultants options to purchase, on the terms and conditions
hereinafter set forth in Article II, authorized but unissued, or reacquired,
----------
shares of Common Stock, provided such grants shall be made only to those
Eligible Optionees and Eligible Consultants, in such amounts and at such times
as determined in the discretion of the Committee, and, for this purpose, the
Committee may consider the Eligible Optionee's or Eligible Consultant's office
or position, degree of responsibility for, and contribution to, the growth and
success of the Company, length of service, promotions, potential and any other
factors which it may deem relevant. All options granted to Eligible Optionees
and Eligible Consultants under the Plan shall be hereinafter referred to as
"nonqualified options."
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1.6 Option Agreements. Each option granted under the Plan shall be
-----------------
evidenced by a written agreement between the Company and the applicable Optionee
and shall contain such terms and conditions, and may be exercisable for such
periods, as may be approved by the Committee, which terms and conditions need
not be identical but which must be in compliance with the terms and provisions
hereof.
1.7 Effective Date. The Plan shall become effective as of the date the Plan
--------------
is approved by the Board (the "Effective Date"). Except with respect to options
--------------
then outstanding, if not sooner terminated under Section 1.4, the Plan shall
-----------
terminate upon, and no further options shall be granted after, the expiration of
ten years from the Effective Date.
1.8 Recapitalization or Reorganization. If at any time or from time to time
----------------------------------
after the grant of any option hereunder there is a capital reorganization of the
Common Stock, then the Optionee shall be entitled to receive upon the exercise
of an option, in lieu of the Common Stock, the number of shares of stock or
other securities or property of the Company to which a holder of the number of
shares of Common Stock deliverable upon exercise of such option would have been
entitled as a result of such capital reorganization. If the Company shall merge
with another corporation and the Company is the surviving corporation in such
merger and under the terms of such merger the Common Stock outstanding
immediately prior to the merger remain outstanding and unchanged, any option
granted hereunder shall continue to apply to the Common Stock thereto and shall
also pertain and apply to any additional securities and other property, if any,
to which a holder of the number of shares of Common Stock deliverable upon
exercise of such option would have been entitled as a result of the merger. If
(i) the Company shall not be the surviving entity in any merger, consolidation
or other reorganization (or
-2-
<PAGE>
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (ii) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other than a
wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved
and liquidated, or (iv) any person or entity, including a "group" as
contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Act"), acquires or gains ownership or control (including, without
---
limitation, power to vote) of more than 50% of the outstanding shares of the
Company's voting stock (based upon voting power), (each such event is referred
to herein as a "Corporate Change"), then all options granted hereunder,
----------------
including that portion not then otherwise vested, shall become exercisable in
full effective immediately prior to the consummation of the Corporate Change,
provided that the exercise of any such option that would not have been vested in
the absence of the Corporate Change shall be conditioned upon the occurrence of
the Corporate Change (i.e., so that if the Corporate Change does not
subsequently occur, the unvested portion of the option shall vest according to
its original terms).
1.9 Foreign Options and Rights. The Committee may grant options to
--------------------------
Eligible Optionees and Eligible Consultants who are subject to the tax laws of
nations other than the United States, which options may have terms and
conditions as determined by the Committee as necessary to comply with applicable
foreign laws. The Committee may take any action which it deems advisable to
obtain approval of any such option by the appropriate foreign governmental
entity; provided, however, that no such option may be granted pursuant to this
Section 1.9 and no action may be taken which would result in a violation of the
- -----------
Act, the Code or any other applicable law.
1.10 General Terms and Conditions of Options. Options granted under the
---------------------------------------
Plan shall be subject to the following terms and conditions and may contain such
additional terms and conditions, not inconsistent with law or the Article
pursuant to which such option was granted, as the Committee shall deem
desirable:
1.10.1 Manner of Exercise. In order to exercise all or a portion of
------------------
any option granted under the Plan, an Optionee shall deliver to the Company
payment in full of the shares then being purchased, together with any
required withholding tax. The payment of such exercise price and any
required withholding tax shall either be in cash or through delivery to the
Company of shares of Common Stock, or by any combination of cash or shares;
provided that no shares of the Company's Common Stock may be delivered in
payment of such exercise price if such delivery would be in violation of the
Act, including but not limited to, Section 16 thereof. The value of each
share of Common Stock so delivered shall be deemed to be equal to the per
share price of the last sale of Common Stock on the trading day immediately
preceding the date the option is exercised (or the closing bid if no sales
were reported), based on the composite transactions in the Common Stock as
reported in The Wall Street Journal (or any successor publication thereto).
If the Committee so requires, such person or persons shall also deliver a
written representation that all shares being purchased are being acquired
for investment and not with a view to, or for resale in connection with, any
distribution of such shares. An option agreement may, in the discretion of
the Committee, provide for other methods to pay for, or otherwise exercise,
an option. An option agreement also may, in the discretion of the
Committee, provide for the withholding of Federal, state or local income tax
upon exercise of an option from any cash or stock remuneration (from the
Plan or otherwise) then or thereafter payable by the Company to the
Optionee. To the extent provided by the terms of an option agreement, the
Optionee may, at the discretion of the Committee, satisfy any mandatory
federal, state or local tax withholding obligation relating to the exercise
or acquisition of stock under an option by any of the following means or by
a combination of such means: (1) tendering cash payment; (2) authorizing
the Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionee as a result of the exercise or
-3-
<PAGE>
acquisition of stock under the option provided that such arrangement will
not result in a charge to the Company's reported earnings in excess of that
which the Company is willing to accept; or (3) delivering to the Company
owned and unencumbered shares of the Common Stock of the Company if (i) such
delivery would not be in violation of the Act, including but not limited to,
Section 16 thereof, and (ii) such delivery would not create a charge to the
Company's reported earnings in excess of that which the Company is willing
to accept. The exercise of the option may be conditioned upon the receipt
by the Company of satisfactory evidence of the Optionee's satisfaction of
any withholding obligations.
1.10.2 Options not Transferable. No option granted under the Plan
------------------------
shall be transferable otherwise than by will or by the laws of descent and
distribution and, during the lifetime of the Optionee, such option shall be
exercisable only by the Optionee. Any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of, or to subject to execution, attachment
or similar process, any option granted under the Plan, or any right
thereunder, contrary to the provisions hereof, shall be void and
ineffective, shall give no right to the purported transferee, and shall, at
the sole discretion of the Committee, result in forfeiture of the option
with respect to the shares involved in such attempt.
1.10.3 Adjustment of Shares. In the event that at any time after the
--------------------
Effective Date the outstanding shares of Common Stock are changed into or
exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares subject to the Plan (including
shares as to which all outstanding options granted under the Plan, or
portions thereof then unexercised, shall be exercisable), to the end that
after such event the shares subject to the Plan and each Optionee's
proportionate interest shall be maintained as if such Optionee had exercised
the option before the occurrence of such event. Such adjustment in an
outstanding option granted under the Plan shall be made without change in
the total price applicable to such option or the unexercised portion of such
option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary
corresponding adjustment in exercise price per share. Any such adjustment
made by the Committee shall be final, conclusive and binding upon all
Optionees, the Company, and all other interested persons.
1.10.4 Listing and Registration of Shares. Each option granted under
----------------------------------
the Plan shall be subject to the requirement that if at any time the
Committee determines, in its discretion, that the listing, registration, or
qualification of the shares subject to such option upon any securities
exchange or under any state or Federal law, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition
of, or in connection with, the issue or purchase of shares thereunder, such
option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained and the same shall have been free of any conditions not acceptable
to the Committee.
1.10.5 Amendments. The Committee may, with the consent of the person
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or persons entitled to exercise any outstanding option granted under the
Plan, amend such option. The Committee may at any time or from time to
time, in its discretion, in the case of any option previously granted under
the Plan which is not then immediately exercisable in full, accelerate the
time or times at which such option may be exercised to any earlier time or
times.
-4-
<PAGE>
1.10.6 Miscellaneous.
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(a) The person or persons entitled to exercise, or who have
exercised, any option granted under the Plan shall not be entitled to
any rights as a shareholder of the Company with respect to any shares
subject to such option until such person shall have become the
beneficial owner of such shares.
(b) No nonqualified option granted under the Plan shall be
construed as limiting any right which the Company or any subsidiary of
the Company may have to terminate at any time, with or without cause,
the employment of any person to whom such nonqualified option has been
granted.
(c) Notwithstanding any provision of the Plan or the terms of any
option granted under the Plan, the Company shall not be required to
issue any shares hereunder or thereunder if such issuance would, in the
judgment of the Committee, constitute a violation of any state or
Federal law or of the rules or regulations of any governmental
regulatory body.
ARTICLE II
NONQUALIFIED OPTIONS
--------------------
2.1 Eligible Optionees. All Eligible Optionees and Eligible Consultants
------------------
shall be eligible to receive nonqualified options under this Article II.
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2.2 Calculation of Exercise Price. The exercise price to be paid for each
-----------------------------
share of Common Stock deliverable upon exercise of each nonqualified option
granted under Article II shall be determined by the Committee and may be more or
----------
less than, or equal to, the fair market value per share of Common Stock at the
time of grant as determined by the Committee. The exercise price for each
nonqualified option shall be subject to adjustment as provided in the Adjustment
Provisions.
2.3 Terms and Conditions of Options. Nonqualified options granted under
-------------------------------
this Article II shall be in such form as the Committee may from time to time
----------
approve, shall be subject to the following terms and conditions and may contain
such additional terms and conditions, not inconsistent with this Article II, as
----------
the Committee shall deem desirable:
2.3.1 Option Period and Conditions and Limitations on Exercise.
--------------------------------------------------------
Subject to Section 1.10.5, no nonqualified option shall be exercisable by an
--------------
Eligible Optionee or Eligible Consultant later than the date which is the
date determined by the Committee upon the grant thereof (the "Option
------
Expiration Date") which shall be no later than ten years after the date of
---------------
grant. To the extent not prohibited by other provisions of the Plan, each
nonqualified option granted to an Eligible Optionee or Eligible Consultant
shall be exercisable at such time or times as the Committee in its
discretion may determine at or prior to the time such option is granted. In
the event the Committee makes no such determination, each nonqualified
option granted to an Eligible Optionee or Eligible Consultant shall be
exercisable from time to time, in whole or in part, at any time prior to the
Option Expiration Date.
2.3.2 Termination of Employment or Relationship as Eligible Consultant;
-----------------------------------------------------------------
Death. For purposes of this Article II and each nonqualified option granted
----- ----------
under this Article II, an Eligible Optionee's employment and a Eligible
----------
Consultant's relationship with the Company shall be deemed
-5-
<PAGE>
to have terminated at the close of business on the day preceding the first
date on which such Eligible Optionee or Eligible Consultant no longer for
any reason whatsoever (including the death of such Eligible Optionee or
Eligible Consultant) is employed by, or has a relationship with, the Company
or a subsidiary of the Company. An Eligible Optionee shall be considered to
be in the employment of the Company or a subsidiary of the Company as long
as such Eligible Optionee remains an employee of the Company or a subsidiary
of the Company, whether active or on any authorized leave of absence. An
Eligible Consultant shall be considered to have a relationship with the
Company as long as such Eligible Consultant has an executory assignment from
Company personnel authorized to make such an assignment. Any question as to
whether and when there has been a termination of such employment or
relationship, and the cause of such termination, shall be determined by the
Committee and its determination shall be final and conclusive. If an
Eligible Optionee's employment or a Eligible Consultant's relationship is
terminated for any reason whatsoever (including the death of such Eligible
Optionee or Eligible Consultant), each nonqualified option thereunto granted
under this Article II and all rights thereunder shall wholly and completely
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terminate as follows:
(a) With respect to nonqualified options not then exercisable, at
the time the Eligible Optionee's employment or a Eligible Consultant's
relationship is terminated; and
(b) With respect to nonqualified options then exercisable:
(i) At the time the Eligible Optionee's employment or term
as a director (if not an employee) or a Eligible Consultant's
relationship is terminated if such person's employment, term or
relationship is terminated because such person has committed fraud,
theft or embezzlement against the Company or a subsidiary,
affiliated entity or customer of the Company, or for conflict of
interest (other than legitimate competition); or
(ii) At the expiration of a period of one year after the
Eligible Optionee's or Eligible Consultant's death (but in no event
later than the Option Expiration Date) if the Eligible Optionee's
employment or Eligible Consultant's relationship is terminated by
reason of such person's death. Any such nonqualified option may be
exercised by the Eligible Optionee's or Eligible Consultant's
estate or by the person or persons who acquire the right to
exercise such nonqualified option by bequest or inheritance; or
(iii) At the expiration of a period of three years (but in
no event later than the Option Expiration Date) after the Eligible
Optionee's employment is terminated because of retirement or the
Eligible Optionee's employment or term or the Eligible Consultant's
relationship is terminated because of disability, if the Eligible
Optionee's employment or term has terminated because of retirement
or disability or the Eligible Consultant's relationship has
terminated because of disability; or
(iv) At the expiration of a period of three months after the
Eligible Optionee's or Eligible Consultant's employment or
relationship is terminated (but in no event later than the Option
Expiration Date) if the Eligible Optionee's employment or term or
Eligible Consultant's relationship is terminated for any reason
other than the reasons specified in Section 2.3.2(b)(i)-(iii).
-6-
<PAGE>
NONSTATUTORY STOCK OPTION AGREEMENT
(1997 Stock Option Plan)
THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "Agreement") is made and
---------
entered into as of __________________, 1997, by and between ___________________
(the "Optionee") and PREMIER LASER SYSTEMS, INC., a California corporation (the
--------
"Company").
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A. The Board of Directors of this Company has adopted the 1997 Stock
Option Plan (the "Plan") which provides for the granting of options to selected
----
officers, directors (whether or not they are employees), key employees
(including officers and directors who are employees) of the Company and key
persons performing services for the Company as independent contractors. The
terms of this Agreement are governed solely by the Plan, a copy of which has
been provided to Optionee.
B. The Board has authorized the grant of options to purchase Common Stock
of the Company pursuant to the terms and conditions set forth herein and in the
Plan. This option is not intended to qualify as and will not be treated as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
----
C. Before making any decision concerning the Plan, this Agreement or an
exercise of any option granted hereby, Optionee is advised to read the Plan and
consult with an attorney and a tax advisor. THE UNTIMELY EXERCISE OF THE OPTION
GRANTED HEREBY AND THE SALE OF STOCK ACQUIRED AS A RESULT OF SUCH EXERCISE MAY
CAUSE OPTIONEE TO INCUR LIABILITIES UNDER THE TAXATION AND SECURITIES LAWS OF
WHICH OPTIONEE MAY BE OTHERWISE UNAWARE WITHOUT SEEKING THE ADVICE OF ADVISORS.
AGREEMENT
---------
NOW, THEREFORE, the parties agree as follows:
1. Grant to Optionee.
-----------------
The Company hereby grants to Optionee, subject to the terms and conditions
of the Plan and subject to the terms and conditions herein set forth herein, an
option (the "Option") to purchase from the Company all or any part of an
------
aggregate of _____________ shares of the Company's Class A Common Stock ("Common
------
Stock").
- -----
<PAGE>
2. Exercise of the Option.
----------------------
(a) Exercise Price. The exercise price of this Option is $________ per
share. Payment of the exercise price per share is due in full upon exercise of
all or any part of this Option. Optionee may elect, to the extent permitted by
applicable statutes and regulations, to make payment of the exercise price under
one of the following alternatives:
(i) Payment of the exercise price per share in cash (including
check) at the time of exercise;
(ii) Provided that at the time of exercise the Company's Common Stock
is publicly traded and quoted regularly in the Wall Street Journal, payment
by delivery of already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings in excess of
that which the Company is willing to accept, and owned free and clear of
any liens, claims, encumbrances or security interests, which Common Stock
shall be valued at its fair market value, which is the per share price of
the last sale of Common Stock on the trading day immediately preceding the
date the Option is exercised (or the closing bid if no sales were
reported), based on the composite transactions in the Common Stock as
reported in the Wall Street Journal (or any successor publication thereto)
(the "Fair Market Value");
-----------------
(iii) Provided that at the time of exercise the Company's Common Stock
is publicly traded and quoted regularly in the Wall Street Journal, and
provided further, that the cashless exercise will not result in a charge to
the Company's earnings, in excess of that which the Company is willing to
accept, payment by delivery and surrender of this Option with a Cashless
Exercise Notice (in the form attached hereto as Exhibit B). In the event of
a cashless exercise, the Optionee shall exchange the Option for such number
of shares of Common Stock underlying the Option determined by multiplying
the number of shares by a fraction, the numerator of which shall be the
difference between the Fair Market Value per share of the Common Stock and
the exercise price per share of the Option, the denominator of which shall
be the Fair Market Value per share of the Common Stock;
(iv) To the extent permitted by applicable law, payment by a
combination of the methods of payment permitted by Sections 2(a)(i), (ii)
----------------------
and (iii) above.
---------
(b) Exercise Notice. In order to exercise this Option, Optionee or any
---------------
other person or persons entitled to exercise the Option shall give written
notice to the Secretary of the Company or to such other person as may be
designated by the Company, in the form set forth on Exhibit A or Exhibit B
hereto, specifying the number of shares to be purchased. This notice shall be
accompanied by payment of the exercise price for the shares as provided in
Section 2(a). Optionee shall also deliver such additional documents as the
- ------------
Company may then require pursuant to the Plan.
-2-
<PAGE>
(c) Compliance with Securities Laws. Notwithstanding anything to the
-------------------------------
contrary contained herein, this Option may not be exercised unless the shares
issuable upon exercise of this Option are then registered under the Act, or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act").
---
(d) Additional Terms and Conditions. By exercising this Option, Optionee
-------------------------------
agrees that the Company may require (as a condition to the exercise of this
Option) Optionee to enter an arrangement providing for the payment by Optionee
to the Company of any tax withholding obligation of the Company arising by
reason of (1) the exercise of the Option; (2) the lapse of any substantial risk
of forfeiture to which the shares are subject at the time of exercise; or (3)
the disposition of shares acquired upon such exercise.
3. Vesting Schedule.
----------------
Subject to the conditions and limitations contained herein, ___________
shares will vest on ____________, 1998, thereafter ________ shares will vest on
____________, 1999, and the remaining ___________ shares will vest on
____________, 2000. Vested installments may be exercised in whole or in part,
and, to the extent not exercised, will accumulate and be exercisable at any time
on or before the termination of the Option; provided however, that this Option
may not be exercised for any number of shares which would require the issuance
of anything other than whole shares. Notwithstanding the above, the vesting of
shares subject to this Option shall accelerate upon the terms and conditions set
forth in Section 1.10 of the Plan.
4. Expiration Date.
---------------
The Option shall terminate and expire at 5:00 p.m., California time, on
________, 2007 (which date shall not be more than ten (10) years from the date
this Option is granted), or such earlier time as may be required by the Plan if
Optionee ceases to be employed or retained by the Company or ceases to be a
member of the Board of Directors. In no event may this Option be exercised after
the date on which it terminates. This Option shall terminate prior the
expiration of its term as follows: ninety days (90) days after the termination
of Optionee's employment with or engagement by the Company or an affiliate for
any reason or for no reason unless:
(i) Disability/Retirement. Such termination is due to Optionee's
---------------------
permanent and total disability (within the meaning of Section 422(c)(6) of
the Code) or to the retirement of an Optionee who is an employee of the
Company, in which event the Option shall terminate on the earlier of the
termination date set forth above or thirty-six (36) months following such
termination; or
(ii) Death. Such termination is due to Optionee's death, in which
-----
event the Option shall terminate on the earlier of the termination date set
forth above or twelve (12) months after Optionee's death; or
-3-
<PAGE>
(iii) Removal for Cause. Such termination is due Optionee's commission
-----------------
of fraud, theft or embezzlement against the Company or a subsidiary,
affiliated entity or customer of the Company, or for conflict of interest
(other than legitimate competition), in which event the Option shall
terminate at the time Optionee's employment or engagement is terminated.
(iv) Section 16(b) Liability. Exercise of the Option within ninety
-----------------------
(90) days after the termination of Optionee's employment with or engagement
by the Company or with an affiliate would result in liability under section
16(b) of the Securities Exchange Act of 1934, as amended, in which case the
Option will terminate on the earlier of (i) the tenth (10th) day after the
last date upon which exercise would result in such liability or (ii) six
(6) months and ten (10) days after the termination of Optionee's employment
with or engagement by the Company or an affiliate.
Notwithstanding the foregoing, this Option may be exercised following
termination of Optionee's employment or engagement by the Company or an
affiliate only as to that number of shares as to which it was exercisable on the
date of such termination under the provisions of Section 3 of this Option.
---------
5. Nontransferable.
---------------
This Option is not transferable, except by will or by the laws of descent
and distribution, and is exercisable during Optionee's life only by Optionee.
Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or
to subject to execution, attachment or similar process, the Option, or any right
thereunder, contrary to the provisions hereof, shall be void and ineffective,
shall give no right to the purported transferee, and shall, at the sole
discretion of the Committee, result in forfeiture of the Option with respect to
the shares involved in such attempt.
6. No Right to Continued Employment or Engagement by the Company.
-------------------------------------------------------------
This Agreement is not an employment contract and nothing in this Option
shall be deemed to create in any way whatsoever any obligation on Optionee's
part to continue in the employ of the Company, or of the Company or an affiliate
to continue Optionee's employment with the Company or an affiliate. In the event
that this Option is granted to Optionee in connection with the performance of
services as a consultant or director, references to employment, employee and
similar terms shall be deemed to include the performance of services as a
consultant or a director, as the case may be; provided however, that no rights
as an employee shall arise by reason of the use of such terms.
7. No Rights as a Shareholder.
--------------------------
The holder of this Option shall not have any of the rights of a shareholder
with respect to the shares subject to the Option until such holder shall have
exercised the option and paid the exercise price.
-4-
<PAGE>
8. Notices.
-------
Any notices provided for in this Option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or five (5) days
after deposit in the United States mail, postage prepaid, certified mail
addressed to Optionee or the Company at the address specified below or at such
other address as the parties may hereafter designate by written notice:
Optionee: _________________________________________
_________________________________________
_________________________________________
The Company: Premier Laser Systems, Inc.
3 Morgan
Irvine, California 92178
Attn: Corporate Secretary
9. Subject to the Plan.
-------------------
This Option is subject to all the provisions of the Plan, a copy of which
has been provided to Optionee, and its provisions are hereby made a part of this
Option. Optionee acknowledges receipt of a copy of the Plan. This Option is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the Plan. In the
event of any conflict between the provisions of this Option and those of the
Plan, the provisions of the Plan shall control.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first set forth above.
"Company" PREMIER LASER SYSTEMS, INC.
a California corporation
By:______________________________________
Title:___________________________________
"Optionee" _________________________________________
_________________________________________
Social Security No.:_____________________
-5-
<PAGE>
EXHIBIT A
EXERCISE NOTICE
Premier Laser Systems, Inc.
3 Morgan
Irvine, California 92718
Attention: Corporate Secretary
Re: Exercise of Stock Option
------------------------
Ladies and Gentlemen:
Pursuant to Section 2 of that certain Nonqualified Stock Option Agreement
(the "Agreement") between the undersigned and Premier Laser Systems, Inc., a
---------
California corporation (the "Company"), the undersigned hereby elects to
-------
exercise the option granted thereby to purchase _________ shares of Class A
Common Stock of the Company at a price of $__________ per share. Accompanying
this Notice is the payment in full for such shares as permitted by the terms of
the 1997 Stock Option Plan, which Plan is specifically made a part of this
Agreement and has been read and understood by the undersigned.
The undersigned represents and warrants to the Company that the undersigned
is acquiring the shares for investment only and not with a view to distribution
or resale.
Dated:________________ ________________________________________
Signature
________________________________________
Print Name
________________________________________
Please print here the exact name desired
to be on the stock certificate and the
records of the Company.
-6-
<PAGE>
EXHIBIT B
CASHLESS EXERCISE NOTICE
Premier Laser Systems, Inc.
3 Morgan
Irvine, California 92718
Attention: Corporate Secretary
Re: Cashless Exercise of Stock Option
---------------------------------
Ladies and Gentlemen:
Pursuant to Section 2(a)(iii) of that certain Nonqualified Stock Option
Agreement (the "Agreement") between the undersigned and Premier Laser Systems,
---------
Inc., a California corporation (the "Company"), the undersigned hereby
-------
irrevocably elects to exchange the Option granted thereby for ___________ shares
of Class A Common Stock of the Company, as permitted by the terms of the 1997
Stock Option Plan, which Plan is specifically made a part of this Agreement and
has been read and understood by the undersigned.
If the number of shares referenced in this Cashless Exercise Notice shall
not be all of the shares exchangeable or purchasable under the Option, a new
Agreement shall be issued in the name of the undersigned for the balance
remaining of the shares purchasable thereunder rounded up to the next higher
number of shares.
The undersigned represents and warrants to the Company that the undersigned
is acquiring the shares for investment only and not with a view to distribution
or resale.
Dated:______________ _______________________________________
Signature
_______________________________________
Print Name
_______________________________________
Please print here the exact name
desired to be on the stock certificate
and the records of the Company.
NOTE: This form may only be used if the cashless exercise will not result
in a charge to the Company's reported earnings.
-7-
<PAGE>
EXHIBIT 10.34
PREMIER LASER SYSTEMS, INC.
1998 STOCK OPTION PLAN
ARTICLE I
GENERAL PROVISIONS
------------------
1.1 Purpose. Premier Laser Systems, Inc. (the "Company") proposes to grant
-------
to selected "Eligible Employees" and "Eligible Consultants" (as defined below)
options to purchase shares of Class A common stock, no par value, of the Company
("Common Stock") for the purposes of (i) furnishing to such persons incentives
to improve operations and increase profits of the Company, (ii) encouraging such
persons to accept or continue employment with the Company and its "Affiliates"
(as defined below) and (iii) encouraging such persons to begin or continue
providing services to the Company. For purposes hereof, the term "subsidiary"
shall have the meaning set forth in Rule 405 promulgated under the Securities
Act of 1933, as amended. The term "Eligible Employees" shall mean employees
(including officers and directors who are employees) of the Company or its
subsidiaries, and the term "Eligible Consultants" shall mean persons performing
services for the Company or a subsidiary of the Company as independent
contractors and not as employees or members of the Board of Directors.
The Company also proposes to grant to those members of the Board of
Directors of the Company (the "Board of Directors") who are not officers or
employees of the Company at the time of a grant (such persons being hereinafter
referred to as "Non-Employee Directors") options to purchase shares of Common
Stock pursuant to the Plan. The purpose of such grants is to (i) provide
incentives for highly qualified individuals to stand for election to the Board
of Directors and continue service on the Board of Directors, (ii) provide
incentives to promote long-term shareholder value, and (iii) promote a greater
identity of interest between Non-Employee Directors and the Company's
shareholders.
Eligible Employees, Eligible Consultants and Non-Employee Directors who are
granted options pursuant to the Plan are sometimes collectively referred to
herein as "Optionees."
The plan herein set forth shall be known as the 1998 Stock Option Plan of
Premier Laser Systems, Inc. (and is herein referred to as the "Plan").
1.2 Shares Subject to the Plan. Subject to adjustment as provided in
--------------------------
Section 1.4 and Section 1.11.3 (the "Adjustment Provisions"), the aggregate
number of shares of Common Stock to be delivered upon exercise of all options
granted under the Plan shall not exceed 1,500,000 shares. The shares of Common
Stock issuable upon exercise of options granted under the Plan may be authorized
and unissued shares or reacquired shares. In the event the number of shares to
be delivered upon the exercise in full of any option granted under the Plan is
reduced for any reason whatsoever or in the event any option granted under the
Plan for any reason shall expire or shall terminate unexercised as to all or any
shares covered thereby, the number of shares no longer subject to any such
option shall thereupon be released from such option and shall thereafter be
available to be re-optioned under the Plan, subject to the limitations, if any,
imposed by the Internal Revenue Code of 1986, as amended (the "Code") on the
availability for regrant of options previously granted pursuant to Article III.
The Compensation
<PAGE>
Committee of the Board of Directors or such other committee of the Board of
Directors which shall succeed to the functions and responsibilities of the
Compensation Committee, or as shall otherwise be delegated the responsibility of
administering the Plan (the "Committee") shall have the authority to effect, at
any time and from time to time, (i) the repricing of any outstanding options
under the Plan, and/or (ii) with the consent of the affected holders of options,
the cancellation of any outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan pursuant to terms consistent
therewith, covering the same or different numbers of shares of stock, provided,
however, that no option granted pursuant to Article III shall be repriced or
regranted on terms that would constitute a "modification" within the meaning of
Section 424(h)(3) of the Code which would disqualify such option as an incentive
stock option described in Section 422 of the Code unless the Company and the
holder of such option shall so agree. Shares issued pursuant to the exercise of
options granted under the Plan shall be fully paid and nonassessable.
1.3 Administration of the Plan. Subject to the provisions of the Plan, the
--------------------------
Committee shall have the authority to (a) determine which persons shall be
granted Options under the Plan, (b) determine the provisions of the options to
be granted under the Plan, (c) interpret the Plan and all options granted under
the Plan, (d) adopt, amend or rescind such rules as it deems necessary for the
proper administration of the Plan, (e) make all other determinations necessary
or advisable for the administration of the Plan, and (f) correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any option
granted under the Plan in the manner and to the extent that the Committee deems
desirable to carry the Plan or any option into effect. The Board of Directors
shall have the power to add or remove members of the Committee from time to
time, to fill vacancies thereon arising by resignation, death, removal, or
otherwise, and shall designate a chairman from among the members of the
Committee, which chairman shall preside at all meetings of the Committee.
Meetings shall be held at such times and places as shall be determined by the
Committee. A majority of the members of the Committee shall constitute a quorum
for the transaction of business, and the vote of a majority of those members
present at any meeting shall decide any question brought before that meeting.
The actions of the Committee in exercising all of the rights, powers and
authorities set out in the Plan, when performed in good faith and in its sole
judgment, shall be final and conclusive. When appropriate, the Plan shall be
administered in order to qualify certain of the options granted hereunder as
"incentive stock options" described in section 422 of the Code.
The Committee shall consist of at least two members of the Board of
Directors.
Notwithstanding any provision of the Plan, the Committee may not exercise
any discretion with respect to any option granted hereunder which would be
inconsistent with the intent that the Plan meet the requirements of Rule 16b-3
("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as amended
(the "Act"), or any similar or successor rule. If any Plan provision is found
not to be in compliance with Rule 16b-3 or Section 162(m) of the Code ("Section
162(m)"), that provision shall be deemed amended so that the Plan does so
comply, to the extent permitted by law and deemed advisable by the Committee,
and in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3 and Section 162(m).
1.4 Amendment and Discontinuance of the Plan. The Board of Directors may
----------------------------------------
amend, suspend or terminate the Plan; provided, however, that each such
amendment of the Plan (a) extending the period within which options may be
granted under the Plan, (b) increasing the aggregate number of shares of Common
Stock to be optioned under the Plan except as provided in the Adjustment
Provisions, (c) materially modifying the requirements as to eligibility of
employees or consultants receiving options under, or changing the eligibility of
employees or consultants or class of employees or consultants to whom options
may be granted under, Article II or III, as applicable, or (d) materially
increasing the benefits to optionees under the Plan, shall, in each case, be
subject to approval by the shareholders of
<PAGE>
the Company (but only if such amendment is required to be approved under the
Code, the Act, the rules promulgated under the Code or the Act, or the rules of
any exchange (including the Nasdaq Stock Market) on which the Company's
securities are listed); and provided further, however, that no amendment,
suspension or termination of the Plan shall be made which may cause the Plan to
fail to meet the requirements of Rule 16b-3 or may, without the consent of the
holder of an option granted under Article II or III, terminate such option or
adversely affect such person's rights in any material respect (except as set
forth in the Plan). Furthermore, the Board of Directors may alter, amend,
suspend, discontinue or terminate the Plan and any option granted hereunder,
without the approval of the shareholders of the Company or any holder of any
option thereby affected, if necessary in order to (a) enable the Plan and any
option granted hereunder intended to be so qualified, to qualify for (i) the
exemption provided by Rule 16b-3, (ii) the benefits provided under section 422
of the Code, or (iii) the exclusion for qualified performance-based compensation
under Section 162(m) and the applicable interpretive authority thereunder, and
(b) comply with changes in the Code, the Employee Retirement Income Security Act
or any other applicable law (including, with respect to any of the foregoing,
changes in any rule, regulation or other interpretive authority).
1.5 Granting of Options to Employees. The Committee shall have authority to
--------------------------------
grant, prior to the expiration date of the Plan, to (i) Eligible Employees,
Eligible Consultants and Non-Employee Directors options to purchase, on the
terms and conditions hereinafter set forth in Article II, and (ii) Eligible
Employees options to purchase, on the terms and conditions hereinafter set forth
in Article III, authorized but unissued, or reacquired, shares of Common Stock,
provided such grants shall be made only to those Optionees, in such amounts and
at such times as determined in the discretion of the Committee, and, for this
purpose, the Committee may consider the Optionee's office or position, degree of
responsibility for, and contribution to, the growth and success of the Company,
length of service, promotions, potential and any other factors which it may deem
relevant. Options granted to Eligible Employees under Section III shall be
"incentive stock options" within the meaning of section 422(b) of the Code, and
are hereinafter referred to as "incentive stock options." All other options
granted to Optionees under the Plan shall be granted pursuant to Article II, and
are hereinafter referred to as "nonqualified options."
1.6 Option Agreements. Each option granted under the Plan shall be
-----------------
evidenced by a written agreement ("Stock Option Agreement") between the Company
and the applicable optionee and shall contain such terms and conditions, and may
be exercisable for such periods, as may be approved by the Committee, which
terms and conditions need not be identical but which must be in compliance with
the terms and provisions hereof.
1.7 Effective Date. The Plan shall become effective as of the date the Plan
--------------
is approved by the Board (the "Effective Date"). No options granted prior to
the approval of the Plan by the shareholders of the Company shall be exercisable
until such approval is received. Except with respect to options then
outstanding, if not sooner terminated under Section 1.4, the Plan shall
terminate upon, and no further options shall be granted after, the expiration of
ten years from the Effective Date.
1.8 Rule 16b-3 Compliance. The Company intends:
---------------------
(a) that the Plan meet the requirements of Rule 16b-3; and
(b) that transactions of the type specified in the first paragraph
of Rule 16b-3 by officers of the Company (whether or not they are
directors) pursuant to the Plan will be exempt from the operation of
Section 16(b) of the Act. In all cases, the terms, provisions,
-3-
<PAGE>
conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this
Section 1.8.
1.9 Recapitalization or Reorganization. If at any time or from time to time
----------------------------------
after the grant of any option hereunder there is a capital reorganization of the
Common Stock, then the Optionee shall be entitled to receive upon the exercise
of an option, in lieu of the Common Stock, the number of shares of stock or
other securities or property of the Company to which a holder of the number of
shares of Common Stock deliverable upon exercise of such option would have been
entitled as a result of such capital reorganization. If the Company shall merge
with another corporation and the Company is the surviving corporation in such
merger and under the terms of such merger the Common Stock outstanding
immediately prior to the merger remain outstanding and unchanged, any option
granted hereunder shall continue to apply to the Common Stock thereto and shall
also pertain and apply to any additional securities and other property, if any,
to which a holder of the number of shares of Common Stock deliverable upon
exercise of such option would have been entitled as a result of the merger. If
(i) the Company shall not be the surviving entity in any merger, consolidation
or other reorganization (or survives only as a subsidiary of an entity other
than a previously wholly-owned subsidiary of the Company), (ii) the Company
sells, leases or exchanges all or substantially all of its assets to any other
person or entity (other than a wholly-owned subsidiary of the Company), (iii)
the Company is to be dissolved and liquidated, or (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the Act, acquires or
gains ownership or control (including, without limitation, power to vote) of
more than 50% of the outstanding shares of the Company's voting stock (based
upon voting power), (each such event is referred to herein as a "Corporate
Change"), then all options granted hereunder, including that portion not then
otherwise vested, shall become exercisable in full effective immediately prior
to the consummation of the Corporate Change, provided that the exercise of any
such option that would not have been vested in the absence of the Corporate
Change shall be conditioned upon the occurrence of the Corporate Change (i.e.,
so that if the Corporate Change does not subsequently occur, the unvested
portion of the option shall vest according to its original terms), and provided
further, however, in no event shall any incentive stock option, without the
consent of the holder thereof, first become exercisable pursuant hereto if the
result would be to cause such option, when granted, not to be treated as an
incentive stock option (whether or not by reason of the possible future
violation of the annual limitation set forth in Section 3.3.3 or otherwise).
1.10 Foreign Options and Rights. The Committee may grant options to
--------------------------
Eligible Employees, Eligible Consultants and Non-Employee Directors who are
subject to the tax laws of nations other than the United States, which options
may have terms and conditions as determined by the Committee as necessary to
comply with applicable foreign laws. The Committee may take any action which it
deems advisable to obtain approval of any such option by the appropriate foreign
governmental entity; provided, however, that no such option may be granted
pursuant to this Section 1.10 and no action may be taken which would result in a
violation of the Act, the Code or any other applicable law.
1.11 General Terms and Conditions of Options. Options granted under the
---------------------------------------
Plan shall be subject to the following terms and conditions and may contain such
additional terms and conditions, not inconsistent with law or the Article
pursuant to which such option was granted, as the Committee shall deem
desirable:
1.11.1 Manner of Exercise. In order to exercise all or a portion of
------------------
any option granted under the Plan, an Optionee shall deliver to the Company
payment in full of the shares then being purchased, together with any
required withholding tax. The payment of such exercise price and any
required withholding tax shall either be in cash or, to the extent permitted
by the applicable Stock Option Agreement, either (i) through delivery to the
Company of shares of Common Stock,
-4-
<PAGE>
(ii) by any combination of cash or shares, or (iii) pursuant to a "net
exercise" provision, permitting exchange of the Option for shares subject to
such Option. The value of each share of Common Stock delivered upon
exercise shall be deemed to be equal to the per share price of the last sale
of Common Stock on the trading day immediately preceding the date the option
is exercised (or the closing bid if no sales were reported), based on the
composite transactions in the Common Stock as reported in The Wall Street
Journal (or any successor publication thereto). If the Committee so
requires, such person or persons shall also deliver a written representation
that all shares being purchased are being acquired for investment and not
with a view to, or for resale in connection with, any distribution of such
shares. An option agreement may, in the discretion of the Committee,
provide for other methods to pay for, or otherwise exercise, an option. An
option agreement also may, in the discretion of the Committee, provide for
the withholding of Federal, state or local income tax upon exercise of an
option from any cash or stock remuneration (from the Plan or otherwise) then
or thereafter payable by the Company to the Optionee. To the extent
provided by the terms of the applicable Stock Option Agreement, the Optionee
may, at the discretion of the Committee, satisfy any mandatory federal,
state or local tax withholding obligation relating to the exercise or
acquisition of stock under an option by any of the following means or by a
combination of such means: (1) tendering cash payment; (2) authorizing the
Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionee as a result of the exercise or acquisition of stock
under the option provided that such arrangement will not result in a charge
to the Company's reported earnings in excess of that which the Company is
willing to accept; or (3) delivering to the Company owned and unencumbered
shares of the Common Stock of the Company that have been held for the
greater of (i) six months, or (ii) the period required to avoid a charge to
the Company's reported earnings in excess of that which the Company is
willing to accept. The exercise of the option may be conditioned upon the
receipt by the Company of satisfactory evidence of the Optionee's
satisfaction of any withholding obligations.
1.11.2 Options not Transferable. No option granted under the Plan
------------------------
shall be transferable otherwise than by will or by the laws of descent and
distribution and, during the lifetime of the Optionee, such option shall be
exercisable only by the Optionee. Any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of, or to subject to execution, attachment
or similar process, any option granted under the Plan, or any right
thereunder, contrary to the provisions hereof, shall be void and
ineffective, shall give no right to the purported transferee, and shall, at
the sole discretion of the Committee, result in forfeiture of the option
with respect to the shares involved in such attempt.
1.11.3 Adjustment of Shares. In the event that at any time after the
--------------------
Effective Date the outstanding shares of Common Stock are changed into or
exchanged for a different number or kind of shares of the Company or other
securities of the Company by reason of merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares subject to the Plan (including
shares as to which all outstanding options granted under the Plan, or
portions thereof then unexercised, shall be exercisable), to the end that
after such event the shares subject to the Plan and each Optionee's
proportionate interest shall be maintained as if such Optionee had exercised
the option before the occurrence of such event. Such adjustment in an
outstanding option granted under the Plan shall be made without change in
the total price applicable to such option or the unexercised portion of such
option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary
corresponding adjustment in exercise price per share. Any such adjustment
made by the Committee shall be final, conclusive and binding upon all
Optionees, the Company, and all other interested persons. Any adjustment of
an incentive stock option pursuant to this Section 1.11.3
-5-
<PAGE>
shall be made in such manner as not to constitute a "modification" within
the meaning of Section 424(h)(3) of the Code.
1.11.4 Listing and Registration of Shares. Each option granted under
----------------------------------
the Plan shall be subject to the requirement that if at any time the
Committee determines, in its discretion, that the listing, registration, or
qualification of the shares subject to such option upon any securities
exchange or under any state or Federal law, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition
of, or in connection with, the issue or purchase of shares thereunder, such
option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained and the same shall have been free of any conditions not acceptable
to the Committee.
1.11.5 Amendments. The Committee may, with the consent of the person
----------
or persons entitled to exercise any outstanding option granted under the
Plan, amend such option; provided, however, that any such amendment shall be
subject to shareholder approval when required in Section 1.4. The Committee
may at any time or from time to time, in its discretion, in the case of any
option previously granted under the Plan which is not then immediately
exercisable in full, accelerate the time or times at which such option may
be exercised to any earlier time or times. Any adjustment of an incentive
stock option pursuant to this Section 1.11.5 shall be made in such manner as
not to constitute a "modification" within the meaning of Section 424(h)(3)
of the Code.
1.11.6 Fair Market Value. The "fair market value" of the Company's
-----------------
Common Stock (as referred to in Sections 2.2, 3.2 and 3.3.3 below),
shall be determined by the Committee using any one of the following
methods (as selected by the Committee in its discretion):
(a) The fair market value shall be the last sale price, as reported
on the Nasdaq National Market System, of the Company's Common Stock on
the business day immediately preceding the date of grant.
(b) For grants of options to persons who will first become Eligible
Employees, Eligible Consultants or Non-Employee Directors at a date
after the date the Committee or Board of Directors authorizes the grant
of the Option, the fair market value shall be the last sale price, as
reported on the Nasdaq National Market System, of the Company's Common
Stock on the business day immediately preceding the date of hire (for
Eligible Employees), date of engagement (for Eligible Consultants) or
date of appointment to the Board of Directors (for Non Employee
Directors).
(c) The fair market value shall be average of the last sale prices,
as reported on the Nasdaq National Market System, of the Company's
Common Stock on the fifteen consecutive business days immediately
preceding the date of grant.
1.11.7 Miscellaneous.
-------------
(a) The person or persons entitled to exercise, or who have
exercised, any option granted under the Plan shall not be entitled to
any rights as a shareholder of the Company with respect to any shares
subject to such option until such person shall have become the
beneficial owner of such shares.
-6-
<PAGE>
(b) No option granted under the Plan shall be construed as limiting
any right which the Company or any subsidiary of the Company may have to
terminate at any time, with or without cause, the employment of any
person to whom such option has been granted.
(c) Notwithstanding any provision of the Plan or the terms of any
option granted under the Plan, the Company shall not be required to
issue any shares hereunder or thereunder if such issuance would, in the
judgment of the Committee, constitute a violation of any state or
Federal law or of the rules or regulations of any governmental
regulatory body, and the failure or refusal to issue shares under such
circumstances shall not constitute a breach of contract or otherwise be
actionable by the Optionee.
(d) The Committee may require any person who exercises an incentive
stock option to give prompt notice to the Company of any disposition of
shares of Common Stock acquired upon exercise of an incentive stock
option within one year after the transfer of shares to such person.
1.12 Maximum Grant. The maximum number of shares issuable under options
-------------
granted in any single calendar year to any single Optionee shall be 1,000,000
shares.
ARTICLE II
NONQUALIFIED OPTIONS
--------------------
2.1 Eligible Employees. All Eligible Employees and Eligible Consultants
------------------
shall be eligible to receive nonqualified options under this Article II.
2.2 Calculation of Exercise Price. The exercise price to be paid for each
-----------------------------
share of Common Stock deliverable upon exercise of each nonqualified option
granted under Article II shall be determined by the Committee and may be more or
less than, or equal to, the fair market value per share of Common Stock at the
time of grant as determined by the Committee. The exercise price for each
nonqualified option shall be subject to adjustment as provided in the Adjustment
Provisions.
2.3 Terms and Conditions of Options. Nonqualified options granted under
-------------------------------
this Article II shall be in such form as the Committee may from time to time
approve, shall be subject to the following terms and conditions and may contain
such additional terms and conditions, not inconsistent with this Article II, as
the Committee shall deem desirable:
2.3.1 Option Period and Conditions and Limitations on Exercise.
--------------------------------------------------------
Subject to Section 1.11.5, no nonqualified option shall be exercisable by an
Eligible Employee or Eligible Consultant later than the date which is the
date determined by the Committee upon the grant thereof (the "Nonqualified
Option Expiration Date") which shall be no later than ten years after the
date of grant. To the extent not prohibited by other provisions of the
Plan, each nonqualified option granted to an Eligible Employee or Eligible
Consultant shall be exercisable at such time or times as the Committee in
its discretion may determine at or prior to the time such option is granted.
In the event the Committee makes no such determination, each nonqualified
option granted to an Eligible Employee or Eligible Consultant shall be
exercisable from time to time, in whole or in part, at any time prior to the
Nonqualified Option Expiration Date.
2.3.2 Termination of Employment or Relationship as Eligible Consultant;
-----------------------------------------------------------------
Death. For purposes of this Article II and each nonqualified option granted
-----
under this Article II, an Eligible
-7-
<PAGE>
Employee's employment and a Eligible Consultant's relationship with the
Company shall be deemed to have terminated at the close of business on the
day preceding the first date on which such Eligible Employee or Eligible
Consultant no longer for any reason whatsoever (including the death of such
Eligible Employee or Eligible Consultant) is employed by, or has a
relationship with, the Company or a subsidiary of the Company. An Eligible
Employee shall be considered to be in the employment of the Company or a
subsidiary of the Company as long as such Eligible Employee remains an
employee of the Company or a subsidiary of the Company, whether active or on
any authorized leave of absence. An Eligible Consultant shall be considered
to have a relationship with the Company as long as such Eligible Consultant
has an executory assignment from Company personnel authorized to make such
an assignment. Any question as to whether and when there has been a
termination of such employment or relationship, and the cause of such
termination, shall be determined by the Committee and its determination
shall be final and conclusive. If an Eligible Employee's employment or a
Eligible Consultant's relationship is terminated for any reason whatsoever
(including the death of such Eligible Employee or Eligible Consultant), each
nonqualified option thereunto granted under this Article II and all rights
thereunder shall wholly and completely terminate as follows:
(a) With respect to nonqualified options not then exercisable, at
the time the Eligible Employee's employment or a Eligible Consultant's
relationship is terminated; and
(b) With respect to nonqualified options then exercisable:
(i) At the time the Eligible Employee's employment or a
Eligible Consultant's relationship is terminated if the Eligible
Employee's employment or the Consultant's relationship is
terminated because such person has committed fraud, theft or
embezzlement against the Company or a subsidiary, affiliated entity
or customer of the Company, or for conflict of interest (other than
legitimate competition); or
(ii) At the expiration of a period of one year after the
Eligible Employee's or Eligible Consultant's death (but in no event
later than the Nonqualified Option Expiration Date) if the Eligible
Employee's employment or Eligible Consultant's relationship is
terminated by reason of such person's death. Any such nonqualified
option may be exercised by the Eligible Employee's or Eligible
Consultant's estate or by the person or persons who acquire the
right to exercise such nonqualified option by bequest or
inheritance; or
(iii) At the expiration of a period of three years (but in
no event later than the Nonqualified Option Expiration Date) after
the Eligible Employee's employment is terminated because of
retirement or the Eligible Employee's employment or the Eligible
Consultant's relationship is terminated because of disability, if
the Eligible Employee's employment has terminated because of
retirement or disability or the Eligible Consultant's relationship
has terminated because of disability; or
(iv) At the expiration of a period of three months after the
Eligible Employee's or Eligible Consultant's employment or
relationship is terminated (but in no event later than the
Nonqualified Option Expiration Date) if the Eligible Employee's
employment or Eligible Consultant's relationship is terminated for
any reason other than the reasons specified in Section 2.3.2(b)(i)-
(iii).
-8-
<PAGE>
ARTICLE III
INCENTIVE STOCK OPTIONS
-----------------------
3.1 Eligible Employees. All Eligible Employees shall be eligible to receive
------------------
incentive stock options under this Article III.
3.2 Calculation of Exercise Price. The exercise price to be paid for each
-----------------------------
share of Common Stock deliverable upon exercise of each incentive stock option
granted hereunder shall be equal to the fair market value per share of Common
Stock at the time of grant, as determined by the Committee pursuant to Section
1.11.6; provided, however, that in the case of an Eligible Employee who, at the
time such incentive stock option is granted, owns more than 10% of the total
combined voting power of all classes of stock of the Company or any subsidiary
corporation, within the meaning of section 422(b)(6) of the Code (a "10%
Eligible Employee"), the exercise price per share shall be at least 110% of the
fair market value per share of Common Stock at the time of grant. The exercise
price for each incentive stock option shall be subject to adjustment as provided
in Section 1.11.5.
3.3 Term and Conditions of Options. Incentive stock options shall be in
------------------------------
such form as the Committee may from time to time approve, shall be subject to
the following terms and conditions and may contain such additional terms and
conditions, not inconsistent with this Article III, as the Committee shall deem
desirable:
3.3.1 Option Period and Conditions and Limitations on Exercise.
--------------------------------------------------------
Subject to Section 3.4, no incentive stock option shall be exercisable with
respect to any of the shares subject to such incentive stock option later
than the date which is the date determined by the Committee upon the grant
thereof (the "ISO Expiration Date"), which shall be no later than ten years
after the date of grant; provided, however, that in the case of any 10%
Eligible Employee, the ISO Expiration Date of any incentive stock option
granted thereto shall not be later than five years after the date of such
grant. To the extent not prohibited by other provisions of the Plan, each
incentive stock option shall be exercisable at such time or times as the
Committee in its discretion may determine at or prior to the time such
incentive stock option is granted. In the event the Committee makes no such
determination, each incentive stock option shall be exercisable from time to
time, in whole or in part, subject to the monetary limitations set forth in
Section 3.3.3, at any time prior to the ISO Expiration Date.
3.3.2 Termination of Employment; Death. For purposes of this Article
--------------------------------
III and each incentive stock option granted hereunder, an Eligible
Employee's employment shall be deemed to have terminated at the close of
business on the day preceding the first date on which such Eligible Employee
is no longer for any reason whatsoever (including the death of such Eligible
Employee) employed by the Company or a subsidiary of the Company. An
Eligible Employee shall be considered to be in the employment of the Company
or a subsidiary of the Company as long as such Eligible Employee remains an
employee of the Company or a subsidiary of the Company, whether active or on
any authorized leave of absence. Any question as to whether and when there
has been a termination of such employment, and the cause of such
termination, shall be determined by the Committee and its determination
shall be final and conclusive. If an Eligible Employee's employment is
terminated for any reason whatsoever (including the death of such Eligible
Employee), each incentive stock option thereunto granted hereunder and all
rights thereunder shall wholly and completely terminate as follows:
(a) With respect to incentive stock options not then exercisable,
at the time the Eligible Employee's employment is terminated; and
-9-
<PAGE>
(b) With respect to incentive stock options then exercisable:
(i) At the time the Eligible Employee's employment is
terminated if his employment is terminated because he is discharged
for fraud, theft or embezzlement committed against the Company or a
subsidiary, affiliated entity or customer of the Company, or for
conflict of interest (other than legitimate competition); or
(ii) At the expiration of a period of one year after the
Eligible Employee's death (but in no event later than the ISO
Expiration Date) if the Eligible Employee's employment is
terminated by reason of his death. An incentive stock option
granted under this Article III may be exercised by the Eligible
Employee's estate or by the person or persons who acquire the right
to exercise such incentive stock option by bequest or inheritance;
or
(iii) At the expiration of a period of three years (but in
no event later than the ISO Expiration Date) after the Eligible
Employee's employment is terminated if the Eligible Employee's
employment has terminated because of retirement or disability ; or
(iv) At the expiration of a period of three months after the
Eligible Employee's employment is terminated (but in no event later
than the ISO Expiration Date) if the Eligible Employee's employment
is terminated for any reason other than the reasons specified in
Section 3.3.2(b)(i)-(iii); provided, however, that the Committee.
In the event and to the extent that an incentive stock option granted
under this Article III is not exercised (i) within three months after
the Eligible Employee's employment is terminated because of retirement
or disability not within the meaning of section 22(e)(3) of the Code, or
(ii) within one year after the Eligible Employee's employment is
terminated because of disability within the meaning of section 22(e)(3)
of the Code, such option shall be taxed as a nonqualified option.
3.3.3 Limitation on Amount. Notwithstanding any other provision of the
--------------------
Plan, the aggregate fair market value (determined as of the time an
incentive stock option is granted, based upon the calculation of the
exercise price as provided in Sections 3.2 and 1.11.6) of the Common Stock
with respect to which incentive stock options are exercisable for the first
time by an Eligible Employee, under all incentive stock option plans of the
Company and its subsidiaries, during any calendar year cannot exceed
$100,000 or such other maximum amount permitted under Section 422(d) of the
Code. If the date on which one or more of such incentive stock options
could first be exercised would be accelerated pursuant to any provision of
the Plan or any option agreement, and the acceleration of such exercise date
would result in a violation of the monetary restriction set forth in the
preceding sentence, then, notwithstanding any such provision, but subject to
the provisions of the next succeeding sentence, the exercise dates of such
incentive stock options shall be accelerated only to the date or dates, if
any, that do not result in a violation of such restriction and, in such
event the exercise date of the incentive stock options with the lowest
option prices shall be accelerated to the earliest such dates. The
Committee may, in its discretion, authorize the acceleration of the exercise
date of one or more incentive stock options even if such acceleration would
violate the monetary restriction set forth in the first sentence of this
Section 3.3.3 and even if such incentive stock options were thereby
converted in whole or in part to nonqualified options.
-10-
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<PAGE>
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<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-START> APR-01-1997 APR-01-1996
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 21,539,432 5,191,898
<SECURITIES> 0 0
<RECEIVABLES> 6,177,737 1,665,576
<ALLOWANCES> (1,224,845) (613,263)
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<CURRENT-ASSETS> 33,504,018 10,303,161
<PP&E> 1,778,423 780,945
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 47,708,420 21,079,336
<CURRENT-LIABILITIES> 14,487,231 2,776,901
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0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 47,708,420 21,079,336
<SALES> 10,417,841 5,090,861
<TOTAL-REVENUES> 10,417,841 5,090,861
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<TOTAL-COSTS> 50,529,432 11,139,711
<OTHER-EXPENSES> (1,347,304) (75,493)
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<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (38,764,287) (5,973,357)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (38,764,287) (5,973,357)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (38,764,287) (5,973,357)
<EPS-PRIMARY> (3.39) (1.02)
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