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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended March 31, 1999.
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ___________ to ____________.
Commission file number 0-25242
PREMIER LASER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0472684
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3 MORGAN, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (949) 859-0656
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class A Common Stock and Class B Warrants
-----------------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act or
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No |_|
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the registrant's voting stock held by
nonaffiliates was approximately $32,019,546 on June 25, 1999, based upon the
closing sale price of such stock on June 25, 1999.
Number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of June 25, 1999:
Class A Common Stock: 14,961,436 Shares
Class E-1 Common Stock: 1,257,461 Shares
Class E-2 Common Stock: 1,257,461 Shares
DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following
documents if incorporated by reference, and the part of the Form 10-K (e.g.,
Part I, Part II, etc.) into which the document is incorporated: (1) any annual
report to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933:
None.
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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 PREMIER LASER SYSTEMS, INC. (THE
"COMPANY" OR "PREMIER") THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. SUCH
FORWARD-LOOKING STATEMENTS ARE PRINCIPALLY CONTAINED IN THE SECTIONS "BUSINESS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND INCLUDE, WITHOUT LIMITATION, OUR EXPECTATIONS AND ESTIMATES AS
TO OUR BUSINESS OPERATIONS, INCLUDING THE INTRODUCTION OF NEW PRODUCTS, AND
FUTURE FINANCIAL PERFORMANCE, INCLUDING GROWTH IN REVENUES AND NET INCOME AND
CASH FLOWS. IN ADDITION, IN THOSE AND OTHER PORTIONS OF THIS ANNUAL REPORT, THE
WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," "PLANS," "INTENDS" AND
SIMILAR EXPRESSIONS, AS THEY RELATE TO US OR OUR MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS
OF OUR MANAGEMENT, WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE RISK FACTORS DESCRIBED IN
THIS ANNUAL REPORT.
BUSINESS
OVERVIEW
Premier develops, manufactures and markets several lines of proprietary
medical lasers, fiberoptic delivery systems and associated products for a
variety of dental, ophthalmic and surgical applications. In addition, through
EyeSys, we develop, manufacture and market diagnostic systems which provide
ophthalmic practitioners with images of the shape and curvature of the human
cornea. Premier's majority owned subsidiary, OIS, is engaged in the business of
designing, developing, manufacturing and marketing digital imaging systems and
image enhancement and analysis software for use by practitioners in the ocular
health field.
Premier commenced operations in August 1991 after acquiring
substantially all of the assets of Pfizer Laser Systems, a division of Pfizer
HPG which is a wholly-owned subsidiary of Pfizer, Inc. In 1993, Premier acquired
from Proclosure, Inc. technology, assets and proprietary rights relating to a
laser system for tissue fusion, and completed its initial public offering of
securities in 1994. In September 1997, Premier acquired EyeSys in exchange for
cash and securities. Premier acquired a majority of the outstanding common stock
of OIS in several transactions commencing in October 1997 and ending in February
1998. As of this date, Premier remains a majority shareholder of OIS. OIS held
its annual shareholders' meeting on January 18, 1999. At that meeting, Premier's
proposed slate of board of directors was elected. On March 7, 1999, Premier and
OIS entered into a Letter Agreement under which Premier committed to undertake
OIS' manufacturing operations.
Premier has made a proposal to the OIS board of directors under which
Premier would acquire the remaining shares of OIS not already owned by Premier.
This proposal was rejected, but additional discussions for such a transaction
may occur in the future.
LASER BUSINESS
Our lasers and related products use the controlled application of
thermal, acoustic and optical energy to allow the physician or dentist to
perform selected minimally invasive procedures which in some cases, compared to
conventional techniques not involving the use of lasers, vaporize or sever
tissue with minimal blood loss and scarring, increase patient comfort and reduce
patient treatment time and treatment costs. We currently market certain of these
lasers for dentistry, ophthalmology and surgery.
In our laser business, we participate in three market segments:
dentistry, ophthalmology and surgery. Some of our innovations include:
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o the first laser cleared for use on hard tissue (teeth) in dentistry
o the first diode laser in dentistry
o the first laser in clinical trials for cataract removal
o the first Erbium:YAG laser for smoothing of skin
o the first laser in clinical trials for tissue melding
Although we have received more than 100 clearances from the FDA in
multiple specialty areas to market our laser products for a variety of medical
applications, due to limited financial resources we have initially focused our
marketing efforts on dental lasers which we believe have the most promise for
commercial success. We initiated marketing efforts in ophthalmology in 1997. As
resources permit, we plan to commence marketing efforts with respect to other
medical applications which we believe may also be commercially viable.
CORNEAL TOPOGRAPHY BUSINESS
EyeSys designs, develops and markets a line of noninvasive diagnostic
imaging systems for use by ophthalmologists and optometrists in surgical
planning and evaluation, diagnosis of corneal diseases and contact lens fitting.
Founded in 1986, EyeSys has installed more than 3,500 systems.
The EyeSys System 2000 and Vista products each combine proprietary
hardware used for capturing an image and a personal computer to control the
hardware and to run the software. The output of these systems is a color- coded
map of the shape and curvature of the human cornea that vision care
professionals can easily interpret and utilize for treatments such as vision
correction and cataract surgery and corneal transplants, for diagnosis of
astigmatisms and corneal diseases, and for contact lens fitting and custom lens
manufacturing.
OCULAR IMAGING BUSINESS
OIS, which commenced business in 1986, is engaged in the business of
designing, manufacturing, and marketing digital imaging systems and image
enhancement and analysis software for use by practitioners in the ocular health
field. OIS's current flagship products are its digital imaging systems, the
WinStation 1024(TM) and WinStation 640(TM). These WinStation products are
targeted primarily at retinal specialists and general ophthalmologists. OIS's
WinStation systems are primarily used by ophthalmologists to perform a
diagnostic test of the blood flow in the patient's retina. This procedure is
used to diagnose and monitor diseases and provide important information in
making treatment decisions. OIS also recently showed a digital fundus imager,
which provides similar diagnostic capabilities, except that it provides a
continuous image rather than a single frame image, and it will be sold at a
lower price. In addition, OIS plans to market a Digital Slit Lamp which will be
used to obtain live motion images of the surface of the eye.
OIS has experienced operating losses for each fiscal year since its
initial public offering in 1992. OIS expects to continue to incur operating
losses for the foreseeable future and while a goal of the combined ophthalmic
businesses is to achieve profitability through consolidation, we cannot assure
you that OIS will be able to achieve or sustain significant revenues or
profitability in the future.
MARKET OVERVIEW
DENTAL AND PERIODONTAL LASER MARKET
The current market for laser equipment in dental procedures is
comprised of hard and soft tissue procedures, composite curing and teeth
whitening.
HARD TISSUE PROCEDURES, INCLUDING CAVITY PREPARATION. Potential dental
laser applications for procedures on teeth, also known as hard tissue
procedures, include pit and fissure sealing, etching, caries removal and cavity
preparation. Based on user feedback from our clinical sites, we believe that the
use of a laser in dentistry reduces the pain associated with various traditional
procedures performed with a dental drill. On May 7, 1997, our Er:YAG laser was
cleared to market for tooth etching, caries removal and cavity preparation. This
laser was the first to be cleared by the FDA for these procedures. We commenced
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marketing of the Er:YAG laser for these procedures shortly after receipt of FDA
clearance.
SOFT TISSUE. The dental laser can be used for selected periodontal
procedures and to treat early gum disease, postponing or in some cases
eliminating the need for conventional periodontal surgery and providing the
opportunity for overall cost savings. While we have clearance to market six
lasers for soft tissue dental procedures, including the Aurora diode laser and
Centauri Er:YAG laser, we focus our marketing efforts on our Aurora diode laser
in this area. The Aurora also is the only diode laser with clearance for
procedures involving removal of the pulp of the tooth.
COMPOSITE CURING. Composites are rapidly replacing gold and silver
fillings as the material of choice for restoration of cavities, because they
more closely match the color of teeth and because gold and silver fillings have
drawn increasing worldwide concern over safety due to the toxic gases which may
be released when they are removed from teeth. Composite fillings are typically
cured using a curing light which provides a broad spectrum of wavelengths. The
use of the argon laser for this application has been shown to frequently result
in a stronger restoration than composites cured by traditional curing lights.
Our argon lasers can also be used to cure the resins used in placing veneers or
bonding orthodontic brackets. Our Arago and MOD argon lasers have received FDA
clearance for use in these applications.
TEETH WHITENING. A large number of dentists use bleaching materials for
teeth whitening. These materials are traditionally applied at night over a six
to eight week period to whiten a patient's teeth while he or she sleeps. Lasers
have been shown to facilitate the use of these light sensitive materials in the
dentist's office by accelerating this process and resulting in an approximately
three shade change in less than one hour. Our MOD and Arago lasers have been
cleared to market for this procedure.
CAVITY PREVENTION. We are currently conducting research and initiating
clinical trials to use our lasers for cavity prevention applications. Our
clinical trials are at an early stage and we cannot assure you that FDA
clearance will be obtained for these applications.
OPHTHALMIC LASER AND DIAGNOSTIC MARKET
Because of the importance of the cornea to visual performance,
virtually all ophthalmologists and optometrists have historically used a
measuring instrument known as a keratometer to quantify corneal curvature, in a
procedure called keratometry. This instrument obtains only four measurement
points, therefore it cannot accurately measure asymmetrical curvatures. A more
precise instrument, called a corneal topographer, was developed to measure the
curvature of the front of the eye.
Applications of this device include:
o important applications in selecting the appropriate procedure for
each refractive patient, preoperative surgical planning,
postoperative evaluation and patient follow-up
o improved pre-surgical planning for removal of a cloudy lens in
cataract surgery, assess and correct surgically induced
astigmatism, which is the most frequent complication caused by
intraocular lens surgery, potentially improve the calculation of
the implanted intraocular lens power, and support combination
cataract/refractive surgical procedures
o improved surgical outcomes in corneal transplants allowing the
practitioner to evaluate surgical technique and adjust
postoperative treatment
o analysis and diagnosis of astigmatism and various corneal diseases
o several applications in contact lens fitting and manufacturing
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The WinStation market consists of current owners of fundus cameras and
anticipated purchasers of fundus cameras suitable for interfacing with the OIS's
digital imaging system products. A fundus camera is a camera that produces
photographs of the retina of the eye.
Retinal specialists who number approximately 3,000 in the U.S.,
comprise the primary target market for digital angiography systems, which allow
the visualization of the blood flow in the retina. For the past two years OIS
digital imaging system sales have been driven in this segment to a large extent
by a procedure known as indocyanine green angiography. This new diagnostic test
procedure yields new clinically significant information that is helpful in the
treatment of patients with macular degeneration, a leading cause of blindness
which afflicts over 13 million people in the U.S. This procedure can only be
performed using a digital imaging system. OIS introduced a digital fundus imager
and Digital Slit Lamp which will allow full motion video of the eye at a
relatively low cost.
The total available market for diagnostic ophthalmic equipment consists
of 16,000 ophthalmologists in the United States, 100,000 additional
ophthalmologists in international markets and 36,000 optometrists in the United
States.
Following diagnostic procedures, laser systems have been used for the
treatment of eye disorders for many years and are widely accepted in the
ophthalmic community. Lasers have traditionally been sold for extra-ocular
procedures and procedures in the back of the eye. We do not promote our lasers
for these markets, which we believe are approaching saturation, but instead
focus on intraocular, refractive vision correction and aesthetic procedures
including anterior capsulotomy, cataract removal, glaucoma treatment, corneal
sculpting and cosmetic or aesthetic skin procedures. We have developed the
Centauri Er:YAG laser which is capable of performing all of these procedures,
which previously typically have been performed by several different types of
medical lasers. To date, however, the Centauri laser has only been cleared for
some of these procedures. A summary of the procedures for which the Centauri
laser has been cleared appears under "Products-Laser Products."
CATARACT REMOVAL PROCEDURES. We believe that no medical lasers have
been approved to date for cataract extraction procedures, and that medical
lasers may result in less trauma and inflammation than traditional surgical
methods, providing more comfort to the patient. Our Centauri Er:YAG laser has
been cleared to market for anterior capsulotomy, a procedure which opens the
capsule of the eye prior to the removal of the cataract. We have also completed
Phase II clinical trials on the Centauri laser for the breakup of the cataract
itself, as an alternative to the emulsification of the cataract by ultrasonic
energy. We believe that this patented technology for use in cataract removal may
provide an easier and safer method.
TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by
increased pressure within the eyeball and progressive loss of vision, has
traditionally been treated with drug therapy. When drug therapy is ineffective,
periodic invasive surgery may be required. In these cases, lasers may be used to
open a pathway into the eye in order to relieve pressure in the eye. This
procedure, which may be repeated periodically, can be performed under local
anesthesia with a self closing incision on an outpatient basis. We are currently
conducting clinical trials prior to seeking clearance to market our Centauri
Er:YAG laser for several alternative techniques for this procedure. We do not
know whether the FDA will grant clearance for these techniques, however.
CORNEAL SCULPTING. We believe that FDA approval of excimer lasers has
resulted in greater acceptance and recognition of laser refractive surgery in
the ophthalmic market. Medical lasers may be used for corneal sculpting, a
procedure in which the laser is used to sculpt the cornea of the eye to a
desired curvature to correct nearsightedness, farsightedness or astigmatism. We
plan to seek approval to market the Centauri laser for corneal sculpting and
have initiated studies in preparation for regulatory submittal for this
application. We do not know whether the FDA will grant clearance for this
procedure, however.
AESTHETIC SURGICAL PROCEDURES. We have received clearance for the use
of our lasers in selected aesthetic procedures such as skin resurfacing and
eyelid surgery. We plan to begin marketing some of these products for aesthetic
applications during the current year.
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SURGICAL LASER MARKET
Laser systems have been approved for and are currently being used in a
variety of surgical applications including orthopedics, neurosurgery, urology,
gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic
surgery. Although our products are cleared to market in a number of specialty
areas within the surgical market, we have specifically targeted tissue melding,
also known as tissue fusion, and aesthetic applications within the surgical
market.
TISSUE MELDING. We believe a significant number of wound closure
procedures may be addressed with surgical lasers in conjunction with or
independent of traditional sutures or staples. The clinically demonstrated
benefits of the use of surgical lasers for tissue melding, as compared to
sutures and staples, include fluid-static seals, immediate strength of the
closure and reduced surgical time. Along with our strategic partner, we have
conducted animal tests to support regulatory submittals for the use of our
Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts,
and are currently conducting clinical studies for skin and hypospadias. We have
also completed clinical trials for vasovasotomy, which is the reversal of
vasectomies. These trials demonstrated a success rate of approximately 89%. We
are also beginning Phase I clinical trials for the treatment of hypospadias, the
lengthening of the urethra to the end of the penis in infants, in which it is
anticipated that the laser's fluid-static seal may minimize post-surgical
complications such as the leakage of urine which results in secondary surgical
procedures. We have clearance for Phase II clinical trials for skin closure
following mastectomies and eyelid surgery at five clinical sites. Artery and
vein melding has been tested in animals by our strategic partner in preparation
for clinical studies.
AESTHETIC SURGICAL PROCEDURES. The market for aesthetic surgery is
growing rapidly worldwide. We have a number of approvals for lasers to be used
in aesthetic applications and will devote further efforts in the future to
entering into and capitalizing on this market.
We have regulatory clearance to market our products for a variety of
additional applications, including in urology, orthopedics, gynecology,
gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In
areas where our technology is not being fully utilized, we may seek agreements
to supply our products under private label for other manufacturers or may enter
into strategic alliances to develop and market our lasers for other
applications.
PRODUCTS
LASER PRODUCTS
The use of laser technology in dentistry, ophthalmology and surgery
involves the controlled application of laser light to hard or soft tissue
causing an optical, thermal, acoustic or plasma interaction with the tissue.
When applied to tissue, the laser light is partially absorbed. This process of
absorption converts the light to heat, which in turn alters the state of the
tissue. The degree of tissue absorption varies with the choice of wavelength and
is an important variable in the application of laser technology in treating
various tissues. The laser energy can also form a gas bubble in a water medium
which provides an acoustic cutting effect as it bursts.
Our lasers often use proprietary delivery systems to control the
relative proportions of acoustic, thermal and optical energy applied to tissue
resulting in enhanced cutting effects. These delivery systems include flexible
fiberoptics, waveguides, articulated arms and micromanipulators or scanners
which are used on a disposable or limited reuse basis, and which we expect will
provide a recurring revenue stream. Our strategy is to target specific
applications in the dental, ophthalmic and surgical markets, where we believe
that our technology and products have competitive strengths.
Our line of portable lasers is specifically designed for use in
outpatient surgical centers and medical offices. We believe that our lasers are
also well suited for the international market, particularly in facilities
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with many surgical suites where easy transportation of equipment is necessary.
By employing techniques developed in the computer industry, we have designed a
laser system that:
o is modularly designed and uses similar components for multiple laser
systems thereby reducing their overall cost
o allows for efficient and inexpensive repair by replacing a board or
assembly in the field or through the mail, reducing the need for a
field service force
o can be easily moved from the office to surgical centers because of its
compact size and limited voltage requirements
Our Er:YAG lasers are currently priced from $37,000 to $126,000 and our Nd:YAG
lasers are currently priced from $25,000 to $80,000. Our diode lasers are
currently priced from $22,000 to $35,000 and our argon lasers are priced from
$5,500 to $22,000. The prices of lasers within these ranges depend upon each
model's power capability and the features offered.
The following table presents, in summary form, our principal lasers and
delivery systems, the principal applications for which we intend to use them,
and the FDA status of these products.
<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............................................ Clinical Trials
Corneal Sculpting......................................... Clinical Trials
General Surgery, Neurosurgery, Orthopedics,
Gastrointestinal and Genitourinary Procedures,
Urology, Gynecology and Oral Surgery...................... Cleared to market
Polaris (1.32u Tissue Melding............................................ Clinical trials
Nd:YAG)
General Surgery, Ophthalmology, Arthroscopic
Surgery, Gastrointestinal and Genitourinary
Procedures, Urology, Gynecology and Oral Surgery.......... Cleared to market
Aurora (diode) Dental--Soft Tissue....................................... Cleared to market
Dental-Hygiene............................................ Cleared to market
Dental-Endodontics........................................ Cleared to market
Dental and General Surgery, Ophthalmology,
Arthroscopic Surgery, Gastrointestinal and
Genitourinary Procedures, Urology, Dermatology,
Plastic Surgery, Podiatry, Neurosurgery,
Gynecology, Pulmonary Surgery and Oral Surgery............ Cleared to market
MOD and Arago Dental--Composite Curing.................................. Cleared to market
(argon)
Dental--Teeth Whitening................................... Cleared to market
</TABLE>
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CENTAURI ER:YAG LASER. Our Centauri Er:YAG laser is a portable Er:YAG
pulsed solid state laser which generates high frequencies (up to 30Hz) at
relatively low peak power. These high frequencies allow faster cutting at lower
energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by water,
producing a cut similar to the scalpel. The Er:YAG wavelength is delivered
through a fiber optic delivery system which enables the beams to be focused and
angled. These fiberoptic catheters are difficult to produce and we have invested
heavily in the technology to develop fibers which can handle adequate power. We
have experienced difficulties in securing a consistent and reliable source for
these fibers in the past. We presently have two sources for these fibers. See
"--Manufacturing and Materials" and "Legal Proceedings."
POLARIS ND:YAG LASERS. The energy of Nd:YAG lasers is absorbed by blood
in tissue and as a result these systems are the preferred lasers to limit
bleeding during surgery and for procedures requiring fiberoptic delivery, such
as laparoscopic surgery. The Nd:YAG fiberoptic delivery system allows the
surgeon to perform surgery through small incisions, providing minimally invasive
surgery to patients and usually reducing treatment costs and the length of
hospital stays.
This laser also uses our disposable unique TouchTIPS, AngleTIPS and
sculptured fibers. By using the Polaris laser with TouchTIPS, the surgeon is
allowed direct contact with tissue and the tactile feeling of the scalpel or
other surgical instruments. We believe that the availability of these
technologies permits the use of a lower power laser system.
With the exception of Japan, China and Taiwan, we hold the proprietary
rights, including several patents, to manufacture and sell the Polaris laser, a
1.32 micron Nd:YAG laser, together with specialized software and delivery
systems, for tissue melding. We are developing the Polaris laser for use in
cosmetic skin closures, vascular surgeries and minimally invasive surgical
procedures normally performed with sutures and staples. Although the use of the
Polaris laser for tissue melding is still in the clinical trial stage, and no
clearance for this application has been received, we believe that tissue melding
offers clinical advantages over traditional sutures and staples including
fluid-static seals, immediate strength of the closure and reduced surgical time.
AURORA DIODE LASER. The Aurora diode laser is our first semiconductor
laser and is the first truly portable diode laser designed for dentistry. The
Aurora diode laser replaced the 20 watt Pegasus laser for periodontal
procedures, and is approximately one-fourth the size and one-half of the cost of
that system. The diode wavelength is absorbed by blood and pigmentation and has
been cleared for use in multiple specialties such as general surgery,
ophthalmology, urology and plastic surgery. The Aurora laser, which was
introduced for soft tissue dental applications in February 1996, is designed to
utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and
sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia.
The dental laser can also be used to treat early stage gum disease, postponing
or in some cases eliminating the need for periodontal surgery and providing the
opportunity for overall cost savings. We believe the Aurora laser compares
favorably with competitive products including pulsed Nd:YAG lasers, which cannot
produce the required laser settings for use with TouchTIPs, or in the new
technique for the treatment of periodontal disease, as well as with CO2 lasers,
which cannot be delivered through a fiber, and argon lasers, which tend to be
slower in cutting and may produce charring.
ARAGO AND MOD ARGON LASERS. The Arago and the MOD are gas lasers which
have been cleared to market in dentistry to accelerate the composite curing
process. Composites are rapidly replacing gold and silver fillings as the
material of choice for the restoration of cavities. The argon wavelength
penetrates through the composite and has been shown to frequently result in a
stronger restoration than composites cured by traditional curing lights. Our
argon lasers can also be used to cure the resins used in placing veneers or
bonding orthodontic brackets.
The argon laser can also be used to enhance teeth whitening procedures
using light activated bleaching materials which have traditionally been applied
at night over a six to eight week period. Lasers have been shown to facilitate
the use of these light activated products in a dentist's office by accelerating
this process and resulting in an approximately three shade change in less than
one hour. The argon laser has been cleared to market for this procedure. We
cannot assure you that the use of the argon laser for teeth whitening will
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become a widely accepted practice in the dental industry. We plan to bundle our
lasers with light activated whitening materials and co-market these products
with the manufacturers of these materials. We are currently manufacturing the
MOD lasers in-house. The Arago laser is currently being supplied by a third
party manufacturer.
OTHER LASERS. We have developed other solid state pulsed lasers
including the Sirius .532 Nd:YAG laser, Pegasus Nd:YAG, Orion Ho:YAG laser and
the Arcturus alexandrite:YAG laser, and other applications for our existing
lasers, but are not actively marketing these lasers at the present time. The
following table briefly describes additional lasers owned by us which we do not
currently market, and the principal applications for which we have clearance to
market these lasers.
<TABLE>
<CAPTION>
Product Medical Application FDA Regulatory Status
- -------------------------------- -------------------------------------------------- ------------------------
<S> <C> <C>
Altair (CO2) Orthopedics General and Plastic Surgery,
Dermatology, Podiatry Ear, Nose and Throat,
Gynecology Pulmonary Procedures;
Neurosurgery and Ophthalmology....................... Cleared to market
Pegasus (Nd YAG) General Surgery, Urology, Gastrointestinal
40W/60W Procedures, Pulmonary Procedures,
Gastroenterology, Gynecology and
Ophthalmology........................................ Cleared to market
Pegasus (Nd:YAG 20W) Dental-Soft Tissue................................... Cleared to market
Dental-Endodontics................................... Cleared to market
Pegasus (Nd:YAG) Oral, Arthroscopic and General Surgery,
100W Gastroenterology, Gastrointestinal and
Genitourinary Procedures, Pulmonary
Procedures, Gynecology, Neurosurgery and
Ophthalmology........................................ Cleared to market
Sirius (.532u Nd:YAG) Dermatology, General and Plastic Surgery,
Podiatry and Orthopedic Applications................. Cleared to market
Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and
Throat, Ophthalmology, Gastroenterology,
Pulmonary Procedures and Urology..................... Cleared to market
Er:YAG/Nd:YAG Various specialties.................................. Cleared to market
(Combination)
</TABLE>
LASER DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS
While each laser system we market consists of a laser and an integral
fiber, the fibers and other products, such as tubing sets and tips, are used by
surgeons on a disposable or limited reuse basis for each clinical procedure. We
believe that expansion into this market could provide us with a recurring
revenue stream.
CORNEAL TOPOGRAPHY PRODUCTS
EYESYS 2000 CORNEAL ANALYSIS SYSTEM. The EyeSys System 2000 corneal
topography instrument and associated Microsoft Windows(C) based software is
targeted at refractive surgeons, general ophthalmologists and optometrists for
diagnostic, surgical and contact lens fitting applications. The primary function
of the instrument is to position a patient for corneal image capture, acquire
the image of reflected rings and send the image to a personal computer for
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further processing. The System 2000 is modular and we market it as a proprietary
computer peripheral and software. The System 2000 hardware interfaces to the
computer via a parallel port connection, allowing EyeSys to unbundle the
computer, monitor, printer, tables and other third party items. This can
significantly lower the price to the customer by allowing physicians to utilize
hardware they already own.
Last year we introduced what we believe to be the smallest hand-held
topography system currently available. The Vista(TM) incorporates much of the
same reliable and accurate software as the System 2000, but its portability
facilitates its use in the operating room or by the optometrist.
OCULAR IMAGING PRODUCTS
OIS currently offers two products to the ophthalmic market: the
WinStation 640 and the WinStation 1024, and intends to commence sales of a
digital fundus imager and a Digital Slit Lamp within the next couple of months.
OIS's WinStation systems are used by ophthalmologists to produce images of blood
vessels within the eye. Whereas the traditional methods of obtaining these
images utilize photographic film which requires special processing and printing,
the WinStation systems allow for immediate diagnosis and treatment of the
patient.
The WinStation products enable the ophthalmologist to perform
indocyanine green ("ICG") angiography. ICG angiography is a new diagnostic test
procedure which is yielding new clinically significant information that is
helpful in the treatment of patients with macular degeneration, a leading cause
of blindness afflicting over 13 million people in the U.S. ICG angiography, used
for approximately 10-20% of patient angiography, is a dye procedure that can
only be performed using a digital imaging system.
OIS also recently showed a digital fundus imager, which provides
similar diagnostic capabilities, except that it provides a continuous image
rather than a single fram image, and it will be sold at a lower price. Another
of OIS's imaging products, the Digital Slit Lamp, will allow the ophthalmologist
to obtain full motion video images of the surface of the eye.
MARKETING, SALES AND SERVICE
We market our products to the dental market in the United States
directly to dentists through our direct sales force consisting of two area sales
managers, a manufacturer's representative network consisting of approximately 15
manufacturer's representatives or companies and our distributor network. The
dental market includes approximately 129,000 practicing dentists in the United
States. We believe that in order to reach this market we must expand our U.S.
distribution capabilities. We market our products primarily through conventions,
educational courses, direct mail, telemarketing and other dental training
programs. Through an active program of educational courses and preceptorships,
we have trained dentists in many countries during the past two years using
industry recognized dentists and periodontists.
We market our products in the ophthalmic market jointly with OIS
through a sales manager and six territory managers who focus their efforts on
key ophthalmologists worldwide. We plan to expand our ophthalmic sales force
both by enlarging our domestic sales force, either internally or through
acquisition or distribution, by acquiring or engaging additional international
manufacturing representatives, and by having existing international distributors
carry our full product line. In 1997, EyeSys entered into an agreement with
Marco Ophthalmic Inc. under which that company was appointed as a nonexclusive
distributor in the United States of the System 2000 and the exclusive
distributor of the Vista portable corneal topography system for a three-year
period following commercialization of that system. Sales and marketing efforts
for ophthalmic products are managed out of Sacramento, California.
In the surgical market, we intend to form strategic alliances in any
specialty area where the partner has an established presence in the market
selling to either the physician or the hospital. We have entered into such a
strategic alliance with Azwell, Inc. which is one of the leading suppliers of
sutures in the Pacific Rim. Under our Exclusive Marketing Agreement with Azwell,
Proclosure granted to Azwell, in exchange for a license fee, the exclusive
rights to market and distribute the Polaris Nd:YAG laser in Japan, China and
Taiwan. In addition, under this agreement we granted to Azwell an option to
manufacture the Polaris, which if exercised would require Azwell to pay us a
$1.5 million fee and royalties. Azwell has not yet indicated whether it intends
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to manufacture these products. We do not know if we will receive any payments
under this agreement.
We have entered into distribution agreements with distributors in many
countries for sales of our dental and ophthalmic products. We typically grant
exclusive distribution rights in select territories to our distributors who
usually must maintain agreed upon distribution minimums in order to retain their
exclusive rights. These agreements are managed by three directors of
distribution marketing and sales for the Pacific Rim; Europe, the Middle East
and Africa; and Canada and South America.
No customer accounted for more than 10% of our net sales, on a
consolidated basis, in fiscal 1999 or fiscal 1998. During fiscal 1997, three
customers each accounted for more than 10% of the sales of EyeSys: Marco
accounted for 13% of sales, Newtech accounted for 14% of sales and Vistatek
accounted for 15% of sales.
We seek to create a group of loyal customers by focusing on customer
service, quality and reliability. In addition to our educational courses, we
perform a complete installation of our products and train the customers' staff
in its proper use. Educational videos and papers are available upon request. We
conduct service training courses for the representatives of our distributors.
Prior to shipping, every product is subjected to an extensive battery of quality
control tests. We generally provide a one year warranty with all products and
extended warranties are available at an additional cost. If service is required,
a product owner is either sent a loaner product by overnight carrier, returns
his product for service or a service representative visits the owner to repair
the unit. International service is provided either by the foreign distributor or
by return of the product to us. We have experienced and may continue to
experience difficulties in providing prompt and cost-effective service for our
products internationally. We are working to improve the service training of our
international distributors.
COMPETITION
We are, and will continue to be, subject to competition in our targeted
markets, principally from businesses providing other traditional surgical and
nonsurgical treatments, including existing and developing technologies or
therapies, some of which include medical lasers manufactured by competitors. In
the dental market, we compete primarily with dental drills, traditional curing
lights and other existing technologies, and to a lesser extent competitors' CO2,
argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, we face competition
principally from:
o traditional surgical treatments using a tearing needle in anterior
capsulotomy
o phacoemulsification, an ultrasound device used to break up cataracts in
cataract removal procedures;
o corrective eyewear such as eyeglasses and contact lenses and surgical
treatments for refractive disorders using either an excimer laser or a
scalpel
o drug therapy or surgical treatment of glaucoma
In the surgical market, wound closure procedures are usually performed
using sutures and staples, and traditional cosmetic surgical procedures may be
performed with a scalpel or other lasers.
The medical laser industry in particular is also subject to intense
competition and rapid technological change. There are approximately 30
competitors in different sectors of the medical laser industry. We believe that
the principal competitive factors for medical laser products are the products'
technological capabilities, proven clinical ability, patent protection, price
and scope of regulatory approval, as well as industry expert endorsements.
We believe that for many applications, our patented or patent pending
methods and fiberoptic delivery systems provide clinical benefits over other
currently known technologies and our competitors' laser products.
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EyeSys' primary competitors in the corneal topography market are Tomey
Technology, Alcon Surgical, Inc., a subsidiary of Nestle, Humphrey Instruments,
a subsidiary of Carl Zeiss, and Orbtek, a subsidiary of Bausch and Lomb.
Competition for products that can diagnose and evaluate eye disease is
intense and is expected to increase. We are aware of three primary OIS
competitors in the U.S.: Topcon, Humphrey Instruments and Tomey Technology. Four
other companies are known to have systems in the international market, each with
lesser market penetration.
We believe that our ability to compete successfully against traditional
treatments, competitive laser systems and treatments that may be developed in
the future will depend on our ability to create and maintain advanced
technology, develop proprietary products, obtain required regulatory approvals
and clearances for our products, attract and retain scientific personnel, obtain
patent or other proprietary protection for our products and technologies, and
manufacture and successfully market products either alone or through other
parties. Some of our competitors have substantially greater financial, technical
and marketing resources than us. We cannot assure you that this competition will
not adversely affect our results of operations or our ability to maintain or
increase market share.
SEASONALITY
To date, our revenues have typically been significantly higher in the
second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter. We expect that this seasonality will continue
indefinitely.
RESEARCH AND DEVELOPMENT
LASER BUSINESS
In the past three fiscal years (1997-1999), Premier has invested in
excess of $8.8 million in research and development programs. This amount is net
of approximately $450,000 received under a Small Business Innovative Research
Grant in fiscal 1997 and excludes a $12.9 million noncash charge for in-process
research and development related to acquisitions in fiscal 1997 and 1998. This
investment in research and development has resulted in the development of 20
models of lasers, reusable accessories such as smoke evacuators and irrigation
aspiration systems, more than 1,000 types of custom delivery systems and
approximately 20 types of surgical tips and accessories.
Our current research is focused on expanding the clinical applications
of our existing products, reducing the size and cost of current laser systems,
developing custom delivery systems and developing new, innovative products. For
our laser products, our in-house research and development efforts have focused
on the development of a systems approach with proprietary delivery systems
designed to allow the laser to interact with tissue by a number of different
mechanisms (e.g., acoustic, ablative and thermal) for unique laser/tissue
effects. These disposable fiberoptic delivery systems, developed specifically
for niche surgical applications, demonstrate the principal focus of our research
efforts. Examples of patented or patent pending products resulting from these
research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO2
waveguides. Clinical research has also yielded several new surgical procedures.
CORNEAL TOPOGRAPHY BUSINESS
EyeSys' research and development efforts are focused on further
development of corneal topography systems, advanced applications software
development, internationalization of software, minimization, simplification and
optimization of the instrument and development of the next generation ophthalmic
instrumentation.
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OCULAR IMAGING BUSINESS
OIS intends to devote significant resources to the development of
telemedicine/managed care applications, the improvement of optics, new fundus
camera interfaces for a green dye, software development (including the continued
enhancement of WinStation), hardware optimization, and the patient/doctor
interface. OIS's research and development expenditures in the year ended August
31, 1998 were $866,745 and in the year ended August 31, 1997, were $1,070,192.
PATENTS AND PATENT APPLICATIONS
Patent protection is an important part of our business strategy, and
our success depends, in part, on our ability to maintain patents and trade
secret protection and on our ability to operate without infringing on the rights
of third parties. We have sought to protect our unique technologies and clinical
advances through the use of the patent process. Patent applications filed in the
United States are frequently also filed in selected foreign countries. We focus
our efforts on filing only for those patents which we believe will provide us
with key defensible features instead of filing for all potential minor device
features. In the United States, we hold 33 patents and have an additional 24
pending patent applications, including divisional applications. In addition, we
hold 23 foreign patents and have at least 44 foreign patent applications. We
also have a nonexclusive license to a number of basic laser technologies which
are commonly licensed on such basis in the laser industry. OIS holds one patent
covering one of its products.
We cannot assure you that our patents or trademarks would be upheld if
challenged, or that competitors might not develop similar or superior processes
or products outside the protection of any patents issued to us. In addition, we
cannot assure you that we will have the financial or other resources necessary
to enforce or defend a patent or trademark infringement or proprietary rights
violation action. Although we currently carry insurance that might cover some of
the amounts we could be liable for in patent litigation, if our products
infringe patents, trademarks or proprietary rights of others, we could become
liable for damages, which also could have a material adverse effect on us.
We are aware of various patents which, along with other patents that
may exist or be granted in the future, could restrict our right to market some
of our technologies without a license, including, without limitation, patents
relating to our lens emulsification product and ophthalmic probes for our Er:YAG
laser. In the past, we have received allegations that certain of our laser
products infringe other patents. There has been significant patent litigation in
the medical and medical device laser industry. Adverse determinations in
litigation or other patent proceedings in which we may become a party could
subject us to significant legal judgments or liabilities to third parties, and
could require us to seek licenses from third parties. We cannot assure you that
any licenses required under these or any other patents or proprietary rights
would be available on terms acceptable to us, if at all. If we do not obtain
these licenses, we could encounter delays in product introductions while we
attempt to design around these patents, or we could find that the development,
manufacture or sale of products requiring these licenses could be enjoined.
We also rely on unpatented proprietary technology, trade secrets and
know-how. Certain components of some of our products are proprietary and
constitute trade secrets, but others are purchased from third parties. There is
no assurance that other parties will not independently develop substantially
equivalent proprietary information or techniques, or otherwise gain access to
our trade secrets in other ways, or disclose this technology, or that we can
meaningfully protect our rights to our unpatented trade secrets.
We seek to protect our unpatented proprietary technology, in part,
through proprietary confidentiality and nondisclosure agreements with employees,
consultants and other parties. We cannot assure you that proprietary information
agreements with employees, consultants and others will not be breached, that we
would have adequate remedies for any breach or that our trade secrets will not
otherwise become known to or independently developed by competitors.
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GOVERNMENT REGULATION
FDA REGULATION
The products that we manufacture are regulated as medical devices by
the FDA under the Food, Drug and Cosmetics Act (the "FDC Act"). Satisfaction of
applicable regulatory requirements may take several years and requirements vary
substantially based upon the type, complexity and novelty of such devices as
well as the clinical procedure. Under the FDC Act and the applicable
regulations, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution, and promotion of medical devices.
Noncompliance with applicable requirements can result in a variety of serious
penalties. The FDA also has the authority to request recall, repair, replacement
or refund of the cost of any device which we manufacture or distribute.
The FDA classifies medical devices in commercial distribution into one
of three classes: Class I, II or III. This classification is based on the
controls the FDA deems necessary to reasonably ensure the safety and
effectiveness of medical devices. Class I devices are subject to general
control, such as labeling, premarket notification and adherence to applicable
requirements for Good Manufacturing Practices, known as "GMP's." Class II
devices are subject to general and special controls, such as performance
standards, postmarket surveillance, patient registries, and FDA guidelines.
Generally, Class III devices are those which must receive premarket approval by
the FDA to ensure their safety and effectiveness. Class III devices include, for
example, life-sustaining, life-supporting and implantable devices, or new
devices which have been found not to be substantially equivalent to legally
marketed devices. Our laser and diagnostic products typically are classified as
Class II devices, but the FDA may classify some indications or technologies into
Class III and require a premarket approval application. OIS's products are
classified as Class II devices which require, among other things, annual
registration, listing of devices, good manufacturing practices and labeling, and
prohibition against misbranding and adulteration.
If a manufacturer or distributor of a medical device can establish that
a proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a pre-1976 Class III medical device for which the
FDA has not called for a premarket approval application, that manufacturer or
distributor may seek FDA clearance for the device by filing a Section 510(k)
premarket notification. If a manufacturer or distributor of a medical device
cannot establish that a proposed device is substantially equivalent to another
legally marketed device, the manufacturer or distributor will have to seek
premarket approval for the proposed device. A 510(k) notification and the claim
of substantial equivalence will likely have to be supported by various types of
data and materials, possibly including test results or the results of clinical
studies in humans. A premarket approval application would have to be submitted
and be supported by extensive data, including preclinical and clinical study
data, to prove the safety and effectiveness of the device. We cannot assure you
that some of our products will not require the more rigorous and time consuming
premarket approval application process, including laser uses for vasovasotomy
or other tissue melding procedures, cavity prevention, cosmetic surgery,
sclerostomy and lens emulsification, among others.
If human clinical studies of a proposed device are required, whether
for a 510(k) or a premarket approval application, and the device presents a
"significant risk," the manufacturer or the distributor of the devices will have
to file an application for an investigational device exemption ("IDE") with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, typically including the results of animal and mechanical
laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate Institutional Review Boards, human clinical trials may begin at
a specific number of investigational sites with a specific number of patients,
as approved by the FDA. The FDA does not approve all IDE's that are submitted.
Even if an IDE is approved, the FDA may determine that the data derived from
these studies do not support the safety and efficacy of the device or warrant
the continuation of clinical studies. Sponsors of clinical studies are permitted
to charge for those devices distributed in the course of the study, provided
that this compensation does not exceed recovery of the costs of manufacture,
research, development and handling. Clinical studies of nonsignificant risk
devices may be performed without prior FDA approval, but various regulatory
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requirements still apply, including the requirement for approval by an
Institutional Review Board, conduct of the study according to applicable
portions of the IDE regulations, and prohibitions against commercialization of
an investigational device.
The manufacturer or distributor may not place the device into
interstate commerce until an order is issued by the FDA granting premarket
clearance for the device. The FDA has no specific time limit by which it must
respond to a 510(k) premarket notification. The FDA has recently been requiring
more rigorous demonstration of substantial equivalence in connection with 510(k)
notifications and the review time can take three to 12 months or longer for a
510(k). If a premarket approval application submission is filed, the FDA has by
statute 180 days to review it; however, the review time is often extended
significantly by the FDA asking for more information or clarification of
information already provided in the submission. During the review period, an
advisory committee may also evaluate the application and provide recommendations
to the FDA as to whether the device should be approved. In addition, the FDA
will inspect the manufacturing facility to ensure compliance with the FDA's good
manufacturing practice requirements prior to approval of a premarket approval
application.
Devices are cleared by 510(k) or approved by premarket approval
application only for the specific intended uses claimed in the submission and
agreed to by the FDA. Labeling and promotional activities are also subject to
scrutiny by the FDA and, in some cases, by the Federal Trade Commission.
Marketing or promotion of products for medical applications other than those
that are cleared or approved could lead to enforcement action by the FDA.
We cannot assure you that we will be able to obtain necessary
regulatory approvals or clearances for our products on a timely basis or at all,
and delays in receipt of or failure to receive these approvals or clearances,
the loss of previously received approvals or clearances, limitations on intended
use imposed as a condition of such approvals or clearances, or failure to comply
with existing or future requirements would have a material adverse effect on our
business, financial condition and results of operations. FDA or other
governmental approvals of products we develop in the future may require
substantial filing fees which could limit the number of applications we seek and
may entail limitations on the indicated uses for which such products may be
marketed. In addition, approved or cleared products may be subject to additional
testing and surveillance programs required by the FDA and other regulatory
agencies, and product approvals and clearances could be withdrawn for failure to
comply with regulatory standards or by the occurrence of unforeseen problems
following initial marketing.
REGULATORY STATUS OF PRODUCTS
We have received 510(k) clearance to market the following lasers in an
aggregate of more than 100 specialty areas: CO2 (four models: 10W, 20W, 35W,
65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two
models); 1.32 micron Nd:YAG (two models: 15W, 25W); .532 micron Nd:YAG (one
model); Argon (three models); diode (four models); Nd:YAG/Er:YAG combination
laser (one model). Each of these lasers has clearances in multiple specialty
areas. We have also received 510(k) clearance to market a scanner, sculptured
fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips
for all cleared wavelengths of our lasers. If a device for which we have already
received 510(k) premarket clearance is changed or modified in design,
components, method of manufacture or intended use, such that the safety or
effectiveness of the device could be significantly affected, a new 510(k)
premarket notification is required before the modified device can be marketed in
the United States. We have made modifications to certain of our products which
we believe do not require the submission of new 510(k) notifications. However,
we cannot assure you that the FDA will agree with our determinations. If they
did not, they could require us to discontinue marketing one or more of the
modified devices until they have been cleared. There also can be no assurance
that any FDA clearance of modifications would be granted should clearance be
necessary.
OIS has received 510(k) clearance for its digital angiography products
and Digital Slit Lamp, and EyeSys has received 510(k) clearance for its System
2000 and Vista corneal topography systems.
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We are currently conducting preclinical animal studies and clinical
trials, both under approved IDEs and as nonsignificant risk studies. We do not
know if the results of any of these clinical studies will be successful or if
the FDA will require us to discontinue any of these studies in the interest of
the public health or due to any violations of the FDA's IDE regulations. We
cannot assure you that we will receive approval from the FDA to conduct any of
the significant risk studies for which we seek IDE approval, or that the FDA
will not disagree with our determination that any of its studies are
"nonsignificant risk" studies and require us to obtain approval of an IDE before
the study can continue.
ADDITIONAL REGULATORY REQUIREMENTS
Any products manufactured or distributed by us under a 510(k) premarket
clearance notification or premarket approval application are or will be subject
to pervasive and continuing regulation by the FDA. The FDC Act also requires us
to manufacture our products in registered establishments and in accordance with
current GMP regulations, which include testing, control and documentation
requirements. We must also comply with Medical Device Reporting requirements
that a firm report to the FDA any incident in which its product may have caused
or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, would be likely to cause or
contribute to a death or serious injury. Our facilities in the United States are
periodically inspected by the FDA. The FDA may require postmarketing
surveillance with respect to our products. The export of medical devices is also
regulated in some instances.
All lasers that we manufacture are required under the Radiation Control
for Health and Safety Act administered by the Center for Devices and
Radiological Health of the FDA. The law requires laser manufacturers to file new
product and annual reports and to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end users under a performance standard, and to comply with labeling and
certification requirements. Various warning labels must be affixed to the laser,
depending on the class of the product under the performance standard.
In addition, the use of our products may be regulated by various state
agencies. For instance, we are required to register as a medical device
manufacturer with various state agencies. In addition to being subject to
inspection by the FDA, we also will be routinely inspected by the State of
California for compliance with GMP regulations and other requirements.
Although we believe that we currently comply in all material respects
and will continue to comply with the applicable regulations regarding the
manufacture and sale of medical devices, these regulations may change
periodically and depend heavily on administrative interpretations. OIS has
recently outsourced its manufacturing operations to Premier, and therefore OIS
also depends on Premier's continuing compliance with these regulations.
It is possible that future changes in law, regulations, review
guidelines or administrative interpretations by the FDA or other regulatory
bodies, with possible retroactive effect, could adversely affect our business,
financial condition and results of operations. In addition to the foregoing, we
are governed by numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. There can be no assurance that we will not be required to incur
significant costs to comply with these laws and regulations in the future, or
that these laws or regulations will not have a material adverse effect upon our
ability to conduct business.
Furthermore, the introduction of our products in foreign countries
often requires obtaining foreign regulatory clearances, and additional safety
and effectiveness standards are required in various other countries. We believe
that only a limited number of foreign countries currently have extensive
regulatory requirements. These countries include the European Union countries,
Canada, Mexico and Japan. Domestic manufacturing locations of American companies
doing business in some foreign countries, including European Union countries,
may be subject to inspection. The time required for regulatory approval in
foreign countries varies and can take a number of years. During the period in
which we will be attempting to obtain the necessary regulatory approvals, we
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expect to market our products on a limited basis in other countries that do not
require regulatory approval. We cannot assure you that our products will be
cleared or approved by the FDA or other governmental agencies for additional
applications in the United States or in other countries or that countries that
do not now require regulatory approval will not require this approval in the
future.
MANUFACTURING AND MATERIALS
Manufacturing of our products consists of component assembly and
systems integration of electronic, mechanical and optical components and
modules. Our product costs are principally related to the purchase of raw
materials while labor and overhead have been reduced due to the use of
customized tooling and automated test systems. We believe that our customized
tooling and automated systems improve quality and manufacturing reliability
resulting in lower overall manufacturing costs. We believe that these systems
will allow us to expand production rapidly.
Recently, OIS has outsourced the assembly of its products to Premier.
We purchase some of the raw materials, components and subassemblies
included in our products and OIS's products from a limited group of qualified
suppliers and do not maintain long-term supply contracts with any of our key
suppliers. While multiple sources of supply exist for most critical components
used in our laser, corneal topography and fiberoptic delivery systems, the
disruption or termination of these sources could prevent us from being able to
ship products, which would materially harm our business. Vendor delays or
quality problems could also result in production delays of up to six months as
several components have long production lead times. These long lead times, as
well as the need for demonstration units, require a significant portion of
working capital to fund inventory growth. We have in the past experienced, and
may continue to experience, shortages in raw materials and supplies.
We own the molds used to produce some of the proprietary parts of the
devices. We also design and develop the software necessary for the operation of
our laser systems. We design and assemble our own fiberoptic delivery systems
and laser accessory equipment such as laser carts and associated disposable
supplies. We believe that our manufacturing practices comply with GMP
regulations.
BACKLOG OF ORDERS
We typically ship to order and therefore have no material backlog.
PRODUCT LIABILITY AND INSURANCE
Since our products are intended for use in the treatment of human
medical conditions, we are subject to an inherent risk of product liability and
other liability claims which may involve significant claims and defense costs.
We currently have product liability insurance with coverage limits of $5.0
million per occurrence and $5.0 million in the aggregate per year. Product
liability insurance is expensive and includes various coverage exclusions, and
in the future may not be available in acceptable amounts, on acceptable terms,
or at all. Although we do not have any outstanding product liability claims, in
the event we were to be held liable for damages exceeding the limits of our
insurance coverage or outside of the scope of our coverage, our business and
results of operations could be materially adversely affected. Our reputation and
business could also be adversely affected by product liability claims,
regardless of their merit or eventual outcome.
EMPLOYEES
As of June 25, 1999, Premier (including EyeSys, but excluding OIS)
employed 75 people, 2 of whom are employed on a part-time basis. None of these
employees are represented by a union. Twenty employees perform sales, marketing
and customer support activities. The remaining employees perform manufacturing,
financial, administration, regulatory, research and development and quality
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control activities. We also engage the services of many independent contractors
and temporary personnel. We have no collective bargaining agreements covering
any of our employees, have never experienced any material labor disruption, and
are unaware of any current efforts or plans to organize our employees. We
consider our relationship with our employees to be good.
OIS EMPLOYEES
As of June 25, 1999, OIS had 26 employees, 24 of which were full time
employees. These include 12 persons engaged in sales, marketing and customer
support activities. OIS also engages the services of consultants from time to
time to assist it on specific projects in the area of research and development,
software development, regulatory affairs, and product services. These
consultants periodically engage contract engineers as independent consultants
for specific projects.
RISK FACTORS
Before you invest in our common stock, you should be aware that there
are various risks, including those described below. You should carefully
consider these risk factors, together with all the other information included or
incorporated by reference in this report, before you decide whether to purchase
shares of our common stock.
Some of the information in this report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You should
read statements that contain these words carefully because they (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our financial condition; or (3) state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this report could
have a material adverse effect on our business, results of operations and
financial condition.
WE HAVE INCURRED NET LOSSES SINCE INCEPTION AND EXPECT FUTURE LOSSES
We incurred net losses of approximately $79,451,000 from April 1, 1995
through March 31, 1999, and approximately $28,961,000 for the fiscal year ended
March 31, 1999. As of March 31, 1999, we had an accumulated deficit of
approximately $92,315,000. We expect to continue to incur net losses until
product sales generate sufficient revenues to fund our continuing operations.
WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY
Our ability to achieve profitability in the future will depend in part
on our ability to continue to successfully develop clinical applications, obtain
regulatory approvals for our products and sell these products on a wide scale.
These risks apply to both our laser products and our ophthalmic diagnostic
products. In turn, our future sales and profitability depend in part on our
ability to demonstrate to dentists, ophthalmologists, optometrists and other
physicians the potential cost and performance advantages of our laser systems,
diagnostic products and other products over traditional methods of treatment and
over competitive products. To date, commercial sales of our lasers and
diagnostic products have been limited, and we do not know if these products can
be successfully commercialized on a broad basis.
Our products may not be accepted by the medical or dental community or
by patients. The acceptance of dental lasers may be adversely affected by their
high cost, concerns by patients and dentists relating to their safety and
efficacy, and the substantial market acceptance and penetration of alternative
dental tools such as the dental drill. Current economic pressure may make
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doctors and dentists reluctant to purchase substantial capital equipment or
invest in new technology. We currently have a limited sales force and will need
to hire additional sales and marketing personnel to increase the general
acceptance of our products. The failure of our products to achieve broad market
acceptance would injure our business, financial condition and results of
operations.
WE ARE INVOLVED IN PENDING LITIGATION AND A REGULATORY INVESTIGATION
We have been sued in a number of related securities class action
matters, generally relating to allegations of misrepresentations during the
period May 7, 1997 to April 15, 1998. In addition, the Securities and Exchange
Commission has commenced an investigation of our practices and procedures
relating to revenue recognition issues and related matters. The costs of our
continuing defense of the litigation matters and responses to the regulatory
investigations, including accounting and legal fees as well as management time
and effort, will be substantial, and we expect these costs to materially and
adversely affect our results of operations for the foreseeable future. We have
reached an agreement in principle to settle this litigation and recorded an
expense in the quarter ended December 31, 1998, relating to this settlement.
However, this settlement is subject to several conditions, and it is possible
that it may not be completed, in which case the litigation would continue. An
adverse judgment entered in this litigation could materially and adversely
affect our business and results of operations.
In addition, the Securities and Exchange Commission is empowered to
assess substantial penalties against us in connection with its findings in the
pending investigation. The imposition of any of these penalties could materially
and adversely affect our business, financial condition and results of
operations.
WE MAY HAVE DIFFICULTY INTEGRATING THE OIS BUSINESS
We acquired a majority of the outstanding common stock of OIS in 1998,
and in March 1999 we agreed to manufacture OIS's products on an outsourcing
basis. In addition, Premier has offered to acquire the remaining outstanding
stock of OIS, however, no agreement has been reached regarding such acquisition.
We are not sure if the synergies of the two entities will allow us to reduce
expenses in such a way as to make OIS profitable. In addition, members of our
management will have to continue to expend time and effort on new activities
relating to the OIS operations, which will detract from their time available to
attend to our other activities. We cannot assure you that the expenses or
dislocations that we may suffer as a result of the coordination of these
businesses will not be material.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS
We purchase some of the raw materials, components and subassemblies
included in our products from a limited group of qualified suppliers and do not
maintain long-term supply contracts with any of our key suppliers. While we
believe that alternative suppliers could be found for all of our components, we
cannot assure you that any supplier could be replaced in a timely manner. Any
interruption in the supply of key components could materially harm our ability
to manufacture our products and our business, financial condition and results of
operations.
Some of the components used by EyeSys and OIS are manufactured by a
sole vendor. These components are subject to rapid innovation and obsolescence.
The discontinuance of the manufacturing of these components may require us to
redesign some of the hardware and software used in our products to accommodate a
replacement component. We cannot assure your that such an event would not prove
costly or cause a disruption in sales of corneal topography and digital imaging
systems.
OUR FOREIGN SALES ARE SUBJECT TO RISKS
A substantial portion of our sales are made in foreign markets. Foreign
sales expose us to risks, including:
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o the difficulty and expense of maintaining foreign sales
distribution channels
o barriers to trade
o potential fluctuations in foreign currency exchange rates
o political and economic instability in the foreign market
o availability of suitable export financing
o difficulty in collecting accounts receivable
o tariff regulations
o governmental quotas and other regulations
o shipping delays
o foreign taxes
o export licensing requirements
The regulation of medical devices worldwide also continues to develop,
and it is possible that new laws or regulations could be enacted which would
have an adverse effect on our business. In addition, we may experience
additional difficulties in providing prompt and cost effective service of our
medical lasers in foreign countries. We do not carry insurance against these
risks. The occurrence of any one or more of these events may individually or in
the aggregate have a material adverse effect upon our business, financial
condition and results of operations.
OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE
The markets in which our medical products compete are subject to rapid
technological change as well as the potential development of alternative
surgical techniques or new pharmaceutical products. These changes could render
our products uncompetitive or obsolete. We will be required to invest in
research and development to attempt to maintain and enhance our existing
products and develop new products. We do not know if our research and
development efforts will result in the introduction of new products or product
improvements.
WE ARE DEPENDENT ON PATENTS AND PROPRIETARY TECHNOLOGY
Our success will depend in part on our ability to obtain patent
protection for products and processes, to preserve our trade secrets and to
operate without infringing the proprietary rights of third parties. While we
hold a number of U.S. and foreign patents and have other patent applications
pending in the United States and foreign countries, we cannot assure you that
any additional patents will be issued, that the scope of any patent protection
will exclude competitors or that any of our patents will be held valid if
subsequently challenged. Further, other companies may independently develop
similar products, duplicate our products or design products that circumvent our
patents. We are aware of certain patents which, along with other patents that
may exist or be granted in the future, could restrict our right to market some
of our technologies without a license, including, among others, patents relating
to our lens emulsification product and ophthalmic probes for the Er:YAG laser.
In the past, we have received allegations that some of our laser
products infringe on other patents. There has been significant patent litigation
in the medical laser industry. Adverse determinations in litigation or other
patent proceedings to which we may become a party could subject us to
significant legal judgments or other liabilities to third parties and could
require us to seek licenses from third parties that may or may not be
economically viable. We cannot assure you that any licenses required under these
or any other patents or proprietary rights would be available on terms
acceptable to us. If we do not obtain these licenses, we could encounter delays
in product introductions while we attempt to design around these patents, or we
could find that the development, manufacture or sale of products requiring these
licenses could be enjoined.
We also rely upon unpatented trade secrets, and we cannot assure you
that others will not independently develop or otherwise acquire substantially
equivalent trade secrets. In addition, at each balance sheet date, we are
required to review the value of our intangible assets based on various factors,
such as changes in technology. Any adjustment downward in the value of our
intangible assets may result in a write-off of the intangible asset and a
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substantial charge to earnings, which would adversely affect our operating
results in the future.
OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION
Our products are regulated as medical devices by the Federal Drug
Administration. As such, these devices require either Section 510(k) premarket
clearance or approval of a premarket approval application by the FDA prior to
commercialization. Satisfaction of regulatory requirements is expensive and may
take several years to complete. We cannot assure you that further clinical
trials of our medical products or of any future products will be successfully
completed or, if they are completed, that any requisite FDA or foreign
governmental approvals will be obtained.
FDA or other governmental approvals of products we may develop in the
future may require substantial filing fees which could limit the number of
applications we seek and may entail limitations on the indicated uses for which
our products may be marketed. In addition, approved or cleared products may be
subject to additional testing and surveillance programs required by the FDA and
other regulatory agencies, and product approvals and clearances could be
withdrawn for failure to comply with regulatory standards or by the occurrence
of unforeseen problems following initial marketing. Also, we have made
modifications to some of our existing products which we do not believe require
the submission of a new 510(k) notification to the FDA. However, we cannot
assure you that the FDA would agree with our determination. If the FDA did not
agree with our determination, they could require us to cease marketing one or
more of the modified devices until the devices have been cleared.
We are also required to adhere to a wide variety of other regulations
governing the operation of our business. Noncompliance with state, local,
federal or foreign requirements can result in serious penalties that could harm
our business.
WE ARE DEPENDENT ON KEY PERSONNEL
We depend to a considerable degree on a limited number of key
personnel, including Colette Cozean, Ph.D., our Chairman of the Board,
President, Chief Executive Officer and Director of Research. Dr. Cozean is also
an inventor of a number of our patented technologies. During our limited
operating history, many key responsibilities have been assigned to a relatively
small number of individuals. The loss of Dr. Cozean's services or those of other
key members of management could harm our business. We carry key person life
insurance in excess of $3 million on Dr. Cozean. Our success will also depend,
among other factors, on the successful recruitment and retention of qualified
technical and other personnel.
OUR BUSINESS IS HIGHLY COMPETITIVE
We are, and will continue to be, subject to intense competition in our
targeted markets, principally from businesses providing other traditional
surgical and nonsurgical treatments, including existing and developing
technologies, and competitive products. Many of our competitors have
substantially greater financial, marketing and manufacturing resources and
experience than us. Furthermore, we expect that other companies will enter the
laser market, particularly as medical lasers gain increasing market acceptance.
Significant competitive factors which will affect future sales in the
marketplace include regulatory approvals, performance, pricing and general
market acceptance.
The ophthalmic diagnostic market is also highly competitive. There are
many companies engaged in this market, some with significantly greater resources
than us. Our competitors may be able to develop technologies, procedures or
products that are more effective or economical than ours, or that would render
our products obsolete or noncompetitive.
To continue to remain competitive, we must develop new software and
hardware meeting the needs of ophthalmologists and optometrists. Our future
revenues will depend, in part, on our ability to develop and commercialize these
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new products as well as on the success of development and commercialization
efforts of our competitors.
OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE
Due to the relatively high sales price of our products and low sales
unit volume, minor timing differences in receipt of customer orders have
produced and could continue to produce significant fluctuations in quarterly
results. In addition, if anticipated sales and shipments in any quarter do not
occur when expected, expenditures and inventory levels could be
disproportionately high, and our operating results for that quarter, and
potentially for future quarters, would be adversely affected. Quarterly results
may also fluctuate based on a variety of other factors, such as:
o seasonality
o production delays
o product mix
o cancellation or rescheduling of orders
o new product announcements by competitors
o receipt of FDA clearances or approvals by us or our competitors
o notices of product suspension or recall
o our ability to manage product transitions
o sales prices
o market conditions
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
In the future, we will require substantial additional funds for
research and development programs, preclinical and clinical testing, development
of our sales and distribution force, operating expenses, regulatory processes
and manufacturing and marketing programs. Our capital requirements may vary, and
will depend on numerous factors, including:
o the progress of research and development programs
o results of preclinical and clinical testing
o the time and cost involved in obtaining regulatory approvals
o the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights
o competing technological and market developments
o developments and changes in our existing research
o licensing and other relationships
o the terms of any new collaborative, licensing and other
arrangements that we may establish
o the amount of legal, accounting and administrative costs
incurred in connection with pending litigation
We believe that our available short-term assets and investment income will be
sufficient to meet our operating expenses and capital expenditures through the
next 12 months. We do not know if additional financing will be available when
needed, or if it is available, if it will be available on acceptable terms.
Insufficient funds may prevent us from implementing our business strategy or may
require us to delay, scale back or eliminate research and product development
programs or to license to third parties rights to commercialize products or
technologies that we would otherwise seek to develop our self.
OUR STOCK PRICE IS VOLATILE
Our common stock was first publicly traded in December 1994 and has had
last reported closing sale prices ranging from a low of $1.875 per share to a
high of $14.00 per share. The market price of our common stock could continue to
fluctuate substantially due to a variety of factors, including:
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o quarterly fluctuations in results of operations
o the commencement of or major developments in litigation
o announcement of key developments or new products by competitors
o changes in regulatory environment or market conditions affecting
the medical laser industry
o developments with respect to patents or proprietary rights
o announcement and market acceptance of acquisitions
o changes in earnings estimates by analysts
o press coverage of favorable or unfavorable developments in our
business
o loss of key personnel
o changes in accounting principles or policies
o sales of common stock by existing stockholders
o economic and political conditions
The market price for our common stock may also be affected by our
ability to meet analysts' expectations. Any failure to meet these expectations,
even slightly, could have an adverse effect on the market price of our common
stock. In addition, the market prices of securities issued by many companies may
change for reasons unrelated to the operating performance of these companies. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
the company. If similar litigation were instituted against us, it could result
in substantial costs and a diversion of our management's attention and
resources, which could have an adverse effect on our business, results of
operations and financial condition.
DEFECTS IN OUR PRODUCTS WOULD HARM OUR BUSINESS
The sale of our medical products involves the inherent risk of product
liability claims against us. We currently maintain product liability insurance
coverage in the amount of $5 million per occurrence and $5 million in the
aggregate, but this insurance is expensive, subject to various coverage
exclusions and may not be obtainable in the future on terms acceptable to us. We
do not know whether claims against us arising with respect to our products will
be successfully defended or that our insurance will be sufficient to cover
liabilities arising from these claims. A successful claim against us in excess
of our insurance coverage could materially harm our business.
THERE ARE LIMITATIONS ON THIRD PARTY REIMBURSEMENT FOR OUR PRODUCTS
Our laser systems and other products are generally purchased by
physicians, dentists and surgical centers which then bill various third party
payors, such as government programs and private insurance plans, for the
procedures conducted using these products. Third-party payors carefully review
and are increasingly challenging the prices charged for medical products and
services, and scrutinizing whether to cover new products and evaluating the
level of reimbursement for covered products. While we believe that the laser
procedures using our products have generally been reimbursed, payors may deny
coverage and reimbursement for our products if they determine that the device
was not reasonable and necessary for the purpose for which it was used, was
investigational or not cost-effective. As a result, we cannot assure you that
reimbursement from third party payors for these procedures will be available or
if available, that reimbursement will not be limited. If third party
reimbursement of these procedures is not available, it will be more difficult
for us to sell our products on a profitable basis. Moreover, we are unable to
predict what legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation may have on us.
UNCERTAINTIES REGARDING HEALTH CARE REFORM
Several states and the United States government are investigating a
variety of alternatives to reform the health care delivery system and further
reduce and control health care spending. These reform efforts include proposals
to limit spending on health care items and services, limit coverage for new
technology and limit or control the price health care providers and drug and
device manufacturers may charge for their services and products. If adopted and
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implemented, such reforms could have a material adverse effect on our business,
financial condition and results of operations.
A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE, AND THEIR SALE COULD
DEPRESS OUR STOCK PRICE
Sales of a substantial number of our shares of common stock in the
public market could adversely affect the market price for our common stock. At
this time, approximately 7.6 million shares of our common stock are issuable
upon the full exercise of our outstanding Class B Warrants, and over 6.4 million
shares of our common stock are issuable upon exercise of other outstanding
warrants and options and conversion of outstanding debentures. The existence of
these outstanding warrants and options could adversely affect our ability to
obtain future financing. We have also reserved 2,250,000 shares of our common
stock for issuance in connection with the proposed settlement of outstanding
litigation. The consummation of this settlement will require satisfaction of a
number of conditions, and we cannot assure you that the settlement will be
completed.
The price which we may receive for our common stock issued upon
exercise of outstanding options and warrants will likely be less than the market
price of our common stock at the time these options and warrants are exercised.
Moreover, the holders of the options and warrants might be expected to exercise
them at a time when we would, in all likelihood, be able to obtain needed
capital by a new offering of our securities on terms more favorable than those
provided for by the options and warrants.
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY
Our articles of incorporation authorize the issuance of 8,850,000
shares of "blank check" preferred stock, which will have terms as may be
determined from time to time by the board of directors. Accordingly, the board
of directors is empowered, without stockholder approval, to issue preferred
stock with terms which could adversely affect the rights of the holders of the
common stock. The preferred stock could also be utilized as a method of
discouraging, delaying or preventing a change in control of Premier.
In March 1998, we adopted a Shareholder Rights Plan, which entitles
certain of our shareholders to purchase our Series A Junior Participating
Preferred Stock. These rights are not exercisable until the acquisition by a
person or affiliated group of 15% or more of the outstanding shares of our
common stock, or the commencement or announcement of a tender offer or exchange
offer which would result in the acquisition of 15% or more of our outstanding
shares. Upon request, we will provide you with a copy of the Shareholder Rights
Plan. The Shareholder Rights Plan may have the effect of discouraging, delaying
or preventing a change of control of Premier.
SHORT SELLING OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE
Downward pressure on the market price of the common stock may result
from sales of common stock issued upon conversion of the debentures and payment
of interest thereon. This downward pressure could encourage short sales of
common stock by the selling shareholders or others. Material amounts of short
selling could place further downward pressure on the market price of the common
stock.
UNCERTAINTIES REGARDING THE YEAR 2000 ISSUE
We have not developed a formal assessment of all potential impacts of
the year 2000. We design, manufacture and sell medical products which contain
computer chips and we utilize software developed by other companies. While our
engineers are developing new software which they expect to complete by mid-
1999, there can be no assurance that their efforts will be successful. We rely
on external business partners. As such, there can be no assurance that our
business will not be negatively affected by year 2000 problems experienced by
these business partners.
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ITEM 2. PROPERTIES.
EXECUTIVE OFFICES AND MANUFACTURING FACILITIES
We lease approximately 41,000 square feet in one facility in Irvine,
California pursuant to a lease which expires in December 2000. This facility
contains our executive offices, service center and manufacturing space. While we
believe that our manufacturing and administrative facilities are adequate to
satisfy our needs through at least 2000, we may need to lease additional clean
room facilities in the future.
OIS FACILITIES
OIS leases, under a triple net lease, approximately 9,675 square feet
of office, manufacturing, and warehouse space in Sacramento, California under a
month-to-month arrangement, and leases approximately 200 square feet of space
for a sales office in Simsbury, Connecticut.
ITEM 3. LEGAL PROCEEDINGS.
LEASE LITIGATION
In February 1999, we were sued by Telephone Real Estate Equity Trust,
Inc., a company that had leased office space to EyeSys, under a lease that has
now terminated. The case is pending in the District Court of Harris County,
Texas. The former lessor contends that EyeSys did not validly exercise its
rights to terminate the lease, and that it is therefore liable for amounts
specified in the lease. This case is presently in the discovery stage. We intend
to vigorously defend this case.
OPTICAL FIBER LITIGATION
In March 1994, we instituted litigation (the "Fiber Litigation") in the
U.S. District Court, Central District of California, against Infrared Fiber
Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical
fiber to us for our ER:YAG laser. Two of IFS's senior officers are also named as
defendants. Our complaint in this matter alleges that IFS and two of its
officers made misrepresentations to us and that IFS breached its agreement to
supply fibers and warranties concerning the quality of the fiber to be provided.
We are seeking damages and an injunction requiring IFS to subcontract the
production of optical fiber to a third party, as provided in the supply
agreement. In April 1994, IFS filed a general denial and a cross-complaint
against us alleging breach of contract and intentional interference with
prospective economic advantage, seeking compensatory damages "in excess of
$500,000," punitive damages and a judicial declaration that the contract has
been terminated and that IFS is free to market its fibers to others. In
September 1996, IFS filed a new cross-complaint alleging the same causes of
action and seeking substantially the same relief in the Orange County California
Superior Court. We have filed an answer to the complaint, denying the
allegations and asserting several affirmative defenses.
IFS has agreed to license certain fiber technologies, to which we claim
exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of ours.
Coherent joined the above federal litigation on behalf of IFS, seeking a
declaration that IFS had the legal right to enter into this license and supply
the fiber covered by that agreement, and then subsequently filed a new complaint
in the Orange County California Superior Court for declaratory relief, seeking
an order that our original agreement with IFS applies only to a specific type of
optical fiber. We have answered this complaint. We have reached an agreement in
principle with IFS to settle the litigation between us and are in the process of
preparing a written settlement agreement. Although we are hopeful that the
formal settlement agreement will be successfully negotiated, we cannot assure
you that the agreement will actually be completed. The settlement agreement
under discussion does not terminate the litigation as between Premier and
Coherent.
In May 1995, we instituted litigation concerning this dispute in the
Orange County, California Superior Court against Coherent, Westinghouse Electric
Corporation ('Westinghouse") and an individual employee of Westinghouse who was
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an officer of IFS from 1986 to 1993, when the events involved in the federal
action against IFS took place and while Westinghouse owned a substantial
minority interest in IFS. The complaint charges that Coherent conspired with IFS
in the wrongful conduct which is the subject of the federal lawsuit described
above and interfered with our contracts and relations with IFS and with
prospective contracts and advantageous economic relations with third parties.
The complaint asserts that Westinghouse is liable for its employee's wrongful
acts as an IFS executive while acting within the scope of his employment at
Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In
October 1995, the federal action was stayed by order of the court in favor of
the California state court action, in which the pleadings have been amended to
include all claims asserted by us in the federal action.
In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of our claims against Coherent. As a
result, the claims that were the subject of the granted demurrer have been
dismissed, subject to our right to appeal. We appealed these decisions as they
related to Westinghouse and the Westinghouse employee, however, the Court of
Appeals affirmed the state court's decision. No trial date has been set as to
the remaining outstanding causes of action.
SECURITIES CLASS ACTION
On May 1, 1998, a class action suit (the "Valenti Litigation") was
commenced in the United States District of Court for the Central District of
California under the federal securities laws on behalf of purchasers of our
securities during the period from February 12, 1998 through April 15, 1998. The
complaint alleges that Premier and certain of our officers and directors
violated the federal securities laws by issuing false and misleading statements
and omitting material facts regarding our financial results and operations
during such period. Among other things, the complaint alleges that the
defendants materially misstated our financial results for the fiscal quarter
ended December 31, 1997 and that as a result of such misstatements, the
plaintiff suffered damages as a result of a decrease in the market price of our
publicly traded securities.
After the filing of this complaint, a number of similar complaints were
also filed in the United States District Court for the Central District of
California, seeking certification as class actions, and covering class periods
commencing as early as May 7, 1997. These complaints alleged facts similar to
those described above with respect to the Valenti Litigation, as well as
allegations that we artificially inflated the price of our outstanding publicly
traded securities as a result of misrepresentations relating to the market and
prospects for sale of our Centauri ER:YAG laser. All of the above described
complaints seek monetary damages in unspecified amounts, together with attorneys
fees, interest, costs and related remedies. All of these class action lawsuits
have now been consolidated into a single action.
We have also been named as a nominal defendant in a shareholder
derivative lawsuit filed in the Orange County, California Superior Court, in a
case captioned Eskeland vs. Cozean, et al. The complaint was filed by a
shareholder of ours, on behalf of Premier, against some of our current and
former officers and directors, including Colette Cozean, Michael Hiebert,
Richard Roemer, Ronald Higgins, Patrick Day, Grace Ching-Hsin Lin, G. Lynn
Powell, and E. Donald Shapiro. The complaint alleges, among other things, that
these persons violated their fiduciary duty to Premier by exposing Premier to
liability under the securities laws, failing to ensure that Premier maintained
adequate accounting controls, and related alleged actions and omissions.
Although Premier is a named defendant, the lawsuit seeks to recover damages from
the individual defendants on behalf of Premier. Accordingly, it is not clear
whether Premier will have any liability or incur any material loss as a result
of being named as a defendant in this matter.
Premier has reached a agreement in principle with lead plaintiffs and
their counsel to settle these lawsuits. In exchange for the release of all
claims against Premier and its officers and directors, this agreement requires
Premier to issue to the defendants an aggregate of 2,250,000 shares of its
common stock and requires Premier's insurance carrier would pay $4.6 million in
cash. This agreement is not final, however, and is subject to several
conditions, including the approval by the court and execution of a final
settlement agreement.
INVESTIGATIONS AND OTHER MATTERS
We have been notified that the Securities and Exchange Commission has
instituted an investigation concerning matters pertaining to our revenue
reporting practices, and related management issues. We are cooperating with the
Securities and Exchange Commission in connection with this investigation. This
investigation, we believe, generally relates to whether Premier, in Securities
and Exchange Commission filings and press releases issued prior to the end of
the 1998 fiscal year, properly recognized revenues for transactions occurring
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during fiscal 1997, and at interim periods in fiscal 1998. To date, the
Securities and Exchange Commission has not indicated that it is seeking to
impose any penalties on Premier or that it is made any specific findings with
respect to our accounting practices.
In May 1998, the Nasdaq Stock Market suspended the trading of our
securities and notified us that they intended to delist these securities. We
appealed this proposed action, and in October 1998 our appeal was granted.
Trading of our securities on the Nasdaq Stock Market National Market recommenced
on October 22, 1998.
We are also involved in various disputes and other lawsuits from time
to time arising from its normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of the IFS litigation,
securities class actions, disputes and other lawsuits may adversely affect us.
OIS LITIGATION
On September 6, 1996, a former employee of OIS filed an action in
Superior Court in the County of Sacramento, California against OIS by alleging
that he was wrongfully terminated by OIS in retaliation for filing a grievance
against a co-employee for harassment and creation of a hostile work environment.
The suit seeks, among other things, lost wages, $150,000 in compensatory
damages, and punitive damages. OIS believes that this action is without merit
and intends to defend this action vigorously.
On or about August 17, 1997, OIS was advised that J.B. Oxford &
Company, one of several market makers in OIS's common shares which trade over
the counter on the Nasdaq Stock Market Small-Cap Market, was being investigated
by the SEC. OIS is cooperating with the Securities and Exchange Commission
investigation of J.B. Oxford & Company. OIS does not believe that it is a
subject of these Securities and Exchange Commission inquiries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our annual meeting of shareholders on February 26, 1999, at
which meeting our shareholders were asked to consider and vote upon (1) the
election of directors and (2) the 1998 Stock Option Plan. At such meeting the
shareholders elected the following individuals as directors:
Shares Voting
----------------------------
Director For Against
-------- --- -------
Colette Cozean, Ph.D. 13,618,155 310,472
Patrick J. Day 13,617,505 311,122
G. Lynn Powell, D.D.S. 13,624,584 304,043
Lawrence D. Ashcroft 13,624,151 304,476
Fredric J. Feldman, Ph.D. 13,623,584 305,043
John D. Hunkeler, M.D. 13,621,829 306,798
Lewis H. Stanton 13,623,584 305,043
Such individuals were elected to serve as directors until the next
annual meeting of shareholders and until their successors are elected and
qualified. Also at such meeting the shareholders approved the 1998 Stock Option
Plan with 3,057,512 votes for the proposal, 1,196,639 votes against and 153,885
votes abstaining.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Class A Common Stock and Class B Warrants are listed on the Nasdaq
National Market under the symbols "PLSIA" and "PLSIZ," respectively. Prior to
January 6, 1998, we had Class A Warrants outstanding which were listed on the
Nasdaq National Market and the symbol "PLSIW," and "Units," each consisting of
one share of Class A Common Stock, one Class A Warrant and one Class B Warrant,
were listed on the Nasdaq SmallCap Market. The Class A Warrants were redeemed by
us pursuant to the terms of the Warrant Agreement on January 6, 1998, and as a
result there have been no outstanding Class A Warrants or Units since that date.
Trading of our Class A Common Stock and Class B Warrants was suspended
by the Nasdaq Stock Market on May 26, 1998, when our former auditors withdrew
their audit opinion on the 1997 fiscal year. Trading of our securities on the
Nasdaq Stock Market National Market recommenced on October 22, 1998.
The following table sets forth, for the calendar quarters indicated,
the high and low closing sale prices per share of our Common Stock and Class B
Warrants as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Class A Class B
Common Stock Warrants
-------------------- --------------------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
1997:
First Quarter ........................................ 5 3/16 8 1/8 27/32 1 11/16
Second Quarter ....................................... 5 1/4 14 3/4 5 3/4
Third Quarter ........................................ 8 1/2 11 17/32 2 5/16 3 27/32
Fourth Quarter ...................................... 7 3/16 10 1/2 1 3/16 3
1998:
First Quarter......................................... 7 11/16 11 11/16 1 5/8 3 7/8
Second Quarter(1)..................................... 4 3/16 10 7/16 25/32 2 7/8
Third Quarter(1)...................................... -- -- -- --
Fourth Quarter(1)..................................... 1 7/8 4 7/16 1/8 13/16
1999:
First Quarter......................................... 1 15/16 4 3/16 5/32 1/2
Second Quarter (through June 25, 1999)................ 2 1/16 3 3/8 1/8 11/32
- --------------------
</TABLE>
(1) From May 26, 198 to October 22, 1998, the trading in our Class A Common
Stock and Class B Warrants was suspended by the Nasdaq Stock Market.
On May 22, 1998, the last day prior to suspension of trading, the last
reported sale price for our Common Stock and Class B Warrants on the Nasdaq
National Market was $4 3/16 and $13/16, respectively. As of June 25, 1999, the
approximate number of holders of record of our Common Stock, Class B Warrants,
Class E-1 Common Stock and Class E-2 Common Stock were 790, 31, 323 and 323,
respectively. There is no public market for our Class E-1 and Class E-2 Common
Stock.
We have not paid dividends and does not anticipate declaring dividends
on our Common Stock in the foreseeable future.
28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table contains certain selected consolidated financial
data of Premier and is qualified by the more detailed financial statements and
notes thereto of Premier included herein. The balance sheet and statement of
operations data for the periods ended March 31, 1996, 1997, 1998 and 1999 have
been derived from our financial statements, audited by Haskell & White LLP,
independent accountants. The balance sheet and statement of operations data for
the period ended March 31, 1995 has been derived from our financial statements,
audited by Price Waterhouse, LLP, independent accountants. The following
information should be read in conjunction with Premier's financial statements
and related notes thereto included herein and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- --------
(RESTATED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF
OPERATIONS DATA:
Net sales.............................. $ 1,249 $ 1,704 $ 5,091 $ 9,886 $ 13,971
Cost of sales.......................... 1,298 3,324 3,649 17,234 13,405
--------- --------- --------- --------- ---------
Gross profit (loss).................... (49) (1,620) 1,442 (7,348) 566
Selling and marketing expenses......... 1,036 1,309 2,415 5,113 7,930
Research and development 1,036 1,214 1,563 3,088 4,165
expenses...............................
General and administrative 1,747 1,709 1,853 3,700 6,625
expenses...............................
Shareholder litigation settlement
expense ............................ -- -- -- -- 8,082
Write-off of investment................ -- -- 881 -- --
Termination of strategic alliance
with IBC............................. -- -- 331 -- --
In process research and develop-
ment acquired in acquisitions........ -- -- 250 12,800 --
Merger related and integration
costs............................... -- -- -- 7,617 --
--------- --------- --------- --------- ---------
Loss from operations................... (3,868) (5,852) (5,851) (39,666) (26,236)
Interest income (expense), net ....... (322) 99 15 1,074 203
Minority interest in loss of
consolidated subsidiary.............. -- -- 60 274 1,764
Discontinued operations................ -- -- (197) (446) (4,692)
Extraordinary gains .................. 382 -- -- -- --
--------- --------- --------- --------- ---------
Net loss ............................. (3,808) (5,753) (5,973) (38,764) (28,961)
Other comprehensive income ........... -- -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive loss..................... $ (3,808) $ (5,753) $ (5,973) $(38,764) $(28,961)
========= ========= ========= ========= =========
SELECTED PER SHARE DATA:
Loss per share before discontinued
operations and extraordinary item(2). $ (1.59) $ (1.26) $ (.99) $ (3.35) $ (1.56)
Discontinued operations................ -- -- (.03) (.04) (.30)
Extraordinary gain from
extinguishment of indebtedness....... 15 -- -- -- --
--------- --------- --------- --------- ---------
Net loss per share(1).................. $ (1.44) $ (1.26) $ (1.02) $ (3.39) $ (1.86)
========= ========= ========= ========= =========
Weighted average shares
outstanding(2)....................... 2,585 4,557 5,833 11,444 15,531
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 5,888 $ 35 $ 174 $ 9,723 $ 889
Working capital (deficit)............ 6,756 5,18 7,526 19,017 (1,363)
Total assets......................... 16,884 15,675 21,079 47,708 19,276
Long-term debt....................... -- -- -- -- --
Shareholders' equity................. 15,002 13,797 16,249 31,456 9,303
</TABLE>
(1) The effect on net loss per common share of the conversion of Premier's
debentures was to reduce historical net loss by $67,995 and to increase
weighted average shares outstanding by 321,099 shares for the fiscal year
ended March 31, 1995. Net loss per common share was computed based on the
weighted average number of our common shares outstanding during the fiscal
year ended March 31, 1995 after giving retroactive adjustment for
recapitalization and conversion of debentures outstanding prior to our
initial public offering into Units upon completion of our initial public
offering.
(2) Does not include shares of Class E-1 or Class E-2 Common Stock, which are
subject to cancellation in certain circumstances.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. THE RESULTS DISCUSSED BELOW
ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN ANY FUTURE
PERIODS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT
EXPECTATIONS AND WHICH INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND THE
TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THESE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
HEREIN, IN THE SECTION ENTITLED "RISK FACTORS" AND ELSEWHERE IN THIS REPORT.
GENERAL
Premier develops, manufactures and markets several lines of proprietary
medical lasers, fiber optic delivery systems, diagnostic imaging systems and
associated products for a variety of dental, ophthalmic and surgical
applications. Premier commenced operations in August 1991, after acquiring
substantially all of the assets of Pfizer Laser Systems, a division of Pfizer
HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets we acquired
included the proprietary rights to a broad base of laser and fiber optic
technologies developed by Pfizer Laser Systems. This acquisition was led by our
current Chief Executive Officer.
While we have received FDA clearance to market laser products covering
a variety of medical applications, to date we have focused our research,
development and marketing efforts on a limited number of products or
applications. These applications principally consist of specific dental and more
recently, ophthalmic applications. As future resources permit, we may introduce
products for applications for which we already have all necessary approvals or
may seek strategic alliances to develop, market and distribute these products.
We have recorded operating losses in each of the fiscal years since our
formation, resulting in large part from substantial sales and marketing and
general and administrative expenses, business acquisition costs and costs
incurred in research and development activities and in obtaining regulatory
approvals. Although sales increased significantly during fiscal 1998, operating
results worsened due to the impacts of expensed business acquisition costs and a
failed distribution agreement.
As discussed in Note 6 to the accompanying financial statements,
Premier and several of our officers and directors have been named in a number of
securities class action lawsuits which allege violations of the Securities
30
<PAGE>
Exchange Act or the California Corporations Code. We have also been named in a
shareholders' derivative action. Any significant uninsured judgment or
settlement amount associated with these claims would seriously affect our
ability to satisfy our working capital requirements.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1998
Our net sales increased 41% to $13,971,000 for the year ended March 31,
1999 ("fiscal 1999") from $9,886,000 for the year ended March 31, 1998 ("fiscal
1998"). This increase was primarily attributable to sales of ophthalmic products
manufactured both by us, and by our 51%-owned subsidiary, Ophthalmic Imaging
Systems. Our fiscal 1998 net sales included only two months of sales by OIS.
Cost of sales decreased 22% to $13,405,000 in fiscal 1999 from
$17,234,000 in fiscal 1998. The majority of the decrease is due to the
difference between inventory reserves of $7,500,000 recognized during fiscal
1998 associated with the failure of a relationship with dental distributor Henry
Schein, Inc., and reserves for additional excess inventory quantities of
$2,300,000 recognized during fiscal 1999. Also contributing to the reduction in
cost of sales were lower warranty service costs and a decrease in materials
scrap expense. Offsetting this reduction were the inclusion of a full year of
OIS cost of sales as well as higher manufacturing expenses associated with
excess manufacturing capacity during fiscal 1999.
Selling and marketing expenses increased 55% to $7,930,000 in fiscal
1999 from $5,113,000 in fiscal 1998. Approximately one-half of the increase was
attributable to the selling and marketing expense of OIS, which was included for
only two months in fiscal 1998. Other factors which contributed to the increase
during fiscal 1999 include substantial growth in trade show and advertising
expense associated with our dental and ophthalmic product offerings, as well as
increased use of professional advisory services.
Research and development expenses increased 35% to $4,165,000 in fiscal
1999 from $3,087,000 in fiscal 1998. Approximately three-fourths of the increase
was due to the inclusion of research and development expenses of OIS which were
included for only two months in fiscal 1998. The balance of the increase was due
to personnel additions, increased clinical costs, and higher consulting services
associated with new product development. Substantially offsetting the increase
in research and development expense during fiscal 1999 was a reduction in
compensation expense for stock options granted to consultants and other
non-employees during fiscal 1998 which were subsequently terminated.
General and administrative expenses increased 79% to $6,625,000 in
fiscal 1999 from $3,700,000 in fiscal 1998. Approximately one-third of the
increase was attributable to the general and administrative expense of OIS,
which was included for only two months in fiscal 1998. Legal and accounting fees
increased substantially during fiscal 1999 as compared to fiscal 1998, rising by
approximately $324,000, and $387,000 respectively. These increases resulted from
the resignation of our former auditors and the resulting need to have audits
performed for two fiscal years, as well as class action litigation and
SEC/Nasdaq inquiries that arose during the quarter ended June 30, 1998. Also
contributing to the increases in fiscal 1999 as compared to fiscal 1998, were an
increase in our provision for bad debts of $405,000 and an increase in
compensation expense of $401,000.
On November 18, 1998, we reached an agreement in principle with lead
plaintiffs and their counsel to settle certain class and derivative action
lawsuits which allege violations of the Securities Exchange Act or the
California Corporations Code . The plaintiffs seek damages on behalf of classes
of investors who purchased our stock between May 7, 1997 and April 15, 1998.
Under the terms of the agreement in principle, in exchange for a release of all
claims, we would pay 2,250,000 shares of common stock and $4,600,000 in cash.
The cash portion of the settlement would be paid by our insurance carrier.
Completion of the settlement is subject to the execution of the final settlement
agreement, court approval and certain other conditions. In accordance with the
terms of the agreement in principle to settle class and derivative actions, we
established a reserve during the third quarter of fiscal 1999 for the future
issuance of 2,250,000 shares of common stock. The shares were valued at a price
of $3.31 per share which was the closing price of our stock on November 18,
1998, the effective date of the proposed settlement agreement. We have included
31
<PAGE>
approximately $634,000 of associated legal and professional fees in this reserve
for fiscal 1999, but have not included in the reserve approximately $4,600,000
in cash that would be paid by our insurers.
In fiscal 1998 we recognized $12,800,000 for in process research and
development and $7,617,000 in merger and integration costs related to the
acquisitions of 51% ownership in OIS and 100% of EyeSys Technologies, Inc. No
business acquisitions have occurred during fiscal 1999.
Net interest income decreased by 81% to $203,000 for fiscal 1999 as
compared to $1,073,000 for fiscal 1998. The decline in interest income reflects
a decrease in excess cash flow available for us to invest during fiscal 1999.
The decrease in cash flow was primarily due to increased operating expenses and
higher working capital requirements.
Approximately $700,000 of the Company's consolidated losses were
attributable to the minority shareholder interest of OIS. However 100% of this
loss was absorbed by us due to the capital deficiency position of OIS.
In March 1999, the board of directors of Data.Site, adopted a plan to
discontinue its operations. Accordingly, the results of Data.Site's operations,
plus the write-off of $3,511,000 in unamortized goodwill, capitalized software
development costs, and equipment have been segregated from continuing operations
and reported on a separate line item on the statement of operations and
comprehensive loss for fiscal 1999. The statement of operations for fiscal 1998
and fiscal 1997 have been reclassified to present Data.Site's operating results
as discontinued operations. Approximately $2,200,000 of the Company's
consolidated losses during fiscal 1999 were attributable to the minority
interest of Data.Site. Of this amount $400,000 could not be attributed to the
minority interest due to the capital deficiency position of Data.Site and was
therefore absorbed by us.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1997
Net sales increased 94% to $9,885,000 for the year ended March 31, 1998
("fiscal 1998") from $5,091,000 for the year ended March 31, 1997 ("fiscal
1997"). This increase was primarily attributable to an increase in sales to the
dental market including sales resulting from the introduction of the Er:YAG
laser for cavity preparation and ophthalmic sales from the EyeSys product line
during the latter half of fiscal 1998. Dental sales during the last two quarters
of fiscal 1998 were adversely affected by an impasse reached with dental
distributor Henry Schein, Inc. over the nature of a relationship between the
parties initiated with a letter of intent executed in December 1997. We believed
that Henry Schein obligated itself to accept an initial shipment of product, and
that the relationship was being expanded. Henry Schein subsequently notified us
that it did not agree with our understanding of the terms of the relationship.
Sales during the last two quarters of fiscal 1997 were also adversely affected
by a disruption in our supply of Arago argon laser and vendor supply problems
with our Multi-Operatory Dentalaser argon laser.
Cost of sales increased 372% to $17,234,000 in fiscal 1998 from
$3,649,000 in fiscal 1997, due to an increase in sales, excess inventory
reserves of $7,500,000 associated with the failure of the Henry Schein
relationship, substantially higher warranty costs, and start-up and training
expenses associated with Er:YAG laser and fiber and EyeSys product manufacture.
Selling and marketing expenses increased 112% to $5,113,000 in fiscal
1998 from $2,415,000 in fiscal 1997. This increase was primarily attributable to
significant increases in marketing personnel, introduction of the Er:YAG laser,
increased commissions and associated selling expenses, and from consolidation of
the expenses of new subsidiaries.
32
<PAGE>
Research and development expenses increased 98% to $3,087,000 in
fiscal 1998 from $1,563,000 in fiscal 1997. This increase resulted primarily
from increases in Premier's research and development personnel, an additional
$510,000 of clinical trial costs and associated samples, travel expenditures for
Premier and EyeSys, and $710,000 of expense for all other new subsidiaries. The
expense in fiscal 1997 was offset by a $450,000 payment received by Premier
under a Small Business Innovative Research grant. We also recognized $225,000
and $190,000 as a research and development expense from the issuance of stock
options to clinical evaluators and medical directors in fiscal 1998 and fiscal
1997 respectively.
General and administrative expenses increased 100% to $3,700,000 in
fiscal 1998 from $1,853,000 in fiscal 1997. This increase was partially due to
$459,000 of expenses from new subsidiaries, $400,000 for litigation expense
related to a supply agreement for optical fibers, and $250,000 for issuance of
stock options.
Net interest income increased to $1,073,000 in fiscal 1998 from $15,000
in fiscal 1997. This increase reflected our higher cash balances following the
completion of our secondary offering in October 1996 and the exercise of
outstanding warrants in January 1998. The net proceeds from these capital stock
transactions were $10,401,000 from the secondary offering and $41,735,000 from
the warrant exercises.
In fiscal 1998, Premier expensed $12,800,000 for in process research
and development and $7,617,000 in merger and integration costs related to the
acquisitions of 51% ownership in OIS and 100% of EyeSys. Approximately $180,000
of losses were attributable to the minority shareholder interest of OIS. However
100% of the loss was absorbed by Premier due to the capital deficiency position
of OIS. We recorded $349,000 of losses attributable to our minority shareholder
interest of Data.Site compared with $60,000 during 1997.
In summary, the operating results for 1998 were negatively impacted by
$20,417,000 of acquisition expenses (including $16,500,000 of non-cash costs),
$7,500,000 of inventory write-downs, $1,100,000 of warranty cost, $480,000 of
non-cash stock option expense, bad debt expense of $600,000, and litigation
costs of $400,000.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been financed through the proceeds from the sale of
our equity securities, including an initial public offering in December 1994,
and a secondary public offering in October 1996, the exercise of publicly traded
warrants and stock options, revenues from operations, and proceeds from a Small
Business Innovative Research Grant. Further, in May of 1999, we received $2
million in gross proceeds from a private offering and sale of convertible
debentures and will receive an additional $2 million in gross proceeds from this
financing upon the effectiveness of this registration statement. The net
proceeds of this financing will be used for working capital requirements. In
connection with this financing, we granted to the lenders a security interest in
substantially all of our assets, including without limitation our patents and
other intellectual property.
Our principal capital requirements include the financing of inventory,
accounts receivable, research and development activities, the development of
ophthalmic, dental and surgical sales forces, the development of marketing
programs and the acquisition and/or licensing of patents.
At March 31, 1999, we had unrestricted cash and short-term investments
of $889,000 and a working capital deficit of $1,363,000. The decrease in cash
and short-term investments since March 31, 1998 was primarily the result of the
losses during fiscal 1999, increased by working capital changes during the
period, including the continued receipt of inventory purchases commitments that
had been made during the prior fiscal year. Cash flow during fiscal 1997 and
1998 was positive as the net result of cash proceeds from equity offerings and
exercise of stock options and warrants, reduced by operating requirements and
investing activities associated with new business acquisitions.
33
<PAGE>
Our future capital requirements will depend on many factors, including:
o the progress of our research and development activities
o the scope and results of pre-clinical studies and clinical trials
o the costs and timing of regulatory approvals
o the rate of technology advances
o competitive conditions within the medical laser industry
o the maintenance of manufacturing capacity
o the outcome of the class action lawsuits
o the establishment of collaborative marketing and other relationships
which may either involve cash infusions to us, or require additional
cash from us.
Our ability to meet our working capital needs will depend on our
ability to achieve sales targets, profitability and a positive cash flow from
operations. We cannot assure you that we will be able to achieve sales targets,
profitable operations or a positive cash flow from operations.
We believe that our present liquid assets and cash to be generated
through the operation of our business will be sufficient to meet our working
capital requirements through at least March 31, 2000. Any significant uninsured
settlement or judgment associated with the class action litigation would
materially adversely affect our ability to satisfy our working capital
requirements. If additional capital is required, we would consider several
financing alternatives including the issuance of securities, licensing of
technology and marketing rights, and/or bank financing. We cannot assure you
that we would be successful in obtaining additional financing.
At March 31, 1999, we had net operating loss carryforwards for federal
income tax purposes totaling approximately $55 million which will begin to
expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which may
limit the net operating loss carryforwards available for use in any given year
if certain events occur, including significant changes in stock ownership.
Utilization of our net operating loss carryforwards to offset future income may
be limited.
GOVERNMENT GRANTS
We have been awarded a SBIR grant for approximately $750,000 for the
study of laser cataract emulsification. Substantially all of this grant has been
drawn for such purposes. The remaining $50,000 of the grant can be drawn upon
the achievement of specified criteria.
YEAR 2000 ISSUES
During the quarter ended September 30, 1998, we upgraded our
computerized accounting system to a release that is compliant with Year 2000
dating sensitivities. The costs of this upgrade were minimal. We have not
prepared a formal assessment of the internal and external Year 2000 issues that
would have a significant impact on our products. Our laser products are not date
sensitive. Diagnostic products, on the other hand, contain date sensitive data
bases. Our software engineers are developing new software to be available by
mid-1999 which will address the Year 2000 dating issues. The costs of software
modification are not expected to be material. Any diagnostic products currently
in the market that are covered by a warranty will be upgraded at no charge to
the customer at an insignificant cost to the company. We plan to charge upgrade
fees for previously sold products that are outside of the warranty period. We
expect that our existing warranty reserves will be adequate to absorb the
upgrade costs.
34
<PAGE>
SEASONALITY
To date, our revenues have typically been significantly higher in the
second and fourth calendar quarters. This seasonality reflects the timing of
major medical and dental industry trade shows in these quarters, significantly
reduced sales during the summer and the effect of year-end tax planning
influencing the purchasing of capital equipment for depreciation during the
fourth calendar quarter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are included in Part IV, Item 14 of this Form 10-K and are presented beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 1, 1998, we filed a Current Report on Form 8-K, reporting a
change in our certifying accountant. This Current Report was amended on June 15,
1998. In connection with the resignation of our former accountants, there was a
disagreement between us and our former accountants concerning certain accounting
matters. Reference is hereby made to such Current Reports for further discussion
of this matter.
On June 22, 1998, we engaged the firm of Haskell & White LLP as our
certifying accountant. The engagement of Haskell & White LLP was reported in a
Current Report on Form 8-K filed June 26, 1998.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
Our directors and executive officers and their ages as of March 31,
1999 are as follows:
<TABLE>
<CAPTION>
NAME Age Position
---- --- --------
<S> <C> <C>
Colette Cozean, Ph.D.(1)............... 41 Chairman of the Board, Chief Executive Officer, President
and Director
Robert V. Mahoney...................... 57 Vice President, Finance and Chief Financial Officer
Tom Hazen.............................. 57 Executive Vice President, Operations
Judith A. McCall....................... 58 Vice President, Human Resources, Administration and
Special Projects and Secretary
Jeffrey A. Anderson.................... 32 Vice President, Regulatory Affairs and Quality Assurance
Lawrence D. Ashcroft(2)(3)............. 70 Director
Patrick J. Day......................... 72 Director
Fredric J. Feldman, Ph.D.(2)(3)........ 59 Director
John Hunkeler, M.D., F.A.C.S.(2)....... 57 Director
G. Lynn Powell, D.D.S.(2).............. 57 Director
Lewis H Stanton(3)..................... 45 Director
- ----------------------------
</TABLE>
(1) We are presently in the process of seeking additional management personnel,
including a new Chief Executive Officer. Under our current plans, if we are
able to hire a new Chief Executive Officer, Dr. Cozean will retain her
positions as Director of Research and Chairman.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
All directors hold office until the next Annual Meeting of Shareholders
or the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The business experience, principal occupations and employment, as well
as periods of service, of each of our directors and executive officers during at
least the last five (5) years are set forth below.
COLETTE COZEAN, PH.D. is a founder of Premier and has been its Chairman
of the Board of Directors, President and Director of Research since it commenced
operations in August 1991 and became the Chief Executive Officer in 1994. From
April 1987 to August 1991, Dr. Cozean served as Director of Research and
Development, Regulatory Affairs and Clinical Programs at Pfizer Laser Systems, a
division of Pfizer Hospital Products Group, Inc. and in these capacities managed
the development of the laser technologies which we acquired from Pfizer Laser
Systems. Prior to April 1987, Dr. Cozean held various research positions at
Baxter Edwards, a division of Baxter Healthcare Corporation, and American
Technology and Ventures, a division of American Hospital Supply Company. Baxter
Healthcare Corporation and American Hospital Supply Company are manufacturers
and suppliers of advanced medical products. Dr. Cozean holds several patents,
has published many articles and has served as a member of the National
Institutes of Health grant review committee. Dr. Cozean received a Ph.D. in
biomedical engineering and an M.S. in Electrical Engineering from Ohio State
University, a B.S. in biomedical engineering from the University of Southern
California, and a B.A. in physical sciences from Westmont College.
36
<PAGE>
JEFFREY A. ANDERSON has been Vice President, Regulatory Affairs and
Quality Assurance since September 1997 when he joined Premier. Prior to that
time and since November 1995, Mr. Anderson had served as Regulatory Affairs
Manager of Medtronic. From December 1993 to November 1995, Mr. Anderson served
as Regulatory Affairs Specialist of Sybron Dental Specialties and from December
1991 to December 1993, he served as Regulatory Affairs/Quality Assurance Manager
of Laser Medical Technology, Inc. Mr. Anderson received a B.S. in Physics from
California State University Fullerton.
TOM HAZEN has been the Executive Vice President, Operations of Premier
since October 1997. Prior to joining Premier and since 1992, Mr. Hazen served as
Vice President of Operations of Imagyn Medical, Inc. In addition, Mr. Hazen has
served in various executive offices with several companies in the medical field
specializing in product development and manufacturing. These positions include
Vice President Operations at MICA Technology Services in Buffalo Grove, Illinois
and President and Chief Executive Officer of California based Dolphin Imaging
Systems. Mr. Hazen received a BSME degree from the University of Arizona and an
MBA from UCLA.
ROBERT V. MAHONEY joined Premier in December 1998 as the Chief
Accounting Officer, and became Chief Financial Officer and Executive Vice
President-Finance in January 1999. Before then and since February 1997, Mr.
Mahoney served as Director, Strategy and New Ventures of Tandem Computers, Inc.
From August 1996 until November 1996, Mr. Mahoney was an employee of Superstill
Technology, Inc. Before his employment at Superstill Technology, from January
1996 until July 1996, Mr. Mahoney served as the Chief Financial Officer and
Senior Vice President, Finance of Interactive Network, Inc. Mr. Mahoney received
a MBA from Stanford University and holds a B.S. in Public Policy from the United
States Air Force Academy.
JUDITH A. MCCALL has been with Premier since April 1993 and became Vice
President, Human Resources, Administration and Special Projects and Secretary in
January 1998. For the past three years, Ms. McCall has headed our human
resources department. Prior to joining Premier, Ms. McCall held various senior
operations and administrative positions with firms in Southern California and
served as Director of Training and Development for API Security. Ms. McCall
received a M.A. in Marriage, Family and Child Psychology from Azusa Pacific
College in Azusa, California and a B.A. in Christian Education from St. Andrews
Presbyterian College in Lauringburg, North Carolina.
LAWRENCE D. ASHCROFT joined the board of directors in December 1998.
Mr. Ashcroft has held a number of senior management and directorial posts in
both the United States and Europe. Before his retirement, from 1988 to 1995, Mr.
Ashcroft served as Chairman of the Board of Directors of Cardiopet, Inc., a
company which specialized in reading animal electrocardiograms worldwide via
telephone. Mr. Ashcroft currently serves on the board of directors of Leading
Edge Technologies and is a non-executive director of Tatatech Inc., Westergaard
Broadcasting Inc. and Comstock and Madison Systems Inc.
PATRICK J. DAY has served as a director of Premier since August 1991.
Mr. Day is a Certified Public Accountant and owns a CPA firm which he
established in 1967. Mr. Day has served as a director for several organizations
including the First Presbyterian Church of Hollywood and many private companies.
Mr. Day is the father of Dr. Cozean, our Chairman of the Board and President.
Mr. Day received a B.A. in accounting from the University of Idaho.
FREDRIC J. FELDMAN, PH.D. joined the board of directors in December
1998. Dr. Feldman has been a consultant to start up healthcare companies,
investment banks and venture capital groups since 1992. Before and during that
period, Dr. Feldman served as Chief Executive Officer of Biex, Inc., a company
specializing in womens' health; as Chief Executive Officer and Chairman of the
Board of Directors of Oncogenetics, Inc., a cancer diagnostics company; and as
President and Chief Executive Officer of Microgenics Corporation, a
biotechnology company. Currently, Dr. Feldman serves as a director for Ostex
37
<PAGE>
International, Inc., SangStat Medical Corporation and Orthologic Corp. and
several private companies. Dr. Feldman received a Ph.D. in Analytical Chemistry
and a M.S. in Inorganic Chemistry from the University of Maryland and a B.S. in
Chemistry from the City University of New York.
JOHN D. HUNKELER, M.D., F.A.C.S. joined the board of directors in
December 1998. Dr. Hunkeler is a board certified ophthalmologist who has been in
private practice in Kansas City, Missouri since 1973. He is also a professor and
Chairman of the Department of Ophthalmology at the University of Kansas Medical
Center, the President of Hunkeler Eye Centers and the former President of the
American Society of Cataract and Refractive Surgery. Dr. Hunkeler is the former
Medical Director and Vice President of the Kansas City Eye Bank. Dr. Hunkeler
holds a B.A. from Harvard College and received his medical degree from the
University of Kansas in 1967.
G. LYNN POWELL, D.D.S. joined the board of directors in January 1997.
Dr. Powell has been on the faculty at the University of Utah since 1982, where
he currently serves as the Assistant Dean for Dental Education in the School of
Medicine and Professor in the Department of Pathology. He is a patent holder who
has performed extensive research in the field of dentistry serving as primary
investigator on several funded grants and is author or co-author of over 45
papers in journals, a majority of which relate to the use of lasers in
dentistry. He serves as a reviewer for three dental and laser journals, has
lectured nationally as well as internationally, and routinely presents his work
at research meetings. Dr. Powell is the current President of the International
Society for Lasers in Dentistry. Dr. Powell received his D.D.S. from the
University of Washington and was on the full time faculty in Restorative
Dentistry at that institution for ten years.
LEWIS H. STANTON joined the board of directors in December 1998. Mr.
Stanton has been the Executive Vice President, Chief Operating Officer and Chief
Financial Officer of MAI Systems Corporation since he joined that company in
1997. From 1996 until he joined MAI Systems in 1997, Mr. Stanton was the
President of Stanton & Associates, a consulting company. From September 1996
until January 1997, Mr. Stanton served as acting Chief Executive Officer of
Worldwide Networks, Inc., an Internet access provider. From 1988 until 1996, Mr.
Stanton served as Chief Financial Officer of Data Analysis Inc., the parent
company of Investor's Business Daily, a national daily newspaper; William O'Neal
& Co. Inc., an institutional research firm and database company; and other
companies. From 1976 until 1988, Mr. Stanton was with the international
accounting firm Arthur Andersen & Co., specializing in financial services. Mr.
Stanton is a member of the AICPA and was chair of the California Society of
CPAs, Los Angeles, Members in Industry Committee for four years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, and the
regulations thereunder, require our directors, executive officers and persons
who own more than 10% of a registered class of our equity securities to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of our and other equity securities, and to
furnish us with copies of all Section 16(a) forms which they file.
During the fiscal year ended March 31, 1999, all reports required to be
filed pursuant to section 16(a) of the Exchange Act were filed on a timely
basis.
During the fiscal year ended March 31, 1998, Jeffrey A. Anderson, J.
Randy Alexander and Judith A. McCall, each one of our executive officers, failed
to file on a timely basis an Initial Statement of Beneficial Ownership of
Securities on Form 3. During the fiscal year ended March 31, 1998, Tom Hazen,
also an executive officer, and Patrick J. Day, one of our directors, failed to
file on a timely basis, a Statement of Changes of Beneficial Ownership on Form
4.
38
<PAGE>
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the two (2) fiscal years ended March 31, 1999 and 1998, all
other Section 16(a) filing requirements applicable to our officers, directors
and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation paid
to our Chief Executive Officer and each other executive officer who received an
annual salary and bonus of more than $100,000 for services rendered to us during
the fiscal year ended March 31, 1998.
<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, 1999 $250,000 $25,000 0 $38,950(2)
Chief Executive Officer and 1998 $165,000 $100,000 1,000,000 $16,704(3)
Director of Research 1997 $151,064 -- 217,500 $32,300(4)
Tom Hazen, Executive Vice 1999 $150,000 $20,000 0 --
President, Operations
- ---------------------
</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 the person shown above. We have
entered into Termination Agreements with the above executive officers which
provide that in the event of a termination of employment following a change
in control of Premier, as defined in this agreement, the named executive
officer will receive (i) a lump sum cash payment equal to two times the
highest annual level of total cash compensation paid to that officer during
the three (3) calendar years prior to the termination; (ii) immediate
vesting of all previously granted stock options; and (iii) continuing
health benefits for a period of twenty-four (24) months. We have also
entered into Employment Agreements with each of the named persons which
provide for two to four (4) months of severance benefits upon their
termination of employment. Based upon salary levels as of March 31, 1999,
these severance benefits would be approximately $83,334 for Dr. Cozean and
$37,500 for Mr. Hazen.
(2) Represents $32,500 of premiums incurred by us for a split-dollar life
insurance policy in the amount of $2 million on the life of Dr. Cozean and
an auto allowance of $6,450.
(3) Represents $5,000 of premiums paid by us for a split-dollar life insurance
policy in the amount of $2 million on the life of Dr. Cozean and an auto
allowance of $11,704.
(4) Represents $27,500 of premiums paid by us for a split-dollar life insurance
policy in the amount of $2 million on the life of Dr. Cozean and an auto
allowance of $4,800.
OPTIONS GRANTED IN LAST FISCAL YEAR
During the fiscal year ended March 31, 1999, we did not grant any stock
options to either of the executive officers named in the Summary Compensation
Table above.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information regarding stock options
exercised by the named executive officers during the fiscal year ended March 31,
1999, as well as the number of exercisable and unexercisable in-the-money stock
options and their values at fiscal year-end. An option is in-the-money if the
fair market value for the underlying securities exceeds the exercise price of
the option.
39
<PAGE>
<TABLE>
<CAPTION>
Value of
Number of Unexercised In-the-
Unexercised Options Money Options at
Shares at March 31, 1999 March 31, 1999(1)
Acquired Value -------------------- --------------------
on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Colette Cozean, Ph.D.............. 0 0 1,043,650/1,716,150 $0/$0
Tom Hazen ........................ 0 0 50,000/150,000 $0/$0
- --------------------
</TABLE>
(1) Represents the Nasdaq Stock Market last sale price of underlying
securities at fiscal year end, minus the exercise price of the options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended March 31, 1999, the members of the
compensation committee were Dr. Feldman, Dr. Hunkeler, Dr. Powell and Mr.
Ashcroft, all of whom are non-employee directors of Premier. No member of the
compensation committee has a relationship that would constitute an interlocking
relationship with executive officers and directors of another entity.
COMPENSATION COMMITTEE REPORT TO SHAREHOLDERS
The Compensation Committee of the Board of Directors (the "Committee")
establishes the compensation level for the Company's Chief Executive Officer
("CEO") and other executive officers based upon the Committee's discretion,
taking into account factors it deems appropriate, such as competitive factors,
attainment of established Company financial performance criteria and individual
performance goals and the implementation of key strategic programs and products.
The Compensation Committee believes that the compensation programs for
the Company's executive officers should reflect the Company's performance and
the value created for the Company's shareholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contributions to the Company's
success. The Company is engaged in a very competitive industry, and the
Company's success depends upon its ability to attract and retain qualified
executives through the competitive compensation packages it offers to such
individuals.
The Compensation Committee's policy is to provide the Company's
executive officers with compensation opportunities that are based upon their
personal performance, the financial performance of the Company and their
contribution to that performance, and that are competitive enough to attract and
retain highly skilled individuals. Compensation for the CEO for fiscal 1999, as
reported above, was based on the Committee's analysis of the Company's financial
performance and achievement of strategic objectives, and the CEO's contribution
to this performance and these achievements.
The Company's policy is not to disclose target levels with respect to
specific quantitative or qualitative performance-related factors, or factors
considered to involve confidential business information, because their
disclosure would have an adverse effect on the Company.
Qualification of compensation under Section 162(m) of the Internal
Revenue Code requires that compensation be "performance based" and that the
shareholders of the Company approve the material terms of the compensation plan.
The Company can deduct compensation paid (or deemed paid) to each named
executive officer in the tax year concerned to the maximum amount of $1,000,000
unless additional compensation qualifies for deductibility under Section 162(m).
40
<PAGE>
Based on its review of all of the factors described above, the
Committee has determined that salaries for the Company's executive officers will
be maintained at their fiscal 1999 levels except that Jeff Anderson, our VP,
Regulatory Affairs and Quality Assurance, received a 33% raise. All amounts paid
or accrued during fiscal 1999 under the above described plans and programs are
included in the tables above.
COMPENSATION COMMITTEE:
Fredric J. Feldman, Ph.D., Chairman
Lawrence D. Ashcroft
John D. Hunkeler, M.D., F.A.C.S.
G. Lynn Powell, D.D.S.
41
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN ON ONE OR MORE COMPANIES, PEER GROUPS,
INDUSTRY INDEXES AND/OR BROAD MARKETS
[Data below represented as a graph here]
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
---------------------------------------------------------------------------------
11/30/94 3/31/95 3/31/96 3/31/97 3/31/98 3/31/99
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
COMPANY/INDEX/MARKET
Premier Laser Systems 100.00 80.00 172.50 110.00 210.00 46.88
Electromedical Equipment 100.00 116.74 190.35 171.13 242.41 302.03
NASDAQ Market Index 100.00 103.04 138.60 155.06 234.33 306.23
Note: Base price date is 11/30/94.
</TABLE>
42
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of June 25,
1999, regarding the beneficial ownership of the Company's Common Stock by: (i)
all persons known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each director and executive officer of the Company,
and (iii) all directors and executive officers as a group. The following table
treats the Common Stock, the Class E-1 Common Stock and the Class E-2 Common
Stock as a single class.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Name and Address Beneficial Common
of Beneficial Owner(1) Ownership Stock
- ---------------------- ----------- -----
<S> <C> <C>
Colette Cozean, Ph.D.(2).......................... 1,187,145 6.4%
Patrick J. Day(3)................................. 269,933 1.5%
G. Lynn Powell, D.D.S.(4)......................... 91,501 *
Lawrence D. Ashcroft (5).......................... 10,000 *
Fredric J. Feldman, Ph.D.(5)...................... 10,000 *
John D. Hunkeler, M.D., F.A.C.S.(5)............... 10,000 *
Lewis H. Stanton (5).............................. 10,000 *
Robert V. Mahoney (6)............................. 17,308 *
Tom Hazen (7)..................................... 52,006 *
Jeffrey Anderson (8).............................. 42,551 *
Judith A. McCall(9)............................... 85,696 *
All directors and executive officers as
a group (11 persons)(10).......................... 1,786,140 9.4%
- ------------------
* Less than 1%.
</TABLE>
(1) The address of each of the individuals listed (other than the selling
shareholders) is 3 Morgan, Irvine, California 92618. Unless otherwise
noted, we believe that all persons named in the table have sole
investment and voting power with respect to all shares of Class A Common
Stock beneficially owned by such person, such shares, subject to
community property laws where applicable.
(2) Includes 52,049 shares of Class A Common Stock, 43,514 shares of Class
E-1 Common Stock and 43,514 shares of Class E-2 Common Stock held by Dr.
Cozean and 1,594 shares of Class A Common Stock, 1,412 shares of Class
E-1 Common Stock and 1,412 shares of Class E-2 Common Stock held by Dr.
Cozean as custodian for her two minor children. Also includes 1,043,650
of Class A Common Stock subject to options exercisable within 60 days.
(3) Includes 54,263 shares of Class A Common Stock, 24,023 shares of Class
E-1 Common Stock and 24,023 shares of Class E-2 Common Stock. Also
includes 133,992 shares of Class A Common Stock, 16,816 shares of Class
E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to
warrants and options exercisable within 60 days.
(4) Includes 91,501 shares of Class A Common Stock subject to warrants and
options exercisable within 60 days.
(5) Consists of 10,000 shares of Class A Common Stock subject to options
exercisable within the next 60 days.
(6) Consists of 17,308 shares of Class A Common Stock subject to options
exercisable within 60 days.
43
<PAGE>
(7) Includes 2,006 shares of Class A Common Stock and 50,000 shares of Class
A Common Stock subject to options exercisable within 60 days.
(8) Includes 885 shares of Class A Common Stock and 41,666 shares of Class A
Common Stock subject to options exercisable within 60 days.
(9) Includes 1,339 shares of Class A Common Stock and 84,357 shares of Class
A Common Stock subject to options exercisable within 60 days.
(10) Includes 112,136 shares of Class A Common Stock, 68,949 shares of Class
E-1 Common Stock and 68,949 shares of Class E-2 Common Stock. Also
includes 1,502,474 shares of Class A Common Stock, 16,816 shares of Class
E-1 Common Stock and 16,816 shares of Class E-2 Common Stock subject to
warrants and options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On April 3, 1999, our board of directors extended the expiration date
of an option to purchase 4,522 shares of common stock until April 22, 2000. The
options had previously been granted to T. Daniel Caruso and were subsequently
inherited by his widow.
In December 1998, we granted options to purchase 40,000 shares of
common stock to three newly elected directors: Dr. Feldman, Dr. Hunkeler and Mr.
Stanton. In January 1999, we granted an option to purchase 40,000 shares of
common stock to Mr. Ashcroft when he came on the board. All of these options
vest over four years beginning on March 31, 1999. These options have an exercise
price of $2.00 per share, the fair market value of our common stock on the date
of grant. In January 1999, we also granted an option to purchase 225,000 shares
of common stock with an exercise price of $1.906 per share to Mr. Robert
Mahoney, our Chief Financial Officer.
In fiscal 1998, we issued options to purchase the following numbers of
shares to certain of its directors: (1) Colette Cozean - 1,000,000 shares
vesting over 5 years; (2) Patrick J. Day, Grace Ching - Hsin Lin, G. Lynn
Powell, and E. Donald Shapiro - 40,000 shares each vesting over 4 years. All of
these options have an exercise price of $7.98 per share, the fair market value
of our common stock on the date of grant. In addition to the above, Mr. Shapiro
and Dr. Powell were each granted options to purchase 30,000 shares at $10.31 per
share vesting over 3 years in connection with services rendered by them. All of
the above options have a term of ten years.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Page in
Annual Report
on Form 10-K
------------
<S> <C>
(a) The following documents are filed as part of this Annual
Report on Form 10-K.
(1) Report of Haskell & White LLP, Independent Auditors................................. F-2
Consolidated Balance Sheets at March 31, 1999 and 1998...............................F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended March 31, 1999, 1998 and 1997....................................F-4
Consolidated Statements of Shareholders' Equity for the years
ended March 31, 1999, 1998 and 1997..................................................F-5
44
<PAGE>
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997........................................................F-7
Notes to Consolidated Financial Statements...........................................F-9
(2) Financial Statements Schedules
Schedule II-Valuation and Qualifying Accounts for the Years
Ended March 1999, 1998 and 1997.....................................................F-27
Schedules not listed above have been omitted because
the information required to be set forth therein is
not applicable or is shown in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of
Regulation S-K)...................................................................... 45
</TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger dated as of April 24, 1997 among the
Registrant, EyeSys Technologies, Inc. and Premier Acquisition of
Delaware, Inc. (incorporated herein by this reference to Exhibit
2.1 to the Registrant's Registration Statement on Form S-4,
Registration No. 33-29573).
2.2 First Amendment to Agreement and Plan of Merger dated as of August
6, 1997, among the Registrant, EyeSys Technologies, Inc. and
Premier Acquisition of Delaware, Inc. (incorporated herein by this
reference to Exhibit 2.2 to the Registrant's Current Report of
Form 8-K filed October 15, 1997).
2.3 Second Amendment to Agreement and Plan of Merger dated as of
September 16, 1997 among the Registrant, EyeSys Technologies, Inc.
and Premier Acquisition of Delaware, Inc., EyeSys Technologies,
Inc. and Premier Acquisition of Delaware, Inc. (incorporated
herein by this reference to Exhibit 2.3 to the Registrant's
Current Report on Form 8-K filed October 15, 1997).
2.4 Stock Purchase Agreement dated February 25, 1998 between the
Registrant and Ophthalmic Imaging Systems (incorporated herein by
this reference to Exhibit 99.1 to the Registrant's Current Report
on Form 8-K filed March 9, 1998).
2.5 Purchase Agreement dated February 25, 1998 between the Registrant
and Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D.
(incorporated herein by this reference to Exhibit 99.4 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
2.6 Purchase Agreement dated February 25, 1998 between the Registrant
and Stanley Chang, M.D. (incorporated herein by this reference to
Exhibit 99.8 to the Registrant's Current Report on Form 8-K filed
March 9, 1998).
45
<PAGE>
Exhibit
- -------
2.7 Purchase Agreement dated February 25, 1998 between the Registrant
and J.B. Oxford & Company (incorporated herein by this reference
to Exhibit 99.12 to the Registrant's Current Report on Form 8-K
filed March 9, 1998).
3.1 Amended and Restated Articles of Incorporation filed with the
California Secretary of state on November 23, 1994 (incorporated
herein by this reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31,
1994).
3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to
the Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
4.1 Rights Agreement dated as of March 31, 1998 between Premier Laser
Systems, Inc. and American Stock Transfer and Trust Company acting
as rights agent (incorporated herein by this reference to Exhibit
4.1 to the Registrant's Current Report on Form 8-K filed April 2,
1998).
10.1 Letter Agreement and Patent License Agreement dated August 29,
1991 among the Registrant, Patlex Corporation and Gordon Gould
(incorporated herein by this reference to Exhibit 1.1 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.2 Assignment Agreement dated July 27, 1992 between the Registrant
and Michael Colvard, M.D. (incorporated herein by this reference
to Exhibit 10.2 to the Registrant's Registration Statement on Form
SB-2, Registration No. 33-83984).
10.3 Form of International Distribution Agreement (incorporated herein
by this reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form SB-2, Registration No. 33-83984).
10.4 Letter of Intent between the Registrant and Richard Leaderman,
D.D.S., together with related Patent Assignments as filed in the
U.S. Patent and Trademark Office on February 22, 1994
(incorporated herein by this reference to Exhibit 10.13 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.5 Exclusive Marketing Agreement dated July 26, 1994 between the
Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.
(incorporated herein by this reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.6 Form of Indemnification Agreement (incorporated herein by this
reference to Exhibit 10.23 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
10.7 Purchase/Supply Agreement dated January 13, 1987 between Infrared
Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as
amended (incorporated herein by this reference to Exhibit 10.26 to
the Registrant's Registration Statement on Form SB-2, Registration
No. 33- 83984).
10.8 Form of Warrant Agreement (including forms of Class B Warrant
Certificates) (incorporated herein by this reference to Exhibit
4.1 to the Registrant's Registration Statement on Form SB-2,
Registration No. 33-83984).
10.9 Form of Underwriter's Unit Purchase Option (incorporated herein by
this reference to Exhibit 4.2 to the Registrant's Registration
Statement on Form SB-2, Registration No. 33-83984).
46
<PAGE>
Exhibit
- -------
10.10 1992 Stock Option Plan, together with form of Nonstatutory Stock
Option Agreement and form of Incentive Stock Option Agreement
(incorporated herein by this reference to Exhibit 4.5 to the
Registrant's Registration statement on Form SB-2, Registration No.
33-83984).
10.11 Employee Bonus Stock Plan, together with form of Bonus Stock
Agreement (incorporated herein by this reference to Exhibit 4.6 to
the Registrant's Registration Statement on Form SB-2, Registration
No. 33-83984).
10.12 Letter agreement dated October 13, 1987 between Pfizer Laser
Systems, Inc. and Duke University, together with patent assignment
as filed in the U.S. Patent and Trademark Office on October 23,
1993 (incorporated herein by this reference to Exhibit 10.8 to the
Registrant's Registration Statement on Form SB-2, Registration No.
33-83984).
10.13 Industrial Lease dated December 6, 1995 between the Registrant and
The Irvine Company (incorporated herein by this reference to
Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1996).
10.14 Form of Consulting Agreement (incorporated herein by this
reference to Exhibit 10.30 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996).
10.15 Form of Termination Agreement between the Registrant and certain
of the Registrant's executive officers (incorporated herein by
this reference to Exhibit 10.33 to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1996).
10.16 1995 Employee Stock Option Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive Stock
Option Agreement (incorporated herein by this reference to Exhibit
10.34 to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1996).
10.17 February 1996 Stock Option Plan (incorporated herein by this
reference to Exhibit 10.35 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996).
10.18 1996 Stock Option Plan (incorporated herein by this reference to
Exhibit 10.36 to the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1996).
10.19 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon
Valley Bank (incorporated herein by this reference to Exhibit
10.38 to the Registrant's Registration Statement on Form SB-2
Registration No. 333-04219).
10.20 Registration Rights Agreement dated June 3, 1996 between the
Registrant and Silicon Valley Bank (incorporated herein by this
reference to Exhibit 10.39 to the Registrant's Registration
Statement on Form SB-2 Registration No. 333-04219).
10.21 Antidilution Agreement dated June 3, 1996 between the Registrant
and Silicon Valley Bank (incorporated herein by this reference to
Exhibit 10.40 to the Registrant's Registration Statement on Form
SB-2 Registration No. 33-04219).
10.22 Joint Venture Agreement dated January 31, 1997 between the
Registrant, RSS, LLC and Data.Site (incorporated herein by this
reference to Exhibit 10.39 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997).
47
<PAGE>
Exhibit
- -------
10.23 Operating Agreement of Data.Site dated January 31, 1997
(incorporated herein by this reference to Exhibit 10.40 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1997).
10.24 Agreement and Plan of Merger dated April 24, 1997 between the
Registrant, Premier Acquisition of Delaware, Inc. and EyeSys
Technologies, Inc. (incorporated herein by this reference to
Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997).
10.25 1997 Stock Option, together with form of Nonqualified Stock Option
Agreement (incorporated herein by the reference to Exhibit 10.33
to the Registrant's Annual Report on Form 10-K filed August 26,
1998).
10.26 1998 Stock Option Plan (incorporated herein by this reference to
Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed
August 26, 1998).
10.27 Rights Agreement dated March 31, 1998 between the Registrant and
American Stock Transfer and Trust Company (incorporated herein by
this reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K filed April 2, 1998).
10.28 Secured Convertible Debenture Purchase Agreement dated May 17,
1999 between the Registrant and the investors signatory thereto.*
10.29 Registration Rights Agreement dated May 17, 1999 between the
Registrant and the investors signatory thereto.*
10.30 Warrant dated May 17, 1999 issued by the Registrant to certain
investors.*
10.31 Intellectual Property Security Agreement dated May 17, 1999
between the Registrant and the secured parties signatory thereto.*
10.32 Security Agreement dated May 17, 1999 between the Registrant and
the secured parties signatory thereto.*
10.33 Form of 6% Secured Convertible Debenture dated May 17, 1999 issued
by the Registrant to certain investors.*
16 Letter dated June 11, 1998 from Ernst & Young, LLP (incorporated
herein by this reference to Exhibit 16 to the Registrant's Current
Report on Form 8-K filed June 1, 1998, and as amended June 15,
1998).
21 Subsidiaries (incorporated herein by this reference to Exhibit 21
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998).
23.1 Consent of Haskell & White LLP.*
27 Financial Data Schedule.*
99.1 Form of Class D Warrant (OIS transaction) (incorporated herein by
this reference to Exhibit 99.3 to the Registrant's Current Report
on From 8-K filed March 9, 1998).
48
<PAGE>
Exhibit
- -------
99.2 Class D Warrant dated February 25, 1998 issued by the Registrant
to Mark S. Blumenkranz, M.D. and Recia Blumenkranz, M.D. (OIS
transaction) (incorporated herein by this reference to Exhibit
99.6 to the Registrant's Current Report on Form 8-K filed March 9,
1998).
99.3 Registration Rights Agreement dated February 25, 1998 issued by
the Registrant and Mark S. Blumenkranz, M.D. and Recia
Blumenkranz, M.D. (OIS transaction) (incorporated herein by this
reference to Exhibit 997 to the Registrant's Current Report on
Form 8-K filed March 9, 1998).
99.4 Class D Warrant dated February 25, 1998 issued by the Registrant
to Stanley Chang, M.D. (OIS transaction) (incorporated herein by
this reference to Exhibit 99.10 to the Registrant's Current Report
on Form 8-K filed March 9, 1998).
99.5 Registration Rights Agreement dated February 25, 1998 issued by
Registrant to Stanley Chang, M.D. (OIS transaction) (incorporated
herein by this reference to Exhibit 99.11 to the Registrant's
Current Report on Form 8-K filed March 9, 1998).
99.6 Class D Warrant dated February 25, 1998 issued by the Registrant
to J.B. Oxford & Company (OIS transaction) (incorporated herein by
this reference to Exhibit 99.14 to the Registrant's Current Report
on From 8-K filed March 9, 1998).
99.7 Registration Rights Agreement dated February 25, 1998 between the
Registrant and J. B. Oxford & Company (OIS transaction)
(incorporated herein by this reference to Exhibit 99.18 to the
Registrant's Current Report on Form 8-K filed March 9, 1998).
+99.8 Agreement dated July 23, 1997 between Nidek Co., Ltd. and EyeSys
Technologies, Inc. (incorporated herein by this reference to
Exhibit 99.1 to the Registrant's Registration Statement on Form
S-4 Registration No. 333-29573).
+99.9 Exclusive Distribution Agreement dated June 2, 1997 between EyeSys
Technologies, Inc. and Marco Ophthalmic Inc. (incorporated herein
by this reference to Exhibit 99.3 to the Registrant's Registration
Statement on Form S-4 Registration No. 333-29573).
- --------------------
* Filed herewith.
+ Confidential treatment has been granted with respect to portions of this
Exhibit.
(b) Financial Statement Schedules.
49
<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
50
<PAGE>
POWER OF ATTORNEY
We, the undersigned officers and directors of Premier Laser Systems,
Inc., do hereby constitute and appoint Colette Cozean, Ph.D., and Robert V.
Mahoney, and each of them, our true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Report, and to file the same, with exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby, ratifying and confirming all that each of
said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------- -------------------------------- ---------------
<S> <C> <C>
/S/ COLETTE COZEAN PH. D. Chairman of the Board, President June 26, 1999
- --------------------------- and Chief Executive Officer
Colette Cozean, Ph.D. (Principal Executive Officer)
/S/ ROBERT V. MAHONEY Executive Vice President, Finance June 26, 1999
- --------------------------- and Chief Financial Officer
Robert V. Mahoney (Principal Financial Officer and
Principal Accounting Officer)
/S/ LAWRENCE D. ASHCROFT Director June 26, 1999
- ---------------------------
Lawrence D. Ashcroft
/S/ PATRICK J. DAY Director June 25, 1999
- ---------------------------
Patrick J. Day
/S/ FREDRIC J. FELDMAN, PH.D. Director June 26, 1999
- ---------------------------
Fredric J. Feldman, Ph. D.
Director _________, 1999
- ---------------------------
John Hunkeler, M.D.
/S/ G. LYNN POWELL, D.D.S. Director June 28, 1999
- ---------------------------
G. Lynn Powell, D.D.S.
/S/ LEWIS H. STANTON Director June 28, 1999
- ---------------------------
Lewis H. Stanton
</TABLE>
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-2
Consolidated Balance Sheets at March 31, 1999 and 1998 F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended March 31, 1999, 1998, and 1997 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 1999, 1998, and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998, and 1997 F-7
Notes to Consolidated Financial Statements F-9
F-1
<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. (the Company) as of March 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
1999. Our audits also included the financial schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, the Company has restated its previously issued 1997
consolidated financial statements.
In our opinion, the 1999, 1998, and 1997 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company as of March 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
HASKELL & WHITE LLP
Newport Beach, California
June 9, 1999
F-2
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
MARCH 31,
------------------------------------
ASSETS 1999 1998
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 888,767 $ 9,722,514
Short-term investments - 9,666,918
Restricted cash 50,000 2,150,000
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $1,997,158 and
$1,224,845, respectively 1,342,917 4,952,892
Inventories, net 5,797,054 4,482,698
Prepaid expenses and other current assets 531,459 2,528,996
--------------- ---------------
Total current assets 8,610,197 33,504,018
Property and equipment, net 1,473,420 1,778,423
Intangible assets, net 9,170,360 11,991,679
Other assets 21,953 434,300
--------------- ---------------
Total assets $ 19,275,930 $ 47,708,420
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,802,606 $ 5,510,692
Line of credit 70,470 2,068,163
Accrued compensation and related costs 968,969 964,691
Other accrued liabilities 5,130,951 5,943,685
--------------- ---------------
Total current liabilities 9,972,996 14,487,231
--------------- ---------------
Commitments and contingencies (Notes 5, 6, 9, and 10)
Minority interest - 1,764,736
--------------- ---------------
Shareholders' equity:
Preferred stock, no par value:
Authorized shares - 8,850,000
Issued and outstanding shares - none - -
Common stock, Class A, no par value:
Authorized shares - 35,600,000
Issued and outstanding shares - 16,962,278 including
2,250,000 subject to issuance for shareholder
litigation settlement at March 31, 1999, and
14,649,421 at March 31, 1998 90,354,340 83,546,913
Common stock, Class E-1, no par value:
Authorized shares - 2,200,000
Issued and outstanding shares - 1,257,461
at March 31, 1999 and 1998 4,769,878 4,769,878
Common stock, Class E-2, no par value:
Authorized shares - 2,200,000
Issued and outstanding shares - 1,257,461
at March 31, 1999 and 1998 4,769,878 4,769,878
Warrants and options 1,723,842 1,723,842
Accumulated deficit (92,315,004) (63,354,058)
--------------- ---------------
Total shareholders' equity 9,302,934 31,456,453
--------------- ---------------
Total liabilities and shareholders' equity $ 19,275,930 $ 47,708,420
=============== ===============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1999 1998 1997
(Restated)
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net sales $ 13,971,085 $ 9,885,569 $ 5,090,861
Cost of sales 13,405,182 17,234,288 3,648,539
----------------- ----------------- ------------------
Gross profit (loss) 565,903 (7,348,719) 1,442,322
Selling and marketing expenses 7,930,444 5,113,080 2,415,010
Research and development expenses 4,164,919 3,087,360 1,563,228
General and administrative expenses 6,625,247 3,699,541 1,852,948
Shareholder litigation settlement expenses 8,081,770 - -
Write off of investment in Mattan
Corporation - - 881,010
Termination of strategic alliance with
IBC - - 331,740
In process research and development
acquired in connection with business
acquisitions - 12,800,000 250,000
Merger related and integration costs - 7,616,924 -
----------------- ----------------- ------------------
Loss from operations (26,236,477) (39,665,624) (5,851,614)
Interest income, net 202,877 1,073,493 15,493
Minority interest in loss of consolidated
subsidiaries 1,764,736 273,811 60,000
----------------- ----------------- ------------------
Loss from continuing operations (24,268,864) (38,318,320) (5,776,121)
----------------- ----------------- ------------------
Discontinued operations:
Loss from discontinued operations (1,180,622) (445,967) (197,236)
Loss on disposal of discontinued
operations (3,511,460) - -
----------------- ----------------- ------------------
(4,692,082) (445,967) (197,236)
----------------- ----------------- ------------------
Net loss (28,960,946) (38,764,287) (5,973,357)
Items of other comprehensive
income (loss) - - -
----------------- ----------------- ------------------
Comprehensive loss $ (28,960,946) $ (38,764,287) $ (5,973,357)
================= ================= ==================
Basic and diluted net loss per share:
Loss from continuing operations $ (1.56) $ (3.35) $ (.99)
Loss from discontinued operations (.30) (.04) (.03)
----------------- ----------------- ------------------
Net loss per share $ (1.86) $ (3.39) $ (1.02)
================= ================= ==================
Weighted average number of shares used
in computation of basic and diluted net
loss per share 15,531,400 11,444,123 5,833,326
================= ================= ==================
</TABLE>
See Accompanying notes.
F-4
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<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, 1996 4,702,203 $ 16,317,376 1,256,818 $ 4,769,878 1,256,818 $ 4,769,878 $ 2,321,057
Common stock and B warrants issued
in connection with secondary public
offering 2,403,500 9,363,298 - - - - -
Common stock issued in connection
with the formation of the Data.Site
joint venture 159,787 1,200,000 - - - - -
Exercise of stock options and
warrants 48,351 249,774 360 - 360 - (25,729)
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - 190,001 - - - - -
Decrease in unrealized holding gain on
short-term investments - - - - - - -
Net loss for the year (restated) - - - - - - -
---------- ------------ --------- ----------- --------- ----------- -----------
Balance at March 31, 1997 (restated) 7,313,841 27,320,449 1,257,178 4,769,878 1,257,178 4,769,878 2,295,328
Common stock and options issued in
connection with business acquisitions 1,065,266 11,757,426 - - - - -
Exercise of stock options and
warrants 6,270,314 43,989,418 283 - 283 - (2,295,328)
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - 479,620 - - - - -
Net loss for the year - - - - - - -
---------- ------------ --------- ----------- --------- ----------- -----------
Balance at March 31, 1998 14,649,421 83,546,913 1,257,461 4,769,878 1,257,461 4,769,878 -
Common stock reserved for issuance
in connection with litigation
settlement 2,250,000 7,447,500 - - - - -
Exercise of stock options and
warrants 62,857 202,619 - - - - -
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - (842,692) - - - - -
Net loss for the year - - - - - - -
---------- ------------ --------- ----------- --------- ----------- -----------
Balance at March 31, 1999 16,962,278 $ 90,354,340 1,257,461 $ 4,769,878 1,257,461 $ 4,769,878 $ -
========== ============ ========= =========== ========= =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
<CAPTION>
Common Unrealized
Class B Stock Holdings Accumulated
Warrants Warrants Gains Deficit Total
------------ ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 $ 376,774 $ 192,130 $ 3,666,367 $ (18,616,414) $ 13,797,046
Common stock and B warrants issued
in connection with secondary public
offering 1,037,514 - - - 10,400,812
Common stock issued in connection
with the formation of the Data.Site
joint venture - - - - 1,200,000
Exercise of stock options and
warrants 76,530 - - - 300,575
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - - - - 190,001
Decrease in unrealized holding gain on
short-term investments - - (3,666,367) - (3,666,367)
Net loss for the year (restated) - - - (5,973,357) (5,973,357)
------------ ------------ -------------- -------------- --------------
Balance at March 31, 1997 (restated) 1,490,818 192,130 - (24,589,771) 16,248,710
Common stock and options issued in
connection with business acquisitions - - - - 11,757,426
Exercise of stock options and
warrants 40,894 - - - 41,734,984
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors, and other
consultants - - - - 479,620
Net loss for the year - - - (38,764,287) (38,764,287)
------------ ------------ -------------- -------------- --------------
Balance at March 31, 1998 1,531,712 192,130 - (63,354,058) 31,456,453
Common stock reserved for issuance
in connection with litigation
settlement - - - - 7,447,500
Exercise of stock options and
warrants - - - - 202,619
Stock options issued to Advisory
Board members, clinical evaluators,
medical directors and other
consultants - - - - (842,692)
Net loss for the year - - - (28,960,946) (28,960,946)
------------ ------------ -------------- -------------- --------------
Balance at March 31, 1999 $ 1,531,712 $ 192,130 $ - $ (92,315,004) $ 9,302,934
=========== ============ ============== ============== ==============
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------
1999 1998 1997
(Restated)
<S> <C> <C> <C>
Operating Activities:
Net loss $ (28,960,946) $ (38,764,287) $ (5,973,357)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,647,794 1,612,691 841,467
Stock issued in connection with
shareholder litigation settlement 7,447,500 - -
Loss on disposal of discontinued operations 3,511,460 - -
Write off of investment in Mattan
Corporation - - 881,010
Acquired in-process research and
development - 12,800,000 250,000
Minority interest in loss of consolidated
subsidiaries (1,764,736) (273,811) (60,000)
Non-cash component of merger related
and integration costs - 2,332,238 -
Stock options issued to advisors and
consultants (842,692) 479,620 190,001
Termination of strategic alliance with IBC - - 125,000
Changes in operating assets and liabilities:
Accounts receivable 3,386,037 (1,977,906) (539,045)
Inventories (1,316,339) 394,975 (1,099,277)
Prepaid expenses and other current
assets 1,947,384 (1,505,104) (342,438)
Accounts payable (1,736,100) 2,190,093 (361,678)
Accrued liabilities (1,353,466) 4,843,974 319,936
Change in operating assets and
liabilities of discontinued operations (276,926) (264,314) 176,909
------------------ ----------------- -------------------
Net cash used in operating activities (18,311,030) (18,131,831) (5,591,472)
------------------ ----------------- -------------------
Investing Activities:
Sale (purchase) of short-term investments 9,666,918 (5,698,630) (3,968,288)
Patent and intangible expenditures (110,151) (87,989) (178,139)
Business acquisitions - (5,002,172) (96,028)
Purchase of property and equipment (360,916) (514,827) (24,477)
Purchase of property, equipment, and
intangible assets of discontinued
operations (23,494) (373,467) -
Other - (410,179) -
------------------ ----------------- -------------------
Net cash provided by (used in) investing
activities 9,172,357 (12,087,264) (4,266,932)
------------------ ----------------- -------------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Financing Activities:
Proceeds from equity offerings - - 10,400,812
Net borrowings (repayments) under
line of credit (1,997,693) (695,340) 800,000
Proceeds from exercise of stock options
warrants 202,619 41,734,984 300,575
Decrease (increase) in restricted cash 2,100,000 (1,100,000) (1,050,000)
Other - (171,645) (454,836)
----------------- ----------------- ------------------
Net cash provided by financing activities 304,926 39,767,999 9,996,551
----------------- ----------------- ------------------
Net (decrease) increase in cash
and cash equivalents (8,833,747) 9,548,904 138,147
Cash and cash equivalents at
beginning of period 9,722,514 173,610 35,463
----------------- ----------------- ------------------
Cash and cash equivalents at
end of period $ 888,767 $ 9,722,514 $ 173,610
================= ================= ==================
Supplemental disclosures of cash
flow information
Cash paid for interest $ 124,011 $ 120,000 $ 115,283
================= ================ ==================
</TABLE>
Significant noncash investing and financing activities excluded from the
accompanying consolidated statements of cash flows are as follows:
In fiscal 1998 and 1997, the Company issued Class A common stock valued at
$11,757,426 and $1,200,000, respectively, in connection with business
acquisitions.
In fiscal 1999, the Company reserved for issuance 2,250,000 shares of Class A
common stock valued at $7,447,500 in connection with an agreement in principle
to settle a lawsuit (Note 6). In addition, the Company wrote-off $3,511,460 of
assets related to discontinued operations (Note 3).
See accompanying notes.
F-8
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION AND NATURE OF OPERATIONS
Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and
commenced operations in August 1991 after acquiring substantially all of
the assets and certain liabilities of Pfizer Laser Systems (Pfizer), a
division of Pfizer Hospital Products Group, Inc. The Company designs,
develops, manufactures and markets several lines of lasers for surgical and
other medical purposes, disposables and associated accessory products for
the medical and dental market. The Company also designs, develops,
manufactures and markets digital imaging systems and image enhancement and
analysis software for use by practitioners in the ocular health field.
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
The Company has suffered recurring losses from operations and may continue
to incur losses for the foreseeable future due to the significant costs
anticipated to be incurred in connection with manufacturing, marketing and
distributing its laser and imaging products. In addition, the Company
intends to conduct continuing research and development activities,
including regulatory submittals and clinical trials to develop additional
applications for its technology. The Company operates in a highly
competitive environment and is subject to all of the risks inherent in a
new business enterprise. Further, as discussed in Note 6, the Company has
been named in class action lawsuits alleging violations of federal and
state securities laws. In November 1998, the Company reached an agreement
in principle with lead plaintiffs and their counsel to settle related
matters. Any significant uninsured judgment or settlement amount ultimately
associated with the class action litigation would significantly impact the
Company's ability to satisfy its working capital requirements. Management
believes that the Company's present liquid assets will be sufficient to
meet its working capital requirements through at least fiscal 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED
The Company's independent auditors unexpectedly resigned during May 1998
and withdrew their opinion on the Company's fiscal year 1997 financial
statements. Accordingly, the Company retained new auditors to re-examine
the 1997 financial statements. Because of the extended period of time that
had passed since the initial report was issued, a number of matters were
identified of which the Company was not aware when it initially issued the
1997 financial statements. Although the Company believes that the initially
issued 1997 financial statements were not materially misstated in terms of
net loss, total assets and shareholders' equity, the statements have
nonetheless been restated in the interest of full disclosure.
F-9
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED (CONTINUED)
The following is a summary of the impact of the restatement on the 1997
consolidated statement of operations.
<TABLE>
<CAPTION>
<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:
Current assets $ 10,658,161 $ (355,000) $ 10,303,161
Other assets 8,662,450 2,113,725 10,776,175
---------------- ----------------- ------------------
Total assets $ 19,320,611 $ 1,758,725 $ 21,079,336
================ ================= ==================
Current liabilities $ 2,688,901 $ 88,000 $ 2,776,901
Minority interest - 2,053,725 2,053,725
Net shareholders' equity 16,631,710 (383,000) 16,248,710
---------------- ----------------- ------------------
Total liabilities and
shareholders' equity $ 19,320,611 $ 1,758,725 $ 21,079,336
================ ================= ==================
Consolidated statement of
operations and comprehensive loss:
Net sales $ 5,530,861 $ (440,000) $ 5,090,861
Cost of sales 3,968,539 (320,000) 3,648,539
---------------- ----------------- ------------------
Gross profit 1,562,322 (120,000) 1,442,322
Selling and marketing
expenses 2,406,010 9,000 2,415,010
General and administrative
expenses 1,538,948 314,000 1,852,948
All other expenses 3,025,978 - 3,025,978
---------------- ----------------- ------------------
Loss from continuing operations (5,408,614) (443,000) (5,851,614)
Interest income, net 15,493 - 15,493
Minority interest in loss of
consolidated subsidiary - 60,000 60,000
---------------- ----------------- ------------------
Loss from continuing operations $ (5,393,121) $ (383,000) $ (5,776,121)
Loss from discontinued operations (197,236) - (197,236)
---------------- ----------------- ------------------
</TABLE>
F-10
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATEMENT OF AMOUNTS PREVIOUSLY REPORTED (CONTINUED)
<TABLE>
<CAPTION>
Previously Increase
Reported (Decrease) Restated
---------------- ----------------- ------------------
<S> <C> <C> <C>
Net loss $ (5,590,357) $ (383,000) $ (5,973,357)
================ ================= ==================
Items of other comprehensive
income (loss) - - -
---------------- ----------------- ------------------
Comprehensive loss $ (5,590,357) $ (383,000) $ (5,973,357)
================ ================= ==================
Basic and diluted net loss per share:
Loss from continuing operations (.93) (.07) (.99)
Loss from discontinued
operations (.03) - (.03)
---------------- ----------------- -----------------
Net loss per share $ (.96) $ (.07) $ (1.02)
================ ================= =================
</TABLE>
REVENUE RECOGNITION
Revenues are generally recognized when products are shipped to customers.
Allowances for returns are provided for based upon actual experience and
identified risks.
SHORT-TERM INVESTMENTS AND RESTRICTED CASH
The Company invests excess cash in United States Treasury securities and
commercial paper, generally with maturities of less than one year.
Short-term investments with a maturity of less than three months when
purchased are classified as cash equivalents. Investments with maturities
in excess of three months are presented as short-term investments in the
accompanying financial statements. Pursuant to Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities, the Company's short-term investments are classified
as available-for-sale and are reported at fair market value with unrealized
gains and losses reflected as an adjustment to shareholders' equity. There
were no material unrealized gains or losses at March 31, 1999 or 1998.
Restricted cash consists of certificates of deposits held to secure
borrowings under the Company's line of credit, and is classified as a
current asset since it is collateral for a current liability.
CONCENTRATION OF CREDIT RISK AND FOREIGN SALES
The Company generates revenues principally from sales in the medical field.
As a result, the Company's accounts receivable are concentrated primarily
in this industry. Sales in foreign countries accounted for approximately
11%, 13%, and 25% of the Company's total sales in fiscal 1999, 1998, and
1997, respectively. These foreign sales related almost entirely to sales in
Asia and Europe.
F-11
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND FOREIGN SALES (CONTINUED)
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on its accounts receivable, other
than the products being sold. Frequently, letters of credit are obtained
for international sales. The Company maintains allowances for estimated
potential credit losses.
LONG LIVED ASSETS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of (SFAS No. 121). No events occurred
during the years ended March 31, 1999 or 1998 which resulted in an
impairment of assets, except for the discontinuance of operations of
Data.Site, LLC which resulted in the write-off of various long-lived assets
(Note 3).
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market, and are comprised of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Raw materials $ 8,980,306 $ 5,980,793
Work-in-process 756,122 1,313,974
Finished goods 7,048,239 5,876,710
---------------- ----------------
16,784,667 13,171,477
Less reserve for slow moving
inventories and excess
purchase commitments (10,987,613) (8,688,779)
---------------- ----------------
$ 5,797,054 $ 4,482,698
================ ================
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for replacements
and improvements are capitalized while expenditures for repairs and
maintenance are charged to operating expense as incurred.
F-12
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Machinery, equipment, molds and tooling $ 2,826,774 $ 1,948,560
Furniture, fixtures, and office equipment 2,277,443 3,004,906
Software 114,345 375,000
--------------- ---------------
5,218,562 5,328,466
Less accumulated depreciation (3,745,142) (3,550,043)
--------------- ---------------
$ 1,473,420 $ 1,778,423
=============== ===============
</TABLE>
Depreciation of property and equipment is calculated on a straight-line
basis over the following estimated useful lives:
Machinery, equipment, molds and tooling 5-10 years
Furniture, fixtures, and office equipment 10 years
Software 3 years
Leasehold improvements Shorter of estimated useful
life or term of lease
INTANGIBLE ASSETS
Intangible assets consist primarily of patents and technology rights,
goodwill and license agreements. The costs assigned to acquired intangible
assets, partially based upon independent appraisals, are being amortized on
a straight-line basis over the estimated useful lives of the assets ranging
from 2 to 15 years.
<TABLE>
Intangibles are comprised of the following:
<CAPTION>
March 31, March 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Patents and technology rights $ 13,963,247 $ 13,062,710
Goodwill 249,172 2,839,570
License agreements 110,000 110,000
--------------- ----------------
14,322,419 16,012,280
Less accumulated amortization (5,152,059) (4,020,601)
--------------- ----------------
$ 9,170,360 $ 11,991,679
=============== ================
</TABLE>
F-13
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
During the year ended March 31, 1999, the Company discontinued the
operations of its 51%-owned subsidiary Data.Site, LLC (Note 3).
Accordingly, the Company wrote-off all remaining unamortized goodwill
amounting to $2,604,251.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. A substantial
portion of the Company's research and development expense is related to
developing new products, improving existing products or processes, and
clinical research programs.
From time to time, the Company enters into agreements with certain doctors
to exchange a portion of a product's sales price for services related to
the completion of certain portions of clinical studies necessary for
obtaining product approval from the U.S. Food and Drug Administration.
Typically, the amounts consist of a portion of the product sales price
which is equal to the cost of the services to be rendered by the doctor.
Pursuant to the agreements, in the event the doctor is unable to complete
the agreed upon clinical study, the doctor is required to remit a cash
payment for the entire amount.
ADVERTISING EXPENSES
The Company expenses advertising costs as they are incurred. Advertising
expenses aggregated $758,301, $628,410, and $143,608 in 1999, 1998, and
1997, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with statement of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
Accounting for Income Taxes. SFAS 109 requires the liability method of
accounting for income taxes. No credits for tax benefits have been
recognized, since their realization is not reasonably assured (see Note 7).
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments, including money market
accounts and mutual funds, with a maturity of three months or less when
acquired to be cash equivalents.
F-14
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share has been computed based on the weighted average number
of the Company's common shares outstanding during each presented period and
excludes all shares of Class E-1 and Class E-2 common stock, outstanding or
subject to option, because all such shares of stock are subject to escrow
and the conditions for the release of those shares from escrow have not
been satisfied. Furthermore, common stock equivalents, such as stock
options and warrants, were not considered in the net loss per share
calculation because the effect would be antidilutive.
As discussed in Note 10, the Company issued convertible debentures in a
private placement subsequent to year-end.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations, in accounting for its employee stock option grants.
Options granted to consultants and other non-employees are accounted for
under the fair value method in accordance with Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based
Compensation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Significant estimates and assumptions include inventory valuation and the
realizability of certain intangible assets. The Company's inventories and
intangible assets largely relate to technologies which have yet to gain
widespread market acceptance. Inventory reserves have been established
based upon sales forecasts. The Company believes that no further losses
will be incurred on the disposition of its inventories and that the
remaining economic life of the Company's intangible assets is reasonable.
If widespread market acceptance of the Company's products is not achieved,
the carrying amount of inventories and intangible assets could be
materially affected. Conversely, better than expected sales could yield
improved margins.
F-15
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130 (SFAS No. 130), Reporting
Comprehensive Income. This statement establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in an entity's financial statements. This statement
requires an entity to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
The Company had no items of other comprehensive income during fiscal years
1999, 1998 and 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
and Enterprise and Related Information. This statement requires public
enterprises to report financial and descriptive information about its
reportable operating segments and establishes standards for related
disclosures about product and services, geographic areas, and major
customers. The Company has not adopted the disclosure requirements of SFAS
No. 131 as management believes that the Company currently has only one
reportable operating segment.
3. BUSINESS ACQUISITIONS AND DISPOSITIONS
DATA.SITE, LLC
Effective January 31, 1997, the Company entered into a joint venture with
Refractive Surgical Services, LLC (RSS), a Kansas City based company
engaged in the development of certain medical outcomes software. Under this
joint venture, the Company and RSS formed Data.Site, LLC (Data.Site).
Data.Site acquired and assumed substantially all of the assets and
liabilities of RSS. The Company acquired a 51 percent interest in
Data.Site, which was accounted for under the purchase method of accounting,
and issued 159,787 shares of its Class A common stock to RSS. In connection
with the acquisition, the Company recorded goodwill in the amount of
$2,893,179 and a minority interest of $2,113,725. The Company has funded
Data.Site's operations with advances of cash or equivalent services in the
aggregate amount of $2,036,452 through March 31, 1999. As of March 31, 1999
and 1998, RSS owed the Company $599,194 and $266,000, respectively, and
such amounts have been fully reserved.
In March 1999, Data.Site's Board of Directors adopted a plan to discontinue
its operations. Accordingly, the operating results of Data.Site's
operations, including the write-off of unamortized goodwill of $2,604,251,
capitalized software of $666,304 and property and equipment of $240,905,
have been segregated from continuing operations and reported on a separate
line item on the statement of operations and comprehensive loss for the
year ended March 31, 1999.
The consolidated statements of operations and comprehensive loss and cash
flows for the years ended March 31, 1998 and 1997, have been reclassified
to present Data.Site's operating results as discontinued operations.
F-16
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
DATA.SITE, LLC (CONTINUED)
Operating results from discontinued operations are as follows for the years
ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 65,866 $ 532,272 $ -
Cost of sales 256,344 160,002 -
---------------- ---------------- ----------------
(190,478) 372,270 -
Operating expenses 990,144 818,237 (197,236)
---------------- ---------------- ----------------
$ (1,180,622) $ (445,967) $ (197,236)
================ ================ ================
</TABLE>
EYESYS TECHNOLOGIES, INC.
On September 30, 1997, the Company acquired all of the equity interests of
EyeSys Technologies, Inc. (EyeSys), a manufacturer and distributor of a
specialized line of diagnostic ophthalmic equipment, for approximately
$12.5 million, in the form of 1,236,668 shares of the Company's common
stock (including 319,684 shares held in an escrow account pending the
outcome of certain warranties to be determined at the end of 12 and 18
months), and $470,000 in cash. 216,761 of the escrowed shares have been
excluded from the determination of the purchase price. If and when they are
released, the allocation of the adjusted purchase price will be
re-assessed. Options to purchase 210,000 shares of the Company's common
stock were also issued in connection with the acquisition. These options
were valued in accordance with SFAS 123 and included in the acquisition
cost. The acquisition was accounted for as a purchase and the total
acquisition cost was allocated among net liabilities assumed ($2,183,429),
intangibles ($2,600,000), and in process research and development
($10,200,000). Merger related and integration expenses of $2,147,224 were
also recorded as of the acquisition date. EyeSys has been consolidated
commencing with the acquisition date. Goodwill arising from the acquisition
($2,298,784) was written-off as of the acquisition date due to uncertainty
as to its recoverability.
F-17
<PAGE>
3. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
OPHTHALMIC IMAGING SYSTEMS
During the final four months of fiscal 1998, the Company acquired a
controlling interest in Ophthalmic Imaging Systems ("OIS") for $3.3 million
in cash. OIS is engaged in the business of designing, developing,
manufacturing and marketing digital imaging systems and image enhancement
and analysis software for use by practitioners in the ocular health field.
Equity accounting was used during the period in which the Company owned at
least 20% but less than 50% of the OIS stock (December 1997 through
February 1998). Commencing with the date at which the controlling interest
was acquired (late February 1998), OIS has been consolidated with the
Company in the accompanying financial statements. The OIS acquisition has
been accounted for as a purchase and the total acquisition cost was
allocated among net liabilities of OIS ($996,835), intangibles ($1,687,407)
and in process research and development ($2,600,000). Merger related and
integration expenses of $1,687,407 were also recorded as of the date at
which the controlling interest was acquired. The Company is in the process
of negotiating an agreement for the purchase of the minority interests of
OIS.
The following unaudited pro forma consolidated results of operations for
the year ended March 31, 1998 give effect to the EyeSys and OIS
acquisitions as if they had occurred at the beginning of fiscal 1998:
Net sales $ 17,975,000
Net loss (42,885,000)
Net loss per share (3.58)
The unaudited pro forma information is not necessarily indicative of the
combined results of operations that would have occurred during the periods
presented nor for future results of operations.
The Company entered into a Stock Purchase Agreement, dated February 25,
1998, pursuant to which it agreed, subject to certain conditions, to
commence an exchange offer to acquire all of the outstanding common stock
of OIS not owned by the Company. This Stock Purchase Agreement was
terminated as of August 21, 1998. In connection with this termination, the
Company may be liable to pay OIS a $500,000 break-up fee, which could be
satisfied by the reduction of indebtedness of OIS to the Company which
arose after March 31, 1998. The parties are currently negotiating various
issues relating to the termination of the Purchase Agreement and their
future business relationship.
OTHER
During fiscal 1998, three other business acquisitions occurred, which were
not individually or collectively significant to the financial condition or
operating results of the Company.
F-18
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
4. RESEARCH GRANT
In September 1995, the Company obtained a Small Business Innovative
Research Grant totaling approximately $750,000 for the study of laser
emulsification. Pursuant to the terms of the grant, the Company is eligible
to receive reimbursement for research and development costs incurred in
connection with the laser emulsification study up to $750,000 upon the
achievement of certain milestones, as defined. During fiscal 1997, the
Company received the final grant payment of approximately $450,000. Amounts
received under the grant were offset against research and development costs
incurred in the study.
5. LINES OF CREDIT
The Company had a credit facility with a bank which provided for borrowings
of up to $2,100,000. As of March 31, 1998, total borrowings under this
agreement were $1,936,000, bearing interest at the bank's prime rate (8.50%
at March 31, 1998). Borrowings under the agreement were secured by a
certificate of deposit and were repaid in September 1998. The agreement
expired in September 1998.
The Company's OIS subsidiary has an account's receivable financing
agreement, which allows for advances of up to 80% of eligible receivables
up to $960,000. The financing agreement is subject to annual renewal in
November of each year, unless terminated by either party. As of March 31,
1999 and 1998, $70,470 and $132,634 were outstanding under OIS's line of
credit, respectively.
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its office and production facilities under a
noncancellable operating lease that expires in December 2000. Total rental
expense under operating leases was $331,247, $251,000, and $296,000 for the
fiscal years ended March 31, 1999, 1998, and 1997, respectively. At March
31, 1999, future minimum lease payments under noncancellable operating
leases are as follows:
2000 $ 245,412
2001 187,866
-----------
$ 433,278
===========
OIS has a month to month operating lease which requires minimum monthly
payments of $7,000.
F-19
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
IFS LITIGATION
The Company entered into an agreement with Infrared Fiber Systems, Inc.
(IFS), a supplier of certain fiber optics, that expires in the fiscal year
ending March 31, 2002. The agreement requires the supplier to sell
exclusively to the Company fiber optics for medical and dental applications
as long as the Company purchases defined minimum amounts.
In March 1994, the Company initiated litigation against IFS. The Company's
complaint alleges that IFS and two of its officers misrepresented IFS'
ability to supply optical fibers, and that IFS breached its supply
agreement and certain warranties. In April 1994, IFS filed a
cross-complaint alleging breach of contract and intentional interference
with prospective economic advantage, seeking declaratory relief that the
contract has been terminated and that IFS is free to market its fiber
optics to others. In July 1994, Coherent, Inc., a major shareholder of IFS
and a manufacturer of medical lasers which employ IFS optical fibers,
joined the lawsuit for the express purpose of defending their rights to the
IFS optical fibers. In May 1995, the Company instituted litigation
concerning this dispute in Orange County, California Superior Court against
Coherent, Westinghouse Electric Corporation (Westinghouse) and an
individual employee of Westinghouse, who was an officer of IFS from 1986 to
1993, when the events involved in the federal action against IFS took place
and while Westinghouse owned a substantial minority interest in IFS. The
complaint charges that Coherent conspired with IFS in the wrongful conduct
which is the subject of the federal lawsuit and interfered with the
Company's contracts and relations with IFS and with prospective contracts
and advantageous economic relations with third parties. The complaint
asserts that Westinghouse is liable for its employee's wrongful acts as an
IFS executive while acting within the scope of his employment at
Westinghouse. The lawsuit seeks injunctive relief and compensatory damages.
In October 1995, the federal action was stayed by order of the court in
favor of the California state court action, in which the pleadings have
been amended to include all claims asserted by the Company in the federal
action.
In July 1996, the court in the California state court action granted
demurrers by Westinghouse and the employee of Westinghouse to all causes of
action against them, as well as all but one of the Company's claims against
Coherent. As a result, the claims that were the subject of the granted
demurrers have been dismissed, subject to the Company's right to appeal.
The Company has filed an appeal of these decisions as they relate to
Westinghouse and the Westinghouse employee, and briefs have been submitted.
No date has been set for a hearing of this appeal. No trial date has been
set as to the remaining outstanding causes of action.
F-20
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SHAREHOLDERS LITIGATION
The Company and certain of the officers and directors have been named in a
number of securities class action lawsuits which allege violations of the
Securities Exchange Act or the California Corporations Code. The plaintiffs
seek damages on behalf of classes of investors who purchased the Company's
stock between May 7, 1997 and April 15, 1998. The complaints allege that
the Company misled investors by failing to disclose material information
and making material misrepresentations regarding the Company's business
operations and projections. The Company has also been named in a
shareholder derivative action purportedly filed on its behalf against
certain officers and directors arising out of the same alleged acts. The
Company has reached an agreement in principle with lead plaintiffs and
their counsel to settle the class and derivative actions. Under the terms
of the agreement in principle, in exchange for a release of all claims, the
Company would pay 2,250,000 shares of common stock and $4,600,000 in cash.
The cash portion of the settlement would be paid by the Company's insurance
carrier. Completion of the settlement is subject to execution of the final
settlement agreement, court approval and certain other conditions. If the
settlement is not completed, is not approved, or is not consummated for any
reason, the parties would continue to litigate the actions.
In accordance with the terms of the agreement in principle to settle class
and derivative actions, the Company established a reserve during the
quarter ended December 31, 1998 for the issuance of 2,250,000 shares of
common stock. These shares were valued at a price of $3.31 per share, which
was the closing price of the Company's stock on November 18, 1998, the
effective date of the proposed settlement agreement. The Company has also
included approximately $634,000 of associated legal and professional fees
in this reserve, but has not included in the reserve approximately
$4,600,000 in cash that would be paid by the Company's insurers.
The Company is involved in various other disputes and lawsuits arising from
its normal operations. The litigation process is inherently uncertain and
it is possible that the resolution of these disputes and other lawsuits may
adversely affect the Company. However, it is the opinion of management,
that the outcome of such other matters will not have a material adverse
impact on the Company's consolidated financial position, results of
operations, or cash flows.
OTHER
The Company has executed royalty agreements with certain parties that
require the payment of royalties upon the achievement of defined sales
levels. To date, no such royalty payments have been required pursuant to
the royalty agreements.
7. INCOME TAXES
The Company has incurred operating losses since its inception and, as a
result, no provision for or benefit from income tax has been recorded.
F-21
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
7. INCOME TAXES (CONTINUED)
<TABLE>
Deferred tax assets comprised the following at March 31:
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Tax operating loss carryforwards $ 18,659,120 $ 14,502,970
Inventory and receivable reserves and related
temporary differences 8,433,262 1,705,050
Depreciation and amortization 1,139,454 890,215
Research and development credit carryforwards 539,630 424,494
Accruals not currently deductible 3,623,530 193,255
---------------- ----------------
Total deferred tax assets 32,394,996 17,715,984
Valuation allowance for deferred tax assets (32,394,996) (17,715,984)
---------------- ----------------
Net deferred taxes $ - $ -
================ ================
</TABLE>
The Company has approximately $55 million of federal net operating loss
carryforwards at March 31, 1999 ($36 million for state purposes), which
will begin to expire in 2006. A valuation allowance has been established
for the entire deferred tax asset.
The Tax Reform Act of 1986 contains provisions which could substantially
limit the availability of the net operating loss carryforwards if there is
a greater than 50% change in ownership during a three year period. As a
result of the Company's public offerings, the Company experienced an
ownership change of more than 50%, resulting in a limitation on the
utilization of their net operating loss carryforwards. Further ownership
changes may occur as a result of shares to be issued to settle litigation
(Note 6) or may occur as a result of the exercise of stock options or
issuance of stock to complete business combinations. The limitation is
based on the value of the Company on the date that the change in ownership
occurred. The ultimate realization of the loss carryforwards is dependent
on the extent of limitations and the future profitability of the Company.
8. SHAREHOLDERS' EQUITY
INITIAL AND SECONDARY PUBLIC OFFERINGS
On December 7, 1994, the Company completed an initial public offering of
2,760,000 Units of the Company's securities, each unit consisting of one
share of Class A common stock, one redeemable Class A warrant and one
redeemable Class B warrant (the Units). The Company realized net proceeds
of $10,953,000 from this offering and the related exercise of the
underwriters over allotment option. Each Class A warrant consisted of the
right to purchase one share of Class A common stock and one Class B warrant
through November 30, 1999 at an exercise price of $6.50. Each Class B
warrant consists of the right to purchase one share of Class A common stock
at an exercise price of $8.00. The Company has the right to redeem the
Class A and Class B warrants after November 30, 1997 at a price of $.05 per
warrant subject to certain conditions regarding the bid price of the Class
A common stock.
F-22
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. SHAREHOLDERS' EQUITY (CONTINUED)
On October 18, 1996, the Company completed a public offering of 11,000
Units of the Company's securities, each Unit consisting of 190 shares of
Class A common stock and 95 redeemable Class B warrants (the Units). The
Company realized net proceeds of $10,401,000 from this offering and the
related exercise of the underwriters over allotment option. Each Class B
warrant consists of the right to purchase one share of Class A common stock
through November 30, 1999 at an exercise price of $8.00.
During fiscal 1998, the Company received approximately $41,735,000 from the
exercise of options and warrants, and issued an additional 4,176,000 Class
B Warrants and 6,270,000 shares of Class A Common Stock. As a result of
such exercises, no Class A warrants remain outstanding.
STOCK OPTIONS
The Company has adopted several stock option plans that authorize the
granting of options to employees, officers and/or consultants to purchase
shares of the Company's Class A common stock. The stock option plans are
administered by the Board of Directors or a committee appointed by the
Board of Directors, which determines the terms of the options, including
the exercise price, the number of shares subject to option and the
exercisability of the options. The options are generally granted at the
fair market value of the shares underlying the options at the date of the
grant and generally expire within ten years of the grant date.
In addition to options granted pursuant to the stock option plans, the
Company has issued options to purchase shares of the Company's Class A
common stock to certain members of the Board of Directors, consultants and
former notes payable holders.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations in accounting for its
employee stock option grants. Accordingly, no compensation expense has been
recognized for its employee stock option awards because the exercise price
of the Company's stock options equals the market price of the underlying
stock on the date of grant. The Company recognizes expense related to
grants of options to non-employees in accordance with the fair value
provisions of SFAS No. 123. Such expenses (recoveries) aggregated
$(842,692) in 1999, $1,590,524 in 1998 (which includes $1,110,904 of merger
related and integration costs associated with the EyeSys acquisition) and
$190,001 in 1997.
F-23
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. SHAREHOLDERS' EQUITY (CONTINUED)
FASB Statement No. 123, Accounting for Stock-Based Compensation, requires
proforma information regarding net income (loss) and net income (loss) per
share using compensation that would have been incurred if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value of options granted have been estimated at
the date of grant using a Black-Scholes option pricing model using the
following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Risk free interest rate 5.50% 6.00% 6.00%
Stock volatility factor 1.50 0.64 0.58
Weighted average expected option life 4 years 4 years 4 years
Expected dividend yield 0% 0% 0%
</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 ($2,049,615, $1,947,458, and $974,469 for fiscal years 1999,
1998, and 1997, respectively) may not be indicative of such expense in
future periods as the 1997 amounts are based only on option grants after
December 15, 1994. Proforma information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Pro forma net loss $ (31,853,753) $ (40,711,745) $ (6,947,826)
Pro forma net loss per share $ (2.05) $ (3.56) $ (1.19)
</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>
1999 1998 1997
---------------------- ----------------------- ----------------------
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 3,486,669 $ 6.84 2,308,049 $ 5.51 1,423,949 $ 5.58
Granted 1,729,000 7.40 1,899,500 9.22 1,042,756 6.16
Exercised (57,115) 4.69 (395,271) 6.20 (1,899) 1.00
Forfeited/cancelled (913,953) 8.00 (325,609) 8.40 (156,757) 10.53
------------ -------- ----------- --------- ------------ -------
Outstanding end of
year 4,244,601 $ 6.85 3,486,669 $ 6.84 2,308,049 $ 5.51
============ ======== =========== ========= ============ =======
</TABLE>
F-24
<PAGE>
PREMIER LASER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
The weighted average remaining contractual life of options as of March 31,
1999 was as follows:
<CAPTION>
Weighted
Average Weighted Weighted
Number of Contractual Average Average
Options Life Exercise Options Exercise
Range of Exercise Prices Outstanding Years Price Exercisable Price
------------------------ --------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$1.00 - $2.81 485,923 5 $ 2.10 122,230 $ 2.32
$4.50 - $8.85 2,792,306 8 6.48 1,765,306 5.98
Greater than $9.00 966,372 9 10.29 486,537 10.46
----------- -----------
4,244,601 2,374,073
========== ==========
</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. Such amount is $26,343,900 for the
fiscal year ending March 31, 2000, and such amount will be increased in
proportion to increases in the weighted average number of shares of common
stock outstanding (as defined) during the relevant year, as compared to the
number of shares outstanding immediately after the Company's initial public
offering. If the above event does not occur, the Class E-1 common stock
will be canceled on June 30, 2000. All of the Class E-2 common stock will
be automatically converted into Class A common stock in the event that the
Company's net income before provision for income taxes, as defined, amounts
to at least $71,181,750 for the year ending March 31, 2000 (which amount
shall be adjusted in the same manner as that for the Class E-1 common
stock). If the above event does not occur, the Class E-2 common stock will
be canceled on June 30, 2000.
The Company will, in the event of the release of the Class E-1 and Class E-
2 common stock, recognize during the period in which the earnings
thresholds are met, a substantial noncash charge to earnings equal to the
fair value of such shares on the date of their release, which would have
the effect of significantly increasing the Company's loss or reducing or
eliminating earnings, if any, at such time.
9. EMPLOYEE BENEFIT PLAN
The Company adopted a Defined Contribution 401(k) Profit Sharing Plan,
effective January 1, 1997, covering substantially all of its employees. The
Plan permits eligible employees to contribute a portion of their
compensation to the Plan, on a tax deferred basis. The Company may make
matching contributions, in amounts determined by the Company's Board of
Directors. The Company's contributions are in the form of shares of the
Company's common stock. During 1997, no amounts were contributed by the
Company to the Plan. During 1999 and 1998, 32,397 and 3,752 shares have
been approved for contribution by the Company, respectively.
10. SUBSEQUENT EVENTS
In May 1999, the Company filed a registration statement to register
4,278,146 shares of its Class A common stock underlying convertible
debentures issued in a private placement. Upon filing the registration
statement and other certain documents, the Company received $2 million in
the private transaction and the Company expects to receive an additional $2
million on the effective date of the registration statement.
F-25
<PAGE>
<TABLE>
PREMIER LASER SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1999, 1998 (RESTATED) AND 1997
<CAPTION>
Deductions/
Balance at Recoveries Balance
Beginning and at end of
Description of period Additions Write-off Other * period
- --------------------- ---------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful
accounts receivable $ 1,224,845 $ 1,079,566 $ (307,253) $ - $ 1,997,158
Inventory reserves 8,688,779 2,298,834 - - 10,987,613
1998
Allowance for doubtful
accounts receivable $ 613,263 $ 385,407 $ (149,801) $ 375,976 $ 1,224,845
Inventory reserves 1,203,324 5,704,455 - 1,781,000 8,688,779
1997
Allowance for doubtful
accounts receivable $ 154,677 $ 403,515 $ (119,054) $ 174,125 $ 613,263
Inventory reserves 950,325 252,999 - - 1,203,324
</TABLE>
* Allowance amounts added in connection with business acquisitions.
F-26
<PAGE>
SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this
"AGREEMENT"), dated as of May 17, 1999, among Premier Laser Systems Inc., a
California corporation (the "COMPANY"), and the investors signatory hereto (each
such investor is a "PURCHASER" and all such investors are, collectively, the
"PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchasers and the
Purchasers, severally and not jointly, desire to purchase from the Company an
aggregate principal amount of $4,000,000 of the Company's 6% Secured Convertible
Debentures, due three (3) years from the date of issuance, which shall be in the
form of EXHIBIT A (the "DEBENTURES") and which are convertible into shares of
the Company's Class A Common Stock, no par value per share (the "COMMON STOCK").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy are
hereby acknowledged, the Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 THE CLOSING.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchasers and the Purchasers
shall, severally and not jointly, purchase from the Company the Debentures for
an aggregate purchase price of $4,000,000. The closing of the purchase and sale
of the Debentures (the "CLOSING") shall take place at the offices of Robinson
Silverman Pearce Aronsohn & Berman LLP ("ROBINSON SILVERMAN"), 1290 Avenue of
the Americas, New York, New York 10104, immediately following the execution
hereof or such later date as the parties shall agree. The date of the Closing is
hereinafter referred to as the "CLOSING DATE."
(b) Prior to the Closing Date, the parties shall deliver or shall
cause to be delivered the following: (A) the Company shall deliver to Robinson
Silverman for the benefit of the Purchasers in accordance with the Escrow
Agreement, dated as of the date hereof, by and among the Company, the Purchasers
and Robinson Silverman in the form of EXHIBIT F (the "ROBINSON SILVERMAN ESCROW
AGREEMENT"), (1) the Debentures in the aggregate principal amount indicated
below each Purchaser's name on the signature page to this Agreement, registered
in the name of each such Purchaser, (2) two Common Stock purchase warrants, each
in the form of EXHIBIT D, registered in the name of the appropriate Purchasers,
pursuant to which the Purchasers shall have the right at any time and from time
to time thereafter through the fifth anniversary of the Closing Date to acquire
an aggregate of 60,000 shares of Common Stock, at an exercise price per share
(subject to adjustment as provided therein) equal to 120% of the average of the
Per Share Market Values for the five (5) days immediately preceding the Closing
Date (collectively, the "WARRANTS"), (3) the legal opinion of Rutan & Tucker,
LLP, outside counsel to the Company (the "ESCROW AGENT"), in the form of EXHIBIT
C, and (4) all other documents, instruments and writings required to have been
delivered at or prior to the Closing by the Company pursuant to this Agreement,
including (A) an executed Registration Rights Agreement, dated the date hereof,
by and among the Company and the Purchasers, in the form of EXHIBIT B (the
"REGISTRATION RIGHTS AGREEMENT"), (B) an executed Security Agreement, dated the
date hereof, by and among the Company and the Purchasers, in the form of EXHIBIT
-1-
<PAGE>
F (the "SECURITY AGREEMENT"), (C) an executed Intellectual Property Security
Agreement, dated the date hereof, by and among the Company and the Purchasers,
in the form of EXHIBIT G (the "IP SECURITY AGREEMENT"), (D) an executed Escrow
Agreement, dated the date hereof, by and among the Company, the Purchasers and
the Escrow Agent, in form acceptable to the parties hereto (the "ESCROW
AGREEMENT"), (E) the Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT E, delivered to and acknowledged by the Company's transfer agent (the
"TRANSFER AGENT INSTRUCTIONS"), and (F) an executed Robinson Silverman Escrow
Agreement; and (B) each Purchaser shall deliver (1) to Robinson Silverman, for
delivery in accordance with the Robinson Silverman Escrow Agreement, one half
(1/2) of the purchase price for the Debentures indicated below such Purchaser's
name on the signature page to this Agreement in United States dollars in
immediately available funds by wire transfer to an account designated in writing
by the Company for such purpose, (2) to the Escrow Agent, one half (1/2) of the
purchase price for the Debentures indicated below such Purchaser's name on the
signature page to this Agreement in United States dollars in immediately
available funds by wire transfer to an account designated in writing by the
Escrow Agent for such purpose, and (3) to Robinson Silverman, for delivery in
accordance with the Robinson Silverman Escrow Agreement, all documents,
instruments and writings required to have been delivered at or prior to the
Closing Date by such Purchaser pursuant to this Agreement, including, without
limitation, an executed Registration Rights Agreement, Security Agreement, IP
Security Agreement and Escrow Agreement.
1.2 CERTAIN DEFINED TERMS. For purposes of this Agreement,
"CONVERSION PRICE," "ORIGINAL ISSUE DATE" and "TRADING DAY" shall have the
meanings set forth in the Debentures; "BUSINESS DAY" shall mean any day except
Saturday, Sunday and any day which shall be a federal legal holiday or a day on
which banking institutions in the State of New York or the State of California
are authorized or required by law or other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
makes the following representations and warranties to the Purchasers:
(a) ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of California, with the requisite corporate power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. The Company has no subsidiaries other than as set forth in SCHEDULE
2.1(a) (collectively the "SUBSIDIARIES"). Each of the Subsidiaries is an entity,
duly incorporated or otherwise organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization (as
applicable), with the full power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Each of the Company
and the Subsidiaries is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may be,
could not, individually or in the aggregate, (x) adversely affect the legality,
-2-
<PAGE>
validity or enforceability of the Debentures or any of this Agreement, the
Registration Rights Agreement, the Warrants, the Escrow Agreement, the Robinson
Silverman Escrow Agreement, the Security Agreement or the IP Security Agreement
(collectively, the "TRANSACTION DOCUMENTS"), (y) have or result in a material
adverse effect on the results of operations, assets, prospects, or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
or (z) adversely impair the Company's ability to perform fully on a timely basis
its obligations under any of the Transaction Documents (any of (x), (y) or (z),
a "MATERIAL ADVERSE EFFECT").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents and the Debentures has been duly executed by the
Company and, when delivered (or filed, as the case may be) in accordance with
the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms. Neither
the Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, by-laws or other charter documents.
(c) CAPITALIZATION. The number of authorized, issued and
outstanding capital stock of the Company is set forth in SCHEDULE 2.1(c). No
shares of Common Stock are entitled to preemptive or similar rights, nor is any
holder of the Common Stock entitled to preemptive or similar rights arising out
of any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as a result of the purchase and sale of the
Debentures and the Warrants and except as disclosed in SCHEDULE 2.1(c), there
are no outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person (as
defined below) any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically disclosed
in the SEC Documents (as defined below) or SCHEDULE 2.1(c), no Person or group
of related Persons beneficially owns (as determined pursuant to Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT")), or has the right to acquire by agreement with or by obligation binding
upon the Company, in excess of 5% of the Common Stock. A "PERSON" means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any kind.
-3-
<PAGE>
(d) ISSUANCE OF THE DEBENTURES AND THE WARRANTS. The Debentures and
the Warrants are duly authorized and, when issued and paid for in accordance
with the terms hereof, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind (collectively, "LIENS"). The Company has on the date hereof
and will, at all times while the Debentures and the Warrants are outstanding,
maintain an adequate reserve of duly authorized shares of Common Stock, reserved
for issuance to the holders of the Debentures and the Warrants, to enable it to
perform its conversion, exercise and other obligations under this Agreement, the
Debentures and the Warrants. Such number of reserved and available shares of
Common Stock is not less than the sum of (i) 200% of the number of shares of
Common Stock which would be issuable upon conversion in full of the Debentures,
assuming such conversion occurred on the Original Issue Date for the Debentures,
the Filing Date or the Effectiveness Date (each as defined in the Registration
Rights Agreement), whichever yields the lowest Conversion Price, (ii) the number
of shares of Common Stock issuable upon exercise of the Warrants, and (iii) the
number of shares Common Stock which would be issuable upon payment of interest
on the Debentures, assuming the Debentures are outstanding for three years and
all interest is paid in shares of Common Stock (such number of shares of Common
Stock as contemplated in clauses (i)-(iii), the "INITIAL MINIMUM"). All such
authorized shares of Common Stock shall be duly reserved for issuance to the
holders of the Debentures and the Warrants. The shares of Common Stock issuable
upon conversion of the Debentures, as payment of interest thereon and upon
exercise of the Warrants are collectively referred to herein as the "UNDERLYING
SHARES." The Debentures, the Warrants and the Underlying Shares are collectively
referred to herein as, the "SECURITIES." When issued in accordance with the
Debentures and the Warrants, the Underlying Shares will be duly authorized,
validly issued, fully paid and nonassessable, free and clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its articles of incorporation, bylaws or other charter
documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
a Company debt or otherwise) to which the Company or any Subsidiary is a party
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including Federal and state
securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) and
(iii), as could not, individually or in the aggregate, have or result in a
Material Adverse Effect. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, could not have or
result in a Material Adverse Effect. The sale and issuance of the Securities
hereunder shall not cause any Purchaser or Purchasers to be an "Acquiring
Person" under the Rights Plan (as defined in Section 3.18).
-4-
<PAGE>
(f) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any filing or registration with, any court or other
Federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filings required pursuant to Section
3.11, (ii) the filing with the Securities and Exchange Commission (the
"COMMISSION") of a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale of the Underlying
Shares by the Purchasers (the "UNDERLYING SHARES REGISTRATION STATEMENT"), (iii)
the application(s) to the Nasdaq National Market ("NASDAQ") for the listing of
the Underlying Shares for trading on the NASDAQ (and with any other national
securities exchange or market on which the Common Stock is then listed), (iv)
applicable Blue Sky filings and (v) in all other cases where the failure to
obtain such consent, waiver, authorization or order, or to give such notice or
make such filing or registration could not have or result in, individually or in
the aggregate, a Material Adverse Effect (collectively, the "REQUIRED
APPROVALS").
(g) LITIGATION; PROCEEDINGS. Except as specifically disclosed in
SCHEDULE 2.1(g), there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (Federal, state, county, local or foreign) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, individually or in
the aggregate, have or result in a Material Adverse Effect.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not individually or in the
aggregate, have or result in a Material Adverse Effect. The security interests
granted to the Purchasers pursuant to the Security Agreement and IP Security
Agreement will convey and grant to the Purchasers a first priority security
interest in all of the Collateral (as such terms is defined in such agreements).
(i) PRIVATE OFFERING. Assuming the accuracy of the representations
and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Neither the Company nor any Person acting on its
behalf has taken any action that could subject the offering, issuance or sale of
the Securities to the registration requirements of the Securities Act.
(j) SEC DOCUMENTS; FINANCIAL STATEMENTS. Except as set forth in
SCHEDULE 2.1 (j) attached hereto, the Company has filed all reports required to
be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the three years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC DOCUMENTS" and,
together with the Schedules to this Agreement and the Supplementary Disclosure
delivered to the Purchasers prior to the date hereof, the "DISCLOSURE
MATERIALS") on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Documents prior to the expiration of any such
extension. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Documents, when filed, contained any untrue statement of a
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<PAGE>
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. All material
agreements to which the Company is a party or to which the property or assets of
the Company are subject have been filed as exhibits to the SEC Documents as
required. The financial statements of the Company included in the SEC Documents
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved ("GAAP"), except as may be otherwise specified in such
financial statements or the notes thereto, and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. Since March 31, 1998, except as
specifically disclosed in the SEC Documents, (a) there has been no event,
occurrence or development that has or that could result in a Material Adverse
Effect, (b) the Company has not incurred any liabilities (contingent or
otherwise) other than (x) liabilities incurred in the ordinary course of
business consistent with past practice and (y) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (c) the Company has not
altered its method of accounting or the identity of its auditors and (d) the
Company has not declared or made any payment or distribution of cash or other
property to its stockholders or officers or directors (other than in compliance
with existing Company stock option plans) with respect to its capital stock, or
purchased, redeemed (or made any agreements to purchase or redeem) any shares of
its capital stock. The Company last filed audited financial statements with the
Commission on August 21, 1998, and has not received any comments from the
Commission in respect thereof.
(k) INVESTMENT COMPANY. The Company is not, and is not an Affiliate
(as defined in Rule 405 under the Securities Act) of, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(l) CERTAIN FEES. Except for certain fees payable by the Company to
Wharton Capital Partners, Ltd., and its Affiliates, no fees or commissions will
be payable by the Company to any broker, financial advisor or consultant,
finder, placement agent, investment banker, or bank with respect to the
transactions contemplated by this Agreement. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by this Agreement. The
Company shall indemnify and hold harmless the Purchasers, their employees,
officers, directors, agents, and partners, and their respective Affiliates, from
and against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any such
claimed or existing fees, as such fees and expenses are incurred.
(m) SOLICITATION MATERIALS. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
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<PAGE>
(n) FORM S-3 ELIGIBILITY. Assuming that between the date hereof and
August 22, 1999 the Company (i) timely files all reports required to be filed by
it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
and (ii) does not default on any of its material debt obligations, the Company
will, on August 22, 1999, be eligible to use Form S-3 promulgated under the
Securities Act to register its securities for resale with the Commission.
(o) EXCLUSIVITY. The Company shall not issue and sell the
Debentures to any Person other than the Purchasers other than with the specific
prior written consent of the Purchasers.
(p) SENIORITY. No indebtedness of the Company is senior to the
Debentures in right of payment, whether with respect to interest or upon
liquidation, dissolution or otherwise.
(q) LISTING AND MAINTENANCE REQUIREMENTS COMPLIANCE. Except as
specified in SCHEDULE 2.1(q) hereto, the Company has not, in the two years
preceding the date hereof, received notice (written or oral) from the NASDAQ or
any other stock exchange, market or trading facility on which the Common Stock
is or has been listed (or on which it has been quoted) to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such exchange or market. The Company is, and has no reason to believe that it
will not in the foreseeable future continue to be, in compliance with all such
maintenance requirements.
(r) PATENTS AND TRADEMARKS. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights which are necessary or
material for use in connection with its business, and which the failure to so
have would have a Material Adverse Effect (collectively, the "INTELLECTUAL
PROPERTY RIGHTS"). The patents and trademark specified in the IP Security
Agreement are the only patent or trademark intellectual property rights (or
applications therefor) held by the Company and the Subsidiaries for which
applications for patents and trademarks have been made or granted in the United
States (excluding, for such purposes, patents and trademarks held by Ophthalmic
Imaging Systems, Inc.). To the best knowledge of the Company all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.
(s) REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as set
forth on SCHEDULE 6(b) to the Registration Rights Agreement, the Company has not
granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) REGULATORY PERMITS. The Company and its Subsidiaries possess
all certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits could not, individually or in the aggregate, have or result
in a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor
any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
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(u) TITLE. The Company and the Subsidiaries have good and
marketable title in fee simple to all real property and personal property owned
by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all Liens, except for Liens granted to the
Purchasers pursuant to the Security Agreement and IP Security Agreement and for
other Liens as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its Subsidiaries. Any real property and facilities held under lease
by the Company and its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.
(v) DISCLOSURE. The Company confirms that it has not provided any
of the Purchasers or its agents or counsel with any information that constitutes
or might constitute material non-public information. The Company understands and
confirms that the Purchasers shall be relying on the foregoing representations
in effecting transactions in securities of the Company. All disclosure provided
to the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(w) OPHTHALMIC IMAGING SYSTEMS, INC. The Company owns free and
clear of all Liens 2,131,758 shares of the common stock, no par value, of
Ophthalmic Imaging Systems, Inc., a California corporation, representing 51% of
the total issued and outstanding shares of voting stock of such entity (the
"OPHTHALMIC SHARES").
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby represents and warrants to the Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority, to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder. The
purchase by such Purchaser of the Securities hereunder has been duly authorized
by all necessary action on the part of such Purchaser. Each of this Agreement,
the Registration Rights Agreement, the Escrow Agreement, the Security Agreement
and the Intellectual Property Security Agreement has been duly executed and
delivered by such Purchaser and constitutes the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the Securities
for its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to such Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration. Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any amount of time.
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(c) PURCHASER STATUS. At the time such Purchaser was offered the
Debentures and the Warrant, it was, and at the date hereof it is, and at each
exercise date under the Warrant, it will be, an "accredited investor" as defined
in Rule 501(a) under the Securities Act.
(d) EXPERIENCE OF THE PURCHASER. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
(e) ABILITY OF THE PURCHASER TO BEAR RISK OF INVESTMENT. Such
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
(f) ACCESS TO INFORMATION. Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its representatives or counsel shall modify, amend
or affect such Purchaser's right to rely on the truth, accuracy and completeness
of the Disclosure Materials and the Company's representations and warranties
contained in the Transaction Documents.
(g) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Securities as a result of or subsequent to any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.
(h) RELIANCE. Such Purchaser understands and acknowledges that (i)
the Securities are being offered and sold to it without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption,
depends in part on, and the Company will rely upon the accuracy and truthfulness
of, the foregoing representations and such Purchaser hereby consents to such
reliance.
The Company acknowledges and agrees that each of the
Purchasers makes no representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in this
Section 2.2.
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ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 TRANSFER RESTRICTIONS. (a) Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements of the Securities Act. In connection
with any transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities under the
Securities Act. Notwithstanding the foregoing, the Company, without requiring a
legal opinion as described in the immediately preceding sentence, hereby
consents to and agrees to register on the books of the Company and with any
transfer agent for the securities of the Company any transfer of Securities by a
Purchaser to an Affiliate of such Purchaser or to one or more funds or managed
accounts under common management with such Purchaser, and any transfer among any
such Affiliates or one or more funds or managed accounts, provided that the
transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes (subject to the qualifications
hereof). Any such transferee shall agree in writing to be bound by the terms of
this Agreement and shall have the rights of a Purchaser under this Agreement and
the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is required
by this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor
any other legend if the conversion of Debentures, the payment of interest
thereon, and exercise of the Warrants or other issuances of Underlying Shares as
contemplated hereby, by the Debentures or the Warrants occurs at any time while
an Underlying Shares Registration Statement is effective under the Securities
Act or, in the event there is not an effective Underlying Shares Registration
Statement, at such time, in the opinion of counsel to the Company, such legend
is not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue the legal opinion
included in the Transfer Agent Instructions to the Company's transfer agent on
the day that the Underlying Shares Registration Statement is declared effective
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by the Commission. The Company agrees that, in the event any Underlying Shares
are issued with a legend in accordance with this Section 3.1(b), it will, within
three (3) Trading Days after request therefor by a Purchaser, provide such
Purchaser with a certificate or certificates representing such Underlying
Shares, free from such legend at such time as such legend would not have been
required under this Section 3.1(b) had such issuance occurred on the date of
such request. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company which enlarge the restrictions
of transfer set forth in this Section. However, the Company may provide
appropriate instructions to any transfer agent of the Company to enforce the
provisions of this Section 3.1(b) when the Underlying Shares Registration
Statement is not effective.
3.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Debentures and
payment of interest thereon in accordance with the terms of the Debentures, and
(ii) exercise of the Warrants in accordance with their terms, will result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares upon (x) conversion of the
Debentures and payment of interest thereon in accordance with the terms of the
Debentures, and (y) exercise of the Warrants in accordance with their terms, is
unconditional and absolute, subject to the limitations set forth herein in the
Debentures or pursuant to the Warrants, regardless of the effect of any such
dilution.
3.3 FURNISHING OF INFORMATION. As long as the Purchasers own
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as the Purchasers own Securities, if
the Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchasers and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for the Purchasers to sell the Securities under Rule 144 promulgated
under the Securities Act. The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, all to the
extent required from time to time to enable such Person to sell Underlying
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144 promulgated under the Securities Act,
including the legal opinion referenced above in this Section. Upon the request
of any such Person, the Company shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
3.4 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers.
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3.5 INCREASE IN AUTHORIZED SHARES. If on any date the Company would
be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) issuing 200% of the number of
Underlying Shares as would then be issuable upon a conversion in full of the
Debentures and as payment of any accrued and unpaid interest in respect thereof
in shares of Common Stock, or (b) issuing the number of Underlying Shares upon
exercise in full of the Warrants (the "CURRENT REQUIRED MINIMUM"), in either
case, due to the unavailability of a sufficient number of authorized but
unissued or reserved shares of Common Stock, then the Board of Directors of the
Company shall promptly (and in any case, within 30 Business Days from such date)
prepare and mail to the stockholders of the Company proxy materials requesting
authorization to amend the Company's Articles of Incorporation to increase the
number of shares of Common Stock which the Company is authorized to issue to at
least such number of shares as reasonably requested by the Purchasers in order
to provide for such number of authorized and unissued shares of Common Stock to
enable the Company to comply with its issuance, conversion exercise and
reservation of shares obligations as set forth in this Agreement, the Debentures
and the Warrants (the sum of (x) the number of shares of Common Stock then
outstanding plus all shares of Common Stock issuable upon exercise of all
outstanding options, warrants and convertible instruments, and (y) the Current
Required Minimum, shall be a reasonable number). In connection therewith, the
Board of Directors shall (a) adopt proper resolutions authorizing such increase,
(b) recommend to and otherwise use its best efforts to promptly and duly obtain
stockholder approval to carry out such resolutions (and hold a special meeting
of the stockholders no later than the 60th day after delivery of the proxy
materials relating to such meeting) and (c) within five (5) Business Days of
obtaining such stockholder authorization, file an appropriate amendment to the
Company's Articles of Incorporation to evidence such increase.
3.6 RESERVATION AND LISTING OF UNDERLYING SHARES. (a) The Company shall
(i) in the time and manner required by NASDAQ and such other exchange, market or
quotation system on which the Common Stock is traded, prepare and file with the
NASDAQ (and such other national securities exchange or market or trading or
quotation facility) an additional shares listing application covering a number
of shares of Common Stock which is not less than the Initial Minimum, (ii) take
all steps necessary to cause such shares of Common Stock to be approved for
listing in the NASDAQ (as well as on any such other national securities exchange
or market or trading or quotation facility on which the Common Stock is then
listed) as soon as possible thereafter, and (iii) provide to the Purchasers
evidence of such listing, and the Company shall maintain the listing of its
Common Stock thereon. If the number of Underlying Shares issuable upon
conversion in full of the then outstanding Debentures, as payment of interest
thereon, and upon exercise of the then unexercised portion of the Warrants
exceeds 85% of the number of Underlying Shares previously listed on account
thereof with NASDAQ (and any such other required exchanges), then the Company
shall take the necessary actions to immediately list a number of Underlying
Shares as equals no less than the then Current Required Minimum.
(b) The Company shall maintain a reserve of shares of Common Stock
for issuance upon conversion of the Debentures and for payment of interest
thereupon in shares of Common Stock and upon exercise in full of the Warrants in
accordance with this Agreement, the Debentures and the Warrants, respectively,
in such amount as may be required to fulfill its obligations in full under the
Transaction Documents, which reserve shall equal no less than the then Current
Required Minimum.
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3.7 CONVERSION AND EXERCISE PROCEDURES. The Transfer Agent
Instructions, Conversion Notice (as defined in EXHIBIT A) and Form of Election
to Purchase under the Warrants set forth the totality of the procedures with
respect to the conversion of the Debentures and exercise of the Warrants,
including the form of legal opinion, if necessary, that shall be rendered to the
Company's transfer agent and such other information and instructions as may be
reasonably necessary to enable the Purchasers to convert their Debentures and
exercise their Warrants as contemplated in the Debentures and the Warrants (as
applicable).
3.8 NOTICE OF BREACHES. Each of the Company and the Purchasers shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained therein to be
incorrect or breached as of the Closing Date. However, no disclosure by either
party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
3.9 CONVERSION AND EXERCISE OBLIGATIONS OF THE COMPANY. The Company
shall honor conversions of the Debentures and exercises of the Warrants and
shall deliver Underlying Shares in accordance with the respective terms,
conditions and time periods set forth in the Debentures and the Warrants.
3.10 RIGHT OF FIRST REFUSAL; SUBSEQUENT REGISTRATIONS. (a) The Company
shall not, directly or indirectly, without the prior written consent of the
Purchasers, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition) any of its or its Affiliates' equity or equity-equivalent
securities (including the issuance of any debt or other instrument is at any
time over life thereof convertible into or exchangeable for Common Stock or any
other transaction intended to be exempt or not subject to registration under the
Securities Act (a "SUBSEQUENT PLACEMENT") for a period of 180 days after the
later to occur of the Effectiveness Date (as defined in the Registration Rights
Agreement) and the date that the Commission first declares effective an
Underlying Shares Registration Statement, except (i) the granting of options or
warrants to employees, consultants, officers and directors, and the issuance of
shares upon exercise of options granted, under any stock option plan heretofore
or hereinafter duly adopted by the Company, (ii) shares of Common Stock issuable
upon exercise of any currently outstanding warrants (including the Class B
Warrants (as defined herein)) and upon conversion of any currently outstanding
convertible securities of the Company, in each case only if such security is
disclosed in SCHEDULE 2.1(c), (iii) shares of Common Stock or Common Stock
Equivalents (as defined in the Debentures) permitted to be issued without giving
rise to an Event of Default under Sections 3(a)(xii) or 3(a)(xiii)(a) of the
Debentures, and (iv) shares of Common Stock issuable upon conversion of
Debentures, as payment of interest thereon and upon exercise of the Warrants in
accordance with the Debentures or the Warrants, respectively, unless (A) the
Company delivers to the Purchasers a written notice (the "SUBSEQUENT PLACEMENT
NOTICE") of its intention effect such Subsequent Placement, which Subsequent
Placement Notice shall describe in reasonable detail the proposed terms of such
Subsequent Placement, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Placement shall be effected, and attached
to which shall be a term sheet or similar document relating thereto and (B) the
Purchasers shall not have notified the Company by 5:00 p.m. (New York City time)
on the tenth (10th) Trading Day after their receipt of the Subsequent Placement
Notice of their willingness to cause the Purchasers to provide (or to cause its
sole designee to provide), subject to completion of mutually acceptable
documentation, financing to the Company on the same terms set forth in the
Subsequent Placement Notice. If the Purchasers shall fail to notify the Company
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of their intention to enter into such negotiations within such time period, the
Company may effect the Subsequent Placement substantially upon the terms and to
the Persons (or Affiliates of such Persons) set forth in the Subsequent
Placement Notice; PROVIDED, that the Company shall provide the Purchasers with a
second Subsequent Placement Notice, and the Purchasers shall again have the
right of first refusal set forth above in this paragraph (a), if the Subsequent
Placement subject to the initial Subsequent Placement Notice shall not have been
consummated for any reason on the terms set forth in such Subsequent Placement
Notice within thirty (30) Trading Days after the date of the initial Subsequent
Placement Notice with the Person (or an Affiliate of such Person) identified in
the Subsequent Placement Notice. If the Purchasers shall indicate a willingness
to provide financing in excess of the amount set forth in the Subsequent
Placement Notice, then each Purchaser shall be entitled to provide financing
pursuant to such Subsequent Placement Notice up to an amount equal to such
Purchaser's pro rata portion of the aggregate principal amount of Debentures
purchased by the Purchasers under this Agreement, but the Company shall not be
required to accept financing from the Purchasers in an amount in excess of the
amount set forth in the Subsequent Placement Notice.
(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the Registration's Rights Agreement to be registered, in the Underlying Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to paragraph (a)(i), (ii) and
(iv) of Section 3.10(a), the Company shall not, for a period of not less than 90
Trading Days after the date that the Underlying Shares Registration Statement is
declared effective by the Commission, without the prior written consent of the
Purchasers (i) issue or sell any of its or any of its Affiliates' equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) register for resale any securities of the Company. Any
days that a Purchaser is not permitted to sell Underlying Shares under the
Underlying Shares Registration Statement shall be added to such 90 Trading Day
period for the purposes of (i) and (ii) above.
3.11 CERTAIN SECURITIES LAWS DISCLOSURES; PUBLICITY. The Company shall:
(i) on the Closing Date issue a press release acceptable to the Purchasers
disclosing the transactions contemplated hereby, (ii) file with the Commission a
Report on Form 8-K disclosing the transactions contemplated hereby within ten
(10) Business Days after the Closing Date, and (iii) timely file with the
Commission a Form D promulgated under the Securities Act as required under
Regulation D promulgated under the Securities Act and provide a copy thereof to
the Purchasers promptly after the filing thereof. The Company shall, no less
than two (2) Business Days prior to the filing of any disclosure required by
clauses (ii) and (iii) above, provide a copy thereof to the Purchasers. No such
filing or disclosure may be made that mentions the Purchasers by name without
the prior consent of the Purchasers. Such filings shall be subject to Section
4.11 hereof.
3.12 TRANSFER OF INTELLECTUAL PROPERTY RIGHTS. Except in connection
with the sale of all or substantially all of the assets of the Company or
licensing arrangements in the ordinary course of the Company's business, the
Company shall not transfer, sell or otherwise dispose of any Intellectual
Property Rights, or allow any of the Intellectual Property Rights to become
subject to any Liens, or fail to renew such Intellectual Property Rights (if
renewable and it would otherwise lapse if not renewed), without the prior
written consent of the Purchasers.
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3.13 USE OF PROCEEDS. If delivered to the Company in accordance with
the terms of the Robinson Silverman Escrow Agreement, the Company shall use the
net proceeds from the funds delivered to it in accordance with the Robinson
Silverman Escrow Agreement for working capital purposes only and not for the
satisfaction of any Company debt (which, for such purposes, shall include
accounts payable) in excess of $750,000 or to redeem any Company equity or
equity equivalent securities or to pay in excess of $250,000 to settle any
litigation or claim against the Company or any Subsidiary. In accordance with
Section 1.1(b), $2,000,000 of proceeds from the sale of the Securities shall be
deposited on the Closing Date into a special segregated trust account maintained
under the Company's name with the Escrow Agent for such purposes pursuant to the
Escrow Agreement, and shall not be released from such account until permitted in
accordance with the Escrow Agreement. Upon such release, if any, such remaining
net proceeds shall only be used in the manner permitted by the first sentence of
this Section and not for the satisfaction of any portion of Company debt, to
redeem any Company equity or equity-equivalent securities or to pay or settle
any litigation or claim against the Company or any Subsidiary.
3.14 REIMBURSEMENT. If any Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which a Purchaser is a named party, the Company
will pay such Purchaser the charges, as reasonably determined by such Purchaser,
for the time of any officers or employees of such Purchaser devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearings,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company in connection with or as a result of the consummation of
the Transaction Documents except to the extent that any losses, claims, damages,
liabilities or expenses incurred by the Company result from the gross negligence
or willful misconduct of the applicable Purchaser or entity in connection with
the transactions contemplated by this Agreement.
3.15 FORM S-3 ELIGIBILITY. The Company use its best efforts to, become
eligible to register for resale its securities pursuant to Form S-3 promulgated
under the Securities Act no later than August 22, 1999.
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3.16 CERTAIN TRADING RESTRICTIONS. The Purchasers will not enter into
any Short Sales (as hereinafter defined) at a price below the Initial Conversion
Price (as defined in the Debentures), PROVIDED, that the limitations set forth
in this Section shall cease to be in effect on the date that an Underlying
Shares Registration Statement is first declared effective by the Commission or
if, by the Effectiveness Date, the Underlying Shares Registration Statement has
not been declared effective by the Commission and, thereafter, shall resume on
the date, if any, the Underlying Shares Registration Statement is declared
effective by the Commission. For purposes of this Section, a "Short Sale" by a
Purchaser shall mean a sale of Common Stock by such Purchaser that is marked as
a short sale and that is made at a time when there is no equivalent offsetting
long position in Common Stock held by such Purchaser. For purposes of
determining whether there is an equivalent offsetting long position in Common
Stock held by a Purchaser, Underlying Shares that have not yet been issued but
for which the Company has received a Conversion Notice (with respect to
Debentures) or Form of Election to Purchase (with respect to Warrants), as the
case may be, shall be deemed held long by a Purchaser.
3.17 CERTAIN FUTURE ACTIONS. Subject to compliance with the Transaction
Documents relating thereto, the Company is expressly permitted to (i) lower the
exercise price of its Class B Warrants, entitling the holders thereof to
purchase an aggregate of 7,592,460 shares of Common Stock (the "CLASS B
WARRANTS") and (ii) issue up to 2,250,000 shares of Common Stock in satisfaction
of the litigation described in SCHEDULE 2.1(g) hereto.
3.18 RIGHTS PLAN. The Company may not claim or enforce any claims that
any Purchaser is (or that the Purchasers taken collectively are) an "Acquiring
Person" under the Company's Shareholders Rights Agreement, dated as of March
1998 (or any amendment thereto) (the "RIGHTS PLAN"), by virtue of its purchase
or beneficial ownership of Securities.
3.19 CONTINUED OWNERSHIP OF THE OPHTHALMIC SHARES. So long as the
security interests granted to the Purchasers under the Security Agreement and
the IP Security Agreement shall be in effect the Company shall not without the
prior written consent of the Purchasers pledge, sell, transfer, or assign or
otherwise dispose of the Ophthalmic Shares.
ARTICLE IV
MISCELLANEOUS
4.1 FEES AND EXPENSES. At the Closing the Company shall reimburse the
Purchasers for their legal fees and expenses incurred in connection with the
preparation and negotiation of the Transaction Documents by paying to Robinson
Silverman (i) $25,000 for the preparation and negotiation of the Transaction
Documents and (ii) $5,000 for due diligence expenses. Such sums shall be
deducted from the funds deposited by the Purchasers in accordance with the
Robinson Silverman Escrow Agreement and shall be retained by Robinson Silverman
and deducted from the amounts, if any, to be delivered to the Company in
accordance with the Robinson Silverman Escrow Agreement. Other than the amounts
contemplated in the immediately preceding sentence, and except as otherwise set
forth in the Registration Rights Agreement, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all stamp and other taxes and duties levied in connection with the
issuance of the Securities.
-16-
<PAGE>
4.2 ENTIRE AGREEMENT; AMENDMENTS. The Transaction Documents, together
with the Exhibits and Schedules thereto, and the Transfer Agent Instructions
contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters, which the parties acknowledge have been
merged into such documents, exhibits and schedules.
4.3 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 6:30 p.m. (New York City
time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Agreement later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) the Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: Premier Laser Systems, Inc.
3 Morgan
Irvine, CA 92618
Facsimile No.: (949) 859-5241
Attn: Chief Financial Officer
With copies to: Rutan & Tucker, LLP
611 Anton Boulevard, 14th floor
Costa Mesa, CA 92626-1998
Facsimile No.: (714) 546-9035
Attn: Thomas G. Brockington, Esq.
If to a Purchaser: To the address
set forth under such
Purchaser's name on the
signature pages hereto.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each of the Purchasers or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or require ment of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
-17-
<PAGE>
4.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Except as set forth in
Section 3.1(a), the Purchasers may not assign this Agreement or any of the
rights or obligations hereunder without the consent of the Company. This
provision shall not limit each Purchaser's right to transfer securities or
transfer or assign rights under the Registration Rights Agreement.
4.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 GOVERNING LAW. The corporate laws of the State of California shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
4.9 SURVIVAL. The representations, warranties, agreements and covenants
contained herein shall survive the Closing and the delivery and conversion or
exercise (as the case may be) of the Debentures and the Warrants.
4.10 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
-18-
<PAGE>
4.11 PUBLICITY. The Company and the Purchasers shall consult with each
other in issuing any press releases or otherwise making public statements or
filings and other communications with the Commission or any regulatory agency or
stock market or trading facility with respect to the transactions contemplated
hereby and neither party shall issue any such press release or otherwise make
any such public statement, filings or other communications without the prior
written consent of the other, which consent shall not be unreasonably withheld
or delayed, except that no prior consent shall be required if such disclosure is
required by law, in which such case the disclosing party shall provide the other
party with prior notice of such public statement, filing or other communication.
Notwithstanding the foregoing, the Company shall not publicly disclose the names
of the Purchasers, or include the names of the Purchasers in any filing with the
Commission, or any regulatory agency, trading facility or stock market without
the prior written consent of the Purchasers, except to the extent such
disclosure (but not any disclosure as to the controlling Persons thereof) is
required by law, in which case the Company shall provide the Purchasers with
prior notice of such disclosure.
4.12 SEVERABILITY. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.13 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers will be entitled to specific performance of the obligations of the
Company under the Transaction Documents. The Company and each of the Purchasers
agree that monetary damages may not be adequate compensation for any loss
incurred by reason of any breach of its obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.
-19-
<PAGE>
4.14 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
-20-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Secured Convertible Debenture Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.
PREMIER LASER SYSTEMS, INC.
By: /S/ COLETTE COZEAN
--------------------------------
Name: Colette Cozean
Title: CEO
STRONG RIVER INVESTMENTS, INC.
By: /S/ KENNETH L. HENDERSON
-------------------------------
Kenneth L. Henderson
Attorney-in
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Avi Vigder
Debentures Purchase Price: $2,000,000
<PAGE>
HERKIMER LLC
By: /S/ L. FAMINGON /S/ JUDITH PATRICK
-----------------------------------
Name: CTC Corporation Ltd.
Title: Director
Address for Notice:
c/o Citco Trustees (Cayman) Limited
Commercial Centre
P.O. Box 31106 SMB
Grand Cayman
Cayman Islands
British West Indies
Facsimile No.: (345) 945-7566
with a copy to: Southridge Capital Management LLC
Executive Pavillon
20 Grove Street
Ridgefield, CT 06877
Facsimile No.: (203) 431-8301
Debentures Purchase Price: $2,000,000
With copies for
communications to
any Purchaser to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen. Esq.
<PAGE>
SCHEDULE 2.1(a) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SUBSIDIARIES
- ------------
1. EyeSys - Premier Inc., a Delaware corporation.
100% owned
2. CRS U.S.A., Inc., a California mutual benefit nonprofit corporation
(Premier Laser Systems, Inc. is the sole member.)
3. Data.Site, LLC, a California limited liability company
(51% owned by Premier Laser Systems, Inc., now in the process of being
shut down).
4. Ophthalmic Imaging Systems, a California corporation (51% owned by
Premier Laser Systems, Inc.)
<PAGE>
<TABLE>
Schedule 2.1(c) to Secured Convertible Debenture Purchase Agreement
<CAPTION>
OUTSTANDING OR RESERVED
-----------------------
<S> <C>
1. Class A Common Stock Outstanding (35,600,000 14, 961,436
shares authorized)
2. Class A Common Stock Reserved for class action 2,250,000
settlement
3. Class E-1 Common Stock Outstanding (2,200,000 shares 1,257,461
authorized)
4. Class E-2 Common Stock Outstanding (2,200,000 shares 1,257,461
authorized
5. Class B Warrants 7,591,760
6. Other Warrants and Options(1) 4,094,522
7. Rights(2) 1 per share of
Common Stock
8. Blank check Preferred Stock (8,850,000 shares 0(3)
authorized)
</TABLE>
- --------
(1) Outstanding at December 31, 1998. Expire between March 2003 and March 2007,
having exercise prices of from $1.00 to $11.06.
(2) Issued under Shareholder Rights Plan.
(3) Class C Preferred shares authorized under Rights Plan.
<PAGE>
SCHEDULE 2.1(g) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
LITIGATION
- ----------
1. PREMIER LASER SYSTEMS, INC. SECURITIES LITIGATION (including derivative
claims). United States District Court, Central District of California, Master
file No. SACV-98-388-AHS (EEx); and ESKELAND V. COZEAN, ET AL., Orange County,
California Superior Court Case No. 797326.
2. FRONTENAC VI LIMITED PARTNERSHIP, ET AL. V. PREMIER LASER SYSTEMS, INC.
United States District Court Case No. CV 98-7880 CBM (ANx). (Dispute with former
shareholders of EyeSys Technologies, Inc., related to securities class action).
3. Litigation against Infrared Fiber Systems, Inc., Coherent, Inc. and
Westinghouse (as described in Item 3 to Premier Laser Systems Form 10-K for the
year ended March 31, 1998).
4. Premier's majority owned subsidiary, Ophthalmic Imaging Systems, Inc. is
engaged in litigation in the Sacramento County, California Superior Court,
brought by a former employee who alleges he was wrongfully terminated.
5. TELEPHONE REAL ESTATE EQUITY TRUST INC. V. EYESYS TECHNOLOGIES, INC.,
District Court of Harris County, Texas. Lessor of property formerly occupied by
EyeSys Technologies, Inc. claims that EyeSys owes amounts in excess of $100,000
as a result of abandonment of leasehold premises.
6. STOTHERS V. EYESYS TECHNOLOGIES, INC., Harris County, Texas State Court,
Cause No. 96- 15283.
Plaintiff claims Defendant EyeSys Technologies, Inc. failed to protect
Plaintiff, a business invitee, in that Defendant failed to exercise
ordinary care to protect Plaintiff from danger either by adequately
warning Plaintiff of the condition or making that condition reasonably
safe.
7. BRITESMILE, INC., A UTAH CORPORATION, PLAINTIFF, V. INTERDENT, INC., A
CALIFORNIA CORPORATION, PREMIER LASER SYSTEMS, INC. A CALIFORNIA CORPORATION.
This is a patent infringement case filed 09/22/97 regarding a laser
method for bleaching teeth.
8. Securities and Exchange Commission investigation into accounting practices,
commenced May-June 1998.
<PAGE>
SCHEDULE 2.1(j) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
DELINQUENT REPORTS
- ------------------
1. Annual report on Form 10-K for the fiscal year ended March 31, 1998, due June
29, 1998, filed August 31, 1998.
2. Quarterly Report for the Quarter ended December 31, 1997, filed (amended)
August 31, 1997.
<PAGE>
SCHEDULE 2.1(q) TO SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
NOTICES RE COMPLIANCE WITH NASDAQ RULES
- ---------------------------------------
1. Letter from NASDAQ Stock Market dated June 23, 1998.
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "AGREEMENT") is made
and entered into as of May 17, 1999, among Premier Laser Systems, Inc., a
California corporation (the "COMPANY"), and the investors signatory hereto (each
such investor is a "PURCHASER" and all such investors are, collectively, the
"PURCHASERS ").
This Agreement is made pursuant to the Secured Convertible
Debenture Purchase Agreement, dated as of the date hereof among the Company and
the Purchasers (the "PURCHASE AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS
-----------
Capitalized terms used and not otherwise defined herein that
are defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"ADVICE" shall have meaning set forth in Section 3(r).
"AFFILIATE" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "CONTROL," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have
meanings correlative to the foregoing.
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state of New York generally are authorized or required by law or other
government actions to close.
"CLOSING DATE" means May 17, 1999.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's Class A Common Stock, no
par value.
"DEBENTURES" means the Company's 6% Secured Convertible
Debentures due three years from the date of issuance thereof, issued to the
Purchasers pursuant to the Purchase Agreement.
<PAGE>
"EFFECTIVENESS DATE" means the 90th day following the Closing
Date.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in
Section 2(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FILING DATE" means the 20th day following the Closing Date.
"HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"INDEMNIFIED PARTY" shall have the meaning set forth in
Section 5(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 5(c).
"LOSSES" shall have the meaning set forth in Section 5(a).
"PERSON" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"REGISTRABLE SECURITIES" means the shares of Common Stock
issuable (i) upon conversion in full of the Debentures, (ii) as payment of
interest in respect of the Debentures, and (iii) upon exercise of the Warrants.
"REGISTRATION STATEMENT" means the registration statement and
any additional registration statements contemplated by Section 2(a), including
(in each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
-2-
<PAGE>
"RULE 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SPECIAL COUNSEL" means one special counsel to the Holders,
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"WARRANTS" means (i) the Common Stock purchase warrants issued
to the Purchasers pursuant to the Purchase Agreement, and (ii) the Common Stock
purchase warrants to purchase an aggregate of 40,000 shares of Common Stock
issued to Wharton Capital Partners, Ltd., The Olmstead Group, LLC and I.F.
Bodkin in connection with the transactions contemplated by the Purchase
Agreement.
2. SHELF REGISTRATION
------------------
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering the
number of Registrable Securities contemplated by Section 2(b) for an offering to
be made on a continuous basis pursuant to Rule 415. The Registration Statement
shall be on Form S-1 or Form SB-2 (or on another appropriate form as mutually
agreed to by the Company and the Holders). The Company shall, within ten (10)
days of the date on which the Company becomes eligible to register the resale by
selling security holders of its securities under Form S-3 promulgated by the
Commission, convert the Registration Statement from the originally filed form to
Form S-3. The Company shall use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, but in any event prior to the Effectiveness
Date, and shall use its best efforts to keep such Registration Statement
continuously effective under the Securities Act until the date which is three
years after the date that such Registration Statement is declared effective by
the Commission or such earlier date when all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the Company
pursuant to a written opinion letter to such effect, addressed and acceptable to
the Company's transfer agent (the "EFFECTIVENESS PERIOD"), PROVIDED, HOWEVER,
-3-
<PAGE>
that the Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell the Registrable Securities covered by such Registration Statement during
the Effectiveness Period, unless such action is required under applicable law or
the Company has filed a post-effective amendment to the Registration Statement
and the Commission has not declared it effective.
(b) In order to account for the fact that the number of shares
of Common Stock issuable upon conversion of the Debentures (and as payment of
interest thereon) is determined in part upon the market price of the Common
Stock prior to the time of conversion, the initial Registration Statement
required to be filed hereunder shall include (but not be limited to) a number of
shares of Common Stock equal to no less than the sum of (i) 200% of the number
of shares of Common Stock into which the Debentures, together with the payment
of interest thereon (assuming all interest is paid in shares of Common Stock and
that the Debentures remain outstanding for three years), are convertible,
assuming such conversion occurred on the Closing Date, the Filing Date or the
date the Company files an acceleration request with the Commission relating to
the Registration Statement, whichever yields the lowest Conversion Price (as
defined in the Debentures) and (ii) the number of shares of Common Stock
issuable upon exercise in full of the Warrants. When initially filed, such
initial Registration Statement shall cause 4,238,146 shares of Common Stock for
the Holders plus 40,000 shares of Common Stock for Wharton Capital Partners,
Ltd., The Olmstead Group, LLC and I.F. Bodkin.
(c) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and, if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro-rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
(d) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company. No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i) agrees to sell its Registrable Securities on the basis provided in any
underwriting agreements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such arrangements.
-4-
<PAGE>
3. REGISTRATION PROCEDURES
-----------------------
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement on the form contemplated by Section 2(a)
which Registration Statement shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" attached hereto as ANNEX A, and cause the
Registration Statement to become effective and remain effective as provided
herein; PROVIDED, HOWEVER, that not less than three (3) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall, (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel to such Holders
and such underwriters, to conduct a reasonable investigation within the meaning
of the Securities Act. The Company shall, within ten (10) days of the date on
which the Company becomes eligible to register the resale by selling security
holders of its securities under Form S-3 promulgated by the Commission, convert
the Registration Statement from the originally filed form to Form S-3. The
Company shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as reasonably possible to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as reasonably possible provide the Holders true and complete
copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
-5-
<PAGE>
(c) File additional Registration Statements if the number of
Registrable Securities at any time exceeds the number of shares of Common Stock
then registered in a Registration Statement. The Company shall have 30 days to
file such additional Registration Statements after its receipt of notice of the
requirement thereof which the Holders may give at any time when the Registrable
Securities exceeds 85% of the number of shares of Common Stock then registered
in a Registration Statement hereunder. In such event, the Registration Statement
required to be filed by the Company shall include a number of shares of Common
Stock equal to no less than 200% of the number of shares of Common Stock into
which all then outstanding principal amount of Debentures are convertible
(assuming such conversion occurred on the Filing Date for such Registration
Statement or the date of the filing of the final acceleration request therefor,
whichever date yields a lower Conversion Price) less the shares covered by the
prior Registration Statement and any other Registrable Securities not then
registered in a Registration Statement.
(d) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five (5) days prior to
such filing) and (if requested by any such Person) confirm such notice in
writing no later than one (1) Business Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to the
Registration Statement is proposed to be filed; (B) when the Commission notifies
the Company whether there will be a "review" of such Registration Statement and
whenever the Commission comments in writing on such Registration Statement (the
Company shall provide true and complete copies thereof and all written responses
thereto to each of the Holders, which the Holders shall keep confidential); and
(C) with respect to the Registration Statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the Commission or any
other Federal or state governmental authority for amendments or supplements to
the Registration Statement or Prospectus or for additional information; (iii) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement covering any or all of the Registrable Securities or
the initiation of any Proceedings for that purpose; (iv) if at any time any of
the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(e) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness of
the Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
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(f) If requested by any managing underwriter or the Holders of
a majority in interest of the Registrable Securities to be sold in connection
with an Underwritten Offering, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment to the Registration Statement such
information as such managing underwriters and such Holders reasonably agree
should be included therein, and (ii) make all required filings of such
Prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated in
such Prospectus supplement or post-effective amendment; PROVIDED, HOWEVER, that
the Company shall not be required to take any action pursuant to this Section
3(f) that would, in the opinion of counsel for the Company, violate applicable
law or be materially detrimental to the business prospects of the Company.
(g) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including, if requested,
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(h) Promptly deliver to each Holder, their Special Counsel,
and any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders and any underwriters in connection with
the offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(i) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject.
(j) Cooperate with the Holders and any managing underwriters
to facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request.
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(k) Upon the occurrence of any event contemplated by Section
3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(l) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq National
Market ("NASDAQ") or on any other stock market or trading facility on which the
shares of Common Stock are traded, listed or quoted (each a "SUBSEQUENT MARKET")
as and when required pursuant to the Purchase Agreement.
(m) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in Underwritten
Offerings) and take all such other actions in connection therewith (including
those reasonably requested by any managing underwriters and the Holders of a
majority of the Registrable Securities being sold) in order to expedite or
facilitate the disposition of such Registrable Securities, and whether or not an
underwriting agreement is entered into, (i) make such representations and
warranties to such Holders and such underwriters as are customarily made by
issuers to underwriters in underwritten public offerings (subject to the
scheduling of appropriate exceptions to insure such representations and
warranties are accurate), and confirm the same if and when requested; (ii) in
the case of an Underwritten Offering obtain and deliver copies thereof to each
Holder and the managing underwriters, if any, of opinions of counsel to the
Company and updates thereof addressed to each Holder and each such underwriter,
in form, scope and substance reasonably satisfactory to any such managing
underwriters and Special Counsel to the selling Holders covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the Registration
Statement, and, in the case of an Underwritten Offering, at the time of delivery
of any Registrable Securities sold pursuant thereto, use its best reasonable
efforts to obtain and deliver copies to the Holders and the managing
underwriters, if any, of "cold comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to the Company in form and substance as are customary in
connection with Underwritten Offerings; (iv) if an underwriting agreement is
entered into, the same shall contain indemnification provisions and procedures
no less favorable to the selling Holders and the underwriters, if any, than
those set forth in Section 5 (or such other provisions and procedures acceptable
to the managing underwriters, if any, and holders of a majority of Registrable
Securities participating in such Under written Offering); and (v) deliver such
documents and certificates as may be reasonably requested by the Holders of a
majority of the Registrable Securities being sold, their Special Counsel and any
managing underwriters to evidence the continued validity of the representations
and warranties made pursuant to Section 3(m)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
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(n) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; PROVIDED, HOWEVER, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(o) Comply with all applicable rules and regulations of the
Commission.
(p) The Company may require each selling Holder to furnish to
the Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
(q) If the Registration Statement refers to any Holder by name
or otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (if such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar Federal statute
then in force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
(r) Each Holder covenants and agrees that (i) it will not sell
any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(h) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(d) and (ii) it and its officers, directors or
Affiliates, if any, will comply with the prospectus delivery requirements of the
Securities Act as applicable to it in connection with sales of Registrable
Securities pursuant to the Registration Statement.
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Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Sections 3(d)(ii), 3(d)(iii), 3(d)(iv),
3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue disposition of such
Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(k), or until it is advised in writing (the
"ADVICE") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph.
4. REGISTRATION EXPENSES
---------------------
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses
(A) with respect to filings required to be made with the NASDAQ and any
Subsequent Market on which the Common Stock is then listed for trading, and (B)
in compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the Holders in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as the managing underwriters, if any, or
the Holders of a majority of Registrable Securities may designate)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses if the
printing of prospectuses is requested by the managing underwriters, if any, or
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant
to the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.
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5. INDEMNIFICATION
---------------
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising
out of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 3(r). The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that such information relates to
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<PAGE>
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus, or in any amendment or supplement thereto. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have proximately
and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified Party
and the Indemnifying Party (in which case, if such Indemnified Party notifies
the Indemnifying Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within ten (10) Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; PROVIDED, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
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(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by PRO
RATA allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall
be required to contribute, in the aggregate, any amount in excess of the amount
by which the proceeds actually received by such Holder from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. MISCELLANEOUS
-------------
(a) REMEDIES. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
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(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of
its subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as and to the extent specified in SCHEDULE 6(b) hereto, neither the
Company nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specified in SCHEDULE 6(b) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) PIGGY-BACK REGISTRATIONS. If at any time when there is not
an effective Registration Statement covering all of the Registrable Securities
and the Underlying Shares, the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; PROVIDED, HOWEVER,
that the Company shall not be required to register any Registrable Securities
pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.
(e) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
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(f) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 6:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: Premier Laser Systems, Inc.
3 Morgan
Irvine, CA 92618
Facsimile No.: (949) 859-5241
Attn: Chief Financial Officer
With copies to: Rutan & Tucker LLP
611 Anton Boulevard, 14th floor
Costa Mesa, CA 92626-1998
Facsimile No.: (714) 546-9035
Attn: Thomas G. Brockington, Esq.
If to a Purchaser: To the address
set forth under such
Purchaser's name on the
signature pages hereto.
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If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in
the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.
(h) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(i) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(j) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(k) SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
-16-
<PAGE>
(l) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(m) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.
PREMIER LASER SYSTEMS, INC.
By: /S/ COLETTE COZEAN
-----------------------------------------
Name: Colette Cozean
Title: CEO
STRONG RIVER INVESTMENTS, INC.
By: /S/ KENNETH L. HENDERSON
-----------------------------------------
Kenneth L. Henderson
Attorney-in-Fact
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Avi Vigder
HERKIMER LLC
By: /S/ L. FARRINGTON /S/ JUDITH PATRICK
-----------------------------------------
Name:
Title:
Address for Notice:
c/o Citco Trustees (Cayman) Limited
Commercial Centre
P.O. Box 31106 SMB
Grand Cayman
Cayman Islands
British West Indies
Facsimile No.: (345) 945-7566
-18-
<PAGE>
with a copy to: Southridge Capital Management LLC
Executive Pavillon
20 Grove Street
Ridgefield, CT 06877
Facsimile No.: (203) 431-8301
With copies for
communications to
any Purchaser to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen. Esq.
<PAGE>
ANNEX A
-------
PLAN OF DISTRIBUTION
--------------------
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the
box, puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
<PAGE>
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
<PAGE>
SCHEDULE 6(b) TO REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS
- -------------------
1. Wound Healing of Oklahoma (relating to shares not yet issued).
2. Corneal Contouring Development (relating to shares not yet issued).
3. Data.Site/RSS (relating to approximately 160,000 shares of Common Stock,
possibly now eligible for Rule 144K).
4. Silicon Valley Bank (relating to warrant to purchase approximately 10,000
shares of Common Stock).
5. Josephthal, Lyon & Ross (relating to warrant to purchase 150,000 shares).
6. Registration rights issued to shareholders of OIS.
7. Class B Warrant holders have registration rights (not "piggyback"
registration rights).
EXHIBIT D
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
PREMIER LASER SYSTEMS, INC.
WARRANT
-------
Dated: May 17, 1999
Premier Laser Systems, Inc., a California corporation (the "Company"),
hereby certifies that, for value received, [ ],or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company up to a total of 30,000 shares of Class A Common Stock, no par value
(the "Common Stock"), of the Company (each such share, a "Warrant Share" and all
such shares, the "Warrant Shares") at an exercise price equal to $3.135 per
share (as adjusted from time to time as provided in Section 9, the "Exercise
Price"), at any time and from time to time from and after the date hereof and
through and including May 17, 2004 (the "Expiration Date"), and subject to the
following terms and conditions:
1. REGISTRATION OF WARRANT. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
2. REGISTRATION OF TRANSFERS AND EXCHANGES.
(a) The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to the
Transfer Agent or to the Company at the office specified in or pursuant to
<PAGE>
Section 3(b). Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new warrant, a
"New Warrant"), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion of
this Warrant not so transferred, if any, shall be issued to the transferring
Holder. The acceptance of the New Warrant by the transferee thereof shall be
deemed the acceptance of such transferee of all of the rights and obligations of
a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or pursuant to
Section 3(b) for one or more New Warrants, evidencing in the aggregate the right
to purchase the number of Warrant Shares which may then be purchased hereunder.
Any such New Warrant will be dated the date of such exchange.
3. DURATION AND EXERCISE OF WARRANTS.
(a) This Warrant shall be exercisable by the
registered Holder on any business day before 6:30 P.M., New York City time, at
any time and from time to time on or after the date hereof to and including the
Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the
portion of this Warrant not exercised prior thereto shall be and become void and
of no value. Prior to the Expiration Date, the Company may not call or otherwise
redeem this Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon
surrender of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice set forth in
Section 12 and upon payment of the Exercise Price multiplied by the number of
Warrant Shares that the Holder intends to purchase hereunder, in the manner
provided hereunder, all as specified by the Holder in the Form of Election to
Purchase, the Company shall promptly (but in no event later than 3 business days
after the Date of Exercise (as defined herein)) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise, free of restrictive legends except (i) either in
the event that a registration statement covering the resale of the Warrant
Shares and naming the Holder as a selling stockholder thereunder is not then
effective or the Warrant Shares are not freely transferable without volume
restrictions pursuant to Rule 144(k) promulgated under the Securities Act of
1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been
issued pursuant to a written agreement between the original Holder and the
Company, as required by such agreement. Any person so designated by the Holder
to receive Warrant Shares shall be deemed to have become holder of record of
such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the
Company shall have received (i) this Warrant (or any New Warrant, as
applicable), with the Form of Election to Purchase attached hereto (or attached
to such New Warrant) appropriately completed and duly signed, and (ii) payment
of the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
-2-
<PAGE>
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant Shares.
If less than all of the Warrant Shares which may be purchased under this Warrant
are exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. [Intentionally left blank]
5. DEMAND REGISTRATION RIGHTS. At any time during the term of
this Warrant when the Warrant Shares are not registered pursuant to an effective
registration statement, the Holder may make a written request for the
registration under the Securities Act (a "Demand Registration"), of all of the
Warrant Shares (the "Registrable Securities"), and the Company shall use its
best efforts to effect such Demand Registration as promptly as possible, but in
any case within 90 days thereafter. Any request for a Demand Registration shall
specify the aggregate number of Registrable Securities proposed to be sold and
shall also specify the intended method of disposition thereof. The right to
cause a registration of the Registrable Securities under this Section 5 shall be
limited to one such registration. In any registration initiated as a Demand
Registration, the Company will pay all of its registration expenses in
connection therewith. A Demand Registration shall not be counted as a Demand
Registration hereunder until the registration statement filed pursuant to the
Demand Registration has been declared effective by the Securities and Exchange
Commission and maintained continuously effective for a period of at least 360
days or such shorter period when all Registrable Securities included therein
have been sold in accordance with such registration statement, provided, however
that any days on which such registration statement is not effective or on which
the Holder is not permitted by the Company or any governmental authority to sell
Warrant Shares under such registration statement shall not count towards such
360 day period.
6. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
this Warrant; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the
registration of any certificates for Warrant Shares or Warrants in a name other
than that of the Holder. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Warrant or
receiving Warrant Shares upon exercise hereof.
7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange
and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
8. RESERVATION OF WARRANT SHARES. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
-3-
<PAGE>
authorized but unissued Common Stock, solely for the purpose of enabling it to
issue Warrant Shares upon exercise of this Warrant as herein provided, the
number of Warrant Shares which are then issuable and deliverable upon the
exercise of this entire Warrant, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder (taking into account
the adjustments and restrictions of Section 9). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly and validly authorized, issued and fully paid and nonassessable.
9. CERTAIN ADJUSTMENTS. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to adjustment
from time to time as set forth in this Section 9. Upon each such adjustment of
the Exercise Price pursuant to this Section 9, the Holder shall thereafter prior
to the Expiration Date be entitled to purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on
outstanding preferred stock as of the date hereof which contain a stated
dividend rate) or otherwise make a distribution or distributions on shares of
its Common Stock or on any other class of capital stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
(b) In case of any reclassification of the Common
Stock, any consolidation or merger of the Company with or into another person,
the sale or transfer of all or substantially all of the assets of the Company or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right to receive the securities or property set forth in this
Section 9(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
-4-
<PAGE>
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to holders
of this Warrant) evidences of its indebtedness or assets or rights or warrants
to subscribe for or purchase any security (excluding those referred to in
Sections 9(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Company's independent certified public accountants that regularly examines
the financial statements of the Company (an "Appraiser").
(d) If, at any time while this Warrant is
outstanding, the Company shall issue or cause to be issued rights or warrants to
acquire or otherwise sell or distribute shares of Common Stock (other than the
shares of Common Stock permitted to be issued pursuant to Section 3.18(ii) of
the Secured Convertible Debenture Purchase Agreement, of even date herewith to
which the Company and the original Holder are parties, in satisfaction of the
litigation described in Schedule 2.1(g) to such Purchase Agreement, (ii) shares
of Common Stock issuable upon the exercise of warrants, options or rights
outstanding on the date hereof and (iii) other than the rights, options and
warrants outstanding prior to the date hereof described in Schedule 2.1(c) of
the Purchase Agreement, but not any modifications thereto) for a consideration
per share less than the market price of the Common Stock then in effect, then,
forthwith upon such issue or sale, the Exercise Price shall be reduced to the
price (calculated to the nearest cent) determined by multiplying the Exercise
Price in effect immediately prior thereto by a fraction, the numerator of which
shall be the sum of (i) the number of shares of Common Stock outstanding
immediately prior to such issuance, and (ii) the number of shares of Common
Stock which the aggregate consideration received (or to be received, assuming
exercise or conversion in full of such rights, warrants and convertible
securities) for the issuance of such additional shares of Common Stock would
purchase at the market price of the Common Stock at the time of such issuance,
and the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made.
However, upon the expiration of any such right or warrant to acquire shares of
Common Stock the issuance of which resulted in an adjustment in the Exercise
Price pursuant to this Section, if any such right or warrant shall expire and
shall not have been exercised, the Exercise Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Exercise Price made pursuant to the provisions of this
Section after the issuance of such rights or warrants) had the adjustment of the
Exercise Price made upon the issuance of such rights or warrants been made on
the basis of offering for subscription or purchase of only that number of shares
of the Common Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
-5-
<PAGE>
(e) For the purposes of this Section 9, the following
clauses shall also be applicable:
(i) RECORD DATE. In case the Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or (B) to
subscribe for or purchase Common Stock or securities convertible or exchangeable
into shares of Common Stock, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) TREASURY SHARES. The number of shares
of Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 9 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(g) Whenever the Exercise Price is adjusted pursuant
to Section 9(c) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Exercise Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment. Such
adjustment shall become effective immediately after the record date mentioned
above.
(h) If:
(i) the Company shall declare a dividend (or
any other distribution) on its Common
Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) the Company shall authorize the
granting to all holders of the Common
Stock rights or warrants to subscribe
for or purchase any shares of capital
stock of any class or of any rights; or
-6-
<PAGE>
(iv) the approval of any stockholders of the
Company shall be required in connection
with any reclassification of the Common
Stock of the Company, any consolidation
or merger to which the Company is a
party, any sale or transfer of all or
substantially all of the assets of the
Company, or any compulsory share
exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the
voluntary dissolution, liquidation or
winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; PROVIDED, HOWEVER, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
10. PAYMENT OF EXERCISE PRICE. The Holder may pay the Exercise
Price in one of the following manners:
(a) CASH EXERCISE. The Holder shall deliver
immediately available funds; or
(b) CASHLESS EXERCISE. The Holder shall surrender
this Warrant to the Company together with a notice of cashless exercise, in
which event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X = Y (A-B)/A
where:
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<PAGE>
X = the number of Warrant Shares to be
issued to the Holder.
Y = the number of Warrant Shares with
respect to which this Warrant is being
exercised.
A = the average of the closing sale prices
of the Common Stock for the five (5) trading
days immediately prior to (but not
including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
11. FRACTIONAL SHARES. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of this
Warrant. The number of full Warrant Shares which shall be issuable upon the
exercise of this Warrant shall be computed on the basis of the aggregate number
of Warrant Shares purchasable on exercise of this Warrant so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 11,
be issuable on the exercise of this Warrant, the Company shall pay an amount in
cash equal to the Exercise Price multiplied by such fraction.
12. NOTICES. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 p.m. (New York City time) on a business day, (ii) the
business day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) the business day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (i) if to the Company, to
3 Morgan, Irvine, CA 92618, Attention: Chief Financial Officer, or to Facsimile
No. (949) 859-5241, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 12.
13. WARRANT AGENT. The Company shall serve as warrant agent
under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent. Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Company or any new warrant agent shall be a party or any
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<PAGE>
corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business shall
be a successor warrant agent under this Warrant without any further act. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the Warrant Register.
14. MISCELLANEOUS.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and assigns. This
Warrant may be amended only in writing signed by the Company and the Holder and
their successors and assigns.
(b) Subject to Section 14(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than the
Company and the Holder any legal or equitable right, remedy or cause under this
Warrant. This Warrant shall inure to the sole and exclusive benefit of the
Company and the Holder.
(c) This Warrant shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. The Company and
the Holder hereby irrevocably submit to the exclusive jurisdiction of the state
and federal courts sitting in the City of New York, borough of Manhattan, for
the adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or that
such suit, action or proceeding is improper. Each of the Company and the Holder
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by receiving a copy thereof
sent to the Company at the address in effect for notices to it under this
instrument and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
(d) The headings herein are for convenience only, do
not constitute a part of this Warrant and shall not be deemed to limit or affect
any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall not
in any way be affected or impaired thereby and the parties will attempt in good
faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated above.
PREMIER LASER SYSTEMS, INC.
By: /S/ COLETTE COZEAN
-----------------------------------
Name: Colette Cozean
---------------------------------
Title: CEO
--------------------------------
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To Premier Laser Systems, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Class A Common, no par value, of Premier Laser Systems, Inc. (the
"Common Stock") and , if such Holder is not utilizing the cashless exercise
provisions set forth in this Warrant, encloses herewith $________ in cash,
certified or official bank check or checks, which sum represents the aggregate
Exercise Price (as defined in the Warrant) for the number of shares of Common
Stock to which this Form of Election to Purchase relates, together with any
applicable taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________________
________________________________________________________________________________
(Please print name and address)
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is entitled
to purchase in accordance with the enclosed Warrant, the undersigned requests
that a New Warrant (as defined in the Warrant) evidencing the right to purchase
the shares of Common Stock not issuable pursuant to the exercise evidenced
hereby be issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated:__________,____ Name of Holder:
(Print)________________________________
(By:)__________________________________
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant)
<PAGE>
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of Premier Laser
Systems, Inc. to which the within Warrant relates and appoints ________________
attorney to transfer said right on the books of Premier Laser Systems, Inc. with
full power of substitution in the premises.
Dated:
- ---------------, ----
---------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
---------------------------------------
Address of Transferee
---------------------------------------
---------------------------------------
In the presence of:
- --------------------------
<PAGE>
INTELLECTUAL PROPERTY SECURITY AGREEMENT
----------------------------------------
INTELLECTUAL PROPERTY SECURITY AGREEMENT, dated as of May 17, 1999,
between Premier Laser Systems, Inc., a California corporation ("Premier"), and
the secured parties signatory hereto, and their respective endorsees,
transferees and assigns (collectively the "Secured Party").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to a Secured Convertible Debenture Purchase
Agreement, dated the date hereof among Premier and the Secured Party (the
"PURCHASE AGREEMENT"), Premier has agreed to issue to the Secured Party and the
Secured Party has agreed to purchase from Premier an aggregate principal amount
of $4,000,000 of Premier's 6% Secured Convertible Debentures (the "DEBENTURES"),
which are convertible into shares of Premier's Class A Common Stock, no par
value (the "COMMON STOCK"). In connection therewith, Premier shall issue to the
Secured Party Common Stock purchase warrants of even date herewith to purchase
an aggregate of 60,000 shares of Common Stock (the "WARRANTS"); and
WHEREAS, in order to induce the Secured Party to purchase the
Debentures, Premier has agreed to execute and deliver to the Secured Party this
Agreement for the benefit of the Secured Party and to grant to it a first
priority security interest in certain general intangible property of Premier to
secure the prompt payment, performance and discharge in full of all of Premier's
obligations under the Debentures and the exercise and discharge in full of all
of Premier's obligations under the Warrants.
NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as "GENERAL INTANGIBLES" and "PROCEEDS") shall have the respective
meanings given such terms in Article 9 of the UCC.
(a) "CLASS B WARRANTS" means the Company's Class B Warrants,
entitling the holders thereof to purchase an aggregate of 7,592,460 shares of
Common Stock.
<PAGE>
(b) "COLLATERAL" means all of the Company's right, title and
interest in and to all of Trademarks, Patents, Copyrights, and other general
intangible property of the Company, all trade secrets, intellectual property
rights in computer software and computer software products, design rights which
may be available to the Company, rights to proceeds arising from any and all
claims for damages by way of past, present and future infringement of any
Collateral with the right but not the obligation to sue on behalf of and collect
such damages for said use or infringement, licenses to use any of the
Copyrights, Patents or Trademarks, and all license fees and royalties arising
from such use to the extent permitted by such license or rights. The term
"Collateral" shall include all of the foregoing items, whether presently owned
or existing or hereafter acquired or coming into existence, all additions and
accessions thereto, all substitutions and replacements thereof, and all
proceeds, products and accounts thereof, including without limitation all
proceeds from the licensing or sale or other transfer of Collateral and of
insurance covering the same and of any tort claims in connection therewith.
(c) "COMPANY" shall mean, collectively, Premier and all of the
subsidiaries of Premier, other than Ophthalmic Imaging Systems, Inc.
(d) "COPYRIGHTS" means any and all copyrights, copyright
applications, copyright registration and like protections in each work or
authorship and derivative work thereof that is created by the Company, whether
published or unpublished and whether or not the same also constitutes a trade
secret, now or hereafter existing, created, acquired or held, including, without
limitation, those set forth on Exhibit A attached hereto.
(e) "OBLIGATIONS" means all of the Company's obligations under
this Agreement, the Debentures and the Warrants, in each case, whether now or
hereafter existing, voluntary or involuntary, direct or indirect, absolute or
contingent, liquidated or unliquidated, whether or not jointly owed with others,
and whether or not from time to time decreased or extinguished and later
decreased, created or incurred, and all or any portion of such obligations or
liabilities that are paid, to the extent all or any part of such payment is
avoided or recovered directly or indirectly from the Secured Party as a
preference, fraudulent transfer or otherwise as such obligations may be amended,
supplemented, converted, extended or modified from time to time.
(f) "PATENTS" means all of the Company's patents, patent
applications, letters patent and like protections of the United States of
America, including, without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same, and
including, without limitation, those set forth on EXHIBIT B attached hereto.
(g) "QUALIFIED FACILITY" means a credit facility or factoring
arrangement with a nationally or regionally recognized institutional lender
without conditions or restrictions (including with respect to borrowing base
requirements) as to availability of funds to the Company, whereby such lender
has required the Company to grant to it a first priority security interest in
the Collateral, loans under which facility shall not be subject to repayment for
at least 364 calendar days.
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<PAGE>
(h) "QUALIFIED INCOME SOURCE" means any of (i) licensing or
royalty arrangements whereby the Company has received prepaid licensing or
royalty fees, (ii) deposits or prepaid distribution arrangements received by the
Company, (iii) non-refundable net proceeds from the exercise of Class B
Warrants, (iv) non-refundable cash proceeds, net of applicable taxes and other
expenses, from the settlement of or judgment from, any of the litigation
specified in SCHEDULE 1(h) hereto, and (v) a Qualified Facility.
(i) "TRADEMARKS" means any trademark, service mark right,
whether or not registered, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of the
Company connected with or symbolized by such trademarks, including, without
limitation, those set forth on Exhibit C attached hereto.
(j) "TWO THIRDS-IN-INTEREST" means one or more of the secured
party signatories hereto holding in excess of 66.66% of the aggregate principal
amount of the Debentures outstanding, determined on a cumulative basis.
(k) "UCC" means the Uniform Commercial Code, as currently in
effect in the State of California.
2. GRANT OF SECURITY INTEREST. As an inducement for the Secured Party
to purchase the Debentures and to secure the complete and timely payment,
performance and discharge in full, as the case may be, of all of the
Obligations, the Company hereby, unconditionally and irrevocably, pledges,
grants and hypothecates to the Secured Party, a continuing security interest in,
a first lien upon and a right of set-off against all of the Company's right,
title and interest of whatsoever kind and nature in and to the Collateral (the
"SECURITY INTEREST").
3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE
COMPANY. The Company represents and warrants to, and covenants and agrees with,
the Secured Party as follows:
(a) The Company has the requisite corporate power and
authority to enter into this Agreement and otherwise to carry out its
obligations thereunder. The execution, delivery and performance by the Company
of this Agreement and the filings contemplated therein have been duly authorized
by all necessary action on the part of the Company and no further action is
required by the Company.
(b) Except as specified in SCHEDULE 3(b), the Company is the
sole owner of the Collateral (except for non-exclusive licenses granted by the
Company in the ordinary course of business), free and clear of any liens,
security interests, encumbrances, rights or claims, and is fully authorized to
grant the Security Interest in and to pledge the Collateral. There is not on
file in any governmental or regulatory authority, agency or recording office an
effective financing statement, security agreement, license or transfer or any
notice of any of the foregoing (other than those that have been filed in favor
of the Secured Party pursuant to this Agreement) covering or affecting any of
the Collateral. So long as this Agreement shall be in effect and other than
-3-
<PAGE>
pursuant to Section 10 hereof, the Company shall not execute and shall not
knowingly permit to be on file in any such office or agency any such financing
statement or other document or instrument (except to the extent filed or
recorded in favor of the Secured Party pursuant to the terms of this Agreement).
(c) EXHIBIT A sets forth a true and complete list of all
registered Copyrights and any applications thereto in existence as of the date
of this Agreement. EXHIBIT B sets forth a true and complete list of all pending
Patent applications that have been filed and all Patents that have been issued
as of the date of this Agreement. EXHIBIT C sets forth a true and complete list
of all Trademark registered and pending Trademark applications filed, in each
case, in the United States of America as of the date of this Agreement. The
Company shall, within ten (10) days of obtaining knowledge thereof, advise the
Secured Party in writing of any change in the composition of the Collateral,
including, without limitation, any subsequent ownership rights of the Company in
or to any Copyright, Patent or Trademark.
(d) Each of the Patents, Trademarks and Copyrights is valid
and enforceable in the United States of America, and no part of the Collateral
has been judged invalid or unenforceable. There has been no adverse decision to
the Company's claim of ownership rights in or exclusive rights to use the
Collateral in any jurisdiction or to the Company's right to keep and maintain
such Collateral in full force and effect, and, except as set forth in Schedule
3(d) there is no proceeding involving said rights pending or, to the best
knowledge of the Company, threatened before any court, judicial body,
administrative or regulatory agency, arbitrator or other governmental authority.
(e) The Company shall at all times maintain its books of
account and records relating to the Collateral at its principal place of
business and may not relocate such books of account and records unless it
delivers to the Secured Party at least 30 days prior to such relocation (i)
written notice of such relocation and the new location thereof (which must be
within the United States) and (ii) evidence that appropriate financing
statements and other necessary documents have been filed and recorded and other
steps have been taken to perfect the Security Interest to create in favor of the
Secured Party valid, perfected and continuing first priority liens in the
Collateral. The principal place of business of the Company is located at the
address set forth in the introduction to this Agreement.
(f) This Agreement creates in favor of the Secured Party a
valid security interest in the Collateral, including the Collateral listed on
the Exhibits hereto, securing the payment and performance of the Obligations,
and, upon making the filings described in the immediately following sentence, a
perfected first priority security interest in such Collateral. Except for (x)
the filing of this Agreement with the United States Patent and Trademark Office
with respect to the Patents and Trademarks and the filing of this Agreement with
the Register of Copyrights with respect to the Copyrights, and (y) the filing of
financing statements on Form UCC-1 under the UCC with the jurisdictions
indicated in SCHEDULE B, attached hereto, no authorization or approval of or
filing with or notice to any governmental authority or regulatory body located
in the United States of America is required either (i) for the grant by the
Company of, or the effectiveness of, the Security Interest granted hereby or for
the execution, delivery and performance of this Agreement by the Company or (ii)
for the perfection of or exercise by the Secured Party of its rights and
remedies hereunder. The Company acknowledges and agrees that a copy of this
Agreement (or instruments executed and delivered pursuant hereto) will be filed
and recorded with each of the United States Patent and Trademark Office and the
Register of Copyrights with respect to the Patents, Trademarks and Copyrights
that are now or hereafter in existence.
-4-
<PAGE>
(g) On the date of execution of this Agreement, the Company
will deliver to the Secured Party (i) one or more executed UCC financing
statements on Form UCC-1 with respect to the Security Interest for filing with
the jurisdictions indicated on SCHEDULE B, attached hereto and in such other
jurisdictions as may be requested by the Secured Party and (ii) one or more
executed recordation sheets relating to the filing and recording of this
Agreement with each of the United States Patent and Trademark Office and the
Register of Copyrights with respect to the Patents, Trademarks and Copyrights
that are now in existence.
(h) The execution, delivery and performance of this Agreement
does not conflict with or cause a breach or default, or an event that with or
without the passage of time or notice, shall constitute a breach or default,
under any agreement to which the Company is a party or by which the Company is
bound. No consent (including, without limitation, from stock holders or
creditors of the Company) is required for the Company to enter into and perform
its obligations hereunder.
(i) The Company shall at all times maintain the liens and
Security Interest provided for hereunder as valid and perfected first priority
(subject to subordination pursuant to Section 10 hereof) liens and security
interests in the Collateral in favor of the Secured Party until this Agreement
and the Security Interest hereunder shall be terminated pursuant to Section 10.
The Company shall safeguard and protect all Collateral for the account of the
Secured Party and the Company hereby agrees to defend the Collateral (provided,
that with respect to the Patents that are included within the definition of
Collateral, such Patents will, for the sole and exclusive purpose of any defense
under this Section 3(i), be limited to the Patents specified on SCHEDULE 3(i))
and the first priority liens and Security Interests created and granted under
this Agreement against any and all persons. At the request of the Secured Party,
the Company will sign and deliver to the Secured Party at any time or from time
to time one or more financing statements pursuant to the UCC (or any other
applicable statute) in form reasonably satisfactory to the Secured Party and
will pay the cost of filing the same in all public offices wherever filing is,
or is deemed by the Secured Party to be, necessary or desirable to effect the
rights and obligations provided for herein. Without limiting the generality of
the foregoing, the Company shall pay all fees, taxes and other amounts necessary
to maintain the Collateral and the Security Interest hereunder, and the Company
shall obtain and furnish to the Secured Party from time to time, upon demand,
such releases and/or subordinations of claims and liens which may be required to
maintain the priority of the Security Interest hereunder. The Patents listed on
SCHEDULE 3(i) are the only Patents that are material to the conduct of the
business of the Company.
(j) Except as permitted by the Purchase Agreement, the Company
will not allow any Collateral to be abandoned, forfeited or dedicated to the
public without the prior written consent of the Secured Party. The Company will
not transfer, pledge, hypothecate, encumber, license (except for non-exclusive
licenses granted by the Company in the ordinary course of business), sell or
otherwise dispose of any of the Collateral without the prior written consent of
the Secured Party.
(k) The Company shall, within ten (10) days of obtaining
knowledge thereof, advise the Secured Party promptly, in sufficient detail, of
any substantial change in the Collateral, and of the occurrence of any event
which would have a material adverse effect on the value of the Collateral or on
the Secured Party's security interest therein.
-5-
<PAGE>
(l) The Company shall permit the Secured Party and its
representatives and agents to inspect the Collateral at any time, and to make
copies of records pertaining to the Collateral as may be requested by the
Secured Party from time to time.
(m) The Company will take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights, claims,
causes of action and accounts receivable in respect of the Collateral.
(n) The Company shall promptly notify the Secured Party in
sufficient detail upon becoming aware of any attachment, garnishment, execution
or other legal process levied against any Collateral and of any other
information received by the Company that may materially affect the value of the
Collateral, the Security Interest or the rights and remedies of the Secured
Party hereunder.
(o) All information heretofore, herein or hereafter supplied
to the Secured Party by or on behalf of the Company with respect to the
Collateral is accurate and complete in all material respects as of the date
furnished.
(p) SCHEDULE A, attached hereto contains a list of all of the
subsidiaries of Premier.
4. DEFAULTS. The following events shall be "EVENTS OF DEFAULT":
(a) The occurrence of an Event of Default (as defined in the
Debentures) under the Debentures;
(b) Any representation or warranty of the Company in this
Agreement or in the Security Agreement, dated the date hereof between the
Company and the Secured Party, shall prove to have been incorrect in any
material respect when made;
(c) The failure by the Company to observe or perform any of
its obligations hereunder or in the Security Agreement, dated the date hereof
between the Company and the Secured Party, for ten (10) days after receipt by
the Company of notice of such failure from the Secured Party; and
(d) Any breach or default under the Warrants.
5. DUTY TO HOLD IN TRUST. Upon the occurrence of any Event of Default
and at any time thereafter, the Company shall, upon receipt by it of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debentures or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party for
application to the satisfaction of the Obligations.
-6-
<PAGE>
6. RIGHTS AND REMEDIES UPON DEFAULT. Upon occurrence of any Event of
Default and at any time thereafter, the Secured Party shall have the right to
exercise all of the remedies conferred hereunder and under the Debentures and
the Warrants, and the Secured Party shall have all the rights and remedies of a
secured party under the UCC and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any Collateral is then
located). Without limitation, the Secured Party shall have the following rights
and powers:
(a) The Secured Party shall have the right to take possession
of all tangible manifestations or embodiments of the Collateral and, for that
purpose, enter, with the aid and assistance of any person, any premises where
the Collateral, or any part thereof, is or may be placed and remove the same,
and the Company shall assemble the Collateral and make it available to the
Secured Party at places which the Secured Party shall reasonably select, whether
at the Company's premises or elsewhere.
(b) The Secured Party shall have the right to operate the
business of the Company using the Collateral and shall have the right to assign,
sell, or otherwise dispose of and deliver all or any part of the Collateral, at
public or private sale or otherwise, either with or without special conditions
or stipulations, for cash or on credit or for future delivery, in such parcel or
parcels and at such time or times and at such place or places, and upon such
terms and conditions as the Secured Party may deem commercially reasonable, all
without (except as shall be required by applicable statute and cannot be waived)
advertisement or demand upon or notice to the Company or right of redemption of
the Company, which are hereby expressly waived. Upon each such sale, assignment
or other transfer of Collateral, the Secured Party may, unless prohibited by
applicable law which cannot be waived, purchase all or any part of the
Collateral being sold, free from and discharged of all trusts, claims, right of
redemption and equities of the Company, which are hereby waived and released.
(c) The Secured Party may license or, to the same extent the
Company is permitted by law and contract to do so, sublicense, whether on an
exclusive or non-exclusive basis, any of the Collateral throughout the world for
such term, on such conditions and in such manner as the Secured Party shall, in
its sole discretion, determine.
(d) The Secured Party may (without assuming any obligations or
liabilities thereunder), at any time, enforce (and shall have the exclusive
right to enforce) against any licensee or sublicensee all rights and remedies of
the Company in, to and under any license agreement with respect to such
Collateral, and take or refrain from taking any action thereunder.
(e) The Secured Party may, in order to implement the
assignment, license, sale or other disposition of any of the Collateral pursuant
to this Section, pursuant to the authority provided for in Section 11, execute
and deliver on behalf of the Company one or more instruments of assignment of
the Collateral in form suitable for filing, recording or registration in any
jurisdictions as the Secured Party may determine advisable.
7. APPLICATIONS OF PROCEEDS; EXPENSES. (a) The proceeds of any such
sale, lease, license or other disposition of the Collateral hereunder shall be
applied first, to the expenses of retaking, holding, storing, processing and
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<PAGE>
preparing for sale, selling, and the like (including, without limitation, any
taxes, fees and other costs incurred in connection therewith) of the Collateral,
to the reasonable attorneys' fees and expenses incurred by the Secured Party in
enforcing its rights hereunder and in connection with collecting, storing and
disposing of the Collateral, and then to satisfaction of the Obligations, and to
the payment of any other amounts required by applicable law, after which the
Secured Party shall pay to the Company any surplus proceeds. If, upon the sale,
license or other disposition of the Collateral, the proceeds thereof are
insufficient to pay all amounts to which the Secured Party is legally entitled,
secured parties signatory hereto will be entitled to their pro rata portion of
such proceeds (determined by reference to the aggregate principal amount of
Debentures outstanding, determined on a cumulative basis), and the Company will
be liable for the deficiency, together with interest thereon, at the rate of 17%
per annum (the "DEFAULT RATE"), and the reasonable fees of any attorneys
employed by the Secured Party to collect such deficiency. To the extent
permitted by applicable law, the Company waives all claims, damages and demands
against the Secured Party arising out of the repossession, removal, retention or
sale of the Collateral, unless due to the gross negligence or willful misconduct
of the Secured Party.
(b) The Company agrees to pay all out-of-pocket fees, costs
and expenses incurred in connection with any filing required hereunder,
including, without limitation, any financing statements, continuation
statements, partial releases and/or termination statements related thereto or
any expenses of any searches reasonably required by the Secured Party. The
Company shall also pay all other claims and charges which in the reasonable
opinion of the Secured Party might prejudice, imperil or otherwise affect the
Collateral or the Security Interest therein. The Company will also, upon demand,
pay to the Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and expenses of its counsel and of any experts and
agents, which the Secured Party may incur in connection with (i) the enforcement
of this Agreement, (ii) the custody or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, or (iii) the
exercise or enforcement of any of the rights of the Secured Party under the
Debentures. Until so paid, any fees payable hereunder shall be added to the
principal amount of the Debentures and shall bear interest at the Default Rate.
8. RESPONSIBILITY FOR COLLATERAL. The Company assumes all liabilities
and responsibility in connection with all Collateral, and the obligations of the
Company hereunder or under the Debentures and the Warrants shall in no way be
affected or diminished by reason of the loss, destruction, damage or theft of
any of the Collateral or its unavailability for any reason.
9. SECURITY INTEREST ABSOLUTE. All rights of the Secured Party and all
Obligations of the Company hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures, the Warrants or any agreement entered into in connection with
the foregoing, or any portion hereof or thereof; (b) any change in the time,
manner or place of payment or performance of, or in any other term of, all or
any of the Obligations, or any other amendment or waiver of or any consent to
any departure from the Debentures, the Warrants or any other agreement entered
into in connection with the foregoing; (c) any exchange, release or
nonperfection of any of the Collateral, or any release or amendment or waiver of
or consent to departure from any other collateral for, or any guaranty, or any
other security, for all or any of the Obligations; (d) any action by the Secured
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<PAGE>
Party to obtain, adjust, settle and cancel in its sole discretion any insurance
claims or matters made or arising in connection with the Collateral; or (e) any
other circumstance which might otherwise constitute any legal or equitable
defense available to the Company, or a discharge of all or any part of the
Security Interest granted hereby. Until the Obligations shall have been paid and
performed in full, the rights of the Secured Party shall continue even if the
Obligations are barred for any reason, including, without limitation, the
running of the statute of limitations or bankruptcy. The Company expressly
waives presentment, protest, notice of protest, demand, notice of nonpayment and
demand for performance. In the event that at any time any transfer of any
Collateral or any payment received by the Secured Party hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Party, then, in any such event, the Company's obligations
hereunder shall survive cancellation of this Agreement, and shall not be
discharged or satisfied by any prior payment thereof and/or cancellation of this
Agreement, but shall remain a valid and binding obligation enforceable in
accordance with the terms and provisions hereof. The Company waives all right to
require the Secured Party to proceed against any other person or to apply any
Collateral which the Secured Party may hold at any time, or to marshal assets,
or to pursue any other remedy. The Company waives any defense arising by reason
of the application of the statute of limitations to any obligation secured
hereby.
10. TERM OF AGREEMENT AND SUBORDINATION OF SECURITY INTEREST. (a) This
Agreement and the Security Interest shall terminate on the earlier of (A)
subject to the provisions of the immediately following sentence, the date of the
receipt by the Secured Party of evidence satisfactory to it that the Company has
received a minimum of $4,000,000 in bona fide funds from a Qualified Income
Source which shall not be subject to repayment prior to the later to occur of
(i) the 364th calendar day following the obtainment of such funds and (ii) the
270th day following the date that an Underlying Shares Registration Statement
(as defined in the Debentures) is first declared effective by the Securities and
Exchange Commission, and (B) the date on which all payments under the Debentures
have been made in full and all other Obligations have been paid or discharged.
Notwithstanding the foregoing and anything to the contrary contained herein, in
no event shall this Agreement or the Security Interest terminate prior to the
date that an Underlying Shares Registration Statement is first declared
effective by the Securities and Exchange Commission.
(b) If the Company shall have entered into a Qualified
Facility for in excess of $500,000, then the Security Interest shall, subject to
terms mutually acceptable to the Company and the Secured Party, become
subordinate to any security interest granted to such lender pursuant to such
Qualified Facility.
(c) Upon any termination or subordination of the Security
Interest pursuant to this Section 10, the Secured Party, at the request and at
the expense of the Company, will join in executing an appropriate amendment or
termination statement (as the case may be) with respect to any financing
statement executed and filed pursuant to this Agreement.
11. POWER OF ATTORNEY; FURTHER ASSURANCES. (a) The Company authorizes
the Secured Party, and does hereby make, constitute and appoint it, and its
respective officers, agents, successors or assigns with full power of
substitution, as the Company's true and lawful attorney-in-fact, with power, in
-9-
<PAGE>
its own name or in the name of the Company, to, after the occurrence and during
the continuance of an Event of Default, (i) endorse any notes, checks, drafts,
money orders, or other instruments of payment (including payments payable under
or in respect of any policy of insurance) in respect of the Collateral that may
come into possession of the Secured Party; (ii) to sign and endorse any UCC
financing statement or any invoice, freight or express bill, bill of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with accounts, and other documents
relating to the Collateral; (iii) to pay or discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on or threatened
against the Collateral; (iv) to demand, collect, receipt for, compromise, settle
and sue for monies due in respect of the Collateral; and (v) generally, to do,
at the option of the Secured Party, and at the Company's expense, at any time,
or from time to time, all acts and things which the Secured Party deems
necessary to protect, preserve and realize upon the Collateral and the Security
Interest granted therein in order to effect the intent of this Agreement, the
Debentures and the Warrants, all as fully and effectually as the Company might
or could do; and the Company hereby ratifies all that said attorney shall
lawfully do or cause to be done by virtue hereof. This power of attorney is
coupled with an interest and shall be irrevocable for the term of this Agreement
and thereafter as long as any of the Obligations shall be outstanding.
(b) On a continuing basis, the Company will make, execute,
acknowledge, deliver, file and record, as the case may be, in the proper filing
and recording places in any jurisdiction, including, without limitation, the
jurisdictions indicated on Schedule B, attached hereto, all such instruments,
including appropriate financing and continuation statements and collateral
agreements and filings with the United States Patent and Trademark Office and
the Register of Copyrights, and take all such action as may reasonably be deemed
necessary or advisable, or as reasonably requested by the Secured Party, to
perfect the Security Interest granted hereunder and otherwise to carry out the
intent and purposes of this Agreement, or for assuring and confirming to the
Secured Party the grant or perfection of a security interest in all the
Collateral.
(c) The Company hereby irrevocably appoints the Secured Party
as the Company's attorney-in-fact, with full authority in the place and stead of
the Company and in the name of the Company, from time to time in the Secured
Party's discretion, to take any action and to execute any instrument which the
Secured Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including:
(i) To modify, in its sole discretion, this Agreement
without first obtaining the Company's approval of or signature to such
modification by amending EXHIBIT A, EXHIBIT B AND EXHIBIT C, hereof, as
appropriate, to include reference to any right, title or interest in any
Copyrights, Patents or Trademarks acquired by the Company after the execution
hereof or to delete any reference to any right, title or interest in any
Copyrights, Patents or Trademarks in which the Company no longer has or claims
any right, title or interest; and
(ii) To file, in its sole discretion, one or more
financing or continuation statements and amendments thereto, relative to any of
the Collateral without the signature of the Company where permitted by law.
-10-
<PAGE>
12. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing, with copies to all the other parties hereto, and
shall be deemed to have been duly given when (i) if delivered by hand, upon
receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof,
(iii) if sent by nationally recognized overnight delivery service (receipt
requested), the next business day or (iv) if mailed by first-class registered or
certified mail, return receipt requested, postage prepaid, four days after
posting in the U.S. mails, in each case if delivered to the following addresses:
If to the Company: Premier Laser Systems, Inc.
3 Morgan
Irvine, CA 92618
Facsimile No.: (949) 859-5241
Attn: Chief Financial Officer
With copies to: Rutan & Tucker LLP
611 Anton Boulevard, 14th floor
Costa Mesa, CA 92626-1998
Facsimile No.: (714) 546-9035
Attn: Thomas G. Brockington, Esq.
If to the Secured Party to the address for notice set forth below such
Secured Party's name on the signature page hereto.
13. OTHER SECURITY. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Party shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Party's rights and
remedies hereunder.
14. ACTIONS BY THE SECURED PARTY. Any action required or permitted
hereunder to be taken by or on behalf of the secured parties signatory hereto
shall, for such action to be valid, require the approval of the Two
Thirds-in-Interest prior to the taking of such action. If the consent, approval
or disapproval of the secured parties signatory hereto is required or permitted
pursuant to this Agreement, such consent, approval or disapproval shall only be
valid if given by the Two Thirds-in-Interest.
15. MISCELLANEOUS.
(a) No course of dealing between the Company and the Secured
Party, nor any failure to exercise, nor any delay in exercising, on the part of
the Secured Party, any right, power or privilege hereunder or under the
Debentures shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
-11-
<PAGE>
(b) All of the rights and remedies of the Secured Party with
respect to the Collateral, whether established hereby or by the Debentures or by
any other agreements, instruments or documents or by law shall be cumulative and
may be exercised singly or concurrently.
(c) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and is intended to supersede
all prior negotiations, understandings and agreements with respect thereto.
Except as specifically set forth in this Agreement, no provision of this
Agreement may be modified or amended except by a written agreement specifically
referring to this Agreement and signed by the parties hereto.
(d) In the event that any provision of this Agreement is held
to be invalid, prohibited or unenforceable in any jurisdiction for any reason,
unless such provision is narrowed by judicial construction, this Agreement
shall, as to such jurisdiction, be construed as if such invalid, prohibited or
unenforceable provision had been more narrowly drawn so as not to be invalid,
prohibited or unenforceable. If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in any
jurisdiction, such provision, as to such jurisdiction, shall be ineffective to
the extent of such invalidity, prohibition or unenforceability without
invalidating the remaining portion of such provision or the other provisions of
this Agreement and without affecting the validity or enforceability of such
provision or the other provisions of this Agreement in any other jurisdiction.
(e) No waiver of any breach or default or any right under this
Agreement shall be considered valid unless in writing and signed by the party
giving such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default or right, whether of the same or similar nature or
otherwise.
(f) This Agreement shall be binding upon and inure to the
benefit of each party hereto and its successors and assigns.
(g) Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in order to
carry out the provisions and purposes of this Agreement.
(h) This Agreement shall be construed in accordance with the
laws of the State of New York, except to the extent the validity, perfection or
enforcement of a security interest hereunder in respect of any particular
Collateral which are governed by a jurisdiction other than the State of New York
in which case such law shall govern. Each of the parties hereto irrevocably
submit to the exclusive jurisdiction of any New York State or United States
Federal court sitting in Manhattan county over any action or proceeding arising
out of or relating to this Agreement, and the parties hereto hereby irrevocably
agree that all claims in respect of such action or proceeding may be heard and
determined in such New York State or Federal court. The parties hereto agree
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. The parties hereto further waive any objection to venue
in the State of New York and any objection to an action or proceeding in the
State of New York on the basis of forum non convenient.
-12-
<PAGE>
(i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR
EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY
RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL
CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY
FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS RIGHTS TO
A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING
THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE
EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
(j) This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
* * * * * * * * * * *
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Intellectual Property Security Agreement to be duly executed on the day and year
first above written.
PREMIER LASER SYSTEMS, INC.
By: /S/ COLETTE COZEAN
---------------------------------
Name: Colette Cozean
Title: CEO
SECURED PARTY:
STRONG RIVER INVESTMENTS, INC.
By: /S/ KENNETH L. HENDERSON
---------------------------------
Kenneth L. Henderson
Attorney-in-Fact
Address for Notice:
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Avi Vigder
HERKIMER LLC
By: /S/ L. FAMINGTON /S/ JUDITH PATRICK
------------------------------------
Name: CT Corporation Ltd.
Title: Director
Address for Notice:
c/o Citco Trustees (Cayman) Limited
Commercial Centre
P.O. Box 31106 SMB
Grand Cayman
Cayman Islands
British West Indies
Facsimile No.: (345) 945-7566
-14-
<PAGE>
with a copy to: Southridge Capital Management LLC
Executive Pavillon
20 Grove Street
Ridgefield, CT 06877
Facsimile No.: (203) 431-8301
With copies for
communications to
Secured Party to: Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Kenneth L. Henderson, Esq.
Eric L. Cohen. Esq.
<PAGE>
EXHIBIT A to Intellectual Property Security Agreement
Copyright Registrations and Applications Therefor
None
<PAGE>
<TABLE>
STATUS REPORT FOR PREMLS U.S. ISSUED PATENTS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREMLS.001FW1 MEDICAL LASER INTERCONNECT SYSTEM USA ISSUED 07/568549 08/16/90 5116329 05/26/92
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.002W1 FILBER OPTIC APPARATUS FOR USE WITH USA ISSUED 07/803919 12/06/91 5207673 05/04/93
MEDICAL LASERS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.009FW4 TRANSPARENT LASER SURGICAL PROBE USA ISSUED 08/419511 04/07/95 5688261 11/18/97
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.011FW4 CONTACT TIP FOR LASER SURGERY USA ISSUED 08/457992 06/01/95 5707368 01/13/98
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.013A OPTICS FOR MEDICAL LASER USA ISSUED 07/644074 01/18/91 5198926 03/30/93
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.013DV1 OPTICS FOR MEDICAL LASER USA ISSUED 08/021354 02/23/93 5289557 02/22/94
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018DV1 MULTIWAVELENGTH MEDICAL LASER USA ISSUED 07/917589 07/17/92 5304167 04/19/94
METHOD
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018FW2 MULTIWAVELENGTH MEDICAL LASER USA ISSUED 07/754327 09/04/91 5139494 08/18/92
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018FW4 METHOD OF LASER SURGERY USING USA ISSUED 08/422648 04/14/95 5540676 07/30/96
MULTIPLE WAVELENGTHS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.024FW1 MEDICAL LASER APPARATUS FOR USA ISSUED 08/075720 06/11/93 5349590 09/20/94
DELIVERING HIGH POWER INFRARED
LIGHT
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.031FW2 CORNEAL SCULPTING USING LASER USA ISSUED 08/384243 02/06/95 5741245 04/21/98
ENERGY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033DV1 APPARATUS AND METHOD FOR USA ISSUED 08/455732 05/31/95 5738677 04/14/98
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.046A LASER SURGICAL METHOD USA ISSUED 07/763350 09/20/91 5267856 12/07/93
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050A HIGH REPETITION RATE MID-INFRARED USA ISSUED 08/240255 05/10/94 5422899 06/06/95
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.052A METHOD AND APPARATUS FOR USA ISSUED 972531 11/06/92 5300065 04/05/94
SIMULTANEOUSLY HOLDING AND
SEALING TISSUE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.053A METHOD AND APPARATUS FOR APPLYING USA ISSUED 972532 11/06/92 5290278 03/01/94
THERMAL ENERGY TO LUMINAL TISSUE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.055FW3 LASER SURGICAL METHOD USING USA ISSUED 08/391612 02/21/95 5722970 03/03/98
TRANSPARENT PROBE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.0556A METHOD AND APPARATUS FOR APPLYING USA ISSUED 972530 11/06/92 5336221 08/09/94
THERMAL ENERGY TO TISSUE USING A
CLAMP
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.059A OPTICAL HEATING SYSTEM USA ISSUED 997554 12/28/92 5354323 10/11/94
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.060A METHOD AND APPARATUS FOR SEALING USA ISSUED 981197 11/25/92 5364389 11/15/94
AND/OR GRASPING LUMINAL TISSUE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.063A LASER SURGICAL PROCEDURES FOR USA ISSUED 08/633670 04/17/96 5865831 02/02/99
TREATMENT OF GLAUCOMA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.075A LASER HEALING METHOD USA ISSUED 06/539527 10/06/83 4672969 06/16/87
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.076A LASER HEALING METHOD AND USA ISSUED 07/062861 06/16/87 4854320 08/08/89
APPARATUS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.077A METHOD FOR CLOSING TISSUE WOUNDS USA ISSUED 07/380622 07/14/89 5002051 03/26/91
USING RADIATIVE ENERGY BEAMS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.078A LASER HEALING METHOD AND USA ISSUED 07/639025 01/09/91 5140984 08/25/92
APPARATUS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.079A METHOD FOR CLOSING TISSUE WOUNDS USA ISSUED 07/934167 08/24/92 5409479 04/25/95
USING RADIATIVE ENERGY BEAMS
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135A METHOD AND APPARATUS FOR USA ISSUED 08/279506 07/22/94 5520631 05/28/96
LOWERING THE INTRAOCULAR PRESSURE
OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135CP1 METHOD AND APPARATUS FOR USA ISSUED 08/570400 12/11/95 5704907 01/06/98
LOWERING THE INTRAOCULAR PRESSURE
OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136A METHOD FOR SURGICALLY RE-PROFILING USA ISSUED 07/450672 12/14/89 5063942 11/12/91
THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136CP1 METHOD FOR SURGICALLY RE-PROFILING USA ISSUED 07/762866 09/18/91 5318044 06/07/94
THE CORNEA TO CORRECT FOR
HYPEROPIA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136CP3 METHOD AND APPARATUS FOR RE- USA ISSUED 08/345245 11/28/94 5591185 01/07/97
PROFILING OR SMOOTHING THE
ANTERIOR OR STROMAL CORNEA USING
SCRAPING
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136CPF2 METHOD AND APPARATUS FOR USA ISSUED 08/170679 12/20/93 5368604 11/29/94
SURGICALLY PROFILING THE CORNEA
USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136DC1 APPARATUS FOR SURGICALLY RE- USA ISSUED 07/979424 11/19/92 5395385 03/07/95
PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATUS REPORT FOR PREMLS U.S. PENDING PATENTS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREMLS.009DV1 LASER SURGICAL PROBE USA PENDING 08/841865 05/05/97
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.011DV1 CONTACT TIP FOR LASER SURGERY USA PENDING 08/455061 05/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.049FW2 DENTAL LASER SURGERY APPARATUS USA PENDING 08/882362 06/25/97
AND METHOD
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050DFC1 HIGH REPETITION RATE MID-INFRARED USA PENDING 08/979213 11/26/97
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050DV2 HIGH REPETITION RATE MID-INFRARED USA PENDING 08/931600 09/17/97
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.063DV1 LASER SURGICAL PROCEDURES FOR USA PENDING 09/169258 10/09/98
TREATMENT OF GLAUCOMA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.112A OPTICAL SOURCE AND METHOD USA PENDING 05/03/99
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135CP2 METHOD AND APPARATUS FOR USA PENDING 08/998875 12/24/97
LOWERING THE INTRAOCULAR PRESSURE
OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.146A OCCULAR FUNDUS CAMERA USA PENDING 09/186710 11/05/98
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.31FDV1 CORNEAL SCULPTING USING LASER USA PENDING 08/455899 05/31/95
ENERGY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.33F3C1 APPARATUS AND METHOD FOR USA PENDING 09/018373 02/04/98
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATUS REPORT FOR PREMLS FOREIGN ISSUED PATENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREMLS.001VAU MEDICAL LASER INTERCONNECT SYSTEM AUSAL ISSUED 43601/89 10/19/89 612910 12/03/91
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VCA MEDICAL LASER INTERCONNECT SYSTEM CANAD ISSUED 2000916 10/18/89 2000916 01/17/95
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VEP MEDICAL LASER INTERCONNECT SYSTEM EPO ISSUED 89310520.5 10/13/89 0365228 12/14/94
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VNO MEDICAL LASER INTERCONNECT SYSTEM NORW ISSUED 894170 10/19/89 178842 06/19/96
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VPT MEDICAL LASER INTERCONNECT SYSTEM PORTG ISSUED 92021 10/18/89 92021 10/09/95
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.002VAU FIBER OPTIC APPARATUS FOR USE WITH AUSAL ISSUED 56921/90 06/07/90 613560 12/11/91
MEDICAL LASERS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.002VCA FIBER OPTIC APPARATUS FOR USE WITH CANAD ISSUED 2018450 06/07/90 2018450 05/09/95
MEDICAL LASERS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.002VKR FIBER OPTIC APPARATUS FOR USE WITH KORSO ISSUED 90-7829 05/30/90 55974 11/02/92
MEDICAL LASERS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018VAU MULTIWAVELENGTH MEDICAL LASER AUSAL ISSUED 44520/89 11/09/89 626339 02/01/93
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018VCA MULTIWAVELENGTH MEDICAL LASER CANAD ISSUED 2002453 11/08/89 2002453 01/17/95
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018VPT MULTIWAVELENGTH MEDICAL LASER PORTG ISSUED 92240 11/09/89 92240 05/03/95
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033RAU APPARATUS AND METHOD FOR AUSAL ISSUED 28572/97 04/01/93 699994 04/01/99
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033VAU APPARATUS AND METHOD FOR AUSAL ISSUED 40486/93 04/01/93 678967 10/09/97
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050VAU HIGH REPETITION RATE MID-INFRARED AUSAL ISSUED 17964/95 05/09/95 685593 05/07/98
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050VEP HIGH REPETITION RATE MID-INFRARED EPO ISSUED 95302891.7 04/28/95 0682389 09/02/98
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050VIL HIGH PULSE REPETITION AND ITS USE ISREA ISSUED 113501 04/26/95 113501 05/19/97
(AMENDED TITLE)
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.053QAU METHOD AND APPARATUS FOR APPLYING AUSAL ISSUED 53643/94 10/19/93 684054 03/26/98
THERMAL ENERGY TO LUMINAL TISSUE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.056VAU CLAMP AND METHOD FOR APPLYING AUSAL ISSUED 53607/94 10/14/93 682324 01/22/98
THERMAL ENERGY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.060VAU METHOD AND APPARATUS FOR SEALING AUSAL ISSUED 56699/94 11/16/93 684057 03/26/98
LUMINAL TISSUE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136HEP APPARATUS FOR SURGICALLY PROFILING EPO ISSUED 91920409.9 09/16/91 0551439 08/09/95
THE CORNEA USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136HMX APPARATUS FOR SURGICALLY PROFILING MEXIC ISSUED 911426 10/03/91 177228 03/15/95
THE CORNEA USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136HZA METHOD AND APPARATUS FOR SOFRC ISSUED 91/7835 10/01/91 91/7835 08/26/92
SURGICALLY PROFILING THE CORNEA
USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136QEP APPARATUS FOR RE-PROFILING THE EPO ISSUED 92920651.4 09/17/92 0680298 01/21/98
CORNEA TO CORRECT FOR HYPEROPIA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136QMX METHOD AND APPARATUS FOR RE- MEXIC ISSUED 925239 09/14/92 178296 06/07/95
PROFILING THE CORNEA TO CORRECT
FOR HYPEROPIA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VCN APPARATUS FOR SURGICALLY RE- CHINA ISSUED 90110433.7 12/14/90 42198 07/24/98
PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VKR APPARATUS FOR RE-PROFILING THE KORSO ISSUED 92-701415 12/12/90 156727 07/23/98
CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VMX APPARATUS FOR SURGICALLY RE- MEXIC ISSUED 23746 12/14/90 167844 04/15/93
PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VRU METHOD AND APPARATUS FOR RUSSA ISSUED 5052732 12/12/90 2094032 10/27/97
SURGICALLY RE-PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VZA METHOD AND APPARATUS FOR SOFRC ISSUED 90/10063 12/14/90 90/10063 11/27/91
SURGICALLY RE-PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATUS REPORT FOR PREMLS PENDING FOREIGN PATENTS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PREMLS.001VDK MEDICAL LASER INTERCONNECT SYSTEM DENMR PENDING 5185/89 10/19/89
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VF1 MEDICAL LASER INTERCONNECT SYSTEM FINLN PENDING 894978 10/19/89
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VJE MEDICAL LASER INTERCONNECT SYSTEM IRELN PENDING 3351/89 10/18/89
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.001VJP1 MEDICAL LASER INTERCONNECT SYSTEM JAPAN PENDING 282818/89 10/30/89
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.002VJP FIBER OPTIC APPARATUS FOR USE WITH JAPAN PENDING 151431/90 06/08/90
MEDICAL LASERS
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.009QCA LASER SURGICAL PROBE CANAD PENDING 2107687 04/03/92
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.009QEP LASER SURGICAL PROBE EPO PENDING 92910340.6 04/03/92
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018VIE MULTIWAVELENGTH MEDICAL LASER IRELN PENDING 3594/89 11/08/89
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.018VJP MULTIWAVELENGTH MEDICAL LASER JAPAN PENDING 292115/89 11/09/89
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.031VEP CORNEAL SCULPTING USING LASER EPO PENDING 93903487.2 01/14/93
ENERGY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.031VJP CORNEAL SCULPTING USING LASER JAPAN PENDING 513266/1993 01/14/93
ENERGY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033VCA APPARATUS AND METHOD FOR CANAD PENDING 2117765 04/01/93
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033VEP APPARATUS AND METHOD FOR EPO PENDING 93911621.6 04/01/93
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033VJP APPARATUS AND METHOD FOR JAPAN PENDING 518505/1993 04/01/93
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.033VKR APPARATUS AND METHOD FOR KORSO PENDING 94-703632 04/01/93
PERFORMING EYE SURGERY
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050RAU HIGH REPETITION RATE MID-INFRARED AUSAL PENDING 63510/98 05/09/95
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050VCA HIGH REPETITION RATE MID-INFRARED CANAD PENDING 2148395 05/02/95
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050VJP PULSED OPTICALLY PUMPED LASER AND JAPAN PENDING 110517/1995 05/09/95
SURGICAL METHOD USING THE SAME
(AMENDED TITLE)
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.050VKR HIGH REPETITION RATE MID-INFRARED KORSO PENDING 11234/1995 05/09/95
LASER
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135QAU APPARATUS FOR LOWERING THE AUSAL PENDING 58782/96 05/24/96
INTRAOCULAR PRESSURE OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135QCA APPARATUS FOR LOWERING THE CANAD PENDING 2240146 05/24/96
INTRAOCULAR PRESSURE OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135QEP APPARATUS FOR LOWERING THE EPO PENDING 96920501.2 05/24/96
INTRAOCULAR PRESSURE OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135QJP APPARATUS FOR LOWERING THE JAPAN PENDING 522009/1997 05/24/96
INTRAOCULAR PRESSURE OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.135QKR APPARATUS FOR LOWERING THE KORSO PENDING 98-704394 05/24/96
INTRAOCULAR PRESSURE OF AN EYE
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136HCA METHOD AND APPARATUS FOR CANAD PENDING 2092285 09/16/91
SURGICALLY PROFILING THE CORNEA
USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136HCN METHOD AND APPARATUS FOR CHINA PENDING 91109274.9 10/03/91
SURGICALLY PROFILING THE CORNEA
USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136HJP METHOD AND APPARATUS FOR JAPAN PENDING 518532/1991 09/16/91
SURGICALLY PROFILING THE CORNEA
USING VACUUM
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136QCA METHOD AND APPARATUS FOR RE- CANAD PENDING 2119365 09/17/92
PROFILING THE CORNEA TO CORRECT
FOR HYPEROPIA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136QCN METHOD AND APPARATUS FOR RE- CHINA PENDING 92110484.7 09/18/92
PROFILING THE CORNEA TO CORRECT
FOR HYPEROPIA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136QOP METHOD AND APPARATUS FOR RE- JAPAN PENDING 506213/1993 09/17/92
PROFILING THE CORNEA TO CORRECT
FOR HYPEROPIA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VBR METHOD AND APPARATUS FOR RE- BRAZL PENDING P19007915-9 12/12/90
PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VCA METHOD AND APPARATUS FOR RE- CANAD PENDING 2071853 12/12/90
PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VEP METHOD FOR SURGICALLY RE-PROFILING EPO PENDING 91902435.6 12/12/90
THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
PREMLS.136VJP METHOD AND APPARATUS FOR RE- JAPAN PENDING 502814/1991 12/12/90
PROFILING THE CORNEA
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATUS REPORT FOR EYESYS FOREIGN ISSUED PATENTS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EYESYS.017XBX ABSOLUTE SCALE FOR CORNEAL BENLX ISSUED 68088-0 10/08/92 23121-00 04/21/93
TOPOGRAPHY
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.017XDE ABSOLUTE SCALE FOR CORNEAL GERWE ISSUED M9207467.7 10/09/92 M9207467.7 02/03/93
TOPOGRAPHY
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.017XFR ABSOLUTE SCALE FOR CORNEAL FRANC ISSUED 926338 10/09/92 0322610 12/31/92
TOPOGRAPHY
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.017XGB ABSOLUTE SCALE FOR CORNEAL UNIKN ISSUED 2026301 10/15/92 2026301 12/08/93
TOPOGRAPHY
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.017XJP ABSOLUTE SCALE FOR CORNEAL JAPAN ISSUED 29897/1992 10/12/92 925512 03/09/95
TOPOGRAPHY
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATUS REPORT FOR EYESYS U.S. ISSUED PATENTS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EYESYS.018A METHOD AND APPARATUS FOR VARIABLE USA ISSUED 08/044401 04/08/93 5418714 05/23/95
BLOCK SIZE INTERPOLATIVE CODING OF
IMAGES
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.020FW1 METHOD OF REFRACTIVE SURGERY USA ISSUED 08/355436 12/13/94 5722427 03/03/98
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.021FW1 MULTI-CAMERA CORNEAL ANALYSIS USA ISSUED 08/638875 04/25/96 5847804 12/08/98
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.13CPCP1 METHOD OF CORNEAL ANALYSIS USING A USA ISSUED 08/736348 10/23/96 5841511 11/24/98
CHECKERED PLACIDO APPARATUS
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
STATUS REPORT FOR EYESYS U.S. PENDING PATENTS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Application Filing Patent Issue
Case Number Title of Invention Country Status Number Date Number Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EYESYS.008A HANDHELD CORNEAL TOPOGRAPHY USA PENDING 09/001339 12/31/97
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.020FICI METHOD OF REFRACTIVE SURGERY USA PENDING 08/956878 10/23/97
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.021FICI MULTI-CAMERA CORNEAL ANALYSIS USA PENDING 08/956515 10/23/97
SYSTEM
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.030A METHOD AND APPARATUS FOR USA PENDING 08/060826 05/10/93
PREDICTING CORNEAL ACUITY
- ------------------------------------------------------------------------------------------------------------------------------------
EYESYS.13CPCPC METHOD OF CORNEAL ANALYSIS USING A USA PENDING 09/102839 06/23/98
CHECKERED PLACIDO APPARATUS
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE B TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
Jurisdictions where UCC-1 filings required
- ------------------------------------------
1. California Secretary of State
<PAGE>
SCHEDULE 1(h) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
Premier Laser Systems vs. Infrared Fiber Systems, Inc., Coherent, Inc., et
al., as described in Item 3 to Annual Report on Form 10-K of Premier Laser
Systems for the fiscal year ended March 31, 1998.
<PAGE>
SCHEDULE 3(b) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
Ownership of Collateral
- -----------------------
1. Under Agreement dated January 9, 1998 with Corneal Contouring
Development LLC ("CCD"), PLS may be obligated to return technology
relating to a corneal reprofiling device, if certain conditions are not
met. This device is not presently marketed by PLS. CCD has a security
interest in the assets pertaining to this product.
2. Under Agreement dated August 28, 1998 with Wound Healing of Oklahoma,
Inc., PLS may be obligated to return technology relating to a device
for lowering the intraocular pressure of the eye, if certain conditions
are not met. This device is not presently marketed by PLS.
3. Under a Technology Transfer and Software License Agreement dated
October 16, 1998 among Premier Laser Systems, Inc., Sarver and
Associates, Inc. and Edwin Sarver, PLS may be required to return
technology relating to mapping of the eye. This device is not presently
marketed by PLS.
4. Joint ownership of patent for laser tip, with Michael Colvard.
<PAGE>
SCHEDULE 3(d) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
CURRENT MATTERS
1. BRITESMILE, INC., A UTAH CORPORATION, PLAINTIFF V. INTERDENT, INC., A
CALIFORNIA CORPORATION, PREMIER LASER SYSTEMS, INC., A CALIFORNIA
CORPORATION. This is a patent infringement case filed 09/22/97
regarding a laser method for bleaching teeth.
2. Opposition against Premier Laser Systems application in the Patent and
Trademark Office to registration of the trademark "Aurora", and
objection to the further use of that name by Premier Laser Systems in
connection with the sale of its products.
OLD MATTERS WHICH MAY NO LONGER BE IN DISPUTE
3. Dr. Pelagalli: Letter alleging that he is an inventor of certain
(unspecified) technology of Premier Laser.
4. Dr. Patricia Bath: Letter alleging that Premier infringes a patent.
5. Opticon: Letter alleging that Premier infringes a patent.
6. Dr. Rabinowitz: Letter alleging that Premier infringes copyright.
7. Dr. Berlin: Letter to his lawyer (not to Premier) alleging that
Premier infringes a patent.
<PAGE>
SCHEDULE 3(i) TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
List of Material Patents
<PAGE>
EXHIBIT B TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
List of Patents
<PAGE>
<TABLE>
SCHEDULE A - FOREIGN TRADEMARK APPLICATIONS AND REGISTRATIONS
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COUNTRY Mark App. No. Reg. No. Class(es) Status
App. Date Reg. Date
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Australia ARAGO 771079 10 Pending.
08/21/98
- ------------------------------------------------------------------------------------------------------------------------
Australia ORION 771080 10 Pending.
08/21/98
- ------------------------------------------------------------------------------------------------------------------------
Australia SIRIUS 771081 10 Pending.
08/21/98
- ------------------------------------------------------------------------------------------------------------------------
Australia POLARIS 771082 771082 10 Registered.
08/21/98 04/06/99
- ------------------------------------------------------------------------------------------------------------------------
Australia ALTAIR 771083 771083 10 Registered.
08/21/98 04/06/99
- ------------------------------------------------------------------------------------------------------------------------
Australia AURORA 771084 771084 10 Registered.
08/21/98 04/06/99
- ------------------------------------------------------------------------------------------------------------------------
Australia CENTAURI 771085 10 Pending.
08/21/98
- ------------------------------------------------------------------------------------------------------------------------
Australia PEGASUS 771086 10 Pending.
08/21/98
- ------------------------------------------------------------------------------------------------------------------------
Australia DERMIUM 774012 774012 10 Registered.
09/23/98 02/12/99
- ------------------------------------------------------------------------------------------------------------------------
Brazil ARAGO 821022784 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil ORION 821022776 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil SIRIUS 821022768 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil POLARIS 821022733 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil ALTAIR 821022741 10 Pending.
08/29/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil AURORA 821022750 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil CENTAURI 821022806 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil PEGASUS 821022792 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
Brazil DERMIUM 821088777 10 Pending.
08/26/98
- ------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------
COUNTRY Mark App. No. Reg. No. Class(es) Status
- ------------------------------------------------------------------------------------------------------------------------
Canada ARAGO 888187 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada ORION 888188 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada SIRIUS 888189 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada POLARIS 888190 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada ALTAIR 888191 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada AURORA 888192 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada CENTAURI 888193 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada PEGASUS 888194 9, 10, 35 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Canada DERMIUM 890293 10 Pending.
099/15/98
- ------------------------------------------------------------------------------------------------------------------------
European ARAGO 913657 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European ORION 913764 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European SIRIUS 913897 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European POLARIS 913723 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European ALTAIR 913632 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European AURORA 913798 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European CENTAURI 913749 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European PEGASUS 913822 9, 10, 35 Pending.
Community 08/28/98
- ------------------------------------------------------------------------------------------------------------------------
European DERMIUM 958553 10 Pending.
Community 09/18/98
- ------------------------------------------------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------
COUNTRY Mark App. No. Reg. No. Class(es) Status
- ------------------------------------------------------------------------------------------------------------------------
Japan ARAGO 072418/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan ORION 072419/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan SIRIUS 072420/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan POLARIS 072421/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan ALTAIR 072422/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan AURORA 072423/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan CENTAURI 072424/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan PEGASUS 072425/1998 10 Pending.
08/24/98
- ------------------------------------------------------------------------------------------------------------------------
Japan DERMIUM 079934/1998 10 Pending.
09/16/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea ARAGO 98-23694 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea ORION 98-23695 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea SIRIUS 98-23696 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea POLARIS 98-23697 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea ALTAIR 98-23698 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea AURORA 98-23699 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea CENTAURI 98-23700 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea PEGASUS 98-23701 10 Pending.
09/12/98
- ------------------------------------------------------------------------------------------------------------------------
South Korea DERMIUM 98-24079 10 Pending.
09/16/98
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT C TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
Trademarks
<PAGE>
SCHEDULE A TO INTELLECTUAL PROPERTY SECURITY AGREEMENT
Subsidiaries
- ------------
1. EyeSys - Premier, Inc., a Delaware corporation
100% owned
2. CRS U.S.A., Inc., a California mutual benefit nonprofit corporation
(Premier Laser Systems, Inc. is the sole member)
3. Data.Site, LLC, a California limited liability company
(51% owned by Premier Laser Systems, Inc., now in the process of being
shut down)
4. Ophthalmic Imaging Systems, a California corporation (51% owned by
Premier Laser Systems, Inc.)
<PAGE>
<TABLE>
Schedule B - U.S. Federal Trademark Applications
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MARK APP. NO. REG. NO. CLASS(ES) Status
APP. DATE REG. DATE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARAGO 75/307,008 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
ORION 75/307,502 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
SIRIUS 75/307,537 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
POLARIS 75/307,518 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
TOUCHTIPS 75/307,510 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
ANGLETIPS 75/307,503 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
ALTAIR 75/307,001 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
AURORA 75/307,276 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
CENTAURI 75/307,520 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
PEGASUS 75/307,155 9, 10 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
PREMIER LASER 75/307,501 9, 10 Pending.
SYSTEMS, INC. 06/11/97
- -----------------------------------------------------------------------------------------------------
PREMIER 75/307,511 9 Pending.
06/11/97
- -----------------------------------------------------------------------------------------------------
THE SAFE 75/307,517 2,176,685 10 Registered.
SYSTEM 06/11/97 07/28/98
- -----------------------------------------------------------------------------------------------------
PROCLOSURE 74/289,453 1,817,399 10 Registered.
06/29/92 01/18/94
- -----------------------------------------------------------------------------------------------------
LTM 74/284,041 1,832,072 10 Registered.
02/20/92 04/19/94
- -----------------------------------------------------------------------------------------------------
DENTISTRY FOR 75/318,632 10 Pending.
THE 21ST 07/02/97
CENTURY
- -----------------------------------------------------------------------------------------------------
PREMIER LASER 75/418,320 9, 10 Pending.
08/25/97
- -----------------------------------------------------------------------------------------------------
DERMIUM 75/458,345 10 Pending.
03/27/98
- -----------------------------------------------------------------------------------------------------
CELLPLANT 75/315,007 10 Pending.
06/26/97
- -----------------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------------
MARK App. No. Reg. No. Class(es) Status
- -----------------------------------------------------------------------------------------------------
DENTISTRY FOR 75/550,091 Pending.
THE 21ST 09/08/98
CENTURY
- -----------------------------------------------------------------------------------------------------
MEDICINE FOR 75/550,084 Pending.
THE 21ST 09/08/98
CENTURY
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Schedule C - U.S. Federal Eyesys Trademark Registrations
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Registration Registration
MARK Number Date Class(es) Status
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRO-FIT 2,136,132 02/10/98 9 Registered
- -----------------------------------------------------------------------------------------------------------------
EYESYS 1,789,249 08/24/93 9, 10 Registered
- -----------------------------------------------------------------------------------------------------------------
TOMORROW'S VISION 1,788,833 08/17/93 9, 10 Registered
TODAY
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TITLE OF INVENTION COUNTRY PATENT NUMBER
------------------ ------- -------------
<S> <C> <C>
Medical Laser Interconnect System USA 5116329
Medical Laser Interconnect System AUSAL 612910
Medical Laser Interconnect System CANAD 2000916
Medical Laser Interconnect System EPO 0365228
Laser Surgical Method USA 5267856
Method for Surgically Re-Profiling the Cornea USA 5063942
Method for Surgically Re-Profiling the Cornea to USA 5318044
Correct For Hyperopia
Apparatus for Re-Profiling the Cornea to EPO 0680298
Correct for Hyperopia
Method and Apparatus for Surgically USA 5368604
Profiling the Cornea
Apparatus for Surgically Profiling the EPO 0551439
Cornea Using Vacuum
Apparatus for Surgically Re-Profiling the USA 5395385
Cornea
Method and Apparatus for Reprofiling or USA 5591185
Smoothing the Anterior or Stromal Cornea
Using Scraping
Laser Healing Method USA 4672969
Laser Healing Method and Apparatus USA 4854320
Method for Closing Tissue Wounds Using USA 5002051
Radiative Energy Beams
Laser Healing Method and Apparatus USA 5140984
Method for Closing Tissue Wounds Using USA 5409479
Radiative Energy Beams
Optical Heating System USA 5354323
Method and Apparatus for Lowering the USA 5520631
Intraocular Pressure of an Eye
Method and Apparatus for Lowering the USA 5704907
Intraocular Pressure of an Eye
<PAGE>
Title of Invention Country Patent Number
------------------ ------- -------------
Laser Surgical Procedures for Treatment of USA 5865831
Glaucoma
Apparatus and Method for Performing Eye USA 5738677
Surgery
Apparatus and Method for Performing Eye AUSAL 699994
Surgery
Apparatus and Method for Performing Eye AUSAL 678967
Surgery
Laser Surgical Method Using Transparent USA 5722970
Probe
Transparent Laser Surgical Probe USA 5688261
High Repetition Rate Mid-Infrared Laser USA 5422899
High Repetition Rate Mid-Infrared Laser AUSAL 685593
High Repetition Rate Mid-Infrared Laser EPO 0682389
High Pulse Repetition and Its Use ISREA 113501
(Amended Title)
Multiwavelength Medical Laser Method USA 5304167
Multiwavelength Medical Laser System USA 5139494
Method of Laser Surgery Using Multiple USA 5540676
Wavelengths
Multiwavelength Medical Laser System AUSAL 626339
Multiwavelength Medical Laser System CANAD 2002453
Multiwavelength Medical Laser System PORTG 92240
Corneal Sculpting Using Laser Energy USA 5741245
Multi-Camera Corneal Analysis System USA 5847804
</TABLE>
<PAGE>
SECURITY AGREEMENT
------------------
SECURITY AGREEMENT, dated as of May 17, 1999, between Premier Laser
Systems, Inc., a California corporation ("PREMIER"), and the secured parties
signatory hereto and their respective endorsees, transferees and assigns
(collectively, the "SECURED PARTY").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to a Secured Convertible Debenture Purchase
Agreement, dated the date hereof among Premier and the Secured Party (the
"Purchase Agreement"), Premier has agreed to issue to the Secured Party and the
Secured Party has agreed to purchase from Premier an aggregate principal amount
of $4,000,000 of Premier's 6% Secured Convertible Debentures (the "Debentures"),
which are convertible into shares of Premier's Class A Common Stock, no par
value (the "Common Stock"). In connection therewith, Premier shall issue to the
Secured Party a Common Stock purchase warrants of even date herewith to purchase
an aggregate of 60,000 shares of Common Stock (the "Warrants"); and
WHEREAS, in order to induce the Secured Party to purchase the
Debentures, Premier has agreed to execute and deliver to the Secured Party this
Agreement for the benefit of the Secured Party and to grant to it a first
priority security interest in certain property of Premier to secure the prompt
payment, performance and discharge in full of all of Premier's obligations under
the Debentures and the exercise and discharge in full of all of Premier's
obligations under the Warrants.
NOW, THEREFORE, in consideration of the agreements herein contained and
for other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings set forth in this Section 1. Terms used but not
otherwise defined in this Agreement that are defined in Article 9 of the UCC
(such as "GENERAL INTANGIBLES" and "PROCEEDS") shall have the respective
meanings given such terms in Article 9 of the UCC.
(a) "CLASS B WARRANTS" means the Company's Class B Warrants,
entitling the holders thereof to purchase an aggregate of 7,592,460 shares of
Common Stock.
(b) "COLLATERAL" means the collateral in which the Secured
Party is granted a security interest by this Agreement and which shall include
the following, whether presently owned or existing or hereafter acquired or
coming into existence, and all additions and accessions thereto and all
<PAGE>
substitutions and replacements thereof, and all proceeds, products and accounts
thereof, including, without limitation, all proceeds from the sale or transfer
of the Collateral and of insurance covering the same and of any tort claims in
connection therewith:
(i) All Goods of the Company, including, without
limitations, all machinery, equipment, computers,
motor vehicles, trucks, appliances, furniture,
special and general tools, fixtures, test and quality
control devices and other equipment of every kind and
nature and wherever situated, together with all
documents of title and documents representing the
same, all additions and accessions thereto,
replacements therefor, all parts therefor, and all
substitutes for any of the foregoing and all other
items used and useful in connection with the
Company's businesses and all improvements thereto
(collectively, the "EQUIPMENT"); and
(ii) All Inventory of the Company; and
(iii) All of the Company's contract rights and
general intangibles, including, without limitation,
all partnership interests, stock or other securities,
licenses, distribution and other agreements, computer
software development rights, leases, franchises,
customer lists, quality control procedures, grants
and rights, goodwill, trademarks, service marks,
trade styles, trade names, patents, patent
applications, copyrights, deposit accounts, and
income tax refunds (collectively, the "GENERAL
INTANGIBLES"); and
(iv) All Receivables of the Company including all
insurance proceeds, and rights to refunds or
indemnification whatsoever owing, together with all
instruments, all documents of title representing any
of the foregoing, all rights in any merchandising,
goods, equipment, motor vehicles and trucks which any
of the same may represent, and all right, title,
security and guaranties with respect to each
Receivable, including any right of stoppage in
transit; and
(v) All of the Company's documents, instruments and
chattel paper, files, records, books of account,
business papers, computer programs and the products
and proceeds of all of the foregoing Collateral set
forth in clauses (i)-(iv) above.
(c) "COMPANY" shall mean, collectively, Premier and all of the
subsidiaries of Premier, other than Ophthalmic Imaging Systems, Inc.
(d) "OBLIGATIONS" means all of the Company's obligations under
this Agreement, the Debentures and the Warrants, in each case, whether now or
hereafter existing, voluntary or involuntary, direct or indirect, absolute or
contingent, liquidated or unliquidated, whether or not jointly owed with others,
and whether or not from time to time decreased or extinguished and later
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increased, created or incurred, and all or any portion of such obligations or
liabilities that are paid, to the extent all or any part of such payment is
avoided or recovered directly or indirectly from the Secured Party as a
preference, fraudulent transfer or otherwise as such obligations may be amended,
supplemented, converted, extended or modified from time to time.
(e) "QUALIFIED FACILITY" means a credit facility or factoring
arrangement with a nationally or regionally recognized institutional lender
without conditions or restrictions (including with respect to borrowing base
requirements) as to availability of funds to the Company, whereby such lender
has required the Company to grant to it a first priority security interest in
the Collateral, loans under which facility shall not be subject to repayment for
at least 364 calendar days.
(f) "QUALIFIED INCOME SOURCE" means(i) licensing or royalty
arrangements whereby the Company has received prepaid licensing or royalty fees,
(ii) deposits or prepaid distribution arrangements received by the Company,
(iii) non-refundable net proceeds from the exercise of Class B Warrants, (iv)
non-refundable cash proceeds net, of applicable taxes and other expenses, from
the settlement of or judgment from the litigation specified in Schedule 1(f)
hereto, and (V) a Qualified Facility.
(g) "TWO THIRDS-IN-INTEREST" means one or more of the secured
party signatories hereto holding in excess of 66.66% of the aggregate principal
amount of the Debentures outstanding, determined on a cumulative basis.
(h) "UCC" means the Uniform Commercial Code, as currently in
effect in the State of California.
2. GRANT OF SECURITY INTEREST. As an inducement for the Secured Party
to purchase the Debentures and to secure the complete and timely payment,
performance and discharge in full, as the case may be, of all of the
Obligations, the Company hereby, unconditionally and irrevocably, pledges,
grants and hypothecates to the Secured Party, a continuing security interest in,
a first lien upon and a right of set-off against all of the Company's right,
title and interest of whatsoever kind and nature in and to the Collateral (the
"SECURITY INTEREST").
3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE
COMPANY. The Company represents and warrants to, and covenants and agrees with,
the Secured Party as follows:
(a) The Company has the requisite corporate power and
authority to enter into this Agreement and otherwise to carry out its
obligations thereunder. The execution, delivery and performance by the Company
of this Agreement and the filings contemplated therein have been duly authorized
by all necessary action on the part of the Company and no further action is
required by the Company.
(b) The Company represents and warrants that it has no place
of business or offices where its respective books of account and records are
kept (other than temporarily at the offices of its attorneys or accountants) or
places where Collateral is stored or located, except as set forth on SCHEDULE A
attached hereto;
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(c) Except as specified in SCHEDULE 3(c), the Company is the
sole owner of the Collateral (except for non-exclusive licenses granted by the
Company in the ordinary course of business), free and clear of any liens,
security interests, encumbrances, rights or claims, and is fully authorized to
grant the Security Interest in and to pledge the Collateral. There is not on
file in any governmental or regulatory authority, agency or recording office an
effective financing statement, security agreement, license or transfer or any
notice of any of the foregoing (other than those that have been filed in favor
of the Secured Party pursuant to this Agreement) covering or affecting any of
the Collateral. So long as this Agreement shall be in effect and other than
pursuant to Section 11 hereof, the Company shall not execute and shall not
knowingly permit to be on file in any such office or agency any such financing
statement or other document or instrument (except to the extent filed or
recorded in favor of the Secured Party pursuant to the terms of this Agreement).
(d) Except as specified in SCHEDULE 3(d), no written claim has
been received that any Collateral or the Company's use of any Collateral
violates the rights of any third party. There has been no adverse decision to
the Company's claim of ownership rights in or exclusive rights to use the
Collateral in any jurisdiction or to the Company's right to keep and maintain
such Collateral in full force and effect, and there is no proceeding involving
said rights pending or, to the best knowledge of the Company, threatened before
any court, judicial body, administrative or regulatory agency, arbitrator or
other governmental authority.
(e) The Company shall at all times maintain its books of
account and records relating to the Collateral at its principal place of
business at the locations set forth on SCHEDULE A attached hereto and may not
relocate such books of account and records or tangible Collateral unless it
delivers to the Secured Party at least 30 days prior to such relocation (i)
written notice of such relocation and the new location thereof (which must be
within the United States) and (ii) evidence that appropriate financing
statements and other necessary documents have been filed and recorded and other
steps have been taken to perfect the Security Interest to create in favor of the
Secured Party valid, perfected and continuing first priority liens in the
Collateral.
(f) This Agreement creates in favor of the Secured Party a
valid security interest in the Collateral securing the payment and performance
of the Obligations and, upon making the filings described in the immediately
following sentence, a perfected first priority security interest in such
Collateral. Except for the filing of financing statements on Form UCC-1 under
the UCC with the jurisdictions indicated on SCHEDULE B, attached hereto, no
authorization or approval of or filing with or notice to any governmental
authority or regulatory body located in the United States of America is required
either (i) for the grant by the Company of, or the effectiveness of, the
Security Interest granted hereby or for the execution, delivery and performance
of this Agreement by the Company or (ii) for the perfection of or exercise by
the Secured Party of its rights and remedies hereunder.
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(g) On the date of execution of this Agreement, the Company
will deliver to the Secured Party one or more executed UCC financing statements
on UCC-1 under the UCC with respect to the Security Interest for filing with the
jurisdictions indicated on SCHEDULE B, attached hereto and in such other
jurisdictions as may be requested by the Secured Party.
(h) The execution, delivery and performance of this Agreement
does not conflict with or cause a breach or default, or an event that with or
without the passage of time or notice, shall constitute a breach or default,
under any agreement to which the Company is a party or by which the Company is
bound. No consent (including, without limitation, from stock holders or
creditors of the Company) is required for the Company to enter into and perform
its obligations hereunder.
(i) The Company shall at all times maintain the liens and
Security Interest provided for hereunder as valid and perfected first priority
(subject to subordination pursuant to Section 11 hereof) liens and security
interests in the Collateral in favor of the Secured Party until this Agreement
and the Security Interest hereunder shall be terminated pursuant to Section 11.
The Company hereby agrees to defend the same against any and all persons. The
Company shall safeguard and protect all Collateral for the account of the
Secured Party. At the request of the Secured Party, the Company will sign and
deliver to the Secured Party at any time or from time to time one or more
financing statements pursuant to the UCC (or any other applicable statute) in
form reasonably satisfactory to the Secured Party and will pay the cost of
filing the same in all public offices wherever filing is, or is deemed by the
Secured Party to be, necessary or desirable to effect the rights and obligations
provided for herein. Without limiting the generality of the foregoing, the
Company shall pay all fees, taxes and other amounts necessary to maintain the
Collateral and the Security Interest hereunder, and the Company shall obtain and
furnish to the Secured Party from time to time, upon demand, such releases
and/or subordinations of claims and liens which may be required to maintain the
priority of the Security Interest hereunder.
(j) The Company will not transfer, pledge, hypothecate,
encumber, license (except for non-exclusive licenses granted by the Company in
the ordinary course of business), sell (except Inventory in the ordinary course)
or otherwise dispose of any of the Collateral without the prior written consent
of the Secured Party.
(k) The Company shall keep and preserve its Equipment,
Inventory and other tangible Collateral in good condition, repair and order and
shall not operate or locate any such Collateral (or cause to be operated or
located) in any area excluded from insurance coverage.
(l) The Company shall, within ten (10) days of obtaining
knowledge thereof, advise the Secured Party promptly, in sufficient detail, of
any substantial change in the Collateral, and of the occurrence of any event
which would have a material adverse effect on the value of the Collateral or on
the Secured Party's security interest therein.
(m) The Company shall promptly execute and deliver to the
Secured Party such further deeds, mortgages, assignments, security agreements,
financing statements or other instruments, documents, certificates and
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assurances and take such further action as the Secured Party may from time to
time request and may in its sole discretion deem necessary to perfect, protect
or enforce its security interest in the Collateral including, without
limitation, the execution and delivery of a separate security agreement with
respect to the Company's intellectual property ("INTELLECTUAL PROPERTY SECURITY
AGREEMENT") in which the Secured Party has been granted a security interest
hereunder, substantially in a form acceptable to the Secured Party, which
Intellectual Property Security Agreement, other than as stated therein, shall be
subject to all of the terms and conditions hereof.
(n) The Company shall permit the Secured Party and its
representatives and agents to inspect the Collateral at any time, and to make
copies of records pertaining to the Collateral as may be requested by the
Secured Party from time to time.
(o) The Company will take all steps reasonably necessary to
diligently pursue and seek to preserve, enforce and collect any rights, claims,
causes of action and accounts receivable in respect of the Collateral.
(p) The Company shall promptly notify the Secured Party in
sufficient detail upon becoming aware of any attachment, garnishment, execution
or other legal process levied against any Collateral and of any other
information received by the Company that may materially affect the value of the
Collateral, the Security Interest or the rights and remedies of the Secured
Party hereunder.
(q) All information heretofore, herein or hereafter supplied
to the Secured Party by or on behalf of the Company with respect to the
Collateral is accurate and complete in all material respects as of the date
furnished.
(r) SCHEDULE A, attached hereto contains a list of all of the
subsidiaries of Premier.
4. DEFAULTS. The following events shall be "EVENTS OF DEFAULT":
(a) The occurrence of an Event of Default (as defined in the
Debentures) under the Debentures;
(b) Any representation or warranty of the Company in this
Agreement or in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;
(c) The failure by the Company to observe or perform any of
its obligations hereunder or in the Intellectual Property Security Agreement for
ten (10) days after receipt by the Company of notice of such failure from the
Secured Party; and
(d) Any breach or default under the Warrants.
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5. DUTY TO HOLD IN TRUST. Upon the occurrence of any Event of Default
and at any time thereafter, the Company shall, upon receipt by it of any
revenue, income or other sums subject to the Security Interest, whether payable
pursuant to the Debentures or otherwise, or of any check, draft, note, trade
acceptance or other instrument evidencing an obligation to pay any such sum,
hold the same in trust for the Secured Party and shall forthwith endorse and
transfer any such sums or instruments, or both, to the Secured Party for
application to the satisfaction of the Obligations.
6. RIGHTS AND REMEDIES UPON DEFAULT. Upon occurrence of any Event of
Default and at any time thereafter, the Secured Party shall have the right to
exercise all of the remedies conferred hereunder and under the Debentures and
the Warrants, and the Secured Party shall have all the rights and remedies of a
secured party under the UCC and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any Collateral is then
located). Without limitation, the Secured Party shall have the following rights
and powers:
(a) The Secured Party shall have the right to take possession
of the Collateral and, for that purpose, enter, with the aid and assistance of
any person, any premises where the Collateral, or any part thereof, is or may be
placed and remove the same, and the Company shall assemble the Collateral and
make it available to the Secured Party at places which the Secured Party shall
reasonably select, whether at the Company's premises or elsewhere, and make
available to the Secured Party, without rent, all of the Company's respective
premises and facilities for the purpose of the Secured Party taking possession
of, removing or putting the Collateral in saleable or disposable form.
(b) The Secured Party shall have the right to operate the
business of the Company using the Collateral and shall have the right to assign,
sell, lease or otherwise dispose of and deliver all or any part of the
Collateral, at public or private sale or otherwise, either with or without
special conditions or stipulations, for cash or on credit or for future
delivery, in such parcel or parcels and at such time or times and at such place
or places, and upon such terms and conditions as the Secured Party may deem
commercially reasonable, all without (except as shall be required by applicable
statute and cannot be waived) advertisement or demand upon or notice to the
Company or right of redemption of the Company, which are hereby expressly
waived. Upon each such sale, lease, assignment or other transfer of Collateral,
the Secured Party may, unless prohibited by applicable law which cannot be
waived, purchase all or any part of the Collateral being sold, free from and
discharged of all trusts, claims, right of redemption and equities of the
Company, which are hereby waived and released.
7. APPLICATIONS OF PROCEEDS. The proceeds of any such sale, lease or
other disposition of the Collateral hereunder shall be applied first, to the
expenses of retaking, holding, storing, processing and preparing for sale,
selling, and the like (including, without limitation, any taxes, fees and other
costs incurred in connection therewith) of the Collateral, to the reasonable
attorneys' fees and expenses incurred by the Secured Party in enforcing its
rights hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations, and to the payment of
any other amounts required by applicable law, after which the Secured Party
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shall pay to the Company any surplus proceeds. If, upon the sale, license or
other disposition of the Collateral, the proceeds thereof are insufficient to
pay all amounts to which the Secured Party is legally entitled, secured parties
signatory hereto will be entitled to their pro rata portion of such proceeds
(determined by reference to the aggregate principal amount of Debentures
outstanding, determined on a cumulative basis), and the Company will be liable
for the deficiency, together with interest thereon, at the rate of 17% per annum
(the "Default Rate"), and the reasonable fees of any attorneys employed by the
Secured Party to collect such deficiency. To the extent permitted by applicable
law, the Company waives all claims, damages and demands against the Secured
Party arising out of the repossession, removal, retention or sale of the
Collateral, unless due to the gross negligence or willful misconduct of the
Secured Party.
8. COSTS AND EXPENSES. The Company agrees to pay all out-of-pocket
fees, costs and expenses incurred in connection with any filing required
hereunder, including without limitation, any financing statements, continuation
statements, partial releases and/or termination statements related thereto or
any expenses of any searches reasonably required by the Secured Party. The
Company shall also pay all other claims and charges which in the reasonable
opinion of the Secured Party might prejudice, imperil or otherwise affect the
Collateral or the Security Interest therein. The Company will also, upon demand,
pay to the Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and expenses of its counsel and of any experts and
agents, which the Secured Party may incur in connection with (i) the enforcement
of this Agreement, (ii) the custody or preservation of, or the sale of,
collection from, or other realization upon, any of the Collateral, or (iii) the
exercise or enforcement of any of the rights of the Secured Party under the
Debentures. Until so paid, any fees payable hereunder shall be added to the
principal amount of the Debentures and shall bear interest at the Default Rate.
9. RESPONSIBILITY FOR COLLATERAL. The Company assumes all liabilities
and responsibility in connection with all Collateral, and the obligations of the
Company hereunder or under the Debentures and the Warrants shall in no way be
affected or diminished by reason of the loss, destruction, damage or theft of
any of the Collateral or its unavailability for any reason.
10. SECURITY INTEREST ABSOLUTE. All rights of the Secured Party and all
Obligations of the Company hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures, the Warrants or any agreement entered into in connection with
the foregoing, or any portion hereof or thereof; (b) any change in the time,
manner or place of payment or performance of, or in any other term of, all or
any of the Obligations, or any other amendment or waiver of or any consent to
any departure from the Debentures, the Warrants or any other agreement entered
into in connection with the foregoing; (c) any exchange, release or
nonperfection of any of the Collateral, or any release or amendment or waiver of
or consent to departure from any other collateral for, or any guaranty, or any
other security, for all or any of the Obligations; (d) any action by the Secured
Party to obtain, adjust, settle and cancel in its sole discretion any insurance
claims or matters made or arising in connection with the Collateral; or (e) any
other circumstance which might otherwise constitute any legal or equitable
defense available to the Company, or a discharge of all or any part of the
Security Interest granted hereby. Until the Obligations shall have been paid and
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performed in full, the rights of the Secured Party shall continue even if the
Obligations are barred for any reason, including, without limitation, the
running of the statute of limitations or bankruptcy. The Company expressly
waives presentment, protest, notice of protest, demand, notice of nonpayment and
demand for performance. In the event that at any time any transfer of any
Collateral or any payment received by the Secured Party hereunder shall be
deemed by final order of a court of competent jurisdiction to have been a
voidable preference or fraudulent conveyance under the bankruptcy or insolvency
laws of the United States, or shall be deemed to be otherwise due to any party
other than the Secured Party, then, in any such event, the Company's obligations
hereunder shall survive cancellation of this Agreement, and shall not be
discharged or satisfied by any prior payment thereof and/or cancellation of this
Agreement, but shall remain a valid and binding obligation enforceable in
accordance with the terms and provisions hereof. The Company waives all right to
require the Secured Party to proceed against any other person or to apply any
Collateral which the Secured Party may hold at any time, or to marshal assets,
or to pursue any other remedy. The Company waives any defense arising by reason
of the application of the statute of limitations to any obligation secured
hereby.
11. TERM OF AGREEMENT AND SUBORDINATION OF SECURITY INTEREST. (a) This
Agreement and the Security Interest shall terminate on the earlier of (A)
subject to the provisions of the immediately following sentence, the date of the
receipt by the Secured Party of evidence satisfactory to it that the Company has
received a minimum of $4,000,000 in bona fide funds from a Qualified Income
Source which shall not be subject to repayment prior to the later to occur of
(i) the 364th calendar day following the obtainment of such funds and (ii) the
270th day following the date that an Underlying Shares Registration Statement
(as defined in the Debentures) is first declared effective by the Securities and
Exchange Commission, and (B) the date on which all payments under the Debentures
have been made in full and all other Obligations have been paid or discharged.
Notwithstanding the foregoing and anything to the contrary contained herein, in
no event shall this Agreement or the Security Interest terminate prior to the
date that an Underlying Shares Registration Statement is first declared
effective by the Securities and Exchange Commission.
(b) If the Company shall have entered into a Qualified
Facility for in excess of $500,000, then the Security Interest shall, subject to
terms mutually acceptable to the Company and the Secured Party, become
subordinate to any security interest granted to such lender pursuant to such
Qualified Facility.
(c) Upon any termination or subordination of the Security
Interest pursuant to this Section 11, the Secured Party, at the request and at
the expense of the Company, will join in executing an appropriate amendment or
termination statement (as the case may be) with respect to any financing
statement executed and filed pursuant to this Agreement.
12. POWER OF ATTORNEY; FURTHER ASSURANCES. (a) The Company authorizes
the Secured Party, and does hereby make, constitute and appoint it, and its
respective officers, agents, successors or assigns with full power of
substitution, as the Company's true and lawful attorney-in-fact, with power, in
its own name or in the name of the Company, to, after the occurrence and during
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the continuance of an Event of Default, (i) endorse any notes, checks, drafts,
money orders, or other instruments of payment (including payments payable under
or in respect of any policy of insurance) in respect of the Collateral that may
come into possession of the Secured Party; (ii) to sign and endorse any UCC
financing statement or any invoice, freight or express bill, bill of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with accounts, and other documents
relating to the Collateral; (iii) to pay or discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on or threatened
against the Collateral; (iv) to demand, collect, receipt for, compromise, settle
and sue for monies due in respect of the Collateral; and (v) generally, to do,
at the option of the Secured Party, and at the Company's expense, at any time,
or from time to time, all acts and things which the Secured Party deems
necessary to protect, preserve and realize upon the Collateral and the Security
Interest granted therein in order to effect the intent of this Agreement, the
Debentures and the Warrants all as fully and effectually as the Company might or
could do; and the Company hereby ratifies all that said attorney shall lawfully
do or cause to be done by virtue hereof. This power of attorney is coupled with
an interest and shall be irrevocable for the term of this Agreement and
thereafter as long as any of the Obligations shall be outstanding, subject to
termination under Section 11.
(b) On a continuing basis, the Company will make, execute,
acknowledge, deliver, file and record, as the case may be, in the proper filing
and recording places in any jurisdiction, including, without limitation, the
jurisdictions indicated on SCHEDULE B, attached hereto, all such instruments,
and take all such action as may reasonably be deemed necessary or advisable, or
as reasonably requested by the Secured Party, to perfect the Security Interest
granted hereunder and otherwise to carry out the intent and purposes of this
Agreement, or for assuring and confirming to the Secured Party the grant or
perfection of a security interest in all the Collateral.
(c) The Company hereby irrevocably appoints the Secured Party
as the Company's attorney-in-fact, with full authority in the place and stead of
the Company and in the name of the Company, from time to time in the Secured
Party's discretion, to take any action and to execute any instrument which the
Secured Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including the filing, in its sole discretion, of one or more
financing or continuation statements and amendments thereto, relative to any of
the Collateral without the signature of the Company where permitted by law.
13. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing, with copies to all the other parties hereto, and
shall be deemed to have been duly given when (i) if delivered by hand, upon
receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof,
(iii) if sent by nationally recognized overnight delivery service (receipt
requested), the next business day or (iv) if mailed by first-class registered or
certified mail, return receipt requested, postage prepaid, four days after
posting in the U.S. mails, in each case if delivered to the following addresses:
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If to the Company: Premier Laser Systems, Inc.
3 Morgan
Irvine, CA 92618
Facsimile No.: (949) 859-5241
Attn: Chief Financial Officer
With copies to: Rutan & Tucker LLP
611 Anton Boulevard, 14th floor
Costa Mesa, CA 92626-1998
Facsimile No.: (714) 546-9035
Attn: Thomas G. Brockington, Esq.
If to the Secured Party, to the address set forth below such Secured
Party's name on the signatures pages hereto.
14. OTHER SECURITY. To the extent that the Obligations are now or
hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Party shall have the right, in its sole discretion, to pursue,
relinquish, subordinate, modify or take any other action with respect thereto,
without in any way modifying or affecting any of the Secured Party's rights and
remedies hereunder.
15. ACTIONS BY THE SECURED PARTY. Any action required or permitted
hereunder to be taken by or on behalf of the secured parties signatory hereto
shall, for such action to be valid, require the approval of the Two
Thirds-in-Interest prior to the taking of such action. If the consent, approval
or disapproval of the secured parties signatory hereto is required or permitted
pursuant to this Agreement, such consent, approval or disapproval shall only be
valid if given by the Two Thirds-in-Interest.
16. MISCELLANEOUS.
(a) No course of dealing between the Company and the Secured
Party, nor any failure to exercise, nor any delay in exercising, on the part of
the Secured Party, any right, power or privilege hereunder or under the
Debentures shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or thereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
(b) All of the rights and remedies of the Secured Party with
respect to the Collateral, whether established hereby or by the Debentures or by
any other agreements, instruments or documents or by law shall be cumulative and
may be exercised singly or concurrently.
(c) This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof and is intended to supersede
all prior negotiations, understandings and agreements with respect thereto.
Except as specifically set forth in this Agreement, no provision of this
Agreement may be modified or amended except by a written agreement specifically
referring to this Agreement and signed by the parties hereto.
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(d) In the event that any provision of this Agreement is held
to be invalid, prohibited or unenforceable in any jurisdiction for any reason,
unless such provision is narrowed by judicial construction, this Agreement
shall, as to such jurisdiction, be construed as if such invalid, prohibited or
unenforceable provision had been more narrowly drawn so as not to be invalid,
prohibited or unenforceable. If, notwithstanding the foregoing, any provision of
this Agreement is held to be invalid, prohibited or unenforceable in any
jurisdiction, such provision, as to such jurisdiction, shall be ineffective to
the extent of such invalidity, prohibition or unenforceability without
invalidating the remaining portion of such provision or the other provisions of
this Agreement and without affecting the validity or enforceability of such
provision or the other provisions of this Agreement in any other jurisdiction.
(e) No waiver of any breach or default or any right under this
Agreement shall be considered valid unless in writing and signed by the party
giving such waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default or right, whether of the same or similar nature or
otherwise.
(f) This Agreement shall be binding upon and inure to the
benefit of each party hereto and its successors and assigns.
(g) Each party shall take such further action and execute and
deliver such further documents as may be necessary or appropriate in order to
carry out the provisions and purposes of this Agreement.
(h) This Agreement shall be construed in accordance with the
laws of the State of New York, except to the extent the validity, perfection or
enforcement of a security interest hereunder in respect of any particular
Collateral which are governed by a jurisdiction other than the State of New York
in which case such law shall govern. Each of the parties hereto irrevocably
submit to the exclusive jurisdiction of any New York State or United States
Federal court sitting in Manhattan county over any action or proceeding arising
out of or relating to this Agreement, and the parties hereto hereby irrevocably
agree that all claims in respect of such action or proceeding may be heard and
determined in such New York State or Federal court. The parties hereto agree
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on the judgment or in any other
manner provided by law. The parties hereto further waive any objection to venue
in the State of New York and any objection to an action or proceeding in the
State of New York on the basis of forum non convenient.
(i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING
OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR
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EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY
RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL
CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY
FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVED ITS RIGHTS TO A
JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING
THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE
EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
(j) This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
* * * * * * * * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Security Agreement to be duly executed on the day and year first above written.
PREMIER LASER SYSTEMS, INC.
By: /S/ COLETTE COZEAN
-------------------------------------
Name: Colette Cozean
Title: CEO
SECURED PARTIES:
STRONG RIVER INVESTMENTS, INC.
By: /s/ KENNETH L.HENDERSON
-------------------------------------
Kenneth L. Henderson
Attornye-in-Fact
Strong River Investments, Inc.
c/o Cavallo Capital Corp.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Avi Vigder
HERKIMER LLC
By: /s/ L. FAMINGTON /S/ JUDITH PATRICK
-------------------------------------
Name: CTC Corporation Ltd.
Title: Director
Address for Notice:
c/o Citco Trustees (Cayman) Limited
Commercial Centre
P.O. Box 31106 SMB
Grand Cayman
Cayman Islands
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<PAGE>
British West Indies
Facsimile No.: (345) 945-7566
with a copy to: Southridge Capital Management LLC
Executive Pavillon
20 Grove Street
Ridgefield, CT 06877
Facsimile No.: (203) 431-8301
-15-
<PAGE>
SCHEDULE A TO SECURITY AGREEMENT
Places where books of account, records and Collateral is located
- ----------------------------------------------------------------
1. 3 Morgan, Irvine, California 92618
(Executive Offices)
Subsidiaries
- ------------
1. EyeSys - Premier Inc., a Delaware corporation.
100% owned
2. CRS U.S.A., Inc., a California mutual benefit nonprofit corporation
(Premier Laser Systems, Inc. is the sole member.)
3. Data.Site, LLC, a California limited liability company
(51% owned by Premier Laser Systems, Inc., now in the process of being
shut down).
4. Ophthalmic Imaging Systems, a California corporation (51% owned by
Premier Laser Systems, Inc.)
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<PAGE>
SCHEDULE B TO SECURITY AGREEMENT
Jurisdictions where UCC-1 filings required
- ------------------------------------------
1. California Secretary of State
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<PAGE>
SCHEDULE 1(f) TO SECURITY AGREEMENT
Premier Laser Systems vs. Infrared Fiber Systems, Inc, Coherent, Inc., et al, as
described in Item 3 to Annual Report on Form 10-K of Premier Laser Systems for
the fiscal year ended March 31, 1998
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<PAGE>
SCHEDULE 3(c) TO SECURITY AGREEMENT
Ownership of Collateral
- -----------------------
1. Under Agreement dated January 9, 1998 with Corneal Contouring Development,
LLC ("CCD"), PLS may be obligated to return technology relating to a corneal
reprofiling device, if certain conditions are not met. This device is not
presently marketed by PLS. CCD has a security interest in the assets pertaining
to this product.
2. Under Agreement dated August 28, 1998 with Wound Healing of Oklahoma, Inc.
PLS may be obligated to return technology relating to a device for lowering the
intraocular pressure of the eye, if certain conditions are not met. This device
is not presently marketed by PLS.
3. Under a Technology Transfer and Software License Agreement dated October 16,
1998 among Premier Laser Systems, Inc., Sarver and Associates, Inc. and Edwin
Sarver, PLS may be required to return technology relating to mapping of the eye.
This device is not presently marketed by PLS.
4. Security interest in favor of Marine National Bank, covering computer
equipment and molds.
5. Joint ownership of patent for laser tip, with Michael Colvard.
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<PAGE>
SCHEDULE 3(d) TO SECURITY AGREEMENT
CURRENT MATTERS
1. BRITESMILE, INC., A UTAH CORPORATION, PLAINTIFF, V. INTERDENT, INC., A
CALIFORNIA CORPORATION, PREMIER LASER SYSTEMS, INC. A CALIFORNIA CORPORATION.
This is a patent infringement case filed 09/22/97 regarding a laser method for
bleaching teeth.
2. Opposition against Premier Laser Systems application in the Patent and
Trademark Office to registration of the trademark "Aurora," and objection to the
further use of that name by Premier Laser Systems in connection with the sale of
its products.
OLD MATTERS WHICH MAY NO LONGER BE IN DISPUTE
3. Dr. Pelagalli: Letter alleging that he is an inventor of certain
(unspecified) technology of Premier Laser.
4. Dr. Patricia Bath: Letter alleging that Premier infringes a patent.
5. Opticon: Letter alleging that Premier infringes a patent.
6. Dr. Rabinowitz: Letter alleging that Premier infringes copyright.
7. Dr. Berlin: Letter to his lawyer (not to Premier) alleging that Premier
infringes a patent.
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<PAGE>
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
No. 1 $2,000,000
PREMIER LASER SYSTEMS, INC.
6% SECURED CONVERTIBLE DEBENTURE
DUE MAY 17, 2002
THIS DEBENTURE is one of a series of duly authorized and issued
debentures of Premier Laser Systems, Inc., a California corporation, having a
principal place of business at 3 Morgan, Irvine, California 92618 (the
"COMPANY"), designated as its 6% Secured Convertible Debentures, due May 17,
2002, in the aggregate principal amount of $4,000,000 (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to [ ], or its
registered assigns (the "HOLDER"), the principal sum of Two Million Dollars
($2,000,000), on May 17, 2002 or such earlier date as the Debentures are
required or permitted to be repaid as provided hereunder (the "MATURITY DATE")
and to pay interest to the Holder on such principal sum at the rate of 6% per
annum, payable on a quarterly basis on March 31, June 30, September 30 and
December 31 of each year while such Debentures are outstanding (each an
"INTEREST PAYMENT DATE") and on each Conversion Date (as defined herein) for
such principal amount, commencing on the earlier to occur of a Conversion Date
for such principal amount and June 30, 1999, in cash or shares of Common Stock
(as defined in Section 7). Subject to the terms and conditions herein, the
decision whether to pay interest hereunder in Common Stock or cash shall be at
the discretion of the Company. Interest shall accrue daily commencing on the
Original Issue Date (as defined in Section 7) until payment in full of the
principal sum, together with all accrued and unpaid interest and other amounts
which may become due hereunder, has been made. Any interest not paid on any
Interest Payment Date shall continue to accrue and shall be due and payable upon
conversion of the Debentures. Interest hereunder will be paid to the Person (as
<PAGE>
defined in Section 7) in whose name this Debenture is registered on the records
of the Company regarding registration and transfers of Debentures (the
"DEBENTURE REGISTER"). All overdue accrued and unpaid interest shall entail a
late fee at the rate of 15% per annum (to accrue daily, from the date such
interest is due hereunder through and including the date of payment), payable in
cash. Not less than ten (10) Trading Days (as defined in Section 7) prior to an
Interest Payment Date, the Company shall provide the Holder notice of its
intention to pay interest in cash or shares of Common Stock (the Company may
indicate in such notice that the election contained in such notice shall
continue for later periods until revised). If interest is paid in shares of
Common Stock, the number of shares of Common Stock issuable on account of such
interest shall equal the cash amount of such interest on such Interest Payment
Date or Conversion Date (as applicable) divided by the Conversion Price (as
defined below) on such date. Notwithstanding anything to contrary set forth
herein, for purposes of determining the number of shares of Common Stock that
are issuable as payment of interest hereunder, the Conversion Price shall not be
subject to any Floor to which the Conversion Price would otherwise be subject.
Notwithstanding anything to the contrary contained herein, the Company
may not issue shares of Common Stock in payment of interest on the principal
amount if:
(i) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as
treasury stock, is insufficient to pay interest hereunder in shares of
Common Stock;
(ii) after the Interest Effectiveness Date (as defined in
Section 7) such shares (x) are not registered for resale pursuant to an
effective Underlying Shares Registration Statement (as defined in
Section 7) and (y) may not be sold without volume restrictions pursuant
to Rule 144(k) promulgated under the Securities Act (as defined in
Section 7), as determined by counsel to the Company pursuant to a
written opinion letter, addressed to the Company's transfer agent in
the form and substance acceptable to the applicable Holder and such
transfer agent (if the Company is permitted and elects to pay interest
in shares of Common Stock under this clause (ii) prior to the Interest
Effectiveness Date and thereafter an Underlying Shares Registration
Statement shall be declared effective by the Commission (as defined in
Section 7), the Company shall, within three (3) Trading Days after the
date of such declaration of effectiveness, exchange such shares for
shares of Common Stock that are free of restrictive legends of any
kind);
(iii) such shares are not listed or quoted on the Nasdaq
National Market ("NASDAQ") or on the New York Stock Exchange, American
Stock Exchange or the Nasdaq SmallCap Market (each, a "SUBSEQUENT
MARKET");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of such shares would result in a violation of
Section 4(a)(ii)(A).
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<PAGE>
This Debenture is subject to the following additional provisions:
SECTION 1. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
SECTION 2. This Debenture has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement (as defined in Section 7) and may be transferred or exchanged only in
compliance with the Purchase Agreement. Prior to due presentment to the Company
for transfer of this Debenture, the Company and any agent of the Company may
treat the Person (as defined in Section 7) in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
(a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
(i) any default in the payment of the principal of, interest
on or liquidated damages in respect of, any Debentures, free of any
claim of subordination except in accordance with a subordination
agreement executed by the Holder, as and when the same shall become due
and payable (whether on the applicable Interest Payment Date, a
Conversion Date or the Maturity Date or by acceleration or otherwise);
(ii) the Company shall fail to observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of any of, any Debenture, the Purchase Agreement, the
Registration Rights Agreement (as defined in Section 7) or either of
the Security Agreements (as defined in Section 7), and such failure or
breach shall not have been remedied within 10 days after the date on
which notice of such failure or breach shall have been given;
(iii) the Company or any of its subsidiaries (for purposes of
this subsection (iii), "subsidiary" shall mean a subsidiary of the
Company representing 5% or more of the consolidated revenues of the
Company and its consolidated subsidiaries for the last fiscal year of
the Company prior to any of the events contemplated in this paragraph)
shall commence, or there shall be commenced against the Company or any
such subsidiary a case under any applicable bankruptcy or insolvency
laws as now or hereafter in effect or any successor thereto, or the
Company commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution,
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<PAGE>
insolvency or liquidation or similar law of any jurisdiction whether
now or hereafter in effect relating to the Company or any subsidiary
thereof or there is commenced against the Company or any subsidiary
thereof any such bankruptcy, insolvency or other proceeding which
remains undismissed for a period of 60 days; or the Company or any
subsidiary thereof is adjudicated insolvent or bankrupt; or any order
of relief or other order approving any such case or proceeding is
entered; or the Company or any subsidiary thereof suffers any
appointment of any custodian or the like for it or any substantial part
of its property which continues undischarged or unstayed for a period
of 60 days; or the Company or any subsidiary thereof makes a general
assignment for the benefit of creditors; or the Company shall fail to
pay, or shall state that it is unable to pay, or shall be unable to
pay, its debts generally as they become due; or the Company or any
subsidiary thereof shall call a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or
the Company or any subsidiary thereof shall by any act or failure to
act expressly indicate its consent to, approval of or acquiescence in
any of the foregoing; or any corporate or other action is taken by the
Company or any subsidiary thereof for the purpose of effecting any of
the foregoing;
(iv) the Company shall default in any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be
issued, or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding one hundred
thousand dollars ($100,000), whether such indebtedness now exists or
shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise become due and payable;
(v) the Common Stock shall be either delisted from the NASDAQ
or suspended from trading on the NASDAQ without resuming trading and/or
being relisted thereon or on a Subsequent Market or having such
suspension lifted for five (5) consecutive Trading Days or eight (8)
Trading Days in the aggregate (which need not be consecutive days);
(vi) the Company shall be a party to any Change of Control
Transaction (as defined in Section 7), shall agree to sell or dispose
all or in excess of 50% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction), or shall redeem or repurchase more than a de minimis
number of shares of Common Stock or other equity securities of the
Company (other than redemptions of Underlying Shares (as defined in
Section 7));
(vii) an Underlying Shares Registration Statement shall not
have been declared effective by the Commission on or prior to the 30th
day after the Effectiveness Date (as defined in the Registration Rights
Agreement);
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<PAGE>
(viii) if, during the Effectiveness Period, the effectiveness
of the Underlying Shares Registration Statement lapses for any reason
or the Holder shall not be permitted to resell Registrable Securities
under the Underlying Shares Registration Statement, in either case, for
more than five (5) consecutive Trading Days or an aggregate of eight
(8) Trading Days (which need not be consecutive days);
(ix) an Event (as hereinafter defined) shall not have been
cured to the satisfaction of the Holder prior to the expiration of
thirty (30) days from the Event Date (as defined below) relating
thereto (other than an Event resulting from a failure of an Underlying
Shares Registration Statement to be declared effective by the
Commission on or prior to the Effectiveness Date, which shall be
covered by Section 3(a)(vii));
(x) the Company shall fail for any reason to deliver
certificates to a Holder prior to the twelfth (12th) day after a
Conversion Date pursuant to and in accordance with Section 4(b) or the
Company shall provide notice to the Holder, including by way of public
announcement, at any time, of its intention not to comply with requests
for conversions of any Debentures in accordance with the terms hereof;
(xi) the Company shall fail for any reason to deliver the
payment in cash pursuant to a Buy-In within seven (7) days after notice
is deemed delivered hereunder;
(xii) the Company shall issue in excess of an aggregate of
25,000 shares of Common Stock or shall issue Common Stock Equivalents
(as defined herein) entitling the holders thereof to acquire in excess
of an aggregate of 25,000 shares of Common Stock in connection with or
to any present or future lender or creditor of the Company or any
affiliate subsidiary thereof;
(xiii) except for (a) the issuance of up to 2,250,000 shares
of Common Stock in settlement of the litigation described in Schedule
2.1(g) to the Purchase Agreement and (b) the payment of up to an
aggregate of $250,000 in cash, the Company shall agree to pay or settle
any litigation or action for an amount in stock or cash that exceeds
the insurance coverage for such litigation or claim;
(xiv) the Company shall, without the consent of the Holders,
restructure any material portion of its present or future debt
obligations or payables (for purposes of this subsection, it is agreed
that solely extending the time for repayment of debt in any such
extensions whereby the aggregate annual rate of interest applicable to
such debt (inclusive of the consideration, if any, for such extension),
does not exceed the prime rate of interest then in effect as announced
by The Chase Manhattan Bank, N.A. plus 3% shall not constitute a
restructuring of debt); or
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<PAGE>
(xv) any of the Common Stock contemplated by clause (xiii) of
this Section 3 shall be registered under the Securities Act or have
registration rights (other than under Rule 144 promulgated under the
Securities Act).
(b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture (and, at the Holder's option, all other
Debentures then held by such Holder), together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become, immediately
due and payable in cash. The aggregate amount payable upon an Event of Default
shall be equal to the sum of (i) the Mandatory Prepayment Amount (as defined in
Section 7) plus (ii) the product of (A) the number of Underlying Shares issued
in respect of conversions hereunder or as payment of interest hereunder, in
either case, within thirty (30) days of the date of a declaration of an Event of
Default and then held by the Holder and (B) the Per Share Market Value (as
defined in Section 7) on the date prepayment is due or the date the full
prepayment price is paid, whichever is greater. Interest shall accrue on the
prepayment amount hereunder from the seventh day after such amount is due (being
the date of an Event of Default) through the date of prepayment in full thereof
at the rate of 15% per annum. All Debentures and Underlying Shares for which the
full repayment price hereunder shall have been paid in accordance herewith shall
promptly, and in any event within two (2) Business Days, be surrendered to or as
directed by the Company. The Holder need not provide and the Company hereby
waives any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period enforce any
and all of its rights and remedies hereunder and all other remedies available to
it under applicable law. Such declaration may be rescinded and annulled by
Holder at any time prior to payment hereunder. No such rescission or annulment
shall affect any subsequent Event of Default or impair any right consequent
thereon.
SECTION 4. CONVERSION.
(a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall
be convertible into shares of Common Stock at the option of the Holder, in whole
or in part at any time and from time to time, after the Original Issue Date
(subject to the limitations on conversion set forth in Section 4(a)(ii) hereof).
The number of shares of Common Stock issuable upon a conversion hereunder shall
be determined by dividing the outstanding principal amount of this Debenture to
be converted, plus all accrued but unpaid interest thereon, by the Conversion
Price. The Holder shall effect conversions by surrendering the Debentures (or
such portions thereof) to be converted, together with the form of conversion
notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each
Conversion Notice shall specify the principal amount of Debentures to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date such Conversion Notice is deemed to have been
delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in
a Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion
Notice, once given, shall be irrevocable. If the Holder is converting less than
all of the principal amount represented by the Debenture(s) tendered by the
Holder with the Conversion Notice, or if a conversion hereunder cannot be
-6-
<PAGE>
effected in full for any reason, the Company shall honor such conversion to the
extent permissible hereunder and shall promptly deliver to such Holder (in the
manner and within the time set forth in Section 4(b)) a new Debenture for such
principal amount as has not been converted.
(ii) CERTAIN CONVERSION RESTRICTIONS
(A)(1) A Holder may not convert Debentures or receive
shares of Common Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act (as defined in Section 7) and
the rules promulgated thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of interest on, the Debentures held by such Holder after
application of this Section. The Holder shall have the sole authority and
obligation to determine whether the restriction contained in this Section
applies and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
principal amount of Debentures are convertible shall be in the sole discretion
of the Holder. The provisions of this Section may be waived by a Holder (but
only as to itself and not to any other Holder) upon not less than 75 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver.
(2) A Holder may not convert Debentures or
receive shares of Common Stock as payment of interest hereunder to the extent
such conversion or receipt of such interest payment would result in the Holder,
together with any affiliate thereof, beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
interest on, the Debentures held by such Holder after application of this
Section. The Holder shall have the sole authority and obligation to determine
whether the restriction contained in this Section applies and to the extent that
the Holder determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of Debentures are
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company. Other
Holders shall be unaffected by any such waiver.
(B) If the Common Stock is then listed for trading on
the NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the
Shareholder Approval (as defined below), then the Company may not issue in
excess of 2,992,287 shares of Common Stock upon conversions of Debentures or as
payment of interest thereon in shares of Common Stock, which number shall be
subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x)
(such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals
19.999% of the number of shares of Common Stock outstanding immediately prior to
the closing of transactions set forth in the Purchase Agreement. If on any
Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the
Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the
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<PAGE>
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding Debentures and as payment of interest
thereon in shares of Common Stock, together with any shares of Common Stock
previously issued upon conversion of Debentures and as payment of interest
thereon, would exceed the Issuable Maximum, and (C) the Company shall not have
previously obtained the vote of shareholders (the "SHAREHOLDER APPROVAL"), if
any, as may be required by the applicable rules and regulations of the Nasdaq
Stock Market (or any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum pursuant to the terms
hereof, then the Company shall issue to the Holder requesting a conversion a
number of shares of Common Stock equal to the Issuable Maximum and, with respect
to the remainder of the principal amount of Debentures then held by such Holder
for which a conversion in accordance with the Conversion Price would result in
an issuance of shares of Common Stock in excess of the Issuable Maximum (the
"EXCESS PRINCIPAL"), the converting Holder shall have the option to require the
Company to either (1) use its best efforts to obtain the Shareholder Approval
applicable to such issuance as soon as is possible, but in any event not later
than the 75th day after such request, or (2) pay cash to the converting Holder
in an amount equal to the Mandatory Prepayment Amount for the Excess Principal.
If the Company fails to pay the Mandatory Prepayment Amount in full pursuant to
this Section, the Company will pay interest thereon at a rate of 15% per annum
to the converting Holder, accruing daily from the Conversion Date until such
amount, plus all such interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any
Conversion Date, the Company will deliver to the Holder (i) a certificate or
certificates which shall be free of restrictive legends and trading restrictions
(other than those required by Section 3.1(b) of the Purchase Agreement)
representing the number of shares of Common Stock being acquired upon the
conversion of Debentures (subject to the limitations set forth in Section
4(a)(ii) hereof), (ii) Debentures in a principal amount equal to the principal
amount of Debentures not converted, (iii) a bank check in the amount of accrued
and unpaid interest (if the Company has elected or is required to pay accrued
interest in cash), and (iv) if the Company has elected and is permitted
hereunder to pay accrued interest in shares of Common Stock, certificates, which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement), representing such shares
of Common Stock; PROVIDED, that the Company shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon conversion of
the principal amount of Debentures until Debentures are delivered for conversion
to the Company, or the Holder notifies the Company that such Debentures have
been lost, stolen or destroyed and provides a bond (or other adequate security)
reasonably satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith. The Company shall, upon request of the
Holder, if available, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If in the case of any
Conversion Notice such certificate or certificates, including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid interest hereunder, are not delivered to or as
directed by the applicable Holder by the third (3rd) Trading Day after the
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<PAGE>
Conversion Date, the Holder shall be entitled by written notice to the Company
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the principal amount of
Debentures tendered for conversion.
(ii) If the Company fails to deliver to the Holder
such certificate or certificates pursuant to Section 4(b)(i), including for
purposes hereof, any shares of Common Stock to be issued on the Conversion Date
on account of accrued but unpaid interest hereunder, by the third (3rd) Trading
Day after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $5,000 for each Trading Day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Debentures or as payment of interest thereon by the third (3rd)
Trading Day after the Conversion Date, the Holder may, by notice to the Company,
require the Company to issue shares of Common Stock pursuant to Section 4(c),
except that for such purpose the Conversion Price applicable thereto shall be
the lesser of the Conversion Price on the Conversion Date and the Conversion
Price on the date of such Holder demand. Any such shares will be subject to the
provision of this Section.
(iii) In addition to any other rights available to
the Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 4(b)(i), including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid interest hereunder, by the third (3rd) Trading Day after the
Conversion Date, and if after such third (3rd) Trading Day the Holder purchases
(in an open market transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall
(A) pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder anticipated receiving from the conversion at issue multiplied
by (2) the market price of the Common Stock at the time of the sale giving rise
to such purchase obligation and (B) at the option of the Holder, either reissue
Debentures in principal amount equal the principal amount of the attempted
conversion or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of Debentures with respect to which the market price of
the Underlying Shares on the date of conversion was a total of $10,000 under
clause (A) of the immediately preceding sentence, the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
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Notwithstanding anything contained herein to the contrary, if a Holder requires
the Company to make payment in respect of a Buy-In for the failure to timely
deliver certificates hereunder and the Company timely pays in full such payment,
the Company shall not be required to pay such Holder liquidated damages under
Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c) (i) The conversion price (the "CONVERSION PRICE") in
effect on any Conversion Date shall be the lesser of (1) the lesser of (I) 3.135
and (II) the lowest exercise price of the Class B Warrants (as defined in
Section 7) from and after the Closing Date under the Purchase Agreement (if the
amount under this clause (II) shall have been decreased due to a decrease in the
exercise price of the Class B Warrants and thereafter such exercise price shall
be increased, the amount due under this clause (II) shall not be readjusted
upwards and shall remain the lower amount) (the lower such amount, the "INITIAL
CONVERSION PRICE") and (2) 90% of the average of the three (3) lowest Per Share
Market Values during the twenty (20) Trading Days immediately preceding the
applicable Conversion Date (which Trading Days may include Trading Days prior to
the Original Issue Date), provided, that such twenty (20) Trading Day period
shall be extended for the number of Trading Days during such period in which (A)
trading in the Common Stock is suspended by the NASDAQ or a Subsequent Market on
which the Common Stock is then listed, or (B) after the date declared effective
by the Commission, the Underlying Shares Registration Statement is not
effective, or (C) after the date declared effective by the Commission, the
Prospectus included in the Underlying Shares Registration Statement may not be
used by the Holder for the resale of Underlying Shares. Notwithstanding the
foregoing, the Conversion Price shall not be less than the Floor (as defined in
Section 7) for so long as the Floor remains in effect in accordance with Section
6; PROVIDED, that the Floor shall be subject to reduction due to operation of
this Section 4(c). If (a) an Underlying Shares Registration Statement is not
filed on or prior to the Filing Date (as defined under the Registration Rights
Agreement) (if the Company files such Underlying Shares Registration Statement
without affording the Holder the opportunity to review and comment on the same
as required by Section 3(a) of the Registration Rights Agreement, the Company
shall not be deemed to have satisfied this clause (a)), or (b) the Company fails
to file with the Commission a request for acceleration in accordance with Rule
12d1-2 promulgated under the Exchange Act, within five (5) days of the date that
the Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed," or not subject to further review, or (c) the Underlying Shares
Registration Statement is not declared effective by the Commission on or prior
to the Effectiveness Date, or (d) such Underlying Shares Registration Statement
is filed with and declared effective by the Commission but thereafter ceases to
be effective as to all Registrable Securities at any time prior to the
expiration of the Effectiveness Period (as defined in the Registration Rights
Agreement), without being succeeded within ten (10) days by an amendment to such
Underlying Shares Registration Statement or by a subsequent Underlying Shares
Registration Statement filed with and declared effective by the Commission, or
(e) the Common Stock shall be delisted or suspended from trading on the NASDAQ
or on any Subsequent Market for more than three (3) Business Days (which need
not be consecutive days), (f) the conversion rights of the Holders are suspended
for any reason (which shall not be triggered due to the operation of the
restrictions set forth in Section 4(a)(ii) hereof), or (g) an amendment to the
Underlying Shares Registration Statement is not filed by the Company with the
Commission within ten (10) days of the Commission's notifying the Company that
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such amendment is required in order for the Underlying Shares Registration
Statement to be declared effective (any such failure or breach being referred to
as an "EVENT," and for purposes of clauses (a), (c), (f) the date on which such
Event occurs, or for purposes of clause (b) the date on which such five (5) day
period is exceeded, or for purposes of clauses (d) and (g) the date which such
10 day-period is exceeded, or for purposes of clause (e) the date on which such
three (3) Business Day-period is exceeded, being referred to as "EVENT DATE"),
then, on the Event Date and on each monthly anniversary thereof until such time
as the applicable Event is cured, the Company shall pay to the Holder 2.5% of
the aggregate principal amount of the Debentures then outstanding in cash, as
liquidated damages and not as penalty. The provisions of this Section are not
exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then the Initial
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or re-classification.
(iii) If the Company, at any time while any
Debentures are outstanding, shall issue rights, options or warrants (other than
the rights, options and warrants outstanding prior to the Original Issue Date
and specified in Schedule 2.1(c) to the Purchase Agreement but not any
modifications thereof) to all holders of Common Stock (and not to Holders)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Value at the record date mentioned
below, then the Initial Conversion Price shall be multiplied by a fraction, of
which the denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered (plus the
amounts payable on exercise of the corresponding options, warrants or rights)
would purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights, options or warrants. However, upon the expiration of any
such right, option or warrant to purchase shares of the Common Stock the
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issuance of which resulted in an adjustment in the Initial Conversion Price
pursuant to this Section, if any such right, option or warrant shall expire and
shall not have been exercised, the Initial Conversion Price shall immediately
upon such expiration be recomputed and effective immediately upon such
expiration be increased to the price which it would have been (but reflecting
any other adjustments in the Initial Conversion Price made pursuant to the
provisions of this Section after the issuance of such rights or warrants) had
the adjustment of the Initial Conversion Price made upon the issuance of such
rights, options or warrants been made on the basis of offering for subscription
or purchase only that number of shares of the Common Stock actually purchased
upon the exercise of such rights, options or warrants actually exercised.
(iv) If the Company or any subsidiary thereof, as
applicable with respect to Common Stock Equivalents (as defined below), at any
time while Debentures are outstanding, shall issue shares of Common Stock or
rights, warrants, options or other securities or debt (other than the rights,
options and warrants outstanding prior to the Original Issue Date and specified
in Schedule 2.1(c) to the Purchase Agreement but not any modifications thereof)
that are convertible into or exchangeable for shares of Common Stock ("COMMON
STOCK EQUIVALENTS") entitling any Person to acquire shares of Common Stock, in
any case at a price per share less than the Conversion Price then in effect,
then the Conversion Price shall be multiplied by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such shares of Common Stock or such Common Stock
Equivalents plus the number of shares of Common Stock which the offering price
for such shares of Common Stock or Common Stock Equivalents (plus the amounts
payable on exercise of the corresponding options, warrants or rights) would
purchase at the Conversion Price, and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock so issued or issuable,
PROVIDED, that for purposes hereof, all shares of Common Stock that are issuable
upon conversion, exercise or exchange of Common Stock Equivalents shall be
deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such adjustment shall be made whenever such shares of Common Stock
or Common Stock Equivalents are issued. No adjustment shall be made under this
Section 4(c)(iv) as a result of a lowering of the exercise price for the Class B
Warrants or as a result of the issuance of up to 2,250,000 shares of Common
Stock in connection with the litigation disclosed in Schedule 2.1(g) to the
Purchase Agreement (but there will be an adjustment hereunder for any issuance
in excess of such number of shares). However, upon the expiration of any Common
Stock Equivalents the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section, if any such Common Stock Equivalents
shall expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Conversion Price made pursuant to the
provisions of this Section after the issuance of such Common Stock Equivalents)
had the adjustment of the Conversion Price made upon the issuance of such Common
Stock Equivalents been made on the basis of offering for subscription or
purchase only that number of shares of the Common Stock actually purchased upon
the exercise of such Common Stock Equivalents actually exercised.
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(v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security, then in each such case the Initial
Conversion Price at which Debentures shall thereafter be convertible shall be
determined by multiplying the Initial Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value determined as of the record date mentioned above, and of
which the numerator shall be such Per Share Market Value on such record date
less the then fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors in good faith;
PROVIDED, HOWEVER, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, if the Holders of a majority in interest
of the Debentures dispute such valuation, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "APPRAISER") selected in good faith by the holders of a majority in
interest of Debentures then outstanding; and PROVIDED, FURTHER, that the
Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(vi) In case of any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holders shall have the
right thereafter to, at their option, (A) convert the then outstanding principal
amount, together with all accrued but unpaid interest and any other amounts then
owing hereunder in respect of this Debenture only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of the Common Stock following such reclassification or share exchange,
and the Holders of the Debentures shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which the then outstanding principal amount, together with all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled or (B) require the
Company to prepay the aggregate of its outstanding principal amount of
Debentures, plus all interest and other amounts due and payable thereon, at a
price determined in accordance with Section 3(b). The entire prepayment price
shall be paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.
(vii) All calculations under this Section 4 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
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(viii) Whenever the Initial Conversion Price is
adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly
mail to each Holder a notice setting forth the Initial Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(ix) If (A) the Company shall declare a dividend (or
any other distribution) on the Common Stock; (B) the Company shall declare a
special nonrecurring cash dividend on or a redemption of the Common Stock; (C)
the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of the Debentures, and shall
cause to be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(x) In case of any (1) merger or consolidation of the
Company with or into another Person that would constitute a Change of Control
Transaction, or (2) sale by the Company of more than one-half of the assets of
the Company (on an as valued basis) in one or a series of related transactions,
or (3) tender or other offer or exchange (whether by the Company or another
Person) pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, stock, cash or property of the
Company or another Person; then a Holder shall have the right to (A) if
permitted under Section 3(b) hereof, exercise its rights of prepayment under
Section 3(b) with respect to such event, (B) convert its aggregate principal
amount of Debentures then outstanding into the shares of stock and other
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such merger, consolidation or sale, and such Holder shall
be entitled upon such event or series of related events to receive such amount
of securities, cash and property as the shares of Common Stock into which such
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aggregate principal amount of Debentures could have been converted immediately
prior to such merger, consolidation or sales would have been entitled, (C) in
the case of a merger or consolidation, (x) require the surviving entity to issue
convertible debentures in a principal amount equal to the aggregate principal
amount of Debentures then held by such Holder, plus all accrued and unpaid
interest and other amounts owing thereon, which newly issued debentures shall
have terms identical (including with respect to conversion) to the terms of this
Debenture and shall be entitled to all of the rights and privileges of a Holder
of Debentures set forth herein and the agreements pursuant to which the
Debentures were issued (including, without limitation, as such rights relate to
the acquisition, transferability, registration and listing of such shares of
stock other securities issuable upon conversion thereof), and (y) simultaneously
with the issuance of such convertible debentures, shall have the right to
convert such instrument only into shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such merger or consolidation, or (D) in the event of an exchange or
tender offer or other transaction contemplated by clause (3) of this Section,
tender or exchange its aggregate principal amount of Debentures for such
securities, stock, cash and other property receivable upon or deemed to be held
by holders of Common Stock that have tendered or exchanged their shares of
Common Stock following such tender or exchange, and such Holder shall be
entitled upon such exchange or tender to receive such amount of securities, cash
and property as the shares of Common Stock into which such aggregate principal
amount of Debentures could have been converted (taking into account all then
accrued and unpaid interest) immediately prior to such tender or exchange would
have been entitled as would have been issued. In the case of clause (C), the
conversion price applicable for the newly issued convertible debentures shall be
based upon the amount of securities, cash and property that each share of Common
Stock would receive in such transaction and the Conversion Price in effect
immediately prior to the effectiveness or closing date for such transaction. The
terms of any such merger, sale, consolidation, tender or exchange shall include
such terms so as to continue to give the Holders of Debentures the right to
receive the securities, cash and property set forth in this Section upon any
conversion or redemption following such event. This provision shall similarly
apply to successive such events.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common Stock
solely for the purpose of issuance upon conversion of the Debentures and payment
of interest on the Debentures, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of the Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(b)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of Common Stock that shall be
so issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and, if the Underlying Shares Registration Statement has
been declared effective under the Securities Act, registered for public sale in
accordance with such Underlying Shares Registration Statement.
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(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the Holder
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, at 3
Morgan, Irvine, California 92618 (facsimile number (949) 859-5241), attention
Chief Financial Officer, or such other address or facsimile number as the
Company may specify for such purposes by notice to the Holders delivered in
accordance with this Section, with a copy to Rutan & Tucker, LLP, 611 Anton
Boulevard, Costa Mesa, CA 92626 (facsimile number (714) 546-9035), attention
Thomas G. Brockington, Esq. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each Holder of the Debentures at the facsimile telephone number or
address of such Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 6:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) four days
after deposit in the United States mail, (iv) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.
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SECTION 5. OPTIONAL PREPAYMENT.
(a) The Company shall have the right, exercisable at any time
and from time to time in accordance with the terms hereof, upon twenty (20)
Trading Days prior written notice to the Holders of the Debentures to be prepaid
and accompanied by any waiver required by holders of senior indebtedness of the
Company for such prepayment (an "OPTIONAL PREPAYMENT NOTICE"), to prepay all or
any portion of the outstanding principal amount of the Debentures which have not
previously been repaid or for which Conversion Notices have not previously been
delivered. The prepayment price applicable to prepayments under this Section
5(a) shall equal the Optional Prepayment Price (as defined in Section 7) and
shall be paid in cash. Any such prepayment shall be free of any claim of
subordination. The Company shall not be entitled to deliver an Optional
Prepayment Notice to the Holders if: (i) the number of shares of Common Stock at
the time authorized, unissued and unreserved for all purposes is insufficient to
satisfy the Company's conversion obligations of the aggregate principal amount
of Debentures then outstanding, or (ii) there is neither an effective Underlying
Shares Registration Statement under which the Holders can resell all of the
issued Underlying Shares and all of the Underlying Shares as are issuable upon
conversion in full of the principal amount of Debentures subject to prepayment
under the Optional Prepayment Notice (which Underlying Shares Registration
Statement must be effective through the applicable Optional Prepayment Date, as
defined below) nor may all of such issued and issuable Underlying Shares be sold
by the Holders subject to such prepayment without volume restrictions pursuant
to Rule 144 promulgated under the Securities Act, as determined by counsel to
the Company pursuant to a written opinion letter, addressed to the Company's
transfer agent in the form and substance acceptable to the Holders and such
transfer agent, or (iii) the Common Stock is not then listed for trading on the
NASDAQ or on a Subsequent Market. The Holders shall have the right to tender,
and the Company shall honor, Conversion Notices delivered prior to the
expiration of the twentieth (20th) Trading Day after receipt by the Holders of
an Optional Prepayment Notice for such Debentures (the 20th Trading Day after
receipt by the Holders of an Optional Prepayment Notice is referred to herein as
the "OPTIONAL PREPAYMENT DATE").
(b) The Company shall have the right to prepay up to 20% of
the then outstanding principal amount of Debentures in any two consecutive month
period at an Optional Prepayment Price equal to the Profit Sharing Prepayment
Price (as defined in Section 7), but only if the Per Share Market Value for each
of the twenty (20) consecutive Trading Days preceding the date of the Optional
Prepayment Notice for which such prepayment price is sought is equal to or
greater than 135% of the Initial Conversion Price. The provisions of Sections
5(a) and (c) relating to the other conditions and provisions governing
prepayments shall apply to a prepayment seeking the pricing set forth in this
Section 5(b).
(c) If any portion of the Optional Prepayment Price shall not
be paid by the Company by the second (2nd) Business Day following the Optional
Prepayment Date, the Optional Prepayment Price shall be increased by 15% per
annum (to accrue daily) until paid (which amount shall be paid as liquidated
damages and not as a penalty). In addition, if any portion of the Optional
Prepayment Price remains unpaid through the expiration of the Optional
Prepayment Date, the Holder subject to such prepayment may elect by written
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notice to the Company to either (x) demand conversion in accordance with the
formula and the time period therefor set forth in Section 4 of any portion of
the principal amount of Debentures for which the Optional Prepayment Price, plus
accrued liquidated damages thereof, has not been paid in full (the "UNPAID
PREPAYMENT PRINCIPAL AMOUNT"), in which event the applicable Per Share Market
Value shall be the lower of the Per Share Market Value calculated on the
Optional Prepayment Date and the Per Share Market Value as of the Holder's
written demand for conversion, or (y) invalidate AB INITIO such optional
redemption, notwithstanding anything herein contained to the contrary. If the
Holder elects option (x) above, the Company shall within three (3) Trading Days
after such election is deemed delivered hereunder to the Holder deliver the
shares of Common Stock issuable upon conversion of the Unpaid Prepayment
Principal Amount subject to such conversion demand and otherwise perform its
obligations hereunder with respect thereto; or, if the Holder elects option (y)
above, the Company shall promptly, and in any event not later than three (3)
Trading Days from receipt of notice of such election, return to the Holder new
Debentures for the full Unpaid Prepayment Principal Amount. If, upon an election
under option (x) above, the Company fails to deliver the shares of Common Stock
issuable upon conversion of the Unpaid Prepayment Principal Amount within the
time period set forth in this Section, the Company shall pay to the Holder in
cash, as liquidated damages and not as a penalty, $2,500 per day until the
Company delivers such Common Stock to the Holder.
SECTION 6. MANDATORY PREPAYMENT/ELIMINATION OF FLOOR.
(a) If the Conversion Price for twenty-one (21) consecutive
days shall be equal to or below $1.50, the Holder may, at any time thereafter,
deliver a notice to the Company (the "HOLDER NOTICE") requiring the Company to
act in accordance with the immediately following sentence. Within three (3)
Business Days after delivery of the Holder Notice under this Section 6(a), the
Company shall notify the Holder of its election to either (i) prepay the entire
outstanding principal amount of the Debentures which have not previously been
repaid or for which Conversion Notices have not previously been delivered,
together with interest and other amounts owed in respect thereof, at a price
equal to the Mandatory Prepayment Price, no later than ten (10) Business Days
from such election, or (ii) discontinue and remove permanently the Floor. The
Company shall honor Conversion Notices delivered prior to the expiration of the
three (3) Business Day period contemplated by this Section 6(a), provided, that
such conversions shall be subject to the Floor. A failure of the Company to
timely elect under this Section 6(a) shall be deemed an election to discontinue
permanently the Floor.
(b) If the Conversion Price for ten (10) consecutive Trading
Days shall be equal to or less than $1.25, then the Holder may deliver a Holder
Notice, requiring the Company to act in accordance with the immediately
following sentence. Within three (3) Business Days after delivery of the Holder
Notice under this Section 6(b), the Company shall notify the Holder of its
election to either (i) prepay the entire outstanding principal amount of the
Debentures which have not previously been repaid or for which Conversion Notices
have not previously been delivered, together with interest and other amounts
owed in respect thereof, at a price equal to the Mandatory Prepayment Price, no
later than ten (10) Business Days from such election, or (ii) discontinue and
-18-
<PAGE>
remove permanently the Floor. The Company shall honor Conversion Notices
delivered prior to the expiration of the three (3) Business Day period
contemplated by this Section 6(b), provided, that such conversions shall be
subject to the Floor. A failure of the Company to timely elect under this
Section 6(b) shall be deemed an election to discontinue permanently the Floor.
SECTION 7. DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York or the State of California are authorized or required by law
or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
in excess of 40% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 60% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"CLASS B WARRANTS" means the Company's Class B Warrants,
entitling the holders thereof to purchase 7,592,460 shares of Common Stock.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Class A Common Stock, no par value
per share, of the Company and stock of any other class into which such shares
may hereafter have been reclassified or changed.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FLOOR" means the lower of (i) $1.50, and (ii) 80% of the
lowest exercise price of the Class B Warrants from and after the Closing Date
under the Purchase Agreement (if the amount under this subsection (ii) shall
have been decreased due to a decrease in the exercise price of the Class B
Warrants and thereafter such exercise price shall be increased, the amount due
under this subsection (ii) shall not be readjusted upwards and shall remain the
lower amount). However, if the Company shall issue the shares of Common Stock
permitted by clause (a) of Section 3(a)(xiii) and the issuance or resale of any
such shares shall be registered prior to the date that is 64 Trading Days after
the date that an Underlying Shares Registration Statement is first declared
-19-
<PAGE>
effective by the Commission (provided, that such 64 Trading Day period shall be
extended for the number of Trading Days during such period in which (A) trading
in the Common Stock is suspended by the NASDAQ or a Subsequent Market on which
the Common Stock is then listed, or (B) after the date declared effective by the
Commission, the Underlying Shares Registration Statement is not effective, or
(C) after the date declared effective by the Commission, the Prospectus included
in the Underlying Shares Registration Statement may not be used by the Holder
for the resale of Underlying Shares), then the then applicable Floor shall be
reduced by 10%.
"INTEREST EFFECTIVENESS DATE" means the earlier to occur of
(x) the Effectiveness Date and (y) the date that an Underlying Shares
Registration Statement is declared effective by the Commission.
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal
the sum of (i) the greater of (A) 115% of the principal amount of Debentures to
be prepaid, plus all accrued and unpaid interest thereon, and (B) the principal
amount of Debentures to be prepaid, plus all accrued and unpaid interest
thereon, divided by the Conversion Price on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory
Prepayment Amount is paid in full, whichever is less, multiplied by the Per
Share Market Value on (x) the date the Mandatory Prepayment Amount is demanded
or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in
full, whichever is greater, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of such Debentures.
"OPTIONAL PREPAYMENT PRICE" shall equal (A) the sum of (i) the
principal amount of Debentures to be prepaid, plus all accrued and unpaid
interest thereon, divided by the Conversion Price on (x) the Optional Prepayment
Date or (y) the date the Optional Prepayment Price is paid in full, whichever is
less, multiplied by the Per Share Market Value on (x) the Optional Prepayment
Date or (y) the date the Optional Prepayment Price is paid in full, whichever is
greater, and (ii) all other amounts, expenses, costs and liquidated damages due
in respect of such Debentures, or (B) when applicable under Section 5(b), the
Profit Sharing Prepayment Price.
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be issued to
evidence such Debenture.
"PER SHARE MARKET VALUE" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the NASDAQ or on
such Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or a Subsequent Market,
the closing bid price for a share of Common Stock in the over-the-counter
market, as reported by the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
-20-
<PAGE>
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the Holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the Holders of a majority in interest of the principal amount
of Debentures then outstanding.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PROFIT SHARING PREPAYMENT PRICE" shall equal 115% of the
principal amount of Debentures to be prepaid in accordance with Section 5(b),
plus all accrued and unpaid interest thereon and all other amounts, expenses,
costs and liquidated damages due in respect of such Debentures.
"PURCHASE AGREEMENT" means the Secured Convertible Debenture
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original Holder of Debentures, as amended, modified or supplemented from
time to time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, between the Company and the
original Holder of Debentures, as amended, modified or supplemented from time to
time in accordance with its terms.
"QUALIFIED FACILITY" means a credit facility or factoring
arrangement with a nationally or regionally recognized institutional lender,
whereby such lender has made available to the Company a minimum of $500,000 in a
financing without conditions or restrictions (including with respect to
borrowing base requirements) as to the availability of funds whereby such lender
has required the Company to grant a first priority security interest in the
collateral secured by the security interests granted pursuant to the Security
Agreements.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENTS" means collectively (i) the Security
Agreement, dated as of the Original Issue Date between the Company and the
original Holders of Debentures, as amended modified or supplemented from time to
time in accordance with its terms, and (ii) the Intellectual Property Security
Agreement dated as of the Original Issue Date between the Company and the
original Holders of Debentures, amended modified or supplemented from time to
time in accordance with its terms.
"TRADING DAY" means (a) a day on which the Common Stock is
traded on the NASDAQ or on such Subsequent Market on which the Common Stock is
then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or
a Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
-21-
<PAGE>
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); PROVIDED, HOWEVER, that in the event that
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance with the
terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Underlying
Shares and naming the Holder as a "selling stockholder" thereunder.
SECTION 8. Except as expressly provided herein, no provision
of this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, interest and liquidated
damages (if any) on, this Debenture at the time, place, and rate, and in the
coin or currency, herein prescribed. This Debenture is a direct obligation of
the Company. This Debenture ranks PARI PASSU with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof. Except for debt issued under a Qualified
Facility, the Company shall not issue any debt or other instrument which shall
be pari passu with or senior to the Debentures in right of payment, whether with
respect to interest or upon liquidation, dissolution or otherwise.
SECTION 9. This Debenture shall not entitle the Holder to any
of the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
SECTION 10. If this Debenture shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
SECTION 11. This Debenture shall be governed by and construed
in accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof. The Company and the Holders hereby irrevocably submit
to the exclusive jurisdiction of the state and federal courts sitting in the
City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
-22-
<PAGE>
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, or that such suit, action or proceeding is
improper. Each of the Company and the Holder hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by receiving a copy thereof sent to the Company at the address in
effect for notices to it under this instrument and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.
SECTION 12. Any waiver by the Company or the Holder of a
breach of any provision of this Debenture shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any
other provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
SECTION 13. If any provision of this Debenture is invalid,
illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances. If it
shall be found that any interest due hereunder shall violate applicable laws
governing usury, the applicable rate of interest due hereunder shall equal the
maximum permitted rate of interest.
SECTION 14. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
SECTION 15. The payment obligations under this Debenture and
the obligations of the Company to the Holder arising upon the conversion of all
or any of the Debentures in accordance with the provisions hereof are secured
pursuant to the Security Agreements.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
-23-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of the
date first above indicated.
PREMIER LASER SYSTEMS, INC.
By: /S/ COLETTE COZEAN
-------------------------------------
Name: Colette Cozean
Title: CEO
Attest:
By: /S/ JUDITH A. McCALL
--------------------------------
Name: Judith A. McCall
Title: VP, HR & Admin.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert the attached Debenture into shares of
Class A Common Stock, no par value per share (the "Common Stock"), of Premier
Laser Systems, Inc. (the "Company") according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
Conversion calculations: ______________________________________________
Date to Effect Conversion
______________________________________________
Principal Amount of Debentures to be Converted
______________________________________________
Number of shares of Common Stock to be Issued
______________________________________________
Applicable Conversion Price
______________________________________________
Signature
______________________________________________
Name
______________________________________________
Address
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-1680) pertaining to the 1995 Stock Option Plan of Premier Laser
Systems, Inc., and related Prospectus, the Registration Statement (Form S-8 No.
333-27151) pertaining to the February 1996 Stock Option Plan of Premier Laser
Systems, Inc., and related Prospectus, the Registration Statement (Form S-8 No.
333-48379) pertaining to the 1996 Stock Option Plan of Premier Laser Systems,
Inc., and related Prospectus, and the Registration Statement (Form S-8 No.
333-29497) pertaining to the 1997 Stock Option Plan of Premier Laser Systems,
Inc., and related Prospectus, of our report dated June 9, 1999, with respect to
the consolidated financial statements and schedule of Premier Laser Systems,
Inc., included in its Annual Report (Form 10-K) for the year ended March 31,
1999.
HASKELL & WHITE LLP
Newport Beach, California
June 29, 1999
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 888,767
<SECURITIES> 0
<RECEIVABLES> 1,342,917
<ALLOWANCES> 0
<INVENTORY> 5,797,054
<CURRENT-ASSETS> 8,610,197
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0
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<COMMON> 99,894,096
<OTHER-SE> (90,591,162)
<TOTAL-LIABILITY-AND-EQUITY> 19,275,930
<SALES> 13,971,085
<TOTAL-REVENUES> 13,971,085
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