-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RSn46SWoXcwnTCe+/roDB1/IOC+227BQMtqLWfgvdyLoISZsd4RBOtywd6NDF9/3 dKUYWoaHWg9iGSRv+Y5WTg== 0000912057-96-013228.txt : 19960629 0000912057-96-013228.hdr.sgml : 19960629 ACCESSION NUMBER: 0000912057-96-013228 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER LASER SYSTEMS INC CENTRAL INDEX KEY: 0000878543 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 330476284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04219 FILM NUMBER: 96586450 BUSINESS ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92718 MAIL ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92677 SB-2/A 1 SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1996 REGISTRATION NO. 333-04219 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ PREMIER LASER SYSTEMS, INC.
(Name of small business issuer in its charter) CALIFORNIA 3841 33-0476284 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification No.) incorporation or organization)
3 MORGAN IRVINE, CALIFORNIA 92718 (714) 859-0656 (Address and telephone number of principal executive offices) COLETTE COZEAN, PH.D. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 3 MORGAN IRVINE, CALIFORNIA 92718 (714) 859-0656 (Name, address and telephone number, of agent of service) ------------------------
COPIES TO: THOMAS G. BROCKINGTON, Esq. JOEL I. PAPERNIK, Esq. Rutan & Tucker, LLP Squadron, Ellenoff, Plesent 611 Anton Boulevard, Suite 1400 & Sheinfeld, LLP Costa Mesa, California 92626 551 Fifth Avenue (714) 641-5100 New York, New York 10176 (212) 661-6500
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement of the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PREMIER LASER SYSTEMS, INC. CROSS REFERENCE SHEET (SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM SB-2)
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS - ---------------------------------------------------------------- ----------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................ Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages of Prospectus; Additional Information 3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors 4. Use of Proceeds...................................... Use of Proceeds 5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Underwriting 6. Dilution............................................. Not Applicable 7. Selling Security Holders............................. Not Applicable 8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting 9. Legal Proceedings.................................... Business 10. Directors, Executive Officers, Promoters and Control Persons............................................. Management 11. Security Ownership of Certain Beneficial Owners and Management.......................................... Principal Shareholders 12. Description of Securities............................ Description of Securities 13. Interest of Named Experts and Counsel................ Not Applicable 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Management; Description of Securities 15. Organization within Last Five Years.................. Certain Transactions 16. Description of Business.............................. Business 17. Management's Discussion and Analysis or Plan of Operation........................................... Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property.............................. Business 19. Certain Relationships and Related Transactions....... Certain Transactions 20. Market for Common Equity and Related Stockholder Matters............................................. Price Range of Common Stock 21. Executive Compensation............................... Management 22. Financial Statements................................. Prospectus Summary; Selected Financial Data; and Financial Statements 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................. Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 27, 1996 2,500,000 SHARES [LOGO] COMMON STOCK All of the 2,500,000 shares of Class A Common Stock (the "Common Stock") offered hereby are being offered by Premier Laser Systems, Inc. (the "Company"). The Common Stock is quoted on the Nasdaq National Market under the symbol "PLSIA." The last reported sale price of the Common Stock on June 3, 1996, as reported by the Nasdaq National Market, was $10.00 per share. See "Price Range of Common Stock." FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE 6 HEREOF. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (1) COMPANY (2) Per Share..................... $ $ $ Total (3)..................... $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain civil liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses estimated to be approximately $550,000 payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any, on the same terms and conditions as the shares offered hereby. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made at the offices of Rodman & Renshaw, Inc., New York, New York, on or about , 1996. ------------------------ RODMAN & RENSHAW, INC. The date of this Prospectus is , 1996 [LOGO] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT"). SEE "UNDERWRITING." Altair, AngleTIPS, Arago, Arcturus, Aurora, Centauri, MOD, Orion, Pegasus, Polaris, Premier Laser Systems, Proclosure-Registered Trademark-, Sirius and TouchTIPS are trademarks of the Company. This Prospectus also includes trademarks and trade names of companies other than the Company. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) A PUBLIC OFFERING PRICE OF $10.00 PER SHARE, (II) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (III) NO EXERCISE OF ANY OTHER OUTSTANDING WARRANTS OR OPTIONS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE COMPANY Premier Laser Systems, Inc. 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 principally for use in surgical centers and medical offices. The Company's lasers and related products use the controlled application of thermal, acoustic and optical energy to allow the physician or dentist to perform selected minimally invasive procedures which, compared to conventional techniques not involving the use of lasers, vaporize or sever tissue with minimal blood loss and scarring, increase patient comfort and reduce patient treatment time and treatment costs. To date, the Company has received clearance to market 19 models of medical lasers, which are covered by 18 United States patents, 13 pending United States patent applications, 11 foreign patents and 41 pending foreign patents. It is estimated that over 60 million soft tissue (gums) procedures are performed by dentists or periodontists in the United States annually, many of which the Company believes can be addressed with laser technology. The Company's Aurora diode laser is currently used by dentists and periodontists to treat periodontal disease and has been shown to postpone or in some cases eliminate the need for conventional periodontal surgery. The Company's Arago and MOD (Multi Operatory Dentalaser) argon lasers are currently used by dentists to accelerate the curing of composites placed in cavity preparations. The use of the laser for this application has been shown to result in a stronger restoration than composites cured by traditional curing lights. The Company is seeking clearance for additional dental applications to enable it to market its Centauri Er:YAG laser for hard tissue (teeth) procedures, and is currently initiating clinical trials for cavity prevention and teeth whitening. Approximately two million cataract extractions were performed in the United States in 1994 and approximately three million people suffered from glaucoma in the United States in 1995. The Company's multiple application Centauri Er:YAG laser is priced significantly below current single purpose refractive lasers and has been cleared for anterior capsulotomy (one step in the cataract extraction procedure) and occuloplastic and other cosmetic procedures, among other indications. The Centauri laser is also currently being tested in clinical trials and animal studies for cataract removal, glaucoma treatment and corneal sculpting (treatment of myopia, hyperopia and astigmatism). The suture, staple and wound closure market in 1994 was estimated to be approximately $2 billion worldwide, a significant portion of which the Company believes may be addressed with surgical lasers, either in conjunction with or independent of traditional sutures or staples. The Company believes that the benefits of the use of surgical lasers for tissue melding, as compared to sutures and staples, include fluid-static seals, immediate closure strength and reduced surgical time. The Company and its strategic partner are currently conducting clinical and animal studies for tissue melding for ducts, arteries, veins and skin, in support of future regulatory applications. The Company's strategy is to seek to increase its market penetration in the dental, ophthalmic and surgical markets by (i) expanding its marketing and distribution efforts, (ii) creating market awareness through increased publicity and the education of dentists and physicians, (iii) pursuing clearance for additional laser applications, (iv) capitalizing on disposable aftermarket related products, and (v) expanding domestically and internationally through strategic alliances or acquisitions of companies with additional distribution channels, complementary products or an international presence. 3 The Company commenced operations in August 1991, after acquiring substantially all of the assets of Pfizer Laser Systems, a division of Pfizer Hospital Products Group, Inc. ("Pfizer HPG"), in an acquisition led by the Company's Chief Executive Officer. The assets acquired by the Company included the proprietary rights to a broad base of laser and fiberoptic technologies, which the Company developed over the past four years into 19 laser models cleared for market introduction. Following an initial public offering in December 1994, the Company increased inventory and expanded its dental sales force in December 1995 to include five area sales managers and 25 independent marketing representatives. As a result of this expansion, the Company achieved $723,000 in sales to the dental market for the fiscal year ended March 31, 1996. The Company has not generated significant revenues to date, and may incur losses for the foreseeable future due to substantial costs associated with manufacturing, marketing and distributing its laser products and continued research and development related to additional applications for these products. The Company's principal executive offices are located at 3 Morgan, Irvine, California 92718. The Company's telephone number is (714) 859-0656. THE OFFERING Common Stock Offered by the Company............. 2,500,000 shares Common Stock to be Outstanding after the Offering....................................... 7,223,758 shares (1) Use of Proceeds................................. To fund the expansion of the Company's marketing and distribution capabilities, including distribution to international markets, through acquisitions, strategic alliances or internal development; to invest in inventory and demonstration equipment; to fund additional research and development; to repay indebtedness; and for general corporate and working capital purposes. Nasdaq National Market Common Stock Symbol...... "PLSIA"
- ------------------------ (1) Does not include (i) 730,402 shares of Common Stock issuable upon exercise of outstanding options as of June 3, 1996 granted under the Company's 1992 Employee Stock Option Plan, 1995 Stock Option Plan and 1996 Stock Option Plans; (ii) 375,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option; (iii) up to 250,000 shares of Common Stock issuable upon exercise of Warrants to be granted to the Representative of the Underwriters upon completion of this Offering; (iv) 698,303 shares of Common Stock issuable upon exercise of other outstanding options and warrants to purchase Common Stock; (v) 8,290,298 shares of Common Stock issuable upon exercise of the Company's outstanding publicly-held Class A Warrants and the underlying Class B Warrants; (vi) 3,102,049 shares of Common Stock issuable upon exercise of the Company's outstanding publicly-held Class B Warrants; (vii) 960,000 shares of Common Stock issuable upon exercise of Unit Purchase Options (and the underlying Class A Warrants and Class B Warrants) granted to the underwriters for the Company's initial public offering in December 1994 (the "IPO") and to certain other persons (the "IPO Unit Purchase Options") and (viii) 1,256,818 shares of each of Class E-1 Common Stock and Class E-2 Common Stock. For a description of the Class A Warrants, Class B Warrants, IPO Unit Purchase Options, Class E-1 Common Stock and Class E-2 Common Stock, see "Description of Securities." For a description of the Company's stock option plans and options outstanding thereunder, see "Management -- Stock Option Plans." 4 SUMMARY FINANCIAL DATA
FISCAL YEAR ENDED MARCH 31, ---------------------------------------------- 1994 1995 1996 -------------- -------------- -------------- SELECTED STATEMENT OF OPERATIONS DATA: Net sales....................................................... $ 2,079,335 $ 1,249,403 $ 1,704,390 Cost of sales................................................... 1,753,352 1,298,420 3,324,757 -------------- -------------- -------------- Gross profit (loss)............................................. 325,983 (49,017) (1,620,367) Selling and marketing expenses.................................. 1,087,461 1,035,863 1,308,767 Research and development expenses............................... 678,279 1,035,705 1,213,471 General and administrative expenses............................. 1,322,888 1,747,090 1,709,327 -------------- -------------- -------------- Loss from operations............................................ (2,762,645) (3,867,675) (5,851,932) Interest (expense) income, net.................................. (434,851) (322,540) 99,037 -------------- -------------- -------------- Loss before extraordinary items................................. (3,197,496) (4,190,215) (5,752,895) Extraordinary gain from extinguishment of indebtedness.......... -- 381,730 -- -------------- -------------- -------------- Net loss........................................................ $ (3,197,496) $ (3,808,485) $ (5,752,895) -------------- -------------- -------------- -------------- -------------- -------------- SELECTED PER SHARE DATA: Net loss........................................................ $ (1.26) -------------- -------------- Weighted average shares outstanding (1)......................... 4,556,959 Pro forma loss before extraordinary item (2).................... $ (2.45) $ (1.59) Extraordinary gain from extinguishment of indebtedness.......... -- .15 -------------- -------------- Pro forma net loss (2).......................................... $ (2.45) $ (1.44) -------------- -------------- -------------- -------------- Pro forma weighted average shares outstanding (1)(2)............ 1,288,751 2,584,722
AT MARCH 31, 1996 ------------------------------ AS ADJUSTED ACTUAL (3) -------------- -------------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents...................................................... $ 35,463 $ 22,235,463 Working capital................................................................ 5,818,492 28,518,492 Total assets................................................................... 15,674,568 37,874,568 Total debt..................................................................... 481,195 -- Shareholders' equity........................................................... 13,797,046 36,497,046
- ------------------------ (1) Does not include 1,256,818 shares of each of Class E-1 or Class E-2 Common Stock outstanding as of March 31, 1996, which are subject to cancellation under certain circumstances. See "Description of Securities -- Common Stock" and Notes 2 and 16 of Notes to Financial Statements. (2) Adjusted to give pro forma effect to the conversion of certain of the Company's indebtedness which occurred upon completion of the Company's initial public offering. The effect on net loss per common share from the conversion of such indebtedness was to reduce historical net loss by $37,500 and $67,995, and to increase weighted average shares outstanding by 76,875 and 321,099 shares for the fiscal years ended March 31, 1994 and 1995, respectively. (3) Adjusted to reflect the receipt by the Company of estimated net proceeds from the issuance of 2,500,000 shares hereby and the application of the net proceeds thereof. See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS In evaluating an investment in the Common Stock being offered hereby, investors should consider carefully the following principal risk factors, as well as the other information contained in this Prospectus. LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES The Company was formed in July 1991 and has not generated significant revenues to date. As of March 31, 1996, the Company had an accumulated deficit of $18,616,414. For the fiscal years ended March 31, 1994, 1995 and 1996, the Company had operating losses of $2,762,645, $3,867,675 and $5,851,932, respectively, resulting principally from costs incurred in research and development and other costs of operations. The Company expects that operating losses will continue until such time as product sales generate sufficient revenues to fund its continuing operations, as to which there can be no assurance. INDEPENDENT ACCOUNTANTS' REPORT; GOING CONCERN QUALIFICATION The report from the Company's independent accountants includes an explanatory paragraph which describes substantial doubt concerning the ability of the Company to continue as a going concern. The Company may incur losses for the foreseeable future due to the significant costs associated with manufacturing, marketing and distributing its laser products and due to continual research and development activities which will be necessary to develop additional applications for the Company's laser technology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements -- Report of Independent Accountants." UNCERTAINTIES CONCERNING FUTURE PROFITABILITY The Company's ability to achieve profitability will depend, in part, on its ability to continue to successfully develop clinical applications and obtain regulatory approvals for its products and to develop the capacity to manufacture and market such products on a wide scale. There is no assurance that the Company will be able to successfully make the transition from research and development to manufacturing and selling commercial medical laser products on a broad basis. While attempting to make this transition, the Company will be subject to all risks inherent in a growing venture, including the need to produce reliable and effective products, develop marketing expertise and enlarge its sales force. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAIN MARKET ACCEPTANCE The Company's future sales are dependent, in part, on the Company's ability to demonstrate to dentists, ophthalmologists and other physicians the potential cost and performance advantages of its laser systems over traditional methods of treatment and, to a lesser extent, over competitive laser systems. To date, commercial sales of the Company's lasers have been limited, and no assurance can be given that these laser products can be successfully commercialized on a broad basis. Lasers have not been widely used in dentistry and their use requires training and expertise. The acceptance of dental lasers may be adversely affected by their high cost, concerns by patients and dentists relating to their safety and efficacy, and the substantial market acceptance and penetration of alternative dental tools such as the dental drill. Current economic pressure may make dentists and physicians reluctant to purchase substantial capital equipment or invest in new technology. The failure of medical lasers to achieve broad market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. No assurance can be given that any of the Company's products will be accepted by the medical or dental community or by patients, or that a significant market for the Company's laser systems will be developed and sustained. The Company currently has a limited sales force and will need to hire additional sales and marketing personnel to facilitate the general acceptance of its products. See "Business -- Market Overview." 6 DEPENDENCE ON SUPPLIERS The Company purchases certain raw materials, components and subassemblies included in the Company's products from a limited group of qualified suppliers and does not maintain long-term supply contracts with any of its key suppliers. The disruption or termination of these sources could have a material adverse effect on the Company's business and results of operations. For example, during fiscal 1994, the Company's sole supplier of the specialized optic fiber required for use in the Company's Er:YAG lasers ceased to provide this fiber to the Company. The Company's inability to obtain sufficient quantities of this specialized optical fiber had a material adverse effect on the volume of Er:YAG lasers the Company was able to sell during fiscal 1994 and 1995. The Company's arrangement with the supplier of its Arago argon laser terminates in August 1996, and if this arrangement is not renewed and the Company is unable to secure another source for this argon laser, the Company's results of operations may be adversely affected. There can be no assurance that any supplier could be replaced in a timely manner. Any interruption in the supply of these and other key components could have a material adverse effect on the Company's ability to manufacture its products and on its business, financial condition and results of operations. See "Business -- Manufacturing and Materials." RISKS APPLICABLE TO FOREIGN SALES Sales of the Company's products to foreign markets account for a substantial portion of the Company's sales. Foreign sales expose the Company to certain risks, including the difficulty and expense of maintaining foreign sales distribution channels, barriers to trade, potential fluctuations in foreign currency exchange rates, political and economic instability, availability of suitable export financing, accounts receivable collections, tariff regulations, quotas, shipping delays, foreign taxes, export licensing requirements and other United States and foreign regulations that may apply to the export of medical lasers. The regulation of medical devices worldwide also continues to develop, and there can be no assurance that new laws or regulations will not have an adverse effect on the Company. In addition, the Company may experience additional difficulties in providing prompt and cost effective service of its medical lasers in foreign countries. The Company does not carry insurance against such risks. The occurrence of any one or more of these events may individually or in the aggregate have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business - -- Marketing, Sales and Service." RISK OF TECHNOLOGICAL OBSOLESCENCE The markets in which the Company's laser products compete are subject to rapid technological change, as well as the potential development of alternative surgical techniques or new pharmaceutical products. Such changes could render the Company's products uncompetitive or obsolete. The Company will be required to invest in research and development to attempt to maintain and enhance its existing products and develop new products. No assurances can be given that such research and development efforts will result in the introduction of new products or product improvements. See "Business -- Research and Development." DEPENDENCE ON PATENTS AND PROPRIETARY TECHNOLOGY The Company's success will depend, in part, on its ability to obtain patent protection for products and processes, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. The Company holds 18 U.S. patents and has other patent applications pending in the United States. The Company also holds 11 foreign patents including two utility model patents and has other foreign patent applications pending. No assurance can be given that any additional U.S. or foreign patents will be issued, that the scope of any patent protection will exclude competitors or that any of the Company's patents will be held valid if subsequently challenged. Further, there can be no assurance that others will not independently develop similar products, duplicate the Company's products or design products that circumvent any patents used by the Company. The Company is aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict the Company's right to market certain of its technologies without a license, including, without 7 limitation, patents relating to the Company's lens emulsification product and ophthalmic probes for the Er:YAG laser. In the past, the Company has received allegations that certain of the Company's laser products infringe other patents. There has been significant patent litigation in the medical industry in general, and in the medical laser industry in particular. Adverse determinations in litigation or other patent proceedings to which the Company may become a party could subject the Company to significant legal judgments or other liabilities to third parties and could require the Company to seek licenses from third parties that may or may not be economically viable. Patent and other intellectual property rights disputes often are settled through licensing arrangements. No assurance can be given that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. If the Company is found, in a legal proceeding, to have infringed the patents or other proprietary rights of others, it could be liable for significant damages. The Company also relies upon unpatented trade secrets, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent trade secrets. In addition, at each balance sheet date, the Company is required to review the value of its intangible assets based on various factors, such as changes in technology. Any adjustment downward in such value may result in a write-off of the intangible asset and a substantial charge to earnings, thereby adversely affecting the operating results of the Company in the future. See "Business -- Patents and Patent Applications" and Note 2 of Notes to Financial Statements. NEED FOR FDA AND FOREIGN GOVERNMENTAL APPROVALS; GOVERNMENT REGULATION The Company's products are regulated as medical devices by the FDA under the Federal Food, Drug and Cosmetic Act (the "FDC Act") and the regulations promulgated thereunder. As such, these devices require either Section 510(k) premarket clearance ("510(k)") or approval of a premarket approval application ("PMA") by the FDA prior to commercialization. Satisfaction of applicable regulatory requirements may take several years and varies substantially based upon the type, complexity and novelty of such devices, as well as the clinical procedure. There can be no assurance that some of the Company's products will not require the more rigorous and time consuming PMA approval, including laser uses for vasovasotomy or other tissue melding, dental hard tissue, cavity prevention, cosmetic surgery, sclerostomy and lens emulsification, among others. Filings and governmental approvals may be required in foreign countries before the devices can be marketed in these countries. There can be no assurance that further clinical trials of the Company's medical lasers or of any future products will be successfully completed or, if they are completed, that any requisite FDA or foreign governmental clearances or approvals will be obtained. FDA or other governmental clearances or approvals of products developed by the Company in the future may require substantial filing fees which could limit the number of applications sought by the Company and may entail limitations on the indicated uses for which such products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. Also, the Company has made modifications to certain of its existing products which it does not believe require the submission of a new 510(k) notification to the FDA. However, there can be no assurance that the FDA would agree with the Company's determination and not require the Company to discontinue marketing one or more of the modified devices until they have been cleared by the FDA. There also can be no assurance that any such clearance of modifications would be granted should it become necessary. The Company is also required to adhere to applicable requirements for current Good Manufacturing Practices ("cGMP") and radiological health requirements, to engage in extensive record keeping and reporting and to comply with the FDA's product labeling, promotional and advertising requirements. Noncompliance with state, local, federal or foreign requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of 8 production, delay, denial or withdrawal of premarket clearance or approval of devices, recommendations by the FDA that the Company not be allowed to enter into government contracts, and criminal prosecution, all of which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's manufacturing facilities are subject to periodic inspections by state and federal agencies, including the FDA, the California Department of Health Services, and comparable agencies in other countries. See "Business -- Government Regulation." DEPENDENCE ON KEY PERSONNEL The Company depends to a considerable degree on a limited number of key personnel, including Colette Cozean, Ph.D., its Chairman of the Board, Chief Executive Officer, President and Director of Research. Dr. Cozean is also an inventor of a number of the Company's patented technologies. During the Company's limited operating history, many key responsibilities within the Company have been assigned to a relatively small number of individuals. The loss of Dr. Cozean's services or those of certain other members of management could adversely affect the Company. The Company has no long-term employment agreements with its key personnel. The success of the Company will also depend, among other factors, on the successful recruitment and retention of qualified technical and other personnel. See "Management." HIGHLY COMPETITIVE INDUSTRY The medical laser industry is subject to intense competition and is characterized by rapid technological change. The Company is and will continue to be subject to competition in its targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies, and to a lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. Many of the Company's competitors have substantially greater financial, marketing and manufacturing resources and experience than the Company. Furthermore, the Company expects other companies will enter the 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. See "-- Dependence on Suppliers" and "Business -- Competition." POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS Due to the relatively high sales price of the Company's laser systems and the low sales unit volume, minor timing differences in receipt of customer orders have produced and could continue to produce significant fluctuations in quarterly results. In addition, if anticipated sales and shipments in any quarter do not occur when expected, expenditures and inventory levels could be disproportionately high, and the Company's operating results for that quarter, and potentially for future quarters, would be adversely affected. Quarterly results may also fluctuate based on a variety of other factors, such as seasonality, production delays, product mix, cancellation or rescheduling of orders, new product announcements by competitors, receipt of clearances or approvals by the Company or its competitors, notices of product suspension or recall, the Company's ability to manage product transitions, sales prices and market conditions. In addition, if the Company expands or augments its manufacturing capabilities in connection with the introduction of new products, quarterly revenues and operating results are expected to fluctuate to an even greater degree. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAIN ABILITY TO MEET CAPITAL NEEDS The Company will require substantial additional funds for its research and development programs, preclinical and clinical testing, development of its sales and distribution force, operating expenses, regulatory processes and manufacturing and marketing programs. The Company's capital requirements will depend on numerous factors, including the progress of its research and development programs, results of preclinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments, developments and changes in the Company's existing research, licensing and other relationships and the terms of 9 any new collaborative, licensing and other arrangements that the Company may establish. The Company believes that the net proceeds of this Offering, together with its available short-term assets and investment income, will be sufficient to meet its operating expenses and capital expenditures through the next 24 months. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." However, the Company's cash requirements may vary materially from those now planned due to potential future acquisitions, the progress of research and development programs, results of clinical testing, relationships with strategic partners, if any, competitive and technological advances, the FDA and foreign regulatory processes and other factors. There can be no assurance, however, that additional financing will be available when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent the Company from implementing its business strategy or may require the Company to delay, scale back or eliminate certain of its research and product development programs or to license to third parties rights to commercialize products or technologies that the Company would otherwise seek to develop itself. BROAD DISCRETION OVER USE OF PROCEEDS The Company intends to use a substantial portion of the net proceeds of this Offering to expand the Company's marketing and distribution capabilities through internal development, strategic alliances and acquisitions. In addition, the Company may use of a portion of the net proceeds to increase its available technologies or products through acquisitions, capital and research and development expenditures or a combination or both. Management's allocation decisions concerning such net proceeds will be dependent upon a variety of factors, including the progress and results of clinical trials, the timing of receipt of regulatory approvals and potential strategic alliances and acquisitions. The Company is not engaged in discussions relating to any acquisitions and has not yet determined the extent to which it will expand its marketing, distribution, technologies and products through acquisitions or strategic alliances, as contrasted with internal growth. As a result, a significant portion of the net proceeds will be available for acquisitions and projects that are not yet identified, and the Board of Directors will have broad discretion with respect to the application of such proceeds. There can be no assurance that the Company will be able to consummate acquisitions or identify and arrange projects that meet the Company's requirements. See "Use of Proceeds." POSSIBLE VOLATILITY OF STOCK PRICE The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In addition, the market price of the Company's Common Stock has been and is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or its competitors, changes in health care policy in the United States and internationally, changes in analysts' recommendations regarding the Company, other medical companies or the medical laser industry generally and general market conditions may have a significant effect on the market price of the Company's Common Stock. See "Price Range of Common Stock." PRODUCT LIABILITY EXPOSURE The sale of the Company's laser products involves the inherent risk of product liability claims against the Company. The Company currently maintains product liability insurance coverage in the amount of $5 million per occurrence and $5 million in the aggregate, but such insurance is expensive, subject to various coverage exclusions and may not be obtainable by the Company in the future on terms acceptable to the Company. There can be no assurance that claims against the Company arising with respect to its products will be successfully defended or that the insurance carried by the Company will be sufficient to cover liabilities arising from such claims. A successful claim against the Company 10 in excess of the Company's insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Product Liability and Insurance." LIMITATIONS ON THIRD PARTY REIMBURSEMENT The Company's laser products are generally purchased by physicians, dentists and surgical centers which then bill various third party payors, such as government programs and private insurance plans, for the procedures conducted with the Company's lasers. Third-party payors carefully review and are increasingly challenging the prices charged for medical products and services. Reimbursement rates from private companies vary depending on the procedure performed, the third-party payor, the insurance plan and other factors. Medicare reimburses hospitals a prospectively-determined fixed amount for the costs associated with an in-patient hospitalization based on the patient's discharge diagnosis, and reimburses physicians a prospectively-determined fixed amount based on the procedure performed, regardless of the actual costs incurred by the hospital or physician in furnishing the care and unrelated to the specific devices used in that procedure. Third-party payors are increasingly scrutinizing whether to cover new products and the level of reimbursement for covered products. Payors may deny coverage and reimbursement for the Company's products if they determine that the device was not reasonable and necessary for the purpose for which used, was investigational or not cost-effective. As a result, there can be no assurance that reimbursement from third party payors for these procedures will be available or if available, that reimbursement will not be limited, thereby adversely affecting the Company's ability to sell its products on a profitable basis. Moreover, the Company is unable to predict what legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislature or regulation may have on the Company. UNCERTAINTIES REGARDING HEALTH CARE REFORM Several states and the United States government are investigating a variety of alternatives to reform the health care delivery system and further reduce and control health care spending. These reform efforts include proposals to limit spending on health care items and services, limit coverage for new technology and limit or control the price health care providers and drug and device manufacturers may charge for their services and products. If adopted and implemented, such reforms could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." CHARGE TO EARNINGS IN THE EVENT OF RELEASE OF ESCROW SHARES The Company has outstanding 1,256,818 shares of each of Class E-1 and Class E-2 Common Stock (the "Escrow Shares") which are being held by the Company in escrow, and which will be released from escrow and converted into shares of Common Stock if certain criteria are met. In the event any of these criteria are met and any shares are released from escrow to shareholders who are officers, directors, employees or consultants of the Company, a substantial noncash compensation expense will be recorded for financial reporting purposes. The recognition of such compensation expense may have an adverse effect on the market price of the Company's securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Potential Future Charge to Income," "Principal Shareholders" and "Description of Securities -- Common Stock." SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF COMMON STOCK RESULTING FROM EFFECT OF OUTSTANDING OPTIONS AND WARRANTS Sales of a substantial number of shares of Common Stock in the public market following this Offering could adversely affect the market price for the Common Stock. Other than 161,352 shares of Common Stock held by the Company's officers and directors which are subject to 180 day lock-up agreements, substantially all of the Company's 7,223,758 shares of Common Stock to be outstanding upon completion of this Offering will be freely tradeable, including 993,831 unregistered shares of Common Stock which may be sold in the public market subject to compliance with Rule 144 promulgated under the Securities Act. An additional 11,392,347 shares of Common Stock are issuable upon 11 the full exercise of the Company's outstanding publicly traded Units, Class A Warrants and Class B Warrants, and 2,388,705 shares of Common Stock are issuable upon exercise of other outstanding warrants and options. The issuance of shares upon the exercise of the Class A Warrants, Class B Warrants, the IPO Unit Purchase Options and options under the 1995 Stock Option Plan has been registered under the Securities Act, and 720,499 shares of Common Stock issuable upon exercise of the remaining options and warrants may be resold pursuant to Rule 701 under the Securities Act. The existence of the Company's outstanding warrants and options could adversely affect the Company's ability to obtain future financing. The price which the Company may receive for the Common Stock issued upon exercise of such options and warrants will likely be less than the market price of the Common Stock at the time such options and warrants are exercised. Moreover, the holders of the options and warrants might be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain needed capital by a new offering of its securities on terms more favorable than those provided for by the options and warrants. See "Management - -- Stock Option Plans" and "Shares Eligible for Future Sale." POTENTIAL ANTI-TAKEOVER EFFECTS The Company's Articles of Incorporation authorize the issuance of 8,850,000 shares of "blank check" preferred stock, which will have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of such issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. See "Description of Securities -- Preferred Stock." In addition, the Company has entered into Termination Agreements with each executive officer of the Company, pursuant to which the Company will provide such officers in the event of a termination of employment following a change in control of the Company, as defined in such agreement, with (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 calendar years prior to the termination, (ii) immediate vesting of all previously granted stock options, and (iii) continuing health benefits for a period of 24 months. These agreements could also discourage, delay or prevent a change in control of the Company. 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock being offered hereby are estimated to be $22,700,000 (or $26,187,500 if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and estimated offering expenses payable by the Company. The Company intends to use the net proceeds of this Offering to fund the expansion of the Company's marketing and distribution capabilities, including distribution into international markets, through acquisitions, strategic alliances or internal development. The Company also plans to invest in inventory and demonstration or loaner equipment, and to fund additional research and development including further clinical trials, regulatory activities and other research and development projects, including corneal sculpting. The Company also plans to use approximately $500,000 of the net proceeds of this Offering to repay the outstanding principal and unpaid accrued interest on a promissory note payable to Pfizer HPG representing acquisition indebtedness, which note bears interest at the rate of 10.0% per annum, and matures on the closing of this Offering. The remaining proceeds are expected to be used for working capital and other general corporate purposes, including possible strategic alliances with or acquisitions of businesses that may provide distributor networks, complementary products or an international presence. There are no present negotiations, agreements or understandings with respect to any such acquisitions. Because a significant portion of the net proceeds will be available for acquisitions and projects that are not yet identified, the Board of Directors will have broad discretion with respect to the application of such proceeds. There can be no assurance that the Company will be able to identify and arrange projects that meet the Company's requirements or to consummate any such acquisition. Pending the application of such proceeds, the Company intends to invest the net proceeds of this Offering in bank deposits and short-term, investment grade securities. 13 PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "PLSIA." Prior to May 1, 1995, the Company's Common Stock was listed on the Nasdaq SmallCap Market under the same symbol. The following table sets forth, for the quarters indicated, the high and low bid prices of the Company's Common Stock on the Nasdaq SmallCap Market through April 30, 1995, and the high and low last sale prices of the Common Stock on the Nasdaq National Market thereafter.
HIGH LOW -------- ------- FISCAL YEAR ENDED MARCH 31, 1995: Third Quarter (commencing November 30, 1994).............. $ 4 $ 4 Fourth Quarter............................................ 4 1/2 3 1/2 FISCAL YEAR ENDED MARCH 31, 1996: First Quarter*............................................ $ 6 3/4 $ 3 3/4 Second Quarter............................................ 7 5 5/8 Third Quarter............................................. 6 1/8 5 Fourth Quarter............................................ 8 5/8 3 7/8 FISCAL YEAR ENDED MARCH 31, 1997: First Quarter (through June 3, 1996)...................... $ 10 3/4 $ 8
- ------------------------ * For April 1 through April 30, 1995, the high and low bid prices of the Common Stock were $5.00 and $3.50. The quotations in the above table reflect inter-dealer prices without retail markups, markdowns or commissions. In addition, for all periods prior to May 1, 1995, the quotations do not represent actual transactions. On June 3, 1996, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $10.00. The Company's Class A Warrants and Class B Warrants are quoted on the Nasdaq National Market and the Company's Units are listed on the Nasdaq SmallCap Market. The Company also has outstanding Class E-1 Common Stock and Class E-2 Common Stock for which there is no public market. See "Description of Securities." As of June 3, 1996, the approximate number of holders of record of the Company's Common Stock, Class E-1 and Class E-2 Common Stock were 277, 325 and 325, respectively. DIVIDEND POLICY The Company has not declared or paid any cash dividends on its capital stock since its inception and for the foreseeable future intends to follow a policy of retaining all of its earnings, if any, to finance the development and continued expansion of its business. There can be no assurance that dividends will ever be paid by the Company. Any future determination as to payment of dividends will depend upon the Company's financial condition, results of operations and such other factors as the Board of Directors deems relevant. In addition, the Company's credit facility with Silicon Valley Bank prohibits the Company's payment of any dividends without the prior consent of such bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Captial Resources." 14 CAPITALIZATION The following table sets forth the capitalization of the Company at March 31, 1996, and as adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by the Company hereby and the application of the net proceeds therefrom. The following table should be read in conjunction with the financial statements and related notes thereto appearing elsewhere in this Prospectus.
AT MARCH 31, 1996 -------------------------------- ACTUAL AS ADJUSTED --------------- --------------- Short-term debt................................................................. $ 481,195 $ -- --------------- --------------- --------------- --------------- Shareholders' equity: Preferred Stock, no par value; 8,850,000 shares authorized; no shares outstanding.................................................................. -- -- Common Stock, no par value; 35,600,000 shares authorized; 4,702,203 shares outstanding; 7,202,203 shares outstanding, as adjusted (1)................................................. 16,317,376 39,017,376 Class E-1 Common Stock, no par value; 2,200,000 shares authorized; 1,256,818 shares outstanding and as adjusted........................................... 4,769,878 4,769,878 Class E-2 Common Stock, no par value; 2,200,000 shares authorized; 1,256,818 shares outstanding and as adjusted........................................... 4,769,878 4,769,878 Class A Warrants, 4,166,099 warrants outstanding and as adjusted.............. 2,321,057 2,321,057 Class B Warrants, 3,081,099 warrants outstanding and as adjusted.............. 376,774 376,774 Warrants to purchase Common Stock............................................. 192,130 192,130 Unrealized holding gain on short-term investments............................. 3,666,367 3,666,367 Accumulated deficit........................................................... (18,616,414) (18,616,414) --------------- --------------- Total shareholders' equity.................................................. 13,797,046 36,497,046 --------------- --------------- Total capitalization...................................................... $ 13,797,046 $ 36,497,046 --------------- --------------- --------------- ---------------
- ------------------------ (1) Does not include (i) 730,402 shares of Common Stock issuable upon the exercise of outstanding options granted under the Company's 1992 Employee Stock Option Plan, 1995 Stock Option Plan and 1996 Stock Option Plans; (ii) 375,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option; (iii) up to 250,000 shares of Common Stock issuable upon exercise of Warrants to be granted to the Representative of the Underwriters upon completion of this Offering; (iv) 688,547 shares of Common Stock issuable upon exercise of other outstanding options and warrants to purchase Common Stock; (v) 8,332,198 shares of Common Stock issuable upon exercise of the Company's outstanding publicly-held Class A Warrants and the underlying Class B Warrants; (vi) 3,081,099 shares of Common Stock issuable upon exercise of the Company's outstanding publicly-held Class B Warrants; (vii) 960,000 shares of Common Stock issuable upon exercise of the IPO Unit Purchase Options and the Class A Warrants and Class B Warrants included in or underlying such securities, and (viii) 1,256,818 shares of each of Class E-1 Common Stock and Class E-2 Common Stock. For a description of the Class A Warrants, Class B Warrants, IPO Unit Purchase Options, Class E-1 Common Stock and Class E-2 Common Stock, see "Description of Securities." For a description of the Company's stock option plans and options outstanding thereunder, see "Management -- Stock Option Plans." 15 SELECTED FINANCIAL DATA The following table sets forth for the periods indicated, the selected financial data of the Company and should be read in conjunction with the Company's Financial Statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus. The selected financial data of the Company as of March 31, 1994, 1995 and 1996 and for each of the fiscal years then ended are derived from financial statements of the Company audited by Price Waterhouse LLP, independent accountants. The balance sheet at March 31, 1996 and the related statements of operations, shareholders' equity and cash flows for the fiscal years ended March 31, 1995 and 1996 and notes thereto are included in this Prospectus. The report of Price Waterhouse LLP, which also appears herein, contains an explanatory paragraph that describes uncertainty as to the ability of the Company to continue as a going concern.
FISCAL YEAR ENDED MARCH 31, ------------------------------------------- 1994 1995 1996 ------------- ------------- ------------- SELECTED STATEMENT OF OPERATIONS DATA: Net sales........................................................ $ 2,079,335 $ 1,249,403 $ 1,704,390 Cost of sales.................................................... 1,753,352 1,298,420 3,324,757 ------------- ------------- ------------- Gross profit (loss).............................................. 325,983 (49,017) (1,620,367) Selling and marketing expenses................................... 1,087,461 1,035,863 1,308,767 Research and development expenses................................ 678,279 1,035,705 1,213,471 General and administrative expenses.............................. 1,322,888 1,747,090 1,709,327 ------------- ------------- ------------- Loss from operations............................................. (2,762,645) (3,867,675) (5,851,932) Interest (expense) income, net................................... (434,851) (322,540) 99,037 ------------- ------------- ------------- Loss before extraordinary items.................................. (3,197,496) (4,190,215) (5,752,895) Extraordinary gain from extinguishment of indebtedness........... -- 381,730 -- ------------- ------------- ------------- Net loss......................................................... $ (3,197,496) $ (3,808,485) $ (5,752,895) ------------- ------------- ------------- ------------- ------------- ------------- SELECTED PER SHARE DATA: Net loss......................................................... $ (1.26) ------------- ------------- Weighted average shares outstanding (1).......................... 4,556,959 Pro forma loss before extraordinary item (2)..................... $ (2.45) $ (1.59) Extraordinary gain from extinguishment of indebtedness........... -- .15 ------------- ------------- Pro forma net loss (2)........................................... $ (2.45) $ (1.44) ------------- ------------- ------------- ------------- Pro forma weighted average shares outstanding (1)(2)............. 1,288,751 2,584,722 AT MARCH 31, ------------------------------------------- 1994 1995 1996 ------------- ------------- ------------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents........................................ $ 308,764 $ 5,888,237 $ 35,463 Working capital.................................................. 1,287,587 6,756,149 5,818,492 Total assets..................................................... 12,325,029 16,883,975 15,674,568 Total debt (3)................................................... 4,403,890 481,195 481,195 Shareholders' equity............................................. 6,022,174 15,002,260 13,797,046
- -------------------------- (1) Does not include 1,256,818 shares of each of Class E-1 or Class E-2 Common Stock outstanding as of March 31, 1996, which are subject to cancellation under certain circumstances. See "Description of Securities -- Common Stock" and Notes 2 and 16 of Notes to Financial Statements. (2) Adjusted to give pro forma effect to the conversion of certain of the Company's indebtedness which occurred upon completion of the Company's initial public offering. The effect on net loss per common share from the conversion of such indebtedness was to reduce historical net loss by $37,500 and $67,995, and to increase weighted average shares outstanding by 76,875 and 321,099 shares for the fiscal years ended March 31, 1994 and 1995, respectively. (3) Amounts for long-term debt at March 31, 1994 include $285,000 in mandatorily redeemable warrants. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Company's Financial Statements and related notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements including, without limitation, statements concerning future cost of sales, which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in these forward-looking statements. Factors that may cause such differences include, but are not limited to, those discussed in "Risk Factors." GENERAL The Company develops, manufactures and markets several lines of proprietary medical lasers, fiberoptic delivery systems and associated products for a variety of dental, ophthalmic and surgical applications. The Company commenced operations in August 1991, after acquiring substantially all of the assets of Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets acquired by the Company included the proprietary rights to a broad base of laser and fiberoptic technologies developed by Pfizer Laser. This acquisition was led by the Company's current Chief Executive Officer. Since its formation and until its IPO in December 1994, the Company principally focused on, and its research and development activities related to, growing markets in dentistry, ophthalmology, cosmetic procedures and certain surgical specialties to be used in surgical centers and medical offices. To implement this strategy, the Company developed the Pegasus Nd:YAG dental laser system from existing technology and introduced this laser to the dental market in February 1992. In June 1993, the Company introduced the Centauri Er:YAG laser for ophthalmology and initiated clinical trials for hard tissue procedures in dentistry. In December 1993, the Company acquired from Proclosure, Inc., a Florida corporation ("Proclosure"), certain technology, assets and proprietary rights relating to a 1.32m Nd:YAG laser system for tissue melding. From its formation in 1991 through its initial public offering, the Company developed and received regulatory approvals for 15 models of lasers and sold certain of those products for soft tissue applications in dentistry and as part of clinical trials conducted by third parties. After the Company's IPO in December 1994, the Company increased its inventory, acquired the distribution rights to two new dental lasers and, in December 1995, expanded its dental sales force. In September and November 1995, the Company acquired rights to market and distribute the Arago and MOD argon lasers, respectively for dental applications, and in February 1996, the Company introduced and began shipping its Aurora diode laser for soft tissue dental applications. While the Company has received clearance to market laser products covering a variety of medical applications, to date the Company has focused its research, development and marketing efforts on a limited number of products or applications (principally specific dental and ophthalmic applications). As future resources permit, the Company may introduce certain products for applications for which it already has all necessary approvals or may seek strategic alliances to develop, market and distribute such products. The Company has recorded operating losses in each of the fiscal years since its formation, resulting principally from substantial costs incurred in research and development activities and obtaining regulatory approvals, together with the absence of significant revenues to date primarily due to the Company's limited marketing and financial resources, the Company's inability to obtain certain critical components and lasers from time to time, and until recently, the limited acceptance of lasers in the medical industry, in general. The report of the Company's independent accountants includes an explanatory paragraph describing substantial doubt concerning the ability of the Company to continue as a going concern. The Company believes, however, that its presently available 17 short-term assets, expected revenues from operations and the net proceeds of this Offering will provide sufficient working capital through the next 24 months. See "-- Liquidity and Capital Resources." RESULTS OF OPERATIONS FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995 Net sales increased 36.4% to $1,704,390 in fiscal 1996 from $1,249,403 in fiscal 1995. This increase was primarily attributable to an increase of $723,000 in sales to the dental market, related principally to the introduction of three new products, the Aurora diode laser, the Arago argon laser and the MOD argon laser, in the latter half of fiscal 1996. This increase was partially offset by a decrease in sales to the surgical market of approximately $200,000, largely due to a decline in the demand for the Company's 10 and 20 watt CO(2) lasers, which are nearing the end of their product life cycle. The Company's arrangement with the supplier of the Arago argon laser terminates in August 1996, and to the extent the Company is unable to extend this arrangement or to secure another source for this laser, the Company's results of operations may be adversely affected. Cost of sales increased 156.1% to $3,324,757 in fiscal 1996 from $1,298,420 in fiscal 1995. This increase in the cost of sales was due primarily to (i) a write down of approximately $848,000 principally attributed to the Company's CO(2) lasers and accessories obtained in the acquisition of Pfizer Laser, and Nd:YAG lasers and accessories, which lasers were developed prior to March 31, 1992 and are nearing the end of their product life cycle, (ii) the underabsorption of manufacturing costs due to low production volumes due in part to the unavailability of certain key components which require long lead-times for delivery, coupled with an increase in the number of manufacturing employees during fiscal 1996 from 12 to 17 employees constituting an increase in payroll expense of approximately $280,000, and (iii) increased costs associated with higher sales volumes in fiscal 1996. Cost of sales for fiscal 1996 also included a fee of $122,000 to a third party pursuant to the Company's manufacturing arrangement relating to the MOD argon laser. If production volumes increase in future periods, management anticipates higher absorption of manufacturing costs and increased utilization of the Company's manufacturing personnel, which could lead to positive gross margins based upon management's current calculation of the Company's standard cost of sales for fiscal 1996. There can be no assurance that the Company will, in future periods, achieve positive gross margins, or that the assumptions on which standard cost of sales is computed will be realized by the Company. Selling and marketing expenses increased 26.3% to $1,308,767 in fiscal 1996 from $1,035,863 in fiscal 1995. This increase was primarily attributable to marketing efforts related to the Company's dental products, which included a $219,000 expense related to the appointment of more than 25 new manufacturer's representatives during the third quarter, and associated expenses including training, promotional costs and commissions. Research and development expenses increased 17.2% to $1,213,471 in fiscal 1996 from $1,035,705 in fiscal 1995. This increase resulted primarily from increases in outside industrial and software design services of approximately $305,000, and expenses of approximately $196,000 associated with the development of new laser products. This increase was partially offset by a $175,000 reduction in clinical studies expense, due to the completion of the Company's dental hard tissue clinical trials and a $250,000 payment received by the Company under a Small Business Innovative Research ("SBIR") grant. General and administrative expenses decreased 2.2% to $1,709,327 in fiscal 1996 from $1,747,090 in fiscal 1995. This decrease was the result of a reduction in legal expenses associated with the Company's litigation with a former supplier of optical fiber (the "Fiber Litigation"), partially offset by increases associated with becoming a public company. In 1995, the Company incurred legal expenses of approximately $400,000 in connection with the Fiber Litigation. Future legal expenses in the Fiber 18 Litigation (not including out-of-pocket expenses) are expected to be limited in accordance with the Company's agreement with its legal counsel, although if the litigation is successful, counsel will be entitled to certain contingency fees. Net interest income increased to $99,037 in fiscal 1996 from net interest expense of $322,540 in fiscal 1995, reflecting the investment of the Company's remaining net proceeds from its IPO and the repayment in December 1994 of a significant portion of the Company's outstanding debt. Net loss increased 51.1% to $5,752,895 in fiscal 1996 from $3,808,485 in fiscal 1995. This increase was principally attributable to increases in cost of sales, selling and marketing expenses and research and development expenses. FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994 Net sales decreased 39.9% to $1,249,403 in fiscal 1995 from $2,079,335 in fiscal 1994. Net sales during fiscal 1994 included substantial revenue from the introduction of the Company's Er:YAG laser. Sales in fiscal 1995 of Nd:YAG lasers, Er:YAG lasers and other laser products were adversely affected by the lack of working capital to fund the purchase of inventory components (some of which require a three month lead time to supply) and manufacturing operations, and the limited availability of optical fibers for the Er:YAG laser. The decrease in sales of these products was partially offset by a general increase in sales of the Company's other products. Cost of sales decreased 25.9% to $1,298,420 in fiscal 1995 from $1,753,352 in fiscal 1994. This decrease was primarily attributable to reduced expenditures of raw materials resulting from lower sales. Selling and marketing expenses decreased 4.7% to $1,035,863 in fiscal 1995 from $1,087,461 in fiscal 1994. Research and development expenses increased 52.7% to $1,035,705 in fiscal 1995 from $678,279 in fiscal 1994 primarily due to increased efforts directed towards dental hard tissue clinical trials and the initial development efforts associated with two potential products. General and administrative expenses increased 32.1% to $1,747,090 in fiscal 1995 from $1,322,888 in fiscal 1994. This increase was primarily due to expenses incurred in connection with the Fiber Litigation, which were partially offset by reductions in management compensation. Net interest expense decreased 25.8% to $322,540 in fiscal 1995 from $434,851 in fiscal 1994. Net loss increased 19.1% to $3,808,485 in fiscal 1995 from $3,197,496 in fiscal 1994. This increase reflected the decreased level of sales and an increase in research and development and general and administrative expenses during fiscal 1995. The net loss for fiscal 1995 included a net extraordinary gain of $381,730 from the extinguishment of indebtedness. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have been financed through the proceeds from the sale of the Company's equity securities, including the IPO, revenues from operations and the proceeds from an SBIR grant. The Company's principal capital requirements include the financing of inventory, accounts receivable, research and development activities, the development of an ophthalmic and a surgical sales force, the development of marketing programs and the acquisition and/or licensing of patents. At March 31, 1996, the Company had a minimal cash balance and its working capital was $5,818,492. This represents a reduction from March 31, 1995 of $5,852,774 in cash and cash equivalents. The decrease in cash and cash equivalents was the result of net cash used in operating activities of $5,312,384 and cash used in investing activities of $540,694, including a $195,971 increase in patent expenditures, a $219,723 addition to capital equipment primarily for molds for new products and a $125,000 note receivable from International Biolaser Corporation. 19 In December 1995, the Company entered into a strategic marketing alliance with Mattan Corporation ("Mattan"), a Canadian corporation whose stock is publicly traded on the Alberta Stock Exchange. Pursuant to this alliance, the Company entered into a Purchasing Agreement with Mattan which provides that the Company will supply all laser equipment and associated disposables for all laser surgery centers to be designed and opened by Mattan in Canada and the United States. In connection with this alliance, the Company entered into a Share Exchange Agreement with Mattan pursuant to which the Company issued 200,000 shares of the Company's Common Stock to two parties affiliated with Mattan, in exchange for 1,150,000 shares of Mattan's Common Stock, which constituted approximately 12% of Mattan's outstanding Common Stock as of the date of the transaction. The Company accounts for this investment as an available-for-sale security pursuant to SFAS 115. At March 31, 1996, the Company's indebtedness consisted of a $481,195 note payable to Pfizer HPG due in three installments commencing with a $240,598 principal reduction, plus accrued interest, in July 1996 and $120,299 quarterly payments in October 1996 and January 1997. Upon completion of this Offering, any remaining unpaid principal and accrued interest becomes immediately due and payable. At March 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes totaling approximately $16,319,249 which will begin to expire in fiscal 2007. Net operating loss carryforwards for state income tax purposes totaling approximately $7,895,167 at March 31, 1996 which will begin to expire in fiscal 1998. The Tax Reform Act of 1986 includes provisions which may limit the net operating loss carryforwards available for use in any given year if certain events occur, including significant changes in stock ownership. Utilization of the Company's net operating loss carryforwards to offset future income may be limited. The Company has a credit facility (the "Credit Facility") with Silicon Valley Bank which permits borrowings of up to $1 million based on the value of the 1,150,000 shares of common stock of Mattan Corporation (the "Mattan Shares") held by the Company. Borrowings under the Credit Facility are secured by the Mattan Shares, bear interest at the rate of 1.0% per annum over the prime rate of interest, and are due and payable in November 1996. In connection with this Credit Facility, the Company issued to such lender warrants to purchase up to 9,756 shares of the Company's Common Stock at an exercise price equal to $10.25 per share. As of June 24, 1996, the Company has drawn approximately $300,000 on this Credit Facility. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development activities, the scope and results of preclinical studies and clinical trials, the costs and timing of regulatory approvals, the rate of technology advances by the Company, competitive conditions within the medical laser industry, the establishment of manufacturing capacity and the establishment of collaborative marketing and other relationships which may either involve cash infusions to the Company, or require additional cash from the Company. Management believes that short term assets, cash generated through expected future revenues and SBIR grants and the net proceeds of this Offering will be adequate to satisfy its working capital needs for at least the next 24 months. After that period the Company's ability to meet its working capital needs will be dependent on its ability to achieve a positive cash flow from operations and profitable operations, in addition to its ability to secure additional debt or equity financing. No assurance can be given that the Company will be able to achieve a positive cash flow from operations, profitable operations or secure financing on acceptable terms. SEASONALITY OF BUSINESS To date, the Company's revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows in these quarters, significantly reduced sales during the summer and the effect of year end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. The Company expects that this seasonality will continue indefinitely. 20 GOVERNMENT GRANTS The Company has been awarded a SBIR grant for approximately $750,000 for the study of laser cataract emulsification. Approximately $250,000 of this amount was drawn at March 31, 1996, and an additional approximately $398,000 has been drawn since that date. The remainder of the grant can be drawn over the next six months upon the achievement of specified criteria. The Company has also applied for new Phase I research grants related to dentistry, orthopedics, tissue melding, and ophthalmology. No assurance can be given that the Company will be awarded any of these potential government grants. POTENTIAL FUTURE CHARGE TO INCOME The Commission has adopted a position with respect to arrangements such as the one entered into among the Company and the holders of its outstanding Class E-1 and Class E-2 Common Stock ("Escrow Shares") which provides that in the event any shares are released from escrow to certain persons who are officers, directors, employees or consultants of the Company, compensation expense will be recorded for financial reporting purposes. Accordingly, the Company expects, in the event of the release of the Escrow Shares from escrow, to recognize substantial noncash charges to earnings during the periods in which the criteria for release of the Escrow Shares are met, which would have the effect of significantly increasing the Company's loss or reducing or eliminating earnings, if any, at such time. The recognition of such compensation expense by the Company may have a depressive effect on the market price of the Company's securities. The Escrow Shares will be automatically converted into Common Stock (at a conversion rate of one share of Common Stock for each Escrow Share) in the event that the Company meets certain criteria relating to the market price of the Common Stock or the achievement by the Company of certain levels of "income," as defined. Different criteria relate to the Class E-1 Common Stock and Class E-2 Common Stock. For these purposes, "income" means the Company's net income before provision for income taxes, including earnings from joint ventures, distribution agreements and licensing agreements, but exclusive of any other earnings that are classified as an extraordinary item, and exclusive of charges to income that may result from conversion of the Escrow Shares into Common Stock, as stated in the Company's financial statements audited by the Company's independent accountants. See "Description of Securities -- Common Stock." If none of the pretax net income or market price levels are attained, the Escrow Shares, as well as any dividends or other distributions made with respect thereto, will be cancelled. The pretax net income and market price levels were determined by negotiation between the Company and the Company's underwriter for the IPO and should not be construed to imply or predict any future earnings by the Company or any increase in the market price of its securities. There can be no assurance that such earnings and market price levels will be attained or that any or all of the Escrow Shares will be converted into Common Stock. 21 BUSINESS OVERVIEW Premier Laser Systems, Inc. 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 principally for use in surgical centers and medical offices. The Company's lasers and related products use the controlled application of thermal, acoustic and optical energy to allow the physician or dentist to perform selected minimally invasive procedures which, compared to conventional techniques not involving the use of lasers, vaporize or sever tissue with minimal blood loss and scarring, increase patient comfort and reduce patient treatment time and treatment costs. To date, the Company has received clearance to market 19 models of medical lasers, which are covered by 18 United States patents, 13 pending United States patent applications, 11 foreign patents and 41 pending foreign patents. While the Company has clearance to market laser products for a variety of medical applications, due to limited resources the Company has focused its marketing and distribution efforts to date on a limited number of products and applications (principally specific dental applications) which the Company believes have the most potential for commercial success. As future resources permit, the Company may introduce certain products for applications for which it already has all necessary approvals or may seek strategic alliances to develop, market and distribute such products. MARKET OVERVIEW The use of laser technology in dentistry, ophthalmology and surgery involves the controlled application of laser light to hard or soft tissue causing an optical, thermal, acoustic or plasma interaction with the tissue. When applied to tissue, the laser light is partially absorbed. This process of absorption converts the light to heat, which in turn alters the state of the tissue. The degree of tissue absorption varies with the choice of wavelength and is an important variable in the application of laser technology in treating various tissues. The laser energy can also form a gas bubble in a water medium which provides an acoustic cutting effect as it bursts. The Company often uses its proprietary delivery systems to control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting effects. These delivery systems include flexible fiberoptics, waveguides, articulated arms and micromanipulators which are used on a disposable or limited reuse basis which the Company intends will provide a recurring revenue stream for the Company. The Company's strategy is to target specific applications in the dental, ophthalmic and surgical markets, where management believes that the Company's technology and products have competitive strengths. DENTAL AND PERIODONTAL MARKET The current market for laser equipment in dental procedures is comprised of soft tissue procedures, composite curing and teeth whitening. If clearance or approval is obtained, this market may be expanded to include hard tissue and cavity prevention procedures. SOFT TISSUE. It is estimated that over 60 million periodontal procedures are performed by dentists and periodontists annually in the United States, many of which the Company believes can be addressed with laser technology. In a clinical study involving more than 900 procedures, periodontists used the Company's lasers during a new minimally invasive surgical technique used in lieu of traditional periodontal flap surgery, for which technique the Company has filed a patent application which is pending. The results demonstrated a reduction in bacteria, improved periodontal pocket depth, minimal or no pain when using the laser even without anesthesia, little or no prescription medication following surgery and a substantial reduction in surgical time. This study also demonstrated that the dental laser can also be used to treat early gum disease, postponing or in some cases eliminating the need for conventional periodontal surgery. While the Company has clearance to market six lasers for soft tissue dental procedures, the Company focuses its marketing efforts on its Aurora diode laser in this area. The Company's Aurora diode laser and Centauri Er:YAG laser have been cleared to market for these soft tissue dental procedures. 22 COMPOSITE CURING. Approximately 48% of all respondants in a recent survey conducted by Clinical Research Associates use composites, an alternate material to amalgams (gold and silver) for cavity filling. Composites are rapidly replacing amalgams as the material of choice for restoration of cavities because they more closely match the color of teeth and because amalgams have drawn increasing worldwide concern over safety due to the toxic gases which may be released when the amalgams are removed from teeth. Composite fillings are typically cured using a curing light which provides a broad spectrum of wavelengths. The use of the argon laser for this application has been shown to result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or to bond orthodontic brackets. The Company's Arago and MOD argon lasers have received clearance for use in these applications. TEETH WHITENING. In a recent survey conducted by Clinical Research Associates, approximately 79% of dentists surveyed used light accelerated bleaching materials with clinical success 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 approximate three shade change in less than one hour. The Company is currently conducting a marketing study with its Arago argon laser for this application and has a 510(k) application pending before the FDA. HARD TISSUE (CAVITY PREPARATION). The American Dental Association estimates that more than 170 million hard tissue restorative procedures are performed each year in the United States, many of which the Company believes could be addressed by a dental laser which could reduce or eliminate the need for a high speed dental hand drill, reduce the need for anesthesia and assist in the prevention of dental caries. Potential dental laser applications for hard tissue procedures include pit and fissure sealing, etching, caries removal and cavity preparation. Based on user feedback from the Company's clinical sites, the Company believes that the use of a laser in dentistry reduces the pain associated with various traditional procedures performed with a dental drill. Although no lasers are currently approved by the FDA for hard tissue procedures, the Company has completed clinical trials to support its 510(k) application to the FDA for clearance to market its Centauri Er:YAG laser on teeth. No assurance can be given, however, that the FDA will not require the Company to submit a PMA application for this use, or require the Company to conduct additional clinical trials. CAVITY PREVENTION. Studies performed by an outside university on human extracted teeth have demonstrated that lasers used in conjunction with fluoride treatments can be highly effective in the prevention of cavity formation. The Company is currently initiating clinical trials to use its lasers for cavity prevention applications. The Company's clinical trials are at an early stage and there can be no assurance that the Company will obtain clearance for these applications. OPHTHALMIC MARKET Lasers have been used for the treatment of eye disorders for many years and are widely accepted in the ophthalmic community. The original and most widely accepted use of lasers in ophthalmology has been for posterior capsulotomy. The Company does not promote its lasers for this market, which it believes is approaching saturation, but instead focuses on intraocular procedures including anterior capsulotomy, cataract removal, glaucoma treatment, corneal sculpting and occuloplastic or cosmetic procedures. The Company has developed the Centauri Er:YAG laser which is capable of performing all of these procedures, which are typically performed using several different types of medical lasers, although to date, the Centauri laser has only been cleared for use in anterior capsulotomies and certain cosmetic procedures. CATARACT REMOVAL PROCEDURES. According to the American Society of Cataract and Refractive Surgeons, approximately two million cataract extraction procedures are performed annually in the United States. The Company believes that no lasers have been approved to date for this application, and that lasers may result in less trauma and inflammation than traditional surgical methods, providing more comfort to the patient. The Company's Centauri Er:YAG laser has been cleared to 23 market for anterior capsulotomy, a procedure which opens the capsule of the eye prior to the removal of the cataract. The Company is also currently conducting clinical trials on the Centauri laser for lens emulsification (the removal of the cataract itself), as an alternative to phacoemulsification (the breakup of the cataract by ultrasonic energy). The Company believes this patented technology for use in lens emulsification may provide an easier and safer method of cataract removal. TREATMENT OF GLAUCOMA. According to the National Institutes of Health, in 1995, approximately three million people in the United States suffered from glaucoma, a disease of the eye characterized by increased intraocular pressure within the eyeball and progressive loss of vision. Traditionally, glaucoma has been treated with drug therapy. When drug therapy is ineffective, periodic invasive surgery may be required. In these cases, lasers may be used to open the sclera and relieve pressure in the eye. This procedure, which must be repeated periodically, can be performed under local anesthesia with a self closing incision on an outpatient basis. The Company is currently conducting clinical trials to support investigational device exemption ("IDE") submittals for clearance to market its Centauri Er:YAG laser for this procedure. If clearance is obtained, concerning which there can be no assurance, the Company's Er:YAG laser could provide a viable alternative to the traditional invasive surgical procedures. CORNEAL SCULPTING. Medical Insight, Inc. estimated in 1993 that 170 million people in the United States suffered from vision disorders including nearsightedness (myopia), farsightedness (hyperopia) and astigmatism. The Company believes that the recent approval of excimer lasers has resulted in greater acceptance and recognition of laser refractive surgery in the ophthalmic market. Medical lasers may be used for corneal sculpting (photorefractive keratectomy), a procedure in which the laser is used to sculpt the cornea of the eye to a desired curvature to correct the myopia, hyperopia or astigmatism. The Company plans to seek FDA approval to market the Centauri laser for corneal sculpting and has initiated animal studies for this application. No assurance can be given, however, that FDA approval will be given for this application. SURGICAL MARKET Lasers have been approved for and are currently being used in a variety of surgical applications including orthopedics, neurosurgery, urology, gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic surgery. Although the Company's products are cleared to market in a number of specialty areas within the surgical market, the Company has specifically targeted tissue melding (tissue fusion) and cosmetic applications within the surgical market. TISSUE MELDING. The suture, staple and wound closure market represented approximately $2 billion worldwide in 1994. The Company believes a significant number of these procedures may be addressed with surgical lasers in conjunction with or independent of traditional sutures or staples. The Company believes that the benefits of the use of surgical lasers for tissue melding, as compared to suture and staples, include fluid-static seals, immediate strength of the closure and reduced surgical time. The Company and its strategic partner have conducted animal tests to support IDE submittals for the use of the Company's Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts, and are currently conducting clinical studies for skin and hypospadias. The Company has also completed clinical trials for vasovasotomy (reversal of vasectomies) which demonstrated a success rate of approximately 89%. The Company is also beginning Phase I clinical trials for the treatment of hypospadias, the lengthening of the urethra to the end of the penis in infant boys, in which it is anticipated that the laser's fluid-static seal may minimize post-surgical complications such as the leakage of urine which requires secondary surgical procedures. The Company has clearance for Phase II clinical trials for skin closure following mastectomies and eyelid surgery at five clinical sites. Artery and vein melding is being tested in animals by the Company's strategic partner in Japan in preparation for clinical studies. COSMETIC SURGICAL PROCEDURES. The market for cosmetic laser surgery is growing rapidly worldwide. Medical Laser Insight, Inc. estimates the procedural fees for the aesthetic facial surgery market in the United States was $775 million in 1992. The Company entered into a Purchasing Agreement 24 and a Share Exchange Agreement dated December 20, 1995 with Mattan Corporation ("Mattan"), the parent corporation of Medical Laser Institute of America ("MLIA"), pursuant to which the Company made an investment in and formed an alliance with MLIA. Mattan owns and operates or provides marketing support for a series of medical laser cosmetic surgery centers, which centers focus on wrinkle removal, treatment of varicose veins, acne scar removal, tattoo removal and refractive surgery. Pursuant to these agreements, Mattan has agreed to purchase all laser equipment, accessories and disposable laser products for use in its laser centers exclusively from the Company until December 31, 2005. To the extent the Company is unable to provide a requested laser to Mattan, the Company will act as purchasing agent for Mattan and purchase the lasers from a third party for resale to Mattan. The Company has regulatory clearance to market its products for a variety of additional applications, including urology, orthopedics, gynecology, gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In areas where the Company's technology is not being fully utilized, the Company may seek agreements to supply its products under private label for other manufacturers or may enter into strategic alliances to develop and market the Company's lasers for other applications. BUSINESS STRATEGY The Company's strategy is to seek to increase its market penetration in the dental, ophthalmic and surgical markets. Key elements of the Company's strategy include the following: FOCUS ON THE OFFICE AND SURGICAL CENTER MARKETS. Recognizing the cost containment environment of the medical industry, the Company intends to focus on clinical applications for lasers which may be performed in a surgical center or medical office. Management believes that the Company's compact and portable lasers offer cost efficiencies and can be used to take advantage of industry trends which favor minimally invasive medical procedures. INCREASE DOMESTIC MARKETING AND ACCEPTANCE OF LASER TECHNOLOGY. The Company intends to expand its domestic marketing organization through additional sales representatives and distributors to target the dental, ophthalmic and surgical markets in the United States. The Company also intends to continue to implement a doctor awareness and education program to address the individual doctor's training, practice management and marketing needs. The Company believes increased publicity and additional publications are essential to educate dentists, physicians and patients about the clinical benefits of medical lasers. EMPHASIZE EXPANSION IN INTERNATIONAL MARKETS. Foreign sales account for a substantial portion of the Company's revenues and the Company intends to devote additional resources to expand the worldwide marketing of its products, particularly in the Pacific Rim and Europe. The Company anticipates substantial growth opportunity in these markets and will seek to enter into marketing arrangements with recognized distributors who will aggressively market and service the Company's products in each region. Such expansion may include potential acquisitions of businesses which have a marketing presence in Europe and the Pacific Rim. There are no present negotiations or agreements with respect to any acquisitions, and no assurance may be given that the Company will be able to identify or consummate any such acquisitions. EXPAND CLINICAL APPLICATIONS FOR PROPRIETARY LASER TECHNOLOGY. The Company manufactures lasers which are multidisciplinary in their surgical applications and multifunctional in the specific procedures for which they have been cleared. The Company holds 18 United States patents and 11 foreign patents, and has pending 13 United States patents and 41 foreign patents. The Company intends to expand its proprietary laser technology by developing and marketing lasers for selected additional applications, which may include corneal sculpting, hard tissue (teeth and bone) cutting, teeth whitening procedures and tissue melding applications, subject to FDA approval or clearance. CAPITALIZE ON DISPOSABLE AFTERMARKET SALES. The Company manufactures a variety of disposable fiberoptic delivery systems and sculpted fiberoptic probes, optical tips, waveguides and catheters which are designed for single-patient use. The unique design of the Company's lasers, including the 25 patented connecters, encourages the users of the Company's products to purchase the compatible disposable products distributed by the Company. The Company believes that the increasing demand for product sterility and cost containment will result in an increase in disposable product sales and will provide a recurring revenue stream. The Company intends to market these products to existing customers, as well as to hospital administrators on a custom basis for other surgical lasers. DEVELOP NEW MARKETS THROUGH STRATEGIC ALLIANCES. The Company intends to establish strategic alliances in order to expedite and lower the cost of developing and bringing to market new products in current markets and existing products in new markets. The Company believes a substantial potential market exists for its laser technology and products both inside and outside the dental, ophthalmic and surgical markets. Strategic alliances could accelerate the Company's efforts to expand in several key areas including, but not limited to, tissue melding, bone shaping, removal of bone cement and disectomy in orthopedics, photo dynamic therapy, revascularization of the heart and interstitial treatment of the prostate. The Company plans to seek strategic alliances to develop additional clinical applications and markets. Pursuant to this strategy, the Company entered into an Exclusive Marketing Agreement dated July 26, 1994 with Nippon Shoji Kaisha, Ltd. ("NSK") to distribute the Company's Polaris Nd:YAG laser for tissue melding applications in Japan, China and Taiwan, subject to receipt of regulatory approval. The Company also entered into a letter agreement dated October 19, 1995 to form a strategic alliance with International Biolaser Corporation ("IBC") to manufacture and distribute the MOD argon laser for dental use pursuant to the Company's joint marketing relationship with IBC. Although the Company will continue to seek to increase its market penetration in the dental, opthalmic and surgical markets, there can be no assurance that the foregoing strategy will be commercially successful or that the Company's products will be accepted by the medical or dental community, or that a significant market for the Company's laser systems will be developed and sustained. LASER PRODUCTS The Company's line of portable lasers are specifically designed for use in outpatient surgical centers and medical offices. The Company believes that its lasers are also well suited for the international market, particularly in facilities with many surgical suites where easy transportation of equipment is necessary. By employing techniques developed in the computer industry, the Company has designed a laser system that (i) is modularly designed and uses similar components for multiple laser systems thereby reducing their overall cost, (ii) allows for efficient and inexpensive repair by replacing a board or assembly in the field or through the mail, reducing the need for a field service force, and (iii) can be easily moved from the office to surgical centers because of its compact size and limited voltage requirements. The Company's Er:YAG lasers are currently priced from $35,000 to $115,000 and its Nd:YAG lasers are currently priced from $25,000 to $80,000. The Company's diode lasers are currently priced from $20,000 to $30,000, its argon laser is priced from $8,000 to $20,000 and its CO(2) lasers are currently priced from $5,500 to $20,000. The prices of lasers within these ranges depend upon each model's power capability and the features offered. 26 The following table presents in summary form, the Company's lasers and delivery systems, the principal applications for which the Company intends to use them, and the FDA status of such products.
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS(1) - ----------------------------- --------------------------------------------------------- ------------------------ Centauri (Er:YAG) Dental -- Soft Tissue.................................... Cleared to market Dental -- Hard Tissue.................................... Clinical trials completed Pending 510(k) Ophthalmology (e.g. Anterior Capsulotomy)................ Cleared to market Ab-externo and Ab-interno Sclerostomy, Laser Lens Emulsification.......................................... Clinical trials Corneal Sculpting........................................ Preclinical animal studies General Surgery, Neurosurgery, Orthopedics, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery............................. Cleared to market Pegasus (Nd:YAG) 20W Dental -- Soft Tissue.................................... Cleared to market Polaris (1.32m Nd:YAG) Tissue Melding........................................... Clinical trials General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery............................. Cleared to market Aurora (diode) Dental -- Soft Tissue.................................... Cleared to market Dental and General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Dermatology, Plastic Surgery, Podiatry, Neurosurgery, Gynecology, Pulmonary Surgery and Oral Surgery................................................. Cleared to market Arago and MOD (argon) Dental -- Composite and Resin Curing..................... Cleared to market Dental -- Teeth Whitening................................ Pending 510(k)
- ------------------------ (1) The Company has made modifications to certain of its products which the Company believes do not require the submission of new 510(k) notifications. However, there can be no assurance that the FDA will agree with the Company's determinations and will not require the Company to discontinue marketing one or more of the modified devices until the modifications have been cleared by the FDA. There also can be no assurance that any such clearance of modifications would be granted should clearance be necessary. See "-- Government Regulation." CENTAURI ER:YAG LASER The Company's Centauri Er:YAG laser is a portable Er:YAG pulsed solid state laser which generates high frequencies (up to 30Hz) at relatively low peak power. These high frequencies allow faster cutting at lower energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by water, producing a cut similar to the scalpel. The Er:YAG wavelength is delivered through a fiber optic delivery system which enables the beams to be focused and angled. These fiberoptic catheters are difficult to produce and the Company has invested heavily in the technology to develop fibers which can handle adequate power. The Company has experienced difficulties in securing a consistent source for these fibers in the past, although it has recently procured two new sources for these fibers. See "-- Legal Proceedings" and "Risk Factors -- Dependence on Suppliers." The Company's Centauri Er:YAG laser has many potential applications in different medical specialties, including cutting hard tissue such as bone and teeth, which could replace or minimize the 27 use of noisy, high speed dental hand drills, and removing ocular structures or performing microsurgery with minimal thermal damage. Although presently marketed only for soft tissue dental procedures and anterior capsulotomy, the Centauri laser also has clearances to market for hemostasis (cessation of bleeding), excision and vaporization of tissues in ophthalmology, general surgery, neurosurgery, orthopedics, gastroenterology, urology, gynecology and oral surgery. See "-- Government Regulation." The Centauri laser is highly effective in cataract ophthalmic procedures because its wavelength is at the peak of the water absorption spectrum and water comprises greater than 60% of ophthalmic tissues. Therefore, the Centauri laser can emulsify cataracts, surgically excise tissue in the treatment of glaucoma and can precisely remove layers of cornea similarly to an excimer laser. This system, which currently is cleared for anterior capsulotomy and other procedures in ophthalmology, is estimated to be available for approximately one-third the price of refractive excimer lasers currently on the market and requires substantially lower maintenance costs than excimer lasers (an estimated annual expense of $10,000 as compared to approximately $70,000). In addition, the multiple application Centauri Er:YAG laser is completely portable, does not emit any toxic gases or cause any potentially mutagenic effect which may result from the use of the excimer laser. The Company has recently introduced what it believes to be the industry's first fully-integrated Er:YAG laser system for ophthalmic procedures. The new system incorporates the Centauri Er:YAG laser and provides the option of either a bi-manual or coaxial, uni-manual handpiece to accommodate an individual physician's technique. The Company has also recently introduced a new irrigation/ aspiration product for use in conjunction with the Centauri system, which integrates with the laser in performing the cataract removal procedure, and includes proprietary vacuum monitoring connectors that create a sterile aspiration line. While animal studies have been encouraging, there can be no assurance that the FDA will approve the use of the Company's Centauri laser for corneal sculpting, or that the laser will work effectively in clinical trials. Clinical trials are estimated to continue for two to five years before approval can be sought in the United States. There are several patents pending on this technology and application, although no assurances can be given that these patents will be approved or approved with the current claims. POLARIS AND PEGASUS ND:YAG LASERS The energy of Nd:YAG lasers is absorbed by blood in tissue and as a result these systems are the preferred lasers to limit bleeding during surgery and for procedures requiring fiberoptic delivery, such as laparoscopic surgery. The Nd:YAG fiberoptic delivery system allows the surgeon to perform surgery through small incisions, providing minimally invasive surgery to patients and usually reducing treatment costs and the length of hospital stays. The Company manufactures a variety of continuous wave solid state Nd:YAG lasers which are designed for use in dentistry and a number of medical specialties. The Company received its first clearance to market a continuous wave Nd:YAG laser system for dental (soft tissue) applications and introduced its 20 watt dental Pegasus Nd:YAG laser in February 1992. The Company also manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have clearance to market for various applications and procedures in general surgery, urology, gastrointestinal procedures, pulmonary procedures, gastroenterology, gynecology and ophthalmology. These lasers also utilize the Company's disposable and reusable unique TouchTIPS, AngleTIPS and sculptured fibers. By using the Pegasus laser with TouchTIPS, the surgeon is allowed direct contact with tissue and the tactile feeling of the scalpel or other surgical instruments. The Company believes that the availability of these technologies permits the use of lower power laser systems (20 watt in dental, 40-60 watt in surgery). In December 1993, the Company entered into an Asset Purchase Agreement with Proclosure, pursuant to which the Company acquired from Proclosure the proprietary rights, including several patents, to manufacture and sell the Polaris laser, a 1.32 micron Nd:YAG laser (except in Japan, China 28 and Taiwan), together with specialized software and delivery systems, for tissue melding. The Company is developing the Polaris laser for use in cosmetic skin closures, vascular surgeries and minimally invasive surgical procedures normally performed with sutures and staples. Although the use of the Polaris laser for tissue melding is still in the development stage, and no clearance for this application has been received, the Company believes that tissue melding offers clinical advantages over traditional sutures and staples. AURORA DIODE LASER The Aurora diode laser is the Company's first semiconductor laser and is the first truly portable diode laser designed for dentistry. The Aurora diode laser replaces the 20 watt Pegasus laser for periodontal procedures, and is one-fourth the size and one-half of the cost of that system. The diode wavelength is absorbed by blood in pigmentation and has been cleared for use in multiple specialties such as general surgery, ophthalmology, urology and plastic surgery. The Aurora laser, which was introduced for soft tissue dental applications in February 1996, is designed to utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia. The dental laser can also be used to treat early stage gum disease, postponing or in some cases eliminating the need for periodontal surgery and providing the opportunity for overall cost savings. The Company believes the Aurora laser compares favorably with competitive products including pulsed Nd:YAG lasers, which cannot produce the required laser settings for use with TouchTIPs, or in the new technique for the treatment of periodontal disease, as well as with CO(2) lasers (which cannot be delivered through a fiber), and argon lasers (which tend to be slower in cutting and may produce charring). ARAGO AND MOD ARGON LASERS The Arago and the MOD are argon gas lasers which have been cleared to market in dentistry to accelerate the composite curing process. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for the restoration of cavities. The argon wavelength penetrates through the composite and has been shown to result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or bonding orthodontic brackets. The argon laser can also be used to enhance teeth whitening procedures using light activated bleaching materials which have traditionally been applied at night over a six to eight week period. Lasers have been shown to facilitate the use of these light activated products in a dentist's office by accelerating this process and resulting in an approximate three shade change in less than one hour. The Company currently has a pending 510(k) for this application. No assurance may be given, however, that the Company will be granted clearance to market this laser for teeth whitening or that the use of the argon laser for teeth whitening will become a widely accepted practice in the dental industry. The Company plans to bundle its lasers with light activated whitening materials and co-market these products with the manufacturers of these materials. The MOD argon laser is manufactured by the Company pursuant to a letter agreement dated October 19, 1995 with IBC which creates a joint marketing relationship for the sale of this product. Pursuant to this agreement, the Company has loaned IBC $125,000 and has the right to designate one member of IBC's Board of Directors. The Company has also entered into a distribution agreement dated March 8, 1996 with Lasermed, Inc., pursuant to which the Company obtained the co-exclusive right to market the portable lightweight Arago argon laser. This agreement terminates in August 1996. The Company will seek to extend this agreement or, if no extension can be obtained on acceptable terms, to find an alternative source for the argon laser, concerning which no assurance can be given. The Company's inability to extend the agreement or find a suitable replacement product could have a material adverse effect on the Company's business, results of operations and financial condition. 29 ALTAIR CO(2) LASERS The CO(2) laser was the first available and the early standard in surgical laser applications. The 10.6 micron wavelength generated by the CO(2) laser is absorbed by water in tissue. The CO(2) laser acts like a surgical scalpel to vaporize tissue with minimal blood loss and scarring. The risk of infection is reduced by thermal sealing of blood and lymphatic vessels in the adjacent tissues. The characteristics of the CO(2) laser have provided a wide variety of medical specialists a modality of treatment that has significantly changed conventional invasive surgery in a number of clinical specialties. The Company's hand-held 10 and 20 watt CO(2) lasers acquired from Pfizer Laser are marketed primarily for office use by podiatrists, dermatologists, orthopedists, dentists and gynecologists. The laser weighs less than 40 pounds and packs in a suitcase. The Company and Pfizer Laser have sold a number of these lasers and the Company continues to provide service and support for these products. To expand its CO(2) laser product line, the Company has designed 35 watt and 65 watt Altair CO(2) lasers for hospital based surgeries. These lasers are portable, and laser energy may be delivered through a waveguide arm, reusable or disposable handpieces or more maneuverable flexible waveguide delivery systems. OTHER LASERS The Company has developed other solid state pulsed lasers including the Sirius .532m Nd:YAG laser and the Orion Ho:YAG laser, and other applications for its existing lasers, but is not actively marketing these lasers at the present time. The following table sets forth in summary form, certain additional lasers owned by the Company which are not currently marketed by the Company, and the principal applications for which the Company has clearance to market such lasers.
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS(1) - ----------------------------- --------------------------------------------------------- ------------------------ Altair (CO(2)) and a CO(2) Orthopedics, General and Plastic Surgery, Dermatology, laser acquired from Pfizer Podiatry, Ear, Nose and Throat, Gynecology, Pulmonary HPG Procedures, Neurosurgery and Ophthalmology.............. Cleared to market Dental -- Soft Tissue.................................... Cleared to market Pegasus (Nd:YAG) 40W/60W General Surgery, Urology, Gastrointestinal Procedures, Pulmonary Procedures, Gastroenterology, Gynecology and Ophthalmology........................................... Cleared to market Pegasus (Nd:YAG) 100W Oral, Arthroscopic and General Surgery, Gastroenterology, Gastrointestinal and Genitourinary Procedures, Pulmonary Procedures, Gynecology, Neurosurgery and Ophthalmology........................................... Cleared to market Sirius (.532m Nd:YAG) Dermatology, General and Plastic Surgery, Podiatry and Orthopedic Applications................................. Cleared to market Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and Throat, Ophthalmology, Gastroenterology, Pulmonary Procedures and Urology............................................. Cleared to market Er:YAG/Nd:YAG combination Various specialties...................................... Cleared to market
- ------------------------ (1) The Company has made modifications to certain of its products which the Company believes do not require the submission of new 510(k) notifications. However, there can be no assurance that the FDA will agree with the Company's determinations and will not require the Company to discontinue marketing one or more of the modified devices until the modifications have been cleared by the FDA. There also can be no assurance that any such clearance of modifications would be granted should clearance be necessary. See "-- Government Regulation." 30 DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS An integral part of any laser system is the means of delivering laser energy to the target tissue. Delivery systems commonly employed in laser surgery include flexible fiberoptics, waveguides, articulated arms and micromanipulators. The Company's proprietary delivery systems control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting efforts. Flexible fibers are a preferred method of delivery for most clinical procedures, but until recently were only available for Nd:YAG and argon lasers. The end of a fiber may be shaped or used with a detachable tip to control the mechanism of laser/tissue interaction, to give a tactile feel, to provide certain mechanical effects and to angle or focus the laser beam. The Company has also been granted a perpetual paid-up license to manufacture, use and sell flexible waveguides to deliver CO(2) energy pursuant to the Assignment and Modification Agreement dated July 26, 1991 among the Company, Pfizer HPG and Medical Laser Technologies Limited. While each laser system marketed by the Company consists of a laser and an integral fiber, these fibers and other products, such as tubing sets, are used by surgeons on a disposable or limited reuse basis for each clinical procedure. The Company believes that expansion into this market could provide it with a recurring revenue stream. The Company manufactures a variety of fiberoptic delivery systems, sculpted fiberoptic probes, optical tips (AngleTIPS and TouchTIPS), waveguides and catheters which are designed for single-patient use. The patented connectors and need for product sterility encourage the users of the Company's lasers to purchase only products which are compatible with this system. The Company believes it can sell these products on a custom basis to hospital administrators for other surgical laser systems at a significant discount to competitors' published prices, while maintaining gross margins through vertical integration and the extensive use of molds and tooling. The Company also assembles and distributes a full line of laser accessories, including glasses, goggles, laser signs and smoke evacuators. MARKETING, SALES AND SERVICE MARKETING AND SALES The Company markets its products to the dental market in the United States directly to dentists and periodontists through its direct sales force consisting of five area sales managers and its recently expanded distributor and manufacturer's representative network consisting of more than 25 people. The Company markets its products primarily through conventions, educational courses, direct mail, telemarketing and other dental training programs. In March 1994, the Company entered into a sales and marketing arrangement for its dental lasers with Burkhart Dental Supply Company, a member of the American Dental Cooperative, Inc., which is one of the largest distributors of dental equipment and supplies in the United States. This agreement is terminable by either party at any time. If this strategic alliance is successful, the Company believes this relationship may be expanded to the other members of the American Dental Cooperative, Inc. which markets dental products to a significant number of the approximately 129,000 practicing dentists in the United States. Such alliance is expected to assist the Company if the Company receives clearance to market the Centauri laser for hard tissue applications. The Company has also entered into a joint marketing relationship with IBC, pursuant to which IBC will provide marketing and technical support for the MOD argon laser. Through an active program of educational courses and preceptorships, the Company has trained dentists in ten countries during the past year using industry recognized dentists and periodontists. In the past two years, more than 20 dental papers have been presented by the Company or clinicians using the Company's products. The Company markets its products in the ophthalmic market through two direct sales managers who focus on sales to key ophthalmologists worldwide. The Company has entered into Distribution Agreements with distributors in nine countries in preparation for market introduction of the Centauri laser during calendar 1996. The Company grants exclusive distribution rights in select territories to its distributors who must maintain certain distribution minimums in order to retain 31 their exclusive rights. The Company plans to expand its ophthalmic sales force both by enlarging its domestic sales force, either internally or through acquisition, and by acquiring or engaging additional international manufacturing representatives. In the surgical market, the Company intends to form strategic alliances in any specialty area where the partner has an established presence in the market selling to either the physician or the hospital. The Company has entered into such a strategic alliance with NSK, one of the leading suppliers of sutures in the Pacific Rim, pursuant to an Exclusive Marketing Agreement. Under this agreement, Proclosure granted to NSK, in exchange for a license fee, the exclusive rights to market and distribute the Polaris Nd:YAG laser in Japan, China and Taiwan. In addition, under this agreement, the Company granted to NSK an option to manufacture the Polaris, which if exercised would require NSK to pay the Company a $1.5 million fee and royalties. NSK has not yet indicated whether it intends to manufacture these products. There can be no assurance that the Company will receive any payments under this agreement. Sales in fiscal 1996 to one customer, Rockford Industries, Inc., a leasing company, accounted for 10% of the Company's net sales for that year. Sales in fiscal 1995 to LaserSite Centers, Inc. accounted for approximately 11% of the Company's net sales for that year. CUSTOMER SERVICE AND SUPPORT The Company is seeking to create a group of loyal customers by focusing on customer service, quality and reliability. In addition to its educational courses, the Company performs a complete installation of its lasers and trains the customers' staff in its proper use. Educational videos and papers are available upon request. The Company conducts service training courses for the representatives of its distributors. Prior to shipping, every laser is subjected to an extensive battery of quality control tests. The Company provides a one year warranty with all lasers and extended warranties are available at an additional cost. The Company generally provides service within one business day to all of its customers in the United States. An owner is either sent a loaner laser by overnight carrier or a service representative visits the owner to repair the unit. International service is provided either by the foreign distributor or by return of the laser to the Company. The Company has experienced and may continue to experience difficulties in providing prompt and cost-effective service of its medical lasers in foreign countries. COMPETITION The Company is and will continue to be subject to competition in its targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies or therapies, some of which include medical lasers manufactured by competitors. In the dental market, the Company competes primarily with dental drills, traditional curing lights and other existing technologies, and to a lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, the Company is subject to competition principally from the (i) traditional surgical treatments using a needle to tear a circle in the anterior capsule, (ii) phacoemulsification, an ultrasound device used to break up cataracts in cataract removal procedures, (iii) corrective eyewear (such as eyeglasses and contact lenses) and surgical treatments for refractive disorders such as photorefractive keratectomy which is typically performed with an excimer laser and radial keratotomy which is performed with a scalpel, and (vi) drug therapy or surgical treatment of glaucoma. In the surgical market, wound closure procedures are usually performed using sutures and staples, and traditional cosmetic surgical procedures may be performed with a scalpel or a CO(2) laser. The Company believes that for many applications its proprietary methods and fiberoptic delivery systems provide clinical benefits over other currently known technologies and competitors' laser products. The medical laser industry in particular is also subject to intense competition and rapid technological changes. The Company believes there are approximately 30 competitors in different sectors of the medical laser industry. The Company believes that the principal competitive factors in the medical laser industry are the products' technological capabilities, proven clinical ability, patent protection, 32 price and scope of regulatory approval, as well as industry expert endorsements. Many conventional laser systems target one particular application, while the Company's Er:YAG system is designed to perform in multiple therapeutic applications. The Company's self-contained units are significantly smaller than competitive surgical models, have internal cooling devices and are powered primarily by dedicated readily available 110 volt lines instead of the 220 volt lines used by most surgical solid state lasers. The specialized menu-driven system software utilized in the Company's lasers also enhances safety and ease of use of the lasers. The Company believes that its ability to compete successfully against traditional treatments, competitive laser systems and treatments that may be developed in the future will depend on its ability to create and maintain advanced technology, develop proprietary products, obtain required regulatory approvals and clearances for its products, attract and retain scientific personnel, obtain patent or other proprietary protection for its products and technologies, and manufacture and successfully market products either alone or through other parties. Certain of the Company's competitors have substantially greater financial, technical and marketing resources than the Company. There can be no assurance that such competition will not adversely affect the Company's results of operations or its ability to maintain or increase market share. RESEARCH AND DEVELOPMENT During the last two fiscal years, the Company has invested an aggregate of approximately $2.5 million in research and development programs. The Company's research and development programs have capitalized on the research and development activities conducted by Pfizer Laser wherein that company identified key military and aerospace technologies and adapted these technologies to portable, efficient, solid-state laser products that were modular in nature. This investment in research and development has resulted in the development of 19 models of lasers, more than 1,000 types of custom delivery systems and approximately 20 types of surgical tips and accessories. Approximately 41% of the Company's net sales for fiscal 1996 were derived from sales of three new lasers introduced during the last six months of that year. Five more lasers or related products are scheduled for introduction in fiscal 1997, subject to receipt of clearance to market such products, for which no assurance may be given. In order to maintain its technological advantage, the Company must continue to invest in new product development. The Company seeks to augment its funding of research and development through government grants. The Company has been awarded a Phase II SBIR grant of $750,000, of which approximately $648,000 has been drawn to date and the remainder of which can be drawn over the next six months to fund additional research and clinical trials regarding laser emulsification of cataracts. The Company has also applied for new Phase I research grants related to dentistry, orthopedics, tissue welding, and ophthalmology. No assurance can be given that the Company will be awarded any of these potential government grants. The Company's current research is focused on expanding the clinical applications of its existing products, reducing the size and cost of current laser systems, developing custom delivery systems and developing new innovative products. The Company's in-house research and development efforts have focused on the development of a systems approach to medical laser products with proprietary delivery systems designed to allow the laser to interact with tissue by a number of different mechanisms (e.g., acoustic, ablative and thermal) for unique laser/tissue effects. These disposable fiberoptic delivery systems, developed specifically for niche surgical applications, demonstrate the principal focus of the Company's research efforts. Examples of patented or patent pending products resulting from these research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO(2) waveguides. Clinical research has also yielded several new surgical procedures. PATENTS AND PATENT APPLICATIONS Patent protection is an important part of the Company's business strategy, and the Company's success depends, in part, on its ability to maintain patents and trade secret protection and on its ability to operate without infringing on the rights of third parties. The Company has sought to protect 33 its unique technologies and clinical advances through the use of the patent process. Patent applications filed in the United States are frequently also filed in selected foreign countries. The Company focuses its efforts on filing only for those patents which the Company believes will provide it with key defensible features instead of filing for all potential minor device features. The Company holds 18 U.S. patents and has other patent applications pending in the United States, including divisional applications. In addition, the Company holds 11 foreign patents including two utility model patents and has other foreign patent applications pending. No assurance can be given that any additional U.S. or foreign patents will be issued, that the scope of any patent protection will exclude competitors or that any of the Company's patents will be held valid if subsequently challenged. The Company also has a nonexclusive license to a number of basic laser technologies which are commonly licensed on such basis in the laser industry. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve trade secrets and to operate without infringing the rights of others. The Company is aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict the Company's right to market certain of its technologies without a license, including, without limitation, patents relating to the Company's lens emulsification product and ophthalmic probes for its Er:YAG laser. In the past, the Company has received allegations that certain of the Company's laser products infringe other patents. There has been significant patent litigation in the medical industry in general, and in the medical laser industry in particular. Adverse determinations in litigation or other patent proceedings in which the Company may become a party could subject the Company to significant legal judgments or liabilities to third parties, and could require the Company to seek licenses from third parties that may or may not be economically viable. Patent and other intellectual property rights disputes often are settled through licensing arrangements. No assurance can be given that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. If the Company is found, in a legal proceeding, to have infringed the patents or other proprietary rights of others, it could be liable for significant damages. The Company also relies on unpatented trade secrets, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent trade secrets. GOVERNMENT REGULATION FDA REGULATION The lasers that are manufactured by the Company are regulated as medical devices by the FDA under the FDC Act. Satisfaction of applicable regulatory requirements may take several years and requirements vary substantially based upon the type, complexity and novelty of such devices as well as the clinical procedure. Pursuant to the FDC Act and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, denial or withdrawal of premarket clearance or approval for devices, recommendations by the FDA that the Company not be allowed to enter into government contracts, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The FDA classifies medical devices in commercial distribution into one of three classes: Class I, II or 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 (E.G., labeling, premarket notification and adherance to GMPs) and Class II devices are subject to general and special controls (E.G., performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (E.G., life-sustaining, life-supporting and implantable devices, or 34 new devices which have been found not to be substantially equivalent to legally marketed devices). Lasers typically are classified as Class II devices, but the FDA may classify certain indications or technologies into Class III and require a PMA. If a manufacturer or distributor of a medical device can establish that a proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a pre-1976 Class III medical device for which the FDA has not called for a PMA, the manufacturer or distributor may seek FDA clearance for the device by filing a Section 510(k) premarket notification. If a manufacturer or distributor of a medical device cannot establish that a proposed device is substantially equivalent to another legally marketed device, the manufacturer or distributor will have to seek premarket approval for the proposed device. A 510(k) notification and the claim of substantial equivalence will likely have to be supported by various types of data and materials, possibly including test results or the results of clinical studies in humans. A PMA would have to be submitted and be supported by extensive data, including preclinical and clinical study data, to prove the safety and effectiveness of the device. There can be no assurance that some of the Company's products will not require the more rigorous and time consuming PMA approval, including laser uses for vasovasotomy or other tissue melding, dental hard tissue, 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 PMA, and the device presents a "significant risk," the manufacturer or the distributor of the devices will have to file an IDE application with the FDA prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and mechanical laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. Submission of an IDE does not give assurance that FDA will approve the IDE and, if it is approved, there can be no assurance that the FDA will determine that the data derived from these studies support the safety and efficacy of the device or warrant the continuation of clinical studies. Sponsors of clinical studies are permitted to charge for those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. Clinical studies of nonsignificant risk devices may be performed without prior FDA approval, but various regulatory requirements still apply, including the requirement for approval by an 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 four to 12 months or longer for a 510(k). If a PMA submission is filed, the FDA has by statute 180 days to review it; however, the review time is often extended significantly by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee may also evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's good manufacturing practice requirements prior to approval of a PMA. Devices are cleared by 510(k) or approved by PMA only for the specific intended uses claimed in the submission and agreed to by the FDA. Marketing or promotion of products for medical applications other than those that are cleared or approved could lead to enforcement action by the FDA. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. 35 There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. FDA or other governmental approvals of products developed by the Company in the future may require substantial filing fees which could limit the number of applications sought by the Company and may entail limitations on the indicated uses for which such products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. REGULATORY STATUS OF PRODUCTS The Company has received 510(k) clearance to market the following lasers in an aggregate of more than 100 specialty areas: CO(2) (four models: 10W, 20W, 35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two models); 1.32m Nd:YAG (two models: 15W, 25W); .532m Nd:YAG (one model); Argon (two models); diode (four models); Nd:YAG/Er:YAG combination laser (one model). Each of these lasers has clearances in multiple specialty areas. The Company also has received 510(k) clearance to market sculptured fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared wavelengths of the Company's lasers as well as argon lasers. If a device for which the Company has already received 510(k) premarket clearance is changed or modified in design, components, method of manufacture or intended use, such that the safety or effectiveness of the device could be significantly affected, a new 510(k) premarket notification is required before the modified device can be marketed in the United States. The Company has made modifications to certain of its products which the Company believes do not require the submission of new 510(k) notifications. However, there can be no assurance that the FDA will agree with the Company's determinations and not require the Company to discontinue marketing one or more of the modified devices until they have been cleared by the FDA. There can also be no assurance that any such clearance of modifications would be granted should it become necessary. The Company currently is conducting preclinical animal studies and clinical trials, both under approved IDEs and as nonsignificant risk studies. There can be no assurance that the results of any of these clinical studies will be successful or that the FDA will not require the Company to discontinue any of these studies in the interest of the public health or due to any violations of the FDA's IDE regulations. There can be no assurance that the Company will receive approval from the FDA to conduct any of the significant risk studies for which the Company seeks IDE approval, or that the FDA will not disagree with the Company's determination that any of its studies are "nonsignificant risk" studies and require the Company to obtain approval of an IDE before the study can continue. ADDITIONAL REGULATORY REQUIREMENTS Any products manufactured or distributed by the Company pursuant to a 510(k) premarket clearance notification or PMA are or will be subject to pervasive and continuing regulation by the FDA. The FDC Act also requires the Company to manufacture its products in registered establishments and in accordance with cGMP regulations, which include testing, control and documentation requirements. The Company must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to a death or serious injury. The Company's facilities in the United States are subject to periodic inspections by the FDA. The FDA may require postmarketing surveillance with respect to the Company's products. The export of medical devices is also subject to regulation in certain instances. 36 All lasers manufactured by the Company are subject to the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the FDA. The law requires laser manufacturers to file new product and annual reports and to maintain quality control, product testing and sales records, to incorporate certain design and operating features in lasers sold to end users pursuant to a performance standard, and to comply with labeling and certification requirements. Various warning labels must be affixed to the laser, depending on the class of the product under the performance standard. In addition, the use of the Company's products may be regulated by various state agencies. For instance, the Company is required to register as a medical device manufacturer with certain state agencies. In addition to being subject to inspection by the FDA, the Company also will be routinely inspected by the State of California for compliance with cGMP regulations and other requirements. Although the Company believes that it currently complies and will continue to comply with the applicable regulations regarding the manufacture and sale of medical devices, such regulations are always subject to change and depend heavily on administrative interpretations. There can be no assurance that future changes in law, regulations, review guidelines or administrative interpretations by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company's business, financial condition and results of operations. In addition to the foregoing, the Company is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to conduct business. Furthermore, the introduction of the Company's products in foreign countries may require obtaining foreign regulatory clearances, and additional safety and effectiveness standards are required in certain other countries. The Company believes that only a limited number of foreign countries currently have extensive regulatory requirements. These countries include the European Union countries, France, Germany, Canada, Mexico and Japan. Domestic manufacturing locations of American companies doing business in certain foreign countries, including European Union countries, may be subject to inspection. The time required for regulatory approval in foreign countries varies and can take a number of years. During the period in which the Company will be attempting to obtain the necessary regulatory approvals, the Company expects to market its products on a limited basis in certain other countries that do not require regulatory approval. There can be no assurance that the Company's products will be cleared or approved by the FDA or other governmental agencies for additional applications in the United States or in other countries or that countries that do not now require regulatory approval will not require such approval in the future. MANUFACTURING AND MATERIALS Manufacturing consists of component assembly and systems integration of electronic, mechanical and optical components and modules. The Company's product costs are principally related to the purchase of raw materials while labor and overhead have been reduced due to the use of customized tooling and automated test systems. The Company believes that these manufacturing systems improve quality and manufacturing reliability resulting in lower overall manufacturing costs, and that these systems will allow the Company to expand production rapidly. The Company purchases certain raw materials, components and subassemblies included in the Company's products from a limited group of qualified suppliers and does not maintain long-term supply contracts with any of its key suppliers. While multiple sources of supply exist for most critical components used in the laser and fiberoptic delivery systems, the disruption or termination of these sources could have a material adverse effect on the Company's business and results of operations. Vendor delays or quality problems could also result in production delays of up to six months as several 37 components have long production lead times. These long lead times, as well as the need for demonstration units, require a significant portion of working capital to fund inventory growth. The Company has in the past experienced and may continue to experience shortages in raw materials and certain supplies. See "Risk Factors -- Dependence on Suppliers." The Company owns the molds used to produce certain proprietary parts of its laser products and owns the software used in the operation of its laser systems. The Company designs and assembles its own fiberoptic delivery systems and laser accessory equipment such as laser carts, smoke evacuation devices and associated disposable supplies. The Company believes that its manufacturing practices are in accordance with cGMP regulations. PRODUCT LIABILITY AND INSURANCE Since the Company's products are intended for use in the treatment of human medical conditions, the Company is subject to an inherent risk of product liability and other liability claims which may involve significant claims and defense costs. The Company currently has product liability insurance with coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate per year. Product liability insurance is expensive and subject to various coverage exclusions, and in the future may not be available in acceptable amounts, on acceptable terms, or at all. Although the Company does not have any outstanding product liability claims, in the event the Company were to be held liable for damages exceeding the limits of its insurance coverage or outside of the scope of its coverage, the business and results of operations of the Company could be materially adversely affected. The Company's reputation and business could also be adversely affected by product liability claims, regardless of their merit or eventual outcome. FACILITIES The Company leases approximately 28,000 square feet in one facility in Irvine, California pursuant to a lease which expires in December 2000. This facility contains the Company's executive offices, service center and manufacturing space. The Company is required to lease an additional 13,000 square feet in the same facility commencing in January 1999, or on such earlier date that the adjoining tenant's lease terminates. While the Company believes that its manufacturing and administrative facilities are adequate to satisfy the Company's needs through at least 2000, it may need to lease additional clean room facilities in the future. EMPLOYEES As of June 3, 1996, the Company employed 44 people, two of whom are employed on a part-time basis. None of these employees are represented by a union. Ten employees perform sales, marketing and customer support activities. The remaining employees perform manufacturing, financial, administration, regulatory, research and development and quality control activities. The Company believes that its relationship with its employees is good. LEGAL PROCEEDINGS In March 1994, the Company instituted litigation in the U.S. District Court, Central District of California, against Infrared Fiber Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical fiber to the Company for the Company's Er:YAG laser. Two of IFS's senior officers are also named as defendants. The Company's complaint in this matter alleges that IFS and two of its officers made misrepresentations to the Company and that IFS breached its agreement to supply fibers and certain warranties concerning the quality of the fiber to be provided. The Company is seeking damages and an injunction requiring IFS to subcontract the production of optical fiber to a third party, as provided in the supply agreement. In April 1994, IFS filed a general denial and a cross- complaint against the Company alleging breach of contract and intentional interference with prospective economic advantage, seeking compensatory damages "in excess of $500,000," punitive damages and a judicial declaration that the contract has been terminated and that IFS is free to market its fibers to others. 38 IFS has agreed to license certain fiber technologies, to which the Company claims exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of the Company. Coherent joined the above 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. In May 1995, the Company instituted litigation concerning this dispute in the Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit described above and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995, the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. No trial date has been set. 39 MANAGEMENT The following table sets forth certain information regarding the Company's directors and executive officers.
NAME AGE POSITION - ----------------------------------- --- ------------------------------------------------------------ Colette Cozean, Ph.D............... 38 Chairman of the Board, Chief Executive Officer, President and Director of Research T. Daniel Caruso, Jr............... 53 Senior Vice President, Sales and Marketing Ronald E. Higgins.................. 54 Vice President, Regulatory Affairs and Quality Assurance, and Secretary James S. Polentz................... 52 Vice President, Finance and Chief Financial Officer Richard Roemer..................... 62 Vice President, Operations and Industrial Lasers Patrick J. Day..................... 69 Director (1) Grace Ching-Hsin Lin............... 46 Director (1)(2) E. Donald Shapiro.................. 64 Director (1)(2)
- ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. The business experience, principal occupations and employment, as well as the periods of service, of each of the directors and executive officers of the Company during at least the last five years are set forth below. DIRECTORS AND OFFICERS COLETTE COZEAN, PH.D. is a founder of the Company and has been Chairman of the Board of Directors, President and Director of Research of the Company since it began operations in August 1991 and became the Chief Executive Officer in 1994. From April 1987 to August 1991, Dr. Cozean served as Director of Research and Development, Regulatory Affairs and Clinical Programs at Pfizer Laser and in such capacities managed the development of the laser technologies which were acquired by the Company from Pfizer Laser. Prior to April 1987, Dr. Cozean held various research positions at Baxter Edwards, a division of Baxter Healthcare Corporation ("Baxter"), and American Technology and Ventures, a division of American Hospital Supply Company ("American Hospital"). Baxter and American Hospital are manufacturers and suppliers of advanced medical products. Dr. Cozean holds several patents, has published many articles and has served as a member of the National Institutes of Health grant review committee. Dr. Cozean holds a Ph.D. in biomedical engineering and an M.S. in Electrical Engineering from Ohio State University, a B.S. in biomedical engineering from the University of Southern California, and a B.A. in physical sciences from Westmont College. T. DANIEL CARUSO, JR. has been Vice President, Sales and Marketing of the Company since July 1992 and became a Senior Vice President in May 1996. From July 1989 to April 1992, Mr. Caruso was Vice President, Sales and Marketing at Hycor Biomedical, a laboratory diagnostics company. From March 1988 to July 1989, Mr. Caruso was President and Chief Executive Officer of Physicians Home Infusion Care, a home health care company. Mr. Caruso has a B.S. in Biology and Chemistry and an M.B.A. in marketing from the University of Southern California. RONALD E. HIGGINS is a founder and the Vice President, Regulatory Affairs and Quality Assurance of the Company, a position he has held since January 1995. From the founding of the Company in August 1991 to January 1995, Mr. Higgins was Vice President, Operations. From September 1989 to August 1991, Mr. Higgins was Manager of Regulatory Affairs and Quality Assurance at Pfizer Laser. From January 1987 to September 1989, Mr. Higgins was Director of Regulatory Affairs at Cardio Pulmonics, a medical device company. Mr. Higgins holds a B.S. in Zoology from the University of Utah and has completed post graduate work in the areas of biochemistry, educational training, regulatory affairs, manufacturing and engineering. 40 JAMES S. POLENTZ joined the Company as Chief Financial Officer in April 1994. From October 1992 to April 1994, Mr. Polentz served as the Chief Financial Officer with Spector Entertainment Group, a telecommunications service company. From March 1991 through July 1992, Mr. Polentz served as the Vice President, Finance and Chief Financial Officer for Commstruct International, Inc., a telecommunications company. A subsidiary of Commstruct International, US Commstruct, Inc., filed a petition under Chapter 11 of the United States Bankruptcy Code within six months after the date Mr. Polentz left the employ of Commstruct International, Inc. Mr. Polentz is a certified public accountant and has a B.S. in Accounting from the University of Southern California and an M.B.A. from California State University. RICHARD ROEMER has been Vice President, Operations and Industrial Lasers of the Company since February 1995. From 1994 to 1995, Mr. Roemer was an independent consultant for the Company. From 1988 to 1994, Mr. Roemer was a consultant to and general manager of California Labs, JMED, Inc. and Pineridge Capital, which are manufacturers of laser-based medical products. Prior to 1988, Mr. Roemer founded the laser group of Melles Griot and served as the Chief Operating Officer of the laser division of Hughes Aircraft Corporation. Mr. Roemer holds a B.S. degree in Mechanical Engineering from Rutgers University. PATRICK J. DAY has served as a director of the Company since August 1991. Mr. Day is a Certified Public Accountant and owns a CPA firm which he established in 1967. He has served as a director for several organizations including the First Presbyterian Church of Hollywood and many private companies. Mr. Day is the father of Dr. Cozean, the Company's Chairman of the Board, Chief Executive Officer and President. Mr. Day has a B.A. in accounting from the University of Idaho. GRACE CHING-HSIN LIN has served as a director of the Company since February 1992, representing a group of original investors in the Company. Ms. Lin has been an agent providing real estate consulting services for Security Trust Realty since April 1988 and an owner of South Pacific Investment, an investment management company, since 1989. E. DONALD SHAPIRO joined the Board of Directors in August 1994. Since 1983, Mr. Shapiro has served as the Joseph Solomon Distinguished Professor of Law at New York Law School where he served as both Dean and Professor of Law from 1973 to 1983. He is Supernumerary Fellow of St. Cross College at Oxford University, England. Mr. Shapiro received a J.D. degree at Harvard Law School. He currently serves on the Boards of Directors for several public companies including Loral Space and Communications, Ltd., Eyecare Products PLC, Kranzco Realty Trust, Group Health Incorporated, Vasomedical Corporation, MacroChem Corporation, United Industrial, Telepad, Inc. and Food Entertainment, Inc. He also serves on the Board of Directors of Bank Leumi NY. Mr. Shapiro is special counsel to the law firm of Herzfeld and Rubin, which firm is representing the Company in the litigation described in "Business -- Legal Proceedings." Mr. Shapiro is not a partner of such firm and receives no compensation calculated by reference to such firm's profits. KEY CONSULTANTS ROBERT J. FREIBERG, PH.D. is currently a Technical Advisor to the Company and from August 1991 has provided consulting services to the Company. From 1986 to 1991, Dr. Freiberg served in various capacities for Pfizer Laser, most recently holding the position of Director of Engineering and Manufacturing Operations. From 1983 to 1986, Dr. Freiberg was Director of Minimally Invasive Surgery Products for American Technology and Ventures, a division of American Hospital. Dr. Freiberg has also managed projects/departments at Hughes Research Laboratory, United Technologies and TRW. In addition to holding several patents, Dr. Freiberg identified and developed emerging medical technologies for American Hospital. Dr. Freiberg holds a Ph.D., M.S. and B.S. in physics from the University of Illinois and Rensselaer Polytechnic Institute. The Company pays Mr. Freiberg $85 per hour for services rendered to the Company. RICHARD P. KRATZ, M.D. became affiliated with the Company in April 1994 as a Medical Director. Dr. Kratz is a clinical professor of ophthalmology at the University of California, Irvine and a clinical professor emeritus at the University of Southern California. Dr. Kratz is on the Board of Directors for 41 the University of California, Irvine, Beckman Laser Institute & Medical Clinic and a member of the Board of Directors of the American Board of Eye Surgeons, and is on the editorial boards for OCULAR SURGERY NEWS, OCULAR SURGERY NEWS INTERNATIONAL and the EUROPEAN JOURNAL OF IMPLANT AND REFRACTIVE SURGERY. Dr. Kratz received a M.D. from the University of Southern California. Dr. Kratz has published numerous papers and frequently lectures on topics in ophthalmology, including cataract surgery. Other than stock options granted at fair market value to Dr. Kratz from time to time at the discretion of the Company's Board of Directors, Dr. Kratz does not receive any other compensation for services rendered to the Company. MEDICAL ADVISORY BOARDS The Company is advised by three Medical Advisory Boards (the "Advisory Boards") covering ophthalmology, dentistry and surgery, respectively. Each of the Advisory Boards is comprised of up to fifteen members who are active primarily in the Company's target markets and who are selected to provide a balance of university deans, researchers and clinicians, different subspecialties, and laser users of multiple wavelengths, users of the Company's systems and users who do not use lasers in their practice at all. The Advisory Board's function is to review clinical, regulatory, new product development and marketing programs and proposals for the Company. Members of these boards often serve as clinical investigators, course lecturers and perform research resulting in published papers. Other than stock options granted at fair market value from time to time at the discretion of the Company's Board of Directors, the Chairmen of the Medical Advisory Boards do not receive any other compensation for services rendered to the Company. Each Advisory Board is headed by a Chairman. Currently, the Chairmen of the Company's Advisory Boards are as follows: D. MICHAEL COLVARD, M.D., OPHTHALMOLOGY. Dr. Colvard is the founder of the Center for Ophthalmic Surgery in Encino, California, and has been responsible for its Outpatient Surgery Center for the past ten years. Dr. Colvard has also been a clinical faculty member at the University of Southern California since 1991 and has published widely in the field of ophthalmology. Dr. Colvard maintains a medical practice and is engaged by a major ophthalmic company to review its clinical trials, procedures and results. Dr. Colvard also served as the Medical Director for the Company during its first two years. The Company has entered into an Assignment Agreement with Dr. Colvard, pursuant to which Dr. Colvard assigned to the Company certain technology relating to the Er:YAG laser for use on ocular structures. While this agreement provides for the payment of royalties under certain circumstances to Dr. Colvard of 1.0% to 2.5% on sales of the Er:YAG intraocular and refractive lasers, fiberoptic intraocular catheters and intraocular probes, no royalties have been earned as of the date of this Prospectus. G. LYNN POWELL, D.D.S., DENTISTRY. 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 for ten years. WARREN SCOTT GRUNDFEST, M.D., GENERAL SURGERY. Dr. Grundfest, a Fellow of the American College of Surgeons, has been the Director, Laser Research and Technology Development Program at Cedars-Sinai Medical Center in Los Angeles since 1985. He is also the holder of the Dorothy and E. Phillip Lyon Chair in Laser Research at such hospital, as well as being an Assistant Director of Surgery. In addition, he is an Assistant Clinical Professor of Surgery at the UCLA School of Medicine, and the co-editor of the Journal of Laparoendoscopic Surgery. Dr. Grundfest has published more than 100 papers, 30 book chapters and conducted multiple courses in the fields of laser applications in medicine, microendoscopy and minimally invasive surgery. His laboratory has been involved in the development 42 of minimally invasive surgery, from angioscopy to laparoscopic transcystic duct common bile duct exploration. Dr. Grundfest consults for a variety of governmental agencies including the FDA and the National Institutes of Health. BOARD COMMITTEES AND DESIGNATED DIRECTORS The Board's Audit Committee consists of Ms. Lin and Messrs. Day and Shapiro. The Audit Committee meets periodically with management and the Company's independent accountants to review the results and scope of the audit and other services provided by the Company's independent auditors and the need for internal auditing procedures and the adequacy of internal controls. The Compensation Committee of the Board of Directors consists of Ms. Lin and Mr. Shapiro. The Compensation Committee establishes salaries, incentives and other forms of compensation for officers, directors and certain key employees and consultants (including the Chairmen of the Advisory Boards), administers the Company's various incentive compensation and benefit plans, including the Company's 1992 Employee Stock Option Plan, 1995 Employee Stock Option Plan and the 1996 Stock Option Plans and recommends policies relating to such plans. The representative of the underwriters for the Company's IPO has certain rights to designate one nominee to the Board of Directors. Until November 1999, the Company has agreed, if requested by such underwriter, to nominate a designee of such underwriter to the Company's Board of Directors. Such underwriter has designated Mr. Shapiro, a current director of the Company, pursuant to this provision. EXECUTIVE COMPENSATION The following table sets forth information concerning the annual compensation paid by the Company for the fiscal years indicated to the Chief Executive Officer and executive officers of the Company whose compensation exceeded $100,000 during the fiscal year ended March 31, 1996. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------- ANNUAL COMPENSATION (1) SECURITIES FISCAL ----------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION - ------------------------------------- --------- -------------- ------------- ------------------- ------------- Colette Cozean, Ph.D. ............... 1996 $ 112,200 $ --(3) 140,000 $ 19,800(5) Chairman of the Board, 1995 $ 97,500 $ 37,500 358,650(4) $ 4,800(6) Chief Executive Officer, President 1994 $ 97,500(2) $ -- -- $ 5,376(6) and Director of Research T. Daniel Caruso, Jr. ............... 1996 $ $ --(3) 109,522 $ -- Senior Vice President, 90,625 Sales and Marketing Ronald E. Higgins ................... 1996 $ 92,625 $ --(3) 90,000 $ -- Vice President, Regulatory Affairs and Quality Assurance and Secretary
- ------------------------ (1) Excludes perquisites and other personal benefits, securities and properties otherwise categorized as salary or bonuses which in the aggregate, for each of the named persons did not exceed the lesser of either $50,000 or 10% of the total annual salary reported for such person. Each of the named executive officers entered into a Termination Agreement in May 1996 which provides that in the event of a termination of employment following a change in control of the Company, as defined in such agreement, the named executive officer will receive (i) a lump sum cash payment equal to two times the highest annual level of total cash compensation paid to that officer during the three calendar years prior to the termination; (ii) immediate vesting of all previously granted 43 stock options, and (iii) continuing health benefits for a period of 24 months. The Company has also entered into Employment Agreements with each of the named persons which provide for two to four months of severance benefits upon their termination of employment. Based upon salary levels as of June 25, 1996, such severance benefits range from approximately $15,000 to $33,000 for each of the named persons. (2) Includes $19,500 which was deferred until January 1995. (3) Bonuses for fiscal 1996 have not yet been determined, but the Company anticipates paying such bonuses in July 1996. The Company estimates that such bonuses will be between approximately $8,000 and $16,000. (4) The exercise price for these options is $5.00 per share. One-half of such options will vest in five equal annual installments commencing on August 8, 1995. The remaining options will vest on the earlier of August 8, 2005, or when the Company attains certain financial criteria. Vesting of these options is accelerated in the event of certain acquisitions of the Company. (5) Represents the full amount of premiums paid by the Company ($15,000) for a split-dollar life insurance policy in the amount of $2 million on the life of Dr. Cozean, and an auto allowance for Dr. Cozean ($4,800). (6) Represents an auto allowance for Dr. Cozean. OPTIONS GRANTED IN LAST FISCAL YEAR The following table sets forth certain information concerning stock options granted to the named executive officers during the fiscal year ended March 31, 1996:
NUMBER OF SHARES OF PERCENT OF TOTAL COMMON STOCK OPTIONS GRANTED EXERCISE OR UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION NAME OPTIONS DURING 1996 PER SHARE (1) DATE - ------------------------------------------- -------------- ------------------- ------------- ---------- Colette Cozean, Ph.D....................... 140,000(2) 19.6% $ 4.625 02/23/06 T. Daniel Caruso, Jr....................... 60,000(3) 13.3% $ 4.625 02/23/06 35,000(4) $ 5.625 06/01/05 Ronald E. Higgins.......................... 45,000(3) 11.2% $ 4.625 02/23/06 35,000(4) $ 5.625 06/01/05
- ------------------------ (1) The options were granted at an exercise price at least equal to the fair market value of the Common Stock on the date of grant. The exercise price may be paid by delivery of cash or already owned shares, subject to certain conditions. (2) Such options vest in four equal annual installments commencing March 31, 1996. (3) Such options vest in three equal annual installments commencing March 31, 1997. (4) 15,000 of the options held by each of Messrs. Caruso and Higgins vest on September 21, 1997. The remaining 20,000 options held by each of Messrs. Caruso and Higgins vest on the earlier of June 1, 2005, or when the Company attains certain financial criteria. 44 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth certain information regarding stock options exercised by the named executive officers during the fiscal year ended March 31, 1996, 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.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES MARCH 31, 1996 AT MARCH 31, 1996 (1) ACQUIRED ON VALUE ----------------------- ------------------------ EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ------------- ----------- ----------------------- ------------------------ Colette Cozean, Ph.D......... -- -- 70,865/427,785 $270,011/$1,654,653 T. Daniel Caruso, Jr......... -- -- 2,500/102,500 $9,063/$372,188 Ronald E. Higgins............ -- -- 2,500/87,500 $9,063/$312,188
- ------------------------ (1) Represents the last sale price of underlying securities at fiscal year end as reported by the Nasdaq National Market, less the exercise price of the options. DIRECTOR COMPENSATION All directors are elected annually and hold office until the next annual meeting of the shareholders and until their successors are duly elected and qualified. The Company pays to all nonemployee directors $1,000 per Board meeting attended, $1,000 per committee meeting attended which is not in conjunction with a Board meeting, $500 per committee meeting attended in conjunction with a Board meeting, and $500 per telephonic Board or committee meeting. Directors are also reimbursed for their out-of-pocket expenses incurred in attending meetings of the Board of Directors and its committees. Mr. Shapiro also receives a fee of $1,000 per month as compensation for additional consulting services relating to the Company's pending litigation matter and to new business issues. The Company may also periodically award options or warrants to its Directors. On November 30, 1994, the Company granted to each nonemployee director warrants to purchase, at an exercise price of $5.00 per share, (i) 45,000 shares of Common Stock, which warrants vest on the earlier of August 8, 2005 or when the Company attains certain financial conditions (subject to earlier vesting upon certain acquisitions of the Company, and subject to the requirement that the director remains on the Board through the vesting date); and (ii) 20,000 shares of Common Stock, which warrants vested immediately upon grant. On February 23, 1996, the Company also granted to Mr. Day, the only nonemployee director of the Company not on the Board's Compensation Committee, an option to purchase 10,000 shares at an exercise price of $4.63 per share. The Company's 1996 Stock Option Plan provides that each person who was or is a member of the Compensation Committee of the Board on February 23, 1996, February 23, 1997 and February 23, 1998 will be issued on each such date, under that plan, options to purchase 10,000 shares of the Company's Common Stock. These options will have an exercise price equal to the fair market value of the Company's Common Stock on the trading day prior to the grant date and a term of ten years. These options are issued subject to approval by the Company's shareholders at the 1996 Annual Meeting of Shareholders, and will terminate if such approval is not given. The Company's Articles of Incorporation and indemnification agreements entered into between the Company and certain of the Company's directors and officers require the Company to indemnify such officers and directors to the fullest extent permitted by applicable law against liabilities incurred in connection with their duties as officers and directors of the Company. Such indemnification rights may extend to liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. 45 STOCK OPTION PLANS Each of the Company's Stock Option Plans is administered by the Board of Directors which has sole discretion and authority, consistent with the provisions of the plans, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options. The Board may also appoint a committee (the "Committee") to administer the plans and, subject to applicable law, to exercise all of the powers of the Board under the plans. 1992 STOCK OPTION PLAN AND 1995 STOCK OPTION PLAN The Company's 1992 Stock Option Plan and 1995 Stock Option Plan each provide for the granting of "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Stock Options"), and nonstatutory options. Under the 1992 Stock Option Plan, options covering an aggregate of 54,264 shares of the Company's Common Stock may be granted and under the 1995 Stock Option Plan options covering an aggregate of 225,000 shares of the Company's Common Stock may be granted, in each case to directors, employees and consultants of the Company, except that Incentive Stock Options may not be granted to nonemployee directors or nonemployee consultants. The 1992 Stock Option Plan terminates in August 2002, and the 1995 Stock Option Plan terminates in 2005. As of June 3, 1996 there were options to purchase an aggregate of 31,952 shares of Common Stock and 1,728 shares of each of Class E-1 and Class E-2 Common Stock outstanding under the 1992 Stock Option Plan, at an exercise price ranging from $1.00 to $11.06, which were held by 18 former and current employees, and 179,250 options outstanding under the 1995 Stock Option Plan at an exercise price of $5.625 per share, held by 31 employees and consultants. FEBRUARY 1996 STOCK OPTION PLAN AND 1996 STOCK OPTION PLAN In February 1996, the Board of Directors adopted two option plans, the February 1996 Stock Option Plan and the 1996 Stock Option Plan which provide for the grant of options covering an aggregate of 550,000 shares and 500,000 shares, respectively, of the Company's Common Stock to employees and directors of, and consultants to the Company. Both plans terminate in February 2006. The 1996 Stock Option Plan provides for the granting of Incentive Stock Options and nonstatutory stock options. The 1996 Stock Option Plan provides that each person who was or is a member of the Company's Compensation Committee of the Board of Directors on February 23, 1996, February 23, 1997 and February 23, 1998 will be issued on each such date, options to purchase 10,000 shares of the Company's Common Stock. These options will have a term of ten years and an exercise price equal to the fair market value of the Company's Common Stock on the trading day prior to the grant date. As of June 3, 1996, there were options to purchase an aggregate of 499,200 shares of Common Stock outstanding under the February 1996 Stock Option Plan, at an exercise price of $4.625 per share, which options were held by 52 employees, directors and consultants. As of June 3, 1996, there were options to purchase an aggregate of 20,000 shares of the Company's Common Stock, at an exercise price of $4.625 per share, which options were held by two directors of the Company. The exercise price of Incentive Stock Options must be not less than the fair market value of a share of Common Stock on the date the option is granted (110% with respect to optionees who own at least 10% of the outstanding Common Stock). Except for formula grants under the 1996 Stock Option Plan the Board of Directors has the authority to determine the time or times at which options granted under the Stock Option Plans become exercisable, provided that options expire no later than ten years from the date of grant (five years with respect to optionees who own at least 10% of the outstanding Common Stock). Options are nontransferable, other than by will and the laws of descent and distribution, and generally may be exercised only by an employee while employed by the Company or within 60 days after termination of employment (one year for termination resulting from death or disability). 46 PRINCIPAL SHAREHOLDERS The following table sets forth certain information as of June 3, 1996, and as adjusted to reflect the sale of 2,500,000 shares of common stock by the Company in this Offering, 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.
PERCENT OF OUTSTANDING AMOUNT AND STOCK OWNED NATURE OF ------------------------------ BENEFICIAL BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNERSHIP OFFERING OFFERING - --------------------------------------------------------------------- ----------- --------------- ------------- Colette Cozean, Ph.D. (2)............................................ 247,320 3.4% 2.5% Patrick J. Day (3)................................................... 232,981 3.2 2.4 E. Donald Shapiro (4)................................................ 108,000 1.5 1.1 Ronald E. Higgins (5)................................................ 97,820 1.4 1.0 Grace Chin-Hsin Lin (6).............................................. 52,801 * * T. Daniel Caruso, Jr. (7)............................................ 48,876 * * James S. Polentz (8)................................................. 2,500 * * Richard Roemer....................................................... -- * * All directors and executive officers as a group (8 persons) (9).......................................... 790,298 10.4% 7.8%
- ------------------------ * Less than 1%. (1) The address of each of Dr. Cozean, Ms. Lin and Messrs. Day, Caruso, Higgins and Shapiro is 3 Morgan, Irvine, California 92718. Unless otherwise noted, the Company believes that all persons named in the table have sole investment and voting power with respect to all shares of Common Stock beneficially owned by such person, subject to community property laws where applicable. (2) Includes 49,144 shares of 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 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 106,730 shares of Common Stock issuable upon exercise of options which become exercisable within 60 days. (3) Includes 54,263 shares of Common Stock, 48,047 shares of Class E-1 Common Stock and 48,047 shares of Class E-2 Common Stock. Also includes 48,992 shares of 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 108,000 shares of Common Stock subject to Class A Warrants and other warrants and options exercisable within 60 days. (5) Includes 34,400 shares of Common Stock, 30,460 shares of Class E-1 Common Stock and 30,460 shares of Class E-2 Common Stock. Also includes 2,500 shares of Common Stock subject to options exercisable within 60 days. (6) Includes 6,330 shares of Common Stock, 5,605 shares of Class E-1 Common Stock and 5,605 shares of Class E-2 Common Stock held by Linco Investments, a limited partnership in which Ms. Lin's husband serves as a general partner, and 1,899 shares of Common Stock, 1,681 shares of Class E-1 Common Stock and 1,681 shares of Class E-2 Common Stock held by the pension plan for Ms. Lin's husband. Also includes 30,000 shares of Common Stock subject to warrants and options exercisable within 60 days. 47 (7) Includes 13,722 shares of Common Stock, 12,150 shares of Class E-1 Common Stock and 12,150 shares of Class E-2 Common Stock. Also, includes 5,514 shares of Common Stock, 2,670 shares of Class E-1 Common Stock and 2,670 shares of Class E-2 Common Stock subject to options exercisable within 60 days. (8) Includes 2,500 shares of Common Stock subject to options exercisable within 60 days. (9) Includes 161,352 shares of Common Stock, 142,869 shares of Class E-1 Common Stock and 142,869 shares of Class E-2 Common Stock. Also includes 304,236 shares of Common Stock, 19,486 shares of Class E-1 Common Stock and 19,486 shares of Class E-2 Common Stock subject to warrants and options exercisable within 60 days. CERTAIN TRANSACTIONS As of September 30, 1994, the Company owed an aggregate of approximately $226,000 to its officers for unreimbursed expenses and deferred salaries. Included in that amount was $52,000 owed to an immediate family member of an officer of the Company for consulting services rendered to the Company. All of these amounts were paid in December 1994 and January 1995. In addition, between June and September 1994, the Company borrowed an aggregate of $55,000 and $25,000 from Messrs. Patrick J. Day (a director) and Irving M. Frankman (a former director), respectively, pursuant to short-term promissory notes bearing interest at 10% per annum (18% upon the occurrence of an event of a default). These loans have been repaid in full. In March 1994, the Company's Board of Directors agreed to extend Mr. Day's outstanding warrants to purchase 100,000 shares of Series A Preferred Stock for two years. In December 1994, the Company exchanged these warrants for warrants to purchase 9,044 shares of Common Stock, and 8,008 shares of each of Class E-1 and Class E-2 Common Stock for an aggregate purchase price of $100,000. In May 1996, the Company's Board of Directors agreed to extend such warrants until March 31, 1997. In connection with the Company's private placement in August 1994, Mr. Shapiro, a director of the Company, purchased $100,000 principal amount of promissory notes and 70,000 warrants (which converted by their terms in December 1994 into Class A Warrants) for an aggregate purchase price of $100,000. These promissory notes were repaid in full in December 1994. 48 DESCRIPTION OF SECURITIES The following description of the Company's capital stock and selected provisions of its Articles of Incorporation and Bylaws is a summary and is qualified in its entirety by the Company's Articles of Incorporation and Bylaws, copies of which have been filed with the Securities and Exchange Commission as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company is authorized to issue 35,600,000 shares of Common Stock, no par value, 2,200,000 shares of Class E-1 Common Stock, no par value, and 2,200,000 shares of Class E-2 Common Stock. The Common Stock, Class E-1 Common Stock and the Class E-2 Common Stock have equal voting rights and are entitled to share equally in dividends from sources available therefor when, as and if declared by the Board of Directors, subject to certain escrow conditions pertaining to dividends declared with respect to the Class E-1 and Class E-2 Common Stock. See "Dividend Policy." Shareholders have no preemptive rights and no right to convert their Common Stock into any other securities. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, except that holders of Common Stock are entitled to cumulative voting with respect to the election of directors upon giving notice as required by law. In cumulative voting, the holders of Common Stock are entitled to cast for each share held the number of votes equal to the number of directors to be elected. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares are, and all shares to be sold and issued as contemplated hereby will be, fully paid and nonassessable and legally issued. The Board of Directors is authorized to issue additional shares of Common Stock within the limits authorized by the Company's charter and without shareholder action. As of June 3, 1996 there were 4,723,758 shares of Common Stock outstanding. CLASS E-1 COMMON STOCK The Company is authorized to issue 2,200,000 shares of Class E-1 Common Stock, no par value. As of June 3, 1996, there were outstanding 1,256,818 shares of Class E-1 Common Stock and 1,256,818 shares of Class E-2 Common Stock (the "Escrow Shares"). The Escrow Shares are not transferrable (but may be voted), and each Escrow Share will automatically convert into one share of Common Stock and be released to the owners thereof upon the achievement of the objectives described below. On June 30, 2000, all Escrow Shares not previously converted into Common Stock will be cancelled. This arrangement was required by the representative of the underwriters for the Company's initial public offering as a condition of such offering. All of the shares of Class E-1 Common Stock will be automatically converted into Common Stock in the event that: (a) the Company's net income before provision for income taxes, including earnings from joint ventures, distribution agreements and licensing agreements, but exclusive of any other earnings that are classified as an extraordinary item, and exclusive of any charges to income that may result from the conversion of the Escrow Shares into Common Stock (as stated in the Company's financial statements audited by the Company's independent accountants) ("Minimum Pretax Income") amounts to at least $5,500,000 for the fiscal year ending March 31, 1997; (b) the Minimum Pretax Income amounts to at least $6,850,000 for the fiscal year ending March 31, 1998; (c) the Minimum Pretax Income amounts to at least $8,425,000 for the fiscal year ending March 31, 1999; (d) the Minimum Pretax Income amounts to at least $9,900,000 for the fiscal year ending March 31, 2000; or (e) the Closing Price of the Company's Common Stock for any 30 consecutive business days shall average in excess of $19.25 during the period commencing June 1996 and ending in November 1997 (subject to adjustment in the event of any reverse stock splits or similar events). The Closing Price shall be the closing sale price as reported by the Nasdaq National Market. In the event additional shares are issued, all of the Minimum Pretax Income amounts will be increased proportionately. 49 CLASS E-2 COMMON STOCK The Company is authorized to issue 2,200,000 shares of Class E-2 Common Stock, no par value. All of the shares of Class E-2 Common Stock will be automatically converted into Common Stock in the event that: (a) the Minimum Pretax Income amounts to at least $11,800,000 for the fiscal year ending March 31, 1997; (b) the Minimum Pretax Income amounts to at least $14,750,000 during the fiscal year ending March 31, 1998; (c) the Minimum Pretax Income amounts to at least $20,475,000 during the fiscal year ending March 31, 1999; (d) the Minimum Pretax Income amounts to at least $26,750,000 during the fiscal year ending March 31, 2000; or (e) the Closing Price of the Company's Common Stock for any 30 consecutive business days shall average in excess of $24.00 during the period commencing June 1996 and ending November 1997. In the event any additional shares are issued, all of the Minimum Pretax Income amounts referenced above will be proportionately increased. Any money, securities, rights or property distributed in respect of the Escrow Shares, including any property distributed as dividends or pursuant to any stock split, merger, recapitalization, dissolution or total or partial liquidation of the Company, shall be held by the Company in escrow until conversion of the Escrow Shares. If none of the foregoing earnings or market price levels are attained, the Escrow Shares, as well as any dividends or other distributions made with respect thereto, will be cancelled. The earnings and market price levels set forth above were determined by negotiation between the Company and the representative of the underwriter in the Company's initial public offering and should not be construed to imply or predict any future earnings by the Company or any increase in the market price of its securities. There can be no assurance that such earnings and market price levels will be attained or that any or all of the Escrow Shares will be converted into Common Stock. However, the conversion to Common Stock of all or any portion of the Escrow Shares may result in a charge to earnings to the extent that such shares are held by management or employees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Potential Future Charge to Income." PREFERRED STOCK The Company's authorized preferred stock consists of 20,000,000 shares, no par value (the "Preferred Stock"), of which 11,150,000 shares have been cancelled or already designated. The Board of Directors has the authority, without further action by the shareholders, to issue from time to time up to 8,850,000 shares of Preferred Stock in one or more series and to fix the dividend rights and terms, conversion rights, voting rights (whole, limited or none), redemption rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges and restrictions applicable to each such series of Preferred Stock. The purpose of authorizing the Board of Directors to determine such rights and preferences is to eliminate delays associated with a shareholder vote on specific issuances. The issuance of the Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, could make it more difficult for a third party to gain control of the Company. Such issuance of Preferred Stock could also adversely affect the distributions on and liquidation preference of the Common Stock by creating more series of Preferred Stock with distribution or liquidation preferences senior to the Common Stock. The Company has no present plan to issue any shares of Preferred Stock. REDEEMABLE WARRANTS The Company has outstanding redeemable Class A Warrants and Class B Warrants (collectively, the "Warrants") which are currently listed on the Nasdaq National Market. These Warrants are in fully registrable form under a Warrant Agreement (the "Warrant Agreement") between the Company and American Stock Transfer and Trust Company, and are evidenced by Warrant certificates. These Warrants may be exercised upon surrender of the Warrant certificate on or prior to the respective expiration dates (or earlier redemption dates), accompanied by payment of the full exercise price (by certified or bank check payable to the order of the Company) for the number of shares with respect to which the Warrants are being exercised. Holders of the Warrants do not have any voting or other 50 rights of a shareholder of the Company. Upon notice to the holders of the Warrants, the Company has the right to unilaterally reduce the exercise price or extend the expiration date of the Warrants. The Warrants provide for the adjustment of the exercise price and for a change in the number of shares issuable upon exercise to protect the holders of the Warrants against dilution in the event of a stock dividend, stock split, combination or reclassification of the Common Stock or upon issuance of additional shares of Common Stock at prices lower than the market price then in effect other than issuances upon exercise of options granted to employees, directors and consultants to the Company. CLASS A WARRANTS Each Class A Warrant entitles the registered holder to purchase one share of Common Stock and one redeemable Class B Warrant at an exercise price of $6.50 at any time prior to November 30, 1999. As of June 3, 1996, the Company has outstanding 4,145,149 Class A Warrants. The Company has the right to redeem all of the Class A Warrants at a price of $0.05 per Class A Warrant upon not less than 30 days' prior written notice at any time after November 30, 1997, provided that before any such redemption can take place, the last sale price of the Company's Common Stock in the over-the-counter market shall have averaged in excess of $9.10 per share for 30 consecutive business days ending within 15 days of the date of the notice of redemption. During the 30-day notice period, a holder shall have the option to exercise his Class A Warrants. This right of redemption shall not apply to the Class A Warrants that are components of the IPO Unit Purchase Options. CLASS B WARRANTS Each Class B Warrant entitles the registered holder to purchase one share of Common Stock at an exercise price of $8.00 per share at any time prior to November 30, 1999. As of June 3, 1996, the Company had outstanding 3,102,049 Class B Warrants. The Company has a right to redeem all of the Class B Warrants at a price of $.05 per Class B Warrant upon not less than 30 days' prior written notice at any time after November 30, 1997, provided that before any such redemption can take place, the last sale price of the Company's Class A Common Stock in the over-the-counter market shall have averaged in excess of $11.20 per share for 30 consecutive business days ending within 15 days prior to the date of the notice of redemption. During the 30-day notice period, a holder shall have the option to exercise his Class B Warrants. This right of redemption shall not apply to the Class B Warrants that are components of the IPO Unit Purchase Options. UNITS The Company also has outstanding Units which are currently listed on the Nasdaq SmallCap Market. Each Unit consists of (i) one share of Class A Common Stock, (ii) one Class A Warrant and (iii) one Class B Warrant. The Class A Common Stock, Class A Warrants and Class B Warrants were separately transferable immediately upon issuance. IPO UNIT PURCHASE OPTIONS In connection with the Company's IPO, the Company granted to the underwriter for the IPO and three finders IPO Unit Purchase Options to purchase up to an aggregate of 240,000 Units. The IPO Unit Purchase Options are exercisable at any time prior to November 30, 1999 at an exercise price of $7.00 per Unit (140% of the initial public offering price) subject to adjustment in certain events to protect against dilution. These units will be identical to the publicly traded Units except that the Class A Warrants and the Class B Warrants included in the IPO Unit Purchase Options will not be subject to redemption by the Company, except if at the time the Warrants are called for redemption, the IPO Unit Purchase Options have been exercised and the underlying warrants are outstanding. The IPO Unit Purchase Options cannot be transferred, sold, assigned or hypothecated until November 30, 1997, except in the case of a transfer to any officer of the underwriter for the IPO or a member of that selling group. LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Bylaws provide that the Company will indemnify its directors and officers to the fullest extent permitted by California law. The Company is also empowered under its Bylaws to enter 51 into indemnification contracts with its directors and officers and certain others and to purchase insurance on behalf of any person it is required or permitted to indemnify. Pursuant to this provision, the Company has entered into indemnity agreements with each of its directors and executive officers and certain key consultants. In addition, the Company's Articles of Incorporation provides that, to the fullest extent permitted by California law, the Company's directors will not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Company or its shareholders. This provision in the Articles of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of nonmonetary relief would remain available under California law. Each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company, for acts or omissions involving intentional misconduct or knowing and culpable violations of law, for acts or omissions that the absence of good faith on the part of the director, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Company or its shareholders when the director was aware or should have been aware of a risk of serious injury to the Company or its shareholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, for improper transactions between the director and the Company, for improper distributions to shareholders and loans to directors and officers or for acts or omissions by the director as an officer. This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving a director or officer of the Company concerning which indemnification is being sought, nor is the Company aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. The Company believes the foregoing provisions are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. TRANSFER AND WARRANT AGENT The Transfer and Warrant Agent for the Company's securities is American Stock Transfer & Trust Company, New York, New York. 52 SHARES ELIGIBLE FOR FUTURE SALE As of June 3, 1996, the Company had outstanding 4,723,758 shares of Common Stock (excluding approximately 2,388,705 shares of Common Stock issuable upon exercise of outstanding stock options and warrants, and approximately 11,392,347 shares of Common Stock issuable upon exercise in full of the Class A Warrants and the Class B Warrants). Of these shares, the 2,760,000 shares of Common Stock sold by the Company in its IPO are freely tradeable without restriction or further registration under the Securities Act. Of the remaining 1,963,758 shares of outstanding Common Stock, 993,831 are "restricted securities" (the "Restricted Shares") within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of a registration under the Securities Act unless an exemption from registration is available, including an exemption contained in Rule 144. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who has beneficially owned "restricted securities," as that term is defined in Rule 144, for at least two years (including, in the case of a nonaffiliate holder, any period of ownership of preceding nonaffiliate holders) is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company, or (ii) the average weekly trading volume in Common Stock during the four calendar weeks preceding such sale, provided that certain public information about the Company, as required by Rule 144, is then available and the seller complies with the manner of sale and notification requirements of the rule. A person who is not an affiliate and has not been an affiliate within three months prior to the sale and has, together with any previous owners who were not affiliates, beneficially owned restricted securities for at least three years is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations described above. Approximately 961,836 of the Restricted Shares are presently eligible for sale upon compliance with Rule 144(k). The issuance of shares of Common Stock upon exercise of the Class A Warrants or Class B Warrants has been registered under the Securities Act, and 720,499 shares of Common Stock are issuable upon exercise of the remaining options and warrants and may be resold pursuant to Rule 701 under the Securities Act. Rule 701 under the Securities Act provides an exemption from the registration requirements of the Securities Act for offers and sales of securities issued pursuant to certain compensatory benefit plans or written contracts of a company not subject, at the time of issuance, to the reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934. Securities issued pursuant to Rule 701 are defined as restricted securities for purposes of Rule 144. However, 90 days after the issuer becomes subject to the reporting provisions of the Exchange Act, the Rule 144 resale restrictions, except for the broker's transaction requirements, are inapplicable for nonaffiliates. Affiliates are subject to all Rule 144 restrictions after this 90-day period, but without the Rule 144 holding period requirement. The officers and directors of the Company (who hold an aggregate of 161,352 shares of Common Stock) have agreed not to sell or otherwise transfer any shares of Common Stock, or any securities convertible into or exercisable for shares of Common Stock, for the 180 days following the effective date of this Prospectus without the consent of the Representative on behalf of the Underwriters. No predictions can be made of the effect, if any, that future sales of shares of Common Stock, and grants of options to acquire shares of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market prices of the Common Stock. See "Principal Shareholders," "Description of Securities" and "Underwriting." 53 UNDERWRITING The Underwriters below, for whom Rodman & Renshaw, Inc., is acting as Representative, have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth below opposite their respective names.
UNDERWRITER NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Rodman & Renshaw, Inc...................................................... ----------------- Total.................................................................. 2,500,000 ----------------- -----------------
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other considerations. The nature of the Underwriters' obligations is such that they are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Underwriters, through the Representative, have advised the Company that they propose to offer the Common Stock initially at the public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share, and that such dealers may reallow a concession of $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Underwriters. The Common Stock is included for quotation on the Nasdaq National Market. The Company has granted to the Underwriters a 30-day over-allotment option to purchase up to an aggregate of 375,000 additional shares of Common Stock, exercisable at the public offering price less the underwriting discount. If the Underwriters exercise such over-allotment option, then each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares of Common Stock to be purchased by it, as shown in the above table, bears to the 2,500,000 shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the shares of Common Stock offered hereby. In connection with this Offering, the Company has agreed to sell to the Representative, for nominal consideration, warrants to purchase a number of shares of Common Stock equal to 10% of the shares of Common Stock sold in the Offering excluding over-allotments, if any (the "Representative's Warrants"). The Representative's Warrants are initially exercisable at a price of $ per share of Common Stock (130% of the public offering price of the shares offered hereby) for a period of four years, commencing one year from the effective date of the Offering and are restricted from sale, transfer, assignment or hypothecation for a period of 12 months from the effective date of the Offering, except to officers, partners or successors of the Representative. The exercise price of the Representative's Warrants and the number of shares of Common Stock issuable upon exercise thereof are subject to adjustment under certain circumstances. The Representative's Warrants grant to the holders thereof certain rights of registration for the securities issuable upon exercise of the Representative's Warrants. The Representative's Warrants are redeemable by the Company, on prior notice, if the price of the Common Stock three years after the closing of the Offering, exceeds $20.00 for 30 consecutive business days within a period of 15 days prior to the date of the notice of redemption. The officers and directors of the Company have agreed that they will not sell or dispose of any shares of Common Stock of the Company for a period of 180 days after the later of the date on which the Registration Statement is declared effective by the Commission or on the first date on which the shares are bona fide offered to the public, without the prior written consent of the Representative on behalf of the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, losses and expenses, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments that the Underwriters may be required to make in respect thereof. 54 The Representative was retained by the Company in April 1996 for a 12-month period to provide certain financial advisory services related to general strategic financial advice, including in connection with serving as the managing underwriter of this Offering, valuation and potential mergers and acquisitions. The Company has agreed to pay the Representative (i) $250,000 for such services, $150,000 of which will be paid upon consummation of this Offering, and the balance will be payable in 12 equal monthly installments commencing the month following the closing of the Offering, and (ii) a transaction fee with respect to consummated restructurings, mergers or acquisitions. In connection with the Offering made hereby, certain Underwriters and selling group members (if any) or their respective affiliates who are qualified registered market makers on the Nasdaq National Market may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act, during a specified period before commencement of offers or sales of the Common Stock. The passive market making transactions must comply with applicable volume and price limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus will be passed upon for the Company by Rutan & Tucker, LLP, Costa Mesa, California. Certain matters in connection with the sale of Common Stock offered hereby will be passed on for the Underwriters by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. EXPERTS The financial statements of the Company as of March 31, 1996 and for each of the two fiscal years in the period ended March 31, 1996 included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 4 to the financial statements) of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Certain statements in this Prospectus under the captions "Risk Factors -- Dependence on Patents and Proprietary Technology" and "Business -- Patents," specifically the second sentence under the former caption and the fifth sentence under the latter caption, have been reviewed and approved by Knobbe, Martens, Olson & Bear, LLP, Newport Beach, California, patent counsel for the Company, and are included herein in reliance upon that review and approval. AVAILABLE INFORMATION The Company has filed with the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, with respect to the Common Stock being offered pursuant to this Prospectus. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement and the exhibits and financial statements filed as a part thereof. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. All of these documents may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained therefrom at prescribed rates. 55 The Company is subject to certain informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files periodic reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the Commission at 210 South Dearborn Street, Room 1204, Chicago, Illinois 60604; 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of such reports, proxy statements and other information concerning the Company may also be inspected and copied at the library of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006, upon which the Common Stock of the Company is listed. The Company intends to furnish its security holders with annual reports containing audited financial statements and such interim unaudited reports as it deems appropriate. 56 INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Independent Accountants.......................................................................... F-2 Balance Sheet at March 31, 1996............................................................................ F-3 Statement of Operations for the Years Ended March 31, 1995 and 1996........................................ F-4 Statement of Shareholders' Equity for the Years Ended March 31, 1995 and 1996.............................. F-5 Statement of Cash Flows for the Years Ended March 31, 1995 and 1996........................................ F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Premier Laser Systems, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Premier Laser Systems, Inc. at March 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP Costa Mesa, California May 17, 1996, except as to Note 18, which is as of June 25, 1996 F-2 PREMIER LASER SYSTEMS, INC. BALANCE SHEET
MARCH 31, 1996 -------------- ASSETS Current assets: Cash and cash equivalents....................................................................... $ 35,463 Short-term investments (Note 6)................................................................. 4,547,377 Accounts receivable, net of allowance for doubtful accounts of $154,677......................... 508,315 Inventories (Note 7)............................................................................ 2,185,355 Prepaid expenses and other current assets....................................................... 419,504 -------------- Total current assets........................................................................ 7,696,014 Property and equipment, net (Note 8)............................................................ 493,942 Intangibles, net (Note 9)....................................................................... 7,353,462 Other assets (Note 6)........................................................................... 131,150 -------------- $ 15,674,568 -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................................ $ 1,208,219 Accrued liabilities (Note 10)................................................................... 188,108 Notes payable to related party (Notes 11 and 12)................................................ 481,195 -------------- Total current liabilities................................................................... 1,877,522 -------------- Commitments and contingencies (Note 14) Shareholders' equity (Notes 5 and 16): Preferred stock -- 8,850,000 shares authorized, no shares issued and outstanding Common stock -- Class A -- no par value, 35,600,000 shares authorized; 4,702,203 shares issued and outstanding........................................................ 16,317,376 Common stock -- Class E-1 -- no par value, 2,200,000 shares authorized; 1,256,818 shares issued and outstanding........................................................ 4,769,878 Common stock -- Class E-2 -- no par value, 2,200,000 shares authorized; 1,256,818 shares issued and outstanding........................................................ 4,769,878 Class A warrants................................................................................ 2,321,057 Class B warrants................................................................................ 376,774 Warrants to purchase Class A common stock....................................................... 192,130 Unrealized holding gain on short-term investments............................................... 3,666,367 Accumulated deficit............................................................................. (18,616,414) -------------- Total shareholders' equity.................................................................. 13,797,046 -------------- $ 15,674,568 -------------- --------------
The accompanying notes are an integral part of these statements. F-3 PREMIER LASER SYSTEMS, INC. STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, ------------------------------ 1995 1996 -------------- -------------- Net sales......................................................................... $ 1,249,403 $ 1,704,390 Cost of sales..................................................................... 1,298,420 3,324,757 -------------- -------------- Gross (loss)...................................................................... (49,017) (1,620,367) Selling and marketing expenses.................................................... 1,035,863 1,308,767 Research and development expenses................................................. 1,035,705 1,213,471 General and administrative expenses............................................... 1,747,090 1,709,327 -------------- -------------- Loss from operations.......................................................... (3,867,675) (5,851,932) Interest income (expense), net.................................................... (322,540) 99,037 -------------- -------------- Loss before extraordinary items............................................... (4,190,215) (5,752,895) Extraordinary gain from extinguishment of indebtedness............................ 381,730 -------------- -------------- Net loss...................................................................... $ (3,808,485) $ (5,752,895) -------------- -------------- -------------- -------------- Loss per share: Net loss........................................................................ $ (1.26) -------------- -------------- Weighted average number of shares outstanding................................... 4,556,959 -------------- -------------- Pro forma loss per share (unaudited): Loss before extraordinary items................................................. $ (1.59) Extraordinary gain from extinguishment of indebtedness.......................... .15 -------------- Net loss........................................................................ $ (1.44) -------------- -------------- Weighted average number of shares outstanding................................... 2,584,722 -------------- --------------
The accompanying notes are an integral part of these statements. F-4 PREMIER LASER SYSTEMS, INC. STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
COMMON STOCK COMMON STOCK COMMON STOCK CLASS A CLASS E-1 CLASS E-2 ---------------------- ---------------------- ----------------------- CLASS A CLASS B SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS WARRANTS --------- ----------- --------- ----------- ---------- ----------- ---------- ---------- Balance, March 31, 1994.... 1,432,636 $ 5,372,022 1,268,488 $ 4,756,528 1,268,488 $ 4,756,528 Exercise of common stock options................. 4,936 2,848 3,011 1,081 3,011 1,081 Common stock issued in lieu of cash payments... 1,635 13,046 1,447 11,552 1,447 11,552 Common stock forfeited due to cessation of employment.............. (7,798) (20,124) (6,905) (17,818) (6,905) (17,818) Warrants issued in connection with private placement units......... Repurchase of common stock................... (17,681) (6,910) (15,752) (6,119) (15,752) (6,119) Initial public offering of units, net proceeds................ 2,400,000 7,633,504 $1,622,222 $ 286,274 Conversion of warrants... 186,000 Conversions of certain related party notes and associated accrued interest................ 7,072 28,448 6,260 24,596 6,260 24,596 Conversion of debentures and associated accrued interest................ 321,099 1,284,397 272,934 48,165 Exercise of over- allotment option........ 360,000 1,128,947 239,901 42,335 Net loss................. --------- ----------- --------- ----------- ---------- ----------- ---------- ---------- Balance, March 31, 1995.. 4,501,899 15,436,178 1,256,549 4,769,820 1,256,549 4,769,820 2,321,057 376,774 Common stock issued for investment in Mattan (Note 6)................ 200,000 881,010 Exercise of stock options................. 304 188 269 58 269 58 Unrealized holding gain on short-term investments............. Net loss................. --------- ----------- --------- ----------- ---------- ----------- ---------- ---------- Balance, March 31, 1996.... 4,702,203 $16,317,376 1,256,818 $ 4,769,878 1,256,818 $ 4,769,878 $2,321,057 $ 376,774 --------- ----------- --------- ----------- ---------- ----------- ---------- ---------- --------- ----------- --------- ----------- ---------- ----------- ---------- ---------- COMMON UNREALIZED STOCK HOLDING ACCUMULATED WARRANTS GAIN DEFICIT TOTAL --------- ---------- ------------ ------------ Balance, March 31, 1994.... $ 192,130 $ (9,055,034) $ 6,022,174 Exercise of common stock options................. 5,010 Common stock issued in lieu of cash payments... 36,150 Common stock forfeited due to cessation of employment.............. (55,760) Warrants issued in connection with private placement units......... 186,000 186,000 Repurchase of common stock................... (19,148) Initial public offering of units, net proceeds................ 9,542,000 Conversion of warrants... (186,000) Conversions of certain related party notes and associated accrued interest................ 77,640 Conversion of debentures and associated accrued interest................ 1,605,496 Exercise of over- allotment option........ 1,411,183 Net loss................. (3,808,485) (3,808,485) --------- ---------- ------------ ------------ Balance, March 31, 1995.. 192,130 (12,863,519) 15,002,260 Common stock issued for investment in Mattan (Note 6)................ 881,010 Exercise of stock options................. 304 Unrealized holding gain on short-term investments............. $3,666,367 3,666,367 Net loss................. (5,752,895) (5,752,895) --------- ---------- ------------ ------------ Balance, March 31, 1996.... $ 192,130 $3,666,367 $(18,616,414) $ 13,797,046 --------- ---------- ------------ ------------ --------- ---------- ------------ ------------
The accompanying notes are an integral part of these statements. F-5 PREMIER LASER SYSTEMS, INC. STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, ------------------------------ 1995 1996 -------------- -------------- Cash flows from operating activities: Net loss........................................................................ $ (3,808,485) $ (5,752,895) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................................. 812,196 814,401 Extraordinary gain from extinguishment of debt................................ (381,730) Amortization of debt discount................................................. 119,230 Exchange of product for clinical studies...................................... (158,250) Amortization of clinical program expense...................................... 227,000 31,367 Issuance of stock options and stock in lieu of consulting payments............ 36,150 Common stock forfeited upon cessation of employment........................... (55,760) Provision for doubtful accounts receivable.................................... (151,751) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable.................................... 142,591 (92,716) Increase in inventories....................................................... (21,880) (14,665) Decrease (increase) in prepaid expenses and other current assets.............. (320,569) 22,468 (Increase) decrease in other assets........................................... 230,793 (6,150) Increase (decrease) in accounts payable....................................... (411,197) 594,654 (Decrease) increase in accrued liabilities.................................... 28,907 (598,847) -------------- -------------- Net cash used in operating activities....................................... (3,402,754) (5,312,384) -------------- -------------- Cash flows from investing activities: Purchases of property and equipment............................................. (45,785) (219,723) Note receivable pursuant to strategic alliance agreement (Note 6)............... (125,000) Patent expenditures............................................................. (204,838) (195,971) -------------- -------------- Net cash used in investing activities......................................... (250,623) (540,694) -------------- -------------- Cash flows from financing activities: Proceeds from exercise of common stock options.................................. 304 Proceeds from issuance of common stock prior to initial public offering......... 5,010 Proceeds from issuance of common stock warrants................................. 186,000 Proceeds from initial public offering and exercise of over-allotment option..... 10,953,183 Cash paid for repurchase of common stock........................................ (19,148) Proceeds from issuance of notes payable......................................... 1,519,000 Cash paid for repurchase of mandatorily redeemable warrants..................... (285,000) Principal payments on notes payable............................................. (3,126,195) -------------- -------------- Net cash provided by financing activities..................................... 9,232,850 304 -------------- -------------- Net (decrease) increase in cash................................................... 5,579,473 (5,852,774) -------------- -------------- Cash and cash equivalents, beginning of period.................................... 308,764 5,888,237 -------------- -------------- Cash and cash equivalents, end of period.......................................... $ 5,888,237 $ 35,463 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these statements. F-6 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and commenced operations in August 1991 after acquiring substantially all of the assets and certain liabilities of Pfizer Laser Systems (Pfizer), a division of Pfizer Hospital Products Group, Inc. The Company designs, develops, manufactures and markets several lines of lasers for surgical and other medical purposes, laser waveguides and fiber optic devices, disposables and associated accessory products for the medical market. The financial statements as of March 31, 1996 and for each of the two years in the period ended March 31, 1996 give effect to the Company's recapitalization and reverse stock splits discussed in Note 16. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company recognizes revenue upon shipment of product to customers, and when no significant contractual obligations remain outstanding. CASH EQUIVALENTS Cash equivalents represent short-term, highly liquid investments that have original maturities of three months or less and are readily convertible to cash. Such investments consist primarily of U.S. Treasury Notes and commercial paper. Cost of such investments is equal to the related fair value at March 31, 1996. SHORT-TERM INVESTMENTS In fiscal 1995, the Company adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS 115, the Company's investments are classified as "available-for-sale" securities and are reported at fair market value. Any unrealized holding gains or losses are reported as a separate component of stockholders' equity. Realized gains and losses are reported on the specific identification method and are reported in income. The Company's marketable securities portfolio at March 31, 1996 consists of its investments in the common stock of Mattan Corporation (see Note 6). INVENTORIES Inventories are stated at the lower of cost or market and include material, labor, and related manufacturing overhead. The Company determines cost using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for replacements and improvements are capitalized and expenditures for repairs, maintenance and routing replacements are charged to operating expense as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is included in operations. Depreciation of furniture, machinery and equipment is calculated on a straight-line basis over the estimated useful lives of the assets ranging from three to eight years. INTANGIBLES Intangible assets consists primarily of patents, technology rights and license agreements. The costs assigned to acquired intangible assets, based in part 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. Periodically, the Company evaluates the recoverability of intangibles based on estimated undiscounted future cash flows from operating activities compared with the carrying values of the intangibles. F-7 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. A substantial portion of the research and development expense is related to developing new products, improving existing products or processes, and clinical research programs. The Company enters into agreements with certain doctors to exchange a portion of a product's sales price for completion of certain portions of clinical studies necessary for obtaining product approval by the U.S. Food and Drug Administration. Typically, the amounts consist of a portion of the product sales price which is equal to the fair value 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 cash payment for the entire amount. The amounts are capitalized as prepaid research and development expense and amortized upon completion of certain milestones of the clinical study. These studies are generally completed within one year. Research and development expenses included in prepaid expenses totaled $204,000 at March 31, 1996. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the liability method for accounting for income taxes. This method mandates the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. NET LOSS PER SHARE Net loss per share was computed based on the weighted average number of the Company's common shares outstanding during fiscal 1996 and excludes all shares of Class E-1 and Class E-2 Common Stock, discussed in Note 16, outstanding, or subject to option, because all such shares of stock are subject to escrow and the conditions for the release of shares from escrow have not been satisfied. Common stock equivalents were not considered in the net loss per share calculation because the effect on the net loss would be antidilutive. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Net loss per common share was computed based on the weighted average number of the Company's common shares outstanding during the fiscal year ended March 31, 1995 after giving retroactive adjustment for the recapitalization discussed in Note 16 and the conversion of the Company's debentures into units (as defined in Note 5) which occurred upon completion of the Company's initial public offering (see Note 5). The effect on net loss per common share of the conversion of the Company's debentures was to reduce historical net loss by $67,995 and to increase weighted average shares outstanding by 321,099 shares for the fiscal year ended March 31, 1995. Class E-1 and E-2 common stock shares, discussed in Note 16, were excluded from the net loss per share calculation because the conditions for release of shares from escrow have not been satisfied. Other common stock equivalents were not considered in the net loss per share calculation because the effect on the net loss per share would be antidilutive. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock options and warrants granted and common shares issued within one year of the Company's initial public offering and not in escrow have been included as outstanding for the six months ended September 30, 1994 (the date of the most recent financial statements included in the Company's initial public offering prospectus) using the treasury stock method. F-8 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for years beginning after December 15, 1995, which establishes a fair value-based method of accounting for stock-based compensation plans. The statement allows companies to continue to use the intrinsic value-based approach, supplemented by footnote disclosure of the pro forma net income and earnings per share of the fair value-based approach. The Company intends to follow this method allowed by SFAS 123. USE OF ESTIMATES BY MANAGEMENT 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include those made surrounding inventory valuation and the realizability of certain intangible assets. The Company's inventory and intangibles largely relate to technologies which have yet to gain wide spread market acceptance. Management believes no loss will be incurred on the disposition of its inventory and that the remaining economic life of the Company's tangible assets is reasonable. If wide spread market acceptance of the Company's products is not achieved, the carrying amount of inventory and intangible assets could be materially reduced. 3. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosures of cash flows information:
YEAR ENDED MARCH 31, ---------------------- 1995 1996 ----------- --------- Cash paid for: Interest................................................. $ 550,962 $ 52,129 Income taxes............................................. 800 800
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES In fiscal 1996, the Company issued 200,000 shares of Class A Common Stock in connection with the acquisition of 1,150,000 shares of Mattan Corporation's common stock. The value of the Mattan Corporation common stock shares was $881,010 on the date of the transaction (see Note 6). Concurrent with the completion of the Company's initial public offering, certain notes payable to shareholders totaling $66,500 and convertible debentures totaling $1,500,000, plus related accrued interest, were converted into 7,072 shares of Class A Common Stock and 6,260 shares of each Class E-1 and E-2 Common Stock, and 321,099 Units, respectively. 4. BASIS OF PRESENTATION The Company has suffered recurring losses from operations and may continue to incur losses for the foreseeable future due to the significant costs anticipated to be incurred in connection with manufacturing, marketing and distributing its laser products. In addition, the Company intends to conduct continuing research and development activities, including regulatory submittals and clinical trials to develop additional applications for its laser technology. The Company operates in a highly competitive environment and is subject to all of the risks inherent in a new business enterprise. The Company is presently attempting to borrow funds and/or complete a public offering of its common stock to provide working capital for operations in the near term. The outcome of such efforts to raise F-9 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. BASIS OF PRESENTATION (CONTINUED) working capital cannot be assured. The ultimate timeframe in which a sufficient level of product or market acceptance can be achieved is uncertain. As such, there is substantial doubt about the Company's ability to continue as a going concern. The Company's financial statements have been prepared on the basis of accounting principles applicable to a going concern. Accordingly, they do not purport to give effect to adjustments, if any, that may be necessary should the Company be required to realize its assets and liquidate its liabilities, contingent liabilities and commitments in other than the normal course of business at amounts different from those disclosed in the financial statements. 5. INITIAL PUBLIC OFFERING On December 7, 1994, the Company completed an initial public offering consisting of 2,400,000 Units of the Company's securities, each unit consisting of one share of Class A Common Stock, one redeemable Class A Warrant and one redeemable Class B Warrant (the "Units"). The Company realized net proceeds of $9,542,000 from this offering. Each Class A Warrant consists of the right to purchase one share of Class A Common Stock and one Class B Warrant at any time through the fifth anniversary date of the initial public offering at an exercise price of $6.50. Each Class B Warrant consists of the right to purchase one share of Class A Common Stock from the date of issuance through the fifth anniversary date of the initial public offering's effective date at an exercise price of $8.00. On January 12, 1995, the underwriter in the initial public offering exercised its over-allotment option to purchase 360,000 Units at the initial public offering price, resulting in net proceeds of $1,411,183 to the Company. 6. STRATEGIC ALLIANCES In December 1995, the Company entered into a strategic marketing alliance with Mattan Corporation (Mattan), a Canadian corporation whose stock is publicly traded on the Alberta Stock Exchange. The purchasing agreement (the Agreement) stipulates that the Company will supply all laser equipment and associated disposables for all laser surgery centers to be designed and opened by Mattan in Canada and the United States. It is anticipated that these surgery centers will be operated under the name of Medical Laser Institute of America. In connection with this alliance, the Company also entered into a share exchange agreement pursuant to which the Company issued 200,000 shares of the Company's Class A Common Stock representing approximately 12% of Mattan's common stock, to certain parties affiliated with Mattan, who purchased 1,150,000 shares of Mattan's common stock for approximately $881,010 on the Company's behalf. Prior to March 31, 1996, the Mattan affiliates sold the 200,000 shares of the Company's Class A Common Stock and released the shares of the Mattan common stock to the Company. The Company accounts for this investment as an available-for-sale security pursuant to SFAS 115 (See Note 2). At March 31, 1996, the fair value of this investment totaled approximately $4,547,377 and the related unrealized holding gain totaled approximately $3,666,367. In October 1995, the Company entered into a strategic business alliance with International Biolaser Corporation (IBC). This agreement specifies that the Company will manufacture IBC's CO(2) and argon lasers and that such products will be jointly marketed by the two companies. Pursuant to the agreement, the Company advanced $125,000 to IBC in exchange for a convertible note payable due in October 1997, bearing interest at 10% per annum and secured by substantially all of IBC's intangible assets. This note payable is convertible, at the Company's sole option, into an 80% ownership interest in IBC only after IBC has repaid certain pre-existing indebtedness. F-10 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INVENTORIES Inventories at March 31, 1996 consist of the following: Raw materials.................................. $ 938,560 Work-in-progress............................... 276,998 Finished goods................................. 969,797 ---------- $2,185,355 ---------- ----------
8. PROPERTY AND EQUIPMENT Property and equipment at March 31, 1996 consist of the following: Machinery, equipment, molds and tooling........ $1,032,188 Furniture, fixtures and office equipment....... 433,286 ---------- 1,465,474 Less: accumulated depreciation............... 971,532 ---------- $ 493,942 ---------- ----------
9. INTANGIBLES Intangibles at March 31, 1996 consist of the following: Patents and technology rights.................. $9,413,088 License agreements............................. 255,000 Other.......................................... 201,000 ---------- 9,869,088 Less: accumulated amortization................. 2,515,626 ---------- $7,353,462 ---------- ----------
10. ACCRUED LIABILITIES Accrued liabilities at March 31, 1996 consist of the following: Accrued payroll, vacation and related taxes.... $ 96,132 Accrued other.................................. 91,976 ---------- $ 188,108 ---------- ----------
11. RELATED PARTY TRANSACTIONS As discussed in Note 1, the Company commenced operations after acquiring substantially all of the assets and certain liabilities of Pfizer in August 1991. At March 31, 1996, notes payable to Pfizer totaled $481,195 (see Note 12). Consulting fees aggregating $12,000 and $26,000 for the fiscal years ended March 31, 1996 and 1995, respectively, were paid to a consultant of the Company, directly related to an officer of the Company. 12. NOTES PAYABLE TO RELATED PARTY AND EXTRAORDINARY GAIN Prior to the completion of the initial public offering described in Note 5, the Company's notes payable to Pfizer amounted to $2,517,390. Pursuant to an agreement between the Company and Pfizer, the Company paid $1,386,195 of the notes payable to Pfizer immediately subsequent to the closing of the initial public offering and Pfizer forgave $650,000 of the total indebtedness. The remaining balance of $481,195, bearing interest at 10% per annum at March 31, 1996, and related F-11 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. NOTES PAYABLE TO RELATED PARTY AND EXTRAORDINARY GAIN (CONTINUED) accrued interest are payable in quarterly installments commencing July 8, 1996 with the first principal payment totaling $240,598, plus accrued interest, and the remaining two quarterly principal payments totaling $120,299, plus accrued interest. If the Company completes a private or public equity offering which raises net proceeds of at least $3 million, the note payable balance outstanding at the time of that offering becomes immediately due and payable. The note payable to Pfizer is secured by substantially all of the tangible assets and certain patents of the Company. In June 1994, notes payable to third parties of $1,500,000 were converted into convertible debentures. These debentures and related accrued interest were converted into 321,099 Units concurrent with the closing of the initial public offering. Also concurrent with the close of the offering, notes payable to shareholders totaling $66,500 plus related accrued interest were converted into 7,072 shares of Class A Common Stock and 6,260 shares of each Class E-1 and E-2 Common Stock. In August 1994, the Company completed a private placement of debt units, whereby $1,550,000 of notes payable bearing interest at 10% per annum (the "Bridge Notes") and warrants to purchase 1,085,000 shares of Class A common stock were issued. In connection with this private placement, the Company incurred placement costs of $201,500 and issued the notes at a discount totaling $186,000. These notes payable were also paid in full in December 1994. In connection with the debt forgiven by Pfizer and the extinguishment of the bridge notes, the Company recognized a net extraordinary gain on extinguishment of debt totaling $381,730. 13. GRANTS In September, 1995, the Company obtained a Small Business Innovative Research Grant totaling approximately $750,000 for the study of laser emulsification. Pursuant to the terms of the grant, the Company is eligible to receive reimbursement for research and development costs incurred in connection with the laser emulsification study up to $750,000 upon the achievement of certain deliverables, as defined. During fiscal 1996, the Company received approximately $250,000 under the grant. The amounts received under the grant were offset against research and development costs incurred in the study. 14. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company leases its facilities and certain equipment under noncancellable operating leases. Total rental expense for operating leases was $348,059 and $387,055 for the fiscal years ended March 31, 1996 and 1995, respectively. At March 31, 1996, future minimum lease payments under noncancellable operating leases are as follows:
YEAR ENDING MARCH 31, - ----------------------------------------------------------- 1997................................................... $ 241,536 1998................................................... 244,634 1999................................................... 247,811 2000................................................... 252,448 2001................................................... 250,488 ------------- $ 1,236,917 ------------- -------------
Pursuant to the Company's facility lease, effective January 1997, the Company becomes guarantor of a lease agreement between the Company's lessor and a third party lessee. The guaranteed future minimum lease payments relating to the third party are $108,456, $111,624, and $85,500 for the years ended March 31, 1997, 1998 and 1999, respectively. F-12 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company entered into employment agreements with three members of its executive management team. These agreements provide for two to four months of severance benefits upon termination of employment. Based upon salary levels as of March 31, 1996, such severance benefits range from approximately $15,000 to $33,000 for each of the above members of management. CONTINGENCIES The Company entered into an agreement with Infrared Fiber Systems, Inc. (IFS), as a supplier of certain fiberoptics that expires in the fiscal year ending March 31, 2002 and requires the supplier to sell exclusively to the Company fiberoptics for medical and dental applications as long as the Company purchases defined minimum amounts. In March 1994, the Company initiated litigation against IFS. The Company's complaint alleges that IFS and two of its officers misrepresented IFS' ability to supply optical fibers, and that IFS breached its supply agreement and certain warranties. In April 1994, IFS filed a cross-complaint alleging breach of 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 fibers 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 the Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995 the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. No trial date has been set. The Company believes that the likely liability of the Company, if any, arising from this litigation would not have a materially adverse impact upon the Company. The Company is involved in various disputes and other lawsuits from time to time arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of the IFS litigation, disputes and other lawsuits may adversely affect the Company. It is the opinion of management, that the outcome of such matters will not have a material adverse impact on the Company's financial position, results of operations, or cash flows. 15. INCOME TAXES The Company incurred losses totaling $5,752,895 and $3,808,485 for fiscal years ended March 31, 1996 and 1995, respectively. As a result, no provision for income taxes has been charged to continuing operations during these periods. F-13 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 15. INCOME TAXES (CONTINUED) Deferred tax assets at March 31, 1996 are comprised as follows: Accounts receivable reserves........................... $ 62,084 Research and development expenditures capitalized for tax purposes.......................................... 410,247 Research and development federal tax credits........... 187,436 Depreciation of property and equipment................. 40,289 Net operating loss carryforwards....................... 6,033,150 Other.................................................. 852,876 ----------- Gross deferred tax assets.............................. 7,586,082 Deferred tax asset valuation allowance................. (7,586,082) ----------- $ -- ----------- -----------
The net change in the valuation allowance for deferred tax assets was an increase of approximately $2,634,142 from the balance at March 31, 1995. The change primarily relates to additional net operating loss carryforwards generated as well as changes in other deferred assets in fiscal 1996, which were fully reserved for at March 31, 1996. At March 31, 1996, the Company had net operating loss carryforwards for federal income tax purposes totaling approximately $16,319,249 which begin to expire in fiscal 2007. Operating loss carryforwards for state income tax purposes totaling approximately $7,895,167 at March 31, 1996 begin to expire in fiscal 1998. Pursuant to provisions in the Tax Reform Act of 1986, the net operating loss carryforwards and research and development credits available for use in any given year may be limited as a result of the significant changes in stock ownership attributable to the initial public offering. 16. SHAREHOLDERS' EQUITY COMMON STOCK AND RECAPITALIZATION On June 11, 1994, the Company effected a recapitalization pursuant to an Amendment of its Articles of Incorporation. In this recapitalization: (i) the Company authorized for issuance three new classes of Common Stock, designated as Class A Common Stock, Class E-1 Common Stock and Class E-2 Common Stock, of which 35,600,000 shares of Class A Common Stock were authorized, 2,200,000 shares of Class E-1 Common Stock were authorized and 2,200,000 shares of Class E-2 Common Stock were authorized; (ii) the Company authorized for issuance a new class of Preferred Stock (having rights, preferences and privileges to be determined in the future) of which 8,850,000 shares were authorized for issuance; (iii) the Common Stock outstanding immediately prior to the recapitalization was reclassified as Class A Common Stock; and (iv) each share of Common Stock outstanding immediately prior to the recapitalization was converted, through a reverse stock split, into 0.1292 shares of Class A Common Stock. Following the above Amendment of the Articles of Incorporation, the Company declared a stock split effected as a stock dividend to the holders of its Common Stock, providing for the issuance of approximately 0.1144 shares of Class E-1 Common Stock and 0.1144 shares of Class E-2 Common Stock for each share of Common Stock held immediately prior to the recapitalization. As a result of this recapitalization and stock split, each share of the Company's outstanding Series A Preferred Stock and Series B Preferred Stock was converted into 0.1292 shares of Class A Common Stock, 0.1144 shares of Class E-1 Common Stock and 0.1144 shares of Class E-2 Common Stock. Conversion of Series A and Series B Preferred Stock into Class A Common Stock, Class E-1 Common Stock and Class E-2 Common Stock was effected upon the closing of the Company's initial public offering. F-14 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. SHAREHOLDERS' EQUITY (CONTINUED) On October 20, 1994, the Company voted to effect a 7:1 reverse stock split pursuant to an amendment of its Articles of Incorporation. As a result thereof, the shares of Series A Common Stock, E-1 Common Stock, and E-2 Common Stock, discussed above, were reduced in number by a factor of 0.7. STOCK OPTION PLANS AND WARRANTS The Company has adopted several stock option plans that authorize the granting of options to employees, officers and/or consultants to purchase shares of the Company's Class A Common Stock. The stock option plans are administered by the Board of Directors or a committee appointed by the Board of Directors, which determines the terms of the options, including the exercise price, the number of shares subject to option and the exercisability of the option. The options are generally granted at the fair market value of the shares underlying the options at the date of the grant and expire within ten years of the grant date. In addition to options granted pursuant to the stock option plans, the Company has issued to certain Board of Directors members, consultants and former notes payable holders warrants to purchase shares of the Company's Class A Common Stock. A summary of the activity related to stock options and warrants for the fiscal years ended March 31, 1995 and 1996 is as follows:
WARRANT/OPTION PRICE PER SHARES SHARE ----------- -------------- Outstanding at March 31, 1994......................... 228,590 $ 1.00-17.69 Granted............................................... 1,733,650 5.00- 6.50 Exercised............................................. (1,535) 1.00- 1.77 Cancelled............................................. (50,872) 8.85 ----------- -------------- Outstanding and exercisable at March 31, 1995......... 1,909,833 1.00-17.69 Granted............................................... 705,700 4.63- 5.63 Exercised............................................. (304) 1.00 Cancelled............................................. (31,236) 1.00-11.06 ----------- -------------- Outstanding at March 31, 1996......................... 2,583,993 $ 1.00-17.69 ----------- -------------- ----------- --------------
Warrants to purchase 89,357 shares of the Company's common stock issued in connection with the acquisition of certain patents and technology rights during fiscal 1994 will expire by December 31, 1998 and the warrants to purchase 9,044 shares of common stock issued to a related party will expire by March 31, 1997. Effective December 30, 1993, the Company issued warrants to purchase 50,872 shares of common stock, under the 1993 Limited Warrant Plan, with an exercise price of $8.85 per share for services rendered by consultants in connection with the acquisition of technology rights. In January 1995, the warrant holders exercised their right to receive a cash payment of $285,000, an amount equal to the liability owed to the consultants on the date of issuance in exchange for and cancellation of the warrants. In connection with the initial public offering in December, 1994 and exercise of the underwriter's over-allotment option, the Company issued 2,760,000 of each of Class A Warrants and Class B Warrants. Both the Class A and Class B Warrants will expire in November 1999. F-15 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 16. SHAREHOLDERS' EQUITY (CONTINUED) The Company has the right, commencing three years from the November 30, 1994, the effective date of the initial public offering, to redeem the Class A and Class B Warrants at a price of $.05 per warrant subject to certain conditions regarding the bid price of the Class A Common Stock. CLASS E-1 AND CLASS E-2 COMMON STOCK The Company's Class E-1 Common Stock and Class E-2 Common Stock are held in escrow, are not transferable, can be voted and will be converted into Class A Common Stock only upon the occurrence of specified events. All the Class E-1 Common Stock shares will be automatically converted into Class A Common Stock shares in the event that: (1) the Company's net income before provision for income taxes, as defined, amounts to at least $4,800,000 for the years ending March 31, 1995 or 1996, or at least $5,500,000, $6,850,000, $8,425,000, $9,900,000 for the fiscal years ending March 31, 1997 through 2000, respectively, provided that if additional shares are issued earnings must increase proportionately; or (2) the closing price, as defined, of the Company's Class A Common Stock shall average in excess of $15.00 for any 30 consecutive trading days during the 18 months following the November 30, 1994 effective date of the Company's initial public offering or average in excess of $19.25 for any 30 consecutive trading days during the period commencing with the nineteenth month after November 30, 1994 and ending 36 months from that date. If none of the above events occur, the Class E-1 Common Stock shares will be cancelled by the Company on June 30, 2000. All of the Class E-2 Common Stock shares will be automatically converted into Class A Common Stock shares in the event that: (1) the Company's net income before provision for income taxes, as defined, amounts to at least $8,625,000 for the years ending March 31, 1995 or 1996 or at least $11,800,000, $14,750,000, $20,475,000 or $26,750,000 for the years ending March 31, 1997 through 2000, respectively, provided that if additional shares are issued earnings must increase proportionally; or (2) the closing price, as defined, of the Company's Class A Common Stock shall average in excess of $19.75 for any 30 consecutive trading days during the 18 months following the November 30, 1994 effective date of the Company's initial public offering or average in excess of $24.00 for any 30 consecutive trading days during the period commencing with the nineteenth month after November 30, 1994 and ending 36 months from November 30, 1994. If none of the above events occur, the Class E-2 Common Stock shares will be cancelled by the Company on June 30, 2000. The Company will, in the event of the release of the Class E-1 Common Stock and Class E-2 Common Stock, recognize during the period in which the earnings thresholds are met or such minimum bid prices are achieved, a substantial noncash charge to earnings equal to the fair value of such shares on the date of their release, which would have the effect of significantly increasing the Company's loss or reducing or eliminating earnings, if any, at such time. 17. CONCENTRATION OF CREDIT RISK AND FOREIGN SALES The Company generates revenues principally from sales in the medical field. As a result, the Company's accounts receivable are concentrated primarily in this industry. In addition, sales to one customer represented 10% of the Company's sales in fiscal 1996 and 11% to a different customer in F-16 PREMIER LASER SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 17. CONCENTRATION OF CREDIT RISK AND FOREIGN SALES (CONTINUED) fiscal 1995. Sales in foreign countries accounted for approximately 63% and 40% of the Company's total sales in fiscal 1995 and 1996, respectively. A summary of sales in geographic locations for the fiscal years ended March 31, 1995 and 1996 is as follows:
1995 1996 ------------- ------------- United States................................................... $ 465,400 $ 1,014,327 Europe.......................................................... 210,386 Asia............................................................ 583,500 190,458 Other Foreign................................................... 200,503 289,219 ------------- ------------- $ 1,249,403 $ 1,704,390 ------------- ------------- ------------- -------------
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Generally, letters of credit are obtained on international sales. The Company maintains reserves for potential credit losses and such losses have been within management expectations. 18. SUBSEQUENT EVENTS On June 3, 1996, the Company entered into a loan agreement with a bank which allows the Company to borrow the lesser of $1 million or 40% of the market value of the 1,150,000 shares of Mattan Corporation common stock (the Mattan shares) held by the Company. Borrowings outstanding under this loan agreement bear interest at the bank's prime rate (8.25% at June 3, 1996) plus 1%, are secured by the Mattan shares and are due and payable in December 1996. The loan agreement also provides for the issuance of warrants to purchase 9,756 shares of the Company's Class A Common Stock at $10.25 per share to the bank. F-17 INSIDE BACK COVER CORPORATE COMMITMENTS From Research and Development To Customer Satisfaction, Premier Laser Systems, Inc. ... Four photographs, including corporate headquarters - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary............................. 3 Risk Factors................................... 6 Use of Proceeds................................ 13 Price Range of Common Stock.................... 14 Dividend Policy................................ 14 Capitalization................................. 15 Selected Financial Data........................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 Business....................................... 22 Management..................................... 40 Principal Shareholders......................... 47 Certain Transactions........................... 48 Description of Securities...................... 49 Shares Eligible for Future Sale................ 53 Underwriting................................... 54 Legal Matters.................................. 55 Experts........................................ 55 Available Information.......................... 55 Index to Financial Statements.................. F-1
[LOGO] 2,500,000 SHARES COMMON STOCK -------------- PROSPECTUS -------------- RODMAN & RENSHAW, INC. , 1996 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the Registrant and its officers and directors, and by the Registrant of the Underwriters for certain liabilities arising under the Securities Act or otherwise. The California General Corporations Laws provides that California corporations may include provisions in their articles of incorporation relieving directors of monetary liability for breach of their fiduciary duty as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involves the absence of good faith on the party of the director (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Registrant or its shareholders, (vi) any improper transaction between a director and the Registrant in which the director has a material financial interest, or (vii) the making of an illegal distribution to shareholders or an illegal loan or guaranty. The Registrant's Articles of Incorporation provide that the Registrant's directors are not liable to the Registrant or its shareholders for monetary damages for breach of their fiduciary duties to the fullest extent permitted by California law. The inclusion of the above provision in the Articles of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Registrant and its shareholders. At present, there is no litigation or proceeding pending involving a director of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any director. The Registrant's Articles of Incorporation provide that the Registrant shall indemnify its directors and officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law. The Registrant has entered into indemnification agreements with certain of its directors and officers that require the Registrant to indemnify such directors and officers to the fullest extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. II-1 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION It is estimated that the following expenses will be incurred in connection with the proposed offering hereunder. All of such expenses will be borne by the Company:
AMOUNT ----------- SEC filing fee....................................................................................... $ 10,410 NASD filing fee...................................................................................... $ 3,519 NASDAQ National Market fee........................................................................... $ 17,500 Legal fees and expenses.............................................................................. $ 110,000 Accounting fees and expenses......................................................................... $ 100,000 Blue sky fees and expenses (including counsel fees).................................................. $ 25,000 Representative's consulting fee...................................................................... $ 150,000 Printing expenses.................................................................................... $ 90,000 Miscellaneous........................................................................................ $ 43,571 ----------- TOTAL............................................................................................ $ 550,000 ----------- -----------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Since May 20, 1993, the Registrant has sold and issued the following unregistered securities: 1. During the period, the Registrant granted incentive stock options (net of cancelled options) to employees, officers and consultants of the Registrant under its 1992 Stock Option Plan to purchase an aggregate of 32,375 shares of the Registrant's Common Stock at a weighted average exercise price of $4.80 per share. Upon exercise of these options, the holders will also receive 2,103 shares of each of Class E-1 Common Stock and Class E-2 Common Stock. These options vest over a period of time following their respective dates of grant. As of May 17, 1996, certain employees exercised options to purchase an aggregate of 423 shares of Common Stock and 374 shares of each of Class E-1 and Class E-2 Common Stock. 2. Between October 1992 and April 1993, the Registrant issued convertible promissory note agreements in the original principal amount of $615,000 to five accredited investors. Effective June 30, 1993, $605,000 of the principal amount was converted into 54,716 shares of Common Stock. The balance of the principal amount was repaid immediately following the IPO. 3. In September 1993, the Registrant sold to two officers of and two consultants to the Company an aggregate of 16,721 shares of Common Stock at an aggregate purchase price of $16,721 payable in cash or for the cancellation of indebtedness, and 311 shares of Series A Preferred Stock at an aggregate purchase price of $310. Also in September 1993, the Registrant issued 904 shares of Common Stock to a former director of the Registrant upon exercise of outstanding stock options, at an aggregate purchase price of $904. 4. In November 1993, the Registrant granted an officer an option to purchase up to 4,522 shares of Common Stock at an exercise price of $11.06 per share. 5. In December 1993, the Registrant sold 18,992 shares of Common Stock and 70,000 shares of Series A Preferred Stock to three accredited investors at an aggregate purchase price of $280,311. 6. In December 1993, the Registrant purchased certain technology rights from Proclosure. As partial payment, the Registrant issued to Proclosure 227,898 shares of Common Stock and warrants to purchase 89,356 shares of Common Stock at an average exercise price of $15.54 per share. The Registrant issued to a consultant to Proclosure 5,217 shares of Common Stock in cancellation of outstanding indebtedness assumed by the Registrant in the acquisition. In connection with the acquisition, the Registrant issued secured promissory notes to three venture capital firms in the original principal amount of $1,500,000. In June 1994, the Registrant exchanged the promissory notes with the venture capital firms for Convertible Debentures in an aggregate of $1,500,000. The Convertible Debentures converted into 321,099 Units in December 1994. II-2 7. In December 1993, the Registrant issued warrants to purchase 50,872 shares of Common Stock to two consultants to the Registrant at an exercise price of $8.85 per share pursuant to the Company's 1993 Limited Warrant Plan (which warrants have been subsequently cancelled). 8. Between February and June 1994, the Registrant issued convertible notes to certain accredited or sophisticated investors in the original principal amount of $66,500, which notes converted into an aggregate of 7,072 shares of Common Stock, 6,260 shares of Class E-1 Common Stock and 6,260 shares of Class E-2 Common Stock at the closing of the IPO. 9. Between July 1993 and September 30, 1994, the Registrant sold and issued shares of Series B Preferred Stock convertible into an aggregate of 8,175 shares of Common Stock and 7,239 shares of each of Class E-1 and Class E-2 Common Stock to certain consultants to the Registrant accredited or sophisticated investors for cash and forgiveness of indebtedness in the aggregate amount of $180,894. 10. In March 1994, a former director of the Registrant and his employee entered into an agreement pursuant to which they exchanged warrants to purchase an aggregate of 318,918 shares of Series A Preferred Stock for an aggregate of 14,420 shares of Common Stock, 12,768 shares of Class E-1 Common Stock and 12,768 shares of Class E-2 Common Stock pursuant to a cashless exchange. No additional consideration was paid for the shares. 11. In June 1994, the Registrant effected a .1292 for 1 reverse stock split. In October 1994, the Registrant effected a .7 for 1 reverse stock split. All numbers of shares in this Item 14 have been adjusted to reflect these reverse stock splits. 12. In June 1994, the Registrant's Board of Directors declared a stock dividend of .1144 shares of each of Class E-1 Common Stock and Class E-2 Common Stock for each share of Common Stock outstanding on the date of the dividend. 13. In connection with the private placement by the Registrant in August 1994, the Registrant issued to certain accredited investors, for an aggregate price of $1,550,000, $1,550,000 principal amount of 10% promissory notes and warrants to purchase 1,085,000 shares of Common Stock at an exercise price equal to $6.64 per share. Upon consummation of the IPO, these warrants were exchanged for 1,085,000 Class A Warrants. The representative of the underwriters for the Registrant's IPO acted as placement agent for this offering and received aggregate commissions in the amount of $155,000, together with $46,500 as reimbursement for nonaccountable expenses. 14. In November 1994, the Registrant granted to a consultant of the Registrant a warrant to purchase up to 3,165 shares of the Registrant's Common Stock at an exercise price of $7.00 per share. The Registrant also granted to the Registrant's Chief Executive Officer an option to purchase up to 358,650 shares of Common Stock at an exercise price of $5.00 per share. 15. In September 1995, the Registrant granted incentive stock options (net of cancelled options) to employees and consultants of the Registrant under its 1995 Stock Option Plan to purchase an aggregate of 179,250 shares of Common Stock at an exercise price of $5.625 per share. 16. In February 1996, the Registrant granted nonqualified stock options under its February 1996 Stock Option Plan to purchase an aggregate of 499,200 shares of Common Stock at an exercise price of $4.625 per share. In addition, the Registrant granted to two nonemployee directors options to purchase an aggregate of 20,000 shares of Common Stock at an exercise price of $4.625 per share pursuant to a formula granted under the Registrant's 1996 Stock Option Plan. These options are subject to the shareholders approval of this plan. 17. In December 1995, the Registrant issued 200,000 shares of Common Stock to two affiliates of Mattan Corporation pursuant to the Share Exchange Agreement between the Registrant and Mattan as consideration for the issuance to the Registrant of 1,150,000 shares of Mattan Corporation's Common Stock. II-3 The issuances of securities described in paragraphs 11 and 12 above were deemed to be exempt from registration under the Securities Act by virtue of Section 2(3) thereof in that the securities were issued in transactions not involving a "sale" of securities as such term is used in Section 2(3) of the Securities Act. The sales and issuances of securities in the remaining transactions described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2), Regulation D or Rule 701 promulgated under the Securities Act. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. ITEM 27. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 1.1 Revised Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation as filed with the California Secretary of State on November 23, 1994.** 3.2 Bylaws of the Registrant, as amended.** 4.1 Form of Common Stock Certificate.** 4.2 Revised Form of Representative's Warrant. 5.1 Opinion of Rutan & Tucker.* 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Registrant, Patlex Corporation and Gordon Gould.** 10.2 Assignment Agreement dated July 27, 1992 between the Registrant and Michael Colvard, M.D.** 10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Registrant and Optical Engineering, Inc.** 10.4 Assignment and Modification Agreement dated July 26, 1991 among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited.** 10.5 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.** + 10.6 Lead Generation/Distribution Agreement dated March 17, 1994 between the Registrant and Burkhart Dental Supply Company.** 10.7 Form of International Distribution Agreement.** 10.8 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.** + 10.9 Exclusive Marketing Agreement dated July 26, 1994 between the Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.** 10.10 Amended and Restated Registration Rights Agreement dated June 17, 1994 among the Registrant, Onset Enterprise Associates, L.P., New Enterprise Associates IV Limited Partnership and Franklin Capital Associates, LLP.** 10.11 Subordinated Note dated August 8, 1991 payable to Pfizer Hospital Products Group, Inc. in the original principal amount of $1,343,658.** 10.12 Letter Agreement dated July 21, 1994 between the Registrant and Pfizer, Inc., as amended.** 10.13 Letter Agreement dated February 29, 1996 between the Registrant and Pfizer Hospital Products Group.*** 10.14 Form of Indemnification Agreement.** 10.15 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company.***
II-4
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 10.16 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc.*** 10.17 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended.** 10.18 Security Agreement dated August 8, 1991 between the Registrant and Pfizer Hospital Products Group, Inc.** 10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the Registrant and International Biolaser Corporation.**** 10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan Corporation.**** 10.21 Purchasing Agreement dated December 20, 1995 between the Registrant and Mattan Corporation.**** 10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S.*** 10.23 Distribution Agreement dated August 31, 1995 between the Registrant and Lasermed, Inc.*** 10.24 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan.*** 10.25 Form of Consulting Agreement.*** 10.26 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics International.*** 10.27 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting option to purchase 358,650 shares of Registrant's Common Stock).*** 10.28 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive Officers.*** 10.29 1996 Stock Option Plan.*** 10.30 Form of Warrant Agreement (including forms of Class A and Class B Warrant Certificates).** 10.31 Form of Underwriter's IPO Unit Purchase Option.** 10.32 Form of Finders' IPO Unit Purchase Option.** 10.33 1992 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.** 10.34 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.*** 10.35 February 1996 Stock Option Plan, together with form of Nonqualified Stock Option Agreement.*** 10.36 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with Schedule to Loan Agreement dated June 3, 1996. 10.37 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank. 10.38 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank. 10.39 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank. 10.40 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Rutan & Tucker LLP (included in the opinion filed as Exhibit 5).
II-5
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 23.3 Consent of Knobbe, Martens, Olson & Bear LLP.* 24 Power of Attorney. Reference is made to page II-7.
- ------------------------ + Confidential treatment was granted with respect to portions of this Exhibit. * Previously filed. ** Incorporated by reference from the Company's Registration Statement on Form SB-2 (Registration No. 33-83984). *** Incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended March 31, 1996. **** Incorporated by reference from the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 24 hereof, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person thereof in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, California, on June 26, 1996. PREMIER LASER SYSTEMS, INC. By: _______/s/_JAMES S. POLENTZ_______ James S. Polentz, Vice President, Finance and Chief Financial Officer In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated.
NAME TITLE DATE - ------------------------------------------------ -------------------------------------------- ----------------- Chairman of the Board, President and Chief * Executive Officer (Principal Executive June 26, 1996 Colette Cozean, Ph.D. Officer) * Patrick J. Day Director June 26, 1996 * Grace Ching-Hsin Lin Director June 26, 1996 * E. Donald Shapiro, J.D. Director June 26, 1996 Vice President, Finance and Chief Financial /s/JAMES S. POLENTZ Officer (Principal Financial Officer and June 26, 1996 James S. Polentz Principal Accounting Officer) *By: /s/JAMES S. POLENTZ James S. Polentz, ATTORNEY-IN-FACT
II-7 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 1.1 Revised Form of Underwriting Agreement. 3.1 Amended and Restated Articles of Incorporation as filed with the California Secretary of State on November 23, 1994.** 3.2 Bylaws of the Registrant, as amended.** 4.1 Form of Common Stock Certificate.** 4.2 Revised Form of Representative's Warrant. 5.1 Opinion of Rutan & Tucker.* 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Registrant, Patlex Corporation and Gordon Gould.** 10.2 Assignment Agreement dated July 27, 1992 between the Registrant and Michael Colvard, M.D.** 10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Registrant and Optical Engineering, Inc.** 10.4 Assignment and Modification Agreement dated July 26, 1991 among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited.** 10.5 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.** + 10.6 Lead Generation/Distribution Agreement dated March 17, 1994 between the Registrant and Burkhart Dental Supply Company.** 10.7 Form of International Distribution Agreement.** 10.8 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.** + 10.9 Exclusive Marketing Agreement dated July 26, 1994 between the Registrant, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd.** 10.10 Amended and Restated Registration Rights Agreement dated June 17, 1994 among the Registrant, Onset Enterprise Associates, L.P., New Enterprise Associates IV Limited Partnership and Franklin Capital Associates, LLP.** 10.11 Subordinated Note dated August 8, 1991 payable to Pfizer Hospital Products Group, Inc. in the original principal amount of $1,343,658.** 10.12 Letter Agreement dated July 21, 1994 between the Registrant and Pfizer, Inc., as amended.** 10.13 Letter Agreement dated February 29, 1996 between the Registrant and Pfizer Hospital Products Group.*** 10.14 Form of Indemnification Agreement.** 10.15 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company.*** 10.16 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc.*** 10.17 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended.** 10.18 Security Agreement dated August 8, 1991 between the Registrant and Pfizer Hospital Products Group, Inc.** 10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the Registrant and International Biolaser Corporation.**** 10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan Corporation.****
EXHIBIT NUMBER DESCRIPTION - --------- --------------------------------------------------------------------------------------------- 10.21 Purchasing Agreement dated December 20, 1995 between the Registrant and Mattan Corporation.**** 10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S.*** 10.23 Distribution Agreement dated August 31, 1995 between the Registrant and Lasermed, Inc.*** 10.24 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan.*** 10.25 Form of Consulting Agreement.*** 10.26 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics International.*** 10.27 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting option to purchase 358,650 shares of Registrant's Common Stock).*** 10.28 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive Officers.*** 10.29 1996 Stock Option Plan.*** 10.30 Form of Warrant Agreement (including forms of Class A and Class B Warrant Certificates).** 10.31 Form of Underwriter's IPO Unit Purchase Option.** 10.32 Form of Finders' IPO Unit Purchase Option.** 10.33 1992 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.** 10.34 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.*** 10.35 February 1996 Stock Option Plan, together with form of Nonqualified Stock Option Agreement.*** 10.36 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with Schedule to Loan Agreement dated June 3, 1996. 10.37 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank. 10.38 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank. 10.39 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank. 10.40 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Rutan & Tucker LLP (included in the opinion filed as Exhibit 5). 23.3 Consent of Knobbe, Martens, Olson & Bear LLP.* 24 Power of Attorney. Reference is made to page II-7.
- ------------------------ + Confidential treatment was granted with respect to portions of this Exhibit. * Previously filed. ** Incorporated by reference from the Company's Registration Statement on Form SB-2 (Registration No. 33-83984). *** Incorporated by reference from the Company's Annual Report on Form 10-KSB for the year ended March 31, 1996. **** Incorporated by reference from the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995. EX-1.1 2 EXHIBIT 1.1 - REVISED FORM OF UNDERWRITING DRAFT 6/26/96 2,500,000 SHARES PREMIER LASER SYSTEMS, INC. COMMON STOCK UNDERWRITING AGREEMENT July __, 1996 Rodman & Renshaw, Inc. One Liberty Plaza 165 Broadway New York, New York 10006 On behalf of the Several Underwriters named in Schedule I attached hereto. Ladies and Gentlemen: Premier Laser Systems, Inc., a California corporation (the "Company"), proposes to sell to you and the other underwriters named in Schedule I attached hereto (the "Underwriters"), for whom you are acting as the Representative, an aggregate of 2,500,000 shares (the "Firm Shares") of the Company's Class A Common Stock, without par value (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 375,000 shares (the "Option Shares"), of Common Stock for the purpose of covering over-allotments in connection with the sale of the Firm Shares. The Firm Shares and the Option Shares are together called the "Shares." 1. SALE AND PURCHASE OF THE SHARES. On the basis of the representations, warranties and agreements contained in, and subject to the terms and conditions of, this Agreement: (a) The Company agrees to issue and sell the Shares to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase at the purchase price per share of Common Stock (the "Initial Price"), the aggregate number of Firm Shares set forth opposite such Underwriter's name in Schedule I attached hereto. The Underwriters agree to offer the Firm Shares to the public as set forth in the Prospectus. (b) The Company grants to the several Underwriters an option to purchase all or any part of the number of Option Shares at the Initial Price. The number of Option Shares to be purchased by each Underwriter shall be the same percentage (adjusted by the Representative to eliminate fractions) of the total number of Option Shares to be purchased by the Underwriter as such Underwriter is purchasing of the Firm Shares. Such option may be exercised only to cover over-allotments in the sales of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time on or before 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date (as defined below), and from time to time thereafter within 30 days after the date of this Agreement, upon written or telegraphic notice, or verbal or telephonic notice confirmed by written or telegraphic notice, by the Representative to the Company no later than 12:00 noon, New York City time, on the business day before the Firm Shares Closing Date or at least two business days before any Option Shares Closing Date (as defined below), as the case may be, setting forth the number of Option Shares to be purchased and the time and date (if other than the Firm Shares Closing Date) of such purchase. (c) On each Closing Date (as defined below), the Company shall issue and sell to the Representative, individually and not as Representative of the Underwriters, for an aggregate purchase price of $.001 per warrant, warrants representing the right of the Representative to purchase a number of Shares of Common Stock (the "Warrant Stock") equal to 10.0% of the aggregate number of shares purchased in the Offering, excluding the over- allotment option (which warrants shall be evidenced in the form set forth as an exhibit to the Registration Statement) (the "Representative's Warrants"). 2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to the Representative for the respective accounts of the Underwriters, and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company, shall take place at the offices of Rodman & Renshaw, Inc., at One Liberty Plaza, 165 Broadway, New York, New York, 10006, at 10:00 a.m., New York City time, on the third business day following the date on which the public offering of the Shares commences (unless such date is postponed in accordance with the provisions of Section 10(b)), or at such time and place on such other date, not later than 10 business days after the date of this Agreement, as shall be agreed upon by the Company and the Representative (such time and date of delivery and payment are called the "Firm Shares Closing Date"). The public offering of the Shares shall be deemed to have commenced at the time, which is the earlier of (a) the time, after the Registration Statement (as defined in Section 4 below) becomes -2- effective, of the release by you for publication of the first newspaper advertisement which is subsequently published relating to the Shares or (b) the time, after the Registration Statement becomes effective, when the Shares are first released by you for offering by the Underwriters or dealers by letter or telegram. In the event the option with respect to the Option Shares is exercised, delivery by the Company of the Option Shares to the Representative for the respective accounts of the Underwriters and payment of the purchase price by certified or official bank check or checks payable in New York Clearing House (next day) funds to the Company shall take place at the offices of Rodman & Renshaw, Inc. specified above at the time and on the date (which may be the same date as, but in no event shall be earlier than, the Firm Shares Closing Date) specified in the notice referred to in Section 1(b) (such time and date of delivery and payment is called the "Option Shares Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Dates are called, individually, a "Closing Date" and, together, the "Closing Dates." Certificates evidencing the Shares shall be registered in such names and shall be in such denominations as the Representative shall request at least two full business days before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be, and shall be made available to the Representative for checking and packaging, at such place as is designated by the Representative, on the full business day before the Firm Shares Closing Date or the Option Shares Closing Date, as the case may be. 3. PUBLIC OFFERING. The Company understands that the Underwriters propose to make a public offering of the Shares, as set forth in and pursuant to the Prospectus (as defined in Section 4 below), as soon after the effective date of the Registration Statement and the date of this Agreement as the Representative deems advisable. The Company hereby confirms that the Underwriters and dealers have been authorized to distribute or cause to be distributed each preliminary prospectus and are authorized to distribute the Prospectus (as from time to time amended or supplemented if the Company furnishes amendments or supplements thereto to the Underwriters). 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the several Underwriters that: (i) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and may have filed one or more amendments thereto, on Form SB-2 (Registration No. 333-04219), including in such registration -3- statement and each such amendment a related preliminary prospectus (a "Preliminary Prospectus"), for the registration of the Shares and the Option Shares, in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"). The Company may also file a related registration statement with the Commission pursuant to Rule 462(b) under the Act for the purpose of registering certain additional Shares, which registration shall be effective upon filing with the Commission. As used in this Agreement, the term "Original Registration Statement" means such registration statement, as amended, on file with the Commission at the time such registration statement becomes effective (including the prospectus, financial statements, exhibits, and all other documents filed as a part thereof or incorporated by reference directly or indirectly therein), provided that such registration statement, at the time it becomes effective, may omit such information as is permitted to be omitted from the registration statement when it becomes effective pursuant to Rule 430A of the General Rules and Regulations promulgated under the Act (the "Regulations"), which information ("Rule 430 Information") shall be deemed to be included in such Registration Statement when a final prospectus is filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4) of the Regulations; the term "Rule 462(b) Registration Statement" means any registration statement filed with the Commission pursuant to Rule 462(b) under the Act (including the Original Registration Statement and any Preliminary Prospectus or Prospectus incorporated therein at the time the Original Registration Statement becomes effective); the term "Registration Statement" includes both the Original Registration Statement and any Rule 462(b) Registration Statement; the term "Preliminary Prospectus" means each prospectus included in the Registration Statement, or any amendments thereto, before it becomes effective under the Act, the form of prospectus omitting Rule 430A Information included in the Registration Statement when it becomes effective, if applicable (the "Rule 430A Prospectus"), and any prospectus filed by the Company with your consent pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the final prospectus included as part of the Registration Statement, except that if the prospectus relating to the securities covered by the Registration Statement in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) of the Regulations shall differ from such final prospectus, the term "Prospectus" shall mean the prospectus as filed pursuant to Rule 424(b) from and after the date on which it shall have first been used. -4- (ii) When the Registration Statement becomes effective, and at all times subsequent thereto to and including the Closing Dates, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, and during such longer period until any post-effective amendment thereto shall become effective, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and 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 not misleading, and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; if a Rule 430A Prospectus is included in the Registration Statement at the time it becomes effective, the Prospectus filed pursuant to Rules 430A and 424(b)(1) or (4) will contain all Rule 430A Information; and each Preliminary Prospectus, as of the date filed with the Commission, did not include 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 in which they were made, not misleading; except that no representation or warranty is made in this Section 4(a)(ii) with respect to statements or omissions made in reliance upon and in conformity with written information furnished to the Company as stated in Section 7(b) with respect to any Underwriter by or on behalf of such Underwriter through the Representative expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto. (iii) If the Company has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement has not been declared effective, then (i) the Company has filed a Rule 462(b) Registration Statement in compliance with and that is effective upon filing pursuant to Rule 462(b) and has received confirmation of its receipt and (ii) the Company has given irrevocable instructions for transmission of the applicable filing fee in connection with the filing of the Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated under the Act or the Commission has received payment of such filing fee. -5- (iv) Neither the Commission nor the "blue sky" or securities authority of any jurisdiction have issued an order (a "Stop Order") suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Firm Shares or the Option Shares, nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. (v) Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (vi) The Company has no subsidiary or subsidiaries and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization, except for those listed on Schedule II hereto and for those permitted to be excluded pursuant to Item 601, Exhibit 21 or Regulation S-K (each such corporation singly a "Subsidiary" and collectively, the "Subsidiaries"). Each of the Company and each of the Subsidiaries is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of incorporation, with full corporate power and authority, and all material consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on its business as now being conducted and in the manner described in the Prospectus. Each of the Company and each of the Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which its ownership, leasing, licensing, or character, location or use of property and assets or the conduct of its business makes such qualification necessary except where the failure to be so qualified would not have a material adverse effect on the Company. (vii) The authorized capital stock of the Company consists of 35,600,000 shares of Common Stock, of which 4,717,258 shares are -6- outstanding as of the date hereof; 2,200,000 shares of Class E-1 Common Stock, without par value, of the Company (the "Class E-1 Stock"), of which 1,256,549 shares are outstanding as of the date hereof; 2,200,000 shares of Class E-2 Common Stock, without par value, of the Company (the "Class E-2 Stock"), of which 1,256,549 shares are outstanding as of the date hereof; and 8,850,000 shares of preferred stock, without par value, of the Company of which none are outstanding. Except as set forth in the Prospectus, each outstanding share of Common Stock and each outstanding share of capital stock of each Subsidiary has been duly and validly authorized and issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof and has not been issued and is not owned or held in violation of any preemptive rights of shareholders and, in the case of the Subsidiaries, is owned of record and beneficially by the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements, and voting trusts. There is no commitment, plan, preemptive right or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, shares of capital stock of the Company or of any Subsidiary or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company or of any Subsidiary, except as are identified described in the Prospectus. There is outstanding no security or other instrument which by its terms is convertible into or exchangeable for capital stock of the Company or of any Subsidiary, except as may be properly described in the Prospectus. (viii) The consolidated financial statements of the Company and the Subsidiaries included in the Registration Statement and the Prospectus together with the related schedules and notes fairly present, with respect to the Company and its Subsidiaries the financial position, the consolidated results of operations, and the other financial information shown therein at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles (except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) consistently applied throughout the periods involved, are correct and complete in all material respects, and are in accordance with the books and records of the Company and the Subsidiaries. The accountants whose report on the audited financial statements is filed with the Commission as a part of the -7- Registration Statement are, and during the periods covered by their report(s) included in the Registration Statement and the Prospectus were, independent certified public accountants with respect to the Company and the Subsidiaries within the meaning of the Act and the Regulations. No other financial statements are required by Form SB-2 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company or any Subsidiary from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. (ix) There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, or in prospect (or any basis therefor) with respect to the Company, any Subsidiary, or any of their respective operations, business, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company. Neither the Company nor any of the Subsidiaries is involved in any labor dispute, nor is such dispute threatened, which dispute would have a material adverse effect upon the operations, business, properties, assets or financial condition of the Company or the Subsidiaries. Neither the Company nor the Subsidiaries is in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree in any material respect; nor is the Company or the Subsidiaries required to take any action in order to avoid any such violation or default. (x) The Company and its Subsidiaries do not own any real property. The Company and each of the Subsidiaries have good title to all other properties and assets which the Prospectus indicates are owned by it, and has valid and enforceable leasehold interests in each of such items, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages (except as may be properly described in the Prospectus and except as do not materially affect the value of such property or as do not materially interfere with the use of such property by the Company). No real property owned, leased, licensed or used by the Company or the Subsidiaries lies in an area which is, or to the knowledge of the Company or the Subsidiaries will be, subject to zoning, use or -8- building code restrictions which would prohibit the continued leasing, licensing or use of such real property in the business of the Company or the Subsidiaries as presently conducted or as the Prospectus indicates it contemplates conducting (except as may be properly described in the Prospectus). (xi) Neither the Company nor any of the Subsidiaries, nor to the knowledge of the Company and the Subsidiaries, any other party, is now or is expected by the Company to be in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding other than such violations, breaches or defaults as do not, individually or in the aggregate have a material adverse effect on the Company and the Subsidiaries or by which any of its properties or business may be bound or affected, and no event has occurred which with notice or lapse of time or both would constitute such a default, and each such contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding is in full force and is the legal, valid and binding obligation of the parties thereto and is enforceable as to them in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization and other laws affecting creditors' rights generally, and by general limitations in the availability of equitable remedies. The Company and each of the Subsidiaries enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. Neither the Company nor any of the Subsidiaries is in violation or breach of, or in default with respect to, any term of its certificate of incorporation (or other charter document) or by- laws or of any franchise, license, permit, judgment, decree, order, statute, rule or regulation which default or violation with respect to any franchise, license, permit judgment, decree, order, statute, rule or regulation do not, individually or in the aggregate have a material adverse effect on the operations, business, properties, assets or financial condition of the Company and the Subsidiaries (taken as a whole). (xii) The Company and each of the Subsidiaries has filed all federal, state, local and foreign tax returns which are required to be filed through the date hereof, or have received extensions thereof, and have paid all taxes shown on such returns and all assessments received by it to the extent that the same are material and have become due. -9- (xiii) All patents, pending patent applications, trademarks, pending trademark applications, trade names, service marks, copyrights, pending copyright applications, franchises, and other intangible properties and assets listed in the Registration Statement under "Business-Patents and Patent Applications" (all of the foregoing being collectively herein called "Intangibles") that the Company and the Subsidiaries own, possess or have pending, or under which they are licensed, are in good standing and there are no current claims against such Intangibles except for an opposition against a Japanese patent application. There is no right under any Intangible necessary to the business of the Company or the Subsidiaries as presently conducted or as the Prospectus indicates the Company or the Subsidiaries contemplates conducting (except as may be so described in the Prospectus). Neither the Company nor any of the Subsidiaries has infringed, is infringing, or has received any notice of infringement with respect to asserted Intangibles of others except as set forth in the Prospectus. To the knowledge of the Company and each of the Subsidiaries, there is no infringement by others of any material Intangibles of the Company or the Subsidiaries. To the knowledge of the Company and the Subsidiaries, there is no Intangible of others which has had or may in the future have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities or future prospects of the Company and the Subsidiaries as described in the Prospectus. (xiv) Neither the Company nor any of the Subsidiaries nor any director, officer, agent, employee or other person acting on behalf of the Company or any of the Subsidiaries has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. No transaction has occurred between or among the Company and any of its officers or directors or any affiliates or affiliates of any such officer or director, except as described in the Prospectus or as may be omitted from the Prospectus in accordance with the Regulations. (xv) The Company has all requisite power and authority to execute, deliver and perform each of this Agreement and the Representative's Warrants (collectively, the "Company Documents"). -10- All necessary corporate proceedings of the Company have been duly taken to authorize the execution, delivery and performance of each of the Company Documents. This Agreement has been duly authorized, executed, and delivered by the Company, is the legal, valid and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms and each of the other Company Documents have been duly authorized and when executed and delivered by the Company will be the legal, valid and binding obligation of the Company enforceable as to the Company in accordance with its terms (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally and to general limitations on the availability of equitable remedies) and subject to the effect, if any, of public policy on the enforceability of indemnification and contribution agreements. No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal, state, local or other governmental authority or any court or other tribunal is required by the Company for the execution, delivery or performance by the Company of the Company Documents (except filings under the Act which have been or will be made before the applicable Closing Date and such consents consisting only of consents under "blue sky" or securities laws which have been obtained at or prior to the date of this Agreement). No consent of any party to any material contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party, or to which any of its respective properties or assets are subject, is required for the execution, delivery or performance of the Company Documents, except such as have been obtained and the execution, delivery and performance of the Company Documents, will not violate, result in a breach of, conflict with, accelerate the due date of any payments under, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such material contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement, or understanding, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any material law, rule, regulation, order, judgment or decree binding on the Company or to which any of its operations, business, properties or assets are subject. (xvi) The Firm Shares and the Option Shares are duly and validly authorized. The Firm Shares and the Option Shares, when delivered in accordance with this Agreement, -11- respectively, will be duly and validly issued, fully paid, and non-assessable, without any personal liability attaching to the ownership thereof (other than liability that may be imposed on shareholders under Section 506 of the California Corporations Code (the "Code") with respect to possible future distributions by the Company to such shareholders, in circumstances where the distribution violates the requirements of Chapter 5 of the Code and the shareholder has knowledge of the facts indicating the impropriety thereof) (the "Section 506 Exception"), and will not be issued in violation of any preemptive rights of shareholders, optionholders, warrantholders and any other persons and the Underwriters will receive good title to the Firm Shares and the Option Shares purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. (xvii) The Warrant Stock is duly and validly authorized and reserved for issuance and, when issued and delivered upon exercise of the Representative Warrants, will be duly and validly issued, fully paid and non-assessable, without any personal liability attaching to the ownership thereof other than the Section 506 Exception, and will not be issued in violation of any preemptive rights of stockholders, optionholders, warrantholders and any other persons and the holders of the Representative Warrants will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements and voting trusts. (xviii) The Firm Shares, the Option Shares, the Representative's Warrants, all of the classes of the Common Stock and the Preferred Stock, conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (xix) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described therein, there has not been any material adverse change in the assets or properties, business or results of operations or financial condition of the Company or any of the Subsidiaries, whether or not arising from transactions in the ordinary course of business; neither the Company nor any of the Subsidiaries has sustained any material loss or interference with its business or properties from fire, explosion, earthquake, flood or other calamity, whether or not covered by insurance; since the date of -12- the latest balance sheet included in the Registration Statement and the Prospectus, except as reflected therein neither the Company nor any of the Subsidiaries has undertaken any liability or obligation, direct or contingent, except for liabilities or obligations undertaken in the ordinary course of business; and, except as reflected in the Prospectus, the Company has not (A) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (B) entered into any transaction not in the ordinary course of business, or (C) declared or paid any dividend or made any distribution on any of its capital stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares of its capital stock. (xx) Neither the Company nor any of the Subsidiaries, nor any of their officers, directors or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the underwriting syndicate contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Firm Shares or the Option Shares. (xxi) The Company has obtained from each of its executive officers and directors, his or her enforceable written agreement, in form and substance satisfactory to counsel for the Underwriters, that for a period of 180 days from the date on which the public offering of the Shares commences he or she will not, without the prior written consent of Rodman & Renshaw, Inc. ("Rodman"), on behalf of the Underwriters, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or other securities of the Company (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by him or her. (xxii) The Company is not, and does not intend to conduct its business in a manner in which it would be, an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940 (the "Investment Company Act"). -13- (xxiii) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement, except such person or entities from whom written waivers of such rights have been received prior to the date hereof. (xxiv) Except as may be set forth in the Prospectus, neither the Company nor any of the Subsidiaries has incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. (xxv) No transaction has occurred between or among the Company or any of the Subsidiaries and any of their respective officers or directors or any affiliates of any such officer or director, that is required to be described in and is not described in the Registration Statement and the Prospectus. (xxvi) All issuances and sales of securities by the Company and the Subsidiaries were either (i) registered in a public offering or (ii) exempt from registration under the Act and complied in all respects with the provisions of all applicable federal and state securities laws. (xxvii) The Company has, and at each Closing Date will have, made all filings required to be made by it under the Exchange Act, and such filings, at the time they were made, complied in all material respects with the requirements of the Exchange Act, and the rules and regulations thereunder, and did not contain any 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. (xxviii) The Common Stock, including the Shares, are authorized for quotation on the Nasdaq National Market. (xxix) Neither the Company nor any of the Subsidiaries nor any of their affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. If, at any time after the date that the Registration Statement is declared effective with the Commission or with the Florida Department of Banking and Finance (the "Florida Department"), whichever date is later, and prior to the end of the period referred to in the first clause of Section 4(a)(ii) hereof, the -14- Company commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba, the Company will so inform the Florida Department within ninety days after such commencement of business in Cuba, and during the period referred to in Section 4(a)(ii) hereof will inform the Florida Department within ninety days after any change occurs with respect to previously reported information. 5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters under this Agreement are several and not joint. The respective obligations of the Underwriters to purchase the Shares are subject in the Representative's sole discretion, to each of the following terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 6(a)(i) of this Agreement; if the Original Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Original Registration Statement or such amendment and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been declared effective not later than the earlier of (i) 11:00 a.m. New York time, on the date on which the amendment to the registration statement originally filed with respect to the Shares or to the Registration Statement, as the case may be, containing information regarding the public offering price of the Shares has been filed with the Commission, and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2) or, with respect to the Original Registration Statement, such later time and date as shall have been consented to by the Representatives. (b) No order preventing or suspending the use of any preliminary prospectus or the Prospectus shall have been or shall be in effect and no order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Representative. (c) The representations and warranties of the Company contained in this Agreement and in the certificate delivered pursuant to Section 5(d) shall be true and correct in all material respects when made and on and as of each Closing Date as if made on such date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such Closing Date. -15- (d) The Representative shall have received on each Closing Date, a certificate, addressed to the Representative and dated such Closing Date, of the chief executive or chief operating officer and the chief financial officer of the Company to the effect that the persons executing such certificate have carefully examined the Registration Statement, the Prospectus and this Agreement and that the representations and warranties of the Company in this Agreement are true and correct in all material respects on and as of such Closing Date with the same effect as if made on such Closing Date and the Company has performed all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by it at or prior to such Closing Date. (e) The Representative shall have received at the time this Agreement is executed and on each Closing Date a signed letter from Price Waterhouse, LLP addressed to the Representative and dated, respectively, the date of this Agreement and each such Closing Date, in form and scope reasonably satisfactory to the Representative, with reproduced copies or signed counterparts thereof for each of the Underwriters confirming that they are independent accountants within the meaning of the Act and the Regulations, that the response to Item 10 of the Registration Statement is correct in so far as it relates to them and stating in effect that: (i) in its opinion the audited financial statements and financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectus and reported on by it comply as to form in all material respects with the applicable accounting requirements of the Act, the Exchange Act and the related published rules and regulations thereunder; (ii) on the basis of a reading of the amounts included in the Registration Statement and the Prospectus under the heading "Selected Financial Data" which would not necessarily reveal matters of significance with respect to the comments set forth in such letter, a reading of the minutes of the meetings of the shareholders and directors of the Company, and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company as to transactions and events subsequent to the date of the latest audited financial statements, except as disclosed in the Registration Statement and the Prospectus, nothing came to their attention which caused them to believe that: (A) the amounts in "Selected Financial Data," and included or incorporated by reference in the Registration -16- Statement and the Prospectus do not agree with the corresponding amounts in the audited financial statements from which such amounts were derived; or (B) with respect to the Company, there were, at a specified date not more than five business days prior to the date of the letter, any decreases in net sales, income before income taxes and net income or any increases in long-term debt of the Company or any decreases in the capital stock, working capital or the shareholders' equity in the Company, as compared with the amounts shown on the Company's audited Balance Sheet for the fiscal year ended March 31, 1996 included in the Registration Statement or the audited Statement of Operations, for such year; and (iii) they have performed certain other procedures as a result of which they determined that information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Registration Statement and the Prospectus and reasonably specified by the Representative agrees with the accounting records of the Company. References to the Registration Statement and the Prospectus in this paragraph (e) are to such documents as amended and supplemented at the date of such letter. (f) The Representative shall have received on each Closing Date from Rutan & Tucker, LLP, counsel for the Company, an opinion, addressed to the Representative and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters, with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, with full corporate power and authority to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus. To the knowledge of such counsel, the Company has no subsidiary and does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization except for those listed on Schedule II attached hereto and those permitted to be excluded in a registration statement pursuant to Item 601, Exhibit 21 of Regulation S-K (each such corporation singly a -17- "Subsidiary" and collectively, the "Subsidiaries"). The Company and each of the Subsidiaries is duly qualified to do business and is in good standing, in each state in which its ownership, leasing, licensing, or character, location or use of property and assets or the conduct of its business makes such qualification necessary except where the failure to be so qualified could have a material adverse effect on the operating condition (financial and otherwise) or business of the Company and each of the Subsidiaries. (ii) The Company has authorized, issued and outstanding capital stock as set forth in the "actual" column of the capitalization table under the caption "Capitalization" in the Prospectus. The certificates evidencing the Shares comply with California law. Each outstanding share of Common Stock has been duly and validly authorized and issued and is fully paid and non-assessable, without any personal liability attaching to the ownership thereof. (iii) To the knowledge of such counsel, there is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation before any court or before any public body or board pending, threatened, with respect to the Company or any of the Subsidiaries, or any of their respective operations, businesses, properties, assets, or financial condition except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, assets, or financial condition of the Company and the Subsidiaries (taken as a whole). (iv) To the knowledge of such counsel, neither the Company, any of the Subsidiaries, nor any other party is now in violation or breach of, or in default with respect to, complying with any term, obligation or provision of any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding which is filed or incorporated by reference as an exhibit to the Registration Statement. (v) To the knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation or breach of, or in default with respect to, any term of its certificate of incorporation (or other charter document) or by-laws. -18- (vi) The Company has all requisite power and authority to execute, deliver and perform the Company Agreements and to issue and sell the Shares and to issue the Representative's Warrants. All necessary corporate proceedings of the Company have been taken to authorize the execution, delivery and performance by the Company of the Company Documents. Each of the Company Documents has been duly authorized, executed and delivered by the Company, is the legal, valid and binding obligation of the Company and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally and general limitations on the availability of equitable remedies and subject to the effect, if any, of public policy on the enforceability of indemnification and contribution agreements) is enforceable as to the Company in accordance with its terms. No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any federal state, local or other governmental authority or any court or other tribunal is required by the Company, for the execution, delivery or performance by the Company of the Company Documents (except filings under the Act which have been made prior to the Closing Date and consents consisting only of consents under "blue sky" or securities laws). To the knowledge of such counsel, no consent of any party to any contract, agreement, instrument, lease, license, indenture, mortgage, deed of trust, note, arrangement or understanding to which the Company is a party which has been filed or incorporated by reference as an exhibit to the registration statement or has been identified to such counsel by the Company as a material contract (the "Material Agreements"), or to which any of its respective properties or assets are subject, is required for the execution, delivery or performance of the Company Documents; and the execution, delivery and performance of the Company Documents will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such Material Agreement, or violate or result in a breach of any term of the Articles of Incorporation (or other charter document) or by-laws of the Company, or violate, result in a breach of, or conflict with any California or Federal law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its respective operations, businesses, properties or assets are subject. (vii) The Warrant Stock is validly authorized and reserved for issuance and, when issued and delivered upon exercise of the Representative Warrants, will be validly issued, fully paid and -19- non-assessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders, optionholders, warrantholders and any other persons contained in the Articles of Incorporation or any Material Agreement, and assuming the holders of the Representative's Warrants act in good faith and without notice of any adverse claim, such holders will acquire the securities issuable upon such exercise free of any adverse claim (including a claim that such transfer is or would be wrongful or that a particular adverse person is the owner of or has an interest in such securities). (viii) The Firm Shares and the Option Shares are duly and validly authorized. Such opinion delivered at each of the Closing Dates shall state that each Share, as the case may be, to be delivered on that date is duly and validly issued, fully paid, and non-assessable, with no personal liability attaching to the ownership thereof, and is not issued in violation of any preemptive rights of shareholders contained in the Articles of Incorporation or any Material Agreement, and assuming the holders of the Representative's Warrants act in good faith and without notice of any adverse claim, such holders will acquire the securities issuable upon such exercise free of any adverse claim (including a claim that such transfer is or would be wrongful or that a particular adverse person is the owner of or has an interest in such securities). The Common Stock, the Preferred Stock, the Firm Shares and the Option Shares conform to all statements relating thereto contained in the Registration Statement or the Prospectus. (ix) To the knowledge of such counsel, there is no contract, agreement, instrument, lease or license of a character required to be summarized or described in the Registration Statement or Prospectus which is not so summarized or described. To the knowledge of such counsel, any contract, agreement, instrument, lease or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. (x) Insofar as statements in the Prospectus purport to summarize the status of litigation or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases or licenses, such statements have -20- been prepared or reviewed by such counsel and to the knowledge of such counsel, accurately reflect the status of such litigation and provisions purported to be summarized and are correct in all material respects. (xi) All offers and sales of the Company's capital stock following its initial public offering and prior to the date hereof, were at all relevant times exempt from the registration requirements of the Act, and were the subject of an available exemption from the registration requirements of all applicable state securities or blue sky laws. (xii) The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act and, if the Company conducts its business as set forth in the Prospectus, will not become an "investment company" and will not be required to be registered under the Investment Company Act. (xiii) To the knowledge of such counsel, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement except such persons or entities from whom written waivers of such rights have been received prior to the Closing Date. (xiv) To the knowledge of such counsel, the Registration Statement has become effective under the Act. No Stop Order has been issued and no proceedings for that purpose has been instituted or are threatened, pending, or to such counsel's knowledge, contemplated. (xv) The Registration Statement, any Rule 430A Prospectus, and the Prospectus, and any amendment or supplement thereto (other than financial statements and other financial data and schedules which are or should be contained in any thereof, as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the Act and the Regulations. The conditions for the use of Form SB-2 have been satisfied with respect to the Registration Statement. -21- (xvi) The agreement of each executive officer and director of the Company, stating that for a period of 180 days from the date on which the public offering of the Shares commences, such executive officer and director will not, without the prior written consent of Rodman, on behalf of the Underwriters, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any other securities of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock or other securities of the Company, including, without limitation, any shares of Common Stock issuable under any employee stock options), beneficially owned by such individual, has been duly and validly executed by such individual and constitutes the legal, valid and binding obligation of such individual enforceable against such individual in accordance with its terms. In addition, such counsel shall state that such counsel has participated in the preparation of the Registration Statement, the Prospectus (including any Rule 430A Prospectus and any supplement or amendment to such Registration Statement and Prospectus) and in conferences with officers and other representatives of the Company, representatives of the Representative and representatives of the independent accountants of the Company, at which conferences the contents of the Registration Statement and the Prospectus (including any Rule 430 Prospectus and any supplement or amendment to such Registration Statement and Prospectus) and related matters were discussed and, although such counsel has not independently verified and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (including any Rule 430 Prospectus and any supplement or amendment to such Registration Statement and Prospectus) (except as specified in the foregoing opinion), on the basis of the foregoing and relying as to materiality upon the representations of executive officers of the Company after conferring with such executive officers, no facts have come to the attention of such counsel which lead such counsel to believe that the Registration Statement or any amendment thereto at the time it became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, (including any Rule 430 Prospectus) or any supplement thereto, except for the financial statements and other financial and statistical data included therein as to which counsel need express no opinion, as amended or supplemented on the date thereof contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. -22- In rendering their opinion as aforesaid, counsel may rely upon an opinion or opinions, each dated the Closing Date, of other counsel retained by the Company as to laws of any jurisdiction other than the Federal laws of the United States, the General Corporate Law of the states of Delaware, California and New York, provided that (1) each such local counsel is reasonably acceptable to the Representative and (2) such reliance is expressly authorized by each opinion so relied upon and a copy of each such opinion is addressed to the Representative and is in form and substance reasonably satisfactory to them and their counsel. In addition, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company, provided that executed copies of such certificates are provided to the Representative. (g) The Representative shall have received on each Closing Date from Knobbe, Martens, Olson & Bear, LLP, patent counsel for the Company, an opinion, addressed to the Representative and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters. (h) The Representative shall have received on each Closing Date from Hogan & Hartson, FDA counsel for the Company, an opinion, addressed to the Representative and dated such Closing Date, and in form and scope satisfactory to counsel for the Underwriters. (i) All proceedings taken in connection with the sale of the Firm Shares and the Option Shares as herein contemplated shall be satisfactory in form and substance to the Representative and its counsel, and the Underwriters shall have received from Squadron, Ellenoff, Plesent & Sheinfeld, LLP, a favorable opinion, addressed to the Representative and dated such Closing Date, with respect to the Shares, the Registration Statement and the Prospectus, and such other related matters, as the Representative may reasonably request, and the Company shall have furnished to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (j) On the Firm Shares Closing Date, the Company shall have issued to the Representative, the Representative's Warrants equal to 10% of the shares of Common Stock sold on Firm Shares Closing Date. 6. COVENANTS OF THE COMPANY. (a) The Company covenants and agrees as follows: -23- (i) The Company shall use its best efforts to cause the Registration Statement to become effective as promptly as possible. If the Registration Statement has become or becomes effective with a form of prospectus omitting Rule 430A information, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to you of such timely filing. The Company shall notify you immediately, and confirm such notice in writing, (A) when the Registration Statement and any post-effective amendment thereto become effective, (B) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, and (C) of the receipt of any notification with respect to a Stop Order. The Company shall not file any amendment of the Registration Statement or supplement to the Prospectus unless the Company has furnished the Representative a copy for its review prior to filing and shall not file any such proposed amendment or supplement to which the Representative reasonably objects. The Company shall use its best efforts to prevent the issuance of any Stop Order and, if issued, to obtain as soon as possible the withdrawal thereof. (ii) During the time when a Prospectus relating to the Shares is required to be delivered hereunder or under the Act or the Regulations, the Company shall comply so far as it is able with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act and the Regulations, there shall occur any event as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend or supplement the Prospectus to comply with the Act or the Regulations, the Company promptly shall prepare and file with the Commission, subject to the third sentence of paragraph (i) of this Section 6(a), an amendment or supplement which shall correct such statement or omission or an amendment which shall effect such compliance. -24- (iii) The Company shall make generally available to its security holders and to the Representative as soon as practicable, but not later than 45 days after the end of the 12-month period beginning at the end of the fiscal quarter of the Company during which the Effective Date (or 90 days if such 12-month period coincides with the Company's fiscal year), an earnings statement (which need not be audited) of the Company, covering such 12-month period, which shall satisfy the provisions of Section 11(a) of the Act or Rule 158 of the Regulations. (iv) The Company shall furnish to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including all exhibits and amendments thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and all amendments thereof and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Act or the Regulations, as many copies of any preliminary prospectus and the Prospectus and any amendments thereof and supplements thereto as the Representative may reasonably request. (v) The Company shall cooperate with the Representative and its counsel in endeavoring to qualify the Shares for offer and sale under the laws of such jurisdictions as the Representative may designate and shall maintain such qualifications in effect so long as required for the distribution of the Shares; provided, however, that the Company shall not be required in connection therewith, as a condition thereof, to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction or subject itself to taxation as doing business in any jurisdiction. (vi) For a period of five years after the date of this Agreement, the Company shall supply to the Representative, and to each other Underwriter who may so request in writing, copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and to furnish to the Representative a copy of each annual or other report it shall be required to file with the Commission. (vii) If the Company elects to rely on Rule 462(b), the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated under the -25- Act by the earlier of (i) 10:00 p.m. eastern time on the date of this Agreement and (ii) the time confirmations are sent or given, as specified by Rule 462(b)(2). (viii) Without the prior written consent of Rodman, on behalf of the Underwriters, for a period of 180 days from the date on which a public offering of the Shares commences, the Company shall not issue, sell or register with the Commission or otherwise dispose of, directly or indirectly, any securities of the Company (or any securities convertible into or exercisable or exchangeable for securities of the Company), except for (A) the issuance of the Shares pursuant to the Registration Statement (B) the issuance of Common Stock upon the exercise of currently outstanding options and warrants, and (C) the issuance of options (or Common Stock upon the exercise thereof) under plans disclosed in the Registration Statement. (ix) On or before completion of this offering, the Company shall make all filings required under applicable securities laws and by the Nasdaq National Market. (x) Until expiration of the Representative's Warrants, the Company shall keep reserved sufficient shares of Common Stock for issuance upon exercise thereof. (xi) The Company will make all filings required to be made under the Exchange Act and such filings shall comply in all material respects with the Requirements of the Exchange Act and the rules and regulations thereunder. (b) The Company agrees to pay, or reimburse if paid by the Representative, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, all costs and expenses relating to the registration and public offering of the Shares including those relating to: (i) the preparation, printing, filing and distribution of the Registration Statement including all exhibits thereto, each preliminary prospectus, the Prospectus, all amendments and supplements to the Registration Statement and the Prospectus, and any documents required to be delivered with any Preliminary Prospectus or the Prospectus, and the printing, filing and distribution of the Agreement Among Underwriters, this Agreement and related documents; (ii) the preparation and delivery of certificates for the Shares to the Underwriters; (iii) the registration or qualification of the Shares for offer and sale under -26- the securities or Blue Sky laws of the various jurisdictions referred to in Section 6(a)(v), including the fees and disbursements of counsel for the Underwriters in connection with such registration and qualification and the preparation, printing, distribution and shipment of preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including costs of shipping and mailing) to the Representative and to the Underwriters of copies of each preliminary prospectus, the Prospectus and all amendments or supplements to the Prospectus, and of the several documents required by this Section to be so furnished, as may be reasonably requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the filing fees of the National Association of Securities Dealers, Inc. in connection with its review of the terms of the public offering; (vi) the furnishing (including costs of shipping and mailing) to the Representative and to the Underwriters of copies of all reports and information required by Section 6(a)(vi); (vii) inclusion of the Shares for quotation on the NASDAQ National Market; and (viii) all transfer taxes, if any, with respect to the sale and delivery of the Shares by the Company to the Underwriters. Except as otherwise contemplated by Section 9 hereof, the Underwriters will pay their own counsel fees and expenses to the extent not otherwise covered by clause (iii) above, and their own travel and travel-related expenses in connection with the offering and distribution of the Shares. Without limiting the Company's obligations set forth above, it agrees to pay all of its other costs and expenses incident to the performance of its obligations under this Agreement and the sale of the Shares by it hereunder. 7. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein such fact required to be stated therein or necessary to make such statements therein, in light of the circumstances under which they were -27- made, not misleading. Such indemnity shall not inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages or liabilities arising from the sale of the Shares to any person by such Underwriter if such untrue statement or omission or alleged untrue statement or omission was made in such preliminary prospectus, the Registration Statement or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with information furnished in writing to the Company by the Representative on behalf of any Underwriter specifically for use therein. In no event shall the indemnification agreement contained in this Section 7(a) inure to the benefit of any Underwriter (or any person controlling such Underwriter) on account of any losses, claims, damages, liabilities or actions arising from the sale of the Shares upon the public offering to any person by such Underwriter if such losses, claims, damages, liabilities or actions arise out of, or are based upon, a statement or omission or alleged omission in a preliminary prospectus and if, in respect to such statement, omission or alleged omission, the Prospectus differs in a material respect from such preliminary prospectus, and a copy of the Prospectus has not been sent or given to such person at or prior to the confirmation of such sale to such person. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company, and each officer of the Company who signs the Registration Statement, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which was made in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, which were made in reliance upon and in conformity with information furnished in writing to the Company by the Representative on behalf of any Underwriter for specific use therein; provided, however, that the obligation of each Underwriter to indemnify the Company (including any controlling person, director or officer thereof) shall be limited to the net proceeds received by the Company from such Underwriter. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information furnished in writing by or on behalf of any Underwriter expressly for inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration Statement or the Prospectus or any amendment or supplement thereto. -28- (c) Any party that proposes to assert the right to be indemnified under this Section will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served. No indemnification provided for in Section 7(a) or 7(b) shall be available to any party who shall fail to give notice as provided in this Section 7(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve it from any liability that it may have to any indemnified party for contribution or otherwise than under this Section. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the approval by the indemnified party of such counsel, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, except as provided below and except for the reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party has been authorized in writing by the indemnifying parties, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying parties and the indemnified party in the conduct of the defense of such action (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party), or (iii) the indemnifying parties shall not have employed counsel to assume the defense of such action within a reasonable time after notice of the commencement thereof, in each of which cases the reasonable fees and expenses of counsel shall be at the expense of the indemnifying parties. An indemnifying party shall not be liable for any settlement of any action, suit, proceeding or claim effected without its written consent. 8. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in -29- Sections 7(a) and (b) is due in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who may also be liable for contribution) to which the Company and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts but before deducting expenses) received by the Company from the sale of the Shares, as set forth in the table on the cover page of the Prospectus (but not taking into account the use of the proceeds of such sale of Shares by the Company), bear to (y) the underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact related to information supplied by the Company, or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter (except as may be provided in the Agreement Among Underwriters) be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) the Company shall be liable and responsible for any amount in excess of the underwriting discount; provided, however (i) that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, -30- each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company within the meaning of the Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i), (ii) and (iii) in the immediately preceding sentence of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Section, notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties from whom contribution may be sought shall not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have hereunder or otherwise than under this Section. No party shall be liable for contribution with respect to any action, suit, proceeding or claim settled without its written consent. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to their respective underwriting commitments and not joint. 9. TERMINATION. This Agreement may be terminated with respect to the Shares to be purchased on any Closing Date by the Representative by notifying the Company at any time prior to the purchase of the Shares: (a) in the absolute discretion of the Representative at or before any Closing Date: (i) if on or prior to such date, any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representative will in the future materially disrupt, the securities markets; (ii) if there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the Representative, inadvisable to proceed with the Offering; (iii) if there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States such as to make it, in the judgment of the Representative, inadvisable or impracticable to market the Shares; (iv) if trading in the Shares has been suspended by the Commission or trading generally on the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or the Nasdaq National Market has been suspended or limited, or minimum or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities have been required, by said exchanges or by order of the Commission, the National Association of Securities Dealers, Inc., or any other governmental or regulatory authority; or (v) if a -31- banking moratorium has been declared by any state or federal authority, or (b) at or before any Closing Date, if any of the conditions specified in Section 5 shall not have been fulfilled when and as required by this Agreement. If this Agreement is terminated pursuant to any of its provisions, the Company shall not be under any liability to any Underwriter, and no Underwriter shall be under any liability to the Company, except that (y) if this Agreement is terminated by the Representative or the Underwriters because of any failure, refusal or inability on the part of the Company or all of them to comply with the terms or to fulfill any of the conditions of this Agreement, the Company will reimburse the Underwriters for all out-of-pocket expenses (including the fees and disbursements of their counsel) incurred by them in connection with the proposed purchase and sale of the Shares or in contemplation of performing their obligations hereunder and (z) no Underwriter who shall have failed or refused to purchase the Shares agreed to be purchased by it under this Agreement, without some reason sufficient hereunder to justify cancellation or termination of its obligations under this Agreement, shall be relieved of liability to the Company or to the other Underwriters for damages occasioned by its failure or refusal. 10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters shall fail (other than for a reason sufficient to justify the cancellation or termination of this Agreement under Section 9) to purchase on any Closing Date the Shares agreed to be purchased on such Closing Date by such Underwriter or Underwriters, the Representative may find one or more substitute underwriters to purchase such Shares or make such other arrangements as the Representative may deem advisable or one or more of the remaining Underwriters may agree to purchase such Shares in such proportions as may be approved by the Representative, in each case upon the terms set forth in this Agreement. If no such arrangements have been made by the close of business on the business day following such Closing Date: (a) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall not exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then each of the nondefaulting Underwriters shall be obligated to purchase such Shares on the terms herein set forth in proportion to their respective obligations hereunder; provided, that in no event shall the maximum number of Shares that any Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by more than one-ninth of such number of Shares without the written consent of such Underwriter, or -32- (b) if the number of Shares to be purchased by the defaulting Underwriters on such Closing Date shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, then the Company shall be entitled to an additional business day within which it may, but is not obligated to, find one or more substitute underwriters reasonably satisfactory to the Representative to purchase such Shares upon the terms set forth in this Agreement. In any such case, either the Representative or the Company shall have the right to postpone the applicable Closing Date for a period of not more than five business days in order that necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or Prospectus) may be effected by the Representative and the Company. If the number of Shares to be purchased on such Closing Date by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares that all the Underwriters are obligated to purchase on such Closing Date, and none of the nondefaulting Underwriters or the Company shall make arrangements pursuant to this Section within the period stated for the purchase of the Shares that the defaulting Underwriters agreed to purchase, this Agreement shall terminate with respect to the Shares to be purchased on such Closing Date without liability on the part of any nondefaulting Underwriter to the Company and without liability on the part of the Company, except in both cases as provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall not in any way affect the liability of any defaulting Underwriter to the Company or the nondefaulting Underwriters arising out of such default. A substitute underwriter hereunder shall become an Underwriter for all purposes of this Agreement. 11. MISCELLANEOUS. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, and the Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of the officers, directors or controlling persons referred to in Sections 7 and 8 hereof, and shall survive delivery of and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall survive the termination or cancellation of this Agreement. This Agreement has been and is made for the benefit of the Underwriters, the Company and their respective heirs, executors, administrators, personal representatives, successors and assigns and, to the extent expressed herein, for the benefit of persons controlling any of the Underwriters, or the Company, and directors and officers of the Company, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of Shares from any Underwriter merely because of such purchase. -33- All notices and communications hereunder shall be in writing and mailed or delivered, or by telefax or telegraph if subsequently confirmed by letter, (a) if to the Representative, to Rodman & Renshaw, Inc., One Liberty Plaza, 165 Broadway, New York, New York 10006, and Attention: Julia H. Heckman, Managing Director, telecopy: (212) 346-5099 and (b) if to the Company, to the Company's agent for service as such agent's address appears on the cover page of the Registration Statement. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the identity of the person or persons or entity or entities require. All section headings herein are for convenience of reference only and are not part of this Agreement, and no construction or inference shall be derived therefrom. Please confirm that the foregoing correctly sets forth the agreement among us. Very truly yours, PREMIER LASER SYSTEMS, INC. By:_________________________________ Name: Colette Cozean, Ph.D. Title: President Confirmed on behalf of itself and as the Representative of the several Underwriters named in Schedule I annexed hereto: RODMAN & RENSHAW, INC. By:______________________________ Name: Julia H. Heckman Title: Managing Director -34- SCHEDULE I
Number of Firm Shares to be Name of Underwriter Purchased - ------------------- -------------- Rodman & Renshaw, Inc. . . . . . . . . . Total 2,500,000
35 EX-4.2 3 EXHIBIT 4.2 - REVISED FORM OF WARRANT AGREEMENT WARRANT FOR COMMON STOCK W/CASHLESS EXERCISE THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN. PREMIER LASER SYSTEMS, INC. Warrant for the Purchase of Shares of Common Stock, par value $.01 per Share No. 1 [__________] Shares THIS CERTIFIES that, for receipt in hand of [$______] [$0.001 per share of underlying Common Stock] and other value received, [Rodman & Renshaw, Inc.] (the "Holder"), is entitled to subscribe for and purchase from PREMIER LASER SYSTEMS, INC., a California corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time after [one year after the effective date], and before 5:00 P.M. on [five years after the effective date], New York time (the "Exercise Period"), [________]shares of the Company's Common Stock, without par value ("Common Stock"), at a price of $_____ per Share [130% of the Offering price] (the "Exercise Price"). This Warrant is the warrant or one of the warrants (collectively, including any warrants issued upon the exercise or transfer of any such warrants in whole or in part, the "Warrants") issued pursuant to the Underwriting Agreement, dated __________, between Rodman & Renshaw, Inc. as representative of the several Underwriters named therein, and the Company. As used herein the term "this Warrant" shall mean and include this Warrant and any Warrant or Warrants hereafter issued as a consequence of the exercise or transfer of this Warrant in whole or in part. This Warrant may not be sold, transferred, assigned or hypothecated until [one year after the effective date] except that it may be transferred, in whole or in part, to (i) one or more officers or partners of the Holder (or the officers or partners of any such partner); (ii) any other underwriting firm or member of the selling group which participated in the public offering of Common Stock (the "Offering") which commenced on [effective date] (or the officers or partners of any such firm); (iii) a successor to the Holder, or the officers or partners of such successor; (iv) a purchaser of substantially all of the assets of the Holder; or (v) by operation of law; and the term the "Holder" as used herein shall include any transferee to whom this Warrant has been transferred in accordance with the above. The number of shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from time to time as hereinafter set forth. 1. This Warrant may be exercised during the Exercise Period, as to the whole or any lesser number of whole Warrant Shares, by the surrender of this Warrant (with the election at the end hereof duly executed) to the Company at its office at 3 Morgan, Irvine, California 92718, or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the Exercise Price multiplied by the number of Warrant Shares for which this Warrant is being exercised (the "Stock Purchase Price"). 2. (a) In lieu of the payment of the Stock Purchase Price, the Holder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 2. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Stock Purchase Price) that number of shares of Common Stock (the "Conversion Shares") equal to the quotient obtained by dividing (x) the value of this Warrant (or portion thereof as to which the Conversion Right is being exercised if the Conversion Right is being exercised in part) at the time the Conversion Right is exercised (determined by subtracting the aggregate Stock Purchase Price of the shares of Common Stock as to which the Conversion Right is being exercised in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Price (as defined in Section 6(e) hereof) of the shares of Common Stock as to which the Conversion Right is being exercised immediately prior to the exercise of the Conversion Right) by (y) the Current Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. (b) The Conversion Rights provided under this Section 2 may be exercised in whole or in part and at any time and from time to time while any Warrants remain outstanding. In order to exercise the Conversion Right, the Holder shall surrender to the Company, at its offices, this Warrant with the Notice of Conversion at the end hereof duly executed. The presentation and surrender shall be deemed a waiver of the Holder's obligation to pay all or any - 2 - portion of the aggregate purchase price payable for the shares of Common Stock as to which such Conversion Right is being exercised. This Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant for conversion in accordance with the foregoing provisions. 3. Upon each exercise of the Holder's rights to purchase Warrant Shares or Conversion Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares or Conversion Shares issuable upon such exercise or conversion, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrant Shares or Conversion Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise or conversion of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares or Conversion Shares issuable upon such exercise or conversion, registered in the name of the Holder or its designee. If this Warrant should be exercised or converted in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares (or portions thereof) subject to purchase hereunder. 4. Any Warrants issued upon the transfer or exercise or conversion in part of this Warrant shall be numbered and shall be registered in a Warrant Register as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. This Warrant shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its - 3 - duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations thereunder. 5. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares and/or Conversion Shares granted pursuant to the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant, upon receipt by the Company of the full Exercise Price therefor, and all shares of Common Stock issuable upon conversion of this Warrant, shall be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of stockholders, optionholders, warrantholders and any other persons and the Holders will receive good title to the securities purchased by them, respectively, free and clear of all liens, security interests, pledges, charges, encumbrances, stockholders' agreements and voting trusts which might be created by acts or omissions to act of the Company. 6. (a) In case the Company shall at any time after the date the Warrants were first issued (i) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares, or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price, and the number and kind of securities issuable upon exercise or conversion of this Warrant, in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination, or reclassification, shall be proportionately adjusted so that the Holder after such time shall be entitled to receive the aggregate number and kind of shares which, if such Warrant had been exercised or converted immediately prior to such time, he would have owned upon such exercise or conversion and been entitled to receive by virtue of such dividend, subdivision, combination, or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of Common Stock (including any such distribution made to the stockholders of the Company - 4 - in connection with a consolidation or merger in which the Company is the continuing corporation) evidences of its indebtedness, cash (other than any cash dividend which, together with any cash dividends paid within the 12 months prior to the record date for such distribution, does not exceed 5% of the Current Market Price at the record date for such distribution) or assets (other than distributions and dividends payable in shares of Common Stock), or rights, options, or warrants to subscribe for or purchase Common Stock, or securities convertible into or exchangeable for shares of Common Stock, then, in each case, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date for the determination of stockholders entitled to receive such distribution by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock on such record date, less the fair market value (as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options, or warrants or convertible or exchangeable securities, or the amount of such cash, applicable to one share, and the denominator of which shall be such Current Market Price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the record date for the determination of stockholders entitled to receive such distribution. (c) For the purpose of any computation under this Section 6, the Current Market Price per share of Common Stock on any date shall be deemed to be the average of the daily closing prices for the 30 consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange (including, for purposes hereof, the NASDAQ National Market System) on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid price for the Common Stock as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information. If on any such date the Common Stock is not listed or admitted to trading on any national securities exchange and is not quoted by NASDAQ or any similar organization, the fair value of a share of Common Stock on such date, as determined in good faith by the board of directors of the Company, whose determination shall be conclusive absent manifest error, shall be used. - 5 - (d) No adjustment in the Exercise Price shall be required if such adjustment is less than $.05; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 6 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-thousandth of a share, as the case may be. (e) In any case in which this Section 6 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised or converted this Warrant after such record date, the shares of Common Stock, if any, issuable upon such exercise or conversion over and above the shares of Common Stock, if any, issuable upon such exercise or conversion on the basis of the Exercise Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (f) Upon each adjustment of the Exercise Price as a result of the calculations made in this Section 6, this Warrant shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of shares (calculated to the nearest thousandth) obtained by dividing (i) the product obtained by multiplying the number of shares purchasable upon exercise of this Warrant prior to adjustment of the number of shares by the Exercise Price in effect prior to adjustment of the Exercise Price, by (ii) the Exercise Price in effect after such adjustment of the Exercise Price. (g) Whenever there shall be an adjustment as provided in this Section 6, the Company shall promptly cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares purchasable upon the exercise of this Warrant and the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. (h) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise or conversion of this Warrant. If any fraction of a share would be issuable on the exercise or conversion of this Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price of such share of Common Stock on the date of exercise or conversion of this Warrant. - 6 - 7. (a) In case of any consolidation with or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the surviving or continuing corporation), or in case of any sale, lease, or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety, such successor, leasing, or purchasing corporation, as the case may be, shall (i) execute with the Holder an agreement providing that the Holder shall have the right thereafter to receive upon exercise or conversion of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such consolidation, merger, sale, lease, or conveyance by a holder of the number of shares of Common Stock for which this Warrant might have been exercised or converted immediately prior to such consolidation, merger, sale, lease, or conveyance, and (ii) make effective provision in its certificate of incorporation or otherwise, if necessary, to effect such agreement. Such agreement shall provide for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 6. (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise or conversion of this Warrant (other than a change in par value or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder shall have the right thereafter to receive upon exercise or conversion of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of the number of shares of Common Stock for which this Warrant might have been exercised or converted immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 6. (c) The above provisions of this Section 7 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 8. In case at any time the Company shall propose - 7 - (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or (c) to effect any reclassification or change of outstanding shares of Common Stock, or any consolidation, merger, sale, lease, or conveyance of property, described in Section 7; or (d) to effect any liquidation, dissolution, or winding-up of the Company; or (e) to take any other action which would cause an adjustment to the Exercise Price; then, and in any one or more of such cases, the Company shall give written notice thereof, by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined, (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up is expected to become effective, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or (iii) the date of such action which would require an adjustment to the Exercise Price. 9. The issuance of any shares or other securities upon the exercise or conversion of this Warrant, and the delivery of certificates or other instruments representing such shares or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required - 8 - to issue or deliver any such certificate unless and until the person or persons requesting the issue 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. 10. (a) If, at any time during the five-year period commencing upon the effective date of the Offering, the Company shall file a registration statement (other than on Form S-4, Form S-8, or any successor form) with the Securities and Exchange Commission (the "Commission") while any Underwriters' Securities (as hereinafter defined) are outstanding, the Company shall give all the then holders of any Underwriters' Securities (the "Eligible Holders") at least 30 days prior written notice of the filing of such registration statement. If requested by any Eligible Holder in writing within 20 days after receipt of any such notice, the Company shall, at the Company's sole expense (other than the fees and disbursements of counsel for the Eligible Holders and the underwriting discounts, if any, payable in respect of the Underwriters' Securities sold by any Eligible Holder), register or qualify all or, at each Eligible Holder's option, any portion of the Underwriters' Securities of any Eligible Holders who shall have made such request, concurrently with the registration of such other securities, all to the extent requisite to permit the public offering and sale of the Underwriters' Securities through the facilities of all appropriate securities exchanges and the over-the-counter market, and will use its best efforts through its officers, directors, auditors, and counsel to cause such registration statement to become effective as promptly as practicable. Notwithstanding the foregoing, if the managing underwriter of any such offering shall advise the Company in writing that, in its opinion, the distribution of all or a portion of the Underwriters' Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then any Eligible Holder who shall have requested registration of his or its Underwriters' Securities shall delay the offering and sale of such Underwriters' Securities (or the portions thereof so designated by such managing underwriter) for such period, not to exceed 90 days (the "Delay Period"), as the managing underwriter shall request, provided that no such delay shall be required as to any Underwriters' Securities if any securities of the Company are included in such registration statement and eligible for sale during the Delay Period for the account of any person other than the Company and any Eligible Holder unless the securities included in such registration statement and eligible for sale during the Delay Period for such other person shall have been reduced pro rata to the reduction of the Underwriters' Securities which were requested to be included and eligible for sale during the Delay Period in such registration. As used herein, "Underwriters' Securities" shall mean the Warrants and the Warrant Shares and the Conversion Shares which, in each case, have not been - 9 - previously sold pursuant to a registration statement or Rule 144 promulgated under the Act. (b) If, at any time during the four-year period commencing [one year after the effective date], the Company shall receive a written request, from Eligible Holders who in the aggregate own (or upon exercise of all Warrants then outstanding would own) a majority of the total number of shares of Common Stock then included (or upon such exercise would be included) in the Underwriters' Securities (the "Majority Holders"), to register the sale of all or part of such Underwriters' Securities, the Company shall, as promptly as practicable, prepare and file with the Commission a registration statement sufficient to permit the public offering and sale of the Underwriters' Securities through the facilities of all appropriate securities exchanges and the over-the-counter market, and will use its best efforts through its officers, directors, auditors, and counsel to cause such registration statement to become effective as promptly as practicable; PROVIDED, HOWEVER, that the Company shall only be obligated to file one such registration statement for which all expenses incurred in connection with such registration (other than the fees and disbursements of counsel for the Eligible Holders and underwriting discounts, if any, payable in respect of the Underwriters' Securities sold by the Eligible Holders) shall be borne by the Company and one additional such registration statement for which all such expenses shall be paid by the Eligible Holders. Within three business days after receiving any request contemplated by this Section 10(b), the Company shall give written notice to all the other Eligible Holders, advising each of them that the Company is proceeding with such registration and offering to include therein all or any portion of any such other Eligible Holder's Underwriters' Securities, provided that the Company receives a written request to do so from such Eligible Holder within 20 days after receipt by him or it of the Company's notice. (c) In the event of a registration pursuant to the provisions of this Section 10, the Company shall use its best efforts to cause the Underwriters' Securities so registered to be registered or qualified for sale under the securities or blue sky laws of such jurisdictions as the Holder or such holders may reasonably request; PROVIDED, HOWEVER, that the Company shall not for any such purpose be required to (A) qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not otherwise required to be so qualified, (B) subject itself to taxation in any jurisdiction wherein it is not so subject or (C) consent to general service of process in any such jurisdiction or otherwise take action that would subject it to the general jurisdiction of the courts of any jurisdiction to which it is not so subject. (d) The Company shall keep effective any registration or qualification contemplated by this Section 10 and shall from time to time amend - 10 - or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document, and communication for such period of time as shall be required to permit the Eligible Holders to complete the offer and sale of the Underwriters' Securities covered thereby. The Company shall in no event be required to keep any such registration or qualification in effect for a period in excess of nine months from the date on which the Eligible Holders are first free to sell such Underwriters' Securities. (e) In the event of a registration pursuant to the provisions of this Section 10, the Company shall furnish to each Eligible Holder such number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other documents, as any Eligible Holder may reasonably request to facilitate the disposition of the Underwriters' Securities included in such registration. (f) In the event of a registration pursuant to the provisions of this Section 10, the Company shall furnish each Eligible Holder of any Underwriters' Securities so registered with an opinion of its counsel (reasonably acceptable to the Eligible Holders) to the effect that (i) the registration statement has become effective under the Act and no order suspending the effectiveness of the registration statement, preventing or suspending the use of the registration statement, any preliminary prospectus, any final prospectus, or any amendment or supplement thereto has been issued, nor has the Commission or any securities or blue sky authority of any jurisdiction instituted or threatened to institute any proceedings with respect to such an order, (ii) the registration statement and each prospectus forming a part thereof (including each preliminary prospectus), and any amendment or supplement thereto, complies as to form with the Act and the rules and regulations thereunder, and (iii) such counsel has no knowledge of any material misstatement or omission in such registration statement or any prospectus, as amended or supplemented. Such opinion shall also state the jurisdictions in which the Underwriters' Securities have been registered or qualified for sale pursuant to the provisions of Section 10(c). (g) In the event of a registration pursuant to the provision of this Section 10, the Company shall enter into a cross-indemnity agreement and a contribution agreement, each in customary form, with each underwriter, if any, and, if requested, enter into an underwriting agreement containing conventional representations, warranties, allocation of expenses, and customary closing conditions, including, but not limited to, opinions of counsel and accountants' - 11 - cold comfort letters, with any underwriter who acquires any Underwriters' Securities. (h) The Company agrees that until all the Underwriters' Securities have been sold under a registration statement or pursuant to Rule 144 under the Act, it shall keep current in filing all reports, statements and other materials required to be filed with the Commission to permit holders of the Underwriters' Securities to sell such securities under Rule 144. 11. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Eligible Holder, its officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 11, but not be limited to, reasonable attorneys' fees and any and all reasonable expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), as and when incurred, arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, relating to the sale of any of the Underwriters' Securities, or (B) in any application or other document or communication (in this Section 11 collectively called an "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify any of the Underwriters' Securities under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to such Eligible Holder by or on behalf of such person expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in this Warrant. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Warrant. If any action is brought against any Eligible Holder or any of its officers, directors, partners, employees, agents, or counsel, or any controlling - 12 - persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability pursuant to this Section 11(a) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be a conflict of interest between the indemnified party or parties and the Company in the conduct of the defense of such action in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this Section 11 to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld. The Company shall not, without the prior written consent of each indemnified party that is not released as described in this sentence, settle or compromise any action, or permit a default or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, in respect of which indemnity may be sought hereunder (whether or not any indemnified party is a party thereto), unless such settlement, compromise, consent, or termination includes an unconditional release of each indemnified party from all liability in respect of such action. The Company agrees promptly to notify the Eligible Holders of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of any Underwriters' Securities or any preliminary prospectus, prospectus, registration statement, or amendment or supplement thereto, or any application relating to any sale of any Underwriters' Securities. (b) The Holder agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering Underwriters' Securities held by the Holder, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their respective counsel, to the same extent as the foregoing indemnity from the Company to the Holder in Section 11(a), but only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, - 13 - or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the Company with respect to the Holder by or on behalf of the Holder expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against the Holder pursuant to this Section 11(b), the Holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 11(a). (c) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 11(a) or 11(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act or otherwise, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such registration statement, any controlling person of the Company, and its or their respective counsel), as one entity, and the Eligible Holders of the Underwriters' Securities included in such registration in the aggregate (including for this purpose any contribution by or on behalf of an indemnified party), as a second entity, shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and such Eligible Holders in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission, or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission, or alleged omission relates to information supplied by the Company or by such Eligible Holders, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement, alleged statement, omission, or alleged omission. The Company and the Holder agree that it would be unjust and inequitable if the respective obligations of the Company and the Eligible Holders for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages, and expenses (even if the Holder and the other indemnified parties were treated as one entity for such - 14 - purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 11(c). In no case shall any Eligible Holder be responsible for a portion of the contribution obligation imposed on all Eligible Holders in excess of its pro rata share based on the number of shares of Common Stock owned (or which would be owned upon exercise of all Underwriters' Securities) by it and included in such registration as compared to the number of shares of Common Stock owned (or which would be owned upon exercise of all Underwriters' Securities) by all Eligible Holders and included in such registration. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 11(c), each person, if any, who controls any Eligible Holder within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent, and counsel of each such Eligible Holder or control person shall have the same rights to contribution as such Eligible Holder or control person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, each director of the Company, and its or their respective counsel shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 11(c). Anything in this Section 11(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 11(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 12. (a) At any time after two (2) years and sixty (60) days after the closing date of the Offering, on not less than thirty (30) days notice, this Warrant may be redeemed, at the option of the Company, at a redemption price of $0.05 per underlying share of Common Stock, provided the market price of the Common Stock receivable upon exercise of such Warrant shall exceed 250% of the price per share of Common Stock in the Offering for a period of 60 days commencing two (2) years after the closing date of the Offering (the "Target Price"), subject to adjustment as set forth in Section 12(e), below. Market price for the purpose of this Section 12 shall mean the last reported sale price on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange or the Nasdaq Market System. (b) In the event the conditions set forth in Section 12(a) are met, and the Company shall desire to exercise its right so to redeem the Warrants, it shall mail a notice of redemption to each of the Holders of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth day before the date fixed for redemption, at their last address as shall appear on the records of the Warrants. Any notice mailed in the manner provided herein - 15 - shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. (c) The notice of redemption shall specify the (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Warrants shall be delivered and the redemption price paid, and (iv) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Holder (a) to whom notice was not mailed or (b) whose notice was defective. (d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant, the Redemption Price. (e) If the shares of the Company's Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Target Price shall be proportionally adjusted by the ratio which the total number of shares of Common Stock outstanding immediately prior to such event bears to the total number of shares of Common Stock to be outstanding immediately after such event. 13. Unless registered pursuant to the provisions of Section 10 hereof, the Warrant Shares or Conversion Shares issued upon exercise or conversion of the Warrants shall be subject to a stop transfer order and the certificate or certificates evidencing such Warrant Shares shall bear the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS." 14. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. - 16 - 15. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 16. This Warrant shall be construed in accordance with the laws of the State of New York applicable to contracts made and performed within such State, without regard to principles of conflicts of law. Dated: , 199_ PREMIER LASER SYSTEMS, INC. By: _______________________________ [Seal] ______________________________ Secretary - 17 - FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, _______________________________ hereby sells, assigns, and transfers unto __________________ a Warrant to purchase __________ shares of Common Stock, without par value, of Premier Laser Systems, Inc. (the "Company"), together with all right, title, and interest therein, and does hereby irrevocably constitute and appoint _______________________________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: ___________________ Signature ________________________ NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. - 18 - To: Premier Laser Systems, Inc. 3 Morgan Irvine, Ca. 92718 ELECTION TO EXERCISE The undersigned hereby exercises his or its rights to purchase _______ Warrant Shares covered by the within Warrant and tenders payment herewith in the amount of $_________ in accordance with the terms thereof, and requests that certificates for such securities be issued in the name of, and delivered to: ________________________________________________________________________________ ________________________________________________________________________________ - -_______________________________________________________________________________ (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrant Shares shall not be all the Warrant Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: _______________________ Name_______________________________ (Print) Address:_________________________________________________________ ___________________________ (Signature) - 19 - To: Premier Laser Systems, Inc. 3 Morgan Irvine, Ca. 92718 CASHLESS EXERCISE FORM (To be executed upon conversion of the attached Warrant) The undersigned hereby irrevocably elects to surrender its Warrant for the number of shares of Common Stock as shall be issuable pursuant to the cashless exercise provisions of the within Warrant, in respect of _____ shares of Common Stock underlying the within Warrant, and requests that certificates for such securities be issued in the name of and delivered to: ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ (Print Name, Address and Social Security or Tax Identification Number) and, if such number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the addressed stated below. Dated: _________________________ Name _____________________________ (Print) Address: _____________________________________________________________ __________________________________ (Signature) - 20 - EX-10.36 4 EXHIBIT 10.36 - LOAN AGREEMENT Exhibit 10.36 [LOGO] SILICON VALLEY BANK LOAN AGREEMENT BORROWER: PREMIER LASER SYSTEMS, INC. ADDRESS: 3 MORGAN IRVINE, CALIFORNIA 92718 DATE: JUNE 3, 1996 THIS LOAN AGREEMENT is entered into on the above date between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). 1. LOANS. 1.1 Revolving Loans. Silicon, in its * discretion, will make loans to the Borrower (the "Revolving Loans") in amounts determined by Silicon in its discretion up to the amount (the "Revolving Loan Credit Limit") shown on the Schedule. The Revolving Loans may be referred to in this Agreement as "Loans." If at any time the total of all outstanding Revolving Loans exceeds the Revolving Loan Credit Limit, the Borrower shall ** <#>immediately pay the amount of the excess to Silicon, without notice or demand. * REASONABLE ** WITHIN FIVE BUSINESS DAYS THEREAFTER 1.2 INTEREST. All Revolving Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule hereto. Interest shall be payable monthly, on the due date shown on the monthly billing from Silicon to the Borrower. Silicon may, in its discretion, charge interest to Borrower's deposit accounts maintained with Silicon. 1.3 FEES. The Borrower shall pay to Silicon a loan origination fee in the amount shown on the Schedule hereto concurrently herewith. This fee is in addition to all interest and other sums payable to Silicon and is not refundable. 1.4 "OBLIGATIONS." The term "Obligations" as used in this Agreement means the following: the obligation to pay all Loans and all interest thereon when due, and to pay and perform when due all other present and future indebtedness, liabilities, obligations, guarantees, covenants, agreements, warranties and representations of the Borrower to Silicon, whether joint or several, monetary or non-monetary, and whether created pursuant to this Agreement or any other present or future agreement or otherwise. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower's Loan account, in which event they will bear interest at the highest rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower's deposit accounts maintained with Silicon. Silicon will notify the Borrower of any such charges to Borrower's deposit accounts. Such charges shall not be deemed to be a setoff for any purpose. 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants to Silicon that all of the following representations and warranties now are and in the future will continue to be true and correct and the Borrower will timely perform all of the following covenants: 2.1 CORPORATE EXISTENCE AND AUTHORITY. The Borrower is and will continue to be, duly authorized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on the Borrower. The execution, delivery and performance by the Borrower of this Agreement, and all other documents contemplated hereby have been duly and validly authorized, are enforceable against the Borrower in accordance with their terms, and do not violate any law or any provision of, and are not grounds for acceleration under, any agreement or instrument which is binding upon the Borrower. The Borrower has no corporate subsidiaries or affiliates, except as set forth on the Schedule. 2.2 CHIEF EXECUTIVE OFFICE. The address set forth in the heading to this Agreement is the Borrower's chief executive office, and the Borrower will give Silicon at -1- least 15 days prior written notice before changing its chief executive office. 2.3 PERMITTED LIENS. All of Borrower's real and personal property of every kind now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for the following ("Permitted Liens"): (i) purchase money security interest in specific items of equipment; (ii) leases of specific items of equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon in its sole discretion *. * AND (V) THOSE LIENS IN FAVOR OF PFIZER AS DISCLOSED IN THE BORROWER'S 10-K REPORT SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE PERIOD ENDING MARCH 31, 1995 (THE "BORROWER'S 10-K REPORT"). 2.4 BOOKS AND RECORDS. The Borrower has maintained and will maintain at the Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 2.5 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the financial condition of the Borrower, at the times and for the periods therein stated. Since the last date covered by any such statement, there has been no material adverse change in the financial condition or business of the Borrower. The Borrower is now and will continue to be solvent. The Borrower will provide Silicon: (i) On the earlier of (A) 45 days after the date of the quarter end or (B) 5 days after the earlier of the date the report 10-Q is filed or is required to be filed with the Securities and Exchange Commission, such 10-Q report, and a quarterly financial statement prepared by the Borrower; and (ii) within 5 days after the earlier of the date the report 10-K is filed or is required to be filed with the Securities Exchange Commission, such 10-K report, complete annual financial statements, certified by independent certified public accountants acceptable to Silicon *. * WITH THE UNDERSTANDING THAT THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING MARCH 31, 1995 WERE PREPARED WITH THE ASSUMPTION THAT THE BORROWER WOULD BE CONTINUING AS A GOING CONCERN AND IT IS ANTICIPATED THAT THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING MARCH 31, 1996 WILL BE PREPARED WITH A SIMILAR ASSUMPTION 2.6 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. The Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and the Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by the Borrower. The Borrower may, however, defer payment of any contested taxes, provided that the Borrower (i) in good faith contests the Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Borrower's property. The Borrower is unaware of any claims or adjustments proposed for any of the Borrower's prior tax years which could result in additional taxes becoming due and payable by the Borrower. The Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans * in accordance with their terms, and The Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of the Borrower, including, without limitation, any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. * , IF ANY, 2.7 COMPLIANCE WITH LAW. The Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to the Borrower, including, but not limited to, those relating to the Borrower's ownership of real or personal property, conduct and licensing of the Borrower's business, and environmental matters. 2.8 LITIGATION. Except as previously disclosed to Silicon in writing *, there is no claim, suit, litigation, proceeding or investigation pending or threatened by or against or affecting the Borrower in any court or before any governmental agency (or any basis therefor known to the Borrower) which may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of the Borrower, or in any material impairment in the ability of the Borrower to carry on its business in substantially the same manner as it is now being conducted. The Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against the Borrower involving amounts in excess of $100,000. * AND AS SET FORTH IN THE BORROWER'S 10-K REPORT 2.9 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. 3. ADDITIONAL DUTIES OF THE BORROWER. 3.1 Financial and Other Covenants. The Borrower shall at all times comply with the financial and other covenants set forth in the Schedule to this Agreement. 3.2 INSURANCE. The Borrower shall, at all times insure all of its properties and carry such other business insurance, with insurers acceptable to Silicon, in such form and amounts as Silicon may reasonably require. -2- 3.3 REPORTS; BOOKS AND RECORDS. The Borrower shall provide Silicon with such written reports with respect to the Borrower (including without limitation budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify, and the Borrower shall permit Silicon or its agents to audit and copy the Borrower's books and records at reasonable times, upon one business day notice. 3.4 NEGATIVE COVENANTS. Except as may be permitted in the Schedule hereto, the Borrower shall not, without Silicon's prior written consent, do any of the following: merge, consolidate, dissolve, or acquire any other corporation *; enter into any transaction not in its usual course of business; guarantee or otherwise become liable with respect to the obligations of another party or entity; pay or declare any dividends upon the Borrower's stock (except for dividends payable solely in stock of the Borrower); redeem, retire, purchase or otherwise acquire, directly or indirectly, any of the Borrower's stock; make any change in the Borrower's capital structure; sell or transfer any of Borrower's assets, except for the sale of finished inventory and obsolete equipment in the ordinary course of business; lend or distribute any of the Borrower's property or assets; make any loans of money or guarantee any obligations of others **; or incur any debts outside of the ordinary course of the Borrower's business. * EXCEPT THAT THE BORROWER MAY MERGE OR CONSOLIDATE WITH ANOTHER CORPORATION IF THE BORROWER IS THE SURVIVING CORPORATION IN THE MERGER AND THE AGGREGATE VALUE OF THE ASSETS ACQUIRED IN THE MERGER DO NOT EXCEED 25% OF BORROWER'S TANGIBLE NET WORTH (AS DEFINED BELOW) AS OF THE END OF THE MONTH PRIOR TO THE EFFECTIVE DATE OF THE MERGER, AND THE ASSETS OF THE CORPORATION ACQUIRED IN THE MERGER ARE NOT SUBJECT TO ANY LIENS OR ENCUMBRANCES, EXCEPT PERMITTED LIENS. AS USED HEREIN THE TERM "TANGIBLE NET WORTH" SHALL MEAN WITH RESPECT TO THE BORROWER, THE EXCESS OF ITS TOTAL ASSETS OVER TOTAL LIABILITIES, DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, CONSISTENTLY APPLIED, EXCLUDING HOWEVER ALL ASSETS WHICH WOULD BE CLASSIFIED AS INTANGIBLE ASSETS UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, INCLUDING WITHOUT LIMITATION GOODWILL, LICENSES, PATENTS, TRADEMARKS, TRADE NAMES, COPYRIGHTS, CAPITALIZED SOFTWARE AND ORGANIZATIONAL COSTS, LICENSES AND FRANCHISES. ** IN AN AMOUNT GREATER THAN $20,000 AT ANY TIME OUTSTANDING TO ANY SINGLE PERSON OR ENTITY OR GREATER THAN $200,000 IN THE AGGREGATE FOR ALL SUCH LOANS AND GUARANTEES 3.5 LITIGATION COOPERATION. Should any suit or proceeding be instituted by or against Silicon in any manner relating to the Borrower, the Borrower shall, without expense to Silicon, make available the Borrower and its officers, employees and agents and the Borrower's books and records to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 3.6 EXECUTE ADDITIONAL DOCUMENTATION. The Borrower agrees, at its expense, on request by Silicon, to execute all documents in form satisfactory to Silicon, as Silicon, may deem reasonably necessary or useful in order to fully consummate the transactions contemplated by this Agreement. 4. TERM. 4.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule hereto (the "Maturity Date"). 4.2 EARLY TERMINATION. This Agreement may be terminated, without penalty, prior to the Maturity Date as follows: (i) by the Borrower, effective three business days after written notice of termination is given to Silicon; or (ii) by Silicon at any time after the occurrence of an Event of Default, without notice, effective immediately. 4.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, the Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Notwithstanding any termination of this Agreement, all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are discretionary on the part of Silicon, Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve the Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. 5. EVENTS OF DEFAULT AND REMEDIES. 5.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and the Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by the Borrower or any of the Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in any material respect; or (b) the Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time exceed the Revolving Loan Credit Limit; or (d) the Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) the Borrower shall fail to pay or perform any other non-monetary Obligation, which failure is not cured within 5 business days after the date due; or (f) Any levy, assessment, attachment, seizure, lien or encumbrance is made on all or any material part of -3- the assets of Borrower which is not cured within 10 days after the occurrence of the same; or (g) Dissolution, termination of existence, insolvency or business failure of the Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by the Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (h) the commencement of any proceeding against the Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; (i) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing; or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (j) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing; or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (k) the Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement or if any person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (l) there shall be a change in the record or beneficial ownership of an aggregate of more than <#>20% * of the outstanding shares of stock of the Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of the Borrower in effect on the date hereof, without the prior written consent of Silicon; or (m) a material adverse change occurs in the business, operations, or financial or other condition of the Borrower, or a material impairment occurs in the prospect of payment of the Obligations, or there is a material impairment of the value or priority of Silicon's security interest in the any collateral for any of the Obligations; or (n) the Borrower shall generally not pay its debts as they become due; or the Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law. Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred. * 49%, PROVIDED THAT CHANGES IN THE RECORD OWNERSHIP OF BORROWER RESULTING FROM THE SECONDARY OFFERING (AS DEFINED IN THE SCHEDULE) SHALL NOT CAUSE AN EVENT OF DEFAULT 5.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by the Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to the Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Offset against any sums in any of Borrower's general, special or other deposit accounts with Silicon; and (d) Exercise all of Silicon's other rights and remedies, at law and in equity. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon's rights and remedies, from and after the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent per annum. 5.3 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies under all applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and the Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 6. GENERAL PROVISIONS. 6.1 CREDITING PAYMENTS. Payments shall not be applied to the Obligations until received by Silicon in immediately available federal funds, and any wire transfer or other payment so received after 12:00 noon Pacific time shall be deemed to have been received by Silicon as of the opening of business on the next business day. 6.1 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or the Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered to the Borrower or to an officer of Silicon, or at the expiration of two business days following the deposit thereof in the United States mail, with postage prepaid. -4- 6.2 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 6.3 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between the Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS SIGNED BY THE PARTIES IN CONNECTION HEREWITH. 6.4 WAIVERS. The failure of Silicon at any time or times to require the Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between the Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent thereto. None of the provisions of this Agreement or any other agreement now or in the future executed by the Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an officer of Silicon and delivered to the Borrower. The Borrower waives the benefit of all statutes of limitations in any action or proceeding based upon or arising out of this Agreement or any other present or future instrument or agreement between Silicon and the Borrower. The Borrower waives demand, protest, notice of protest and notice of default or dishonor. 6.5 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by the Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other person affiliated with or representing Silicon. 6.6 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by the Borrower and a duly authorized officer of Silicon. 6.7 TIME OF ESSENCE. Time is of the essence in the performance by the Borrower of each and every obligation under this Agreement. 6.8 ATTORNEYS FEES AND COSTS. The Borrower shall reimburse Silicon for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement *; obtain legal advice in connection with this Agreement; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, account debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Borrower's assets or books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon's security interest in, any collateral; and otherwise represent Silicon in any litigation relating to the Borrower. IN SATISFYING BORROWER'S OBLIGATION HEREUNDER TO REIMBURSE SILICON FOR ATTORNEYS FEES, BORROWER MAY, FOR CONVENIENCE, ISSUE CHECKS DIRECTLY TO SILICON'S ATTORNEYS, LEVY, SMALL & LALLAS, BUT BORROWER ACKNOWLEDGES AND AGREES THAT LEVY, SMALL & LALLAS IS REPRESENTING ONLY SILICON AND NOT BORROWER IN CONNECTION WITH THIS AGREEMENT. If either Silicon or the Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of the Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. * (WITH THE UNDERSTANDING THAT THE FEES FOR THE SUCH PREPARATION AND NEGOTIATION WILL NOT EXCEED $2,500) 6.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release the Borrower from its liability for the Obligations. 6.10 <#>JOINT AND SEVERAL LIABILITY. If the Borrower consists of more than one person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 6.11 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. The Borrower acknowledges that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any -5- manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or the Borrower under any rule of construction or otherwise. 6.12 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and the Borrower shall be governed by, and in accordance with, the laws of the State of California. As a material part of the consideration to Silicon to enter into this Agreement, the Borrower (i) agrees that all actions and proceedings relating directly or indirectly hereto shall, at Silicon's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Orange County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights the Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 6.13 MUTUAL WAIVER OF JURY TRIAL. THE BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND THE BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR THE BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR THE BORROWER. THIS WAIVER OF THE RIGHT TO JURY TRIAL APPLIES TO ALL CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, COMMON LAW CLAIMS, STATUTORY CLAIMS AND ALL OTHER CLAIMS AND CAUSES OF ACTION OF EVERY KIND. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING JURY TRIAL WAIVER CONSTITUTES A MATERIAL INDUCEMENT TO THE OTHER PARTY TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING ITS CONSULTATION WITH ITS LEGAL COUNSEL. BORROWER: PREMIER LASER SYSTEMS, INC. BY /s/ Colette Cozean ------------------------------- [VICE] PRESIDENT BY /s/ Ronald E. Higgins ------------------------------- [ASS'T] SECRETARY SILICON: SILICON VALLEY BANK BY /s/ [illegible] ------------------------------- TITLE AVP ---------------------------- -6- [LOGO] SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT BORROWER: PREMIER LASER SYSTEMS, INC. ADDRESS: 3 MORGAN IRVINE, CALIFORNIA 92718 DATE: JUNE 3, 1996 REVOLVING LOAN CREDIT LIMIT (SECTION 1.2): An amount not to exceed the lesser of: (i) $1,000,000 at any one time outstanding; or (ii) 40% of the current market value in United States dollars of Borrower's 1,150,000 shares of common stock of Mattan Corporation, a corporation organized under the laws of Alberta, Canada ("Mattan Stock"), which stock is publicly traded on the Alberta Exchange, which has been pledged to Silicon as provided below and in which Silicon has a first-priority perfected security interest. For purposes of the foregoing, the current market value of the Mattan Stock shall be based on the closing price thereof on the Alberta Exchange and shall be calculated bi-weekly, on Wednesday of every other week, beginning June 5, 1996, PROVIDED that if, and during such period, the price of Mattan Stock in Canadian dollars is less than C$4.00 per share, the current market value of the Mattan Stock shall be calculated on a daily basis. INTEREST RATE (SECTION 1.2): A rate equal to the "Prime Rate" in effect from time to time, plus 1.00% per annum, calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. LOAN ORIGINATION FEE (SECTION 1.3): $10,000. (Any Facility Fee previously paid by the Borrower in connection with this loan shall be credited against this Fee.) MATURITY DATE (SECTION 4.1): 180 days from the date of this Agreement. CORPORATE SUBSIDIARIES AND AFFILIATES (SECTION 2.1): Sonomo Corporation, a Florida corporation, a wholly- owned subsidiary of Borrower. PRIOR NAMES OF BORROWER (SECTION 3.2): NONE -1- TRADE NAMES OF BORROWER (SECTION 3.2): ALTAIR, ARAGO, ARAGO MOD, ARCTURUS, ANGLETIPS, AURORA, CENTAURI, ORION, LTM, MOD, PEGASUS, POLARIS, PREMIER LASER SYSTEMS, PREMIER MOD, PROCLOSURE, SAFE, SIRIUS, AND TOUCH TIPS OTHER LOCATIONS AND ADDRESSES (SECTION 3.3): NONE OTHER COVENANTS (SECTION 3.1): Borrower shall at all times comply with all of the following additional covenants: 1. BANKING RELATIONSHIP. Borrower shall at all times maintain its bank accounts and its primary banking relationship with Silicon. 2. STOCK PLEDGE AGREEMENT. Borrower shall concurrently execute and deliver to Silicon a Stock Pledge Agreement with respect to the Mattan Stock and all documents relating thereto, in such form as Silicon shall specify. 3. WARRANTS. Borrower shall provide Silicon with five- year warrants to purchase 9,756 shares of Class A common stock of Borrower at $10.25 per share, on the terms and conditions of the Warrant to Purchase Stock and related documents being executed concurrently with this Agreement. 4. INDEBTEDNESS. Without limiting any of the foregoing terms or provisions of this Agreement, Borrower shall not in the future incur indebtedness for borrowed money, except for (i) indebtedness to Silicon, and (ii) indebtedness incurred in the future for the purchase price of or lease of equipment in an aggregate amount not exceeding $250,000 at any time outstanding. 5. SECONDARY OFFERING. Upon the consummation of Borrower's proposed public offering of its stock (the "Secondary Offering"), that is determined to be satisfactory to Silicon in its discretion, and if the condition of the Borrower, financial and otherwise, is satisfactory to Silicon in its discretion, Silicon will undertake the consideration of an alternative financing arrangement with the Borrower, provided it is understood and agreed that any such consideration of an alternative financing arrangement shall not constitute an agreement or commitment whatsoever to provide any additional financing after the Maturity Date, which shall be in Silicon's sole discretion. BORROWER: PREMIER LASER SYSTEMS, INC. BY /s/ Colette Cozean ------------------------------- PRESIDENT OR VICE PRESIDENT BY /s/ Ronald E. Higgins ------------------------------- SECRETARY OR ASS'T SECRETARY SILICON: SILICON VALLEY BANK BY /s/ [illegible] ------------------------------- TITLE AVP ---------------------------- -2- EX-10.37 5 EXHIBIT 10.37 - PLEDGE AGREEMENT Exhibit 10.37 [LOGO] SILICON VALLEY BANK PLEDGE AGREEMENT PLEDGOR: PREMIER LASER SYSTEMS, INC. ADDRESS: 3 MORGAN IRVINE, CALIFORNIA 92718 DATE: JUNE 3, 1996 THIS PLEDGE AGREEMENT ("Pledge Agreement"), dated the above date, is entered into at between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa Clara, California 95054, and the pledgor named above ("Pledgor"), whose address is set forth above. 1. PLEDGE OF STOCK. Pledgor shall concurrently deliver to Silicon the stock certificates and other securities listed on Exhibit A hereto, together with duly executed instruments of assignment thereof to Silicon (which, together with all replacements and substitutions therefor are hereinafter referred to as the "Securities"). Pledgor hereby pledges to Silicon and grants Silicon a security interest in the Securities, and all rights and remedies relating to, or arising out of, any and all of the foregoing, and all proceeds thereof (collectively, the "Collateral") to secure the payment and performance of all debts, duties, obligations, liabilities, representations, warranties and guaranties of Pledgor to Silicon, heretofore, now, or hereafter made, incurred or created, of every kind and nature (collectively, the "Obligations"), including, but not limited to, those arising under the Loan Agreement of even date (the "Loan Agreement"). Any and all stock dividends, rights, warrants, options, puts, calls, conversion rights and other securities and any and all property and money distributed or delivered with respect to the Securities or issued upon the exercise of any puts, calls, conversion rights, options, warrants or other rights included in or pertaining to the Securities shall be included in the term "Securities" as used herein and shall be subject to this Pledge Agreement, and Pledgor shall deliver the same to Silicon immediately upon receipt thereof together with any necessary instruments of transfer; provided, however, that until an Event of Default (as hereinafter defined) shall occur, Pledgor may retain any dividends paid in cash or its equivalent, with respect to any stock included in the Securities and any interest paid with respect to any bonds, debentures or other evidences of indebtedness included in the Securities. Pledgor hereby acknowledges that the acceptance of the pledge of the Securities by Silicon shall not constitute a commitment of any kind by Silicon to permit Pledgor to incur Obligations. 2. VOTING AND OTHER RIGHTS. Pledgor shall have the right to exercise all voting rights with respect to the Securities, provided no Event of Default (as hereinafter defined) has occurred. Upon the occurrence of any Event of Default, Silicon shall have the right (but not any obligation) to exercise all voting rights with respect to the Securities. Provided no Event of Default has occurred, Pledgor shall have the right to exercise all puts, calls, straddles, conversion rights, options, warrants, and other rights and remedies with respect to the Securities, provided Pledgor obtains the prior written consent of Silicon thereto. Silicon shall have no responsibility or liability whatsoever for the exercise of, or failure to exercise, any puts, calls, straddles, conversion rights, options, warrants, rights to vote or consent, or other rights with respect to any of the Securities. Whether or not an Event of Default has occurred, Silicon shall have the right from time to time to transfer all or any part of the Securities to Silicon's own name or the name of its nominee. 3. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to Silicon that Pledgor now has, and throughout the term of this Agreement will at all times have, good title to the Securities and the other Collateral, free and clear of any and all security interests, liens and claims of any kind whatsoever. 4. EVENTS OF DEFAULT. If any one or more of the following events shall occur, any such event shall constitute an Event of Default and Pledgor shall provide Silicon with immediate notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Pledgor or any of Pledgor's officers, employees or agents now or hereafter is incorrect, false, untrue or misleading in any material respect; or (b) Pledgor shall fail to promptly pay or perform when due part or all of any of the Obligations, or -1- any default or event of default shall occur under the Loan Agreement or any other present or future instrument, document or agreement between Silicon and Pledgor. 5. REMEDIES. If an Event of Default shall occur, Pledgor shall give immediate written notice thereof to Silicon. Upon the occurrence of an Event of Default, and at any time thereafter, Silicon shall have the right, without notice to or demand upon Pledgor, to exercise any one or more of the following remedies: (a) accelerate and declare all or any part of the Obligations to be immediately due, payable and performable, notwithstanding any deferred or installment payments allowed by any agreement or instrument evidencing or relating to any of the same; (b) sell or otherwise dispose of the Securities, and other Collateral, at a public or private sale, for cash, or other property, or on credit, with the authority to adjourn or postpone any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon may directly or through any affiliate purchase the Securities, and other Collateral, at any such public disposition, and if permissible under applicable law, at any private disposition. Pledgor and Silicon hereby agree that it shall conclusively be deemed commercially reasonable for Silicon, in connection with any sale or disposition of the Securities, to impose restrictions and conditions as to the investment intent of a purchaser or bidder, the ability of a purchaser or bidder to bear the economic risk of an investment in the Securities, the knowledge and experience in business and financial matters of a purchaser or bidder, the access of a purchaser or bidder to information concerning the issuer of the Securities, as well as legend conditions and stop transfer instructions restricting subsequent transfer of the Securities, and any other restrictions or conditions which Silicon believes to be necessary or advisable in order to comply with any state or federal securities or other laws. Pledgor acknowledges that the foregoing restrictions may result in fewer proceeds being received upon such sale then would otherwise be the case. Pledgor hereby agrees to provide to Silicon any and all information required by Silicon in connection with any sales of Securities by Silicon hereunder. If, after the occurrence of any Event of Default, Rule 144 promulgated by the Securities and Exchange Commission (or any other similar rule) is available for use by Silicon in connection with the sales of any Securities hereunder, Pledgor agrees not to utilize Rule 144 in the sale of any securities held by Pledgor of the same class as the Securities, without the prior written consent of Silicon. Any and all attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon in connection with the foregoing shall be added to and become a part of the Obligations and shall be due from Pledgor to Silicon upon demand. 6. REMEDIES, CUMULATIVE; NO WAIVER. The failure of Silicon to enforce any of the provisions of this Agreement at any time or for any period of time shall not be construed to be a waiver of any such provision or the right thereafter to enforce the same. All remedies hereunder shall be cumulative and shall be in addition to all rights, powers and remedies given to Silicon by law. 7. TERM. This Agreement and Silicon's rights hereunder shall continue in full force and effect until all of the Obligations have been fully paid, performed and discharged. Upon termination, Silicon shall return the Collateral to Pledgor, with any necessary instruments of transfer. 8. GENERAL PROVISIONS. This Agreement and the documents referred to herein are the entire and only agreements between Pledgor and Silicon with respect to the subject matter hereof, and all representations, warranties, agreements, or undertakings heretofore or contemporaneously made, with respect to the subject matter hereof, which are not set forth herein or therein, are superseded hereby. The terms and provisions hereof may not be waived, altered, modified, or amended except in a writing executed by Pledgor and Silicon. All rights, benefits and privileges hereunder shall inure to the benefit of and be enforceable by Silicon and its successors and assigns and shall be binding upon Pledgor and its successors and assigns; provided that Pledgor may not transfer any of its rights hereunder without the prior written consent of Silicon. Paragraph headings are used herein for convenience only. Pledgor acknowledges that the same may not describe completely the subject matter of the applicable paragraph, and the same shall not be used in any manner to construe, limit, define or interpret any term or provision hereof. Pledgor shall upon demand reimburse Silicon for all costs, fees and expenses (including without limitation attorneys' fees, whether or not suit be brought), which are incurred by Silicon in connection with, or arising out of, this Agreement. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed, and interpreted in accordance with the internal laws (and not conflict of laws rules) of the State of California. Pledgor hereby agrees that all actions or proceedings relating directly or indirectly hereto may, at the option of Silicon, be litigated in courts located within said State, and Pledgor hereby expressly consents to the jurisdiction of any such court and consents to the service of process in any such action or proceeding by personal delivery or by certified or registered mailing directed to Pledgor at its last address known to Silicon. 9. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. SILICON AND PLEDGOR EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND PLEDGOR; OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR PLEDGOR OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR PLEDGOR; IN EACH OF THE -2- FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. PLEDGOR: PREMIER LASER SYSTEMS, INC. BY /s/ Colette Cozean ------------------------------ TITLE CEO --------------------------- SILICON: SILICON VALLEY BANK BY /s/ [illegible] ------------------------------ TITLE AVP --------------------------- EXHIBIT A 1,150,000 shares of common stock of Mattan Corporation EX-10.38 6 EXHIBIT 10.38 - WARRANT TO PURCHASE Exhibit 10.38 WARRANT TO PURCHASE STOCK WARRANT TO PURCHASE 9,756 ISSUE DATE:JUNE 3, 1996 SHARES OF THE CLASS A COMMON EXPIRATION DATE:JUNE 3, 2001 STOCK OF PREMIER LASER SYSTEMS, INC. INITIAL EXERCISE PRICE: $10.25 PER SHARE THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and non-assessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE. 1.1 METHOD OF EXERCISE. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased. 1.2 CONVERSION RIGHT. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant Section 1.4. 1.3 <#>ALTERNATIVE STOCK APPRECIATION RIGHT. At Holder's option, the Company shall pay Holder the fair market value of the Shares issuable upon conversion of this Warrant pursuant to Section 1.2 in cash in lieu of such Shares. 1.4 FAIR MARKET VALUE. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. The foregoing notwithstanding, if Holder advises the Board of Directors in writing that Holder disagrees with such determination, then the Company and Holder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors, then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by Holder. 1.5 DELIVERY OF CERTIFICATE AND NEW WARRANT. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.6 REPLACEMENT OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.7 REPURCHASE ON SALE, MERGER OR CONSOLIDATION OF THE COMPANY. 1.7.1. "ACQUISITION". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.7.2. ASSUMPTION OF WARRANT. If upon the closing of any Acquisition the successor entity assumes the obligations of this Warrant, then this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price shall be adjusted accordingly. -1- 1.7.3. NONASSUMPTION. If upon the closing of any Acquisition the successor entity does not assume the obligations of this Warrant and Holder has not otherwise exercised this Warrant in full, then the unexercised portion of this Warrant shall be deemed to have been automatically converted pursuant to Section 1.2 and thereafter Holder shall participate in the acquisition on the same terms as other holders of the same class of securities of the Company. 1.7.4. PURCHASE RIGHT. Notwithstanding the foregoing, at the election of Holder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Acquisition for an amount equal to (a) the fair market value of any consideration that would have been received by Holder in consideration of the Shares had Holder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Acquisition, less (b) the aggregate Warrant Price of the Shares, but in no event less than zero. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred. 2.2 RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 ADJUSTMENTS FOR COMBINATIONS, ETC. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased. 2.4 ADJUSTMENTS FOR DILUTING ISSUANCES. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A). 2.5 NO IMPAIRMENT. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. <#>If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward in such a manner that the aggregate Warrant Price of this Warrant is unchanged. 2.6 FRACTIONAL SHARES. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.7 CERTIFICATE AS TO ADJUSTMENTS. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than <#>(i) the price per share at which the Shares were last issued in an arms- length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant *. * AVERAGED OVER THE 20 DAY PERIOD PRIOR TO THE DATE OF THIS WARRANT (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 3.2 NOTICE OF CERTAIN EVENTS. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 INFORMATION RIGHTS. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 3.4 REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B, if attached. ARTICLE 4. MISCELLANEOUS. 4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole or in part, at any time and from time to time on or before the Expiration Date set forth above. <#>The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder. 4.2 LEGENDS. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. 4.3 COMPLIANCE WITH SECURITIES LAWS ON TRANSFER. This Warrant and the Shares issuable upon exercise this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holders notice of proposed sale. 4.4 TRANSFER PROCEDURE. Subject to the provisions of Section 4.2 *, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. * AND SECTION 4.3 4.5 NOTICES. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 4.6 WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 ATTORNEYS FEES. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees. 4.8 GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. PREMIER LASER SYSTEMS, INC. BY /s/ Colette Cozean ------------------------------ CHAIRMAN OF THE BOARD, PRESIDENT OR VICE PRESIDENT BY /s/ Ronald E. Higgins ------------------------------ SECRETARY OR ASS'T SECRETARY APPENDIX 1 NOTICE OF EXERCISE 1. The undersigned hereby elects to purchase ____________ shares of the Common/Series ____ Preferred [strike one] Stock of __________ pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to _______ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: -------------------------- (NAME) -------------------------- -------------------------- (ADDRESS) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. - ------------------------------------- (Signature) - ------------------------------------- (Date) APPENDIX 2 NOTICE THAT WARRANT IS ABOUT TO EXPIRE _____________, __ (Name of Holder) (Address of Holder) Attn: Chief Financial Officer Dear ____________: This is to advise you that the Warrant issued to you described below will expire on ________________, 19__. Issuer: Issue Date: Class of Security Issuable: Exercise Price per Share: Number of Shares Issuable: Procedure for Exercise: Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. (Name of Issuer) By ----------------------------- Its ---------------------------- EXHIBIT A ANTI-DILUTION PROVISIONS In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, or, if the Shares are common stock, less than the then conversion price of the Company's Preferred Stock, then the number of shares of common stock issuable upon conversion of the Shares, or if the Shares are common stock, the number of Shares issuable upon exercise of the Warrant, shall be adjusted as a result of Diluting Issuances in accordance with the Holder's standard form of Anti-Dilution Agreement in effect on the Issue Date. Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance. EXHIBIT B REGISTRATION RIGHTS See Registration Rights Agreement of even date herewith between Company and Holder. EX-10.39 7 EXHIBIT 10.39 - REGISTRATION RIGHTS Exhibit 10.39 [LOGO] SILICON VALLEY BANK REGISTRATION RIGHTS AGREEMENT ISSUER: PREMIER LASER SYSTEMS, INC. ADDRESS: 3 MORGAN IRVINE, CALIFORNIA 92718 DATE: JUNE 3, 1996 THIS REGISTRATION RIGHTS AGREEMENT is entered into as of the above date by and between SILICON VALLEY BANK ("Purchaser"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and the above Company, whose address is set forth above. RECITALS A. Concurrently with the execution of this Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Agreement, the Purchaser and the Company desire to set forth the registration rights of the Shares all as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (i) the Shares (if Common Stock) or all shares of Common Stock of the Company issuable or issued upon conversion of the Shares and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any stock referred to in (i). (c) The terms "Holder" or "Holders" means the Purchaser or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 1.2 COMPANY REGISTRATION. (a) Registration. If at any time or from time to time *, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their successor forms) or any successor to such forms, which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection 1.2(b) below. * (OTHER THAN THE CURRENT OFFERING CONTEMPLATED BY THE COMPANY HAVING SECURITIES AND EXCHANGE COMMISSION REGISTRATION NUMBER 33-04219 (REFERRED TO AS THE "CONTEMPLATED OFFERING")) -1- (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. (C) IF THE REPRESENTATIVE OF THE UNDERWRITER OR UNDERWRITERS (THE "REPRESENTATIVE") ADVISES THE COMPANY THAT, IN ITS GOOD FAITH ESTIMATION, MARKET OR OTHER FACTORS REQUIRE A LIMITATION OF THE NUMBER OF SHARES WHICH MAY BE UNDERWRITTEN, THE REPRESENTATIVE MAY EXCLUDE SOME OR ALL OF THE REGISTRABLE SECURITIES FROM THE REGISTRATION AND UNDERWRITING; AND IN SUCH EVENT, THE NUMBER OF SHARES TO BE INCLUDED IN THE REGISTRATION SHALL BE ALLOCATED AS FOLLOWS: (A) THE REGISTRABLE SECURITIES THAT THE COMPANY SEEKS TO BE INCLUDED IN THE REGISTRATION AND UNDERWRITING SHALL FIRST BE ACCOMMODATED AND THEN (B) THE NUMBER OF SHARES TO BE INCLUDED IN THE REGISTRATION AND UNDERWRITING SHALL BE ALLOCATED AMONG ALL OTHER HOLDERS AND THE HOLDERS, IN PROPORTION, AS NEARLY AS PRACTICABLE, TO THE RESPECTIVE AMOUNTS OF SECURITIES (INCLUDING REGISTRABLE SECURITIES) WHICH SUCH HOLDER OR HOLDERS, ABSENT SUCH LIMITATION, WOULD OTHERWISE BE ENTITLED TO INCLUDE IN SUCH REGISTRATION. 1.3 EXPENSES OF REGISTRATION. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except the Company shall not be required to pay underwriters' fees, discounts or commissions relating to Registrable Securities. All expenses of any registered offering not otherwise borne by the Company shall be borne pro rata among the Holders participating in the offering and the Company. 1.4 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to this Registration Rights Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. Except as otherwise provided in subsection 1.3, at its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 1.5 INDEMNIFICATION. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Rights Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, or -2- any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld); and provided further, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein. * * FURTHER, THE FOREGOING INDEMNITY AGREEMENT SHALL NOT INURE TO THE BENEFIT OF ANY HOLDER FROM WHOM THE PERSON ASSERTING ANY SUCH LOSSES, CLAIMS, DAMAGES OR LIABILITIES PURCHASED THE REGISTRABLE SECURITIES, OR ANY PERSON CONTROLLING SUCH HOLDER, IF A COPY OF THE PROSPECTUS (AS THEN AMENDED OR SUPPLEMENTED IF THE COMPANY SHALL HAVE FURNISHED ANY AMENDMENTS AND SUPPLEMENTS THERETO) WAS NOT SENT OR GIVEN BY OR ON BEHALF OF SUCH HOLDER TO SUCH PERSON, IF REQUIRED BY LAW SO TO HAVE BEEN DELIVERED, AT OR PRIOR TO THE WRITTEN CONFIRMATION OF THE SALE OF THE REGISTRABLE SECURITIES TO SUCH PERSON, AND IF THE PROSPECTUS (AS SO AMENDED OR SUPPLEMENTED) WOULD HAVE CURED THE DEFECT GIVING RISE TO SUCH LOSS CLAIM, CLAIM, DAMAGE OR LIABILITY, PROVIDED THAT THE FOREGOING LIMITATION SHALL ONLY APPLY IN THOSE INSTANCES WHERE NO UNDERWRITER HAS BEEN OBTAINED IN CONNECTION WITH THE RELATED OFFERING. (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, * and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder specifically for use therein **; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Holder (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. * OR ANY VIOLATION OR ALLEGED VIOLATION BY THE HOLDER OF THE SECURITIES ACT, THE EXCHANGE ACT, OR ANY STATE SECURITIES LAW APPLICABLE TO THE HOLDER OR ANY RULE OR REGULATION PROMULGATED UNDER THE SECURITIES ACT, THE EXCHANGE ACT OR ANY SUCH STATE LAW AND RELATING TO ACTION OR INACTION REQUIRED OF THE HOLDER IN CONNECTION WITH ANY SUCH REGISTRATION, ** OR ANY SUCH VIOLATION OR ALLEGED VIOLATION OCCURS IN CONNECTION WITH ANY SUCH REGISTRATION (c) Each party entitled to indemnification under this subsection 1.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense; and provided further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified -3- Party and any other party represented by such counsel in such proceeding. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 1.6 INFORMATION BY HOLDER. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 RULE 144 REPORTING. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) so long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 TRANSFER OF REGISTRATION RIGHTS. Holders' rights to cause the Company to register their securities and keep information available, granted to them by the Company under subsections 1.2 and 1.7 may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public, provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. The Company may prohibit the transfer of any Holders' rights under this subsection 1.8 to any proposed transferee or assignee who the Company reasonably believes is a competitor of the Company. 2. GENERAL. 2.1 WAIVERS AND AMENDMENTS. With the written consent of the record or beneficial holders of at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Holders of the Registrable Securities under this agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement; provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1. 2.2 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 2.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.4 ENTIRE AGREEMENT. Except as set forth below, this Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 2.5 NOTICES. ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth in the heading to this Agreement, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth in the heading to this Agreement, or at such other address as the Company shall have furnished to the Holder in writing. 2.6 SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement or any provision of the other Agreements shall not in any way be affected or impaired thereby. -4- 2.7 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. COMPANY: PREMIER LASER SYSTEMS, INC. BY /s/ Colette Cozean ------------------------------ PRESIDENT OR VICE PRESIDENT BY /s/ Ronald E. Higgins ------------------------------ SECRETARY OR ASS'T SECRETARY PURCHASER: SILICON VALLEY BANK BY /s/ [illegible] ------------------------------ TITLE AVP --------------------------- EX-10.40 8 EXHIBIT 10.40 - ANTIDILUTION AGREEMENT Exhibit 10.40 [LOGO] SILICON VALLEY BANK ANTIDILUTION AGREEMENT Issuer: Premier Laser Systems, Inc. Address: 3 Morgan Irvine, California 92718 Date: June 3, 1996 THIS AGREEMENT is entered into as of the above date by and between SILICON VALLEY BANK ("Purchaser"), whose address is 3003 Tasman Drive, Santa Clara, California 95054, and the above Company, whose address is set forth above. RECITALS A. Concurrently with the execution of this Antidilution Agreement, the Purchaser is purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant to which Purchaser has the right to acquire from the Company the Shares (as defined in the Warrant). B. By this Antidilution Agreement, the Purchaser and the Company desire to set forth the adjustment in the number of Shares issuable upon exercise of the Warrant as a result of a Diluting Issuance (as defined in Exhibit A to the Warrant). C. Capitalized terms used herein shall have the same meaning as set forth in the Warrant. NOW, THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: 1. DEFINITIONS. As used in this Antidilution Agreement, the following terms have the following respective meanings: (a) "Option" means any right, option, or warrant to subscribe for, purchase, or otherwise acquire common stock or Convertible Securities. (b) "Convertible Securities" means any evidences of indebtedness, shares of stock, or other securities directly or indirectly convertible into or exchangeable for common stock. (c) "Issue" means to grant, issue, sell, assume, or fix a record date for determining persons entitled to receive, any security (including Options), whichever of the foregoing is the first to occur. (d) "Additional Common Shares" means all common stock (including reissued shares) issued (or deemed to be issued pursuant to Section 2) after the date of the Warrant *. Additional Common Shares does not include, however, any common stock issued in a transaction described in Sections 2.1 and 2.2 of the Warrant; any common stock Issued upon conversion of preferred stock outstanding on ** the date of the Warrant; the Shares; or common stock Issued as incentive or in a nonfinancing transaction to employees, officers, directors, or consultants to the Company. * BUT NOT INCLUDING THE SHARES ISSUED IN CONNECTION WITH THE CONTEMPLATED OFFERING (AS DEFINED IN THE REGISTRATION RIGHTS AGREEMENT OF EVEN DATE HEREWITH BETWEEN THE PARTIES HERETO). ** OR PRIOR TO (e) The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. * * IN BOTH OF THE FOREGOING CASES, THEREFORE, IF THE OPTION OR THE CONVERTIBLE SECURITY IS ISSUED PRIOR TO THE DATE HEREOF, THE SHARES OF COMMON STOCK ULTIMATELY ISSUABLE UPON THE CONVERSION OR EXERCISE THEREOF, AS APPLICABLE, SHALL NOT BE DEEMED ADDITIONAL COMMON SHARES HEREUNDER. -1- 2. DEEMED ISSUANCE OF ADDITIONAL COMMON SHARES. The shares of common stock ultimately Issuable upon exercise of an Option (including the shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security Issuable pursuant to an Option) are deemed to be Issued when the Option is Issued. The shares of common stock ultimately Issuable upon conversion or exercise of a Convertible Security (other than a Convertible Security Issued pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible Security. The maximum amount of common stock Issuable is determined without regard to any future adjustments permitted under the instrument creating the Options or Convertible Securities. 3. ADJUSTMENT OF WARRANT PRICE FOR DILUTING ISSUANCES. 3.1 WEIGHTED AVERAGE ADJUSTMENT. If the Company Issues Additional Common Shares after the date of the Warrant and the consideration per Additional Common Share (determined pursuant to Section 9) is less than the Warrant Price in effect immediately before such Issue, the Warrant Price in effect immediately before such Issue shall be reduced, concurrently with such Issue, to a price (calculated to the nearest hundredth of a cent) determined by multiplying the Warrant Price by a fraction: (a) the numerator of which is the amount of common stock outstanding immediately before such Issue plus the amount of common stock that the aggregate consideration received by the Company for the Additional Common Shares would purchase at the Warrant Price in effect immediately before such Issue, and (b) the denominator of which is the amount of common stock outstanding immediately before such Issue plus the number of such Additional Common Shares. 3.2 ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant Price, the number of Shares issuable upon exercise of the Warrant shall be increased to equal the quotient obtained by dividing (a) the product resulting from multiplying (i) the number of Shares issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case as in effect immediately before such adjustment, by (b) the adjusted Warrant Price. 3.3 SECURITIES DEEMED OUTSTANDING. For the purpose of this Section 3, all securities issuable upon exercise of any outstanding Convertible Securities or Options, warrants, or other rights to acquire securities of the Company shall be deemed to be outstanding. 4. NO ADJUSTMENT FOR ISSUANCES FOLLOWING DEEMED ISSUANCES. No adjustment to the Warrant Price shall be made upon the exercise of Options or conversion of Convertible Securities. 5. ADJUSTMENT FOLLOWING CHANGES IN TERMS OF OPTIONS OR CONVERTIBLE SECURITIES. If the consideration payable to, or the amount of common stock Issuable by, the Company increases or decreases, respectively, pursuant to the terms of any outstanding Options or Convertible Securities, the Warrant Price shall be recomputed to reflect such increase or decrease. The recomputation shall be made as of the time of the Issuance of the Options or Convertible Securities. Any changes in the Warrant Price that occurred after such Issuance because other Additional Common Shares were Issued or deemed Issued shall also be recomputed. 6. RECOMPUTATION UPON EXPIRATION OF OPTIONS OR CONVERTIBLE SECURITIES. The Warrant Price computed upon the original Issue of any Options or Convertible Securities, and any subsequent adjustments based thereon, shall be recomputed when any Options or rights of conversion under Convertible Securities expire without having been exercised. In the case of Convertible Securities or Options for common stock, the Warrant Price shall be recomputed as if the only Additional Common Shares Issued were the shares of common stock actually Issued upon the exercise of such securities, if any, and as if the only consideration received therefor was the consideration actually received upon the Issue, exercise or conversion of the Options or Convertible Securities. In the case of Options for Convertible Securities, the Warrant Price shall be recomputed as if the only Convertible Securities Issued were the Convertible Securities actually Issued upon the exercise thereof, if any, and as if the only consideration received therefor was the consideration actually received by the Company (determined pursuant to Section 9), if any, upon the Issue of the Options for the Convertible Securities. 7. LIMIT ON READJUSTMENTS. No readjustment of the Warrant Price pursuant to Sections 5 or 6 shall increase the Warrant Price more than the amount of any decrease made in respect of the Issue of any Options or Convertible Securities. 8. 30 DAY OPTIONS. In the case of any Options that expire by their terms not more than 30 days after the date of Issue thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options. 9. COMPUTATION OF CONSIDERATION. The consideration received by the Company for the Issue of any Additional Common Shares shall be computed as follows: (a) CASH shall be valued at the amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends. (b) PROPERTY. Property other than cash shall be computed at the fair market value thereof at the time of the Issue as determined in good faith by the Board of Directors of the Company. (c) MIXED CONSIDERATION. The consideration for Additional common Shares Issued together with other property of the Company for consideration that covers both shall be determined in good faith by the Board of Directors. -2- (d) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per Additional Common Share for Options and Convertible Securities shall be determined by dividing: (i) the total amount, if any, received or receivable by the Company for the Issue of the Options or Convertible Securities, plus the minimum amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon exercise of the Options or conversion of the Convertible Securities, by (ii) the maximum amount of common stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) ultimately Issuable upon the exercise of such Options or the conversion of such Convertible Securities. 10. GENERAL. 10.1 GOVERNING LAW. This Antidilution Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 10.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 10.3 ENTIRE AGREEMENT. Except as set forth below, this Antidilution Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 10.4 NOTICES. ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Purchaser at Purchaser's address as set forth in the heading to this Agreement, or at such other address as Purchaser shall have furnished to the Company in writing, or (b) if to the Company, at the Company's address set forth in the heading to this Agreement, or at such other address as the Company shall have furnished to the Purchaser in writing. 10.5 SEVERABILITY. In case any provision of this Antidilution Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Antidilution Agreement shall not in any way be affected or impaired thereby. 10.6 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Antidilution Agreement. 10.7 COUNTERPARTS. This Antidilution Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. COMPANY: PREMIER LASER SYSTEMS, INC. BY /s/ Colette Cozean ------------------------------ PRESIDENT OR VICE PRESIDENT BY /s/ Ronald E. Higgins ------------------------------ SECRETARY OR ASS'T SECRETARY PURCHASER: SILICON VALLEY BANK BY /s/ [illegible] ------------------------------ TITLE AVP --------------------------- 38112-V1 2/10/92 EX-23.1 9 EXHIBIT 23.1 - CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated May 17, 1996, except as to Note 18, which is as of June 25, 1996, relating to the financial statements of Premier Laser Systems, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." PRICE WATERHOUSE LLP Costa Mesa, California June 25, 1996 -----END PRIVACY-ENHANCED MESSAGE-----