-----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, DxjNuE7haBGcOX0W3NlCNos9FMEp50EpkFdqAs68IoKScg6NOSXilOTmfwI8fL9b t5XD5+qPWu2BpkTm/FNh1g== 0000912057-97-018773.txt : 19970529 0000912057-97-018773.hdr.sgml : 19970529 ACCESSION NUMBER: 0000912057-97-018773 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER LASER SYSTEMS INC CENTRAL INDEX KEY: 0000878543 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330476284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25242 FILM NUMBER: 97614603 BUSINESS ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92718 MAIL ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92677 10-K 1 10K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 1997. / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to .
COMMISSION FILE NUMBER 0-25242 ------------------------ PREMIER LASER SYSTEMS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 33-0472684 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 MORGAN, IRVINE, CALIFORNIA 92718 (Address of principal executive (Zip Code) offices)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (714) 859-0656 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class A Common Stock, Class A Warrants, Class B Warrants, Units (each comprised of one share of Class A Common Stock, one Class A Warrant and one Class B Warrant) (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act or 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the registrant's voting stock held by nonaffiliates was approximately $103,504,753 on May 19, 1997, based upon the closing sale price of such stock. Number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of May 19, 1997: Class A Common Stock: 9,260,671 Shares Class E-1 Common Stock: 1,257,178 Shares Class E-2 Common Stock: 1,257,178 Shares
DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference, and the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933: Part III incorporates certain information by reference from the registrant's definitive proxy statement for the annual meeting of shareholders, which proxy statement will be filed no later than 120 days after the close of the registrant's fiscal year ended March 31, 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. OVERVIEW Premier Laser Systems, Inc. (the "Company," or "Registrant") develops, manufactures and markets several lines of proprietary medical lasers, fiberoptic delivery systems and associated products for a variety of dental, ophthalmic and surgical applications. The Company is currently in the process of acquiring EyeSys Technologies, Inc. ("EyeSys"), which is a leading developer and supplier of corneal topography (diagnostic imaging) systems with an installed base of more than 3,500 systems worldwide. The Company's majority-owned Data.Site joint venture ("Data.Site") assists physicians and researchers with ophthalmic data collection and outcomes analysis for specific procedures. The Company's lasers and related products use the controlled application of thermal, acoustic and optical energy to allow the physician or dentist to perform selected minimally invasive procedures which, compared to conventional techniques not involving the use of lasers, vaporize or sever tissue with minimal blood loss and scarring, increase patient comfort and reduce patient treatment time and treatment costs. To date, the Company has received clearance to market 20 models of medical lasers, which are covered by 20 U.S. patents, 14 pending U.S patent applications, 13 foreign patents and 44 pending foreign patents. The Company currently markets certain of these lasers for dentistry, ophthalmology and surgery. The Company commenced operations in August 1991 after acquiring substantially all of the assets of Pfizer Laser, a division of Pfizer Hospital Products Group ("Pfizer HPG") which is a wholly-owned subsidiary of Pfizer, Inc. The Company acquired from Proclosure, Inc. ("Proclosure") certain technology, assets and proprietary rights relating to a laser system for tissue fusion in 1993, and completed its initial public offering of securities in 1994. In 1997, it formed a joint venture, named "Data.Site," with Kansas City-based Refractive Surgical Services for the purpose of providing data collection and outcomes analysis and in April 1997 entered into an agreement to acquire EyeSys. Completion of the EyeSys transaction is subject to the satisfaction of several conditions including approval by the EyeSys shareholders. The Company participates in three market segments: dentistry, ophthalmology and surgery. The Company's innovations include: the first laser cleared for use on hard tissue (teeth) in dentistry, the first diode laser in dentistry, the first laser for cataract emulsification, the first Erbium:YAG laser for ablation of skin and the first laser in clinical trials for tissue melding. Although the Company has received more than 100 clearances from the United States Food and Drug Administration (the "FDA") in multiple specialty areas to market its laser products for a variety of medical applications, due to limited financial resources the Company has initially focused its marketing efforts on dental lasers which the Company believes have the most promise for commercial success. The Company plans to initiate marketing efforts in ophthalmology in calendar 1997. The level of future marketing efforts is partially dependent upon the receipt of future financing. As resources permit, the Company plans to commence marketing efforts with respect to other medical applications which it believes may also be commercially successful. MARKET OVERVIEW The use of laser technology in dentistry, ophthalmology and surgery involves the controlled application of laser light to hard or soft tissue causing an optical, thermal, acoustic or plasma interaction with the tissue. When applied to tissue, the laser light is partially absorbed. This process of absorption converts the light to heat, which in turn alters the state of the tissue. The degree of tissue absorption varies with the choice of wavelength and is an important variable in the application of laser technology in treating various tissues. The laser energy can also form a gas bubble in a water medium which provides an acoustic cutting effect as it bursts. The Company often uses its proprietary delivery systems to control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting effects. These delivery systems include flexible fiberoptics, waveguides, articulated arms and micromanipulators which are used on a disposable or limited reuse basis, and which the Company expects will provide a 2 recurring revenue stream for the Company. The Company's strategy is to target specific applications in the dental, ophthalmic and surgical markets, where management believes that the Company's technology and products have competitive strengths. DENTAL AND PERIODONTAL MARKET The current market for laser equipment in dental procedures is comprised of soft tissue procedures, composite curing and teeth whitening. The Company has recently received FDA clearance to market its Er:YAG laser for hard tissue and cavity preparation procedures, and is in the process of implementing its marketing plans to address this market. SOFT TISSUE. The dental laser can be used for certain periodontal procedures and to treat early gum disease, postponing or in some cases eliminating the need for conventional periodontal surgery and providing the opportunity for overall cost savings. While the Company has clearance to market six lasers (including the Aurora diode laser and Centauri Er:YAG laser) for soft tissue dental procedures, the Company focuses its marketing efforts on its Aurora diode laser in this area. COMPOSITE CURING. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for restoration of cavities, because they more closely match the color of teeth and because amalgams have drawn increasing worldwide concern over safety due to the toxic gases which may be released when the amalgams are removed from teeth. Composite fillings are typically cured using a curing light which provides a broad spectrum of wavelengths. The use of the argon laser for this application has been shown to result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or bond orthodontic brackets. The Company's Arago and MOD argon lasers have received FDA clearance for use in these applications. TEETH WHITENING. A large number of dentists use light accelerated bleaching materials for teeth whitening. These materials are traditionally applied at night over a six to eight week period to whiten a patient's teeth while he or she sleeps. Lasers have been shown to facilitate the use of these light sensitive materials in the dentist's office by accelerating this process and resulting in an approximately three shade change in less than one hour. The Company's MOD laser has been cleared to market for this procedure. HARD TISSUE (CAVITY PREPARATION). Potential dental laser applications for hard tissue procedures (i.e., procedures on teeth) include pit and fissure sealing, etching, caries removal and cavity preparation. Based on user feedback from the Company's clinical sites, the Company believes that the use of a laser in dentistry reduces the pain associated with various traditional procedures performed with a dental drill. On May 7, 1997, the Company's Er:YAG laser was cleared to market for tooth etching, caries removal and cavity preparation. This laser was the first to be cleared by the FDA for such procedures. CAVITY PREVENTION. The Company is currently conducting research and is initiating clinical trials to use its lasers for cavity prevention applications. The Company's clinical trials are at an early stage and there can be no assurances that FDA clearance will be obtained for these applications. OPHTHALMIC MARKET Laser systems have been used for the treatment of eye disorders for many years and are widely accepted in the ophthalmic community. The original and most widely accepted use of laser systems in ophthalmology has been for posterior capsulotomy. The Company does not promote its lasers for this market, which it believes is approaching saturation, but instead focuses on intraocular procedures including anterior capsulotomy, cataract removal, glaucoma treatment, corneal sculpting and occuloplastic or cosmetic procedures. The Company has developed the Centauri Er:YAG laser which is capable of performing all of these procedures, which are typically performed by several different types of medical lasers. To date, however, the Centauri laser has only been cleared for use in anterior capsulotomies and certain cosmetic procedures. 3 CATARACT REMOVAL PROCEDURES. The Company believes that no medical lasers have been approved to date for cataract extraction procedures, and that medical lasers may result in less trauma and inflammation than traditional surgical methods, providing more comfort to the patient. The Company's Centauri Er:YAG laser has been cleared to market for anterior capsulotomy, a procedure which opens the capsule of the eye prior to the removal of the cataract. The Company is also currently conducting clinical trials on the Centauri laser for lens emulsification (the removal of the cataract itself), as an alternative to phacoemulsification (the breakup of the cataract by ultrasonic energy). The Company believes that this patented technology for use in lens emulsification may provide an easier and safer method of cataract removal. TREATMENT OF GLAUCOMA. Glaucoma, a disease of the eye characterized by increased intraocular pressure within the eyeball and progressive loss of vision, has traditionally been treated with drug therapy. When drug therapy is ineffective, periodic invasive surgery may be required. In these cases, lasers may be used to open the sclera and relieve pressure in the eye. This procedure, which must be repeated periodically, can be performed under local anesthesia with a self closing incision on an outpatient basis. The Company is currently conducting clinical trials prior to seeking clearance to market its Centauri Er:YAG laser for this procedure. If clearance is obtained, concerning which there can be no assurance, the Company's Er:YAG laser could provide a viable alternative to the traditional invasive surgical procedures. CORNEAL SCULPTING. The Company believes that the recent approval of excimer lasers has resulted in greater acceptance and recognition of laser refractive surgery in the ophthalmic market. Medical lasers may be used for corneal sculpting (photorefractive keratectomy), a procedure in which the laser is used to sculpt the cornea of the eye to a desired curvature to correct the myopia, hyperopia or astigmatism. The Company plans to seek approval to market the Centauri laser for corneal sculpting and has initiated animal studies for this application. No assurance can be given, however, that approval will be given for this application. SURGICAL MARKET Laser systems have been approved for and are currently being used in a variety of surgical applications including orthopedics, neurosurgery, urology, gastroenterology, ophthalmology, cardiology, dermatology, gynecology and plastic surgery. Although the Company's products are cleared to market in a number of specialty areas within the surgical market, the Company has specifically targeted tissue melding (tissue fusion) and cosmetic applications within the surgical market. TISSUE MELDING. The Company believes a significant number of wound closure procedures may be addressed with surgical lasers in conjunction with or independent of traditional sutures or staples. The clinically demonstrated benefits of the use of surgical lasers for tissue melding, as compared to sutures and staples, include fluid-static seals, immediate strength of the closure and reduced surgical time. The Company and its strategic partner have conducted animal tests to support IDE submittals for the use of the Company's Polaris Nd:YAG laser in the areas of arteries, veins, blood vessels and ducts, and are currently conducting clinical studies for skin and hypospadias. The Company has also completed clinical trials for vasovasotomy (reversal of vasectomies) which demonstrated a success rate of approximately 89%. The Company is also beginning Phase I clinical trials for the treatment of hypospadias, the lengthening of the urethra to the end of the penis in infants, in which it is anticipated that the laser's fluid-static seal may minimize post-surgical complications such as the leakage of urine which results in secondary surgical procedures. The Company has clearance for Phase II clinical trials for skin closure following mastectomies and eyelid surgery at five clinical sites. Artery and vein anastomosis is being tested in animals by the Company's strategic partner in Japan in preparation for clinical studies. COSMETIC SURGICAL PROCEDURES. The market for cosmetic surgery is growing rapidly worldwide. The Company has a number of approvals for lasers to be used in cosmetic applications and will devote further efforts in the future to entering into and capitalizing on this market. 4 The Company has regulatory clearance to market its products for a variety of additional applications, including in urology, orthopedics, gynecology, gastroenterology, podiatry, pulmonary and neurosurgery, among other areas. In areas where the Company's technology is not being fully utilized, the Company may seek agreements to supply its products under private label for other manufacturers or may enter into strategic alliances to develop and market the Company's lasers for other applications. LASER PRODUCTS The Company's line of portable lasers are specifically designed for use in outpatient surgical centers and medical offices. The Company believes that its lasers are also well suited for the international market, particularly in facilities with many surgical suites where easy transportation of equipment is necessary. By employing techniques developed in the computer industry, the Company has designed a laser system that (i) is modularly designed and uses similar components for multiple laser systems thereby reducing their overall cost, (ii) allows for efficient and inexpensive repair by replacing a board or assembly in the field or through the mail, reducing the need for a field service force, and (iii) can be easily moved from the office to surgical centers because of its compact size and limited voltage requirements. The Company's Er:YAG lasers are currently priced from $39,000 to $126,000 and its Nd:YAG lasers are currently priced from $25,000 to $80,000. The Company's diode lasers are currently priced from $22,000 to $35,000 and its argon laser is priced from $8,000 to $22,000. The prices of lasers within these ranges depend upon each model's power capability and the features offered. The following table presents in summary form, the Company's principal lasers and delivery systems, the principal applications for which the Company intends to use them, and the FDA status of such products.
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS - ---------------------------- ------------------------------------------------------------- --------------------- Centauri (Er:YAG) Dental--Soft Tissue.......................................... Cleared to market Dental--Hard Tissue.......................................... Cleared to market Ophthalmology (e.g. Anterior Capsulotomy).................... Cleared to market Ab-externo and Ab-interno Sclerostomy, Laser Lens Emulsification............................................... Clinical trials Corneal Sculpting............................................ Preclinical animal studies General Surgery, Neurosurgery, Orthopedics, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery...................................................... Cleared to market Pegasus (Nd:YAG) 20W Dental--Soft Tissue.......................................... Cleared to market Polaris (1.32m Nd:YAG) Tissue Melding............................................... Clinical trials General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Gynecology and Oral Surgery.................................. Cleared to market Aurora (diode) Dental--Soft Tissue.......................................... Cleared to market Dental and General Surgery, Ophthalmology, Arthroscopic Surgery, Gastrointestinal and Genitourinary Procedures, Urology, Dermatology, Plastic Surgery, Podiatry, Neurosurgery, Gynecology, Pulmonary Surgery and Oral Surgery...................................................... Cleared to market MOD (argon) Dental--Composite Curing..................................... Cleared to market Dental--Teeth Whitening...................................... Cleared to market
CENTAURI ER:YAG LASER The Company's Centauri Er:YAG laser is a portable Er:YAG pulsed solid state laser which generates high frequencies (up to 30Hz) at relatively low peak power. These high frequencies allow faster cutting at 5 lower energies. The 2.9 micron wavelength of the Er:YAG is highly absorbed by water, producing a cut similar to the scalpel. The Er:YAG wavelength is delivered through a fiber optic delivery system which enables the beams to be focused and angled. These fiberoptic catheters are difficult to produce and the Company has invested heavily in the technology to develop fibers which can handle adequate power. The Company had experienced difficulties in securing a consistent source for these fibers in the past. It has procured two sources for these fibers. See "--Manufacturing and Materials" and "Legal Proceedings." The Company's Centauri Er:YAG laser has many potential applications in different medical specialties, including cutting hard tissue such as bone and teeth, which could replace or minimize the use of noisy, high speed dental hand drills, and removing ocular structures or performing microsurgery with minimal thermal damage. Although until recently marketed only for soft tissue dental procedures and anterior capsulotomy, the Centauri laser also has received FDA clearance to market for hard tissue dental procedures. This laser also has received FDA clearances to market for hemostasis, excision and vaporization of tissues in ophthalmology, general surgery, neurosurgery, orthopedics, gastroenterology, urology, gynecology and oral surgery. See "--Government Regulation." The Centauri laser is highly effective in cataract ophthalmic procedures because its wavelength is at the peak of the water absorption spectrum and water comprises greater than sixty percent of ophthalmic tissues. Therefore, the Centauri laser can emulsify cataracts, surgically excise tissue in the treatment of glaucoma and can precisely remove layers of cornea similarly to an excimer laser. This system, which currently is cleared for anterior capsulotomy and other procedures in ophthalmology, is estimated to be available for approximately one-third the price of refractive excimer lasers currently on the market and requires substantially lower maintenance costs than excimer lasers (an estimated $10,000 per year as compared to approximately $70,000). In addition, the multipurpose Centauri Er:YAG laser is completely portable and does not emit any toxic gases or cause any potential mutagenic effect which may result from the use of the excimer laser. The Company has recently introduced what it believes to be the industry's first fully-integrated Er:YAG laser system for ophthalmic procedures. The new system incorporates the Centauri Er:YAG laser and provides the option of either a bi-manual or coaxial, uni-manual handpiece to accommodate an individual physician's technique. The Company has also recently introduced a new irrigation aspiration product for use in conjunction with the Centauri system, which integrates with the laser in performing the cataract removal procedures, and includes proprietary vacuum monitoring connectors that create a sterile aspiration line. While animal studies have been encouraging, there can be no assurance that the FDA will approve the use of the Company's Centauri laser for corneal sculpting, or that the laser will work effectively in clinical trials. Clinical trials are estimated to continue for two to five years before approval can be sought in the United States. There are several patents pending on this technology and application, although no assurances can be given that these patents will be approved or approved with the current claims. POLARIS AND PEGASUS ND:YAG LASERS The energy of Nd:YAG lasers is absorbed by blood in tissue and as a result these systems are the preferred lasers to limit bleeding during surgery and for procedures requiring fiberoptic delivery, such as laparoscopic surgery. The Nd:YAG fiberoptic delivery system allows the surgeon to perform surgery through small incisions, providing minimally invasive surgery to patients and usually reducing treatment costs and the length of hospital stays. The Company manufactures a variety of continuous wave solid state Nd:YAG lasers which are designed for use in dentistry and a number of medical specialties. The Company received its first FDA clearance to market a continuous wave Nd:YAG laser system for dental (soft tissue) applications and introduced its 20 watt dental Pegasus Nd:YAG laser in February 1992 (which has in large part been superseded by the Company's newer diode laser system). The Company also manufactures 40, 60 and 100 watt Pegasus Nd:YAG lasers which have FDA clearance to market for various applications and procedures in general surgery, urology, gastrointestinal procedures, pulmonary procedures, gastroenterology, gynecology and ophthalmology. 6 These lasers also utilize the Company's disposable unique TouchTIPS, AngleTIPS and sculptured fibers. By using the Pegasus laser with TouchTIPS, the surgeon is allowed direct contact with tissue and the tactile feeling of the scalpel or other surgical instruments. The Company believes that the availability of these technologies permits the use of lower power laser systems (20W in dental, 40-60W in surgery). The Company holds the proprietary rights, including several patents, to manufacture and sell the Polaris laser, a 1.32 micron Nd:YAG laser (except in Japan, China and Taiwan), together with specialized software and delivery systems, for tissue melding. The Company is developing the Polaris laser for use in cosmetic skin closures, vascular surgeries and minimally invasive surgical procedures normally performed with sutures and staples. Although the use of the Polaris laser for tissue melding is still in the development stage, and no clearance for this application has been received, the Company believes that tissue melding offers clinical advantages over traditional sutures and staples including fluid-static seals, immediate strength of the closure and reduced surgical time. AURORA DIODE LASER The Aurora diode laser is the Company's first semiconductor laser and is the first truly portable diode laser designed for dentistry. The Aurora diode laser replaces the 20 watt Pegasus laser for periodontal procedures, and is one-fourth the size and one-half of the cost of that system. The diode wavelength is absorbed by blood in pigmentation and has been cleared for use in multiple specialties such as general surgery, ophthalmology, urology and plastic surgery. The Aurora laser, which was introduced for soft tissue dental applications in February 1996, is designed to utilize the Nd:YAG delivery systems, including TouchTIPS, AngleTIPS and sculptured fibers, for soft tissue surgery with minimal bleeding or anesthesia. The dental laser can also be used to treat early stage gum disease, postponing or in some cases eliminating the need for periodontal surgery and providing the opportunity for overall cost savings. The Company believes the Aurora laser compares favorably with competitive products including pulsed Nd:YAG lasers, which cannot produce the required laser settings for use with TouchTIPs, or in the new technique for the treatment of periodontal disease, as well as with CO(2) lasers (which cannot be delivered through a fiber), and argon lasers (which tend to be slower in cutting and may produce charring). ARAGO AND MOD ARGON LASERS The Arago and the MOD (Multi Operatory Dentalaser) are gas lasers which have been cleared to market in dentistry to accelerate the composite curing process. Composites are rapidly replacing amalgams (gold and silver) as the material of choice for the restoration of cavities. The argon wavelength penetrates through the composite and has been shown to result in a stronger restoration than composites cured by traditional curing lights. The Company's argon lasers can also be used to cure the resins used in placing veneers or bonding orthodontic brackets. The argon laser can also be used to enhance teeth whitening procedures using light activated bleaching materials which have traditionally been applied at night over a six to eight week period. Lasers have been shown to facilitate the use of these light activated products in a dentist's office by accelerating this process and resulting in an approximately three shade change in less than one hour. The argon laser has been cleared to market for this procedure. No assurance may be given that the use of the argon laser for teeth whitening will become a widely accepted practice in the dental industry. The Company plans to bundle its lasers with light activated whitening materials and co-market these products with the manufacturers of these materials. The Company is currently manufacturing the MOD lasers in-house and has experienced some minor problems with the supply of components required for such production. The Company's supplier of components for its Arago laser previously ceased shipments causing the Company to temporarily cease production of these lasers. By September 1997, the Company intends to commence the in-house manufacture of the Arago lasers. 7 OTHER LASERS The Company has developed other solid state pulsed lasers including the Sirius .532 Nd:YAG laser, Orion Ho:YAG laser and the Arcturus alexandrite:YAG laser, and other applications for its existing lasers, but is not actively marketing these lasers at the present time. The following table sets forth in summary form, certain additional lasers owned by the Company which are not currently marketed by the Company, and the principal applications for which the Company has clearance to market such lasers.
PRODUCT MEDICAL APPLICATION FDA REGULATORY STATUS - ---------------------------- ------------------------------------------------------------- --------------------- Altair (CO(2)) and a CO(2) Orthopedics, General and Plastic Surgery, Dermatology, laser acquired from Pfizer Podiatry, Ear, Nose and Throat, Gynecology, Pulmonary HPG Procedures; Neurosurgery and Ophthalmology................... Cleared to market Dental--Soft Tissue.......................................... Cleared to market Pegasus (Nd:YAG) 40W/60W General Surgery, Urology, Gastrointestinal Procedures, Pulmonary Procedures, Gastroenterology, Gynecology and Ophthalmology................................................ Cleared to market Pegasus (Nd:YAG) 100W Oral, Arthroscopic and General Surgery, Gastroenterology, Gastrointestinal and Genitourinary Procedures, Pulmonary Procedures, Gynecology, Neurosurgery and Ophthalmology....... Cleared to market Sirius (.532m Nd:YAG) Dermatology, General and Plastic Surgery, Podiatry and Orthopedic Applications...................................... Cleared to market Orion (Ho:YAG) General Surgery, Orthopedics, Ear, Nose and Throat, Ophthalmology, Gastroenterology, Pulmonary Procedures and Urology...................................................... Cleared to market Er:YAG/Nd:YAG combination Various specialties.......................................... Cleared to market
DELIVERY SYSTEMS AND DISPOSABLE PRODUCTS An integral part of any laser system is the means of delivering laser light to the target tissue. Delivery systems commonly employed in laser surgery include flexible fiberoptics, waveguides, articulated arms and micromanipulators. The Company's proprietary delivery systems control the relative proportions of acoustic, thermal and optical energy applied to tissue resulting in enhanced cutting efforts. Flexible fibers are a preferred method of delivery for most clinical procedures, but until recently were only available for Nd:YAG and argon lasers. The end of a fiber may be shaped or used with a detachable tip to control the mechanism of laser/tissue interaction, to give a tactile feel, to provide certain mechanical effects and to angle or focus the laser beam. The Company has also been granted a perpetual paid-up license to manufacture, use and sell flexible waveguides to deliver CO(2) energy pursuant to the Assignment and Modification Agreement dated July 26, 1991 among the Company, Pfizer HPG and Medical Laser Technologies Limited. While each laser system marketed by the Company consists of a laser and an integral fiber, these fibers and other products, such as tubing sets, are used by surgeons on a disposable or limited reuse basis for each clinical procedure. The Company believes that expansion into this market could provide it with a recurring revenue stream. The Company manufactures a variety of fiberoptic delivery systems, sculpted fiberoptic probes, optical tips (AngleTIPS and TouchTIPS), waveguides and catheters which are designed for single-patient use. The patented connectors and need for product sterility encourage the users of the Company's lasers to purchase only products which are compatible with this system. The Company believes it can sell these products on a custom basis to hospital administrators for other surgical laser systems at a significant discount to competitors' published prices, while maintaining gross margins through vertical 8 integration and the extensive use of molds and tooling. The Company also assembles and distributes a full line of laser accessories, including glasses, goggles, laser signs and smoke evacuators. MARKETING, SALES AND SERVICE MARKETING AND SALES The Company markets its products to the dental market in the United States directly to dentists and periodontists through its direct sales force consisting of five area sales managers and its distributor and manufacturer's representative network consisting of approximately 20 people. The Company markets its products primarily through conventions, educational courses, direct mail, telemarketing and other dental training programs. In March 1994, the Company entered into a sales and marketing arrangement for its dental lasers with Burkhart Dental Supply Company, a member of the American Dental Cooperative, Inc., which is one of the largest distributors of dental equipment and supplies in the United States. This agreement is terminable by either party at any time. If this strategic alliance is successful, the Company believes this relationship may be expanded to the other members of the American Dental Cooperative, Inc. which markets dental products to a significant number of the approximately 129,000 practicing dentists in the United States. Such alliance is expected to assist the Company's marketing of the Centauri laser for hard tissue applications. Through an active program of educational courses and preceptorships, the Company has trained dentists in many countries during the past year using industry recognized dentists and periodontists. The Company markets its products in the ophthalmic market through two direct sales managers who focus their efforts on key ophthalmologists worldwide. The Company has entered into distribution agreements with distributors in many countries in preparation for market introduction of the Centauri laser. The Company grants exclusive distribution rights in select territories to its distributors who must maintain certain distribution minimums in order to retain their exclusive rights. The Company plans to expand its ophthalmic sales force both by enlarging its domestic sales force, either internally or through acquisition, and by acquiring or engaging additional international manufacturing representatives. The Company has recently entered into an agreement to acquire the operations and assets of EyeSys in preparation of the establishment of increased international distribution. See "--Overview." In the surgical market, the Company intends to form strategic alliances in any specialty area where the partner has an established presence in the market selling to either the physician or the hospital. The Company has entered into such a strategic alliance with Nippon Shoji Kaisha, Ltd. ("NSK"), which is one of the leading suppliers of sutures in the Pacific Rim pursuant to an Exclusive Marketing Agreement. Under this agreement, Proclosure granted to NSK, in exchange for a license fee, the exclusive rights to market and distribute the Polaris Nd:YAG laser in Japan, China and Taiwan. In addition, under this agreement the Company granted to NSK an option to manufacture the Polaris, which if exercised would require NSK to pay the Company a $1.5 million fee and royalties. NSK has not yet indicated whether it intends to manufacture these products. There can be no assurance that the Company will receive any payments under this agreement. No customer accounted for more than 10% of net sales in fiscal 1997. Sales in fiscal 1996 to one customer, Rockford Industries, Inc., a leasing company, accounted for approximately 10% of the Company's net sales for that year. Sales in fiscal 1995 to LaserSight Centers, Inc., accounted for approximately 11% of the Company's net sales for that year. 9 CUSTOMER SERVICE AND SUPPORT The Company is seeking to create a group of loyal customers by focusing on customer service, quality and reliability. In addition to its educational courses, the Company performs a complete installation of its lasers and trains the customers' staff in its proper use. Educational videos and papers are available upon request. The Company conducts service training courses for the representatives of its distributors. Prior to shipping, every laser is subjected to an extensive battery of quality control tests. The Company generally provides a one year warranty with all lasers and extended warranties are available at an additional cost. The Company ordinarily provides service within one business day to all of its customers in the United States. An owner is either sent a loaner laser by overnight carrier or a service representative visits the owner to repair the unit. International service is provided either by the foreign distributor or by return of the laser to the Company. The Company has experienced and may continue to experience difficulties in providing prompt and cost-effective service of its medical lasers in foreign countries. COMPETITION The Company is and will continue to be subject to competition in its targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies or therapies, some of which include medical lasers manufactured by competitors. In the dental market, the Company competes primarily with dental drills, traditional curing lights and other existing technologies, and to a lesser extent competitors' CO(2), argon, Er:YAG and Nd:YAG lasers. In the ophthalmic market, the Company is subject to competition principally from (i) traditional surgical treatments using a tearing needle in anterior capsulotomy, (ii) phacoemulsification, an ultrasound device used to break up cataracts in cataract removal procedures, (iii) corrective eyewear (such as eyeglasses and contact lenses) and surgical treatments for refractive disorders such as photorefractive keratectomy which is typically performed with an excimer laser and radial keratotomy which is performed with a scalpel, and (vi) drug therapy or surgical treatment of glaucoma. In the surgical market, wound closure procedures are usually performed using sutures and staples, and traditional cosmetic surgical procedures may be performed with a scalpel or a CO(2) laser. The Company believes that for many applications its patented or patent pending methods and fiberoptic delivery systems provide clinical benefits over other currently known technologies and competitors' laser products. The medical laser industry in particular is also subject to intense competition and rapid technological changes. The Company believes that there are approximately 30 competitors in different sectors of the medical laser industry. The Company believes that the principal competitive factors for medical laser products are the products' technological capabilities, proven clinical ability, patent protection, price and scope of regulatory approval, as well as industry expert endorsements. Many conventional laser systems target one particular application, while the Company's Er:YAG system is designed to perform in multiple therapeutic applications. The Company's self-contained units are significantly smaller than competitive surgical models, have internal cooling devices and are powered primarily by dedicated readily available 110 volt lines instead of the 220 volt lines used by most surgical solid state lasers. The specialized menu-driven system software utilized in the Company's lasers also enhances safety and ease of use of the lasers. The Company believes that its ability to compete successfully against traditional treatments, competitive laser systems and treatments that may be developed in the future will depend on its ability to create and maintain advanced technology, develop proprietary products, obtain required regulatory approvals and clearances for its products, attract and retain scientific personnel, obtain patent or other proprietary protection for its products and technologies, and manufacture and successfully market products either alone or through other parties. Certain of the Company's competitors have substantially greater financial, technical and marketing resources than the Company. There can be no assurance that such competition will not adversely affect the Company's results of operations or its ability to maintain or increase market share. 11 SEASONALITY To date, the Company's revenues have typically been significantly higher in the second and fourth calendar quarters. This seasonality reflects the timing of major medical and dental industry trade shows in these quarters, significantly reduced sales during the summer and the effect of year end tax planning influencing the purchasing of capital equipment for depreciation during the fourth calendar quarter. Although revenues during the summer of 1996 did not follow this historical pattern, the Company expects that this seasonality will continue indefinitely. RESEARCH AND DEVELOPMENT In the past three fiscal years, the Company has invested approximately $4.5 million in research and development programs. The Company's research and development programs have capitalized on the research and development activities conducted by Pfizer Laser wherein that company identified key military and aerospace technologies and adapted these technologies to portable, efficient, solid-state laser products that were modular in nature. This investment in research and development has resulted in the development of 20 models of lasers, reusable accessories such as smoke evacuators and irrigation aspiration systems, more than 1,000 types of custom delivery systems and approximately 20 types of surgical tips and accessories. In order to maintain its technological advantage, the Company must continue to invest in new product development. The Company seeks to augment its funding of research and development through government grants. The Company has been awarded a Phase II SBIR grant of $750,000, substantially all of which has been drawn to fund additional research and clinical trials regarding laser emulsification of cataracts. The Company has also applied for new Phase I research grants related to dentistry, orthopedics, tissue melding, and ophthalmology. No assurance can be given that the Company will be awarded any of these potential government grants. The Company's current research is focused on expanding the clinical applications of its existing products, reducing the size and cost of current laser systems, developing custom delivery systems and developing new innovative products. The Company's in-house research and development efforts have focused on the development of a systems approach to medical laser products with proprietary delivery systems designed to allow the laser to interact with tissue by a number of different mechanisms (e.g., acoustic, ablative and thermal) for unique laser/tissue effects. These disposable fiberoptic delivery systems, developed specifically for niche surgical applications, demonstrate the principal focus of the Company's research efforts. Examples of patented or patent pending products resulting from these research efforts include: TouchTIPS, AngleTIPS, Er:YAG fiberoptics and CO(2) waveguides. Clinical research has also yielded several new surgical procedures. PATENTS AND PATENT APPLICATIONS Patent protection is an important part of the Company's business strategy, and the Company's success depends, in part, on its ability to maintain patents and trade secret protection and on its ability to operate without infringing on the rights of third parties. The Company has sought to protect its unique technologies and clinical advances through the use of the patent process. Patent applications filed in the United States are frequently also filed in selected foreign countries. The Company focuses its efforts on filing only for those patents which the Company believes will provide it with key defensible features instead of filing for all potential minor device features. In the United States, the Company holds 20 patents which expire at various times throughout approximately the next 7-17 years, and has an additional 14 pending patent applications, including divisional applications. In addition, the Company holds 13 foreign patents including two utility model patents and has at least 44 foreign patent applications. The Company also has a 12 nonexclusive license to a number of basic laser technologies which are commonly licensed on such basis in the laser industry. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve trade secrets and to operate without infringing the rights of others. The Company is aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict the Company's right to market certain of its technologies without a license, including, without limitation, patents relating to the Company's lens emulsification product and ophthalmic probes for its Er:YAG laser. In the past, the Company has received allegations that certain of the Company's laser products infringe other patents. There has been significant patent litigation in the medical industry in general, and in the medical laser industry in particular. Adverse determinations in litigation or other patent proceedings in which the Company may become a party could subject the Company to significant legal judgments or liabilities to third parties, and could require the Company to seek licenses from third parties that may or may not be economically viable. Patent and other intellectual property rights disputes often are settled through licensing arrangements. No assurance can be given that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or it could find that the development, manufacture or sale of products requiring such licenses could be enjoined. If the Company is found, in a legal proceeding, to have infringed the patents or other proprietary rights of others, it could be liable for significant damages. The Company also relies on unpatented trade secrets, and no assurance can be given that others will not independently develop or otherwise acquire substantially equivalent trade secrets. GOVERNMENT REGULATION FDA REGULATION The lasers that are manufactured by the Company are regulated as medical devices by the FDA under the FDC Act. Satisfaction of applicable regulatory requirements may take several years and requirements vary substantially based upon the type, complexity and novelty of such devices as well as the clinical procedure. Pursuant to the FDC Act and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution, and promotion of medical devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, denial or withdrawal of premarket clearance or approval for devices, recommendations by the FDA that the Company not be allowed to enter into government contracts, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. The FDA classifies medical devices in commercial distribution into one of three classes: Class I, II or Ill. This classification is based on the controls the FDA deems necessary to reasonably ensure the safety and effectiveness of medical devices. Class I devices are subject to general control (e.g., labeling, premarket notification and adherence to applicable requirements for Good Manufacturing Practices or cGMPs) and Class II devices are subject to general and special controls (e.g., performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have been found not to be substantially equivalent to legally marketed devices). Lasers typically are classified as Class II devices, but the FDA may classify certain indications or technologies into Class III and require a premarket approval application ("PMA"). If a manufacturer or distributor of a medical device can establish that a proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a pre-1976 Class III medical device for which the FDA has not called for a PMA, the manufacturer or distributor may seek FDA 13 clearance for the device by filing a Section 510(k) premarket notification. If a manufacturer or distributor of a medical device cannot establish that a proposed device is substantially equivalent to another legally marketed device, the manufacturer or distributor will have to seek premarket approval for the proposed device. A 510(k) notification and the claim of substantial equivalence will likely have to be supported by various types of data and materials, possibly including test results or the results of clinical studies in humans. A PMA would have to be submitted and be supported by extensive data, including preclinical and clinical study data, to prove the safety and effectiveness of the device. There can be no assurance that some of the Company's products will not require the more rigorous and time consuming PMA approval, including laser uses for vasovasotomy or other tissue melding procedures, cavity preparation, cosmetic surgery, sclerostomy and lens emulsification, among others. If human clinical studies of a proposed device are required, whether for a 510(k) or a PMA, and the device presents a "significant risk," the manufacturer or the distributor of the devices will have to file an IDE application with the FDA prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and mechanical laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards ("IRBs"), human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. Submission of an IDE does not give assurance that FDA will approve the IDE and, if it is approved, there can be no assurance that the FDA will determine that the data derived from these studies support the safety and efficacy of the device or warrant the continuation of clinical studies. Sponsors of clinical studies are permitted to charge for those devices distributed in the course of the study provided such compensation does not exceed recovery of the costs of manufacture, research, development and handling. Clinical studies of nonsignificant risk devices may be performed without prior FDA approval, but various regulatory requirements still apply, including the requirement for approval by an IRB, conduct of the study according to applicable portions of the IDE regulations, and prohibitions against commercialization of an investigational device. The manufacturer or distributor may not place the device into interstate commerce until an order is issued by the FDA granting premarket clearance for the device. The FDA has no specific time limit by which it must respond to a 510(k) premarket notification. The FDA has recently been requiring more rigorous demonstration of substantial equivalence in connection with 510(k) notifications and the review time can take four to 12 months or longer for a 510(k). If a PMA submission is filed, the FDA has by statute 180 days to review it; however, the review time is often extended significantly by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee may also evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's good manufacturing practice requirements prior to approval of a PMA. Devices are cleared by 510(k) or approved by PMA only for the specific intended uses claimed in the submission and agreed to by the FDA. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. Marketing or promotion of products for medical applications other than those that are cleared or approved could lead to enforcement action by the FDA. There can be no assurance that the Company will be able to obtain necessary regulatory approvals or clearances for its products on a timely basis or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future requirements would have a material adverse effect on the Company's business, financial condition and results of operations. FDA or other governmental approvals of products developed by the Company in the future may require substantial filing fees which could limit the number of applications sought by the Company and may entail limitations on the indicated uses for which such products may be marketed. In 14 addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. REGULATORY STATUS OF PRODUCTS The Company has received 510(k) clearance to market the following lasers in an aggregate of more than 100 specialty areas: CO(2) (four models: 10W, 20W, 35W, 65W); Nd:YAG (four models: 20W, 40W, 60W, 100W); Ho:YAG (one model); Er:YAG (two models); 1.32m Nd:YAG (two models: 15W, 25W); .532m Nd:YAG (one model); Argon (two models); diode (four models); Nd:YAG/Er:YAG combination laser (one model). Each of these lasers has clearances in multiple specialty areas. The Company also has received 510(k) clearance to market sculptured fiber contact tip fibers, bare fibers, TouchTIPS, AngleTIPS and focusing tips for all cleared wavelengths of the Company's lasers as well as argon lasers. If a device for which the Company has already received 510(k) premarket clearance is changed or modified in design, components, method of manufacture or intended use, such that the safety or effectiveness of the device could be significantly affected, a new 510(k) premarket notification is required before the modified device can be marketed in the United States. The Company has made modifications to certain of its products which the Company believes do not require the submission of new 510(k) notifications. However, there can be no assurance that the FDA will agree with the Company's determinations and not require the Company to discontinue marketing one or more of the modified devices until they have been cleared by the FDA. There also can be no assurance that any such clearance of modifications would be granted should clearance be necessary. The Company currently is conducting preclinical animal studies and clinical trials, both under approved IDEs and as nonsignificant risk studies. There can be no assurance that the results of any of these clinical studies will be successful or that the FDA will not require the Company to discontinue any of these studies in the interest of the public health or due to any violations of the FDA's IDE regulations. There can be no assurance that the Company will receive approval from the FDA to conduct any of the significant risk studies for which the Company seeks IDE approval, or that the FDA will not disagree with the Company's determination that any of its studies are "nonsignificant risk" studies and require the Company to obtain approval of an IDE before the study can continue. ADDITIONAL REGULATORY REQUIREMENTS Any products manufactured or distributed by the Company pursuant to a 510(k) premarket clearance notification or PMA are or will be subject to pervasive and continuing regulation by the FDA. The FDC Act also requires the Company to manufacture its products in registered establishments and in accordance with current cGMP regulations, which include testing, control and documentation requirements. The Company must also comply with Medical Device Reporting ("MDR") requirements that a firm report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to a death or serious injury. The Company's facilities in the United States are subject to periodic inspections by the FDA. The FDA may require postmarketing surveillance with respect to the Company's products. The export of medical devices is also subject to regulation in certain instances. All lasers manufactured by the Company are subject to the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health of the FDA. The law requires laser manufacturers to file new product and annual reports and to maintain quality control, product testing and sales records, to incorporate certain design and operating features in lasers sold to end users pursuant to a performance standard, and to comply with labeling and certification requirements. Various warning labels must be affixed to the laser, depending on the class of the product under the performance standard. 15 In addition, the use of the Company's products may be regulated by various state agencies. For instance, the Company is required to register as a medical device manufacturer with certain state agencies. In addition to being subject to inspection by the FDA, the Company also will be routinely inspected by the State of California for compliance with cGMP regulations and other requirements. Although the Company believes that it currently complies and will continue to comply with the applicable regulations regarding the manufacture and sale of medical devices, such regulations are always subject to change and depend heavily on administrative interpretations. There can be no assurance that future changes in law, regulations, review guidelines or administrative interpretations by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect the Company's business, financial condition and results of operations. In addition to the foregoing, the Company is subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to conduct business. Furthermore, the introduction of the Company's products in foreign countries may require obtaining foreign regulatory clearances, and additional safety and effectiveness standards are required in certain other countries. The Company believes that only a limited number of foreign countries currently have extensive regulatory requirements. These countries include the European Union countries, France, Germany, Canada, Mexico and Japan. Domestic manufacturing locations of American companies doing business in certain foreign countries, including European Union countries, may be subject to inspection. The time required for regulatory approval in foreign countries varies and can take a number of years. During the period in which the Company will be attempting to obtain the necessary regulatory approvals, the Company expects to market its products on a limited basis in certain other countries that do not require regulatory approval. There can be no assurance that the Company's products will be cleared or approved by the FDA or other governmental agencies for additional applications in the United States or in other countries or that countries that do not now require regulatory approval will not require such approval in the future. MANUFACTURING AND MATERIALS Manufacturing consists of component assembly and systems integration of electronic, mechanical and optical components and modules. The Company's product costs are principally related to the purchase of raw materials while labor and overhead have been reduced due to the use of customized tooling and automated test systems. The Company believes that its customized tooling and automated systems improve quality and manufacturing reliability resulting in lower overall manufacturing costs. The Company believes that these systems will allow the Company to expand production rapidly. The Company purchases certain raw materials, components and subassemblies included in the Company's products from a limited group of qualified suppliers and does not maintain long-term supply contracts with any of its key suppliers. While multiple sources of supply exist for most critical components used in the laser and fiberoptic delivery systems, the disruption or termination of these sources could have a material adverse effect on the Company's business and results of operations. Vendor delays or quality problems could also result in production delays of up to six months as several components have long production lead times. These long lead times, as well as the need for demonstration units, require a significant portion of working capital to fund inventory growth. The Company has in the past experienced and may continue to experience shortages in raw materials and certain supplies. The Company owns the molds used to produce certain proprietary parts of the devices. The Company also designs and develops the software necessary for the operation of its laser systems. The Company designs and assembles its own fiberoptic delivery systems and laser accessory equipment such as laser carts, 16 smoke evacuation devices and associated disposable supplies. The Company believes that its manufacturing practices are in accordance with cGMP regulations. BACKLOG OF ORDERS At the end of fiscal 1997, the Company had a backlog of orders of approximately $2,000,000, compared with the end of fiscal 1996 when the Company's backlog of orders was negligible. The Company's backlog of orders has increased substantially in both the dental and ophthalmic market segments during the first quarter of fiscal 1998. The Company expects to build and ship all of these orders within the current fiscal year. There can be no assurance that any of such orders will not be cancelled by the customer prior to shipment by the Company. PRODUCT LIABILITY AND INSURANCE Since the Company's products are intended for use in the treatment of human medical conditions, the Company is subject to an inherent risk of product liability and other liability claims which may involve significant claims and defense costs. The Company currently has product liability insurance with coverage limits of $5.0 million per occurrence and $5.0 million in the aggregate per year. Product liability insurance is expensive and subject to various coverage exclusions, and in the future may not be available in acceptable amounts, on acceptable terms, or at all. Although the Company does not have any outstanding product liability claims, in the event the Company were to be held liable for damages exceeding the limits of its insurance coverage or outside of the scope of its coverage, the business and results of operations of the Company could be materially adversely affected. The Company's reputation and business could also be adversely affected by product liability claims, regardless of their merit or eventual outcome. EMPLOYEES As of May 15, 1997, the Company employed 47 people, 2 of whom are employed on a part-time basis. None of these employees are represented by a union. Eleven employees perform sales, marketing and customer support activities. The remaining employees perform manufacturing, financial, administration, regulatory, research and development and quality control activities. The Company also engages the services of many independent contractors and temporary personnel. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES. The Company leases approximately 28,000 square feet in one facility in Irvine, California pursuant to a lease which expires in December 2000. This facility contains the Company's executive offices, service center and manufacturing space. The Company is required to lease an additional 13,000 square feet in the same facility commencing in January 1999, or on such earlier date that the adjoining tenant's lease terminates. While the Company believes that its manufacturing and administrative facilities are adequate to satisfy the Company's needs through at least 2000, it may need to lease additional clean room facilities in the future. ITEM 3. LEGAL PROCEEDINGS. In March 1994, the Company instituted litigation (the "Fiber Litigation") in the U.S. District Court, Central District of California, against Infrared Fiber Systems, Inc., a Delaware corporation ("IFS") which contracted to supply optical fiber to the Company for the Company's Er:YAG laser. Two of IFS's senior officers are also named as defendants. The Company's complaint in this matter alleges that IFS and two of its officers made misrepresentations to the Company and that IFS breached its agreement to supply fibers and certain warranties concerning the quality of the fiber to be provided. The Company is seeking damages and an injunction requiring IFS to subcontract the production of optical fiber to a third party, as provided 17 in the supply agreement. In April 1994, IFS filed a general denial and a cross-complaint against the Company alleging breach of contract and intentional interference with prospective economic advantage, seeking compensatory damages "in excess of $500,000," punitive damages and a judicial declaration that the contract has been terminated and that IFS is free to market its fibers to others. In September 1996, IFS filed a new cross-complaint alleging the same causes of action and seeking substantially the same relief in the Orange County California Superior Court. The Company has filed an answer to the complaint, denying the allegations and asserting several affirmative defenses. IFS has agreed to license certain fiber technologies, to which the Company claims exclusive license rights, to Coherent, Inc. ("Coherent"), a competitor of the Company. Coherent joined the above federal litigation on behalf of IFS, seeking a declaration that IFS had the legal right to enter into this license and supply the fiber covered by that agreement, and then subsequently filed a new complaint in the Orange County California Superior Court for declaratory relief, seeking an order that the Company's original agreement with IFS applies only to a specific type of optical fiber. The Company has answered this complaint. In May 1995, the Company instituted litigation concerning this dispute in the Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit described above and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995, the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. In July 1996, the court in the California state court action granted demurrers by Westinghouse and the employee of Westinghouse to all causes of action against them, as well as all but one of the Company's claims against Coherent. As a result, the claims that were the subject of the granted demurrers have been dismissed, subject to the Company's right to appeal. The Company has filed an appeal of these decisions and briefs have been submitted. No date has been set for a hearing of this appeal. No trial date has been set as to the remaining outstanding causes of action. The Company is involved in various disputes and other lawsuits from time to time arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of the IFS litigation, disputes and other lawsuits may adversely affect the Company. It is the opinion of management that the outcome of such matters will not have a material adverse impact on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's annual meeting of shareholders was held on March 31, 1997. Two matters were to be submitted to a vote of security holders at such meeting: the election of the Board of Directors and the approval and adoption of a Stock Option Plan. A quorum was not obtained and as a result, no vote was taken. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock, Class A Warrants and Class B Warrants are listed on the Nasdaq National Market under the symbols "PLSIA," "PLSIW" and "PLSIZ," respectively. Prior to May 1, 1995, such securities were listed on the Nasdaq SmallCap Market under the same symbols. The Company's Units currently trade on the Nasdaq SmallCap Market under the symbol "PLSIU." Each Unit consists of one share of Common Stock, one Class A Warrant and one Class B Warrant. The following table sets forth, for the quarters indicated, the high and low bid prices of the Company's securities on the Nasdaq SmallCap Market, and the high and low closing sale prices per share of the Common Stock, Class A Warrants and Class B Warrants on the Nasdaq National Market. These prices are as reported on the Nasdaq SmallCap Market through April 30, 1995, and as reported on the Nasdaq National Market (for Common Stock, Class A Warrants and Class B Warrants only) thereafter. The Units continue to trade on the Nasdaq SmallCap Market.
CLASS A COMMON STOCK CLASS A CLASS B WARRANTS WARRANTS ------------ ------------------------- ------------ HIGH LOW HIGH LOW HIGH ----- --- ----------- ----- ----- FISCAL YEAR ENDED MARCH 31, 1996: First Quarter*........................................ 63/4 33/4 25/16 63/64 3/4 Second Quarter........................................ 7 55/8 21/2 13/4 2 Third Quarter......................................... 61/8 5 31/8 11/2 23/8 Fourth Quarter........................................ 85/8 37/8 43/4 13/4 3 FISCAL YEAR ENDED MARCH 31, 1997: First Quarter......................................... 103/4 8 77/8 37/8 35/8 Second Quarter........................................ 9 61/8 57/8 3 23/4 Third Quarter......................................... 77/8 5 47/8 2 21/16 Fourth Quarter........................................ 81/8 53/16 49/16 2 111/16 UNITS ------------------------ LOW HIGH LOW ----- ------ ----- FISCAL YEAR ENDED MARCH 31, 1996: First Quarter*........................................ 25/32 101/8 53/4 Second Quarter........................................ 11/2 101/8 91/4 Third Quarter......................................... 13/8 101/8 83/4 Fourth Quarter........................................ 15/8 16 73/4 FISCAL YEAR ENDED MARCH 31, 1997: First Quarter......................................... 21/8 213/4 15 Second Quarter........................................ 13/8 171/2 101/4 Third Quarter......................................... 13/16 151/2 8 Fourth Quarter........................................ 27/32 1515/16 8
- ------------------------ * For April 1 through April 30, 1995, the high and low bid prices of the Common Stock, Class A Warrants and Class B Warrants were $5.00 and $3.50, $1.00 and $0.935, and $0.75 and $0.50, respectively. On January 31, 1997, the Company issued 159,787 shares of its Class A Common Stock to RSS, LLC, a Kansas limited liability company ("RSS") pursuant to a Joint Venture Agreement between the Company, RSS, LLC and Data.Site, LLC. Pursuant to this agreement, RSS transferred to the Company an undivided 30% interest in all of its intangible assets. The assets of RSS were ultimately transferred to Data.Site, in which the Company and RSS were issued a 51% and 49% interest, respectively. The Company's issuance of these securities was exempt from registration under Section 4(2) of the Securities Act of 1933. In March 1997, the Company granted options to purchase an aggregate of 1,033,000 shares of its Class A Common Stock to certain employees and directors pursuant to its 1997 Stock Option Plan. Such grants are not considered to be sales of securities under the federal securities laws. In addition, in June, 1996, in connection with its Credit Facility with Silicon Valley Bank (the "Credit Facility"), the Company issued to Silicon Valley Bank warrants to purchase up to 9,756 shares of Class A Common Stock at an exercise price of $10.25 per share. The Company's issuance of warrants in connection with its Credit Facility were exempt from registration under Section 4(2) of the Securities Act of 1933. On May 13, 1997, the last reported sale price for the Company's Common Stock, Class A Warrants and Class B Warrants on the Nasdaq National Market was $11.75, $9.25 and $3.94, respectively. The closing bid price for the Company's Units on the Nasdaq SmallCap Market as of May 14, 1997 was $21.50. As of May 15, 1997, the approximate number of holders of record of the Common Stock, Class A 19 Warrants, Class B Warrants, Class E-1 Common Stock and Class E-2 Common Stock were 247, 20, 18, 326 and 326, respectively. There is no public market for the Company's Class E-1 and Class E-2 Common Stock. ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA (HISTORICAL) The following table contains certain selected consolidated financial data of the Company and is qualified by the more detailed financial statements and notes thereto of the Company included herein. The balance sheet and statement of operations data for the periods ended March 31, 1994, 1995, 1996 and 1997, as well as statement of operations data for the nine months ended March 31, 1993, have been derived from the Company's financial statements, audited by Price Waterhouse LLP, independent accountants. The report of Price Waterhouse LLP with respect to such financial statements contains an explanatory paragraph that describes uncertainty as to the ability of the Company to continue as a going concern. The selected financial data for the year ended March 31, 1997 was derived from the Company's financial statements audited by Ernst & Young LLP. The following information should be read in conjunction with the Company's financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
NINE MONTHS ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31, ------------ -------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------------ ----------- ----------- ----------- ----------- SELECTED STATEMENT OF OPERATIONS DATA: Net sales.................................... $1,527,457 $ 2,079,335 $ 1,249,403 $ 1,704,390 $ 5,530,861 Cost of sales................................ 1,053,180 1,753,352 1,298,420 3,324,757 3,968,539 ------------ ----------- ----------- ----------- ----------- Gross profit (loss).......................... 474,277 325,983 (49,017) (1,620,367) 1,562,322 Selling and marketing expenses............... 1,261,571 1,087,461 1,035,863 1,308,767 2,406,010 Research and development expenses............ 647,810 678,279 1,035,705 1,213,471 1,563,228 General and administrative expenses.......... 574,676 1,322,888 1,747,090 1,709,327 1,736,184 Write-off of investment in Mattan............ -- -- -- -- 881,010 Termination of strategic alliance with IBC... -- -- -- -- 331,740 In-process research and development acquired in the Data.Site acquisition............... -- -- -- -- 250,000 ------------ ----------- ----------- ----------- ----------- Loss from operations......................... (2,009,780) (2,762,645) (3,867,675) (5,851,932) (5,605,850) Interest (expense) income.................... (201,697) (434,851) (322,540) 99,037 15,493 ------------ ----------- ----------- ----------- ----------- Loss before extraordinary items.............. (2,211,477) (3,197,496) (4,190,215) (5,752,895) (5,590,357) Extraordinary gain from extinguishment of indebtedness............................... -- -- 381,730 -- -- ------------ ----------- ----------- ----------- ----------- Net loss..................................... $(2,211,477) $(3,197,496) $(3,808,485) $(5,752,895) $(5,590,375) ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- -----------
20
NINE MONTHS ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31, ------------ -------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------------ ----------- ----------- ----------- ----------- SELECTED PER SHARE DATA: Loss per share before extraordinary item(2).................................... -- $ (2.45) $ (1.59) $ (1.26) $ (.96) Extraordinary gain from extinguishment of indebtedness -- .15 ------------ ----------- ----------- ----------- ----------- Net loss per share........................... -- $ (2.45) $ (1.44) $ (1.26) $ (.96) ------------ ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- Weighted average shares outstanding(3)....... -- 1,288,751 2,584,722 4,556,959 5,833,326 AT MARCH 31, ---------------------------------------------------------------- 1993(1) 1994 1995 1996 1997 ------------ ----------- ----------- ----------- ----------- SELECTED BALANCE SHEET DATA: Cash and cash equivalents(4)................. $ 308,764 $ 5,888,237 $ 35,463 $ 173,610 Working capital(4)........................... 1,287,587 6,756,149 5,818,492 8,018,616 Total assets(5).............................. 7,459,161 12,325,029 16,883,975 15,674,568 19,320,611 Long-term debt(5)............................ 1,564,507 4,303,890 -- -- 49,356 Shareholders' equity(4)...................... 6,022,174 15,002,260 13,797,046 16,631,710
- ------------------------------ (1) The Company changed its fiscal year end from June 30 to March 31, commencing with the fiscal year ended March 31, 1993. Accordingly, the fiscal year ended March 31, 1993 was a nine-month period. (2) The effect on net loss per common share of the conversion of the Company's debentures was to reduce historical net loss by $37,500 and $67,995 and to increase weighted average shares outstanding by 76,875 shares and 321,099 shares for the fiscal years ended March 31, 1994 and 1995, respectively. Net loss per common share was computed based on the weighted average number of the Company's common shares outstanding during the fiscal years ended March 31, 1995 and 1994 after giving retroactive adjustment for recapitalization and conversion of debentures into Units upon completion of the Company's initial public offering. (3) Does not include shares of Class E-1 or Class E-2 Common Stock, which are subject to cancellation in certain circumstances. (4) These amounts are unavailable at March 31, 1993. (5) Total assets and long-term debt amounts at March 31, 1993 are unaudited. Amounts for long-term debt at March 31, 1994 include $285,000 in mandatorily redeemable warrants. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion and analysis should be read in conjunction with the Company's Financial Statements and related notes thereto appearing elsewhere in this Report. This Report contains forward-looking statements including, without limitation, statements concerning future cost of sales, which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in these forward-looking statements. GENERAL The Company develops, manufactures and markets several lines of proprietary medical lasers, fiberoptic delivery systems and associated products for a variety of dental, ophthalmic and surgical applications. The Company commenced operations in August 1991, after acquiring substantially all of the assets of Pfizer Laser Systems ("Pfizer Laser"), a division of Pfizer HPG which is a wholly-owned subsidiary of Pfizer, Inc. The assets acquired by the Company included the proprietary rights to a broad base of laser and fiberoptic technologies developed by Pfizer Laser. This acquisition was led by the Company's current Chief Executive Officer. Since its formation and until its initial public offering in December 1994, the Company principally focused on, and its research and development activities related to, growing markets in dentistry, ophthalmology, cosmetic procedures and certain surgical specialties to be used in surgical centers and medical offices. To implement this strategy, the Company developed the Pegasus Nd:YAG dental laser system from existing technology and introduced this laser to the dental market in February 1992. In June 1993, the Company introduced the Centauri Er:YAG laser for ophthalmology and initiated clinical trials for hard 21 tissue procedures in dentistry. In December 1993, the Company acquired from Proclosure certain technology, assets and proprietary rights relating to a 1.32 Nd:YAG laser system for tissue melding. From its formation in 1991 through its initial public offering, the Company developed and received regulatory approvals for 15 models of lasers and sold certain of those products for soft tissue applications in dentistry and as part of clinical trials conducted by third parties. After the Company's initial public offering in December 1994 (the "IPO"), the Company increased its inventory, acquired the distribution rights to two new dental lasers and, in December 1995, expanded its dental sales force. In September and November 1995, the Company acquired rights to market and distribute the Arago and MOD argon lasers, respectively, for dental applications, and in February 1996, the Company introduced and began shipping its Aurora diode laser for soft tissue dental applications. The Company completed a secondary offering in October 1996. In 1997, it formed a joint venture named "Data.Site," with Kansas City-based Refractive Surgical Services for the purposes of providing ophthalmic data collection and outcomes analysis. In April 1997, the Company entered into an agreement to acquire EyeSys Technologies, Inc., which is a leading developer and supplier of corneal topography (diagnostic imaging) systems with an installed base of more than 3,500 systems worldwide. As of the date of this report, this transaction has not yet been completed. No assurance can be given that the transactions contemplated by such agreement will be consummated. While the Company has received FDA clearance to market laser products covering a variety of medical applications, to date the Company has focused its research, development and marketing efforts on a limited number of products or applications (principally specific dental and more recently, ophthalmic applications). As future resources permit, the Company may introduce certain products for applications for which it already has all necessary approvals or may seek strategic alliances to develop, market and distribute such products. The Company has recorded operating losses in each of the fiscal years since its formation, resulting principally from substantial costs incurred in research and development activities and obtaining regulatory approvals, together with the absence of significant revenues to date and limited commercial sales of its products. RESULTS OF OPERATIONS FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996 Net sales increased 225% to $5,531,000 for the year ended March 31, 1997 ("fiscal 1997") from $1,704,000 for the year ended March 31, 1996 ("fiscal 1996"). This increase was primarily attributable to an increase in sales to the dental market of the Aurora diode laser and argon lasers which were introduced in the latter half of fiscal 1996. Ophthalmic sales also increased significantly as the Er:YAG was purchased by key ophthalmic industry leaders in several countries. Sales during the last two quarters of fiscal 1997 were adversely affected by a disruption in the supply of the Company's Arago argon laser and vendor supply problems with the MOD argon laser. Cost of sales increased 19% to $3,969,000 in fiscal 1997 from $3,325,000 in fiscal 1996, due to an increase in sales. Selling and marketing expenses increased 84% to $2,406,000 in fiscal 1997 from $1,309,000 in fiscal 1996. This increase was primarily attributable to increased commissions and associated selling expenses, expenses associated with attendance at two ophthalmic shows and from the consolidation of the Company's expenses with those of Data.Site. Research and development expenses increased 29% to $1,563,000 in fiscal 1997 from $1,213,000 in fiscal 1996. This increase resulted primarily from increases in research and development personnel at the Company, partially offset by a $450,000 payment received by the Company under a Small Business 22 Innovative Research ("SBIR") grant. The Company also recognized $190,000 as a research and development expense from the issuance of stock options to clinical evaluators and medical directors. General and administrative expenses increased 2% to $1,736,000 in fiscal 1997 from $1,709,000 in fiscal 1996. This increase was partially due to $75,000 of additional expenses from the consolidation of Data.Site. Net interest income decreased to $15,000 in fiscal 1997 from $99,000 in fiscal 1996. This reduction reflected the Company's limited cash balances prior to the completion of its secondary offering in October 1996. In fiscal 1997, the Company wrote off its investment in Mattan of $881,000 when the Mattan shares ceased being traded on the public market. In addition, the Company expensed $250,000 of in-process research and development incurred in connection with the formation of Data.Site. During the year the Company also wrote off $332,000 as a settlement of its joint marketing relationship with International Biolaser Corporation ("IBC") since it is unlikely that IBC will repay its debt to the Company. FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995 Net sales increased 36% to $1,704,000 in fiscal 1996 from $1,249,000 for the year ended March 31, 1995 ("fiscal 1995"). This increase was primarily attributable to an increase of $723,000 in sales to the dental market, related principally to the introduction of three new products in the latter half of fiscal 1996, the Aurora diode laser, the Arago argon laser and the MOD argon laser. This increase was partially offset by a decrease in sales to the surgical market of approximately $200,000, largely due to a decline in the demand for the Company's 10 and 20 watt CO(2) lasers, which are nearing the end of their product life cycle. The Company has recently experienced supply difficulties with its Arago and MOD argon lasers. Cost of sales increased 156% to $3,325,000 in fiscal 1996 from $1,298,000 in fiscal 1995. This increase in the cost of sales was due primarily to (i) a write-down of approximately $848,000 principally attributed to the Company's CO(2) lasers and accessories obtained in the acquisition of Pfizer Laser, and Nd:YAG lasers and accessories, which lasers were developed prior to March 31, 1992 and are nearing the end of their product life cycle, (ii) the underabsorption of manufacturing costs due to low production volumes due in part to the unavailability of certain key components which require long lead-times for delivery, coupled with an increase in the number of manufacturing employees during fiscal 1996 from 12 to 17 employees resulting in an increase in payroll expense of approximately $280,000, and (iii) increased costs associated with higher sales volumes in fiscal 1996. Cost of sales for fiscal 1996 also included a fee of $122,000 to a third party pursuant to the Company's manufacturing arrangement relating to the MOD argon laser. Selling and marketing expenses increased 26% to $1,309,000 in fiscal 1996 from $1,036,000 in fiscal 1995. This increase was primarily attributable to marketing efforts related to the Company's dental products, which included a $219,000 expense related to the appointment of more than 25 new manufacturer's representatives during the third quarter, and associated expenses including training, promotional costs and commissions. Research and development expenses increased 17% to $1,213,000 in fiscal 1996 from $1,036,000 in fiscal 1995. This increase resulted primarily from increases in outside industrial and software design services of approximately $305,000, and expenses of approximately $196,000 associated with the development of new laser products. This increase was partially offset by a $175,000 reduction in clinical studies expense, due to the completion of the Company's dental hard tissue clinical trials and a $250,000 payment received by the Company under a SBIR grant. General and administrative expenses decreased 2% to $1,709,000 in fiscal 1996 from $1,747,000 in fiscal 1995. This decrease was the result of a reduction of legal expenses associated with the Fiber Litigation, partially offset by increases associated with becoming a public company. In 1995, the Company incurred legal expenses of approximately $400,000 in connection with the Fiber Litigation. Future legal 23 expenses related to the Fiber Litigation (not including out-of-pocket expenses) are expected to be limited in accordance with the Company's agreement with its legal counsel, although if the litigation is successful, counsel will be entitled to certain contingency fees. Net interest income increased to $99,000 in fiscal 1996 from net interest expense of $323,000 on fiscal 1995, reflecting the investment of the Company's remaining net proceeds from its IPO and the repayment in December 1994 of a significant portion of the Company's outstanding debt. Net loss increased 51% to $5,753,000 in fiscal 1996 from $3,808,000 in fiscal 1995. This increase was principally attributable to increases in cost of sales, selling and marketing expenses and research and development expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have been financed through the proceeds from the sale of the Company's equity securities, including an initial public offering in December 1994 and a secondary public offering in October 1996, revenues from operations and the proceeds from an SBIR grant. The Company's principal capital requirements include the financing of inventory, accounts receivable, research and development activities, the development of an ophthalmic and a surgical sales force, the development of marketing programs and the acquisition and/or licensing of patents. At March 31, 1997, the Company had cash and short-term investments of $5,192,000 and its working capital was $8,019,000. This represents an increase from March 31, 1996, when the Company had a minimal cash balance. The increase in cash and short-term investments was the result of the secondary offering of securities completed in October 1996. At March 31, 1997, the Company's indebtedness consisted of a $800,000 balance on its Silicon Valley line of credit, $57,000 in capital lease obligations and $24,000 in a note payable. The Company's Credit Facility with Silicon Valley Bank permits borrowings of up to $1,000,000. Borrowings under the Credit Facility are secured by a Certificate of Deposit pledged to Silicon Valley Bank by the Company pursuant to a Pledge Agreement and bear an interest rate equal to the prime rate of interest, as announced by Silicon Valley Bank, and are due and payable in February 1998. As of March 31, 1997, total borrowings under this agreement were $800,000. In connection with the Credit Facility, the Company issued to such lender warrants to purchase up to 9,756 shares of the Company's Class A Common Stock at an exercise price equal to $10.25 per share. At March 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes totaling approximately $20,400,000 which will begin to expire in fiscal 2006. The Tax Reform Act of 1986 includes provisions which may limit the net operating loss carryforwards available for use in any given year if certain events occur, including significant changes in stock ownership. Utilization of the Company's net operating loss carryforwards to offset future income may be limited. From the end of fiscal 1997 through May 22, 1997, the Company has received approximately $19,108,000 from the exercise of approximately 1,401,000 Class A Warrants and approximately 1,251,000 Class B Warrants. As a result of such exercises, the Company has issued an additional 1,401,000 Class B Warrants and 2,652,000 shares of Class A Common Stock. The Company's future capital requirements will depend on many factors, including the progress of the Company's research and development activities, the scope and results of preclinical studies and clinical trials, the costs and timing of regulatory approvals, the rate of technology advances by the Company, competitive conditions within the medical laser industry, the establishment of manufacturing capacity and the establishment of collaborative marketing and other relationships which may either involve cash infusions to the Company, or require additional cash from the Company. The Company's ability to meet its working capital needs will be dependent on its ability to achieve a positive cash flow from operations and profitable operations, in addition to its ability to secure additional debt or equity financing. No assurance 24 can be given that the Company will be able to achieve a positive cash flow from operations, profitable operations or secure financing on acceptable terms. GOVERNMENT GRANTS The Company has been awarded a SBIR grant for approximately $750,000 for the study of laser cataract emulsification. Substantially all of this grant has been drawn for such purposes. The remainder of the grant can be drawn over the next six months upon the achievement of specified criteria. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements, including notes thereto, at March 31, 1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995 follow. 25 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Premier Laser Systems, Inc. We have audited the accompanying consolidated balance sheet of Premier Laser Systems, Inc. as of March 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Premier Laser Systems, Inc. at March 31, 1997, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Orange County, California May 1, 1997 26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Shareholders of Premier Laser Systems, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Premier Laser Systems, Inc. at March 31, 1996, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP Costa Mesa, California May 17, 1996 27 PREMIER LASER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
MARCH 31 ---------------------------- 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 173,610 $ 35,463 Short-term investments........................................................... 3,968,288 4,547,377 Restricted cash.................................................................. 1,050,000 -- Accounts receivable, net of an allowance for doubtful accounts of $387,263 and $154,677 in 1997 and 1996, respectively........................................ 1,718,312 508,315 Inventories...................................................................... 2,964,632 2,185,355 Prepaid expenses and other current assets........................................ 783,319 419,504 ------------- ------------- Total current assets............................................................... 10,658,161 7,696,014 Property and equipment, net........................................................ 780,945 493,942 Intangible assets, net............................................................. 7,875,028 7,353,462 Other assets....................................................................... 6,477 131,150 ------------- ------------- Total assets....................................................................... $ 19,320,611 $ 15,674,568 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 1,217,256 $ 1,208,219 Line of credit..................................................................... 800,000 -- Notes payable to Pfizer............................................................ -- 481,195 Accrued compensation and related costs............................................. 318,000 96,132 Other accrued liabilities.......................................................... 272,369 91,976 Note payable and current portion of capital lease obligations...................... 31,920 -- ------------- ------------- Total current liabilities.......................................................... 2,639,545 1,877,522 Capital lease obligations, net of current portion.................................. 49,356 -- Commitments and contingencies Shareholders' equity Preferred stock, no par value: Authorized shares--8,850,000 Issued and outstanding shares--none -- -- Common stock, Class A, no par value: Authorized shares--35,600,000 Issued and outstanding shares--7,313,841 at March 31, 1997 and 4,702,203 at March 31, 1996............................................................... 27,320,449 16,317,376 Common stock, Class E-1, no par value: Authorized shares--2,200,000 Issued and outstanding shares--1,257,178 at March 31, 1997 and 1,256,818 at March 31, 1996............................................................... 4,769,878 4,769,878 Common stock, Class E-2, no par value: Authorized shares--2,200,000 Issued and outstanding shares--1,257,178 at March 31, 1997 and 1,256,818 at March 31, 1996............................................................... 4,769,878 4,769,878 Warrants and options............................................................. 3,978,276 2,889,961 Unrealized holding gain on short-term investments................................ -- 3,666,367 Accumulated deficit.............................................................. (24,206,771) (18,616,414) ------------- ------------- Total shareholders' equity......................................................... 16,631,710 13,797,046 ------------- ------------- Total liabilities and shareholders' equity......................................... $ 19,320,611 $ 15,674,568 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. 28 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31 ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Net sales............................................................ $ 5,530,861 $ 1,704,390 $ 1,249,403 Cost of sales........................................................ 3,968,539 3,324,757 1,298,420 ------------- ------------- ------------- Gross profit (loss).................................................. 1,562,322 (1,620,367) (49,017) Selling and marketing expenses....................................... 2,406,010 1,308,767 1,035,863 Research and development expenses.................................... 1,563,228 1,213,471 1,035,705 General and administrative expenses.................................. 1,736,184 1,709,327 1,747,090 Write off of investment in Mattan Corporation........................ 881,010 -- -- Termination of strategic alliance with IBC........................... 331,740 -- -- In-process research and development acquired in the Data.Site acquisition........................................................ 250,000 -- -- ------------- ------------- ------------- Loss from operations................................................. (5,605,850) (5,851,932) (3,867,675) Interest income (expense), net....................................... 15,493 99,037 (322,540) ------------- ------------- ------------- Loss before extraordinary item....................................... (5,590,357) (5,752,895) (4,190,215) Extraordinary gain from extinguishment of indebtedness............... -- -- 381,730 ------------- ------------- ------------- Net loss............................................................. $ (5,590,357) $ (5,752,895) $ (3,808,485) ------------- ------------- ------------- ------------- ------------- ------------- Net loss per share................................................... $ (0.96) $ (1.26) ------------- ------------- ------------- ------------- Shares used in the computation of net loss per share................. 5,833,326 4,556,959 ------------- ------------- ------------- ------------- Pro forma net loss per share (unaudited): Loss before extraordinary items.................................... $ (1.59) Extraordinary gain from extinguishment of indebtedness............. 0.15 ------------- Net loss........................................................... $ (1.44) ------------- ------------- Shares used in computation of pro forma net loss per share........... 2,584,722 ------------- -------------
SEE ACCOMPANYING NOTES. 29 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
COMMON STOCK COMMON STOCK COMMON STOCK CLASS A CLASS E-1 CLASS E-2 ----------------------- ---------------------- ---------------------- CLASS A SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS ---------- ----------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1994.................. 1,432,636 $ 5,372,022 1,268,488 $4,756,528 1,268,488 $4,756,528 $ -- Exercise of common stock options......... 4,936 2,848 3,011 1,081 3,011 1,081 -- Common stock issued in lieu of cash payments............................... 1,635 13,046 1,447 11,552 1,447 11,552 -- Common stock forfeited due to cessation of employment.......................... (7,798) (20,124) (6,905) (17,818) (6,905) (17,818) -- Warrants issued in connection with private placement units................ -- -- -- -- -- -- -- Repurchase of common stock............... (17,681) (6,910) (15,752) (6,119) (15,752) (6,119) -- Initial public offering of units, net proceeds............................... 2,400,000 7,633,504 -- -- -- -- 1,622,222 Conversion of warrants................... -- -- -- -- -- -- 186,000 Conversions of certain related party notes and associated accrued interest............................... 7,072 28,448 6,260 24,596 6,260 24,596 -- Conversion of debentures and associated accrued interest....................... 321,099 1,284,397 -- -- -- -- 272,934 Exercise of over-allotment option........ 360,000 1,128,947 -- -- -- -- 239,901 Net loss................................. -- -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1995.................. 4,501,899 15,436,178 1,256,549 4,769,820 1,256,549 4,769,820 2,321,057 Common stock issued for investment in Mattan................................. 200,000 881,010 -- -- -- -- -- Exercise of stock options................ 304 188 269 58 269 58 -- Increase in unrealized holding gain on short-term investments................. -- -- -- -- -- -- -- Net loss................................. -- -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1996.................. 4,702,203 16,317,376 1,256,818 4,769,878 1,256,818 4,769,878 2,321,057 Common stock and B warrants issued in connection with secondary public offering............................... 2,403,500 9,363,298 -- -- -- -- -- Common stock issued in connection with the formation of the Data.Site joint venture................................ 159,787 1,200,000 -- -- -- -- -- Exercise of stock options and warrants... 48,351 249,774 360 -- 360 -- (25,729) Stock options issued to Advisory Board members, clinical evaluators and medical directors...................... -- 190,001 -- -- -- -- -- Decrease in unrealized holding gain on short-term investments................. -- -- -- -- -- -- -- Net loss................................. -- -- -- -- -- -- -- ---------- ----------- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1997.................. 7,313,841 $27,320,449 1,257,178 $4,769,878 1,257,178 $4,769,878 $2,295,328 ---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------- COMMON UNREALIZED CLASS B STOCK HOLDING ACCUMULATED WARRANTS WARRANTS GAIN DEFICIT TOTAL ---------- --------- ----------- ------------- ----------- Balance at March 31, 1994.................. $ -- $ 192,130 $ -- $(9,055,034) $ 6,022,174 Exercise of common stock options......... -- -- -- -- 5,010 Common stock issued in lieu of cash payments............................... -- -- -- -- 36,150 Common stock forfeited due to cessation of employment.......................... -- -- -- -- (55,760) Warrants issued in connection with private placement units................ -- 186,000 -- -- 186,000 Repurchase of common stock............... -- -- -- -- (19,148) Initial public offering of units, net proceeds............................... 286,274 -- -- -- 9,542,000 Conversion of warrants................... -- (186,000) -- -- -- Conversions of certain related party notes and associated accrued interest............................... -- -- -- -- 77,640 Conversion of debentures and associated accrued interest....................... 48,165 -- -- -- 1,605,496 Exercise of over-allotment option........ 42,335 -- -- -- 1,411,183 Net loss................................. -- -- -- (3,808,485) (3,808,485) ---------- --------- ----------- ------------- ----------- Balance at March 31, 1995.................. 376,774 192,130 -- (12,863,519) 15,002,260 Common stock issued for investment in Mattan................................. -- -- -- -- 881,010 Exercise of stock options................ -- -- -- -- 304 Increase in unrealized holding gain on short-term investments................. -- -- 3,666,367 -- 3,666,367 Net loss................................. -- -- -- (5,752,895) (5,752,895) ---------- --------- ----------- ------------- ----------- Balance at March 31, 1996.................. 376,774 192,130 3,666,367 (18,616,414) 13,797,046 Common stock and B warrants issued in connection with secondary public offering............................... 1,037,514 -- -- -- 10,400,812 Common stock issued in connection with the formation of the Data.Site joint venture................................ -- -- -- -- 1,200,000 Exercise of stock options and warrants... 76,530 -- -- -- 300,575 Stock options issued to Advisory Board members, clinical evaluators and medical directors...................... -- -- -- -- 190,001 Decrease in unrealized holding gain on short-term investments................. -- -- (3,666,367) -- (3,666,367) Net loss................................. -- -- -- (5,590,357) (5,590,357) ---------- --------- ----------- ------------- ----------- Balance at March 31, 1997.................. $1,490,818 $ 192,130 $ -- $(24,206,771) $16,631,710 ---------- --------- ----------- ------------- ----------- ---------- --------- ----------- ------------- -----------
SEE ACCOMPANYING NOTES. 30 PREMIER LASER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31 1997 1996 1995 ----------- ----------- ----------- OPERATING ACTIVITIES Net loss................................................................. $(5,590,357) $(5,752,895) $(3,808,485) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................................ 841,467 814,401 812,196 Write off of investment in Mattan Corporation........................ 881,010 -- -- Acquired in-process research and development......................... 250,000 -- -- Stock options issued to Advisory Board members....................... 190,001 -- -- Termination of strategic alliance with IBC........................... 125,000 -- -- Provision (reversal) of allowance for doubtful accounts receivable... 177,515 (151,751) -- Issuance of stock and stock options in lieu of payment for services........................................................... -- -- 36,150 Extraordinary gain from extinguishment of debt....................... -- -- (381,730) Amortization of debt discount........................................ -- -- 119,230 Common stock forfeited upon cessation of employment.................. -- -- (55,760) Changes in operating assets and liabilities: Accounts receivable................................................ (1,382,560) (92,716) 142,591 Inventories........................................................ (779,277) (14,665) 21,880) Prepaid expenses and other current assets.......................... (351,438) (110,565) 137,224 Accounts payable................................................... (272,769) 594,654 (411,197) Accrued liabilities................................................ 319,936 (598,847) 28,907 ----------- ----------- ----------- Net cash used in operating activities.................................... (5,591,472) (5,312,384) (3,402,754) INVESTING ACTIVITIES Purchase of short-term investments....................................... (3,968,288) -- -- Patent expenditures...................................................... (178,139) (195,971) (204,838) Acquisition of Data.Site................................................. (96,028) -- -- Purchase of property and equipment....................................... (24,477) (219,723) (45,785) Note receivable pursuant to strategic alliance with IBC.................. -- (125,000) -- ----------- ----------- ----------- Net cash used in investing activities.................................... (4,266,932) (540,694) (250,623) FINANCING ACTIVITIES Proceeds from equity offerings........................................... 10,400,812 -- 10,958,193 Net borrowings under line of credit...................................... 800,000 -- -- Proceeds from exercise of stock options and warrants..................... 300,575 304 -- Principle payments on note payable and capital lease obligations......... (454,836) -- (3,126,195) Increase in restricted cash.............................................. (1,050,000) -- -- Proceeds from issuance of notes payable.................................. -- -- 1,519,000 Proceeds from issuance of common stock warrants.......................... -- -- 186,000 Repurchase of common stock............................................... -- -- (19,148) Repurchase of mandatorily redeemable warrants............................ -- -- (285,000) ----------- ----------- ----------- Net cash provided by financing activities................................ 9,996,551 304 9,232,850 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents..................... 138,147 (5,852,774) 5,579,473 Cash and cash equivalents at beginning of year........................... 35,463 5,888,237 308,764 ----------- ----------- ----------- Cash and cash equivalents at end of year................................. $ 173,610 $ 35,463 $ 5,888,237 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest................................................... $ 115,283 $ 52,129 $ 550,962
SEE ACCOMPANYING NOTES. 31 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 1. ORGANIZATION AND NATURE OF OPERATIONS Premier Laser Systems, Inc. (the Company) was incorporated in July 1991 and commenced operations in August 1991 after acquiring substantially all of the assets and certain liabilities of Pfizer Laser Systems (Pfizer), a division of Pfizer Hospital Products Group, Inc. The Company designs, develops, manufactures and markets several lines of lasers for surgical and other medical purposes, laser waveguides and fiber optic devices, disposables and associated accessory products for the medical and dental market. The accompanying consolidated financial statements include the accounts of the Company and its 51% owned subsidiary Data.Site, LLC which is a joint venture established on January 31, 1997. All intercompany transactions and balances have been eliminated. The Company has suffered recurring losses from operations and may continue to incur losses for the foreseeable future due to the significant costs anticipated to be incurred in connection with manufacturing, marketing and distributing its laser products. In addition, the Company intends to conduct continuing research and development activities, including regulatory submittals and clinical trials to develop additional applications for its laser technology. The Company operates in a highly competitive environment and is subject to all of the risks inherent in a new business enterprise. In October 1996, the Company completed a public offering of its securities which generated net proceeds aggregating $10.4 million. The Company believes that the proceeds of this offering and anticipated proceeds from the exercise of outstanding warrants and options to acquire the Company's Class A common stock will be sufficient to meet its working capital requirements through at least fiscal 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenues are recognized when products are shipped to customers. SHORT-TERM INVESTMENTS AND RESTRICTED CASH The Company invests excess cash in United States Treasury securities and commercial paper generally with maturities of less than one year. Short-term investments with a maturity of less than three months when purchased are classified as cash equivalents. Investments with maturities in excess of three months are presented as short-term investments in the accompanying financial statements. Pursuant to Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company's short-term investments are classified as available-for-sale and are reported at fair market value with unrealized gains and losses reflected as an adjustment to shareholders' equity. There were no material unrealized gains or losses at March 31, 1997. Restricted cash consists primarily of certificates of deposits held to secure borrowings under the Company's line of credit. CONCENTRATION OF CREDIT RISK AND FOREIGN SALES The Company generates revenues principally from sales in the medical field. As a result, the Company's accounts receivable are concentrated primarily in this industry. In addition, sales to one customer represented 10% of the Company's sales in fiscal 1996 and 11% to a different customer in fiscal 1995. Sales in foreign countries accounted for approximately 25%, 40% and 63% of the Company's total sales in fiscal 1997, 1996 and 1995, respectively. These foreign sales related almost entirely to sales in Asia and Europe. 32 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Generally, letters of credit are obtained on international sales. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. LONG LIVED ASSETS In fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121). The adoption of SFAS No. 121 had no impact on the Company's financial position or results of operations. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and are comprised of the following at March 31:
1997 1996 ------------ ------------ Raw materials..................................................... $ 1,583,460 $ 938,560 Work-in-progress.................................................. 101,802 276,998 Finished goods.................................................... 1,279,370 969,797 ------------ ------------ $ 2,964,632 $ 2,185,355 ------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for replacements and improvements are capitalized and expenditures for repairs and maintenance are charged to operating expense as incurred. Property and equipment consist of the following at March 31:
1997 1996 ------------ ------------ Machinery, equipment, molds and tooling........................... $ 1,041,574 $ 1,032,188 Furniture, fixtures and office equipment.......................... 596,347 433,286 Software.......................................................... 250,000 -- ------------ ------------ 1,887,921 1,465,474 Less accumulated depreciation..................................... 1,106,976 971,532 ------------ ------------ $ 780,945 $ 493,942 ------------ ------------ ------------ ------------
Depreciation of furniture, machinery and equipment is calculated on a straight-line basis over the following estimated useful lives: Machinery and equipment....................... 5-10 years Furniture and fixtures........................ 10 years Software...................................... 3 years Leasehold improvements........................ Shorter of estimated useful life or term of lease
INTANGIBLE ASSETS Intangible assets consist primarily of patents and technology rights, goodwill and license agreements. The costs assigned to acquired intangible assets, partially based upon independent appraisals, are being amortized on a straight-line basis over the estimated useful lives of the assets ranging from 2 to 15 years. 33 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Intangibles consist of the following at March 31:
1997 1996 ------------ ------------ Patents and technology rights..................................... $ 9,581,230 $ 9,413,088 Goodwill.......................................................... 1,042,279 -- License agreements................................................ 265,000 255,000 Other............................................................. -- 201,000 ------------ ------------ 10,888,509 9,869,088 Less accumulated amortization..................................... 3,013,481 2,515,626 ------------ ------------ $ 7,875,028 $ 7,353,462 ------------ ------------ ------------ ------------
RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. A substantial portion of the Company's research and development expense is related to developing new products, improving existing products or processes, and clinical research programs. The Company enters into agreements with certain doctors to exchange a portion of a product's sales price for services related to the completion of certain portions of clinical studies necessary for obtaining product approval from the U.S. Food and Drug Administration. Typically, the amounts consist of a portion of the product sales price which is equal to the cost of the services to be rendered by the doctor. Pursuant to the agreements, in the event the doctor is unable to complete the agreed upon clinical study, the doctor is required to remit a cash payment for the entire amount. The amounts are capitalized as prepaid research and development expense and are amortized upon completion of certain milestones of the clinical study. These studies are generally completed within one year. Research and development expenses included in prepaid expenses totaled $405,000 and $204,000 at March 31, 1997 and 1996, respectively. INCOME TAXES The Company accounts for income taxes in accordance with statement of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the liability method of accounting for income taxes. This method mandates the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. STATEMENTS OF CASH FLOWS The Company invests its excess cash in money market funds. The Company considers all highly liquid investments with an original maturity of three months or less and money market funds to be cash equivalents. Significant noncash investing and financing activities excluded from the accompanying statements of cash flows are as follows: In fiscal 1996, the Company issued 200,000 shares of Class A common stock in connection with the acquisition of 1,150,000 shares of Mattan Corporation's common stock. The value of the Mattan Corporation common stock shares was $881,010 on the date of the transaction. Concurrent with the completion of the Company's initial public offering, certain notes payable to shareholders totaling $66,500 and convertible debentures totaling $1,500,000, plus related accrued 34 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) interest, were converted into 7,072 shares of Class A common stock and 6,260 shares of each Class E-1 and E-2 common stock, and 321,099 Units, respectively. In fiscal 1997, the Company issued 159,787 shares of Class A common stock valued at $1,200,000 in connection with its acquisition of Data.Site. NET LOSS PER SHARE Net loss per share was computed based on the weighted average number of the Company's common shares outstanding during fiscal 1997 and 1996 and excludes all shares of Class E-1 and Class E-2 common stock, outstanding or subject to option, because all such shares of stock are subject to escrow and the conditions for the release of shares from escrow have not been satisfied. Common stock equivalents were not considered in the net loss per share calculation because the effect would be antidilutive. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per common share was computed based on the weighted average number of the Company's common shares outstanding during the fiscal year ended March 31, 1995 after giving retroactive adjustment for the recapitalization and the conversion of the Company's debentures into units which occurred upon completion of the Company's initial public offering. The effect on pro forma net loss per common share of the conversion of the Company's debentures was to reduce historical net loss by $67,995 and to increase weighted average shares outstanding by 321,099 shares for fiscal year ended March 31, 1995. Class E-1 and E-2 common stock shares were excluded from the pro forma net loss per share calculation because the conditions for release of shares from escrow have not been satisfied. Other common stock equivalents were not considered in the pro forma net loss per share calculation because the effect on the pro forma net loss per share would be antidilutive. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock options and warrants granted and common shares issued within one year of the Company's initial public offering and not in escrow have been included as outstanding for the six months ended September 30, 1994 (the date of the most recent financial statements included in the Company's initial public offering prospectus) using the treasury stock method. EARNINGS PER SHARE In February 1997, Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE was issued and is effective for interim and annual periods ending after December 15, 1997. The statement requires presentation of both basic and diluted earnings per share. As of the result of the Company's net loss, basic and diluted loss per share will not differ materially from the per share amounts in the accompanying financial statements. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related Interpretations in accounting for its employee stock option grants. Options granted to consultants and other non-employees are accounted for under the fair value method in accordance with Statement of Financial Accounting Standards No 123, ACCOUNTING FOR STOCK BASED COMPENSATION. 35 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates and assumptions include inventory valuation and the realizability of certain intangible assets. The Company's inventory and intangibles largely relate to technologies which have yet to gain wide spread market acceptance. Management believes no loss will be incurred on the disposition of its inventory and that the remaining economic life of the Company's tangible assets is reasonable. If wide spread market acceptance of the Company's products is not achieved, the carrying amount of inventory and intangible assets could be materially affected. BASIS OF PRESENTATION Certain prior year amounts have been reclassified in order to conform with the current year presentation. 3. STRATEGIC ALLIANCES In December 1995, the Company entered into a strategic marketing alliance with Mattan Corporation (Mattan), a Canadian Corporation, whose stock was publicly traded on the Alberta Stock Exchange. The strategic marketing alliance agreement (the Agreement) stipulates that the Company would supply all laser equipment and associated disposables for any laser surgery centers to be designed and opened by Mattan in Canada and the United States. These surgery centers would be operated under the name of Medical Laser Institute of America (MLIA). In connection with entering into the Agreement, the Company issued 200,000 shares of the Company's Class A common stock with a fair market value of $881,000 for 1,150,000 shares of Mattan's common stock. The Company accounted for this investment as an available-for-sale security pursuant to SFAS No. 115. At March 31, 1996, the fair value of this investment totaled approximately $4,547,377 and the related unrealized holding gain totaled approximately $3,666,367. As a result of the halting of trading of Mattan stock and ongoing reorganization activities, the fair market value of the investment was zero at March 31, 1997 and accordingly, the Company wrote off its investment. In October 1995, the Company entered into a strategic business alliance (Strategic Alliance) with International Biolaser Corporation (IBC). This Strategic Alliance specified that the Company would manufacture IBC's CO2 and argon lasers and that such products would be jointly marketed by the two companies. Pursuant to the agreement, the Company advanced $125,000 to IBC in exchange for a convertible note payable due in October 1997, bearing interest at 10% per annum and secured by substantially all of IBC's intangible assets. This note payable is convertible, at the Company's sole option, into an 80% ownership interest in IBC only after IBC has repaid certain pre-existing indebtedness. IBC and the Company terminated the Strategic Alliance in August 1996. In settlement of the Strategic Alliance, the Company obtained IBC's argon MOD laser proprietary rights, intellectual property and technology in exchange for a guaranty of $201,000 of IBC's outstanding indebtedness. As of March 31, 1997, the Company wrote-off the $331,740 carrying value of its advances and payments made under the guarantee on behalf of IBC due to the uncertainty regarding its realizability. 36 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. JOINT VENTURE Effective January 31, 1997, the Company entered into a joint venture with Refractive Surgical Services, LLC (RSS), a Kansas City based company engaged in the development of certain medical outcomes software. Under this joint venture, the Company and RSS formed Data.Site. LLC, ("Data.Site"). Data.Site acquired and assumed substantially all of the assets and liabilities of RSS. The Company acquired a 51 percent interest in Data.Site, which was accounted for under the purchase method of accounting, and issued 159,787 shares of its Class A common stock to RSS. In connection with the acquisition the Company recorded goodwill in the amount of $1,042,279. The Company is obligated to pay an additional $300,000 to the shareholders of RSS in the form of common stock or cash, at the option of the Company, if Data.Site's gross revenues equal or exceed $1,500,000 for the year ending December 31, 1997. The Company is also obligated to fund Data.Site's operations with up to an additional $1,000,000 in cash or equivalent services during the two-year period ending January 31, 1999. 5. GRANTS In September 1995, the Company obtained a Small Business Innovative Research Grant totaling approximately $750,000 for the study of laser emulsification. Pursuant to the terms of the grant, the Company is eligible to receive reimbursement for research and development costs incurred in connection with the laser emulsification study up to $750,000 upon the achievement of certain milestones, as defined. During fiscal 1997 and 1996, the Company received approximately $450,000 and $250,000 under the grants, respectively. The amounts received under the grant were offset against research and development costs incurred in the study. 6. LINE OF CREDIT The Company has a line of credit agreement with a bank which provides for borrowings of up to $1,000,000. As of March 31, 1997, total borrowings under this agreement were $800,000, bearing interest at the bank's prime rate (8.50% at March 31, 1997). Borrowings under the agreement are secured by a certificate of deposit. The agreement matures on February 12, 1998. 7. NOTES PAYABLE AND EXTRAORDINARY GAIN Pursuant to an agreement between the Company and Pfizer, the Company paid $1,386,195 of the notes payable to Pfizer immediately subsequent to the closing of the Company's fiscal 1995 initial public offering and Pfizer forgave $650,000 of the total indebtedness. The remaining balance of $481,195, bearing interest at 10% per annum at March 31, 1996, and related accrued interest were payable in quarterly installments. This remaining balance was paid in full upon the closing of the Company's fiscal 1997 public offering. In June 1994, notes payable to third parties of $1,500,000 were converted into convertible debentures. The debentures and related accrued interest were converted into 321,099 Units (see footnote 10) concurrent with the closing of the initial public offering. Also concurrent with the close of the offering, notes payable to shareholders totaling $66,500 plus related accrued interest were converted into 7,072 shares of Class A Common Stock and 6,260 shares each of Class E-1 and E-2 common stock. In August 1994, the Company completed a private placement of debt units, whereby $1,550,000 of notes payable bearing interest at 10% per annum (the Bridge Notes) and warrants to purchase 1,085,000 shares of Class A common stock were issued. In connection with this private placement, the Company incurred placement costs of $201,500 and issued the notes at a discount totaling $186,000. These notes payable were paid in full in December 1994. 37 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In connection with the debt forgiven by Pfizer and the extinguishment of the bridge notes, the Company recognized a net extraordinary gain on extinguishment of debt totaling $381,730 in fiscal 1995. 8. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company leases its facilities and certain equipment under noncancellable operating leases. Total rental expense for operating leases was $296,000, $348,000 and $387,000 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. At March 31, 1997, future minimum lease payments under noncancellable operating leases are as follows:
1998.............................................................. $ 257,000 1999.............................................................. 258,000 2000.............................................................. 249,000 2001.............................................................. 188,000 --------- $ 952,000 --------- ---------
Pursuant to the Company's facility lease, effective January 1997, the Company becomes guarantor of a lease agreement between the Company's lessor and a third party lessee. The guaranteed future minimum lease payments relating to the third party are $112,000, and $86,000 for the years ended March 31, 1998 and 1999, respectively. LITIGATION The Company entered into an agreement with Infrared Fiber Systems, Inc. (IFS), as a supplier of certain fiber optics that expires in the fiscal year ending March 31, 2002. The agreement requires the supplier to sell exclusively to the Company fiberoptics for medical and dental applications as long as the Company purchases defined minimum amounts. In March 1994, the Company initiated litigation against IFS. The Company's complaint alleges that IFS and two of its officers misrepresented IFS' ability to supply optical fibers, and that IFS breached its supply agreement and certain warranties. In April 1994, IFS filed a cross-complaint alleging breach of contact and intentional interference with prospective economic advantage, seeking declaratory relief that the contract has been terminated and that IFS is free to market its fiber optics to others. In July 1994, Coherent, Inc., a major shareholder of IFS and a manufacturer of medical lasers which employ IFS optical fibers, joined the lawsuit for the express purpose of defending their rights to the IFS optical fibers. In May 1995, the Company instituted litigation concerning this dispute in Orange County, California Superior Court against Coherent, Westinghouse Electric Corporation ("Westinghouse") and an individual employee of Westinghouse who was an officer of IFS from 1986 to 1993, when the events involved in the federal action against IFS took place and while Westinghouse owned a substantial minority interest in IFS. The complaint charges that Coherent conspired with IFS in the wrongful conduct which is the subject of the federal lawsuit and interfered with the Company's contracts and relations with IFS and with prospective contracts and advantageous economic relations with third parties. The complaint asserts that Westinghouse is liable for its employee's wrongful acts as an IFS executive while acting within the scope of his employment at Westinghouse. The lawsuit seeks injunctive relief and compensatory damages. In October 1995 the federal action was stayed by order of the court in favor of the California state court action, in which the pleadings have been amended to include all claims asserted by the Company in the federal action. No trial date has been set. 38 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is involved in various disputes and other lawsuits from time to time arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of the IFS litigation, disputes and other lawsuits may adversely affect the Company, however, it is the opinion of management, that the outcome of such matters will not have a material adverse impact on the Company's financial position, results of operations, or cash flows. 9. INCOME TAXES The Company has incurred operating losses since its inception and as a result, no provision for or benefit from income tax has been recorded. Deferred tax assets consist of the following at March 31:
1997 1996 ------------- ------------- Tax operating loss carryforwards................................ $ 7,540,050 $ 6,033,150 Inventory and receivable reserves and related temporary differences................................................... 1,051,030 708,404 Depreciation and amortization................................... 598,817 141,077 Research and development credit carryforwards................... 429,686 597,683 Accruals not currently deductible............................... 126,693 105,767 ------------- ------------- Total deferred tax assets....................................... 9,746,276 7,586,081 Valuation allowance for deferred tax assets..................... (9,746,276) (7,586,081) ------------- ------------- Net deferred taxes.............................................. $ -- $ -- ------------- ------------- ------------- -------------
The Company has approximately $20.4 million of federal net operating loss carryforwards at March 31, 1997, which will begin to expire in 2006. A valuation allowance has been established for the entire deferred tax asset related to those net operating losses. The Tax Reform Act of 1986 contains provisions which could substantially limit the availability of the net operating loss carryforwards if there is a greater than 50% change in ownership during a three year period. As a result of the Company's public offerings the Company experienced an ownership change of more than 50%, resulting in a limitation on the utilization of their net operating loss carryforwards. The limitation is based on the value of the Company on the date that the change in ownership occurred. The ultimate realization of the loss carryforwards is dependent on the future profitability of the Company. 10. SHAREHOLDERS' EQUITY INITIAL AND SECONDARY PUBLIC OFFERINGS On December 7, 1994, the Company completed an initial public offering of 2,400,000 Units of the Company's securities, each unit consisting of one share of Class A common stock, one redeemable Class A warrant and one redeemable Class B warrant (the Units). The Company realized net proceeds of $9,542,000 from this offering. Each Class A warrant consists of the right to purchase one share of Class A common stock and one Class B warrant through November 30, 1999 at an exercise price of $6.50. Each Class B warrant consists of the right to purchase one share of Class A common stock at an exercise price of $8.00. The Company has the right to redeem the Class A and Class B warrants after November 30, 1997 at a price of $.05 per warrant subject to certain conditions regarding the bid price of the Class A common 39 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY (CONTINUED) stock. On January 12, 1995, the underwriter in the initial public offering exercised its over allotment option to purchase 360,000 Units at the public offering price, resulting in additional net proceeds of $1,411,000. On October 18, 1996, the Company completed a public offering of 11,000 Units of the Company's securities, each Unit consisting of 190 shares of Class A common stock and 95 redeemable Class B warrants (the "Units"). The Company realized net proceeds of $10,402,000 from this offering and the related exercise of the underwriters overallotment option. Each Class B warrant consists of the right to purchase one share of Class A common stock through November 30, 1999 at an exercise price of $8.00. STOCK OPTIONS The Company has adopted several stock option plans that authorize the granting of options to employees, officers and/or consultants to purchase shares of the Company's Class A common stock. The stock option plans are administered by the Board of Directors or a committee appointed by the Board of Directors, which determines the terms of the options, including the exercise price, the number of shares subject to option and the exercisability of the option. The options are generally granted at the fair market value of the shares underlying the options at the date of the grant and expire within ten years of the grant date. In addition to options granted pursuant to the stock option plans, the Company has issued options to purchase shares of the Company's Class A common stock to certain members of the Board of Directors, consultants and former notes payable holders. Effective December 30, 1993, the Company issued warrants under the 1993 Limited Warrant Plan to purchase 50,872 shares of common stock, with an exercise price of $8.85 per share for services rendered by consultants in connection with the acquisition of technology rights. In January 1995, the warrant holders exercised their right to receive a cash payment of $285,000, an amount equal to the liability owed to the consultants on the date of issuance, in exchange for cancellation of the warrants. The Company has elected to follow APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations in accounting for its employee stock option grants. Accordingly, no compensation expense has been recognized for its employee stock option awards and its employee stock purchase plan because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. The Company recognized expense related to grants of options to non-employees in accordance with the fair value provision of SFAS No. 123. Such expense was $190,001 and none during fiscal 1997 and 1996, respectively. FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires pro forma information regarding net income (loss) and net income (loss) per share using compensation that would have been incurred if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of options granted have been estimated at the date of grant using a Black-Scholes option pricing model using the following assumptions:
Risk free interest rate.......................................... 6.0% Stock volatility factor.......................................... 0.580 Weighted average expected option life............................ 4 years Expected dividend yield.......................................... 0%
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's compensation expense used in determining the pro forma 40 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY (CONTINUED) information may not be indicative of such expense in future periods as the 1997 and 1996 amounts are based only on option grants after December 15, 1994. Pro forma information is as follows:
1997 1996 ------------- ------------- Pro forma net loss.............................................. $ (6,593,000) $ (6,135,000) Pro forma net loss per share.................................... $ (1.13) $ (1.35)
A summary of the Company's stock option activity, and related information for the years ended March 31 follows:
1997 1996 1995 ----------------------- ----------------------- ----------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- ----------- ---------- ----------- ---------- ----------- Outstanding--beginning of year............ 1,423,949 $ 5.58 788,157 $ 6.14 734,646 $ 9.14 Granted................................... 1,042,756 6.16 704,700 4.89 621,815 5.01 Exercised................................. (1,899) 1.00 (1,722) 1.00 (3,067) 1.03 Forfeited................................. (156,757) 10.53 (67,186) 4.96 (565,237) 8.81 ---------- ---------- ---------- Outstanding--end of year.................. 2,308,049 5.51 1,423,949 5.58 788,157 6.14 ---------- ----------- ---------- ----- ---------- ----- ---------- ----------- ---------- ----- ---------- ----- Exercisable at end of year................ 775,629 $ 5.18 782,999 $ 6.15 758,157 $ 6.19 ---------- ----------- ---------- ----- ---------- ----- ---------- ----------- ---------- ----- ---------- ----- Weighted-average fair value of options granted during the year................. $ 3.44 $ 2.46 $ 2.53 ----------- ----- ----- ----------- ----- -----
The weighted average remaining contractual life of options as of March 31, 1997 was as follows:
OUTSTANDING EXERCISABLE ------------------------ ---------------------------------------------------------------- WEIGHTED- NUMBER OF WEIGHTED-AVERAGE WEIGHTED AVERAGE SHARES REMAINING CONTRACTUAL AVERAGE SHARES EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE - ---------------------------------------- ----------- --------------------- --------------- ----------- ----------- $1.00................................... 28,438 1.7 $ 1.00 28,438 $ 1.00 $4.50 - $8.85........................... 2,255,921 9.0 5.51 723,501 5.16 Greater than $10.00..................... 23,690 6.8 10.73 23,690 10.73
CLASS E-1 AND CLASS E-2 COMMON STOCK The Company's Class E-1 and Class E-2 common stock is held in escrow, is not transferable, can be voted and will be converted into Class A common stock only upon the occurrence of specified events. All of the Class E-1 common stock will be automatically converted into Class A common stock in the event that the Company's net income before provision for income taxes, as defined, exceeds certain amounts. These amounts were originally $6,850,000, $8,425,000, $9,900,000 for the fiscal years ending March 31, 1998 through 2000, respectively, but these amounts will be increased in future fiscal years in proportion to increases in the weighted average number of shares of common stock outstanding (as defined) in the relevant year, as compared to the number of shares outstanding immediately after the Company's initial public offering. In addition, the Class E-1 common stock will be converted if the closing price, as defined, of the Company's Class A common stock shall average in excess of $19.25 for any 30 consecutive trading 41 PREMIER LASER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SHAREHOLDERS' EQUITY (CONTINUED) days during the period May 1, 1996 to November 30, 1997. If none of the above events occur, the Class E-1 common stock will be canceled on June 30, 2000. All of the Class E-2 common stock will be automatically converted into Class A common stock in the event that: (1) the Company's net income before provision for income taxes, as defined, amounts to at least $14,750,000, $20,475,000 or $26,750,000 for the years ending March 31, 1998 through 2000, respectively, (which amounts shall be adjusted in the same manner as those for the Class E-1 common stock) or (2) the closing price, as defined, of the Company's Class A common stock shall average in excess of $24.00 for any 30 consecutive trading days during the period May 1, 1996 to November 30, 1997. If none of the above events occur, the Class E-2 common stock will be canceled on June 30, 2000. The Company will, in the event of the release of the Class E-1 and Class E-2 common stock, recognize during the period in which the earnings thresholds are met or such minimum bid prices are achieved, a substantial noncash charge to earnings equal to the fair value of such shares on the date of their release, which would have the effect of significantly increasing the Company's loss or reducing or eliminating earnings, if any, at such time. 11. EMPLOYEE BENEFIT PLAN The Company adopted a Defined Contribution 401(k) Profit Sharing Plan, effective January 1, 1997 covering substantially all of its employees. The Plan permits eligible employees to contribute a portion of their compensation to the Plan, on a tax deferred basis. The Company may make matching contributions, in amounts determined by the Company's Board of Directors. The Company's contributions will be in the form of shares of the Company's common stock. During 1997, no amounts were contributed by the Company to the Plan. 12. SUBSEQUENT EVENT ACQUISITION OF EYESYS TECHNOLOGIES, INC. On April 24, 1997, the Company entered into an Agreement and Plan of Merger, pursuant to which it will acquire EyeSys Technologies, Inc. ("EyeSys"). Consummation of the transaction is subject to satisfaction of certain conditions. In connection with the merger, the Company will issue, to certain EyeSys creditors, shareholders, option holders and warrant holders, common stock having a value of $10,600,000, as well as options to purchase 165,000 shares of the Company's common stock with a value of $200,000. If EyeSys enters into certain license agreements related to its technology within 90 days of closing, the Company may be required to issue additional common stock or options to purchase common stock pursuant to the following formula: the Company shall issue securities with a value equal to 78% of the first $1,500,000 of license fees and 50% of additional license fees received prior to April 24, 1998. 42 PREMIER LASER SYSTEMS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1997, 1996 AND 1995
BALANCE AT DEDUCTIONS/ BEGINNING RECOVERIES BALANCE OF AND AT END OF DESCRIPTION PERIOD ADDITIONS WRITE-OFFS OTHER* PERIOD - ---------------------------------------------- ----------- ---------- ------------- ---------- ------------ 1997 Allowance for doubtful accounts receivable................................ $ 154,677 $ 177,515 $ (119,054) $ 174,125 $ 387,263 Inventory reserves.......................... 950,325 252,999 -- -- 1,203,324 1996 Allowance for doubtful accounts receivable................................ $ 306,428 $ 254,962 $ (406,713) $ -- $ 154,677 Inventory reserves.......................... 699,269 838,968 (587,912) -- 950,325 1995 Allowance for doubtful accounts receivable................................ $ 574,106 $ 220,453 $ (488,131) $ -- $ 306,428 Inventory reserves.......................... 540,987 158,282 -- -- 699,269
- ------------------------ * Allowance for Data.Site 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On March 1, 1997, the Company filed a Current Report on Form 8-K, reporting a change in its certified accountant. Reference is hereby made to such Current Report for further discussion of this matter. 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is incorporated herein by this reference to the section entitled "Election of Directors" in the Company's definitive Proxy Statement prepared pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, for the Company's 1997 Annual Meeting of Shareholders involving, among other things, the election of directors. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 1997. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by this reference to the section entitled "Executive Compensation" in the Company's definitive Proxy Statement prepared pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, for the Company's 1997 Annual Meeting of Shareholders involving, among other things, the election of directors. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated herein by this reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement prepared pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, for the Company's 1997 Annual Meeting of Shareholders involving, among other things, the election of directors. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated herein by this reference to the section entitled "Executive Compensation--Certain Transactions" in the Company's definitive Proxy Statement prepared pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, for the Company's 1997 Annual Meeting of Shareholders involving, among other things, the election of directors. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 1997. 45 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE IN ANNUAL REPORT ON FORM 10-K --------------- (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Report of Ernst & Young LLP, Independent Auditors.............................. 26 Report of Price Waterhouse LLP, Independent Accountants........................ 27 Consolidated Balance Sheets at March 31, 1997 and 1996......................... 28 Consolidated Statements of Operations for the Years Ended March 31, 1997, 1996 and 1995..................................................................... 29 Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997, 1996 and 1995.......................................................... 30 Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994..................................................................... 31 Notes to Consolidated Financial Statements..................................... 32 (2) Financial Statements Schedules Schedule II--Valuation and Qualifying Accounts for the Years Ended March 1997, 1996 and 1995................................................................ 43 Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (3) Exhibits (numbered in accordance with Item 601 of Regulation S-K).............. 46
EXHIBITS - ------------- 3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of State on November 23, 1994. (incorporated herein by this reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-QSB for the Quarter ended December 31, 1994) 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.2 Assignment Agreement dated July 27, 1992 between the Company and Michael Colvard, M.D. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).
46
EXHIBITS - ------------- +10.4 Lead Generation/Distribution Agreement dated March 17, 1994 between the Company and Burkhart Dental Supply Company (incorporated herein by this reference to Exhibit 10.10 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.5 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit 10.12 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.6 Letter of Intent between the Company and Richard Leaderman, D.D.S., together with related Patent Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994 (incorporated herein by this reference to Exhibit 10.13 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). +10.7 Exclusive Marketing Agreement dated July 26, 1994 between the Company, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.8 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.9 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended (incorporated herein by this reference to Exhibit 10.26 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.10 Form of Warrant Agreement (including forms of Class A and Class B Warrant Certificates) (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.11 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.12 Form of Finder's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.13 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.14 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by this reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.15 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984).
47
EXHIBITS - ------------- 10.16 Letter agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke University, together with patent assignment as filed in the U.S. Patent and Trademark Office on October 23, 1993 (incorporated herein by this reference to Exhibit 10.8 to the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984). 10.17 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company (incorporated herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.18 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the Registrant and International Biolaser Corporation (incorporated herein by this reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan Corporation (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995). 10.21 Purchasing Agreement dated December 20, 1995 between Registrant and Mattan Corporation (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995). 10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.23 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.24 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.25 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics International (incorporated herein by this reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).
48
EXHIBITS - ------------- 10.26 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting option to purchase 358,650 shares of Registrant's Common Stock) (incorporated herein by this reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.27 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive Officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.28 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 10.34 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984). 10.29 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.30 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996). 10.31 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with Schedule to Loan Agreement dated June 3, 1996 (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.32 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.33 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.34 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.35 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.36 Agreement dated August 12, 1996 between the Registrant and Circuit Tree Medical, Inc. (incorporated herein by this reference to Exhibit 10.42 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.37 Amendment to Loan Agreement together with Schedule, dated February 13, 1997, between the Registrant and Silicon Valley Bank.* 10.38 Pledge Agreement dated February 13, 1997 between the Registrant and Silicon Valley Bank.* 10.39 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site.*
49
EXHIBITS - ------------- 10.40 Operating Agreement of Data.Site dated January 31, 1997.* 10.41 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition of Delaware, Inc. and EyeSys Technologies, Inc.* 23.1 Consent of Ernst & Young LLP.* 23.2 Consent of Price Waterhouse LLP.*
- ------------------------ * Filed herewith. + Confidential treatment has been granted with respect to portions of this Exhibit. (b) Reports on Form 8-K. During the last quarter of the period covered by this report, on March 1, 1997, the Company filed a Current Report on Form 8-K, reporting a change in its public accountant. On March 18, 1997, the Company filed an amendment to its Current Report on Form 8-K/A for the purpose of filing a letter by its former accountants confirming the information contained in the Form 8-K. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIER LASER SYSTEMS, INC. By: /s/ COLETTE COZEAN ----------------------------------------- Colette Cozean, Ph.D., CHIEF EXECUTIVE OFFICER AND PRESIDENT Dated: May 21, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE ------------------------- -------------------------- ------------------- Chief Executive Officer, By: /s/ COLETTE COZEAN President (Principal ------------------------- Executive Officer), Dated: May 21, 1997 Colette Cozean, Ph.D. Director By: /s/ PATRICK J. DAY ------------------------- Director Dated: May 21, 1997 Patrick J. Day By: /s/ GRACE CHING-HSIN LIN ------------------------- Director Dated: May 21, 1997 Grace Ching-Hsin Lin By: /s/ E. DONALD SHAPIRO ------------------------- Director Dated: May 21, 1997 E. Donald Shapiro Chief Financial Officer By: /s/ MICHAEL HIEBERT (Principal Financial ------------------------- Officer and Principal Dated: May 21, 1997 Michael Hiebert Accounting Officer) By: /s/ G. LYNN POWELL ------------------------- Director Dated: May 21, 1997 G. Lynn Powell, D.D.S. 51 EXHIBIT INDEX
EXHIBIT NO. - ----------- 3.1 Amended and Restated Articles of Incorporation filed with the California Secretary of State on November 23, 1994. (incorporated herein by this reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-QSB for the Quarter ended December 31, 1994)............................. 3.2 Bylaws (incorporated herein by this reference to Exhibit 3.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)................................................... 10.1 Letter Agreement and Patent License Agreement dated August 29, 1991 among the Company, Patlex Corporation and Gordon Gould (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)......................... 10.2 Assignment Agreement dated July 27, 1992 between the Company and Michael Colvard, M.D. (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)........................................................................... 10.3 Gold Catalyst Licensing Agreement dated April 16, 1992 between the Company and Optical Engineering, Inc. (incorporated herein by this reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)................................................... +10.4 Lead Generation/Distribution Agreement dated March 17, 1994 between the Company and Burkhart Dental Supply Company (incorporated herein by this reference to Exhibit 10.10 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)...................................... 10.5 Form of International Distribution Agreement (incorporated herein by this reference to Exhibit 10.12 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).................. 10.6 Letter of Intent between the Company and Richard Leaderman, D.D.S., together with related Patent Assignments as filed in the U.S. Patent and Trademark Office on February 22, 1994 (incorporated herein by this reference to Exhibit 10.13 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)........................................................................... +10.7 Exclusive Marketing Agreement dated July 26, 1994 between the Company, Proclosure, Inc. and Nippon Shoji Kaisha, Ltd. (incorporated herein by this reference to Exhibit 10.14 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)...................................... 10.8 Form of Indemnification Agreement (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)......................... 10.9 Purchase/Supply Agreement dated January 13, 1987 between Infrared Fiber Systems, Inc. and Pfizer Hospital Products Group, Inc., as amended (incorporated herein by this reference to Exhibit 10.26 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)..................... 10.10 Form of Warrant Agreement (including forms of Class A and Class B Warrant Certificates) (incorporated herein by this reference to Exhibit 4.1 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)........................................................................... 10.11 Form of Underwriter's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.2 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)..................... 10.12 Form of Finder's Unit Purchase Option (incorporated herein by this reference to Exhibit 4.3 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984).........................
52
EXHIBIT NO. - ----------- 10.13 1992 Stock Option Plan, together with form of Nonstatutory Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 4.5 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)......................... 10.14 Employee Bonus Stock Plan, together with form of Bonus Stock Agreement (incorporated herein by this reference to Exhibit 4.6 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)............................................................................................ 10.15 Assignment and Modification Agreement dated July 26, 1991, among the Registrant, Pfizer Hospital Products Group and Medical Laser Technologies Limited (incorporated herein by this reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984)............................................................................................ 10.16 Letter agreement dated October 13, 1987 between Pfizer Laser Systems, Inc. and Duke University, together with patent assignment as filed in the U.S. Patent and Trademark Office on October 23, 1993 (incorporated herein by this reference to Exhibit 10.8 to the Registrant's Registration Statement on Form SB-2, Registration Number 33-83984)............................................................. 10.17 Industrial Lease dated December 6, 1995 between the Registrant and Irvine Company (incorporated herein by this reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).................................................................... 10.18 Use and Cost Sharing Agreement dated December 1, 1995 between the Registrant and Biopsys Medical, Inc. (incorporated herein by this reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)................................................ 10.19 Letter of Intent dated October 19, 1995 between the Registrant and International Biolaser Corporation, together with related Promissory Note dated October 19, 1995 payable to Registrant in the original principal amount of $125,000, and Security Agreement dated October 19, 1995 between the Registrant and International Biolaser Corporation (incorporated herein by this reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)..... 10.20 Share Exchange Agreement dated December 20, 1995 among the Registrant, 658994 Alberta Ltd., 658997 Alberta Ltd. and Mattan Corporation (incorporated herein by this reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995)............... 10.21 Purchasing Agreement dated December 20, 1995 between Registrant and Mattan Corporation (incorporated herein by this reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995).................................................................... 10.22 Exclusive Licensing Agreement dated June 1, 1992 between the Registrant and Quentin M. Murphy, D.D.S. (incorporated herein by this reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)..................................................... 10.23 Broker Agreement dated March 13, 1996 among the Registrant, First National Marketing Services, Inc. and William F. Sullivan (incorporated herein by this reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)............................... 10.24 Form of Consulting Agreement (incorporated herein by this reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).................. 10.25 Radiation Services Agreement dated January 10, 1994 between the Registrant and SteriGenics International (incorporated herein by this reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)......................................
53
EXHIBIT NO. - ----------- 10.26 Form of Nonstatutory Stock Option Agreement between the Registrant and Colette Cozean (granting option to purchase 358,650 shares of Registrant's Common Stock) (incorporated herein by this reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)...................................................................................... 10.27 Form of Termination Agreement between the Registrant and certain of the Registrant's Executive Officers (incorporated herein by this reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)................................................ 10.28 1995 Employee Stock Option Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement (incorporated herein by this reference to Exhibit 10.34 to the Registrant's Registration Statement on Form SB-2, Registration No. 33-83984)......................... 10.29 February 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996).................. 10.30 1996 Stock Option Plan (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996)............................... 10.31 Loan Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank, together with Schedule to Loan Agreement dated June 3, 1996 (incorporated herein by this reference to Exhibit 10.36 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984)................... 10.32 Pledge Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.37 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984)........................................................................... 10.33 Warrant to Purchase Stock dated June 3, 1996 issued to Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.38 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984)........................................................................................ 10.34 Registration Rights Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.39 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984)................................................................. 10.35 Antidilution Agreement dated June 3, 1996 between the Registrant and Silicon Valley Bank (incorporated herein by this reference to Exhibit 10.40 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984)................................................................. 10.36 Agreement dated August 12, 1996 between the Registrant and Circuit Tree Medical, Inc. (incorporated herein by this reference to Exhibit 10.42 to the Registrant's Registration Statement on Form SB-2 Registration No. 33-83984). 10.37 Amendment to Loan Agreement together with Schedule, dated February 13, 1997, between the Registrant and Silicon Valley Bank.*............................................................................ 10.38 Pledge Agreement dated February 13, 1997 between the Registrant and Silicon Valley Bank.*............ 10.39 Joint Venture Agreement dated January 31, 1997 between the Registrant, RSS, LLC and Data.Site.*...... 10.40 Operating Agreement of Data.Site dated January 31, 1997.*............................................ 10.41 Agreement and Plan of Merger dated April 24, 1997 between the Registrant, Premier Acquisition of Delaware, Inc. and EyeSys Technologies, Inc.*........................................................ 23.1 Consent of Ernst & Young LLP*........................................................................
54
EXHIBIT NO. - ----------- 23.2 Consent of Price Waterhouse LLP*.....................................................................
- ------------------------ + Confidential treatment has been granted with respect to portions of this Exhibit. + Incorporated by reference herein. * Filed herewith. 55 EX-10.37 2 AMENDMENT TO LOAN AGREEMENT --------------------------------------------------------------------- SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT BORROWER: PREMIER LASER SYSTEMS, INC. ADDRESS: 3 MORGAN IRVINE, CALIFORNIA 92718 DATE: FEBRUARY 13, 1997 THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK ("Silicon") and the borrower named above (the "Borrower"). The Parties agree to amend the Loan Agreement between them, dated June 3, 1996, as amended by that Amendment to Loan Agreement dated October __, 1996 (the "Loan Agreement"), as follows. (Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. AMENDED SCHEDULE. The Schedule to Loan Agreement is hereby amended in its entirety to read as is set forth on the Schedule to the Loan Agreement as attached hereto. 2. FEE. Borrower shall pay to Silicon concurrently herewith a fee of $5,000, which shall be in addition to all interest and all other amounts payable hereunder and which shall not be refundable. 3. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 4. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and the Borrower, and the other written documents and agreements between Silicon and the Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and the Borrower shall continue in full force and effect and the same are hereby ratified and confirmed. BORROWER: SILICON: PREMIER LASER SYSTEMS, INC. SILICON VALLEY BANK By /S/ COLETTE COZEAN By /S/ Robert Anderson ------------------------------ ----------------------------- PRESIDENT OR VICE PRESIDENT TITLE ------------------------ By /S/ RONALD E. HIGGINS ------------------------------ SECRETARY OR ASS'T SECRETARY /S/ MICHAEL L. HIEBERT - -------------------------------- TREASURER ---------------------------------------------------------------------- SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT BORROWER: PREMIER LASER SYSTEMS, INC. ADDRESS: 3 MORGAN IRVINE, CALIFORNIA 92718 DATE: FEBRUARY 13, 1997 THIS SCHEDULE is an integral part of the Loan Agreement between Silicon Valley Bank ("Silicon") and the above-named borrower ("Borrower"). REVOLVING LOAN CREDIT An amount not to exceed the lesser of: LIMIT (SECTION 1.2): (i) $1,000,000 at any one time outstanding; or (ii) the amount of the Certificate of Deposit pledged to Silicon by Borrower pursuant to the Pledge Agreement dated February 13, 1997. REVOLVING LOAN A rate equal to the "Prime Rate" in effect from (SECTION 1.2): time to time, 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): See Amendment to Loan Agreement of even date herewith. MATURITY DATE (SECTION 4.1): February 12, 1998. CORPORATE SUBSIDIARIES AND AFFILIATES (SECTION 2.1): Sonoma Corporation, a Florida corporation, a wholly-owned subsidiary of Borrower. PRIOR NAMES OF BORROWER (SECTION 3.2): None 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. -1- 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. PLEDGE AGREEMENT. Borrower shall concurrently execute and deliver to Silicon a Pledge Agreement regarding a $1,000,000 certificate of deposit, in form and substance satisfactory to Silicon in its discretion. 3. WARRANTS. Borrower shall continue in full force and effect the Warrant to Purchase Stock and related documents delivered to Silicon in connection with the original Loan 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. BORROWER: SILICON: PREMIER LASER SYSTEMS, INC. SILICON VALLEY BANK By /S/ COLETTE COZEAN By /S/ Robert Anderson ---------------------------------- ----------------------------- PRESIDENT OR VICE PRESIDENT TITLE ------------------------ By /S/ RONALD E. HIGGINS ---------------------------------- SECRETARY OR ASS'T SECRETARY /S/ MICHAEL L. HIEBERT - ------------------------------------ TREASURER -2- EX-10.38 3 PLEDGE AGREEMENT --------------------------------------------------------------------------- SILICON VALLEY BANK PLEDGE AGREEMENT PLEDGOR: PREMIER LASER SYSTEMS, INC. DOLLAR AMOUNT TO BE PLEDGED: ADDRESS: 3 MORGAN $1,000,000 IRVINE, CALIFORNIA 92718 ---------- ---------- DATE: FEBRUARY 13, 1997 THIS PLEDGE AGREEMENT is entered into as of the above date between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Lakeside Drive, Santa Clara, California 95054, and the pledgor named above ("Pledgor"). 1. PLEDGE OF FUNDS. Pledgor shall concurrently deposit with Silicon the sum set forth above, by wire transfer or cashier's check payable to Silicon, which funds shall be invested in a certificate of deposit issued by Silicon, at the interest rate currently offered by Silicon (which, together with all proceeds thereof is referred to in this Agreement as the "Certificate of Deposit"). Pledgor hereby pledges to Silicon and grants Silicon a security interest in such funds and the Certificate of Deposit to secure the payment and performance of all present and future debts, duties, obligations, liabilities, representations, warranties and guaranties of the Pledgor to Silicon, heretofore, now, or hereafter made, incurred or created, whether primary, secondary, direct, absolute, contingent, fixed, secured or unsecured, whether as principal, guarantor or otherwise, whether joint or several, whether evidenced by written instrument or oral, whether monetary or non-monetary, and regardless of whether or not the instrument evidencing the same recites that it is secured hereby, including without limitation any and all of the foregoing arising under the Loan Agreement between Pledgor and Silicon dated June 3, 1996, as amended from time to time (the "Loan Agreement") and all extensions and renewals and modifications thereof, and including without limitation any and all attorneys' fees, court costs and collection charges incurred in endeavoring to collect or enforce any of the foregoing against Pledgor and any and all costs, fees and expenses incurred by Silicon in connection with any of the foregoing (all of the foregoing is hereinafter collectively referred to as the "Indebtedness"). Unless and until an "Event of Default" (as defined below) shall occur, interest on the Certificate of Deposit shall be paid to Pledgor. 2. RENEWAL OF CERTIFICATE OF DEPOSIT. At the maturity of the Certificate of Deposit, Silicon is hereby authorized to reinvest the proceeds in a new Certificate of Deposit issued by Silicon having such term as Silicon shall specify, and bearing interest at the rate then regularly offered by Silicon. Silicon shall have no liability for any loss of interest on the Certificate of Deposit, whether resulting from delays in reinvesting the proceeds of the Certificate of deposit or from any other cause. 3. REPRESENTATION, WARRANTIES AND COVENANTS. Pledgor hereby represents and warrants that (i) Pledgor has good title to the Certificate of Deposit, free and clear of any and all claims, liens, encumbrances and security interests, (ii) this Agreement has been duly and validly authorized, executed and delivered and constitutes the binding obligation of Pledgor, enforceable in accordance with its terms, and (iii) the execution and delivery of this Agreement does not violate or constitute a default under (with or without giving of notice, the passage of time, or both) any order, judgment, decree, instrument or agreement to which Pledgor is a party or by which it or its assets are affected or bound. 4. RECOURSE TO CERTIFICATE OF DEPOSIT; EVENTS OF DEFAULT. If any Event of Default shall occur, Silicon shall have the right, without notice to or demand upon Pledgor, to obtain payment of the Certificate of Deposit (regardless of whether or not it has matured and regardless of any loss of interest resulting from its payment prior to maturity of any other cause), and to apply the proceeds thereof to the Indebtedness, regardless of whether or not the Indebtedness is then due and payable by their terms. An "Event of Default," as used herein, shall be deemed to occur in the event Pledgor shall fail to pay or perform when due all or any part of the Indebtedness, or any other default or event of default occurs under, or as specified in, -1- any present or future instrument or agreement between Silicon and Pledgor, including but not limited to the Loan Agreement. 5. REMEDIES, CUMULATIVE; NO WAIVER. Silicon shall have the right to recourse to the Certificate of Deposit to the full extent provided for herein and in any other document or instrument evidencing obligations of Pledgor to Silicon. No election in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Silicon's right to proceed in any other form of action or proceeding or against any other party. 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. 6. TERM. This Agreement and Silicon's rights hereunder shall continue in full force and effect until all agreements between Silicon and Pledgor have terminated and all of the Indebtedness has been fully paid, performed and discharged. Following such date all of the foregoing events have occurred, Silicon shall return the Certificate of Deposit to Pledgor. 7. COSTS. Pledgor shall, upon demand, reimburse Silicon for all reasonable costs, fees and expenses, which are incurred by Silicon in connection with or arising out of this Pledge Agreement or the enforcement hereof (including without limitation reasonable attorneys' fees), whether or not suit be brought. 8. INTEGRATION. This Agreement is the entire and only agreement between Pledgor and Silicon with respect to the subject matter hereof, and all representations, warranties, agreements or undertakings with respect to the subject hereof which are not set forth herein, are superseded hereby. Nothing herein shall, however, limit or affect any of the terms or provisions of any other document or agreement between Pledgor and Silicon, and all of the same shall continue in full force and effect. 9. REVIVOR. If any payment made on any of the Indebtedness to Silicon shall for any reason be required to be returned by Silicon, whether on the ground that such payment constituted a preference or for any other reason, then for purposes of this Agreement, and notwithstanding any prior termination of this Agreement, such payment shall be treated as not having been made, and this Agreement shall in all respects be effective with respect to the Indebtedness, as though such payment had not been made; and if the Certificate of Deposit or the funds represented thereby have been released or returned to Pledgor, then Pledgor shall return the Certificate of Deposit or the funds, as the case may be, to Silicon, to be held and dealt with in accordance with the terms of this Agreement. 10. WAIVER; AMENDMENT. The terms and provisions hereof may not be waived, altered, modified, or amended except in a writing executed by Pledgor and a duly authorized officer of Silicon. 11. SUCCESSORS. 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 his or its heirs, executors, administrators, personal representatives, successors and assigns. 12. HEADINGS. Paragraph headings are used herein for convenience only; 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. 13. GOVERNING LAW. 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 laws 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 his last address known to Silicon. 14. MUTUAL WAIVER OF 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 FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. Silicon: SILICON VALLEY BANK By /S/ Robert Anderson ------------------------------- Title ---------------------------- Pledgor: PREMIER LASER SYSTEMS, INC. By /S/ COLETTE COZEAN ------------------------------- Title CHIEF EXECUTIVE OFFICER --------------------------- -2- EX-10.39 4 JOINT VENTURE AGREEMENT JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT ("AGREEMENT") is effective as of January 31, 1997, by and between PREMIER LASER SYSTEMS, INC., a California corporation ("PREMIER"), RSS, LLC, a Kansas limited liability company ("RSS"), and DATA.SITE, a California limited liability company ("DATA.SITE"). R E C I T A L S: A. Premier and RSS desire to form a joint venture to develop and market "outcomes" software in multiple medical specialties and to market and distribute certain other products of Premier. B. The parties have caused the formation of Data.Site, through which the operations of the joint venture will be conducted. C. The parties desire to exchange certain assets and to contribute certain assets to Data.Site in accordance with the terms and conditions of this Agreement. D. Dr. Daniel Durrie, Mr. Ramgopal Rao and Dr. John Hunkeler are members of RSS (the "Members"). AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties agree as follows: 1. FORMATION AND OPERATION OF LIMITED LIABILITY COMPANY. 1.1 ARTICLES OF ORGANIZATION. The parties previously have caused to be filed with the California Secretary of State the Articles of Organization for Data.Site, a copy of which is attached hereto as EXHIBIT A. 1.2 OPERATING AGREEMENT. The parties shall execute the Operating Agreement for Data.Site, which is attached hereto as EXHIBIT B and incorporated herein by this reference (the "OPERATING AGREEMENT"). 1.3 BUSINESS OF DATA.SITE. Data.Site has been formed for the purpose of developing and marketing "outcomes" software in multiple medical specialties and to market and distribute certain other products of Premier. Upon reasonable request of Premier, and upon mutual agreement concerning the terms of such arrangement, Data.Site shall market and sell certain products of Premier through Data.Site's distribution channels and the efforts of Data.Site's employees. Upon reasonable request of Data.Site, and upon mutual agreement concerning the terms of such arrangement, Premier shall market and sell certain products of Data.Site through Premier's distribution channels and the efforts of Premier's employees. 2. ISSUANCE OF COMMON STOCK. 2.1 PRESENT ISSUANCE. Premier hereby sells and issues to RSS 159,787 shares (the "Shares") of Class A Common Stock (the "COMMON STOCK"), such number being that number of shares of Common Stock equal to $1,200,000 divided by the average of the closing price of such Common Stock during the last fifteen (15) days immediately preceding the Closing. For all purposes of this Agreement, the date of the "CLOSING" shall be the date hereof. In consideration for the issuance of such Shares, RSS hereby transfers to Premier an undivided 30% interest in all of the intangible assets of RSS (the "INTANGIBLE ASSETS"), including but not limited to, intellectual property rights (including the "Intellectual Property" as defined in SECTION 6.16), copyrights, contractual rights and trade secrets, and more particularly described in the Bill of Sale attached hereto as EXHIBIT C and incorporated herein by this reference. 2.2 FUTURE ISSUANCE. If Data.Site's gross revenue (as determined in accordance with generally accepted accounting principles) equals or exceeds $1,500,000 for the year ending December 31, 1997, then Premier will pay to RSS an additional $300,000 in cash or Common Stock, at Premier's option (the "ADDITIONAL PAYMENT"). Premier shall give written notice to RSS on or before January 31, 1998 of its determination to pay the Additional Payment in the form of cash or Common Stock (the "DETERMINATION NOTICE"). If Premier issues Common Stock to RSS pursuant to this Section 2.2, the number of shares so issued shall be equal to $300,000 divided by the average of the closing price of such Common Stock during, at Premier's option, either (i) the last fifteen (15) days immediately preceding the date the Determination Notice is given, or (ii) the thirty (30) day period ending fifteen (15) days prior to the date the Determination Notice is given. Common Stock issued pursuant to this SECTION 2.2 shall be restricted securities and shall be subject to SECTIONS 6.8, 6.9 AND 6.10 hereof. RSS agrees that it shall acquire any shares of Common Stock pursuant to this SECTION 2.2 solely for the purpose of investment for its own account. It will not acquire such shares with a view to distribution in connection with any resale or other distribution of those shares. 2.3 DISCLAIMER CONCERNING LIABILITIES. Premier does not assume and shall not be required to assume, pay or discharge any duties, obligations or liabilities of RSS whatsoever, past or present or future, fixed or contingent, direct or indirect, known or unknown, express or implied. 2.4 SALES TAX. RSS shall be responsible for the payment of any sales or use tax or other transfer, registration or recordation -2- tax, fee or charge levied by any governmental authority upon the transfer to Premier of the Intangible Assets. 2.5 REGISTRATION RIGHTS. (a) If Premier proposes to register any of its stock or other securities under the Securities Act of 1933, as amended (the "ACT") in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to employee participants in an employee benefit plan or a sale with respect to a transaction to which Rule 145 promulgated under the Act or any successor to such Rule, is applicable or otherwise pursuant to a registration on Form S-4), Premier shall, at such time, promptly give RSS written notice of such registration. Upon the written request of RSS given within thirty (30) days after such notice is given by Premier, Premier shall, subject to the following provisions, use all reasonable efforts to cause to be included in such public offering all of the Shares issued to RSS hereunder that RSS has requested to be registered. Premier shall not be required under this SECTION 2.5 to include any of RSS's Shares in an underwritten offering of Premier's Common Stock unless RSS accepts the terms of the underwriting as agreed upon between Premier and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the managing underwriter, interfere with the successful marketing of the offering by Premier; provided, however, the terms of the underwriting applied to RSS shall be no less favorable than the terms applied to other persons holding Premier's Common Stock and who are selling such shares in such offering. (b) Beginning on the date six (6) months after the Closing, Premier shall (provided Premier has not previously commenced a public offering since the Closing), as promptly as practicable (but in any event within sixty (60) days), after written request (the "REQUEST") by RSS or persons holding 100% of the Shares, prepare and file at its own expense a Registration Statement with the Securities and Exchange Commission and appropriate Blue Sky authorities sufficient to permit the public offering of the Shares and will use its best efforts at its own expense through its officers, directors, auditors and counsel, in all matters necessary or advisable, to cause such Registration Statement to become effective as promptly as practicable and to maintain such effectiveness so as to permit resale of the Shares covered by the Request until the earlier of the time that all such Shares have been sold or the expiration of two (2) years from the effective date of the Registration Statement (the "MINIMUM PERIOD"); provided, however, that Premier shall only be obligated to file and have declared effective one such Registration Statement under this SECTION 2.5. If a Registration Statement is filed pursuant to this subsection but not declared effective, or is not kept effective for the Minimum Period, then it shall not be deemed -3- to be a Registration Statement meeting the requirements hereunder. (c) Premier shall not be required by this SECTION 2.5 to file a Registration Statement if, in the opinion of counsel for RSS and Premier (or, if they do not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for RSS and Premier), the proposed public offering or other transfer as to which such Registration Statement is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not "restricted securities," as defined in Rule 144 under the Act. In addition, Premier shall not be required to register the Shares under SECTION 2.5(a) if the sale of the Shares was previously registered under SECTION 2.5(b). 3. CONTRIBUTION OF ASSETS BY RSS. 3.1 CAPITAL CONTRIBUTION. In exchange for a 49% interest in Data.Site, RSS hereby transfers to Data.Site all of its right, title and interest to its equipment and machinery, its undivided 70% interest in the Intangible Assets, and all of its other tangible and intangible property, as more particularly described in the Bill of Sale attached hereto at EXHIBIT D and incorporated herein by this reference (the Intangible Assets and all other property of RSS to be transferred hereunder are collectively referred to herein as the "ASSETS"). 3.2 DISCLAIMER CONCERNING LIABILITIES. Data.Site will not assume and shall not be required to assume, pay or discharge any duties, obligations or liabilities of RSS whatsoever, past or present or future, fixed or contingent, direct or indirect, known or unknown, express or implied, except for those specific liabilities identified on EXHIBIT 3.2 hereto (the "ASSUMED LIABILITIES"). 3.3 SALES TAX. RSS shall be responsible for the payment of any sales or use tax or other transfer, registration or recordation tax, fee or charge levied by any governmental authority upon the transfer to Data.Site of the Assets. 4. CONTRIBUTION OF INTANGIBLE ASSETS BY PREMIER. 4.1 CAPITAL CONTRIBUTION. In exchange for a 51% interest in Data.Site: (i) Premier hereby transfers to Data.Site its undivided 30% interest in the Intangible Assets, as set forth in the Bill of Sale attached hereto as EXHIBIT E and incorporated herein by this reference; and (ii) during the two year period following the Closing, Premier agrees to contribute to Data.Site an additional $1,000,000 in cash or "cash equivalent services" (as defined below) pursuant to SECTION 4.2. -4- 4.2 CASH OR CASH EQUIVALENT SERVICES. During the two year period following the Closing, Premier shall provide such cash or cash equivalent services at the times and in the amounts as determined by the Board of Managers of Data.Site. "CASH EQUIVALENT SERVICES" are payments made by Premier to individuals or entities to perform services on behalf of Data.Site, including but not limited to payments to Premier's personnel who perform functions such as accounting, research and development, or attending a trade show on behalf of Data.Site. RSS hereby acknowledges that Premier has, as of the date hereof, funded $100,000 towards its obligation to contribute cash or cash equivalent services under SECTION 4.1 above. 4.3 DISCLAIMER CONCERNING LIABILITIES. Data.Site will not assume and shall not be required to assume, pay or discharge any duties, obligations or liabilities of Premier whatsoever, past or present or future, fixed or contingent, direct or indirect, known or unknown, express or implied. 5. CLOSING. 5.1 CLOSING. The closing of the transactions contemplated by this Agreement shall occur simultaneously with the execution of this Agreement by all parties hereto (the "CLOSING"). 5.2 DELIVERY BY RSS. Concurrently herewith, RSS is delivering to Premier (or to Data.Site as applicable) the following: (a) the Operating Agreement (EXHIBIT B) duly executed by RSS and the Members; (b) the Bill of Sale (EXHIBIT C) duly executed by RSS; (c) the Bill of Sale (EXHIBIT D) duly executed by RSS; (d) certified copies of resolutions adopted by the Managers and Members of RSS authorizing and approving the execution, delivery and performance of this Agreement. (e) evidence, satisfactory to Premier, that all consents of third parties required for RSS's consummation of the transactions contemplated by this Agreement have been obtained. (f) an opinion of counsel in the form attached hereto as EXHIBIT F. 5.3 DELIVERY BY PREMIER. Concurrently herewith, Premier is delivering to RSS (or to Data.Site as applicable) the following: (a) the Operating Agreement (EXHIBIT B) duly executed by Premier; -5- (b) a Stock Certificate duly executed by Premier evidencing the Shares issued to RSS hereunder (provided that at the option of Premier such stock certificate may be delivered within five (5) business days of the date hereof, and provided further that such certificate shall be held by Premier in accordance with SECTION 10.5; below); (c) the Bill of Sale (EXHIBIT E) duly executed by Premier; (d) certified copies of resolutions adopted by the Board of Directors of Premier authorizing and approving the execution, delivery and performance of this Agreement. (e) evidence, satisfactory to RSS, that all consents of third parties required for Premier's consummation of the transactions contemplated by this Agreement have been obtained. (f) an opinion of counsel in the form attached hereto as EXHIBIT G. 5.4 DELIVERY BY DATA.SITE. Concurrently herewith, Data.Site is delivering to RSS the following: (a) An instrument by which Data.Site is assuming the Assumed Liabilities. 6. RSS'S REPRESENTATIONS AND WARRANTIES. RSS and the Members, jointly and severally, represent, warrant and agree, as follows: 6.1 ORGANIZATION AND RELATED MATTERS. RSS is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Kansas. RSS has all necessary power and authority to own its properties and conduct its business as now being conducted by it and to consummate the transactions contemplated hereby. RSS is duly qualified and in good standing in each of the jurisdictions in which it is required by the nature of its business so to qualify, and where failure so to qualify might have a material adverse effect upon its business or assets or impair the ability of RSS to consummate the transactions contemplated hereby. 6.2 VALID AND BINDING AGREEMENT. The execution, delivery and performance by RSS of this Agreement have been duly and validly authorized by all necessary action on the part of RSS and its members and managers, and the Agreement constitutes the valid and binding obligation of RSS, enforceable against RSS in accordance with its terms, except as limited or otherwise affected by bankruptcy, insolvency, reorganization, moratorium or other similar -6- laws relating to or affecting creditors' rights generally and by the application of general equitable principles. 6.3 INFORMATION. RSS has received, reviewed and is familiar with Premier's Annual Report on Form 10-KSB filed for the fiscal year ended March 31, 1996 (the "ANNUAL REPORT"), Quarterly Report on Form 10-QSB filed for the quarter ended September 30, 1996 (the "QUARTERLY REPORT"), and Registration Statement on Form SB-2 declared effective on October 15, 1996 (the "REGISTRATION STATEMENT"). RSS has had an opportunity to ask questions and receive answers from Premier's officers and directors concerning such documents and any other aspects of Premier's business or operations. RSS acknowledges that Premier has made no representation or warranty regarding any projections, estimates or budgets of future revenues or expenses, future results of operations, or the future business and operations of Premier. 6.4 NO GOVERNMENTAL RECOMMENDATION/INDORSEMENT. RSS is aware that no federal or state agency has made any finding or determination concerning the fairness for public investment in, nor any recommendation or endorsement of, the Shares. 6.5 RISK. RSS recognizes and has assessed the risk involved in investing in the Shares and has determined based on sufficient experience in business and financial matters that it is capable of bearing that risk. 6.6 INVESTMENT INTENT. RSS is acquiring the Shares solely for the purpose of investment for its own account. It is not acquiring the Shares with a view to distribution in connection with any resale or other distribution of the Shares. RSS was not formed for the purpose of acquiring or investing in the Shares. The principal executive offices of RSS are located in Kansas City, Kansas, and RSS's operations have been conducted from such offices. 6.7 PREEXISTING RELATIONSHIP. RSS has a preexisting personal or business relationship with Premier or one or more of its officers, directors or controlling persons, which relationship is of a nature and duration as to permit RSS to be aware of the character, business acumen and general business and financial circumstances of the person with whom such relationship exists. 6.8 LEGEND. RSS agrees and represents that it will not transfer or distribute any of the Shares to its members or make any other disposition of the Shares unless a registration statement under the Securities Act of 1933, as amended, is in effect with respect to such securities or, in the alternative, an exemption from registration under said Act is found to be available to the reasonable satisfaction of Premier. RSS further understands that an opinion of counsel with respect thereto may be required by Premier in its sole discretion. RSS further understands and agrees that the following legend will be placed on the certificates representing the Shares: -7- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS THEREUNDER. 6.9 STOP TRANSFER NOTICE. RSS understands and is aware that, in order to insure that transfers of the Shares are made in strict accordance with all limitations upon transfer imposed by the federal securities laws, the books and records of Premier will include a "stop transfer" notation to the effect that no transfer of any shares shall be effective unless strict compliance with such limitation has been made, the determination of which will be made at the absolute discretion of Premier. 6.10 HOLDING PERIOD FOR SHARES. Until January 31, 1997, RSS agrees that it shall not sell, assign, pledge, transfer or otherwise dispose of the Shares or any interest therein until the expiration of the period set forth in SECTION 10.3, except that RSS may pledge the Shares in accordance with the terms of SECTION 10.5(b). 6.11 TITLE TO AND SUFFICIENCY OF ASSETS. RSS has good and marketable title to all of the Assets and other property being transferred to Premier and to Data.Site pursuant to this Agreement, and RSS will transfer and convey the Assets and other property to Premier and Data.Site, as provided herein, free and clear of all mortgages, liens, pledges, charges, agreements, title retention or security agreements, claims, restrictions, defects of title, easements or other encumbrances other than those which do not and will not materially impair the value or use of any of the Assets or other property subject thereto. The Assets being transferred to Data.Site hereunder constitute all of the tangible and intangible assets of RSS, and are sufficient for the operation of the business of Data.Site in substantially the same manner as currently conducted by RSS. There are no other assets used by RSS in connection with the conduct of its business which are not being transferred to Data.Site hereunder. 6.12 LITIGATION. RSS is not involved in any pending or threatened investigation, litigation or legal proceeding that may have a material adverse effect upon the assets, business operations or condition (financial or otherwise) of RSS, nor is it subject to any order, judgment or decree that may have such an effect. RSS has no knowledge of any facts which may give rise to such an investigation or legal proceeding. 6.13 DEFAULTS. The execution, delivery and performance of this Agreement and the consummation of the transactions provided for in this Agreement do not and will not (i) violate any provision of law applicable to RSS, the Articles of Organization, Bylaws or Operating Agreement of RSS, or any order, judgment or decree of any court or other agency of government binding on RSS, (ii) conflict -8- with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any contractual obligation of RSS, or (iii) result in or require the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the assets or properties of RSS. 6.14 CONSENTS. No approval, authorization, consent, order or other action of, or filing with, any third party, including without limitation, any private party or public, governmental, administrative or regulatory authority or agency, is required in connection with the execution, delivery or performance of this Agreement by RSS or the consummation of the transactions contemplated hereby, except such approvals, authorizations, consents or orders as have been obtained. 6.15 INTELLECTUAL PROPERTY. RSS owns, or is licensed or otherwise has the full right to use, all Intellectual Property (as defined below) necessary for the conduct of its business. All such Intellectual Property owned, held by, or licensed to RSS and used or intended for use in connection with the business of RSS is valid and does not infringe any similar rights owned or controlled by others. RSS is in compliance with all licenses of Intellectual Property. For purposes hereof, "INTELLECTUAL PROPERTY" means all intellectual property rights, both registered and at common law, relating to the RSS's business, irrespective of where any of the same were issued, whether pending or existing, including, without limitation, all: United States and foreign patents or any description and applications therefor; registrations of trademarks, service marks and of other marks, registrations of trade names, labels, logos, trading styles or other trade rights, registered user entries, and applications for any such registrations or entries; United States and foreign copyrights, copyright registrations and applications therefor; United States and foreign trademarks and other marks, trade names, labels and other trade rights, whether or not registered, and applications therefor; trade secrets, know-how, inventions, discoveries, improvements, engineering or other drawings, designs, processes and formulae, whether patented or patentable or not; customer lists, technical data, marketing information and plans, software and software documentation source codes; any other proprietary information or intangible rights; shop rights, license agreements and other agreements relating in whole or in part to any of the foregoing; and all claims and causes of action on behalf of RSS or against third parties relating to any of the foregoing, including claims and causes of action for past infringement. SCHEDULE 6.15 contains a true and complete list of (a) the Intellectual Property used or proposed to be used by the RSS in connection with the conduct of its business, all applications therefor and all licenses and other agreements relating thereto and (b) all agreements relating to technology, know-how or processes which RSS is licensed or authorized to use by others or which the RSS licenses or authorizes others to use in connection with the conduct of its business. No consent of any third party is required for the use of the Intellectual Property by Data.Site upon the consummation of the -9- transactions contemplated hereby, except for such consents as have been obtained. 6.16 FINANCIAL STATEMENTS. RSS has heretofore delivered to Premier the following financial statements: (a) the unaudited balance sheet as of December 31, 1996 for RSS (the "BALANCE SHEET"); and (b) the unaudited statement of income as of December 31, 1996 for RSS. All such statements were prepared in accordance with generally accepted accounting principles and fairly present the financial position of RSS at the respective dates thereof and the results of operations and changes in financial position of RSS for each of the periods then ended, subject to changes for normal year-end adjustments. 6.17 NO MATERIAL ADVERSE CHANGE. Since December 31, 1996, there has not been any material adverse change in the financial condition, business, assets or liabilities of RSS. 6.18 LIABILITIES OR DEBTS. RSS has no liabilities or debts, fixed or contingent, liquidated or unliquidated, secured or unsecured, or of any other kind, other than those specifically disclosed and identified as to nature and amount on the Balance Sheet. All salaries and compensation, including without limitation any bonuses or other variable compensation, of all employees and others who perform personal service for RSS have been paid when due. 6.19 CONDITIONS OF PROPERTIES. All machinery and equipment, furniture, fixtures and improvements and other assets and properties of RSS to be transferred pursuant to this Agreement are in good operating condition and repair, ordinary wear and tear excepted, and have been reasonably serviced and maintained since the time of installation. 6.20 PERFORMANCE OF SOFTWARE PRODUCTS. The software products of RSS transferred to Data.Site hereunder shall operate and perform in substantial conformance with the standards and specifications described in the brochures and product material attached hereto in SCHEDULE 6.20, and will be free of defects which substantially affect system performance, except for those defects of which RSS has notified Premier in writing. 6.21 REGULATORY MATTERS. RSS has all licenses, permits, authorizations, approvals, consents, franchises, and orders, including but not limited to all federal, state and local regulatory approvals and clearances, (individually, a "PERMIT" and, collectively, the "PERMITS") required for the conduct and operation of its business and the marketing, sale and distribution of its products. No violations have been recorded in respect of any such -10- Permit. There is no claim or action pending, or, to the best of the RSS's knowledge, after due inquiry and diligent investigation, threatened, which disputes the validity of any such Permit or threatens to revoke, cancel, suspend or limit any such Permit. 6.22 EMPLOYEE BENEFIT PLANS. Except as set forth on SCHEDULE 6.22, RSS has no pension, retirement, severance, welfare, profit-sharing, stock purchase, stock option, vacation, deferred compensation, bonus or other incentive plan, or other employee benefit program, arrangement, agreement or understanding, or medical, vision, dental or other health plan, or life insurance or disability plan, retiree medical or life insurance plan or any other employee benefit plans, to which RSS contributes or is a party or by which it is bound or under which it may have liability and under which employees or former employees of RSS (or their beneficiaries) are eligible to participate or derive a benefit. 6.23 EMPLOYMENT LAW MATTERS. (a) RSS (i) is in compliance with all applicable laws respecting employment, employment practices, terms and conditions of employment and wages and hours with respect to the conduct of its business; (ii) is in compliance with all applicable laws and regulations relating to the employment of aliens or similar immigration matters with respect to the conduct of its business; and (iii) is not engaged in any unfair labor practice, including, but not limited to, discrimination or wrongful discharge with respect to the conduct of its business. (b) None of the employees of RSS is represented by a labor union, and no petition has been filed or proceedings instituted by any employee or group of employees with any labor relations board seeking recognition of a bargaining representative. RSS is not a party to any multi-employer collective bargaining agreement covering any of its employees involved in its business. 6.24 MATERIAL CONTRACTS. SCHEDULE 6.24 sets forth a complete list of all contracts and commitments of RSS relating to the marketing, sale or distribution of its products or services or which are otherwise material to the conduct of its business (the "MATERIAL CONTRACTS"). Each of the Material Contracts has been entered into in the ordinary course of business and is valid and binding, and none of such contracts contains terms or conditions which are materially adverse to RSS or its business. RSS is not, and no other party is, in default under or in breach or violation of, nor has RSS received notice of any asserted claim of default by RSS or by any other party under, or a breach or violation of, any of the Material Contracts. -11- 6.25 SUPPLIERS AND CUSTOMERS. (a) RSS enjoys good commercial relationships under all of its supply, purchase, sale, distribution, sales representative and similar agreements necessary for the normal operation of its business. (b) SCHEDULE 6.25 contains a true and complete list of all suppliers, customers and distributors of RSS, which during any of the calendar years 1995, 1994, or 1993, and for the nine (9) month period ended September 30, 1996, accounted for 5% or more of the RSS's gross purchases or sales, respectively, during such period. (c) RSS has no knowledge or basis for knowledge that any such supplier, customer or distributor has cancelled or otherwise terminated or threatened to cancel or otherwise terminate, its relationship with RSS, which termination would have a material adverse effect on the business of RSS, or has during the last twelve (12) months decreased materially, or threatened to decrease or limit materially, its services, supplies or materials to RSS or its usage or purchase of the services or products of RSS, as the case may be, or that any such supplier, distributor or customer expects to reduce its business with RSS (or Data.Site) by reason of the transactions contemplated by this Agreement or for any other reason whatsoever. 6.26 ACCOUNTS RECEIVABLE. The amount of all accounts receivable, unbilled invoices and other debts due or recorded in the respective records and books of account of RSS as being due to RSS as of the Closing (less the amount of any provision or reserve therefor made in the respective records and books of account of RSS) will be good and collectible in full in the ordinary course of business without resort to legal proceedings and in any event not later than sixty (60) days after the Closing; and none of such accounts receivable or other debts is or will at the Closing be subject to any counterclaim or set-off except to the extent of any such provision or reserve. 6.27 FINDERS. RSS has not made, nor will it make, any commitment to pay any finder's or brokerage fee or commission on account of the execution of this Agreement or the consummation of the transactions contemplated by this Agreement. 6.28 ACCURACY OF INFORMATION FURNISHED. No representation, warranty or statement made, or information provided by RSS in this Agreement, the schedules, the exhibits hereto or included in any certificates or documents to be delivered to Premier at the Closing, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements or facts contained therein, in light of the circumstances under which they were made, not misleading. -12- 7. REPRESENTATIONS AND WARRANTIES BY PREMIER. Premier hereby represents and warrants to RSS as follows: 7.1 ORGANIZATION AND RELATED MATTERS. Premier is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Premier has the corporate power and authority to own its properties and conduct its business as now being conducted by it, to consummate the transactions contemplated hereby and to issue the Shares to be issued and sold to RSS hereunder. Premier is duly qualified and in good standing in each of the jurisdictions in which it is required by the nature of its business or the ownership of its properties so to qualify and where the failure so to qualify might have a material adverse effect upon Premier, or its business or properties. 7.2 VALID AND BINDING AGREEMENT. The execution, delivery and performance by Premier of this Agreement have been duly and validly authorized by all necessary corporate action on the part of Premier and the Agreement constitutes the valid and binding obligation of Premier, enforceable against Premier in accordance with its terms, except as limited or otherwise affected by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally and by the application of general equitable principles. 7.3 ISSUANCE OF SHARES. All of the Shares issued to RSS hereunder shall be validly issued, fully paid and nonassessable, and good title thereto shall be vested in RSS, free and clear of all liens, claims and encumbrances, except those created by RSS. 7.4 LITIGATION. Except as described in the Registration Statement or in SCHEDULE 7.4 hereto, Premier is not involved in any pending or, to the best knowledge of Premier, threatened investigation, litigation or legal proceeding that may have a material adverse effect upon the assets, business operations or condition (financial or otherwise) of Premier or might impair Premier's ability to perform any or all of its obligations under this Agreement, nor is it subject to any order, judgment or decree that may have such an effect. 7.5 NO CONFLICT. The execution, delivery and performance by Premier of this Agreement, the issuance, delivery and payment of the Note, and the consummation of the transactions provided for in this Agreement do not and will not (i) violate any provision of law applicable to Premier, the Articles of Incorporation or Bylaws of Premier, or any order, judgment or decree of any court or other agency of government binding on Premier, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any contractual obligation of Premier, or (iii) require any approval of stockholders or any approval or consent of any person under any contractual obligation of Premier other than approvals or consents which have been obtained. -13- 7.6 FINDERS. Premier has not made, nor will it make, any commitment to pay any finder's or brokerage fee or commission on account of the execution of this Agreement or the consummation of the transactions contemplated by this Agreement. 7.7 ACCURACY OF INFORMATION FURNISHED. No representation, warranty or statement made, or information provided, by Premier in this Agreement, the Annual Report, the Quarterly Report or the Registration Statement, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements or facts contained therein, in light of the circumstances under which they were made, not misleading. 8. CONFIDENTIALITY AGREEMENT. 8.1 Each party hereto acknowledges that it has received, had access to, and will continue to have access to certain information, trade secrets, customer lists, other customer information, technical data or know-how relating to the products, developments, services, processes, methods, designs or business practices of the other parties hereto ("CONFIDENTIAL INFORMATION"). 8.2 No party shall at any time, either during the term of Data.Site or thereafter, directly or indirectly: (i) use for its own benefit (other than benefits accruing pursuant to this Agreement) or for the benefit of others, or (ii) disseminate or disclose to any person or entity, any such Confidential Information, whether acquired in the performance of services in connection with this Agreement or in any other capacity; provided, however, that the foregoing covenant not to disclose Confidential Information shall not apply to any information which has become publicly available without a breach of this Agreement, or the disclosure of which is required by applicable law or legal process. 9. RECONCILIATION OF ACCOUNTS RECEIVABLE AND ASSUMED LIABILITIES. For purposes hereof, the term "PAID RECEIVABLES" shall refer to those of RSS's accounts receivable transferred to Data.Site hereunder which have been collected since the Closing Date. On or before the earliest of: (1) January 31, 1998; (2) the date the RSS Board of Managers requests the members of RSS to make an additional capital contribution to RSS; or (3) such earlier date as the parties may mutually agree, the parties shall perform an accounting, in which they shall compare the amounts of the Assumed Liabilities to the aggregate amount of the Paid Receivables. On or before January 31, 1999, RSS shall pay to Data.Site an amount equal to the sum of: (a) the amount, if any, by which the Assumed Liabilities exceeds the aggregate amount of the Paid Receivables, plus (b) $49,000 (representing the reimbursement of RSS's pro rata portion of amounts advanced by Premier and used by RSS). -14- 10. INDEMNITY. 10.1 RSS'S AND MEMBERS' INDEMNITY. Subject to the limitations set forth in SECTIONS 10.3 AND 10.5 below, RSS and the Members agree to, jointly and severally, indemnify and hold harmless Premier and Data.Site against, and to reimburse Premier and Data.Site for, any actual damage, loss, cost or expense (including attorneys' fees and costs of investigation incurred in defending against and/or settling such damage, loss, costs or expense or claim therefor and any amounts paid in settlement thereof) reasonably incurred by Premier or Data.Site (i) in respect of any misrepresentation, breach of warranty, or failure to perform or violation of any agreement or covenant on the part of RSS under this Agreement (including, without limitation, its obligations under SECTION 9 above), and (ii) in respect of any liability, obligation or claim relating to or resulting from the operations, assets or business of RSS prior to or after the Closing. 10.2 PREMIER'S INDEMNITY. Subject to the limitations set forth in SECTIONS 10.3 AND 10.6 below, Premier agrees to indemnify and hold harmless RSS and Data.Site against, and to reimburse RSS and Data.Site for, any actual damage, loss, cost or expense (including attorneys' fees and costs of investigation incurred in defending against and/or settling such damage, loss, cost or expense or claim therefor and any amounts paid in settlement thereof) reasonably incurred by RSS or Data.Site in respect of any misrepresentation, breach of warranty, or failure to perform or violation of any agreement or covenant on the part of Premier under this Agreement. 10.3 DURATION OF INDEMNITIES. The indemnities set forth in SECTION 10.1 and SECTION 10.2, and any other liability that any party may have for any breach of a representation, warranty or covenant in this Agreement, shall survive the Closing and shall remain in effect until the later of January 31, 1998 or the date RSS makes the payment required under SECTION 9 above, at which time they shall expire (provided that if RSS does not make the payment required under SECTION 9 by January 31, 1999, Premier's indemnity obligations and other liabilities hereunder shall nonetheless terminate on January 31, 1999). Notwithstanding the foregoing, the respective indemnitors shall continue to be bound by the indemnification provisions of SECTIONS 10.1 AND 10.2 after such date with respect to any claim which has been asserted hereunder prior to such date and which is pending or unresolved at the end of such periods. 10.4 NOTIFICATION AND PARTICIPATION. RSS, the Members, Premier and Data.Site shall each notify the others of any liabilities, claims, litigation or proceeding that reasonably appears to involve matters covered by the indemnities set forth in SECTION 10.1 AND 10.2 promptly upon its discovery or notification thereof, whether before or after the Closing, provided, however, that the failure to give such notification shall not terminate or otherwise affect the parties' respective obligations to indemnify -15- each other hereunder, unless, and only to the extent that, such failure results in actual prejudice to the indemnifying party. 10.5 LIMITATIONS ON INDEMNITIES BY RSS AND MEMBERS. In addition to the limitations set forth in SECTION 10.3 above, the obligations of RSS and the Members under SECTION 10.1 or otherwise for any breach of this Agreement shall be limited as follows: (a) In the event Premier is entitled to indemnity hereunder or otherwise to damages for breach of this Agreement, the amount to which Premier is entitled (the "LOSS") shall be liquidated and paid as follows: (i) The amount of Shares issued to RSS shall be reduced by an amount (expressed in Shares) equal to the amount of the Loss divided by the per share price used in SECTION 2.1 for purposes of calculating the number of Shares to be delivered to RSS hereunder. RSS shall transfer and assign to Premier the number of Shares so calculated. Subject to SECTION 10.5(b) below, so long as RSS remains obligated to indemnify Premier hereunder, Premier shall have (and is hereby granted) a security interest in the Shares (including any shares which may become issuable under SECTION 2.2 hereof)as collateral for performance of such indemnification obligations. At any time after a default in the performance of such indemnification obligations, Premier shall be entitled to all rights and remedies of a secured party under the California Uniform Commercial Code, with respect to the Shares so pledged. (ii) If the remedy provided under SECTION 10.5(b)(i) above is insufficient to make Premier whole for the full amount of the Loss, then all of the Shares shall, pursuant to SECTION 10.5(b)(i) above, be transferred to Premier, and in addition the number of additional Shares to which RSS is entitled under SECTION 2.2 hereof (the "ADDITIONAL SHARES") shall be reduced by an amount (expressed in Shares) equal to: (1) the amount of the Loss which is not reimbursed under SECTION 10.5(b)(i), divided by (2) the per share price used in calculating the number of Additional Shares issuable under SECTION 2.2. RSS shall transfer and assign to Premier the number of Shares so calculated. This SECTION 10.5(b)(ii) shall be operative only to the extent RSS becomes entitled to the additional Shares under SECTION 2.2. Subject to SECTION 10.5(b) below, the security interest granted under SECTION 10.5(b)(i) shall extend to any Shares issued or issuable under SECTION 2.2. (iii) If the remedies provided under SECTIONS 10.5(b)(i) AND (b)(ii) above are insufficient to make Premier whole for the full amount of the Loss, then -16- all of the Shares and Additional Shares shall, pursuant to SECTIONS 10.5(b)(i) AND (b)(ii) above, be transferred to Premier, and in addition RSS's "Percentage Interest" in Data.Site (as such term is defined in the Operating Agreement) shall be reduced by 1% for each $43,137 by which the Loss exceeds $1,200,000 (being the value of the Shares so transferred to Premier). In the event that RSS becomes entitled to Additional Shares under SECTION 2.2, and the remedy set forth in SECTION 10.5(b)(ii) is implemented, then for purposes of this SECTION 10.5(b)(iii) the reference to $1,200,000 in the foregoing sentence shall read, instead, "$1,500,000." (iv) If the remedies provided under SECTIONS 10.5(b)(i) TO 10.5(b)(iii) above are insufficient to make Premier whole for the full amount of the Loss, then the Members shall indemnify Premier for any Loss for which Premier has not been reimbursed under such Sections, up to the maximum amount set forth in SECTION 10.5(c) below. (b) So long as Premier continues to have a security interest in the Shares and Additional Shares under SECTIONS 10.5(a)(i) AND (a)(ii) above, Rutan & Tucker, LLP, counsel to Premier, shall retain possession of the certificate representing such Shares and Additional Shares, in order to perfect the security interest granted to Premier hereunder. The parties agree to enter into an agreement with Rutan & Tucker, LLP, promptly following the Closing, containing reasonable terms relating to such firm's duties in its capacity as agent for Premier. Notwithstanding any provisions of this Agreement to the contrary, in the event the Company makes a capital call of its members at a time at which the Shares and Additional Shares remain subject to the security interest described above, Premier will release from such security interest a sufficient number of shares to permit RSS to pledge such Shares and Additional Shares as collateral for a loan to be used to fund its obligations under such capital call. In addition, on the date RSS pays the amounts required to be paid under SECTION 9 above (the "SECTION 9 PAYMENT"), Premier shall release its security interest in the Shares and Additional Shares (but in no event earlier than July 31, 1997). The release of such security interest shall not, however, terminate or otherwise affect the indemnity obligations of RSS and the Members under SECTION 10.1 above, which shall continue until the expiration of the periods set forth in SECTION 10.3. If RSS becomes entitled to and thereafter disposes of any Shares or Additional Shares, the remaining Shares and Additional Shares held by them shall continue to be subject to the terms of this Agreement, and in satisfying the indemnification obligations of RSS and the Members, such parties shall then receive credit under SECTIONS 10.5(a)(i) AND (ii) only to the extent of the actual amount of Shares or Additional Shares returned to Premier, and -17- the formula set forth in SECTION 10.5(a)(iii) shall be correspondingly adjusted. (c) The maximum amount for which each of the Members shall be liable shall not exceed 10% of the amount, determined in accordance with generally accepted accounting principles, initially recorded on the Premier balance sheet for its investment in Data.Site. 10.6 LIMITATIONS ON INDEMNITY BY PREMIER. In addition to the limitations set forth in SECTION 10.3 above, RSS and the Members agree that they shall not rely upon, and shall have no recourse against Premier for, any representations or warranties that are not contained in SECTION 7 hereof, and Premier shall not be deemed to have made to RSS or the Members any representation or warranty other than as expressly made by Premier in SECTION 7 hereof. Without limiting the generality of the foregoing, and notwithstanding any express representations and warranties made by Premier in SECTION 7, Premier makes no representations or warranty to RSS or the Members with respect to the value of the Shares, any projections, estimates or budgets heretofore delivered or made available to RSS with respect to future revenues, expenses or expenditures or results of operations, or any other information or documents made available to RSS or its counsel, accountants or advisors with respect to Premier, except as expressly covered by a representation and warranty contained in SECTION 7 hereof. 11. MISCELLANEOUS. 11.1 BULK SALES. RSS hereby represents and warrants to Premier that it has complied with the bulk sales provisions of the Uniform Commercial Code, to the extent that they apply to the transactions contemplated hereby. 11.2 NOTICES. Written notice given in accordance with any provision of this Agreement shall be hand delivered or sent by prepaid registered or certified mail with return receipt requested to the respective addresses of the parties set forth on the signature page hereof (or to such other address as any party may designate in writing). Any notice delivered by hand is deemed to have been given upon delivery. Any notice mailed as provided above is deemed to have been given five (5) days after the date of mailing. 11.3 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement, together with all exhibits, schedules and statements delivered pursuant to the terms of this Agreement, constitutes the entire agreement between the parties hereto and supersedes any prior agreement and understanding of the parties in connection herewith. No supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other -18- provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 11.4 FURTHER ASSURANCES. Each of the parties hereto shall, following the Closing, and without charge to the other, take such additional actions and execute, deliver and file such additional instruments as may be reasonably required to give effect to the transactions contemplated hereby. 11.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 11.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 11.7 HEADINGS. The headings of the several Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 11.8 NO ASSIGNMENTS. This Agreement may not be assigned by operation of law or otherwise without the written consent of the other party hereto. -19- IN WITNESS WHEREOF, the parties hereto have executed this Joint Venture Agreement as of the date first written above. PREMIER: PREMIER LASER SYSTEMS, INC., a California corporation By: /s/ Colette Cozean -------------------------- Colette Cozean, President ADDRESS: 3 Morgan Irvine, California 92718 RSS: RSS, LLC, a Kansas limited liability company By: /s/ Daniel S. Durrie -------------------------- Daniel S. Durrie, President ADDRESS: 1212 Cambridge Circle Drive Kansas City, Kansas 66103 DATA.SITE: DATA.SITE, LLC, a California limited liability company By: /s/ Colette Cozean -------------------------- Colette Cozean, Manager By: /s/ Daniel S. Durrie -------------------------- Daniel S. Durrie, Manager MEMBERS: /s/ Daniel S. Durrie ----------------------------- Dr. Daniel S. Durrie /s/ John D. Hunkeler ----------------------------- Dr. John D. Hunkeler /s/ Ramgopal Rao ----------------------------- Ramgopal Rao -20- EX-10.40 5 OPERATING AGREEMENT OF DATA.SITE, LLC OPERATING AGREEMENT OF DATA.SITE, LLC THIS OPERATING AGREEMENT is entered into and effective as of the 31st day of January, 1997, by and between PREMIER LASER SYSTEMS, INC., a California corporation ("PREMIER"), and RSS, LLC, a Kansas limited liability company ("RSS") (collectively referred to as the "MEMBERS"). A. On December 27, 1996, the Members caused a California limited liability company to be formed pursuant to the Beverly-Killea Limited Liability Company Act (the "ACT") under the name "Data.Site, LLC" (the "COMPANY") and they now desire to enter into an Operating Agreement, as defined in Section 17001(ab) of the Act, to delineate their rights and liabilities as members with each other, to provide for the management of the business, and to provide for certain other matters, all as permitted under the Act. B. In connection with the formation of the Company the Members have entered into that certain Joint Venture Agreement dated January 31, 1997 (the "JOINT VENTURE AGREEMENT"). NOW, THEREFORE, THE MEMBERS AGREE AS FOLLOWS: ARTICLE 1 THE COMPANY 1.1 PRINCIPAL PURPOSE. The principal purpose of the Company shall be to engage in the business of developing and marketing "outcomes" software and marketing other products of Premier and in any and all lawful business activities related or incidental thereto. 1.2 PLACE OF BUSINESS. The principal place of business of the Company shall be 1212 Cambridge Circle Drive, Kansas City, Kansas, unless changed by a vote of the Members. 1.3 TERM. The Company commenced on the date when its Articles of Organization (the "ARTICLES") were filed with the California Secretary of State as required by the Act and shall continue until terminated as a result of the dissolution and winding up of the Company in accordance with Article 8 hereof. ARTICLE 2 MEMBERS; CAPITAL CONTRIBUTIONS; PERCENTAGE INTERESTS 2.1 INITIAL MEMBERS. The names and addresses of the Members of the Company, their respective initial capital contributions, and the percentage which shall be used to determine their respective interests in Company profits, losses and distributions ("PERCENTAGE INTEREST") are set forth below. Each Member's acquisition of a membership interest in the Company shall be effective upon the payment in full in cash of such Member's respective capital contribution. Initial Capital Percentage Member Contribution Interest ------ --------------- ---------- Premier Laser Systems, Inc. certain assets 51% 3 Morgan contributed Irvine, CA 92718 pursuant to the Joint Venture Agreement, and valued at $2,200,000 RSS, LLC certain assets 49% 1212 Cambridge Circle Dr. contributed Kansas City, KS 66103 pursuant to the Joint Venture Agreement, and valued at $2,113,725 -2- 2.2 ADDITIONAL CAPITAL CONTRIBUTIONS. (a) The Board of Managers may determine from time to time that additional cash is required to permit the Company to carry on its business, and may therefore request that such additional cash be contributed by the Members in proportion to their respective Percentage Interests. The Members shall have the option, but not the obligation, to make such additional capital contributions at any time during a period of four (4) months after the determination of the need for such additional cash has been made. Each Member shall receive a credit to its capital account in the amount of any additional capital which it contributes to the Company. Immediately following any such capital contributions, the Percentage Interests shall be adjusted by the Company to reflect the new relative proportions of the capital accounts of the Members. (b) The Board of Managers may also determine, from time to time, that it is in the best interest of the Company to issue options, warrants, or other securities representing an equity interest in the Company, on term authorized by the Board of Managers. Such options, warrants, and other securities may include terms, among others, providing for their exercisability or conversion into other interests in the Company upon the occurrence of future events, including, without limitation, the completion of a public offering by the Company or by a successor to the Company. In no event, however, shall said options, warrants, additional securities, or other securities into which they are convertible or for they are exercisable provide the holder thereof with voting rights with respect to the affairs of the Company, except with the express prior written consent of Premier. The Board of Managers is authorized to cause the Company to issue options, warrants and other securities in accordance with the foregoing, without further approval of the Members. -3- 2.3 OTHER MATTERS. (a) No interest shall accrue on any capital contributed to the Company by any Member. Except as otherwise expressly provided herein, no Member shall be entitled to receive a return of such Member's capital contributions prior to the dissolution and winding up of the Company. (b) Except as otherwise expressly provided herein or as may be mandatory under the Act, no Member shall be entitled to retire, withdraw from, or dissolve the Company without the consent of all the other Members. 2.4 LIABILITY OF MEMBERS; INDEMNITY. (a) No Member shall be personally liable for the debts, obligations or liabilities of the Company solely by reason of being a Member. Each Member shall indemnify and hold the other Members (and, where applicable, their respective officers, partners, directors and shareholders) harmless from and against all claims, demands, costs, losses and damages, including, without limitation, attorneys' fees and expenses (collectively, "LOSSES") incurred as a result of or in connection with the indemnifying party's breach (directly or by its agents or other representatives) of any provision of this Agreement or action outside the scope of this Agreement. (b) Subject to paragraph (a) above, the Company shall indemnify and hold each Member (and, where applicable, such Member's respective officers, partners, directors and shareholders) harmless from and against all Losses incurred as a result of or in connection with (i) any claim that such Member is liable for any debt, obligation or liability of the Company or is directly or indirectly required to make payments in respect thereof or in connection therewith, and (ii) any act or omission by such Member -4- for or on behalf of the Company, unless such act or omission is unauthorized, contrary to this Agreement, in bad faith or constitutes gross negligence or fraud. (c) Each party to be indemnified under paragraph (a) or (b) above shall give each indemnifying party notice of any Loss subject to the indemnity within thirty (30) days after the indemnified party has received actual notice thereof. The indemnifying party shall be entitled to participate in or direct the defense of any action in connection with the reported Loss, provided that it employs counsel reasonably satisfactory to the indemnified party. An indemnifying party shall not be liable to an indemnified party in respect of settlements effected by the indemnified party without the written consent of the indemnifying party, which consent shall not be unreasonably withheld or delayed. 2.5 MEMBERS ARE NOT AGENTS. Pursuant to SECTION 5.1 hereof and the Articles, the management of the Company is vested in the Board of Managers. The Members shall have no power to participate in the management of the Company except as expressly authorized by this Agreement or the Articles and except as expressly required by the Act. No Member, acting solely in the capacity of a Member, is an agent of the Company nor does any Member, unless expressly and duly authorized in writing to do so by the Board of Managers, have any power or authority to bind or act on behalf of the Company in any way, to pledge its credit, to execute any instrument on its behalf or to render it liable for any purpose. ARTICLE 3 CAPITAL ACCOUNTS; PROFITS AND LOSSES; DISTRIBUTIONS 3.1 CAPITAL ACCOUNTS. The Company shall establish and maintain a capital account for each Member, which accounts shall have initial balances equal to such Member's initial capital contribution. A Member's capital account shall be increased by the amount of (a) any -5- additional capital contributions by, and (b) the income and gain allocated to, such Member, and shall be decreased by any losses and deductions allocated, or distributions made, to such Member pursuant to the terms of this Agreement. It is the intention of the Members that capital accounts be maintained strictly in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv). 3.2 ALLOCATIONS OF PROFITS AND LOSSES. All profits and losses of the Company shall be allocated to the Members in accordance with their respective Percentage Interests. 3.3 DISTRIBUTIONS. Prior to the dissolution of the Company, the Company shall distribute its funds and other assets to Members at such times and in such amounts as the Board of Managers determines to be appropriate. Distributions shall be made to the Members in accordance with their respective Percentage Interests. ARTICLE 4 MEETINGS OF MEMBERS 4.1 CALL, NOTICE AND CONDUCT OF MEETINGS. Meetings of the Members, for any purpose or purposes, may be called by a Member or Members then owning more than ten percent (10%) of the Percentage Interests in the Company. Whenever any meeting of the Members is called, written notice thereof shall be given and the meeting shall otherwise be conducted in accordance with the provisions of Section 17104 of the Act. 4.2 VOTING BY MEMBERS. At any meeting of Members, every Member shall be entitled to vote either in person or by proxy executed in writing by such Member. Except as may otherwise be specifically provided herein, with respect to any matter at any meeting, or otherwise with respect to any determination or action required or permitted to be made or taken by the Members under this Agreement, the affirmative vote of Members then owning more than -6- fifty percent (50%) of the Percentage Interests in the Company shall be sufficient to make such determination or to take such action. 4.3 ACTION WITHOUT A MEETING. Any action which is required or permitted to be taken at any annual or special meeting of Members, including determinations under this Agreement, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the Members whose affirmative vote would otherwise be required for such action at a meeting hereunder. Such action by written consent shall constitute the act of the Members. 4.4 TELEPHONIC MEETINGS. Members may participate in and hold meetings by using conference telephone or similar communications equipment, by means of which all persons participating in such meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting. ARTICLE 5 MANAGEMENT OF COMPANY 5.1 MANAGEMENT OF THE COMPANY BY BOARD OF MANAGERS. (a) EXCLUSIVE MANAGEMENT BY BOARD OF MANAGERS. The business, property and affairs of the Company shall be managed exclusively by the Board of Managers. Except for situations in which the approval of the Members is expressly required by the Act, the Articles or this Agreement, the Managers shall have full, complete and exclusive authority, power, and discretion to manage and control the business, property and affairs of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business, property and affairs. -7- (b) MEETINGS OF BOARD OF MANAGERS. Meetings of the Board of Managers may be called by any Manager. All meetings shall be held upon four (4) days notice by mail or forty-eight (48) hours notice delivered personally or by telephone, telegraph or facsimile. A notice need not specify the purpose of any meeting. Notice of a meeting need not be given to any Manager who signs a waiver of notice or a consent to holding the meeting (which waiver or consent need not specify the purpose of the meeting) or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior to its commencement, the lack of notice to such Manager. All such waivers, consents and approvals shall be filed with the Company records or made a part of the minutes of the meeting. A majority of the Managers present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment shall be given prior to the time of the adjourned meeting to the Managers who are not present at the time of the adjournment. Meetings of the Board of Managers may be held at any place within or without the State of California which has been designated in the notice of the meeting or at such place as may be approved by the Board of Managers. Managers may participate in a meeting through use of conference telephone or similar communications equipment, so long as all Managers participating in such meeting can hear one another. Participation in a meeting in such manner constitutes a presence in person at such meeting. A majority of the authorized number of Managers constitutes a quorum of the Managers for the transaction of business. Except to the extent that this Agreement expressly requires the approval of all Managers, every act requiring the approval of the Managers must be approved by a majority of a quorum of the Managers, and every act or decision done or made by a majority of the -8- Managers present at a meeting duly held at which a quorum is present is the act of the Board of Managers. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Managers, if any action taken is approved by at least a majority of the required quorum for such meeting. (c) ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Managers may be taken by the Board of Managers without a meeting, if all of the Managers individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a vote of such Managers. 5.2 ELECTION OF MANAGERS. (a) NUMBER, TERM, AND QUALIFICATIONS. The Company shall have five (5) Managers. The number of Managers of the Company may be changed only upon the approval of all the Members, provided that in no instance shall there be less than one Manager and provided further that if the number of Managers is reduced from more than one to one, the Articles shall be amended to so state, and if the number of Managers is increased to more than one, the Articles shall be amended to delete the statement that the Company has only one Manager. Unless he resigns or is removed, each Manager shall hold office until a successor shall have been elected and qualified. A Manager need not be a Member, an individual, a resident of the State of California, or a citizen of the United States. (b) ELECTION. Premier and RSS each shall be entitled to appoint two Managers to the Board of Managers (the "PREMIER MANAGERS" and "RSS MANAGERS" respectively). The fifth Manager shall be elected by the affirmative vote or written -9- consent of all Members. The following persons shall be the initial Managers of the Company: Premier Manager Daniel Caruso Premier Manager Colette Cozean RSS Manager Daniel Durrie RSS Manager John Hunkeler Elected by Members ______________________ (c) RESIGNATION. Any Manager may resign at any time by giving written notice to the Members and remaining Managers without prejudice to the rights, if any, of the Company under any contract to which the Manager is a party. The resignation of any Manager shall take effect upon receipt of that notice or at such later time as shall be specified in the notice. Unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective. The resignation of a Manager who is also a Member shall not affect the Manager's rights as a Member and shall not constitute a withdrawal of a Member. (d) REMOVAL. The Premier Managers and the RSS Managers may be removed only by Premier or RSS, respectively. The fifth Manager may be removed at any time, with or without cause, by the affirmative vote of all of the Members at a meeting called expressly for that purpose. Any removal shall be without prejudice to the rights, if any, of the Manager under any employment contract and, if the Manager is also a Member, shall not affect the Manager's rights as a Member or constitute a withdrawal of a Member. (e) VACANCIES. Any vacancy occurring for any reason with respect to the Premier Managers or RSS Managers may be filled only by Premier or RSS, respectively. -10- Any vacancy occurring with respect to the fifth Manager may be filled by the affirmative vote or written consent of all of the Members. 5.3 POWERS OF MANAGERS. (a) POWERS OF BOARD OF MANAGERS. Without limiting the generality of SECTION 5.1, but subject to SECTION 5.3(b) and to the express limitations set forth elsewhere in this Agreement, the Board of Managers shall have all necessary powers to manage and carry out the purposes, business, property, and affairs of the Company, including, without limitation, the power to exercise on behalf and in the name of the Company all of the powers described in Corporations Code Section 17003. (b) LIMITATIONS ON POWER OF MANAGERS. Notwithstanding any other provisions of this Agreement, no debt, liability or expenditure of more than $100,000 may be contracted or made on behalf of the Company in the ordinary course of business except by the written consent of all Managers, and no debt, liability or expenditure of more than $25,000 may be contracted or made on behalf of the Company outside the ordinary course of business except with the written consent of all Managers. Additionally, the Managers shall not have authority hereunder to cause the Company to engage in the following transactions without first obtaining the affirmative vote or written consent of all of the Members. (i) The dissolution of the Company; (ii) The sale, exchange or other disposition of all, or substantially all, of the Company's assets occurring as part of a single transaction or plan, or in multiple transactions over a six (6) month period, except in the orderly liquidation and winding up of the business of the Company upon its duly authorized dissolution; -11- (iii) The merger of the Company with another business entity; (iv) The establishment of different classes of Members; (v) The issuance of any new membership interests in the Company or options or commitments to issue any such interests, and (vi) The amendment of the Articles. 5.4 PERFORMANCE OF DUTIES. The Managers shall perform their managerial duties in good faith, in a manner they reasonably believe to be in the best interests of the Company and its Members, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. A Manager who so performs the duties of Manager shall not have any liability by reason of being or having been a Manager of the Company. In performing their duties, the Managers shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, of the following persons or groups unless they have knowledge concerning the matter in question that would cause such reliance to be unwarranted and provided that the Managers act in good faith and after reasonable inquiry when the need therefor is indicated by the circumstances: (a) One or more officers, employees or other agents of the Company whom the Managers reasonably believe to be reliable and competent in the matters presented; (b) Any attorney, independent accountant, or other person as to matters which the Managers reasonably believe to be within such person's professional or expert competence; or (c) A committee upon which the Managers do not serve, duly designated in accordance with a provision of the Articles or this Agreement, as to matters within its -12- designated authority, which committee the Managers reasonably believe to merit competence. 5.5 DEVOTION OF TIME. The Managers are not obligated to devote all of their time or business efforts to the affairs of the Company. The Managers shall devote whatever time, effort, and skill as they deem appropriate for the operation of the Company. 5.6 TRANSACTIONS BETWEEN THE COMPANY AND THE MANAGERS. Notwithstanding that it may constitute a conflict of interest, the Managers may, and may cause their affiliates to, engage in any transaction (including, without limitation, the purchase, sale, lease, or exchange of any property or the rendering of any service, or the establishment of any salary, other compensation, or other terms of employment) with the Company so long as such transaction is not expressly prohibited by this Agreement and so long as the terms and conditions of such transaction, on an overall basis, are fair and reasonable to the Company and are at least as favorable to the Company as those that are generally available from Persons capable of similarly performing them and in similar transactions between parties operating at arm's-length. A transaction between the Managers and/or their affiliates, on the one hand, and the Company, on the other hand, shall be conclusively determined to constitute a transaction on terms and conditions, on an overall basis, fair and reasonable to the Company and at least as favorable to the Company as those generally available in a similar transaction between parties operating at arm's- length if the Members having no interest in such transaction (other than their interests as Members) affirmatively vote or consent in writing to approve the transaction. Notwithstanding the foregoing, the Managers shall not have any obligation, in connection with any such transaction between the Company and the Managers or an affiliate of the Managers, to seek the consent of the Members. -13- 5.7 PAYMENTS TO MANAGERS. Except as specified in the Joint Venture Agreement or other agreement between the parties, the Managers and their affiliates shall receive only the following payments: (a) MANAGEMENT FEE. The Company shall pay the Managers a monthly fee for services in connection with the management of the Company in the amount of $__________. Such fee may be changed from time to time only by the affirmative vote or written consent of all of the Members, and no Manager shall be prevented from receiving any fee because the Manager is also a Member of the Company. (b) SERVICES PERFORMED BY MANAGERS OR AFFILIATES. The Company shall pay the Managers or affiliates of the Managers for services rendered or goods provided to the Company to the extent that the Managers are not required to render such services or goods themselves without charge to the Company, and to the extent that the fees paid to such Managers or affiliates do not exceed the fees that would be payable to an independent responsible third party that is willing to perform such services or provide such goods. 5.8 APPOINTMENT OF OFFICERS. The Board of Managers may appoint officers at any time. The officers of the Company, if deemed necessary by the Board of Managers, may include a chairman, president, vice president, secretary, and chief financial officer. The officers shall serve at the pleasure of the Board of Managers, subject to all rights, if any, of an officer under any contract of employment. Any individual may hold any number of offices. No officer need be a resident of the State of California or citizen of the United States. If a Manager is not an individual, such Manager's officers may serve as officers of the Company if elected by the Board of Managers. The officers shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Managers. -14- 5.9 SIGNING AUTHORITY OF MANAGER/OFFICERS. Subject to SECTION 5.3(b) and any restrictions imposed by the Members or the Board of Managers, any Manager (or officer if authorized by the Board of Managers), acting alone, is authorized to endorse checks, drafts, and other evidences of indebtedness made payable to the order of the Company, but only for the purpose of deposit into the Company's accounts. All checks, drafts, and other instruments obligating the Company to pay money in an amount of less than $5,000 may be signed by any one Manager (or authorized officer), acting alone. All checks, drafts, and other instruments obligating the Company to pay money in an amount of $5,000 or more must be signed on behalf of the Company by any two Managers (or authorized officers) acting together. Any two Managers (or authorized officers) acting together, shall be authorized to sign contracts and obligations on behalf of the Company. Notwithstanding the above, however, when the signature of two managers is required, this Section 5.9 is not satisfied if the only two managers signing the document are both RSS Managers or both Premier Managers. 5.10 REGULATORY MATTERS. The Board of Managers shall keep each Member apprised of all developments relating to federal, state or local regulatory matters affecting the Company's business, including but not limited to inquiries made by, or correspondence received from or directed to, any regulatory agency. Notwithstanding any power or authority granted to the Board of Managers herein, the Board of Managers shall follow Premier's direction in connection with all such regulatory matters unless such direction would result in a violation of the law and any Member or Manager presents a legal opinion from counsel to that effect. 5.11 LIMITED LIABILITY. No person who is a Manager and/or officer of the Company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the Company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a Manager and/or officer of the Company. A -15- Manager or officer shall not be liable to the Company or to any Member for any loss or damage sustained by the Company or any Member, unless the loss or damage shall have been the result of fraud, deceit, gross negligence, reckless or intentional misconduct, or a knowing violation of law by the Manager or officer. 5.12 INDEMNIFICATION OF MANAGER; INSURANCE. The Company shall, to the fullest extent permitted by applicable law from time to time, indemnify, save harmless, and pay all judgments and claims against any Manager or officer relating to any liability or damage incurred by reason of any act performed or omitted to be performed by such Manager or officer in connection with the business of the Company, including attorneys' fees incurred by the Manager or officer in connection with the defense of any action based on any such act or omission, which attorneys' fees may be paid as incurred; provided, however, that a Manager or officer shall not be indemnified from any liability for fraud, bad faith, willful misconduct or violation of the terms of this Agreement. The Company shall obtain and maintain product liability and directors' and officers' insurance in amounts and with insurance companies satisfactory to Premier. ARTICLE 6 TRANSFERS OF INTERESTS 6.1 LIMITATION ON TRANSFER. Except as otherwise expressly provided below, a Member shall not sell, assign, mortgage, pledge or otherwise transfer (collectively, "TRANSFER") all or any part of such Member's membership interest in the Company, nor shall any Member suffer or permit any third party to Transfer such Member's membership interest in the Company, without the prior written consent of all Members, which consent may be withheld for any reason or for no reason; and any purported Transfer of a Member's membership interest in the Company without such prior consent shall be void and of no effect against the Company, any -16- other Member, any creditor of the Company, or any claimant against the Company. If the required prior consent to any such Transfer is obtained as above provided, the transferee shall be admitted to the Company as a substituted Member provided that the following conditions are complied with: (a) The other Members shall approve of the form and content of the instrument of assignment; (b) The transferring Member and such transferee shall execute and acknowledge such other instrument or instruments as the other Members may deem necessary or desirable to effectuate such admission; (c) Such transferee shall in writing accept, adopt and agree to be bound by all of the terms and provisions of this Agreement; and (d) The transferring Member or such transferee shall pay or agree to pay, as the other Members may determine, all reasonable expenses connected with such admission, including, but not limited to, legal fees and costs. The giving of such consent in any one or more instances shall not limit or waive the need for such consent in any other or subsequent instances. 6.2 PERMITTED TRANSFERS. The foregoing notwithstanding, the restrictions of this ARTICLE 6 shall not apply to: (a) A Transfer of a Member's membership interest in the Company by will or by intestacy, or by a Transfer to a trustee or trustees of a trust revocable by the Member and under which the Member has a significant beneficial interest, or to a Member's immediate family (defined as the husband, wife, adult child, father, mother or adult grandchild of the Member, trustees for any of the foregoing, or trustees for minor lineal issue of the Member); or -17- (b) A Transfer of a membership interest in the Company held by a Member which is a corporation, partnership, trust or other entity which Transfer is a result of the dissolution or termination of such entity; provided, however, that before any such transferee shall be admitted to the Company as a substituted Member, such transferee must in writing accept, adopt and agree to be bound by all of the terms and provisions of this Agreement. 6.3 ASSIGNEE. An assignee who has acquired a beneficial interest in this Company from a Member but who has not become a substituted Member in accordance with the provisions of SECTIONS 6.1 OR 6.2 above shall have no right to require any information on account of Company transactions, to inspect the Company books, or to vote on any of the matters to which the transferor Member would be entitled to vote pursuant to this Agreement. An Assignee shall be entitled to only receive the share of distributions to which such transferor Member would otherwise be entitled. 6.4 RIGHT OF FIRST REFUSAL. Each time a Member proposes to transfer all or any part of its membership interest (or as required by operation of law or other involuntary transfer to do so) other than pursuant to SECTION 6.2, such Member shall first offer such membership interest to the Company and the non-transferring Members in accordance with the following provisions: (a) Such Member shall deliver a written notice ("OPTION NOTICE") to the Company and the other Members stating such Member's bona fide intention to transfer such membership interest, the membership interest to be transferred, the purchase price and terms of payment for which the Member proposes to transfer such membership interest and the name and address of the proposed transferee. -18- (b) Within thirty (30) days after receipt of the Option Notice, the Company shall have the right, but not the obligation, to elect to purchase all or any part of the membership interest upon the price and terms of payment designated in the Option Notice. If the Option Notice provides for the payment of non-cash consideration, the Company may elect to pay the consideration in cash equal to the good faith estimate of the present fair market value of the non-cash consideration offered as determined by the Board of Managers. If the Company exercises such right within such thirty (30) day period, the Board of Managers shall give written notice of that fact to the transferring and non-transferring Members. (c) If the Company fails to elect to purchase the entire membership interest proposed to be transferred within the thirty (30) day period described in SECTION 6.4(b), the non-transferring Members shall have the right, but not the obligation, to elect to purchase any remaining share of such membership interest upon the price and terms of payment designated in the Option Notice. If the Option Notice provides for the payment of non-cash consideration, such purchasing Members each may elect to pay the consideration in cash equal to the good faith estimate of the present fair market value of the non-cash consideration offered as determined by the Board of Managers. Within sixty (60) days after receipt of the Option Notice, each non-transferring Member shall notify the Board of Managers in writing of his desire to purchase a portion of the membership interest proposed to be so transferred. The failure of any Member to submit a notice within the applicable period shall constitute an election on the part of that Member not to purchase any of the membership interest which may be so transferred. Each Member so electing to purchase shall be entitled to purchase a portion of such membership interest in the same proportion that the Percentage Interest of such Member -19- bears to the aggregate of the Percentage Interests of all of the Members electing to so purchase the membership interest being transferred. In the event any Member elects to purchase none or less than all of his pro rata share of such membership interest, then the other Members can elect to purchase more than their pro rata share. (d) If the Company and the other Members elect to purchase or obtain all of the membership interest designated in the Option Notice, then the closing of such purchase shall occur within ninety (90) days after receipt of such notice and the transferring Member, the Company and/or the other Members shall execute such documents and instruments and make such deliveries as may be reasonably required to consummate such purchase. (e) If the Company and the other Members elect not to purchase or obtain, or default in their obligation to purchase or obtain, all of the membership interest designated in the Option Notice, then the transferring Member shall not be obligated hereunder to sell to the Company and the other Members any portion of the membership interest proposed to be transferred, but instead may proceed with the transfer described in the Option Notice, providing such transfer is completed within thirty (30) days after the expiration of the Company's and the other Members' right to purchase such membership interest, is made on terms no less favorable to the transferring Member than as designated in the Option Notice, and complies with SECTION 6.1 relating to unanimous consent of Members. If such membership interest is not so transferred, the transferring Member must give notice in accordance with this Section prior to any other or subsequent transfer of such membership interest. -20- ARTICLE 7 DISSOCIATION OF A MEMBER 7.1 DISSOCIATION. A Member shall cease to be a Member upon the occurrence of any of the following events: (a) the death of the Member; (b) the retirement or withdrawal of the Member; (c) the bankruptcy of the Member; and (d) if the Member is an entity other than a natural person, the dissolution, termination or commencement of winding up of the Member. 7.1 RIGHTS OF DISSOCIATING MEMBER. If any Member dissociates from the Company prior to the latest date on which the Company is to dissolve as specified in its Articles of Organization: (a) If the dissociation causes a dissolution and winding up of the Company under ARTICLE 8 hereof, the Member (or his or her estate) shall be entitled to participate in the winding up of the Company as would any other Member, except that if the dissociation is the result of the retirement, withdrawal or bankruptcy of the Member (and for this purpose, the revocation of any Member which is a revocable trust shall be deemed to be the withdrawal of such Member), any distributions to which the dissociating Member would have been entitled shall be reduced by any damages sustained by the Company as a result of the dissolution and winding up; and (b) If the dissociation does not cause a dissolution and winding up of the Company under ARTICLE 8 hereof, the business of the Company shall continue without interruption and without any break in continuity, and the other Members shall continue to conduct the business of the Company under the terms of this Agreement with any -21- successor or transferee of such former Member who shall be bound by the provisions of this Agreement, but who shall not be entitled to participate in the management or affairs of the Company or to exercise any rights of a Member unless such successor or transferee has been admitted as a substituted Member of the Company in accordance with the provisions of ARTICLE 6 hereof. ARTICLE 8 DISSOLUTION AND WINDING UP OF THE COMPANY 8.1 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved and wound up upon the first to occur of any of the following events: (a) The latest date on which the Company is to dissolve as specified in its Articles of Organization; (b) The election by Members then owning more than fifty percent (50%) of the Percentage Interests in the Company to dissolve the Company; (c) The death, retirement, withdrawal, bankruptcy or expulsion of a Member unless, within ninety (90) days after the occurrence of such event, other Members then owning more than fifty percent (50%) of the Percentage Interests in the Company vote to continue the Company business, in which event the business shall continue without interruption and without any break in continuity; (d) The entry of a decree of dissolution; or (e) Any event which causes there to be only one Member. 8.2 WINDING UP. Upon dissolution of the Company, the Company shall wind up its affairs promptly, in accordance with the direction of the Board of Managers (or such other person elected by the Members to perform such duties). -22- 8.3 LIQUIDATING DISTRIBUTIONS. Any monies or property (other than money) then held by the Company shall be applied or distributed in one or more installments in the following order of priority: (a) First, to the payment and discharge of all of the Company's debts and liabilities, other than debts to Members and transferable debts secured by Company property; (b) Second, to the payment and discharge of any loans or advances made by Members to the Company and all expenses, including attorneys' fees, incurred by the Members in connection with the winding up and liquidation of the Company; then (c) The balance, if any, to the Members in accordance with the positive balances in their respective capital accounts after giving effect to all contributions, distributions and allocations for all periods. If the Board of Managers so determines, a pro rata portion of the distributions that would otherwise be made to the Members pursuant to this SECTION 8.3 may be: (i) distributed to a trust established for the benefit of the Members for the purpose of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company. The assets of any such trust shall be distributed to the Members from time to time in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; (ii) withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment -23- obligations owed the Company, provided that such withheld amounts shall be distributed to the Members as soon as practicable. ARTICLE 9 MISCELLANEOUS 9.1 NOTICES. Notices given under this Agreement shall be in writing and shall either be served personally or delivered by first class registered or certified, return receipt requested U.S. mail, postage prepaid. Notices may also effectively be given by transmittal over electronic transmitting devices such as Telex, facsimile or telecopy machine, if the party to whom the notice is being sent has such a device in its office, provided a complete copy of any notice so transmitted shall also be mailed in the same manner as required for a mailed notice. Notices shall be deemed received at the earlier of actual receipt or three (3) days following deposit in U.S. mail, postage prepaid. Notices shall be directed to the Company at 1212 Cambridge Circle Drive, Kansas City, Kansas 66103, and to the Members at the addresses shown in SECTION 2.1 hereof, provided that a Member may change such Member's address for notice by giving written notice to all other Members in accordance with this Section. 9.2 CAPTIONS. Any titles or captions of Articles or Sections contained in this Agreement are for convenience only and shall not be deemed part of the context of this Agreement. 9.3 SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement. 9.4 GENDER; NUMBER. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identification of the individual -24- or entity may require. The use of the singular includes the plural, and the use of the plural includes the singular, wherever the context thereof may require. 9.5 SUCCESSORS. Except as otherwise herein provided, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their heirs, executors, administrators, successors and all individuals or entities hereafter having or holding an interest in the Company, whether as assignees, substituted Members, or otherwise. 9.6 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire understanding between the parties and supersedes any prior understandings and agreements between them respecting the within subject matter. No amendment, alteration or modification of this Agreement shall be binding unless in writing and signed by all of the Members. 9.7 COUNTERPART EXECUTION. This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document. All counterparts shall be construed together and shall constitute one agreement. 9.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California and, unless expressly or by necessary implication contravened by any provision hereof, the provisions of the Act shall apply. -25- IN WITNESS WHEREOF, the parties have signed this Agreement as of the day and year first above written. PREMIER LASER SYSTEMS, INC., a California corporation By: /s/ Colette Cozean --------------------------- Colette Cozean, President RSS, LLC, a Kansas limited liability company By: /s/ Daniel S. Durrie --------------------------- Its: President ----------------------- -26- EX-10.41 6 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER AMONG PREMIER LASER SYSTEMS, INC. PREMIER ACQUISITION, INC. AND EYESYS TECHNOLOGIES, INC. APRIL 24, 1997 TABLE OF CONTENTS ----------------- Page ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 General Terms. . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 2 PLAN OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1 Board of Directors' and Stockholders' Approval . . . . . . . . . 9 2.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.3 Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.4 The Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.5 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.6 Registration Rights. . . . . . . . . . . . . . . . . . . . . . . 15 2.7 Restrictions on Securities . . . . . . . . . . . . . . . . . . . 15 2.8 Surrender and Exchange of Outstanding Certificates, Premier Warrants for EyeSys Warrants and Premier Options for EyeSys Options; Status of Outstanding Certificates. . . . . . . . . . . 15 2.9 Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . 16 2.10 Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.11 Articles and Certificate of Incorporation; Bylaws; Directors and Officers of Premier and the Surviving Corporation. . . . . . . . 16 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF EYESYS . . . . . . . . . . . . 17 3.1 Organization and Standing. . . . . . . . . . . . . . . . . . . . 17 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.4 Authority, Approval and Enforceability . . . . . . . . . . . . . 18 3.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 19 3.6 Material Changes . . . . . . . . . . . . . . . . . . . . . . . . 20 3.7 Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3.8 Properties and Inventories . . . . . . . . . . . . . . . . . . . 21 3.9 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.10 Purchase, Sale and Other Agreements. . . . . . . . . . . . . . . 22 3.11 Intellectual Property Rights . . . . . . . . . . . . . . . . . . 24 3.12 Employees and Employee Benefit Plans . . . . . . . . . . . . . . 25 3.13 Environmental and Safety Laws. . . . . . . . . . . . . . . . . . 27 3.14 Proprietary Information and Inventions and Confidentiality Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3.15 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . 28 3.16 Compliance with Laws and Permits; Regulatory Matters . . . . . . 28 3.17 Absence of Litigation. . . . . . . . . . . . . . . . . . . . . . 28 3.18 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.19 The Registration Statement and Proxy Statement/Prospectus. . . . 29 3.20 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 -i- Page ---- 3.21 Other Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.22 Compliance with Instruments. . . . . . . . . . . . . . . . . . . 33 3.23 Foreign Status . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.24 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . 33 3.25 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . 33 3.26 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.27 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . 34 3.28 Related Party Transactions . . . . . . . . . . . . . . . . . . . 34 3.29 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PREMIER AND PAI. . . . . . . . 34 4.1 Organization and Standing. . . . . . . . . . . . . . . . . . . . 34 4.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.3 Authority, Approval and Enforceability . . . . . . . . . . . . . 35 4.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 35 4.5 Material Changes . . . . . . . . . . . . . . . . . . . . . . . . 36 4.6 Absence of Litigation. . . . . . . . . . . . . . . . . . . . . . 36 4.7 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.8 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4.9 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . 37 4.11 The Registration Statement and Proxy Statement/Prospectus. . . . 38 4.12 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.13 Shares Fully Paid and Non-Assessable . . . . . . . . . . . . . . 39 4.14 SEC Documents. . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE 5 COVENANTS OF PREMIER, PAI AND EYESYS . . . . . . . . . . . . . . 40 5.1 Maintenance of Business. . . . . . . . . . . . . . . . . . . . . 40 5.2 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . 40 5.3 Actions Contrary to Stated Intent. . . . . . . . . . . . . . . . 41 5.4 Access to Information. . . . . . . . . . . . . . . . . . . . . . 41 5.5 Other Discussions. . . . . . . . . . . . . . . . . . . . . . . . 41 5.6 EyeSys Lock-Up Agreements. . . . . . . . . . . . . . . . . . . . 41 5.7 Reasonable Best Efforts. . . . . . . . . . . . . . . . . . . . . 41 5.8 Registration Statement and Proxy Statement/Prospectus. . . . . . 42 5.9 EyeSys Payables. . . . . . . . . . . . . . . . . . . . . . . . . 42 5.10 Tax Forms. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.11 Notification of Certain Matters. . . . . . . . . . . . . . . . . 42 5.12 Merger Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 42 5.13 Assumption of Bank Loan Agreement. . . . . . . . . . . . . . . . 42 5.14 Premier Covenant Regarding SEC Filings . . . . . . . . . . . . . 43 5.15 Premier Board Seat . . . . . . . . . . . . . . . . . . . . . . . 43 5.16 Funding For EyeSys . . . . . . . . . . . . . . . . . . . . . . . 43 5.17 Nonincluded Costs. . . . . . . . . . . . . . . . . . . . . . . . 44 5.18 Options and Warrants . . . . . . . . . . . . . . . . . . . . . . 44 -ii- Page ---- 5.19 March 31, 1997 Financial Statements. . . . . . . . . . . . . . . 44 5.20 "Stay Bonuses," RSS Payable. . . . . . . . . . . . . . . . . . . 44 5.21 Transactional Costs. . . . . . . . . . . . . . . . . . . . . . . 44 5.22 Reimbursement of Amounts Paid to Dissenting Shareholders . . . . 45 ARTICLE 6 CONDITIONS TO OBLIGATIONS OF PREMIER, PAI AND EYESYS . . . . . . 45 6.1 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . 45 6.2 Representations, Warranties and Agreements . . . . . . . . . . . 45 6.3 Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.4 Opinions of Counsel. . . . . . . . . . . . . . . . . . . . . . . 45 6.5 No Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.6 Proceeding and Documents . . . . . . . . . . . . . . . . . . . . 46 6.7 Accuracy of Documents and Information. . . . . . . . . . . . . . 46 6.8 Lock-Up Agreements . . . . . . . . . . . . . . . . . . . . . . . 46 6.9 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 6.10 Securities Approval. . . . . . . . . . . . . . . . . . . . . . . 46 6.11 Delaware Filings . . . . . . . . . . . . . . . . . . . . . . . . 46 6.12 Termination of EyeSys Stock Option Plan. . . . . . . . . . . . . 46 6.13 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . . 46 6.14 Options, Warrants and EyeSys Notes . . . . . . . . . . . . . . . 46 6.15 Foreign Status Representation Letter . . . . . . . . . . . . . . 47 6.16 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . 47 6.17 Bank Loan Agreement. . . . . . . . . . . . . . . . . . . . . . . 47 6.18 No EyeSys Material Adverse Effect. . . . . . . . . . . . . . . . 47 6.19 No Premier Material Adverse Effect . . . . . . . . . . . . . . . 47 6.20 Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . 47 6.21 Diligence Review . . . . . . . . . . . . . . . . . . . . . . . . 47 6.22 Amount of Shares Issuable. . . . . . . . . . . . . . . . . . . . 48 6.23 Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . 48 6.24 Compliance With Rule 145 . . . . . . . . . . . . . . . . . . . . 48 6.25 EyeSys Financial Information . . . . . . . . . . . . . . . . . . 48 6.26 EyeSys Personnel . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE 7 INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 7.1 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 48 7.2 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . 49 7.3 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7.4 Indemnification of EyeSys Agents . . . . . . . . . . . . . . . . 49 7.5 Indemnification regarding Securities Act Issues. . . . . . . . . 49 ARTICLE 8 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 50 8.1 Termination by Mutual Consent. . . . . . . . . . . . . . . . . . 50 8.2 Termination by Premier or PAI or EyeSys. . . . . . . . . . . . . 50 8.3 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . 51 -iii- Page ---- ARTICLE 9 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 51 9.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 9.2 Entire Agreement; Modifications; Waiver. . . . . . . . . . . . . 52 9.3 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.5 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.6 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 52 9.7 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.8 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 53 9.9 Each Party to Bear Own Costs . . . . . . . . . . . . . . . . . . 53 9.10 Confidentiality and Nondisclosure Agreements . . . . . . . . . . 53 9.11 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . 53 9.12 Transfer of EyeSys Books and Assets. . . . . . . . . . . . . . . 53 9.13 Appointment and Indemnity of Escrow Committee. . . . . . . . . . 53 9.14 Survival of Representations and Warranties . . . . . . . . . . . 54 EXHIBITS B Escrow Agreement and Instructions C-1 Lock-Up Agreement C-2 Lock-Up Agreement D Certificate of Merger F Terms of Securities G EyeSys Operating Plan H Loans included in Nonincluded Costs SCHEDULES 2.1 Noteholders 2.7 Stockholders Executing Lock-Up Agreements 5.16 EyeSys Personnel 5.21 Transactional Costs -iv- AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger is made as of April 24, 1997 by and among Premier Laser Systems, Inc., a California corporation ("PREMIER"), Premier Acquisition of Delaware, Inc., a Delaware corporation ("PAI"), EyeSys Technologies, Inc., a Delaware corporation ("EYESYS"), and Frontenac Company (the "PRINCIPAL SHAREHOLDER"). RECITALS A. The parties hereto intend that, subject to the terms and conditions hereinafter set forth, PAI, a wholly owned subsidiary of Premier, will be merged with and into EyeSys (the "MERGER") in accordance with this Agreement and the applicable provisions of the laws of the State of Delaware, with EyeSys surviving as a wholly owned subsidiary of Premier. All outstanding shares of EyeSys Common Stock, EyeSys Series A Preferred Stock and EyeSys Series B Preferred Stock and the EyeSys Notes will be converted into the right to receive shares of Premier Common Stock. B. All outstanding EyeSys Common Stock Warrants, Preferred Warrants and EyeSys Options shall be either exercised or terminated prior to the Closing, or exchanged for Premier Options. EyeSys Common Stock, Preferred Stock, EyeSys Notes, EyeSys Options and EyeSys Warrants shall be collectively referred to herein as "INTERESTS IN EYESYS." C. By executing this Agreement, the parties hereto intend to adopt a plan of reorganization within the meaning of Section 368(a) the Internal Revenue Code of 1986. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. The following terms shall have the following meanings for purposes of this Agreement: "AGREEMENT" means this Agreement and Plan of Merger among Premier, PAI and EyeSys, dated as of April 24, 1997. "APPRAISAL RIGHTS" shall have the meaning set forth in Section 5.22. "BANK" means the Silicon Valley Bank. "CERTIFICATE OF MERGER" shall mean that certificate, substantially in the form attached hereto as EXHIBIT D, that shall be filed in the office of the Delaware Secretary of State at the Effective Time. "CLAIM" or "CLAIMS" shall mean any and all claims, demands, causes of action, suits, proceedings, administrative proceedings, losses, judgments, decrees, debts, damages, liabilities, court costs, attorneys' fees, and any other expenses incurred, assessed or sustained by or against EyeSys. "CLOSING" shall have the meaning stated in Section 2.4. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985. "CODE" means the Internal Revenue Code of 1986. "CONTINGENCY PAYMENT" means, with respect to each EyeSys Note, the Principal of such Note multiplied by a factor of two (2). "COWEN" shall mean Cowen & Company, a limited partnership. "COWEN SHARES" shall mean that amount of shares of Premier Common Stock, valued at the Per Share Value, equal to the lesser of (i) $75,000, or (ii) one-fourth of the amount of fees payable by EyeSys to Cowen and which are included in the Transactional Costs. "DISSENTING SHAREHOLDERS" means those EyeSys shareholders that exercise their dissenter's appraisal rights under the Delaware General Corporation Law, in connection with the Merger. "DIVIDENDS" with respect to a share of Series B Preferred Stock shall mean the accumulated and unpaid dividends thereon immediately prior to the Effective Time. "EA" shall mean, with respect to an EyeSys Note held by an EyeSys Affiliate Noteholder, the number of Merger Shares equal to the quotient of the Principal thereon divided by the Per Share Value. "EFFECTIVE TIME" shall have the meaning stated in Section 2.5. "ENA" shall mean with respect to an Eyesys Note held by an EyeSys Non- Affiliate Noteholder, the number of Merger Shares equal to the quotient of (x) the product of two multiplied by the Principal, divided by (y) the Per Share Value. "ERISA" means the Employee Retirement Income Security Act of 1974. "ESCROW AGREEMENT" shall mean that agreement pursuant to which certain Merger Shares shall be held in escrow for a period of one (1) year after the Effective Time as the source -2- of payment for the indemnification obligations of EyeSys pursuant to Article 7 of this Agreement, substantially in the form of EXHIBIT B attached hereto. "ESCROW SHARES" shall have the meaning given in Section 2.3. "EXCHANGE ACT" means the Securities Exchange Act of 1934. "EYESYS" shall mean EyeSys Technologies, Inc., a Delaware corporation. "EYESYS AFFILIATE NOTEHOLDERS" shall mean all holders of EyeSys Notes as so identified on Schedule 2.1. "EYESYS CERTIFICATE OF INCORPORATION" shall have the meaning given in Section 3.2(g) of this Agreement. "EYESYS COMMON STOCK" shall mean all of the issued and outstanding shares of EyeSys Common Stock. "EYESYS COMMON STOCK AND COMMON STOCK EQUIVALENTS" shall mean the sum of (i) the number of shares of Eyesys Common Stock outstanding immediately prior to the Effective Time (after giving effect to any exercise of Eyesys Warrants or Eyesys Options prior to the Closing) and (ii) the product of (a) the number of shares of Eyesys Common Stock issuable upon exercise of EyeSys Options outstanding immediately prior to the Effective Time and (b) the fraction, the numerator of which is the difference between the EyeSys Common Stock Consideration Per Share and the exercise price of each such EyeSys Option and the denominator of which is the Common Stock Consideration Per Share; and (iii) the product of (a) the number of shares of Eyesys Common Stock issuable upon exercise of EyeSys Common Warrants outstanding immediately prior to the Effective Time and (b) the fraction, the numerator of which is the difference between the EyeSys Common Stock Consideration Per Share and the exercise price of each such EyeSys Common Warrant and the denominator of which is the Common Stock Consideration Per Share. "EYESYS COMMON STOCK AND COMMON STOCK EQUIVALENTS CONSIDERATION" shall mean the difference between the Shareholder Consideration and the sum of the Series A Preference and the Series B Preference. "EYESYS COMMON STOCK CONSIDERATION PER SHARE" shall mean the quotient of Eyesys Common Stock and Common Stock Equivalents Consideration divided by EyeSys Common Stock and Common Stock Equivalents. "EYESYS COMMON WARRANTS" means all warrants to purchase EyeSys Common Stock outstanding immediately prior to the Effective Time. "EYESYS FINANCIALS" shall have the meaning given in Section 3.5 of this Agreement. -3- "EYESYS LETTER" means that certain disclosure letter, certified by the President and Secretary of EyeSys and delivered by EyeSys to Premier prior to the Closing, that describes certain matters regarding EyeSys and sets forth exceptions to certain representations and warranties made by EyeSys for the benefit of Premier and PAI in this Agreement. "EYESYS LOCK-UP AGREEMENTS" has the meaning given in Section 2.7. "EYESYS MATERIAL ADVERSE EFFECT" means any fact, event or condition, or the absence of any fact, event or condition, as the context requires, that, individually or in the aggregate, would have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of EyeSys, or that would constitute a liability of EyeSys, individually in excess of $10,000, or in the aggregate in excess of $25,000. "EYESYS NON-AFFILIATE NOTEHOLDERS" shall mean all holders of EyeSys Notes as so identified on Schedule 2.1. "EYESYS NOTES" means those certain convertible subordinated notes issued by EyeSys prior to the date of this Agreement and outstanding immediately prior to the Closing. "EYESYS OPTIONS" shall mean all options outstanding immediately prior to the Effective Time to purchase EyeSys Common Stock. "EYESYS PENSION PLAN" shall have the meaning given in Section 3.12. "EYESYS STOCKHOLDERS" has the meaning given in Section 2.7. "EYESYS WARRANTS" means all outstanding EyeSys Common Warrants and all outstanding Preferred Warrants. "FIRST AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF EYESYS" means the Certificate of Amendment of the Restated Certificate of Incorporation of EyeSys to be filed prior to the Closing, as provided in Section 2.1(a), in form reasonably acceptable to Premier. "FORM 10-K" shall have the meaning given in Section 4.14 of this Agreement. "FRONTENAC PAYABLE" shall mean the obligation of EyeSys to reimburse Frontenac Company the amount of $72,500 for expenses paid by Frontenac Company on behalf of EyeSys. "GAAP" means generally accepted accounting principles. "HAZARDOUS SUBSTANCES" shall mean any asbestos, petroleum or any substance or material defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or other similar term, by any federal, state or local environmental statute, regulation or ordinance presently in effect, including, without limitation, any material or substance that is designated or defined as a "hazardous substance," "hazardous waste" or "toxic substance" in (a) the Federal Water Pollution Control Act, 33 U.S.C. Sections 1251 et seq., -4- and any amendments thereto, (b) the Federal Resource Conservation and Recovery Act 42 U.S.C. Sections 6901 et seq., and any amendments thereto, (c) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601 et seq., and any amendments thereto, or (d) the Hazardous Material Transportation Act, 49 U.S.C. Sections 1801 et seq., and any amendments thereto. "INTEREST" with respect to an EyeSys Note shall mean the accrued and unpaid interest thereon immediately prior to the Closing. "INTERESTS IN EYESYS" shall have the meaning given in Recital B. "INTELLECTUAL PROPERTY" shall have the meaning given in Section 3.11 of this Agreement. "LOAN AGREEMENT" has the meaning given in Section 5.13 of this Agreement. "LOSSES" shall have the meaning given in Section 2 of this Agreement. "MERGER" shall mean the merger of PAI, a wholly owned subsidiary of Premier, into EyeSys on the terms and conditions set forth in this Agreement. "MERGER CONSIDERATION" shall mean the aggregate dollar amount of the Merger Securities issued in the Merger based upon the value(s) attributable to such Merger Securities under Article 2, plus $495,000. "MERGER SECURITIES" shall mean the Merger Shares and the securities issuable under Section 2.2(c) below. "MERGER SHARES" shall mean the sum of (a) that number of shares of Premier Common Stock determined by dividing $10,600,000 by the Per Share Value of the Premier Common Stock, plus (b) any additional shares required as a result of the elimination of fractional shares pursuant to Section 2.2(f). "NONINCLUDED COSTS" shall mean all obligations for money borrowed as shown on Exhibit H existing at the Closing of EyeSys to one or more shareholders to EyeSys (excluding the Frontenac Payable); all legal and accounting fees payable by EyeSys other than those which are payable by Premier under Section 5.21 hereof; all amounts due to Cowen that are in excess of the amounts required to be paid by Premier hereunder; all amounts payable by EyeSys to settle claims as required by Section 5.20; and all interest accrued on the EyeSys Notes as of the Closing Date. "PAI" shall mean Premier Acquisition of Delaware, Inc., a Delaware corporation. "PER SHARE VALUE" shall mean, at the election of Premier, either (i) the average of the closing sales prices of Premier's Class A Common Stock for the fifteen (15) trading days immediately preceding the Closing; or (ii) the average of the closing sale prices of the Common -5- Stock for the thirty (30) days ending fifteen (15) days prior to such Closing. The Per Share Value, as so defined, shall be used in the calculation of both the base amount of Merger Securities issuable under Section 2.2(b) hereof, as well as the additional Merger Securities potentially issuable under Section 2.2(c) hereof, except that with respect to the calculation of the additional securities issuable under Section 2.2(c), the Per Share Value shall also be determined in accordance with the terms of Section 2.2(c)(iii). "PREFERRED STOCK" shall collectively refer to the Series A Preferred Stock and the Series B Preferred Stock. "PREFERRED WARRANTS" means all of the warrants to purchase Series B Preferred Stock that are outstanding immediately prior to the Effective Time. "PREMIER" shall mean Premier Laser Systems, Inc., a California corporation. "PREMIER CLASS AA OPTIONS" shall mean options to purchase Premier Common Stock, and having the terms set forth in EXHIBIT F hereto. "PREMIER CLASS BB OPTIONS" shall mean options to purchase Premier Common Stock, and having the terms set forth in EXHIBIT F hereto. "PREMIER COMMON STOCK" means the Class A Common Stock of Premier. "PREMIER LETTER" means that certain disclosure letter certified by the President and Secretary of Premier and delivered by Premier to EyeSys prior to the Closing, which describes certain matters regarding Premier and PAI and sets forth exceptions to certain representations and warranties made by Premier and PAI for the benefit of EyeSys in this Agreement. "PREMIER MATERIAL ADVERSE EFFECT" means any fact, event or condition, or the absence of any fact, event or condition, as the context requires, that, individually or in the aggregate, could or would have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of Premier. "PREMIER OPTIONS" shall mean options to purchase 165,000 shares of Premier Common Stock, and having the terms set forth in EXHIBIT F hereto. "PRINCIPAL" with respect to an EyeSys Note shall mean the outstanding principal amount of such EyeSys Note immediately prior to the Effective Time. "PRINCIPAL SHAREHOLDER" means Frontenac Company. "PROXY STATEMENT/PROSPECTUS" means the Proxy Statement/Prospectus furnished to the EyeSys shareholders for a special meeting of shareholders to be held on or about June 25, 1997. -6- "REGISTRATION STATEMENT" means that certain registration statement on Form S-4 to be filed with the Securities and Exchange Commission by Premier in connection with the registration of the issuance of the Merger Shares. "RETURNS" shall have the meaning given in Section 3.20 of this Agreement. "SEC" shall mean the Securities and Exchange Commission. "SEC DOCUMENTS" shall have the meaning given in Section 4.14 of this Agreement. "SERIES A PREFERENCE" with respect to all of the outstanding shares of Series A Preferred Stock, in the aggregate, means that amount determined by multiplying the total amount of the Shareholder Consideration times "D," calculated under the following formula: D = 0.12293255 - (0.084469 * 10(8) * (Shareholder Consideration minus the Series B Preference)); provided, however, in no event shall D be more than .1215426 or less than .1204357. "SERIES B PREFERENCE" with respect to all of the outstanding shares of Series B Preferred Stock, in the aggregate, shall mean that amount of the Shareholder Consideration equal to "A" in the following formula: A = (1-P)*(Shareholder Consideration), where P equals (9.732853 * 10(8) * Shareholder Consideration) minus 0.31470577; provided, however, in no event shall P be less than .2726550 or more than .4016254. "SERIES B PREFERRED STOCK" means all of the outstanding shares of EyeSys Series B Preferred Stock immediately prior to the Effective Time. "SHAREHOLDER CONSIDERATION" shall mean the difference between (a) the Merger Consideration and (b) the sum of (i) the Nonincluded Costs and (ii) the value of the Merger Shares issued to the holders of the EyeSys Notes pursuant to Section 2.2(b)(i), based upon the Per Share Value. "SHAREHOLDER GUARANTEES" has the meaning given in Section 5.13 of this Agreement. "SHAREHOLDER GUARANTORS" has the meaning given in Section 5.14 of this Agreement. "STAY BONUS" shall have the meaning set forth in Section 5.20 of this Agreement. "TAXES" shall have the meaning given in Section 3.20 of this Agreement. -7- "TRANSACTIONAL COSTS" means such standard and customary fees and costs as may be reasonably claimed in connection with rendering services related to the Merger on behalf of EyeSys by Cowen, the accounting firm of Coopers & Lybrand and the following law firms: Epstein Becker & Green P.C., Hopkins & Sutter, and Gardere, Wynn, Sewell & Riggs, L.L.P. 1.2 GENERAL TERMS. As used in this Agreement, the terms "herein," "herewith," and "hereof" are references to this Agreement, taken as a whole; the term "includes" or "including" shall mean "including, without limitations," and references to a "Section," "subsection," "clause," "Article," "Exhibit," "Appendix," or "Schedule" shall mean a Section, subsection, clause, Article, Exhibit, Appendix or Schedule of this Agreement, as the case may be, unless in any such case the context requires otherwise. All references to a given agreement, instrument or other document shall be a reference to that agreement, instrument or other document as modified, amended, supplemented and restated through the date as of which such reference is made, and reference to a Law includes any amendment or modification thereof. The singular shall include the plural, and the masculine shall include the feminine and neuter, and vice versa. [remainder of page intentionally left blank] -8- ARTICLE 2 PLAN OF MERGER 2.1 BOARD OF DIRECTORS' AND STOCKHOLDERS' APPROVAL. (a) The board of directors of EyeSys has duly adopted this Agreement and, prior to the Closing, this Agreement shall be submitted for approval by (1) at least 67% of the outstanding shares of Series B Preferred Stock voting as a separate class, (2) a majority of the outstanding shares of the following voting as one class: EyeSys Common Stock, Series A Preferred Stock on an as-converted basis and Series B Preferred Stock on an as-converted basis, and (3) the holders of a majority of the outstanding principal under the EyeSys Notes. In addition, as conditions to the consummation of the Merger: (i) the First Amendment to the Restated Certificate of Incorporation of EyeSys, which amends the EyeSys Certificate of Incorporation to provide that if the Merger is consummated the Series A Preference and the Series B Preference shall be as set forth in Article 1, and to eliminate any right of the Series B Preferred Stock to participate with EyeSys Common Stock in liquidation of the net assets of EyeSys after payment of debts and preferences, shall be approved by (1) a majority of the outstanding shares of the following, voting as one class: EyeSys Common Stock, Series A Preferred Stock on an as-converted basis, and Series B Preferred Stock on an as-converted basis, (2) with respect to the amendments of Sections 4.3.4(b) and (c) of the Restated Certificate of Incorporation of EyeSys, at least 67% of the outstanding shares of Series B Preferred Stock voting as a separate class, (3) with respect to the amendment of Section 4.2.4(b)(ii), a majority of the holders of Series A Preferred Stock voting as a separate class and at least 67% of the outstanding shares of Series B Preferred Stock voting as a separate class, and (4) the holders of a majority of the outstanding principal under the EyeSys Notes; (ii) on or before the Closing, the holders of EyeSys Notes who are listed on Schedule 2.1 shall have elected to accept in payment of their EyeSys Notes (excluding interest thereon), in whole or in part, EA or ENA, as the case may be. (b) The board of directors and sole shareholder of PAI have duly adopted and approved this Agreement in accordance with the applicable provisions of the Delaware General Corporation Law. 2.2 THE MERGER. (a) At the Effective Time, subject to the terms and conditions of this Agreement, PAI shall be merged with and into EyeSys pursuant to the Certificate of Merger, with EyeSys as the surviving corporation; and the separate existence of PAI shall thereupon cease, and EyeSys, as the surviving corporation in the Merger and a wholly owned subsidiary of Premier, shall continue its corporate existence under the laws of the State of Delaware. -9- (b) Subject to Section 2.2(f) and Section 2.3, at the Effective Time the Interests in EyeSys identified below shall be converted into the right to receive the securities set forth in this Section 2.2(b) as well as in Section 2.2(c), and the settlement of such issuance of securities shall be effected pursuant to Section 2.2(d): (i) each EyeSys Note outstanding immediately prior to the Effective Time held by an EyeSys Affiliate Noteholder shall be converted into the right to receive such number of the Merger Shares equal to EA, and each EyeSys Note outstanding immediately prior to the Effective Time held by an EyeSys Non-Affiliate Holder shall be converted into the right to receive such number of Merger Shares equal to ENA; (ii) each share of Series B Preferred Stock shall be converted into the right to receive such number of the Merger Securities equal to the Series B Preference divided by the Per Share Value, divided by the number of shares of Series B Preferred Stock outstanding immediately prior to the Effective Time. (iii) each Preferred Warrant that has not been exercised shall be cancelled. (iv) each share of Series A Preferred Stock shall be converted into the right to receive such number of Merger Securities equal to the Series A Preference, divided by the Per Share Value divided by the number of shares of Series A Preferred Stock outstanding immediately prior to the Effective Time. (v) each share of EyeSys Common Stock, excluding shares held by Dissenting Shareholders, shall be converted into the right to receive such number of Merger Securities as is equal to the EyeSys Common Stock Consideration Per Share divided by the Per Share Value. (vi) all of the EyeSys Options and EyeSys Common Warrants that are not exchanged for Premier Options pursuant to Section 2.2(e) below or exercised by the holders thereof shall be terminated. If the Merger Securities include Premier Class AA Options or Premier Class BB Options, the holders of each of the classes of EyeSys securities identified in Section 2.2(b)(ii) through 2.2(b)(vi) above shall, in their capacities as holders of such class of EyeSys securities, receive a pro rata share of each of the types of Premier securities included in the Merger Securities. The references in Sections 2.2(b)(ii), 2.2(b)(iv) and 2.2(b)(v) to the "number of Merger Securities" to be issued and to the "Per Share Value" shall be deemed to refer to the respective numbers of each type of Premier securities allocated, on such pro rata basis, under such sections, and to the Per Share Value of the Premier Common Stock, or the values attributed to the Premier Class AA Options and Premier Class BB Options determined under Section 2.2(c)(iii) below, as appropriate. (c) The Merger Securities shall also include Premier Common Stock, Premier Class AA Options and/or Premier Class BB Options, as set forth below. -10- (i) Except as set forth in Section 2.2(c)(iv) below, EyeSys may, at its election, determine whether the securities so issuable shall be Premier Common Stock, Premier Class AA Options or Premier Class BB Options; provided, however, that unless waived by Premier in its sole discretion the maximum aggregate amount of Premier Class AA Options and Premier Class BB Options shall not exceed options to purchase 335,000 shares of Premier Common Stock. (ii) Such securities shall be issuable under this Section 2.2(c) only if EyeSys shall, prior to or within 90 days of the Closing Date (the "CONTINGENCY TERMINATION DATE"), execute a definitive license agreement with Nidek Company, Ltd. and/or Marco Ophthalmic, Inc., on terms reasonably acceptable to Premier (the "FUTURE LICENSE AGREEMENTS"), and which provides for the payment of at least 10% of the Future License Fees (as defined below) on or prior to the Contingency Termination Date. The aggregate amount of securities issuable under this Section 2.2(c) (the "CONTINGENT CONSIDERATION") shall be calculated by reference to the noncontingent license fees (the "FUTURE LICENSE FEES") paid or payable to EyeSys under the Future License Agreements, which amounts shall have been actually received by EyeSys before the Contingency Termination Date or which are contractually required to be paid within one year from the date hereof. The value of the securities issuable under this Section 2.2(c) shall be equal to the sum of: (i) .78 times the amount of the Future License Fees, for the first $1,500,000 of such Future License Fees; plus (iii) .5 times the amount of the Future License Fees in excess of $1,500,000. (iii) For purposes of this Section 2.2(c), with respect to that amount of the Future License Fees which is received prior to the Closing Date, Premier Common Stock shall be valued at the Per Share Value used in connection with the Merger, and Premier Class AA Options and Premier Class BB Options shall be deemed to have the same value as Premier's outstanding publicly traded Class A Warrants and Class B Warrants computed in the same manner as the Per Share Value and over the same measuring periods, respectively, used in the calculation of the Per Share Value (but without adjustment for the differences in terms between such securities). With respect to that amount of the Future License Fees which is received after the Closing Date, the Premier Common Stock, Premier Class AA Options and Premier Class BB Options shall be valued using the same measuring period selected by Premier in computing the Per Share Value, but substituting the date of receipt of such additional Future License Fees for the date of the "Closing" in such definition. (iv) In no event shall Premier be obligated to issue Premier Common Stock under this Section 2.2(c) if the total number of shares so issuable, when taken together with all other Premier Common Stock issued in connection with the Merger, shall exceed the maximum number of shares issuable in the Merger without the approval of the Merger by Premier shareholders in accordance with the California Corporations Code (the "MAXIMUM AMOUNT"); provided, however, that in the event the number of shares of Premier Common Stock issuable hereunder exceeds the Maximum Amount, Premier shall have the option of delivering, in lieu of the shares that would be in excess of the Maximum Amount, either cash, Premier Class AA Options or Premier Class BB Options, such that the total amount of consideration paid by Premier hereunder is equal to the amount required to be paid under Section 2.2(c)(ii) above. -11- (v) If any part of the Future License Fees with respect to which the Contingent Consideration has been calculated is not paid when due by the party obligated to pay such amounts, then the Contingent Consideration shall be recalculated using the amount of Future License Fees actually received within the one-year period after the Closing Date and the Per Share Value and/or warrant prices specified in Section 2.2(c)(iii) used to calculate the number of shares or options issued in the Contingent Consideration (the "ORIGINAL VALUES"), and the excess of the amount of Contingent Consideration actually paid or delivered over the amount of Contingent Consideration as recalculated shall be reimbursed to Premier out of the Escrow Shares (using the Original Values). Section 2.3 shall govern the reallocation of the Merger Securities among the holders of Interests in EyeSys, in the event that Merger Securities shall be returned to Premier out of the Escrow pursuant to this Section 2.2(c)(v). (d) The conversion of the EyeSys Notes and exchange of Merger Securities for Nonincluded Costs (other than Stay Bonuses) shall be effected at the Closing. The amount and type of securities into which the Interests in EyeSys (other than the EyeSys Notes) shall be converted hereunder shall be calculated immediately after the Contingency Termination Date, when the total amount of the Contingent Consideration is known. Accordingly, within 3 business days after the Contingency Termination Date, the EyeSys Representative selected pursuant to Section 9.13 shall notify Premier of the type of securities EyeSys has elected to issue under Section 2.2(c)(i), and shall calculate the total amount and type of the securities issuable hereunder and shall notify Premier in writing of such calculation. Premier shall have 3 business days from the receipt of such notice to review the calculations contained therein, and unless Premier gives the EyeSys Representative notice in writing within such 3 day period of Premier's disapproval of such calculation, it shall be deemed final, absent manifest error. If Premier disapproves such calculation, it shall provide the EyeSys Representative with written notice of the reasons for such disapproval. The parties shall thereafter confer in a good faith effort to resolve such dispute. If such dispute cannot be resolved within two weeks after the date of Premier's notice of disapproval, the matter shall be submitted to binding arbitration in accordance with the procedures set forth in the Escrow Agreement. After the allocation of the Merger Securities has been agreed upon, or determined according to such arbitration procedures, Premier shall promptly forward certificates representing the Merger Securities, in accordance with such allocation. (e) For purposes of this Section 2.2(e) only, the Premier Options included in the Shareholder Consideration shall be deemed to have a value of $3.00 per option. Premier shall issue to the holders of all then-outstanding EyeSys Options and EyeSys Common Warrants, and to the persons entitled to the Stay Bonuses, an aggregate of 165,000 Premier Options, as follows: (i) The value of outstanding and unexercised EyeSys Options shall be equal to the value of the EyeSys Common Stock issuable upon exercise thereof (using the Per Share Value of the Premier Common Stock into which such EyeSys Common Stock would be converted in this Merger), less the exercise price of such options. Each EyeSys Option shall be exchanged for that number of Premier Options as is equal to the value determined under the foregoing sentence, divided by $3.00. In the event that the Contingent Consideration is payable hereunder and there are no further Premier Options issuable in exchange for the full value of an Eyesys Option, determined in accordance with the second -12- preceding sentence, then the holder thereof shall be entitled to receive the balance of such value in Merger Securities. (ii) If any Premier Options remain after EyeSys Options are exchanged under Section 2.2(e)(i) above, the remaining Premier Options shall then be issued in exchange for outstanding EyeSys Common Warrants. Each outstanding and unexercised EyeSys Common Warrant shall be exchanged for that number of Premier Options as is equal to the value of the EyeSys Common Stock issuable upon the "net exercise" thereof (using the Per Share Value of the Premier Common Stock into which such EyeSys Common Stock would be converted in this Merger), divided by $3.00. In the event that the Contingent Consideration is payable hereunder and there are no further Premier Options issuable in exchange for the full value of an EyeSys Common Warrant, determined in accordance with the second preceding sentence, then the holder thereof shall be entitled to receive the balance of such value in Merger Securities. (iii) If any Premier Options remain after the application of sections 2.2(e)(i) and 2.2(e)(ii) above, the remaining Premier Options shall be issued to the persons entitled to the holders of the Stay Bonuses, in satisfaction of such Stay Bonuses, at the rate of $3.00 of Stay Bonus forgiven for each Premier Option so issued. EyeSys shall determine which persons shall receive Premier Options under this Section 2.2(e)(iii). (iv) EyeSys shall make arrangements for agreements with the holders of the EyeSys Options and EyeSys Common Warrants and the persons entitled to the Stay Bonuses to exchange such securities or claims for the Premier Options in accordance with this Section 2.2(e), and for the termination of any EyeSys Option or EyeSys Common Warrant, or payment of any Stay Bonus, that is not exchanged or paid as set forth above. Premier will issue the Premier Options within three (3) business days after the determination of the allocation of the Merger Securities as set forth in Section 2.2(d). (f) Notwithstanding anything herein, with respect to each holder of Interests in EyeSys, if the aggregate number of shares of Premier Common Stock collectively issuable to such a holder for conversion of all of such holder's EyeSys Common Stock, Preferred Stock and EyeSys Notes pursuant to Section 2.2(b) includes a fractional share, such fractional share shall be rounded to the nearest whole number. The aggregate number of shares of Premier Common Stock purchasable under Premier Options issued in exchange for EyeSys Options and EysSys Common Warrants shall be rounded to the nearest whole number and the aggregate exercise price (but not the exercise price per share thereof) shall be adjusted accordingly. To the extent that any of the holders of Interests in EyeSys have presently outstanding rights to purchase shares of EyeSys capital stock that expire in whole or in part unexercised, the exchange ratios set forth above with respect to the exchange of Interests in EyeSys into shares of Premier Common Stock or Premier Options shall not be adjusted after the Effective Time of the Merger. All shares of EyeSys Common Stock or EyeSys Preferred Stock that are owned by EyeSys shall be canceled, and no securities of Premier or other consideration shall be delivered in exchange therefor. (g) At the Effective Time, by virtue of the Merger and without any action on the part of any shareholder of PAI, each issued and outstanding share of capital stock -13- of PAI shall continue to be issued and shall be converted into one share of Common Stock of EyeSys, as the surviving corporation in the Merger. Each stock certificate of PAI evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of EyeSys, as the surviving corporation in the Merger. 2.3 ESCROW. (a) Twenty percent of all securities otherwise issuable in respect of EyeSys Common Stock, Preferred Stock and the EyeSys Notes pursuant to Sections 2.2(b) (collectively, the "ESCROW SHARES") shall be deducted from the Merger Shares on a pro rata basis among the holders of EyeSys Common Stock, Preferred Stock and the EyeSys Notes and placed in an escrow for a one (1)-year period as the source of payment for the indemnification obligations of EyeSys, pursuant to Article 7 of this Agreement and the Escrow Agreement. (b) In addition to the shares described in Section 2.3(a) above, there shall be deposited into the Escrow that number of shares of Premier Common Stock (the "ESCROWED DISSENTING SHARES") equal to the number of shares that would be issuable to any EyeSys stockholders who have perfected their Appraisal Rights at the Closing Date in accordance with Delaware law. To the extent that the Principal Shareholder sells shares of Premier Common Stock under Section 5.22, the Escrowed Dissenting Shares so deposited in the Escrow shall be immediately released to the Principal Shareholder, in an amount equal to the amounts of Premier Common Stock sold by it, and shall be subject to the Lock-Up Agreement executed by the Principal Shareholder. At such time as the claims of dissenting shareholders have been paid, all of the Escrowed Dissenting Shares that have not been released to the Principal Shareholder shall be returned to Premier. The Interests in Eyesys held by the Principal Shareholder shall be deemed converted, upon consummation of the Merger, into the right to receive that number of the Escrowed Dissenting Shares required to be delivered under this Section 2.3(b). (c) Upon the distribution out of the Escrow of any remaining securities to the holders of Interests in EyeSys, such securities shall be distributed to such holders in such amounts as would provide such holders with that amount of the Merger Securities that they would have received under Section 2.2(b) had the aggregate amount of Merger Securities originally issued been only the total amount of Merger Securities outstanding after any reimbursement to Premier of Merger Securities required to be made under this Agreement. 2.4 THE CLOSING. Subject to termination of this Agreement as provided in Article 8 below, the closing of the Merger shall take place at the offices of Rutan & Tucker, 611 Anton Boulevard, Suite 1400, Costa Mesa, California 92626, at 10:00 a.m. on the business day that is three (3) business days after the Merger has been approved by the EyeSys shareholders, or such other place, time and date as Premier, PAI and EyeSys may mutually select (the "CLOSING"). 2.5 EFFECTIVE TIME. Upon the complete satisfaction or satisfactory waiver of all conditions set forth in Article 6 of this Agreement, the Certificate of Merger shall be executed and filed as set forth herein. Simultaneously with the Closing, the Certificate of Merger shall be submitted for filing in the office of the Secretary of State for the State of -14- Delaware. The Merger shall become effective immediately upon the filing of the Certificate of Merger in the office of the Secretary of State for the State of Delaware (the "EFFECTIVE TIME"). 2.6 REGISTRATION RIGHTS. (a) The Merger Shares, the Premier Options, the Premier Class AA Options, the Premier Class BB Options, the securities issuable upon exercise of any of such options and the Cowen Shares shall be registered, pursuant to the Registration Statement to be filed with the Securities and Exchange Commission. EyeSys shall furnish its shareholders with a Proxy Statement/Prospectus for a special meeting of the shareholders of such company, to be held on or about June 15, 1997, or as soon thereafter as is practicable. (b) EyeSys shall provide Premier with such audited financial statements and other information concerning EyeSys (including updated financial information, if required by applicable securities laws) as may be required in order to accurately prepare the Registration Statement, and Premier shall have no obligation to file the Registration Statement until such information has been provided. 2.7 RESTRICTIONS ON SECURITIES. The Premier Common Stock, Premier Class AA Options, Premier Class BB Options, and Premier Options issued to certain holders of Interests in EyeSys shall be subject to the following agreements: (a) the Lock-Up Agreement, executed by the EyeSys stockholders listed on Schedule 2.7 (the "EYESYS STOCKHOLDERS") in the forms attached hereto as EXHIBIT C-1 (for holders of 5% or more of the EyeSys Shares, on an as-converted basis) or EXHIBIT C-2 (for holders of less than 5% of the EyeSys Shares, on an as-converted basis) (collectively, the "EYESYS LOCK-UP AGREEMENTS"); and (b) the Escrow Agreement. 2.8 SURRENDER AND EXCHANGE OF OUTSTANDING CERTIFICATES, PREMIER WARRANTS FOR EYESYS WARRANTS AND PREMIER OPTIONS FOR EYESYS OPTIONS; STATUS OF OUTSTANDING CERTIFICATES. The conversion of the EyeSys Notes, the EyeSys Common Stock and Preferred Stock into the right to receive Merger Shares and additional securities under Section 2.2(d), as provided for by this Agreement, shall occur automatically at the Effective Time without further action by the holders thereof. Until surrendered, each certificate that prior to the Effective Time represented shares of EyeSys Common Stock and Preferred Stock, as well as each EyeSys Note, will be deemed to evidence the right to receive the number of shares of Premier Common Stock or additional securities into which such EyeSys Common Stock, Preferred Stock or EyeSys Note have been converted. Premier shall, within ten (10) business days after the Effective Time, use reasonable efforts to notify each holder of a certificate or certificates theretofore representing a share or shares of EyeSys Common Stock, Preferred Stock and EyeSys Notes to surrender all of such holder's certificates or EyeSys Notes, as the case may be, to Premier; and upon such surrender such holder shall be entitled to receive in exchange a certificate or certificates representing the Premier Common Stock into which such shares or EyeSys Notes have been converted. -15- 2.9 APPRAISAL RIGHTS. Holders of EyeSys Common Stock or Preferred Stock who have complied with all requirements for perfecting the appraisal rights as set forth in the Delaware General Corporation Law shall be entitled to their rights under such laws. EyeSys shall give Premier prompt written notice of any written demands for appraisal, withdrawals of demands for appraisal and any other instrument in respect thereof received by EyeSys. 2.10 REORGANIZATION. The parties intend to adopt the Agreement as a plan of reorganization and to consummate the Merger in accordance with Section 368(a) of the Code. To the best of its knowledge, EyeSys believes that (a) the fair market value of the Merger Shares and other consideration received by each EyeSys shareholder from Premier in respect of the Merger is approximately equal to the fair market value of the Interests in EyeSys surrendered in the exchange, and (b) that the fair market value of the assets of EyeSys after the Effective Time will equal or exceed the sum of the liabilities to which the transferred assets are subject. 2.11 ARTICLES AND CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS OF PREMIER AND THE SURVIVING CORPORATION. (a) The Articles of Incorporation of Premier as in effect as of the date of this Agreement shall be the Articles of Incorporation of Premier after the Merger, unless and until thereafter amended. The Certificate of Incorporation of EyeSys, modified as indicated in the Certificate of Merger, shall be the Certificate of Incorporation of EyeSys as the surviving corporation after the Merger, unless and until thereafter amended. (b) The Bylaws of Premier as in effect immediately prior to the Effective Time shall be the Bylaws of Premier after the Merger, unless and until thereafter amended. The Bylaws of PAI in effect immediately prior to the Merger shall be the Bylaws of EyeSys as the surviving corporation after the Merger, unless and until thereafter amended. (c) The directors and officers of Premier immediately following the Effective Time of the Merger shall be the same as the directors and officers of Premier immediately prior to the Merger, until their successors are elected or appointed and qualified, except as set forth in Section 5.15. (d) The officers of EyeSys as the surviving corporation immediately following the Effective Time of the Merger shall be as follows until their successors are elected or appointed and qualified: Rom Rao President and Director Michael Hiebert Secretary and Chief Financial Officer The directors of EyeSys as the surviving corporation immediately following the Effective Time shall be those persons specified by Premier at the Closing. -16- ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF EYESYS Except as set forth in the EyeSys Letter, which disclosures shall be deemed representations and warranties hereunder, EyeSys represents and warrants to Premier and PAI as follows: 3.1 ORGANIZATION AND STANDING. (a) EyeSys is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to own, operate and lease its properties and carry on its business as now conducted, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect. (b) EyeSys has delivered to Premier and PAI complete and accurate copies of its current Certificate of Incorporation and Bylaws, and minutes of all of its directors' and shareholders' meetings. EyeSys' stock books provided to Premier and PAI are complete and accurate as of the date hereof 3.2 CAPITALIZATION. (a) EyeSys' current outstanding capitalization (common stock, preferred stock, warrants and options and any other issued or granted security) is as set forth in the EyeSys Letter. The EyeSys Letter accurately describes the vesting schedules associated with EyeSys Options and states the number of shares of EyeSys Common Stock which may be acquired pursuant to unvested EyeSys Options. EyeSys has advised Premier in writing of the residence of any holder of an Interest in EyeSys if such residence is outside of the United States. EyeSys does not have in effect any stock appreciation rights plan and no stock appreciation rights are currently outstanding. (b) Other than as set forth in the EyeSys Letter, EyeSys does not have outstanding any preemptive or subscription rights, options, warrants, rights to convert, capital stock equivalents or other rights to purchase or otherwise acquire any of EyeSys' capital stock or other securities. (c) All of the issued and outstanding shares of EyeSys Common Stock and EyeSys Preferred Stock have been duly authorized and validly issued and are fully paid and non-assessable, and such common and preferred stock has been issued in full compliance with all applicable federal and state securities laws. All of EyeSys' incentive stock options have been issued in compliance with all laws, rules and regulations necessary to preserve such incentive stock option treatment. All EyeSys Options have been issued in accordance with EyeSys' current stock option plan. (d) Except for any restrictions imposed by applicable state and federal securities laws, and except as set forth in the EyeSys Letter, there is no right of first refusal, -17- co-sale right, right of participation, right of first offer, option or other restriction on transfer applicable to any shares of EyeSys Common or Preferred Stock. (e) Except as set forth in the EyeSys Letter, (i) none of the holders of EyeSys Option or EyeSys Warrants has registration rights, and (ii) EyeSys is not and will not be under any obligation to register under the Securities Act any shares of EyeSys Common or Preferred Stock or any other of its securities that might be issued in the future if the Merger were not consummated. (f) Except as set forth in the EyeSys Letter, EyeSys is neither a party nor subject to any agreement or understanding, and, to EyeSys' knowledge, there is no agreement or understanding between or among any persons that affects or relates to the voting or giving of written consent with respect to any security. (g) Except as set forth in the EyeSys Letter, there have not been and nor are there outstanding any adjustments made or required to be made to the conversion prices of the Preferred Stock from those set forth in EyeSys' Restated Certificate of Incorporation (the "EYESYS CERTIFICATE OF INCORPORATION"). The number of Merger Securities into which each share of EyeSys Common Stock, Preferred Stock and the EyeSys Notes convert pursuant to Section 2.2 of this Agreement is consistent with that which the holders of the respective Interests in EyeSys are entitled to under the amendments to the EyeSys Notes and the First Amendment to the Restated Certificate of Incorporation of EyeSys. Upon obtaining the approvals and consents described in Section 2. 1 (a) of this Agreement, (i) the EyeSys Notes shall have been duly amended and such amended EyeSys Notes shall be the legal, valid and binding obligation of EyeSys and the holders of the EyeSys Notes, and (ii) the First Amendment to the Restated Certificate of Incorporation of EyeSys shall have been duly adopted in accordance with Delaware Law upon the filing with the Secretary of State for the State of Delaware. 3.3 SUBSIDIARIES. EyeSys neither owns nor controls, directly or indirectly, any corporation, partnership, business, trust or other entity. 3.4 AUTHORITY, APPROVAL AND ENFORCEABILITY. (a) Subject to obtaining the approval of the holders of EyeSys Common Stock, Preferred Stock and the holders of the EyeSys Notes required pursuant to Section 2.1(a), EyeSys has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and all corporate action on its part necessary for such execution, delivery and performance has been duly taken. (b) Subject to obtaining all necessary consents, the execution and delivery by it of this Agreement do not, and the performance and consummation of the transactions contemplated by this Agreement shall not, result in any conflict with, breach or violation of or default, termination or forfeiture under (or upon the failure to give notice or the lapse of time, or both, result in any conflict with, breach or violation of or default, termination or forfeiture under) any terms or provisions of the EyeSys Certificate of Incorporation, the First Amendment to the Restated Certificate of Incorporation of EyeSys or its Bylaws, or any statute, rule, regulation, judicial, governmental, regulatory or administrative decree, order or judgment, or -18- any agreement, lease, license, permit or other instrument to which it is a party or to which any of its assets is subject, the breach, violation, default, termination or forfeiture of which could or would result in a Material Adverse Effect. (c) No consent, approval, authorization, order, registration, qualification or filing of or with any court or any regulatory authority or any other governmental or administrative body is required on its part for the consummation by it of the transactions contemplated by this Agreement, except the filing of the First Amendment to the Restated Certificate of Incorporation of EyeSys and the Certificate of Merger in the office of the Secretary of State of the State of Delaware. (d) Subject to Premier, PAI and EyeSys obtaining the approvals identified in Section 2.1, this Agreement is the legal, valid and binding obligation of EyeSys, enforceable against EyeSys in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to the availability of equitable remedies. 3.5 FINANCIAL STATEMENTS. (a) Except as set forth in the EyeSys Letter, EyeSys has delivered to Premier and PAI complete copies of its consolidated balance sheets as at December 31 for calendar years 1991 through 1995 and the related statements of operations, shareholders' equity and cash flows for the calendar years 1990 through 1995 and the notes thereto, accompanied by the auditors' report containing the unqualified opinion of its independent certified public accountants. Prior to the Closing, EyeSys shall deliver to Premier and PAI a complete copy of its consolidated balance sheets as at December 31, 1996, and the related statements of operations, shareholders equity and cash flows for the calendar year 1996 and the notes thereto, accompanied by the auditor's report containing the opinion of its independent certified public accountants, containing a "going concern" qualification (the "1996 FINANCIALS"). The financial statements described above are referred to herein, collectively as the "AUDITED FINANCIALS." EyeSys' Audited Financials are (or, with respect to the 1996 Financials, will be) complete and correct in all material respects and present fairly its consolidated financial position as of those dates and the results of its operations and cash flows for the years then ended, in conformity with GAAP applied on a consistent basis. (b) EyeSys has delivered to Premier and PAI an unaudited consolidated balance sheet as of December 31, 1996 and the related unaudited statements of operations, shareholders' equity and cash flows for the twelve (12) months then ended (the "INTERIM FINANCIALS"). EyeSys' Interim Financials are complete and correct in all material respects (notwithstanding any annotations in the EyeSys Letter schedule of accounts receivable) and present fairly its financial condition as of December 31, 1996 and the results of its operations and cash flows for the twelve (12) months then ended, in conformity with GAAP applied on a basis consistent with its Audited Financials (except for the absence of notes thereto and subject to normal year-end audit adjustments, which are not material). The Audited Financials and the Interim Financials are hereinafter collectively referred to as the "EYESYS FINANCIALS." -19- (c) There are no debts, liabilities or claims against EyeSys as of the dates of the EyeSys Financials that are not currently reflected in such EyeSys Financials, contingent or otherwise, which are or would be of a nature required to be reflected in a balance sheet prepared in accordance with GAAP. All deferred taxes of EyeSys are properly accounted for in the EyeSys Financials, in accordance with GAAP. EyeSys' revenue recognition policies with respect to the EyeSys Financials have been made in accordance with GAAP. All of EyeSys' general ledgers, books and records are located at EyeSys' principal place of business. EyeSys does not have any of its records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) that (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of EyeSys. (d) Subject to any reserves set forth in the EyeSys Financials, all of the accounts receivable and notes receivable owing to EyeSys, as of the date hereof, constitute and as of the Effective Time will constitute, valid and enforceable claims arising from bona fide transactions in the ordinary course of business, and there are no known or asserted claims, refusals to pay, or other rights of set-off against any thereof. Except as set forth in the EyeSys Letter, there is (i) no account debtor nor note debtor delinquent in its payment by more than 60 days, (ii) no account debtor nor note debtor that has refused (or, to the best knowledge of EyeSys, threatened to refuse) to pay its currently outstanding obligations to EyeSys for any reason, (iii) to the best knowledge of EyeSys, no account debtor nor note debtor that is insolvent or bankrupt, and (iv) no account receivable nor note receivable pledged to any third party by EyeSys. (e) Except for any Transaction Costs, all accounts payable and notes payable by EyeSys to third parties as of the date hereof arose, and as of the Closing will have arisen, in the ordinary course of business, and, there is no such account payable nor note payable delinquent in its payment, except as set forth in the EyeSys Letter, or any update thereto prior to the Closing. 3.6 MATERIAL CHANGES. Since December 31, 1996, except as set forth in the EyeSys Letter, there has not been: (a) any material change in its assets, liabilities, financial condition, or operating results from that reflected in the Financials, except changes in the ordinary course of business that have not been, in the aggregate, material; nor any damage, destruction or loss, whether or not covered by insurance, materially adversely affecting its business, properties, prospects, or financial condition (as such business is presently conducted and as it is proposed to be conducted); (b) any waiver or compromise by it of a valuable right or of a debt owed to it; nor any satisfaction or discharge of any lien, claim, or encumbrance or payment of any obligation by it, except in the ordinary course of business and that is not material to its business, properties, prospects, or financial condition (as such business is presently conducted and as it is proposed to be conducted); -20- (c) any material change to a material contract or material arrangement by which it or any of its material assets is bound or subject; any material change in any compensation arrangement or agreement with any employee, consultant, officer, director or shareholder; any sale, assignment, or transfer of any patents, trademarks, copyrights, trade secrets, or other intangible assets; nor notification that there has been a loss of or material order or contract cancellation by any of its customers; (d) any resignation or termination of employment of any of its key officers or employees; and EyeSys, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer or employee; (e) any mortgage, pledge, transfer of a security interest in, or lien created by it, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; any loans or guarantees made by it to or for the benefit of its employees, officers, or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; nor any declaration, setting aside or payment or other distribution in respect of any of its capital stock, nor any direct or indirect redemption, purchase, or other acquisition of any of such stock by it; (f) any other event or condition of any character that would result in a Material Adverse Effect; nor (other than in the ordinary course of business) any agreement or commitment by it to do any of the things described in this Section 3.6. 3.7 RETURNS. EyeSys has not had any of its products returned by a purchaser or user thereof other than for minor, nonrecurring warranty problems. Except as set forth in the EyeSys Letter, EyeSys is not aware of any pending warranty claims. The reserves reflected on the EyeSys Financials for future warranty claims are adequate to provide for future warranty claims on products sold by EyeSys through the date of the EyeSys Financials. 3.8 PROPERTIES AND INVENTORIES. (a) EyeSys has good and marketable title to and the right to use all of the assets used in its operations or necessary for the conduct of its business, as reflected in the EyeSys Financials, free and clear of any mortgages, pledges, security interests, licenses, encumbrances, restrictions or adverse claims, except as disclosed in the notes to its Financials, except for the lien of taxes not yet due and payable, and except as set forth in the EyeSys Letter. All of the physical assets reflected on its balance sheets included in the EyeSys Financials are valued therein at the lower of fair market value or the amount computed under other EyeSys financial reporting policies (and, for such purposes, taking into account any obsolescence of such assets), are in the possession of EyeSys, and will be in the possession of EyeSys at the Closing (except for inventory sold in the ordinary course of business). All of such physical assets are in good operating condition, normal wear and tear excepted. (b) Since September 30, 1996, there has not occurred any transfer of title other than in the ordinary course of business, any abandonment, any pilferage or any other material loss with respect to, any of its property, plant or equipment. -21- (c) Included in the EyeSys Letter is a true and correct list of all of the physical assets (including fixed assets) owned by EyeSys having a net book value in excess of $5,000. EyeSys does not own any real property. All improvements on leased property used in the business of EyeSys and the present use thereof are in accordance with all applicable laws. The net book value of any fixed assets owned by EyeSys has not been written up nor down, other than pursuant to depreciation or amortization expense in accordance with its historical practice. (d) The EyeSys Letter lists all real property leases to which EyeSys is a party. Assuming due authorization, execution and delivery by the other parties thereto, such leases are legal, valid, binding and enforceable in accordance with their respective terms (except as limited by bankruptcy, insolvency, reorganization or other laws of general application affecting creditors' rights generally). EyeSys has a valid and subsisting leasehold interest in its leased real property, free and clear of all material encumbrances. Neither EyeSys nor, to the knowledge of EyeSys, any other party to any of such leases, is in material default under any of such leases, or has performed any act or omitted to perform any act which act or omission, with notice or lapse of time or both, will become a material default thereunder. 3.9 INSURANCE. EyeSys maintains policies of insurance covering its assets, properties, business and liabilities in types and amounts customary for similarly sized companies engaged in similar businesses. EyeSys is in compliance with each of such policies, such that none of the coverage provided under such policies has been invalidated. EyeSys has fully paid all premiums and other payments which have become due to its insurers. The EyeSys Letter contains a complete and accurate list of all insurance policies, bonds and surety instruments. To the knowledge of EyeSys, there is no threat by any of the insurers to terminate or materially increase the premiums payable under any of such insurance policies due to the activities or loss experience of EyeSys. 3.10 PURCHASE, SALE AND OTHER AGREEMENTS. (a) Except as described in the EyeSys Letter, EyeSys is not a party to nor subject to any: (i) agreement for the purchase of inventory, supplies, or equipment, other real or personal property, or the procurement of services, except individual purchase orders or aggregate purchase orders to a single vendor involving payments of less than $10,000 or as have been entered into in the ordinary course of the business of EyeSys; (ii) lease or ownership of equipment, machinery or other personal property; (iii) agreement for the sale or lease of products or furnishing of its services, except individual purchase orders or aggregate purchase orders from a single customer involving payments of less than $10,000, or as have been entered into in the ordinary course of the business of EyeSys; -22- (iv) joint venture, partnership or other contract or arrangement involving the sharing of profits; (v) agreement relating to the purchase or acquisition, by merger or otherwise, of a significant portion of its business, assets or securities by any other person or of any other person by it other than as contemplated herein; (vi) agreement containing a covenant or covenants which purport. to limit its ability or right to engage in any lawful business activity or compete with any person or entity; (vii) agreement presently in effect pursuant to which it has appointed any organization or person to act as its distributor or sales agent or pursuant to which it has been appointed a distributor or sales agent by any third party; (viii) agreement with any of its officers, directors or affiliates, other than stock option or stock purchase plans or agreements or proprietary information or consulting or independent contractor agreements; (ix) agreement for the license of any patent, copyright, trade secret or other proprietary right or indemnification by it with respect to infringements of proprietary rights, except employee or consultant proprietary information agreements and except for those end-user licenses sold in the ordinary course of business by EyeSys in connection with the sale of its products; (x) agreements involving payments to or obligations of it, not otherwise described in this Section 3.10, in excess of $10,000 (other than agreements for the sale of inventory in the ordinary course of business); or (xi) agreements of indebtedness, capital equipment leases or guarantees of the obligations of others. (b) To the best of EyeSys' knowledge, except as set forth in the EyeSys Letter, no party to any such contract, agreement or arrangement intends to cancel, withdraw, modify or amend such agreement or arrangement or return a product for reimbursement or discontinue any provision of agreed-upon services. (c) Except as described in the EyeSys Letter, EyeSys has performed all material obligations required to be performed by it on or prior to the date hereof under each contract, obligation, commitment, agreement, undertaking, arrangement or lease referred to in this Agreement (including, without limitation, the Loan Agreement) or the EyeSys Letter, and it is not in default, breach nor violation thereunder, or under any other agreements to which it is a party, except for such defaults, breaches, or violations under such instruments or obligations that would not have a Material Adverse Effect. -23- 3.11 INTELLECTUAL PROPERTY RIGHTS. (a) EyeSys has complete and undisputed title and ownership and the right to utilize all patents, trademarks, license rights, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes (collectively, "INTELLECTUAL PROPERTY") necessary for or used in its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. All of EyeSys' patents, trademarks, license rights, service marks, trade names and copyrights, whether or not registered, are identified in the EyeSys Letter. Except as disclosed in the EyeSys Letter, there are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is it bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other person or entity. It has not received any communications nor is it aware of any entity alleging that it has violated or, by conducting its business as proposed, would violate any Intellectual Property of any other person or entity. It is not aware that any of its employees or consultants is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of EyeSys or that would conflict with its business as proposed to be conducted. EyeSys does not believe it is or will be necessary to utilize any inventions of any of its employees or consultants (or persons it currently intends to hire as service providers) made prior to their employment by it. The EyeSys Letter sets forth all patents, patent applications, trademarks (registered or unregistered), license agreements, independent contractor or consulting agreements and any other Intellectual Property that requires a consent or waiver to consummate the transactions contemplated in this Agreement. All of EyeSys' license agreements with respect to its Intellectual Property are in writing and evidence legitimate ownership of such rights in EyeSys. All royalty obligations of EyeSys are listed in the EyeSys Letter. No claims for royalties have been, are or will be asserted against EyeSys. No invention that is shown as being owned by any individual service provider of EyeSys is necessary for the conduct of EyeSys' business. (b) EyeSys is not making use of any confidential information of third parties nor any confidential information in which any of its present or, to its actual knowledge, past employees or other service providers, has claimed a proprietary interest; and EyeSys is not actually aware of any facts that would give rise to such a claim. (c) Without limiting the generality of the foregoing representations, except as described in the EyeSys Letter, EyeSys expressly represents and warrants that: (i) EyeSys has satisfied all obligations pursuant to any and all consulting agreements; (ii) EyeSys has no present or future liability under any agreement to (x) provide indemnification for infringement of any third-party rights or otherwise; or (y) provide updates, enhancements, modifications, bug fixes, support, maintenance or the like of any products, or technology; -24- (iii) Except as disclosed in the EyeSys Letter, as of the date of this Agreement, EyeSys has not entered into nor negotiated with others to enter into any consulting agreements, software development agreements, license agreements or similar agreements; (iv) EyeSys has retained all rights, title and interest (including, without limitation, rights to derivatives, modifications, updates and enhancements) to the components necessary for its business as now conducted and as proposed to be conducted in the future; (v) EyeSys knows of no facts or circumstances which would materially and adversely affect the validity or enforceability of any of its patents, trademarks, or copyrights; (vi) All fees and filings necessary to keep the patents, copyrights and trademarks of EyeSys in full force and effect, including without limitation, patent maintenance fees and annuity fees, have been duly and properly paid or executed; (vii) All applications of EyeSys for patents, trademark registrations and copyright registrations were properly filed in compliance with the applicable laws of the countries in which they were filed; (viii) All information known to EyeSys to be material to the patentability of the claims of EyeSys' U.S. patents and U.S. patent applicable was submitted to the United States Patent and Trademark Office in accordance with the duty of candor and good faith set forth in 37 C.F.R. Section 1.56; (ix) EyeSys has taken reasonable precautions to safeguard the confidentiality of its trade secrets; (x) All copyrightable material used in EyeSys products were either authored solely by employees of EyeSys within the scope or their employment or authored by nonemployees with the copyright rights assigned in writing to EyeSys; and (xi) The manufacturing, distribution, promotion and/or activities of EyeSys as its business is presently conducted or proposed to be conducted, does not violate any intellectual property rights, including without limitation patent rights, of any other person or entity. 3.12 EMPLOYEES AND EMPLOYEE BENEFIT PLANS. (a) Other than as set forth in the EyeSys Letter regarding employee benefit plans, programs or arrangements maintained or sponsored by EyeSys (such plans, the "EMPLOYEE PLANS"), neither EyeSys nor any entity or trade or business which together with EyeSys is treated as a single employer under Sections 414(b), (c), (m) or (o) of the Code (its "ERISA AFFILIATES") is a party to any pension, profit sharing, savings, retirement or other deferred compensation plan, any bonus (whether payable in cash or stock), stock option, stock -25- purchase or incentive program, or any group health plan (whether insured or self-funded), or any disability or group life insurance plan, severance or other employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), or to any collective bargaining agreement or other agreement, written or oral, with any trade or labor union, employees' association or similar organization. EyeSys is not a party to, nor has made any contribution to or otherwise incurred any obligation under, any "multiemployer plan" as defined in Section 3(37) of ERISA. With respect to each such Employee Plan, EyeSys has furnished to Premier and PAI or their counsel complete and accurate copies of the plan documents (including plan amendments currently under consideration, trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and any material employee communications), and all IRS Forms 5500 filed with respect to any Employee Plans. (b) With respect to each of the Employee Plans subject to ERISA as either an employee pension benefit plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(l) of ERISA, EyeSys has prepared in good faith and timely filed all requisite governmental reports, and has properly and timely posted or distributed all notices and reports to employees required to be filed, posted or distributed with respect to each such Employee Plan. (c) Each such Employee Plan has at all times been operated and administered in all material respects in accordance with its terms and all applicable laws, including but not limited to, ERISA and the Code. (d) Each Employee Plan that is intended to be qualified under Code Section 401(a) ("EYESYS PENSION PLAN") has received a favorable determination letter from the Internal Revenue Service that such Employee Plan is qualified under Code Section 401(a) and that the trust under such Employee Plan is exempt from tax under Code Section 501(a). EyeSys knows of no reasonable basis for the disqualification of any EyeSys Pension Plan from exemption under Section 401(a) of the Code. (e) Neither EyeSys nor any EyeSys Pension Plan, nor any fiduciary, trustee thereof nor, to the best knowledge of EyeSys, the administrator thereof or any party in interest (as defined in Section 3(14) of ERISA) or disqualified person (as defined in Section, 4975(e)(2) of the Code) with respect to such plan has engaged in any transaction which would subject EyeSys, the EyeSys Pension Plan, any trust created under such plan, or any trustee or administrator thereof, or any party dealing with such EyeSys Pension Plan or any such trust, to either civil liability or a civil penalty assessed pursuant to Section 409 or 502 of ERISA, or a tax imposed pursuant to Section 4975, 4976 or 4979 of the Code. EyeSys has no knowledge of any breach of fiduciary duties owed to EyeSys Pension Plan participants pursuant to the provisions of Part 4 of Title I of ERISA. (f) There are no pending claims by or on behalf of any of the EyeSys Employee Plans, by any employee or beneficiary covered under any such EyeSys Employee -26- Plan, or otherwise involving any such EyeSys Employee Plan (other than claims for benefits in the ordinary course). (g) No EyeSys Pension Plan is subject to Section 412 of the Code nor Title IV of ERISA. (h) There are no strikes or labor disputes pending or threatened by nor any attempts at union organization of any EyeSys employees. (i) The EyeSys Letter includes a full and complete list of all directors, officers and employees of EyeSys as of the date of this Agreement, specifying their names and job titles. The EyeSys Letter provides accurate information to Premier and PAI regarding the total amount of base salary, whether it is fixed or commission or a combination thereof with respect to each of the foregoing. Except as set forth in the EyeSys Letter, the employment of each of EyeSys' employees is "at will" employment, except as may be required to the contrary under applicable law. Except as set forth in the EyeSys Letter, EyeSys does not have any obligation (i) to provide any particular form or period of notice prior to termination, or (ii) to pay any of such employees any severance benefits in connection with their termination of employment or service. In addition, except as set forth in the EyeSys Letter, no severance pay will become due to any EyeSys employees under any EyeSys agreement, plan or program as a result of the Merger. EyeSys does not owe and has not accrued any bonuses or vacation pay or retirement benefits to employees or former employees, other than as set forth on the payroll records delivered by EyeSys to Premier and PAI prior to the Closing. (j) EyeSys has not violated any of the health care continuation coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") applicable to its employees prior to the Effective Time of the Merger. 3.13 ENVIRONMENTAL AND SAFETY LAWS. Except as described in the EyeSys Letter, there are no Hazardous Substances (as hereinafter defined) at any of the facilities owned or used by EyeSys. The EyeSys Letter describes the way in which EyeSys disposes of any Hazardous Substances used by it, including the names and locations of any offsite storage or disposal facilities used by EyeSys. EyeSys has not released, discharged nor disposed of Hazardous Substances on or under any of such facilities or on or under any premises previously occupied by EyeSys during the period in which such facilities have been owned or used by EyeSys. The facilities owned or used by EyeSys do not now contain, nor did such facilities or any premises previously occupied by EyeSys contain, any underground storage tanks for any Hazardous Substances. EyeSys has complied and is in compliance with all applicable local, state and federal environmental laws, regulations, ordinances and administrative and judicial orders relating to the generation, recycling, use, sale, storage, handling, transfer and disposal of any Hazardous Substances. EyeSys has not been alleged to be in violation of, nor been subject to any administrative, judicial or regulatory proceeding pursuant to, such laws or regulations either now or any time during the past twenty-four months. No Claims have been or are currently asserted against EyeSys nor, to EyeSys' knowledge, will be asserted against EyeSys after the Effective Time, based on EyeSys' acts or failures to act prior to the Effective Time with respect to Hazardous Substances. -27- 3.14 PROPRIETARY INFORMATION AND INVENTIONS AND CONFIDENTIALITY AGREEMENTS. Each employee, officer and director of EyeSys has executed a confidentiality agreement and all of the employees, officers and directors (not including non-employee directors) of EyeSys have executed a proprietary information and inventions agreement. Copies of such agreements have been provided to counsel to Premier and PAI. EyeSys is not aware that any of such persons is in violation thereof. 3.15 POWERS OF ATTORNEY. Except as set forth in the EyeSys Letter, no person holds a power of attorney from EyeSys. 3.16 COMPLIANCE WITH LAWS AND PERMITS; REGULATORY MATTERS. Except where the failure to so comply would not have a Material Adverse Effect, EyeSys has all valid and current permits, licenses, orders, authorizations, registrations, approvals and other analogous instruments (and each is in full force and effect) and EyeSys has made all filings and registrations and the like necessary or required by law to conduct its business as presently conducted. EyeSys has not received any governmental notice within two years of the date hereof of any violation by EyeSys of any such laws, rules, regulations or orders. Except where the failure to comply would not have a Material Adverse Effect, (a) EyeSys is not in default or noncompliance under any such permits, consents, or similar instruments, and (b) the business and operations of EyeSys are in compliance with all foreign, federal, state, local and county laws, ordinances, regulations, judgments, orders, decrees or rules of any court, arbitrator or governmental, regulatory or administrative agency or entity. Without limiting the generality of the foregoing, all of the products presently marketed by EyeSys have been approved or cleared to market pursuant to valid and subsisting Premarket Approval or Section 510(k) Clearances issued by the United States Food and Drug Administration ("FDA"). EyeSys has never conducted any clinical trials which have required Investigational Device Exemptions ("IDE's"). EyeSys is unaware of any medical complications arising in connection with or resulting from clinical trials conducted by EyeSys either directly or under its direction, or from the use of its products following FDA approval or clearance, except as set forth in the EyeSys Letter. No complaints have been received by EyeSys with respect to such procedures, and no Medical Device Reports have been filed by EyeSys or have been required to be filed. The design, manufacture and distribution of all of EyeSys' products has been conducted, and shall continue through the Closing Date to be conducted, in accordance with "good manufacturing practices" as required by the FDA. 3.17 ABSENCE OF LITIGATION. Except as disclosed in the EyeSys Letter, neither EyeSys nor, to the best of its knowledge, any of its officers or directors is engaged in, or has been threatened with, any litigation, arbitration, investigation or other proceeding relating to it, its employee benefit plans, property, business, assets, licenses, permits or goodwill, or against or affecting the Merger or the actions taken or contemplated in connection therewith, nor, to the best of its knowledge, is there any reasonable basis therefor. There is no action, suit, proceeding or investigation pending or threatened against EyeSys that questions the validity of this Agreement or the Agreement of Merger or the right of EyeSys to enter into this Agreement or the Agreement of Merger or to consummate the transactions contemplated hereby or thereby or which might result in any Material Adverse Effect. The foregoing includes actions pending or threatened (or any reasonable basis therefor known to it) involving any dispute with its consultants or the prior employment of any of its employees, their use in connection with its -28- business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. There is no action, suit, proceeding or investigation by EyeSys currently pending, nor which it intends to initiate. Neither EyeSys nor, to the best of its knowledge, any of its officers or directors is bound by any judgment, decree, injunction, ruling or order of any court, governmental, regulatory or administrative department, commission, agency or instrumentality, arbitrator or any other person which would have a Material Adverse Effect. 3.18 NO BROKERS. Except with respect to the fees payable to Cowen which are included in the Transactional Costs, EyeSys is not obligated for the payment of fees or expenses of any broker or finder in connection with the origin, negotiation or execution of this Agreement or the Agreement of Merger nor in connection with any transaction contemplated hereby or thereby. 3.19 THE REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS. The information supplied by EyeSys for inclusion in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact nor omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The information supplied by EyeSys for inclusion in the Proxy Statement/Prospectus to be sent to the holders of interests in EyeSys will not, on the date the Proxy Statement/Prospectus (or any amendment thereof or supplement thereto) is first mailed to holders of Interests in EyeSys, at the time of the EyeSys Stockholder Meeting, or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statement made therein not false or misleading. If at any time prior to the Effective Time any event relating to EyeSys or any of its respective affiliates, officers or directors should be discovered by EyeSys which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/ Prospectus, EyeSys shall promptly inform Premier and PAI. The Proxy Statement/Prospectus, including all financial statements of EyeSys required to be included therein, shall comply in all material respects as to form with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, EyeSys makes no representation or warranty with respect to any information supplied or required to be supplied by Premier or PAI which is contained in any of the foregoing documents. 3.20 TAXES. (a) DEFINITIONS. For purposes of this Agreement: (i) the term "TAXES" means (A) all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (B) any liability for payment of amounts described in clause (A) whether as a result of transferee liability, of being a member -29- of an affiliated, consolidated, combined or unitary group for any period, or otherwise through operation of law and (C) any liability for the payment of amounts described in clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax allocation agreement or any other expressed or implied agreement to indemnify any other person; and the term "TAX" means any one of the foregoing Taxes; and (ii) the term "RETURNS" means all returns, declarations, reports, statements and other documents required to be filed in respect of Taxes, and the term "RETURN" means any one of the foregoing Returns. (b) EyeSys has properly completed and filed on a timely basis all Returns required to be filed on or prior to the date of this Agreement. As of the time of filing, the foregoing Returns properly reflected the applicable facts then known to EyeSys regarding its income, business, assets, operations, activities, status or any other information required to be shown thereon. No extension of time within which to file any Return that has been required to be filed has failed to be requested and granted. EyeSys will properly complete and file on a timely basis all Returns required to be filed on or prior to the Closing. (c) With respect to all Taxes imposed upon EyeSys, or for which EyeSys is or was liable, whether to taxing authorities (as, for example, under law) or to other persons or entities (as, for example, under tax allocation agreements), with respect to all taxable periods or portions of periods ending on or before the date of Closing, EyeSys has fully complied with all applicable tax laws and agreements, and except as set forth in the EyeSys Letter, all such amounts required to be paid by EyeSys to taxing authorities, on or before the date of this Agreement, have been paid. EyeSys does not owe any taxes on compensation paid to any of its employees. (d) No issues have been raised (nor are currently pending) by any taxing authority in connection with any of the Returns. No extensions nor waivers of statutes of limitations with respect to the Returns have been given by or requested from EyeSys. Except to the extent indicated in the EyeSys Letter, all deficiencies asserted or assessments made as a result of any state or federal income tax examinations have been fully paid, or are fully reflected as a liability in the Financials of EyeSys, or are being contested and an adequate reserve therefor has been established and is fully reflected in the Financials of EyeSys. (e) Except as set forth in the EyeSys Letter, there are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of EyeSys. EyeSys is not a party to or bound by (nor will EyeSys become a party to or bound by) any tax indemnity, tax sharing or tax allocation agreement. EyeSys has never been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code. EyeSys has not filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state, local or foreign income Tax law) nor agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state, local or foreign income Tax law) apply to any disposition of any asset owned by it. (f) EyeSys has not elected to be treated as an S Corporation pursuant to Section 1362(a) of the Code. None of the assets of EyeSys is property that EyeSys is -30- required to treat as being owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Code. None of the assets of EyeSys directly or indirectly secures any debt the interest on which is tax-exempt under Section 103 (a) of the Code. None of the assets of EyeSys is "tax-exempt use property" within the meaning of Section 168(h) of the Code. (g) EyeSys has not made and has not agreed to make a deemed dividend election under Treas. Reg. Section 1.1502-32(f)(2) nor a consent dividend election under Section 565 of the Code. EyeSys has not agreed to make, nor is it required to make, any adjustment under Sections 481(a) or 263A of the Code or any comparable provision of any applicable state or foreign tax laws by reason of a change in accounting method or otherwise. EyeSys has not participated in (and has not agreed to participate in) an international boycott within the meaning of Section 999 of the Code. (h) EyeSys is not a party to any agreement, contract, arrangement or plan that has resulted or would result, whether separately or in the aggregate, in connection with the Merger, or with any change of control of EyeSys or any other transaction contemplated by this Agreement, in the payment of any "excess parachute payments" within the meaning of Section 28OG of the Code. To the best knowledge of EyeSys, except as set forth in the EyeSys Letter, no Shareholder of EyeSys is other than a United States person within the meaning of the Code. EyeSys does not have and has not had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country, and EyeSys has not engaged in a trade or business within any foreign country. (i) Except as set forth in the EyeSys Letter, EyeSys is not party to any joint venture, partnership, or other arrangement or contract which is treated as a partnership for federal income tax purposes. (j) The unpaid Taxes of EyeSys do not exceed any reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth or included in EyeSys' balance sheets as at December 31, 1995 and September 30, 1996, as adjusted for the passage of time through the Effective Time in good faith in accordance with the past custom and practice of EyeSys. No Tax liability of EyeSys has been incurred since December 31, 1995, other than in the ordinary course of business, and an adequate reserve on the Financials has been made for all Taxes since that date. (k) After the date of this Agreement, no material election with respect to Taxes shall be made by EyeSys without the prior written consent of Premier and PAI. (l) The liabilities of EyeSys to which the transferred assets of EyeSys are subject were incurred by EyeSys in the ordinary course of its business. (m) To the best knowledge of EyeSys, there is no plan or intention on the part of the shareholders of EyeSys to sell, exchange, or otherwise dispose of such number of the Merger Shares as would reduce the EyeSys shareholders' ownership of shares of Premier -31- Common Stock to a number of shares having a value, determined as of the Effective Time, of less than 50% of the value, determined as of the Effective Time, of all of the shares of EyeSys Common and Preferred Stock outstanding immediately prior to the Effective Time. For purposes of this representation, shares of EyeSys Common or Preferred Stock exchanged for cash or other property surrendered by dissenters, shall be treated as outstanding EyeSys Common or Preferred Stock at the Effective Time of the Merger. Moreover, shares of EyeSys Common or Preferred Stock and shares of Premier Common Stock held by EyeSys shareholders as of the date hereof and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. (n) EyeSys is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (o) At least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by EyeSys immediately prior to the Merger will be held by the surviving corporation immediately after the Merger. For the purpose of determining the percentage of EyeSys' net and gross assets held by the surviving corporation immediately following the Merger, the following assets will be treated as property held by EyeSys immediately prior to the Merger that is not held by the surviving corporation subsequent to the Merger: (i) assets disposed of by EyeSys prior to the Merger and in contemplation thereof (including, without limitation, any asset disposed of by EyeSys, other than in the ordinary course of business, pursuant to a plan or intent existing during the period ending on the Effective Time of the Merger and beginning with the commencement of negotiations (whether formal or informal) with Premier regarding the Merger); (ii) assets disposed of after the Merger pursuant to a binding obligation entered into by EyeSys before the Merger and in contemplation thereof, other than in the ordinary course of business; (iii) assets used by EyeSys to pay shareholders perfecting dissenters' rights or other expenses or liabilities incurred in connection with the Merger; and (iv) assets used to make distribution, redemption or other payments in respect of EyeSys capital stock or rights to acquire such stock (including payments treated as such for tax purposes) that are made in contemplation of the Merger or related thereto. (p) EyeSys has not sold, exchanged or discontinued any line or lines of business with a value representing in the aggregate more than 25% of the current fair market value of the total assets of EyeSys as of the Closing. 3.21 OTHER TAXES. (a) The hours worked by and payments made to EyeSys' employees have not been in violation of the Fair Labor Standards Act or any other applicable federal, foreign, state or local labor laws. (b) All payments due from EyeSys on account of employee health and welfare insurance have been paid or accrued as a liability on its balance sheets included in the EyeSys Financials. -32- (c) All severance and vacation payments which are or were due and payable by EyeSys under the terms of any agreement have been paid or accrued as a liability on its balance sheets included in the EyeSys Financials. 3.22 COMPLIANCE WITH INSTRUMENTS. EyeSys is not in violation of or conflict with, breach of or in default under (either with the giving of notice or the passage of time or both) any term or provision of the EyeSys Certificate of Incorporation or its Bylaws. 3.23 FOREIGN STATUS. EyeSys is not a foreign corporation, foreign partnership, foreign trust or foreign establishment (as each such term is defined in the Code). 3.24 CONSENTS AND APPROVALS. The EyeSys Letter lists all consents and approvals required for the execution and delivery of this Agreement by EyeSys and the consummation of the Merger by EyeSys, including those that are necessary because of the transactions contemplated by this Agreement or those which are necessary to avoid the loss of the rights to use EyeSys' Intellectual Property or other rights. 3.25 ACCOUNTS RECEIVABLE. The EyeSys Letter lists all accounts receivable, unbilled invoices and other debts due or recorded in the records of EyeSys, as of April 7, 1997. Notwithstanding any annotations in the EyeSys Letter schedule of accounts receivable, at least 95% of the amount of all accounts receivable, unbilled invoices and other debts due or recorded in the records and books of account of EyeSys as being due to EyeSys as at the date of this Agreement will be good, payable and collectible in full in the ordinary course of business within ninety (90) days after the Closing (or one hundred twenty (120) days, with respect to receivables, invoices and debts due from foreign (non-U.S.) payors), net of applicable reserves as recorded on EyeSys' books on the date hereof; no contest with respect to the amount or validity of any amount is pending; and none of such accounts receivable or other debts is or will at the Closing be subject to any counterclaim or set-off. The values at which accounts receivable are carried reflect the accounts receivable valuation policy of EyeSys which is consistent with GAAP applied on a consistent basis. 3.26 INVENTORY. The inventories shown on the Financials as of December 31, 1995 and September 30, 1996 or thereafter acquired by EyeSys, consisted of items of a quantity and quality usable or salable in the ordinary course of business. The inventories are valued at the lower of cost or market value, determined in accordance with generally accepted accounting principles consistently applied and on a basis which is consistent with the past practices of EyeSys. Since December 31, 1996, EyeSys has continued to replenish inventories in a normal and customary manner consistent with past practices. EyeSys has not received written or oral notice that it will experience in the foreseeable future any difficulty in obtaining, in the desired quantity and quality and at a reasonable price and upon reasonable terms and conditions, the raw materials, supplies or component products required for the manufacture, assembly or production of its products. Except as disclosed in the EyeSys Letter, EyeSys does not have any sole source suppliers and has been and is able to acquire component parts from multiple sources on a timely basis. The values at which inventories are carried reflect the inventory valuation policy of EyeSys which is consistent with its past practice and in accordance with GAAP applied on a consistent basis. -33- 3.27 NO UNDISCLOSED LIABILITIES. Except as set forth in the EyeSys Letter, there is no outstanding claim, liability or obligation of any nature, whether absolute, accrued, contingent or otherwise, other than: (a) the liabilities and obligations that are fully reflected, accrued or reserved against on the Financials for which the reserves are appropriate and reasonable; (b) liabilities incurred in the ordinary course of business since the date of the Financials, (c) Transactional Costs, or (d) contractual liabilities or obligations not required to be disclosed in the Financials prepared in accordance with GAAP. 3.28 RELATED PARTY TRANSACTIONS. Except as set forth in the EyeSys Letter, or otherwise reflected in the Capitalization Table included in the EyeSys Letter, no employee, officer or director of EyeSys or member of his or her immediate family is indebted to EyeSys, nor is EyeSys indebted (or committed to make loans or extend or guarantee credit) to any of them. Except as set forth in the EyeSys Letter, to the best of EyeSys' knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which EyeSys is affiliated or with which EyeSys has a business relationship, or any firm or corporation that competes with EyeSys, except that the employees, officers or directors of EyeSys and members of their immediate families may own stock in publicly traded companies that may compete with EyeSys. No member of the immediate family of any officer or director of EyeSys is directly interested in any material contract with EyeSys. 3.29 DISTRIBUTION. All of EyeSys' international distributors for its products are identified in the EyeSys Letter. EyeSys has entered into written distribution agreements with each of such distributors, copies of which have been delivered to Premier. All of such agreements are in full force and effect. To EyeSys' knowledge, no such distributor intends or expects to materially reduce the volume of purchases of EyeSys' products from the amounts purchased during the fiscal year ended December 31, 1996. When used in this Article 3, "KNOWLEDGE" means information actually known or which should have been known by any one of the directors of EyeSys or any of the following: Youssef Wakil, Kenneth Carbonari, David Harley, Michel Ulsas, David Liu or Henry Kuehn after inquiry by such persons of EyeSys personnel who report to them. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PREMIER AND PAI Except as set forth in Premier Letter, which disclosures shall be deemed representations and warranties hereunder, each of Premier and PAI represents and warrants to EyeSys as follows: 4.1 ORGANIZATION AND STANDING. (a) Each of Premier and PAI is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, has all requisite corporate power and authority to own, operate and lease its properties and carry on its business as now conducted, and is duly qualified to do business and is in good standing as a foreign -34- corporation in each jurisdiction in which the failure to so qualify could or would have a Material Adverse Effect. (b) Prior to Closing, each of Premier and PAI shall have delivered or made available to EyeSys complete and accurate copies of its current Certificates of Incorporation and Bylaws, as the case may be. 4.2 SUBSIDIARIES. Premier does not own or control, directly or indirectly, any corporation, partnership, business, trust or other entity, except Data.Site, LLC and PAI. 4.3 AUTHORITY, APPROVAL AND ENFORCEABILITY. (a) Subject to obtaining any required approvals of their respective stockholders, each of Premier and PAI has full corporate power and authority to execute, deliver and perform its obligations under this Agreement, and all corporate action on their respective parts necessary for such execution, delivery and performance has been duly taken. (b) Subject to obtaining all necessary consents, the execution and delivery by each of Premier and PAI, as the case may be, of this Agreement do not, and the performance and consummation of the transactions contemplated by this Agreement shall not, result in any conflict with, breach or violation of or default, termination or forfeiture under (or upon the failure to give notice or the lapse of time, or both, result in any conflict with, breach or violation of or default, termination or forfeiture under) any terms or provisions of its current Articles of Incorporation or Bylaws, as the case may be, or any statute, rule, regulation, judicial, governmental, regulatory or administrative decree, order or judgment, or any agreement, lease or other instrument to which either is a party or to which any of its assets is subject, the breach, violation, default, termination or forfeiture of which could or would result in a Material Adverse Effect. (c) No consent, approval, authorization, order, registration, qualification or filing of or with any court or any regulatory authority or any other governmental or administrative body is required on its part for the consummation by each of Premier and PAI, as the case may be, of the transactions contemplated by this Agreement, except the filing of the First Amendment to the Restated Certificate of Incorporation of EyeSys, and the Certificate of Merger in the offices of the Secretaries of State of the States of Delaware and California. (d) Subject to Premier, PAI and EyeSys obtaining the approvals identified in Section 2.1 of this Agreement, this Agreement is the legal, valid and binding obligation of Premier and PAI, respectively, and enforceable against Premier and PAI in accordance with the respective terms hereof and thereof, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and subject to the availability of equitable remedies. 4.4 FINANCIAL STATEMENTS. (a) Premier has delivered or made available to EyeSys complete copies of its consolidated balance sheets as at March 31 for the fiscal years 1994 through 1996 and the -35- related statements of operations, shareholders' equity and cash flows for the years ended on each March 31 for the years 1994 through 1996 and the notes thereto (collectively, the "PREMIER AUDITED FINANCIALS") accompanied by the auditors' report and the opinion of its independent certified public accountants. Premier's Audited Financials present fairly its consolidated financial position as of those dates and the results of its operations and cash flows for the years then ended, in conformity with GAAP applied on a consistent basis. (b) Premier has delivered to EyeSys an unaudited consolidated balance sheet as of December 31, 1996 and the related unaudited statements of operations for the nine (9) months then ended (the "PREMIER INTERIM FINANCIALS"). Premier's Interim Financials present fairly its financial condition as of December 31, 1996 and the results of its operations and cash flows for the nine (9) months then ended, in conformity with GAAP applied on a basis consistent with the Premier Audited Financials (except for the absence of notes thereto and subject to normal year-end audit adjustments which are not material). The Audited Financials and the Interim Financials are hereinafter collectively referred to as the "PREMIER FINANCIALS." 4.5 MATERIAL CHANGES. Since December 31, 1996, there has not been any material change in Premier's assets, liabilities, financial condition or operating results from that reflected in the Premier Financials or the Registration Statement, except changes in the ordinary course of business that have not been, in the aggregate, material. 4.6 ABSENCE OF LITIGATION. Neither Premier nor, to the best of its knowledge, any of its officers or directors is engaged in, or has been threatened with, any litigation, arbitration, investigation or other proceeding relating to it, its employee benefit plans, property, business, assets, licenses, permits or goodwill, or against or affecting the Merger or the actions taken or contemplated in connection therewith, nor, to the best of its knowledge, is there any reasonable basis therefor. There is no action, suit, proceeding or investigation pending or threatened against Premier that questions the validity of this Agreement or the right of Premier or PAI to enter into this Agreement or to consummate the transactions contemplated hereby or thereby or which might result in any Material Adverse Effect. The foregoing includes, without limitation, actions pending or threatened (or any reasonable basis therefor known to Premier) involving the prior employment of any of its employees, their use in connection with its business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. There is no action, suit, proceeding or investigation by Premier currently pending or which it intends to initiate. Neither Premier nor, to the best of its knowledge, any of its officers or directors is bound by any judgment, decree, injunction, ruling or order of any court, governmental, regulatory or administrative department, commission, agency or instrumentality, arbitrator or any other person which would or could have a Material Adverse Effect. 4.7 NO BROKERS. Except with respect to the fees payable to Cowen pursuant to Section 5.21, Premier is not obligated for the payment of fees or expenses of any broker or finder in connection with the origin, negotiation or execution of this Agreement or in connection with any transaction contemplated hereby. 4.8 INSURANCE. Premier maintains policies of insurance covering its assets, properties and business in types and amounts customary for similarly sized companies engaged -36- in similar businesses. Premier is in compliance with each of such policies such that none of the coverage provided under such policies has been invalidated. Premier has fully paid all premiums and other payments which may be due to its insurers. The Premier Letter contains a complete and accurate list of all insurance policies, bonds and surety instruments. There is no threat by any of the insurers to terminate or materially increase the premiums payable under any of such insurance policies due to the activities or loss experience of Premier. 4.9 CAPITALIZATION. (a) Premier's capitalization (common stock, preferred stock, warrants and options and any other issued or granted security) is as set forth in the Premier Letter. Premier does not have in effect any stock appreciation rights plan and no stock appreciation rights are currently outstanding. (b) Other than as set forth in the Premier Letter, Premier does not have outstanding any preemptive or subscription rights, options, warrants, rights to convert, capital stock equivalents or other rights to purchase or otherwise acquire any of Premier's capital stock or other securities. (c) All of the issued and outstanding shares of Premier's capital stock have been duly authorized, validly issued, are fully paid and nonassessable, and such capital stock has been issued in full compliance with all applicable federal and state securities laws. All of Premier's incentive stock options have been issued in compliance with all laws, rules and regulations necessary to preserve such incentive stock option treatment. All of Premier's options have been issued in accordance with Premier's current stock option plans. None of Premier's options are entitled to be accelerated as a result of the Merger. (d) Except for any restrictions imposed by applicable state and federal securities laws, there is no right of first refusal, co-sale right, right of participation, right of first offer, or other restriction on transfer applicable to any shares of Premier capital stock. (e) Except as described in the Premier Letter, Premier is not and will not be under any obligation to register under the Securities Act any shares of its capital stock or any other of its securities that might be issued in the future if the Merger were not consummated. (f) Premier is not a party or subject to any agreement or understanding, and, to Premier's knowledge, there is no agreement or understanding between or among any persons that affects or relates to the voting or giving of written consent with respect to any security. 4.10 COMPLIANCE WITH LAWS. The business and operations of Premier and PAI are in compliance with all foreign, federal, state, local and county laws, ordinances, regulations, judgments, orders, decrees or rules of any court, arbitrator or governmental, regulatory or administrative agency or entity, except where the failure so to comply would not have a Material Adverse Effect. Each of Premier and Premier PAI has all valid and current permits, licenses, orders, authorizations, registrations, approvals and other analogous instruments (and each is in -37- full force and effect) and each of Premier and PAI has made all filings and registrations and the like necessary or required by law to conduct its business as presently conducted, except where the failure to maintain such permits and other instruments or to make such filings and registrations would not have a Material Adverse Effect. Neither Premier nor PAI has received any governmental notice within two years of the date hereof of any violation by it of any such laws, rules, regulation or orders. Neither Premier nor PAI is in material default or material noncompliance under any such permits, consents, or similar instruments. 4.11 THE REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS. The Registration Statement pursuant to which the Premier Common Stock to be issued in the Merger will be registered with the SEC shall not, at the time the Registration Statement is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The information supplied by Premier and PAI for inclusion in the Proxy Statement/Prospectus to be sent to the holders of Interests in EyeSys will not, on the date the Proxy Statement/Prospectus (or any amendment thereof or supplement thereto) is first mailed to holders of Interests in EyeSys, at the time of the EyeSys Stockholder Meeting or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statement made therein not false or misleading. If at any time prior to the Effective Time any event relating to Premier or PAI or any of their respective affiliates, officers or directors should be discovered by Premier or PAI which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, Premier and PAI shall promptly inform EyeSys. The Proxy Statement/Prospectus, including all financial statements of Premier and PAI required to be included therein, shall comply in all material respects as to form with the requirements of the Securities Act, the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, Premier and PAI make no representation or warranty with respect to any information supplied by EyeSys which is contained in any of the foregoing documents. 4.12 TAXES. (a) Prior to the Merger, Premier will be in control of PAI within the meaning of Section 368(c) of the Code. Premier shall not cause or permit PAI to issue additional shares of its stock that would result in Premier losing control of PAI within the meaning of Section 368(c) of the Code. No stock of PAI will be issued in the Merger. (b) During its corporate existence, PAI has owned no assets, and prior to the Merger shall not own any assets other than the Merger Shares of Premier to be distributed in the Merger. (c) As of the date hereof and as of the Effective Time, Premier has no plan or intention to reacquire any of its stock issued in the Merger, other than the possible acquisition of the Escrow Shares pursuant to Article 7 hereof. -38- (d) Premier shall not: liquidate PAI; merge PAI with or into another corporation; sell or otherwise dispose of the stock of PAI in any transaction other than this Merger, nor cause PAI to sell or otherwise dispose of any of the assets of EyeSys acquired in the Merger, except for dispositions made in the ordinary course of business transfers described in Section 368(a) of the Code, or other liquidations, dispositions or transfers which may be made without disqualifying the Merger as a tax-free reorganization under the Code. Following the Merger, Premier will cause EyeSys to continue the historic business of EyeSys or to use a significant portion of EyeSys' business assets in a business. (e) There is no intercorporate indebtedness existing between EyeSys and Premier nor between EyeSys and PAI that was issued, acquired, or will be settled at a discount. Premier is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. 4.13 SHARES FULLY PAID AND NON-ASSESSABLE. The shares of Premier Common Stock issuable to holders of Interests in EyeSys pursuant to Section 2.2, when issued as contemplated by this Agreement, will be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights of any security holder of Premier. 4.14 SEC DOCUMENTS. Premier has furnished, or within 10 days of the date hereof shall furnish, EyeSys with a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by Premier with the SEC since November 1, 1994 (the "SEC DOCUMENTS"), which are all the documents that Premier was required to file with the SEC under the Exchange Act since that date. The SEC Documents as of their respective dates complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC thereunder, applicable to such SEC Documents, and none of the SEC Documents as of the date thereof 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. Except to the extent that the information contained in Premier's Annual Report on Form 10-K for its fiscal year ended March 31, 1996 ("FORM 10-K") has been revised or superseded by a later-filed SEC Document, or except as set forth in the Registration Statement or the Premier Letter, the Form 10-K does not currently contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Premier included in the SEC Documents as of their respective dates complied as to form in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q and subject to normally recurring audit adjustments. -39- ARTICLE 5 COVENANTS OF PREMIER, PAI AND EYESYS Each of Premier, PAI and EyeSys, as the case may be, covenants to the other, except as expressly provided otherwise herein, as follows: 5.1 MAINTENANCE OF BUSINESS. (a) During the period from the date hereof to the Effective Time, it shall carry on and preserve its business, goodwill and its relationships with distributors, customers, suppliers, officers, employees, agents and others in substantially the same manner as it did prior to the date of this Agreement. It will use its reasonable efforts to keep and maintain the existing favorable business relationship with each of such distributors, customers, suppliers, officers, employees and agents. If it becomes aware of a deterioration in a relationship with any distributor, customer, supplier, officer, employee or agent which is material to its business or prospects, it will promptly bring such information to the attention of the other and will use its best efforts to restore such relationship or establish a reasonable replacement relationship, as may be appropriate. EyeSys recognizes that Premier and PAI intend to continue certain of EyeSys' existing businesses after the Effective Date and that Premier and PAI intend to continue EyeSys' current relationships with its customers and other parties. (b) EyeSys agrees to consult with Premier concerning any material operating decisions (including, without limitation, proposed employee hiring layoff and termination decisions). Notwithstanding the foregoing, EyeSys expressly acknowledges that EyeSys alone shall make such operating decisions and shall be solely responsible for their implementation, consequences and liabilities, if any. 5.2 ABSENCE OF CERTAIN CHANGES. Prior to the Closing, except as expressly permitted or contemplated hereby, or except as set forth in the EyeSys Letter or the Premier Letter, as the case may be, neither party shall, without the prior written consent of the other party: (a) incur any additional indebtedness for money borrowed or guarantee any indebtedness or obligation of any other party; set aside or pay any dividend or distribution of assets to, or repurchase any of its stock from any of its shareholders; issue or grant any securities or securities convertible into capital stock or grant or issue any options, warrants or rights to subscribe for its capital stock or securities convertible into its capital stock; (b) enter into, amend or terminate any employment or consulting agreement or any similar agreement or arrangement; increase the compensation payable or to become payable to any of its officers, employees or agents above the amount payable as of December 31, 1996, or adopt or amend any employee benefit plan or arrangement; (c) acquire or dispose of any properties or assets used in its business except in the ordinary course of business; permit any change in the nature of business or the manner in which its books and records are maintained; -40- (d) waive any statute of limitations so as to extend any tax or other liability; create or suffer to be imposed any lien, mortgage, security interest or other charge on or against its properties or assets; or enter into, amend or terminate any lease of real or personal property otherwise than in the ordinary course of business; (e) except as contemplated by Section 2.1, amend its Certificate of Incorporation or Bylaws; engage in any activities or transactions outside the ordinary course of its business as conducted at the date hereof; make any amendments or changes in any instruments, agreements, other documents or written information delivered by it or its representatives to the other or its representatives; or accelerate the vesting of any employee stock benefit (including vesting under stock purchase agreements or the exercisability of stock options). 5.3 ACTIONS CONTRARY TO STATED INTENT. Each party will use its best efforts to cause the Merger to qualify as a tax-free reorganization under Section 368(a) of the Code and accordingly will not, either before or after consummation of the Merger, take any action or fail to take any action that would prevent the Merger from so qualifying as a tax-free reorganization under Section 368(a) of the Code, or that would be inconsistent with such qualification. 5.4 ACCESS TO INFORMATION. Each party will give to the other party and their respective accountants, legal counsel and other representatives full access, during normal business hours throughout the period prior to the Closing, to all of the properties, books, contracts, commitments and records relating to its business, assets and liabilities, and each party will furnish to the other party, their respective accountants, legal counsel and other representatives during such period all such information concerning its affairs as the other may reasonably request but subject to Section 9.10 below; provided, that any furnishing of such information pursuant hereto or any investigation by each party hereto shall not affect such party's right to rely on the representations, warranties, agreements and covenants made by the other party in this Agreement. 5.5 OTHER DISCUSSIONS. From the date hereof until the Closing or the termination of this Agreement in accordance with Article 8 hereof, whichever occurs first, neither EyeSys nor any officer, director, shareholder, agent or representative of EyeSys will discuss or negotiate, or authorize any person or entity to discuss or negotiate on its or their behalf, with any other party, concerning the possible disposition of EyeSys' business, assets or capital stock, except that such persons may discuss and negotiate back-up offers to sell or otherwise dispose of EyeSys' business, assets or capital stock in case the Merger is not consummated pursuant to this Agreement, provided that EyeSys must inform any potential purchaser or acquirer that EyeSys has entered into this definitive Agreement with Premier. 5.6 EYESYS LOCK-UP AGREEMENTS. EyeSys shall use its reasonable best efforts to cause the EyeSys Shareholders to execute and deliver to Premier the EyeSys Lock-Up Agreements. 5.7 REASONABLE BEST EFFORTS. Each party will use its reasonable best efforts to cause all conditions to the Closing to be satisfied, including obtaining any of its consents -41- necessary or desirable in connection with the consummation of the transactions contemplated by this Agreement. 5.8 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS. As promptly as practicable, Premier, PAI and EyeSys shall prepare and file with the SEC preliminary proxy materials which shall constitute the Proxy Statement/Prospectus and the Registration Statement of Premier with respect to the Premier Common Stock to be issued in connection with the Merger and shall use all reasonable efforts to cause the Registration Statement to become effective as soon as practicable, and to mail the Proxy Statement/Prospectus to EyeSys shareholders, as soon thereafter as practicable. The Proxy Statement/Prospectus shall include the recommendation of the Boards of Directors of Premier and EyeSys in favor of the Merger; provided, that the Boards of Directors of Premier or EyeSys may, at any time prior to the Effective Time, withdraw, modify or change such recommendation if, in the opinion of either such Board of Directors, the Board determines in good faith that there is a reasonable possibility that the failure to withdraw, modify or change such recommendation could be a breach of its fiduciary duties under applicable law. EyeSys shall call and hold a shareholder meeting as promptly as practicable after the date on which the Registration Statement becomes effective and in accordance with applicable laws for the purpose of obtaining the approvals required herein. 5.9 EYESYS PAYABLES. EyeSys shall pay its accounts payable, including (without limitation) its payroll, amounts due under equipment and facilities leases, loan agreements and similar leases and agreements, sales and payroll taxes and trade payables, and all other taxes, in a timely manner. 5.10 TAX FORMS. EyeSys shall not make or change any material Tax election, adopt or change any material Return or any amendment to a material Return, enter into any closing agreement, settle any Tax claim or assessment, file any state or federal income tax return, or consent to any extension or waiver of limitation period applicable to any Tax claim or assessment, without the prior consent of Premier, which consent will not be unreasonably withheld. 5.11 NOTIFICATION OF CERTAIN MATTERS. EyeSys shall give prompt notice to Premier, and Premier and PAI shall give prompt notice to EyeSys, of (a) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the notifying party contained in this Agreement to become materially untrue or inaccurate, or (b) any failure of the notifying party to materially comply with or to satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. 5.12 MERGER EXPENSES. EyeSys will use its best efforts to limit all of its non merger-related fees and expenses to be incurred by it prior to or on the Closing. 5.13 ASSUMPTION OF BANK LOAN AGREEMENT. EyeSys and the Silicon Valley Bank ("BANK") have entered into that certain Bank Loan Agreement, dated as of March 11, 1995, as amended, pursuant to which the Bank agreed to loan EyeSys up to $2,100,000 (the "LOAN AGREEMENT"). Up to $650,000 of such loan has been guaranteed by each of Frontenac VI Limited Partnership and American Healthcare Fund II, L.P., shareholders of EyeSys (the -42- "SHAREHOLDER GUARANTEES"). EyeSys shall use its reasonable best efforts to obtain the agreement of the Bank, or another lender acceptable to Premier, to agree to advance at least $2,100,000 for at least one year after Closing at advance rates no greater than those specified in the Loan Agreement, with such adjustments to the loan covenants as reflect the merged companies and are acceptable to Premier. Premier agrees to provide to Bank the corporate guaranty of Premier with respect to $300,000 principal amount of indebtedness of EyeSys to Bank; provided, however, that (i) Bank's recourse under such guaranty shall be limited to Premier's accounts receivable, inventory and fixed assets; (ii) Premier's obligation to provide such guaranty is subject to the condition that Frontenac Company and/or other shareholders reasonably acceptable to Premier shall have agreed that in the event the Merger is terminated for any reason, Frontenac and such other shareholders shall provide a guaranty to Bank in substitution for the guaranty provided by Premier; and (iii) Bank shall have agreed to accept such substitute guaranty in lieu of the Premier guaranty. 5.14 PREMIER COVENANT REGARDING SEC FILINGS. For the benefit of affiliates of EyeSys, Premier agrees to make all filings it is required to make pursuant to the Exchange Act through 1998 on a timely basis; provided, however, that Premier shall be entitled to cure any late filings in accordance with the Exchange Act and the rules and regulations promulgated thereunder. 5.15 PREMIER BOARD SEAT. Commencing with the next annual meeting of Premier shareholders at which directors are to be elected after the Closing (or at such earlier time as there may be a vacancy on Premier Board of Directors), Premier shall nominate for election to its Board of Directors a person who is designated from time to time by Frontenac Co., and who is reasonably acceptable to Premier. The foregoing obligation shall terminate on the earlier of: (i) three (3) years from the Closing Date of the Merger; or (ii) at such time as the persons receiving Premier Common Stock in the Merger hold in the aggregate less than five percent (5%) of the outstanding Premier voting stock. 5.16 FUNDING FOR EYESYS. From the date hereof until the earlier of the Closing or the termination of the Merger in accordance with Article 8 below, Premier will loan to EyeSys, pursuant to a Demand Promissory Note bearing interest at the rate of 10.5% per annum (or, if less, the maximum rate permitted by law) and secured by substantially all of the assets of EyeSys, the Reasonable Cash Requirements of EyeSys; provided that Premier's obligation to provide such loan shall be subject to the conditions that: (i) all necessary approvals of shareholders of EyeSys with respect to the Merger and the transactions contemplated hereby shall have been obtained and shall be irrevocable (provided that for this purpose, the delivery of irrevocable written consents to the Merger by those EyeSys shareholders holding sufficient votes to approve the Merger under its charter documents and applicable law shall be deemed to satisfy this condition); (ii) EyeSys shall not be in breach of any material representation, warranty or covenant set forth in this Agreement; (iii) no regulatory approvals or licenses shall be required as a condition to the Closing (other than approval of the Securities and Exchange Commission of the Registration Statement); (iv) the condition set forth in Section 6.17 concerning the Bank's credit facilities shall have been met, and (v) the employees of EyeSys identified on Schedule 5.16 shall have agreed to be employed by Premier after the Closing. For purposes hereof, the term "REASONABLE CASH REQUIREMENTS" shall mean the monthly cash requirements of EyeSys following the execution of this Agreement as set forth in that certain -43- operating plan of EyeSys attached hereto as Exhibit G (the "OPERATING PLAN"), but in no event shall exceed $100,000 per month. 5.17 NONINCLUDED COSTS. EyeSys shall make arrangements for the payment of the Nonincluded Costs either out of the Merger Shares or from the proceeds received by EyeSys after the date hereof from the exercise of any option or warrant, but in no event from the funds or other assets of EyeSys. 5.18 OPTIONS AND WARRANTS. Prior to the Closing, EyeSys shall make arrangements for the exercise, termination or exchange of the EyeSys Options and EyeSys Warrants, as set forth herein. Any cash proceeds received as a result of such exercise may be applied by EyeSys to the payment of the Nonincluded Costs. 5.19 MARCH 31, 1997 FINANCIAL STATEMENTS. Prior to the Closing, EyeSys shall prepare and forward to Premier unaudited financial statements for the three-month period ended March 31, 1997, which statements shall be prepared in accordance with GAAP, and shall be subject to normal audit adjustments, but shall reflect accounting policies and conventions with respect to reserves, write-offs and other similar matters approved by Premier. Prior to the Closing, Premier shall prepare and forward to EyeSys unaudited financial statements for the year ended March 31, 1997, which shall be prepared in accordance with GAAP but shall be subject to normal audit adjustments, and shall further deliver, upon completion, copies of its audited financial statements for such fiscal year (provided that EyeSys shall maintain such financial statements as confidential until such time as a press release or other public announcement concerning Premier's results of operations for such fiscal year has been published). 5.20 "STAY BONUSES," RSS PAYABLE. Prior to the Closing, EyeSys shall make arrangements for the termination and/or satisfaction of all bonuses or other consideration payable to EyeSys employees, consultants or advisers in order to induce them to remain in the employ of, or to continue to render services to, EyeSys (the "Stay Bonuses"). Prior the Closing, EyeSys shall also make arrangements for the compromise and payment of all amounts due by EyeSys to RSS, LLC. Any amounts payable in connection with the foregoing arrangements shall be paid from the Merger Shares or the proceeds thereof. 5.21 TRANSACTIONAL COSTS. EyeSys shall deliver to Premier at least two business days prior to the Closing a list of the transactional fees claimed by the parties listed on Schedule 5.21 in connection with the Merger. At the Effective Time, Premier shall pay the lesser of: (i) the Transactional Costs of such parties, or (ii) the amount of $100,000, to be applied to the Transactional Costs other than the fees payable to Cowen. In addition, Premier shall pay a cash payment to Cowen of the lesser of (i) $75,000 or (ii) one-fourth of the investment banking fee of Cowen (the "COWEN FEES"), and shall issue the Cowen Shares to Cowen, all of which shall be in payment of one-half of the investment fee due Cowen. EyeSys shall be responsible for paying the remaining portion of such transactional costs and remaining portion of the Cowen Fee, pursuant to Section 5.17 hereof. At the Effective Time, Premier also shall repay on behalf of EyeSys the amount of $72,500 in full satisfaction of the Frontenac Payable. -44- 5.22 REIMBURSEMENT OF AMOUNTS PAID TO DISSENTING SHAREHOLDERS. The Principal Shareholder agrees that if the total amount payable to Dissenting Shareholders under the Delaware General Corporation Law ("APPRAISAL RIGHTS"), as a result of the exercise of their Appraisal Rights, exceeds $250,000, the Principal Shareholder shall sell Premier Common Stock received by it in the Merger, in a manner reasonably acceptable to Premier, until the net proceeds from such sale(s) equals the total amount payable to such Dissenting Shareholders, and shall remit such net proceeds to Premier to reimburse it for the amounts so paid to Dissenting Shareholders. The Principal Shareholder shall be released from its Lock Up Agreements to the extent necessary to sell Premier Common Stock under this Section 5.22. The maximum number of shares that the Principal Shareholder shall sell hereunder is equal to the number of Escrowed Dissenting Shares. ARTICLE 6 CONDITIONS TO OBLIGATIONS OF PREMIER, PAI AND EYESYS The obligations of Premier, PAI and EyeSys to consummate the transactions contemplated hereby are, at the election of each such party, subject to satisfaction of the following conditions by the other party, to the extent applicable to the other party, or waiver thereof: 6.1 CONSENTS AND APPROVALS. The parties hereto shall have obtained all consents and approvals of stockholders and third parties (including governmental authorities) required to consummate the transactions contemplated by this Agreement and the Certificate of Merger, or as required by applicable law. 6.2 REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All representations and warranties (including those contained in the Premier and EyeSys Letters) made herein by the other party and those contained in any documents executed by stockholders of the other party shall be true, accurate and correct in all material respects as of the date made and as if made as of the Closing. The other party shall have performed in all material respects all obligations and agreements undertaken by it herein to be performed at or prior to the Closing. 6.3 CERTIFICATE. The parties shall have received at the Closing a certificate, dated as of the Closing and executed by the other's President and Secretary, to the effect that the conditions set forth in Sections 6.1 and 6.2 shall have been satisfied or waived by the other party. 6.4 OPINIONS OF COUNSEL. Premier and PAI shall have received at the Closing the opinion of Epstein Becker & Green, P.C., counsel to EyeSys, in form and substance satisfactory to Premier and PAI and their counsel. EyeSys shall have received at the Closing the opinion of Rutan & Tucker, LLP, counsel to Premier and PAI, in form and substance satisfactory to EyeSys and its counsel. 6.5 NO ACTIONS. Consummation of the transactions contemplated by this Agreement shall not violate any order, decree or judgment of any court or governmental body -45- having jurisdiction, and no litigation, arbitration, action or other proceeding shall have been commenced or overtly threatened against either party hereto as a result of or relating to the transactions contemplated hereby. 6.6 PROCEEDING AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be in form and substance reasonably satisfactory to its counsel, and it shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. 6.7 ACCURACY OF DOCUMENTS AND INFORMATION. The copies of all material instruments, agreements, other documents and written information delivered to the other by it or its representatives, including, without limitation, the EyeSys Letter and the Premier Letter, shall be complete and correct as of the Closing. 6.8 LOCK-UP AGREEMENTS. Premier and PAI shall have received an EyeSys Shareholder Lock-Up Agreement executed by each EyeSys Shareholder. 6.9 CONTRACTS. Premier shall be satisfied that EyeSys shall have amended or obtained waivers in respect of any and all rights pursuant to contract that will be necessary in order to consummate the Merger and to enable EyeSys to conduct its business and operations after the Effective Time of the Merger substantially as EyeSys did immediately preceding the Effective Time of the Merger. 6.10 SECURITIES APPROVAL. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the Proxy Statement/Prospectus shall have been initiated or threatened by the SEC. 6.11 DELAWARE FILINGS. Premier and EyeSys shall be satisfied that as of the Effective Time, the First Amendment to the Restated Certificates of Incorporation of EyeSys, and the Certificate of Merger shall have been filed in the office of the Secretary of State of the State of Delaware. 6.12 TERMINATION OF EYESYS STOCK OPTION PLAN. The EyeSys Board of Directors shall have voted to terminate the EyeSys' Stock Option Plan as of the Effective Time. 6.13 INTENTIONALLY OMITTED. 6.14 OPTIONS, WARRANTS AND EYESYS NOTES. Those persons identified on Exhibit 2.1 as converting their EyeSys Notes or waiving Contingency Payments thereon shall have converted such EyeSys Notes, or waived their Contingency Payments, to the extent shown in such schedule. All outstanding rights, options, warrants and convertible securities of EyeSys described in the EyeSys Letter shall have been terminated, canceled, replaced or otherwise eliminated, to the satisfaction of Premier, consistent with the other provisions of this Agreement. All existing registration rights of holders of Interests in EyeSys shall have been terminated and -46- Premier shall have received a certificate to such effect, signed on behalf of EyeSys by the President and Secretary of EyeSys. 6.15 FOREIGN STATUS REPRESENTATION LETTER. EyeSys shall furnish Premier with an affidavit stating under penalty of perjury that EyeSys is not a foreign corporation, foreign partnership, foreign trust or foreign establishment (as each term is defined in the Code) and will provide in such affidavit its taxpayer identification number and shall have executed a representation letter substantially in the form provided by Premier to EyeSys and its counsel before Closing. 6.16 ESCROW AGREEMENT. The Escrow Agreement shall be executed by all of the appropriate parties. 6.17 BANK LOAN AGREEMENT. Bank, or another lender acceptable to Premier, shall have consented to the Merger and shall have agreed to continue to loan at least $2,100,000 for at least one year after Closing at the advance rates currently available to EyeSys, as specified in the Loan Agreement, with such adjustments to the loan covenants and other terms as reflect the merged companies and are acceptable to Premier, and shall further have agreed to release the Shareholder Guarantees at the Closing. 6.18 NO EYESYS MATERIAL ADVERSE EFFECT. Premier shall not have become aware of any fact, event or condition, or the absence of any fact, event or condition, as the context requires, which, individually or in the aggregate would have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of EyeSys. 6.19 NO PREMIER MATERIAL ADVERSE EFFECT. EyeSys shall not have become aware of any fact, event or condition, or the absence of any fact, event or condition, as the context requires, which, individually or in the aggregate would have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of Premier. 6.20 APPRAISAL RIGHTS. At the Closing, EyeSys shareholders holding in the aggregate less than 10% of the EyeSys Common Stock, shall have perfected their Appraisal Rights, and none of the holders of EyeSys Preferred Stock shall have perfected their Appraisal Rights. 6.21 DILIGENCE REVIEW. Premier shall have completed, to its reasonable satisfaction, a "due diligence review" of: (i) the patent and proprietary rights, including potential infringement of patents, relating to the products sold or proposed to be sold and technology owned by EyeSys; and (ii) the relationships between EyeSys and its distributors and vendors. Such due diligence review shall be deemed satisfactorily completed unless Premier notifies EyeSys: (x) within 21 days of the date hereof that it is dissatisfied with the relationships between EyeSys and its distributors and/or vendors; (y) prior to the Closing Date, that it is dissatisfied with issues pertaining to the validity of EyeSys' patents or to the possible infringement of the patent rights of others by products sold by EyeSys; and (z) within 10 days of the date hereof that it is dissatisfied with EyeSys' title to the proprietary rights to the technology used in EyeSys' products. -47- 6.22 AMOUNT OF SHARES ISSUABLE. The number of shares of Premier Common Stock issuable hereunder shall not exceed the maximum amount that is issuable without the approval of the Merger by the shareholders of Premier (the "MAXIMUM AMOUNT") as required under the California Corporations Code. To the extent the number of shares of Premier Common Stock issuable hereunder exceeds such Maximum Amount, Premier shall deliver, in lieu of such excess, Premier Class AA Options, Premier Class BB Options, cash or promissory notes (having a maturity of not more than three years and bearing interest at the rate of 10.5% per annum), selected by Premier, having a value equivalent to the value of such excess. 6.23 ESTOPPEL CERTIFICATE. Premier shall have received from General Electric Company and Colloptics Inc. an Estoppel Certificate, in form and substance acceptable to Premier, confirming that the License Agreement among them and EyeSys dated September 23, 1994 is in full force and effect. 6.24 COMPLIANCE WITH RULE 145. All persons who are "affiliates" of EyeSys at the Closing Date shall have executed and delivered to Premier an agreement in form and substance satisfactory to Premier providing that such persons will not sell or otherwise dispose of any securities of Premier received pursuant to the Merger except in compliance with Rule 145 promulgated under the Securities Act of 1933, as amended. 6.25 EYESYS FINANCIAL INFORMATION. EyeSys shall have delivered to Premier its audited financial statements for the year ended December 31, 1996, and such additional financial information concerning EyeSys as is necessary to permit Premier to comply with its reporting requirements under the Securities Exchange Act of 1934, as amended. 6.26 EYESYS PERSONNEL. No more than three of the EyeSys personnel identified on Schedule 5.16 shall have failed to agree to be employed by Premier after the closing, and no more than two of Joe Wakil, Ken Carbonari, David Liu, Michel Olsas, David Headlee and Eric Serfoss shall have failed to so agree. ARTICLE 7 INDEMNITY 7.1 INDEMNIFICATION. EyeSys agrees to indemnify, defend and hold harmless Premier and PAI from and against and shall reimburse Premier and PAI against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, remedies and penalties, including interest, penalties and reasonable attorneys' fees and expenses (collectively, "LOSSES") that Premier or PAI shall incur or suffer and which arise from or are attributable to by reason of or in connection with any breach or inaccuracy of or any failure to perform or comply with any of EyeSys' representations, warranties, agreements or covenants contained in this Agreement (including any exhibit, letter, schedule or certificate referred to herein) or in the Escrow Agreement. Notwithstanding the foregoing, in the absence of fraud, EyeSys shall have no obligations under this Section 7.1 with respect to Losses that would otherwise be deemed to have incurred: (a) due to a breach of a representation or warranty by EyeSys with respect to its inventory, or (b) as a result of the condition of its fixed assets, so -48- long as the representations and warranties set forth in the first two sentences of Section 3.8(a) hereof are true and correct. 7.2 ESCROW AGREEMENT. The indemnity obligations of EyeSys hereunder shall be met pursuant to the terms and conditions of the Escrow Agreement. The indemnification made pursuant to Section 7.1 and the representations, warranties, covenants and other agreements set forth in this Agreement and in the Escrow Agreement, shall survive Closing for a period of twelve (12) months after the Effective Time, except that indemnity for Losses for which claim has been made pursuant to the terms of the Escrow Agreement against the Escrow Shares within such twelve (12)-month period shall survive until resolved pursuant to the terms of the Escrow Agreement. As set forth herein, the indemnity obligations of EyeSys under this Article 7 (together with all of EyeSys' representations, warranties, covenants and other agreements) set forth herein shall survive the Closing and, absent fraud, shall be satisfied solely and exclusively by recourse against the Escrow Shares in accordance with the Escrow Agreement and this Agreement. 7.3 NO WAIVER. No investigation made by or on behalf of Premier or PAI with respect to EyeSys shall be deemed to affect Premier's or PAI's reliance on the representations, warranties, covenants and agreements made by EyeSys contained in this Agreement and shall not be a waiver of Premier's or PAI's rights to indemnity as herein provided for the breach or inaccuracy of or failure to perform or comply with any of EyeSys' representations, warranties, covenants or agreements under this Agreement or the Escrow Agreement. 7.4 INDEMNIFICATION OF EYESYS AGENTS. Premier agrees that until six (6) years from the Effective Time, Premier shall maintain all rights to indemnification existing in favor of the present and former directors, officers, employees, fiduciaries and agents of EyeSys under the terms of its charter and bylaws in effect immediately prior to the Effective Time, and that the charter and bylaws of EyeSys as the surviving corporation, or any successor in interest of EyeSys, shall not be amended to reduce or limit the rights of indemnity afforded to such persons. 7.5 INDEMNIFICATION REGARDING SECURITIES ACT ISSUES. In connection with the registration by Premier of any of its securities under the Securities Act pursuant to this Agreement, EyeSys shall indemnify and hold harmless Premier, each underwriter (as defined in the Securities Act) and each controlling person of any holder or underwriter, if any (within the meaning of the Securities Act), against any losses, claims, damages of liabilities, joint or several (or actions in respect thereof), to which Premier, such underwriter or controlling person may be subject under the Securities Act, under any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement (or alleged untrue statement) of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary proxy statement/prospectus or final proxy statement/prospectus contained therein, or any amendment to supplement thereto, or any other document, or (ii) any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation by EyeSys of the Securities Act or any Blue Sky law, or any rule or regulation promulgated under the Securities Act or any Blue Sky law, or any other -49- law, applicable to Premier in connection with any such registration, qualification or compliance, and shall reimburse each such holder, underwriter or controlling person for any legal or other expenses reasonably incurred by such holder, underwriter or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that EyeSys shall not be liable to Premier, any underwriter or any controlling person in any such case unless and to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or omission made in such registration statement, preliminary prospectus, summary prospectus, prospectus, or amendment or supplement thereto, or any other document, in reliance upon and in conformity with written information furnished to Premier by EyeSys specifically for use therein. The indemnity provided for herein shall remain in full force and effect regardless of any investigation made by or on behalf of Premier or such underwriter or controlling person. ARTICLE 8 TERMINATION 8.1 TERMINATION BY MUTUAL CONSENT. At any time prior to the Closing, this Agreement and the Agreement of Merger may be terminated by written consent of Premier, PAI and EyeSys, notwithstanding approval of the Merger by the stockholders of PAI or EyeSys. 8.2 TERMINATION BY PREMIER OR PAI OR EYESYS. (a) Premier or PAI may terminate this Agreement at any time prior to the Closing by delivery of written notice to EyeSys if: (1) EyeSys has breached or violated this Agreement in any material respect and, if such breach or violation is curable, has failed to cure such violations within ten (10) days of receiving written notice thereof, (2) any representation or warranty made by EyeSys is false or inaccurate in any material respect or there is any material misrepresentation or omission by EyeSys; (3) upon the occurrence of a Material Adverse Effect with respect to EyeSys; (4) the rate of sales received by EyeSys, measured on a monthly basis, shall have declined by more than 10% (calculated separately for international sales and domestic sales) as compared to the average monthly sales rate over the corresponding period as set forth in the Operating Plan; (5) any of the EyeSys foreign distributors who have been responsible on an annual basis for more than ten percent (10%) of EyeSys' foreign sales, or any EyeSys domestic independent manufacturing representative who has been responsible on an annual basis for more than ten percent (10%) of EyeSys' domestic sales, shall have terminated his, her or its relationship with EyeSys; or (6) the Closing has not occurred by July 15, 1997. (b) EyeSys may terminate this Agreement at any time prior to the Closing by delivery of written notice to Premier and PAI if: (1) Premier or PAI has breached or violated this Agreement in any material respect and, if such breach or violation is curable, has failed to cure such violations within ten (10) days of receiving written notice thereof, (2) any representation or warranty made by Premier or PAI is false or inaccurate in any material respect or there is any material misrepresentation or omission by either Premier or PAI; (3) upon the -50- occurrence of a Material Adverse Effect with respect to Premier; or (4) the Closing has not occurred by July 15, 1997. 8.3 EFFECT OF TERMINATION. In the event of termination as provided above, all parties hereto shall bear their own costs associated with this Agreement and all transactions mentioned herein and there shall be no obligation on the part of either party's officers, directors or stockholders; provided, that (a) Sections 9.5, 9.9, 9.10 and 9.11 shall survive such termination and continue in full force and effect, and (b) nothing herein will relieve any party from liability for any breach of this Agreement which occurred prior to such termination. ARTICLE 9 MISCELLANEOUS 9.1 NOTICES. Any notice given hereunder shall be in writing and shall be deemed effective upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by certified or registered mail, postage prepaid as follows: (a) If to Premier or PAI: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92718 Attention: Chief Executive Officer Facsimile: (714) 951-7218 With a copy to: Rutan & Tucker 611 Anton Boulevard, Suite 1400 Costa Mesa, California 92626 Attention: Thomas G. Brockington, Esq. Facsimile: (714) 546-9035 (b) If to EyeSys: EyeSys Technologies, Inc. 2776 Bingle Road Houston, TX 77055 Attention: President and Chief Executive Officer Facsimile: (713) 465-2418 -51- With a copy to: Epstein Becker & Green, P.C. 250 Park Avenue New York, NY 10177 Attention: Lowell S. Lifschultz, Esq. Facsimile: (212) 661-0989 or to such other address as any party may have furnished in writing to the other parties in the manner provided above. 9.2 ENTIRE AGREEMENT; MODIFICATIONS; WAIVER. Except as set forth in Section 9.10 herein, this Agreement constitutes the final, exclusive and complete understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings and discussions with respect thereto, including, without limitation, the Letter of Intent dated March 3, 1997, by and between Premier and EyeSys. No variation or modification of this Agreement and no waiver of any provision or condition hereof or granting of any consent contemplated hereby, shall be valid unless in writing and signed by the party against whom enforcement of any such variation, modification, waiver or consent is sought. After the Effective Time, the rights and remedies available to Premier and PAI pursuant to this Agreement and all exhibits hereunder shall be as set forth in Article 7. 9.3 CAPTIONS. The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 9.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall constitute an original copy hereof but all of which together shall constitute one agreement. 9.5 PUBLICITY. Except for disclosure (if any) required by any law to which any party is subject, the timing and content of any announcements, press releases and public statements concerning the acquisition contemplated hereby shall be by mutual agreement of Premier and EyeSys. 9.6 SUCCESSORS AND ASSIGNS. No party may, without the prior express written consent of each other party, assign this Agreement in whole or in part. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the parties hereto. 9.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents made and to be performed entirely within the State of California; provided that matters affecting the validity of the corporate action taken by the parties relating to the Merger shall be governed by the applicable General Corporation Laws of the States of Delaware and California. -52- 9.8 FURTHER ASSURANCES. At the request of any of the parties hereto, and without further consideration, the other parties agree to execute such documents and instruments and to do such further acts as may be necessary or desirable to effect the Merger. 9.9 EACH PARTY TO BEAR OWN COSTS. Subject to Section 5.21, each of the parties shall pay all costs and expenses incurred or to be incurred by it in negotiating and preparing this Agreement and the Agreement of Merger and in closing and carrying out the transactions contemplated by this Agreement and the Agreement of Merger; provided, however, that any costs related to the Merger, other than the Transactional Costs to be paid by Premier pursuant to Section 5.21, shall be paid by EyeSys shareholders. Each of the parties and its respective advisors shall use its best efforts to minimize all Merger-related fees and expenses. 9.10 CONFIDENTIALITY AND NONDISCLOSURE AGREEMENTS. Except as required by law, statute, rule or regulation, all confidential information which shall have been finished or disclosed by one party to the other pursuant to this Agreement shall be held in confidence pursuant hereto or pursuant to the confidential information non-disclosure agreements entered into by such parties, and shall not be disclosed to any person other than those with a need to have access to such information, including their respective employees, directors, legal counsel, accountants or financial advisors. 9.11 ATTORNEYS' FEES. In the event of any suit or other proceeding to construe or enforce any provision of this Agreement or any other agreement to be entered into pursuant hereto, or otherwise in connection with this Agreement, the prevailing party's or parties' reasonable attorneys, fees and costs (in addition to all other amounts and relief to which such party or parties may be entitled) shall be paid by the other party or parties. 9.12 TRANSFER OF EYESYS BOOKS AND ASSETS. EyeSys agrees, at any time after the Closing, upon the request of Premier or PAI to do, execute, acknowledge and deliver or to cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be required for the better assigning, transferring, conveying and confirming to Premier, or to its successors and assigns, or for the aiding, assisting, collecting and reducing to possession of any or all of the books, records and assets of EyeSys. EyeSys and its counsel shall provide Premier and its counsel upon request all documentation covering all aspects of EyeSys' business operations. 9.13 APPOINTMENT AND INDEMNITY OF ESCROW COMMITTEE. (a) By approval of this Agreement (by written consent or at a duly authorized shareholders' meeting) the EyeSys shareholders shall appoint James E. Crawford, or any successor designated by James E. Crawford or his legal representative as the EyeSys Representative pursuant to the Escrow Agreement. Mr. Crawford or his designated successor shall have all of the authority granted to the EyeSys Representative pursuant to the Escrow Agreement. (b) The EyeSys Representative shall not be liable to anyone whatsoever by reason of any error or judgment or of any act done or step taken or omitted by him in good -53- faith or for any mistake of fact or law except as is provided in Section 11 of the Escrow Agreement. 9.14 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties made by EyeSys in this Agreement shall survive the Effective Time for a one (1)-year period consistent with the provisions of Article 7 of this Agreement. The representations and warranties of Premier and PAI shall terminate as of the Effective Time; provided, however, the representation made by Premier and PAI in Sections 4.11 and 4.13 of this Agreement shall survive the Closing for a one (1)-year period. -54- IN WITNESS WHEREOF, each of the parties has executed this Agreement as of the date first above written. PREMIER LASER SYSTEMS, INC. By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ PREMIER ACQUISITION OF DELAWARE, INC. By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ EYESYS TECHNOLOGIES, INC. By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ FRONTENAC COMPANY (signing as the "Principal Shareholder" and with respect to the obligations in Section 5.22 of this Agreement only) By: --------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------ -55- EXHIBIT B ESCROW AGREEMENT AND INSTRUCTIONS This Escrow Agreement and Instructions ("AGREEMENT") is entered into by and among Premier Laser Systems, Inc., a California corporation, EyeSys Technologies, Inc., a Delaware corporation, James E. Crawford or his duty appointed successor in interest, and _____________________. RECITALS A. Pursuant to the terms of the Merger Agreement, Premier and EyeSys have agreed to establish an escrow to hold twenty percent (20%) of the Merger Securities issued in respect of the EyeSys Common Stock, Preferred Stock and the EyeSys Notes (collectively, the "ESCROW SHARES") for a one (1)-year period as the source of payment for certain indemnification obligations of EyeSys. In addition, pursuant to the terms of Section 2.3(b) of the Merger Agreement, the escrow shall hold the "Escrowed Dissenting Shares," as such term is defined in the Merger Agreement, for disposition pursuant to such Section 2.3(b). The term "Escrow Shares," as used herein, does not include the "Escrowed Dissenting Shares." B. ______________ has agreed to act as Escrow Holder. James E. Crawford has been appointed to serve as the EyeSys Representative pursuant to Section 9.13 of the Merger Agreement. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. DEFINITIONS. Unless the context requires to the contrary or terms are otherwise defined herein, terms used in this Agreement, but not defined herein shall have the meaning given in the Merger Agreement. The following terms shall have the meanings specified below: "AGREEMENT" shall mean this Escrow Agreement and Instructions. "DISTRIBUTION DATE" shall mean the date which is five (5) business days after Escrow Holder has received written authorization from both Premier and the EyeSys Representative to distribute Escrow Shares, or Escrow Holder is otherwise authorized to make a distribution of Escrow Shares pursuant to the terms of this Agreement. "ESCROW HOLDER" shall mean ______________. "ESCROW PERIOD" shall have the meaning set forth in Section 4 of this Agreement. "ESCROW SHARES" shall have the meaning given in Recital A of this Agreement, and shall also include any stock resulting from stock recapitalizations, any stock dividends paid -1- on such shares during the period of time they are held in escrow, and any cash or other property received by EyeSys prior to the Distribution Date from account debtors on account of receivables, invoices or other payables with respect to which an indemnification claim has been made under Sections 7.1 and 3.25 of the Agreement, and for which Premier has been reimbursed as a result thereof. "ESCROW SHAREHOLDERS" shall mean the former holders of EyeSys Common Stock, Preferred Stock and EyeSys Notes who have Merger Shares held in escrow pursuant to the terms of the Agreement. "ESCROWED DISSENTING SHARES" shall have the meaning set forth in Section 2.3(b) of the Merger Agreement. "EYESYS" shall mean EyeSys Technologies, Inc., a Delaware corporation. "EYESYS REPRESENTATIVE" shall mean James Crawford or any successor duly appointed pursuant to the terms of the Merger Agreement. "LOSSES" shall have the meaning given in Section 1 of this Agreement. "MERGER AGREEMENT" shall mean that certain Agreement and Plan of Merger, entered into by and among Premier, EyeSys and Premier Acquisition, Inc., dated as of April 24, 1997. "PREMIER" shall mean Premier Laser Systems, Inc., a California corporation, or any of its subsidiaries. "PREMIER CERTIFICATE" shall have the meaning given in Section 6 of this Agreement. "PREMIER NOTICE" shall have the meaning given in Section 6 of this Agreement. "SHARE PRICE" shall mean the Per Share Value, as defined in the Merger Agreement, and shall be calculated by using the same measuring period selected by Premier in computing the Per Share Value under the Merger Agreement, but substituting the date three (3) business days prior to the date of a distribution of Shares to Premier hereunder for the "Closing Date" in such definition (except in the case of reimbursements under Section 2.2(d)(v) of the Merger Agreement, in which case Escrow Shares shall be valued as set forth in such Section 2.2(d)(v)). 2. INDEMNIFICATION. Pursuant to Article 7 of the Merger Agreement, EyeSys has entered into the following indemnification agreement: "EyeSys agrees to indemnify, defend and hold harmless Premier and PAI from and against and shall reimburse Premier and PAI against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities, damages, -2- remedies and penalties, including interest, penalties and reasonable attorneys' fees and expenses (collectively, "LOSSES") that Premier or PAI shall incur or suffer and which arise from or are attributable to by reason of or in connection with any breach or inaccuracy of or any failure to perform or comply with any of EyeSys' representations, warranties, agreements or covenants contained in this Agreement (including any exhibit, letter, schedule or certificate referred to herein) or in the Escrow Agreement. Notwithstanding the foregoing, in the absence of fraud, EyeSys shall have no obligations under this Section 7.1 with respect to Losses that would otherwise be deemed to have incurred: (a) due to a breach of a representation or warranty by EyeSys with respect to its inventory, or (b) as a result of the condition of its fixed assets, so long as the representations and warranties set forth in the first two sentences of Section 3.8(a) hereof are true and correct." EyeSys has also agreed in the Agreement that in the circumstances set forth in Section 2.2(c)(vi) of the Agreement, it may be required to return certain Escrow Shares to Premier. Any claim by Premier that it is entitled to the receipt of such securities under Section 2.2(c)(vi) shall be deemed a "claim for indemnification" hereunder, and the amount of Escrow Shares Premier believes it is entitled to as a result thereof shall be treated as a "LOSS" hereunder. 3. ESCROW HOLDER. Pursuant to Section 1.3 of the Merger Agreement, as of the Effective Time, Premier shall cause the Escrow Shares to be deposited with Escrow Holder. Escrow Holder shall hold, safeguard, and distribute the Escrow Shares in accordance with the terms and instructions set forth in this Agreement. 4. ESCROW PERIOD. The Escrow Shares shall be held in escrow by the Escrow Holder for a period of twelve (12) months after the Effective Time, except that if any notice of a claim for indemnification has been given to Escrow Holder by Premier against the Escrow Shares within such twelve (12)-month period, such number of Escrow Shares as may be necessary to satisfy the claim for indemnification (as determined pursuant to Section 10 below) shall remain in escrow until such time as all of such indemnification claims have been resolved pursuant to Section 8 or Section 9 of this Agreement (the "ESCROW PERIOD"). 5. THE EYESYS REPRESENTATIVE. The EyeSys Representative shall act as the agent of EyeSys and the Escrow Shareholders, for the purpose of receiving all notices, giving all approvals, and doing all other things and exercising all other rights of EyeSys and the Escrow Shareholders pursuant to this Agreement. The EyeSys Representative has agreed to waive the right to any fees for performing such services. Any costs or expenses incurred by the EyeSys Representative in performance of his obligations under this Agreement shall be reimbursed from the Escrow Shares at the expiration of the Escrow Period, subject to the prior satisfaction of any rights of Premier to reimbursement from the Escrow Shares. 6. PREMIER CERTIFICATION. In the event that Premier believes in good faith that it is entitled to indemnification pursuant to the Merger Agreement, or to receive Escrow Shares under Section 2.2(c)(vi) of the Merger Agreement, Premier shall deliver a notice (the "PREMIER NOTICE") to the Escrow Holder and the EyeSys Representative which: -3- (a) states that Premier anticipates that it may sustain Losses for which it is entitled to indemnification pursuant to the Merger Agreement; and the nature of the misrepresentation, breach of warranty or covenant, or other basis upon which the claim for indemnification is based; and (b) provides a good faith estimate of the amount of Losses which Premier may sustain, if Premier has sufficient information upon which to estimate reasonably the amount of the Losses, including any amounts paid or accrued as of the date of the Premier Certificate, if applicable. At such time as Premier has determined the exact amount of any claim for Losses, Premier shall deliver a certificate signed by the chief executive officer, president or any vice president of Premier to Escrow Holder and the EyeSys Representative ("PREMIER CERTIFICATE") which certifies that Premier is entitled to payment of the amount specified pursuant to this Merger Agreement and this Agreement. 7. DISTRIBUTIONS TO PREMIER OF THE ESCROW SHARES. Subject to the provisions of Section 8 of this Agreement, within no more than forty-five (45) days after receipt of a Premier Certificate which makes claim for a specific amount, Escrow Holder shall distribute to Premier such number of the Escrow Shares, based upon the Share Price, as is equal to the amount claimed by Premier in the Premier Certificate. To the extent that the Escrow Shares consist of different types of securities (e.g., Common Stock or different types of options), Premier shall be entitled to specify which types of such securities are to be distributed to it under this Section 7. 8. OBJECTIONS TO DISTRIBUTIONS. Notwithstanding Section 7 of this Agreement, Escrow Holder shall not make any distribution of Escrow Shares claimed by Premier unless Escrow Holder either (a) has received written authorization from the EyeSys Representative to make the distribution, or (b) at least thirty (30) days have elapsed from the date that Escrow Holder determines that a Premier Certificate was delivered to the EyeSys Representative without any response from the EyeSys Representative. Escrow Holder shall distribute such number of Escrow Shares to Premier as is required pursuant to Section 7 no later than five (5) days after receipt of authorization from the EyeSys Representative or expiration of the thirty (30)-day period. If the EyeSys Representative has a reasonable basis for objecting to a claim for Losses from Premier and has provided the Escrow Holder with written notice of an objection ("NOTICE OF OBJECTION") within such thirty (30)-day period, Escrow Holder shall make a distribution of the Escrow Shares only when permitted pursuant to Section 9 of this Agreement. 9. SETTLEMENT OF DISPUTED CLAIMS; ARBITRATION. (a) If the EyeSys Representative delivers a Notice of Objection to the reimbursement of Premier for any claim made in any Premier Certificate, the EyeSys Representative and Premier shall attempt in good faith to agree on the rights of the respective parties regarding any disputed claims. At such time as the EyeSys Representative and Premier may reach agreement, a memorandum setting forth the agreement shall be prepared and signed by both parties and shall be furnished to Escrow Holder. Escrow Holder shall be entitled to rely -4- on any such memorandum, and shall promptly make distributions of the Escrow Shares in accordance with the terms of such a memorandum. (b) If no such agreement has been reached within fifteen (15) days after a Notice of Objection from the EyeSys Representative, such disputed claim may be sent to mediation in accordance with such mediation procedures as the parties may agree. If the dispute has not been resolved within sixty (60) days after issuance of a Notice of Objection from the EyeSys Representative, the dispute shall be submitted to arbitration as set forth below. The mediator of any dispute submitted to mediation under this section shall not serve as arbitrator of such dispute unless otherwise agreed to by all of the parties to the arbitration. In addition to resolving pending disputes, the mediator shall provide assistance with respect to allocating responsibility for the costs of mediation. (c) If, and to the extent that, any disputed claim is not resolved through good faith negotiation or through mediation in accordance with subsections (a) and (b) above, such disputed claim shall, upon demand of a party, be submitted to and decided by binding arbitration. The arbitration shall be conducted pursuant to Part 3, Title 9 of the California CODE OF CIVIL PROCEDURE (Sections 1280-1288.8). Discovery, including depositions for the purpose of discovery, shall be broadly permitted, and the provisions of CODE OF CIVIL PROCEDURE Section 1283.05 shall apply. Any demand to arbitrate, for purposes of the statute of limitations, shall have the same effect as if suit had been filed on the date the demand is made. The arbitration shall occur in Orange County, California. The parties shall agree upon an arbitrator twenty-one (21) days after the demand is made, and if the parties fail to so agree, then any of them may apply to the court for an order appointing an arbitrator meeting the requirements of this section. The decision of the arbitrator shall be final and binding, and shall be subject to confirmation, correction or vacation in accordance with the provisions of Code of Civil Procedure Sections 1285-1287.4. Any application, petition or other proceeding (i) to enforce the award or the provisions of this Agreement, (ii) to the extent that the arbitrator does not have the power or authority to resolve or grant the relief sought, and/or (iii) for provisional or equitable relief pending appointment of the arbitrator, shall be commenced in the appropriate state or federal courts having jurisdiction in Orange County, California and the parties hereby consent to jurisdiction and venue in such courts. The decision of the arbitrator about the validity of any claim in a Premier Certificate shall be binding and conclusive on the parties to this Agreement; and notwithstanding anything to the contrary in this Escrow Agreement, Escrow Holder shall make or withhold distributions of the Escrow Shares or otherwise act in accordance with the arbitrator's decision. The prevailing party in the arbitration, as determined by the arbitrator, shall be entitled to reimbursement of any costs or expenses incurred by it in connection with any mediation or arbitration hereunder, except to the extent decided to the contrary by the arbitrator. Judgment on any award rendered by the arbitrator may be entered in any court having jurisdiction over the matter. 10. FINAL DISTRIBUTION OF ESCROW SHARES. Upon expiration of the Escrow Period and receipt of written authorization from Premier, Escrow Holder shall distribute to Escrow Shareholders all shares then remaining in the escrow, except (a) such number of Escrow Shares as are sufficient, in the reasonable judgment of Premier to satisfy any unsatisfied claims specified in any Premier Notice or Premier Certificate previously delivered to Escrow Holder; (b) such number of Escrow Shares as are sufficient, in the reasonable judgment of the EyeSys -5- Representative to pay the costs and expenses incurred or likely to be incurred by the EyeSys Representative, and (c) the fees and disbursements of the Escrow Holder. As soon as all claims have been resolved, Escrow Holder shall distribute to the EyeSys Shareholders all shares then remaining in the escrow not required to satisfy those claims, amounts due to the EyeSys Representative and the unpaid fees and disbursements of the Escrow Holder. Distributions of the remaining Escrow Shares to the EyeSys Shareholders pursuant to this Escrow Agreement, whenever made, shall be proportionate to the EyeSys Shareholders respective interests as determined pursuant to Section 2.2 of the Merger Agreement. 11. DISPOSITION OF ESCROWED DISSENTING SHARES. In the event the Principal Shareholder (as defined in the Merger Agreement) sells any shares and remits the proceeds thereof to Premier pursuant to Section 5.22 of the Merger Agreement, upon the notification to Escrow Holder of such sale and acknowledgment of receipt by Premier of such proceeds, Escrow Holder shall distribute to the Principal Shareholder, out of the Escrowed Dissenting Shares, shares of Premier Class A Common Stock in an amount equal to the number of shares sold by the Principal Shareholder. At such time as the Principal Shareholder has no further obligations under Section 5.22 of the Merger Agreement, all of the Escrowed Dissenting Shares then remaining in the Escrow shall be returned to Premier. 12. LIABILITY AND INDEMNIFICATION OF ESCROW HOLDER AND THE EYESYS REPRESENTATIVE. (a) In performing any duties under this Escrow Agreement, neither Escrow Holder nor the EyeSys Representative shall be liable to any party hereto for damages, losses or expenses, except for gross negligence or willful misconduct on the part of the Escrow Holder. Escrow Holder shall not incur any such liability for (i) any act or failure to act made or omitted in good faith, or (ii) any action taken or omitted in reliance upon any instrument, including any written statement or affidavit provided for in this Agreement, that Escrow Holder shall in good faith believe to be genuine, nor shall Escrow Holder be liable or responsible for forgeries, fraud, impersonations, or determining the scope of any representative authority. Escrow Holder is not responsible for determining and verifying the authority of any person acting or purporting to act on behalf of any party to this Escrow Agreement. (b) The parties hereto agree jointly and severally to indemnify and hold Escrow Holder harmless against any and all losses, claims, damages, liabilities, and expenses, including reasonable costs of investigation, reasonable attorneys' fees and disbursements that may be imposed on or incurred by Escrow Holder in connection with the performance of Escrow Holder's duties under this Agreement, including but not limited to any litigation arising from this Agreement or involving its subject matter, but excluding any losses, claims, damages, liabilities and expenses (including costs of investigation, attorneys' fees and disbursements) resulting from Escrow Holder's negligence or willful misconduct. (c) Notwithstanding the foregoing, the EyeSys Representative shall have no personal responsibility with respect to any actions taken or not taken in connection with the performance of his obligations hereunder. To the extent that the EyeSys Representative may incur costs or expenses under this Agreement, including with respect to the indemnity provided -6- to the Escrow Holder, such obligations shall be satisfied solely by the Escrow Shares, subject to the prior satisfaction of any rights of Premier to reimbursement from the Escrow Shares. 13. MISCELLANEOUS. (a) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and, except as otherwise expressly provided herein, shall inure to the benefit of the parties hereto and their respective successors and assigns. (b) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents made and to be performed entirely within the State of California. (c) ATTORNEYS' FEES. Except as provided otherwise in Section 9 of this Agreement, in the event of any suit or other proceeding to construe or enforce any provision of this Agreement or any other agreement to be entered into pursuant hereto, or otherwise in connection with this Agreement, the prevailing party's or parties' reasonable attorneys' fees and costs (in addition to all other amounts and relief to which such party or parties may be entitled) shall be paid by the other party or parties. (d) CAPTIONS AND HEADINGS. The captions and headings included in this Agreement are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. (e) ENTIRE AGREEMENT; MODIFICATIONS; WAIVER. This Agreement, together with the Merger Agreement, constitutes the final, exclusive and complete understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings and discussions with respect thereto, including, without limitation, the Memorandum of Understanding, dated ____________, 1997, by and among Premier and EyeSys. No variation nor modification of this Agreement and no waiver of any provision or condition hereof, nor granting of any consent contemplated hereby, shall be valid unless in writing and signed by the party against whom enforcement of any such variation, modification, waiver or consent is sought. (f) SEVERABILITY. If any provision of this Agreement or the application thereof to any person, entity or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other persons, entities or circumstances shall not be affected and shall be enforced to the greatest extent permitted by law. (g) NOTICE. Any notice given hereunder shall be in writing and shall be deemed delivered upon the earlier of personal delivery (including personal delivery by facsimile) or the third day after mailing by certified or registered mail, postage prepaid as follows: -7- If to Premier: Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92718 Attention: Chief Executive Officer Facsimile: (714) 951-7218 With a copy to: Rutan & Tucker 611 Anton Boulevard, Suite 1400 Costa Mesa, California 92626 Attention: Thomas G. Brockington, Esq. Facsimile: (714) 546-9035 If to EyeSys: EyeSys Technologies, Inc. 2776 Bingle Road Houston, TX 77055 Attention: President and Chief Executive Officer Facsimile: (713) 465-2418 With a copy to: Epstein Becker & Green, PC 250 Park Avenue New York, New York 10177 Attention: Lowell S. Lifschultz, Esq. Facsimile: (212) 661-0989 or to such other address as any party may have furnished in writing to the other parties in the manner provided above. (h) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, enforceable against the signatory thereto, but all of which together shall constitute but one agreement. -8- IN WITNESS WHEREOF, each of the parties hereto has executed, or caused to be executed on its behalf by its duly authorized officer, this Agreement, all as of the day and year first above written. PREMIER LASER SYSTEMS, INC. a California corporation By: --------------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- EYESYS TECHNOLOGIES, INC. a Delaware corporation By: --------------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- EYESYS REPRESENTATIVE By: --------------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- ESCROW HOLDER By: --------------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- -9- EXHIBIT C-1 PREMIER LASER SYSTEMS, INC. LOCK-UP AGREEMENT (for holders of 5% or more of the Shares) ___________, 1997 Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92718 Ladies and Gentlemen: The undersigned understands that you have entered into that certain Agreement and Plan of Merger dated as of ______________, 1997, by and among Premier Laser Systems, Inc., a California corporation ("PREMIER"), Premier Acquisition, Inc., a California corporation, and a wholly owned subsidiary of Premier, and EyeSys Technologies, Inc., a Delaware corporation (the "MERGER AGREEMENT"), which provides for the issuance of Class A Common Stock, no par value, of Premier ("COMMON STOCK") pursuant to Premier's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on ____________, 1997 (Registration No. 333-_______) (as may be amended or supplemented, the "REGISTRATION STATEMENT"). For purposes hereof, the term "PRIMARY EYESYS SHAREHOLDER GROUP" shall mean the ___ former holders of EyeSys securities who receive the largest number of shares of Common Stock as a result of the transactions described in the Merger Agreement. In consideration of the foregoing and in acknowledgment of the benefit therefrom to the undersigned, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned hereby agrees: (i) for a period of four and one-half (4 1/2) months from the Effective Time (as defined in the Merger Agreement), not to offer for sale, sell or otherwise dispose of (or enter into any transaction which is designed to, or could be expected to, result in the disposition by any person of), directly or indirectly (collectively, a "DISPOSITION") any of the shares of Common Stock, any then-vested options or any then-vested warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "SECURITIES"), now owned by the undersigned; and (ii) for a period commencing at the end of such four and one-half (4 1/2) month period and ending November 30, 1997, an amount which, when added to all other Dispositions by the Primary EyeSys Shareholder Group, does not exceed 65,000 shares per month, and thereafter, during each month, an amount equal to one-ninth (1/9) of the number of shares held by such person on November 30, 1997; provided, however, that if at any time Premier notifies the undersigned that it will commence within thirty (30) days a "call" with respect to Premier's outstanding Class A or Class B Warrants, the undersigned will not make any further Dispositions until the termination of such call (provided that the foregoing suspension of dispositions shall not exceed ninety (90) days in length). The restrictions set forth in section (i) above are expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the four and one-half (4 1/2) month lock-up period, even if such Securities would be disposed of by someone other than the undersigned. Notwithstanding any other provision of this Agreement to the contrary, in no event shall the undersigned offer for sale, sell or otherwise dispose of any Securities received pursuant to the Merger Agreement in an amount or manner which violates Rule 145(d) promulgated under the Securities Act of 1933, as amended. Furthermore, the undersigned hereby agrees and consents to the entry of stop-transfer instructions with Premier's transfer agent against the transfer of the Securities held by the undersigned except in compliance with this Lock-Up Agreement. ------------------------------------------------ Name: Accepted as of the date first set forth above: PREMIER LASER SYSTEMS, INC. By: ------------------------------------- Authorized Representative Premier requests that this Lock-Up Agreement be completed and delivered to Premier's counsel, Rutan & Tucker, LLP, 611 Anton Boulevard, Suite 1400, Costa Mesa, California 92626, Attn: Thomas G. Brockington, Esq. -2- EXHIBIT C-2 PREMIER LASER SYSTEMS, INC. LOCK-UP AGREEMENT (for holders of less than 5% of the Shares) __________, 1997 Premier Laser Systems, Inc. 3 Morgan Irvine, CA 92718 Ladies and Gentlemen: The undersigned understands that you have entered into that certain Agreement and Plan of Merger dated as of ______________, 1997, by and among Premier Laser Systems, Inc., a California corporation ("PREMIER"), Premier Acquisition, Inc., a California corporation, and a wholly owned subsidiary of Premier, and EyeSys Technologies, Inc., a Delaware corporation (the "MERGER AGREEMENT"), which provides for the issuance of Class A Common Stock, no par value, of Premier ("COMMON STOCK") pursuant to Premier's Registration Statement on Form S-4 filed with the Securities and Exchange Commission on ____________, 1997 (Registration No. 333-_______) (as may be amended or supplemented, the "REGISTRATION STATEMENT"). In consideration of the foregoing and in acknowledgment of the benefit therefrom to the undersigned, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned hereby agrees that the undersigned shall not offer for sale, sell or otherwise dispose of, (or enter into any transaction which is designed to, or could be expected to, result in the disposition by any person of), directly or indirectly (collectively, a "DISPOSITION"), any of the shares of Common Stock, any then-vested options or any then-vested warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "SECURITIES"), except that during each calendar month after the closing of the transactions contemplated by the Merger Agreement the undersigned shall be entitled to sell or otherwise dispose of Securities in an amount equal to (but not more than) one-tenth (1/10) of the number of shares of Common Stock issued to such person in connection with the Merger Agreement (treating, for such purposes, warrants, options and convertible securities as though they had been exercised or converted in accordance with their terms). The restrictions set forth above are expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities in excess of the amount specified above, even if such Securities would be disposed of by someone other than the undersigned. Furthermore, the undersigned hereby agrees and consents to the entry of stop-transfer instructions with Premier's transfer agent against the transfer of the Securities held by the undersigned except in compliance with this Lock-Up Agreement. ------------------------------------------------ Name: Accepted as of the date first set forth above: PREMIER LASER SYSTEMS, INC. By: ------------------------------------ Authorized Representative Premier requests that this Lock-Up Agreement be completed and delivered to Premier's counsel, Rutan & Tucker, LLP, 611 Anton Boulevard, Suite 1400, Costa Mesa, California 92626, Attn: Thomas G. Brockington, Esq. -2- EXHIBIT D CERTIFICATE OF MERGER OF DOMESTIC CORPORATIONS CERTIFICATE OF MERGER OF PREMIER ACQUISITION, INC. INTO EYESYS TECHNOLOGIES, INC. The undersigned corporation, organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger is as follows: NAME STATE OF INCORPORATION Premier Acquisition, Inc. Delaware EyeSys Technologies, Inc. Delaware SECOND: That a plan and agreement of merger between the parties to the merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of Section 251 of the General Corporation Law of the State of Delaware. THIRD: That the name of the surviving corporation of the merger is EyeSys Technologies, Inc. FOURTH: That the certificate of incorporation in the form of the Certificate of Incorporation of EyeSys attached hereto, shall be the certificate of incorporation of the surviving corporation. FIFTH: That the executed plan and agreement of merger is on file at the principal place of business of the surviving corporation. The address of the principal place of business of the surviving corporation is EyeSys Technologies, Inc., c/o Premier Laser Systems, Inc., 3 Morgan, Irvine, California 92618. SIXTH: That a copy of the plan and agreement of merger will be furnished by the surviving corporation, on request and without cost, to any stockholder of any constituent corporation. EYESYS TECHNOLOGIES, INC. By: --------------------------------------------- President ATTEST: By: --------------------------------------- - ------------------------------------------ Secretary -2- EXHIBIT F TERMS OF SECURITIES PREMIER CLASS AA OPTIONS Each Premier Class AA Option shall represent the right to purchase one share of Premier's Class A Common Stock at an exercise price of $6.50 at any time through November 30, 1999. Commencing immediately, such Premier Class AA Option shall be redeemable by Premier at a price of $.05 per option on thirty (30) days written notice, so long as the average closing bid price, as reported by the Nasdaq Stock Market, of the Class A Common Stock exceeds $9.10 per share, for thirty (30) consecutive trading days ending within fifteen (15) days of the notice of redemption. PREMIER CLASS BB OPTIONS Each Premier Class BB Option shall represent the right to purchase one share of Premier's Class A Common Stock at an exercise price of $8.00 at any time through November 30, 1999. Commencing immediately, such Premier Class BB Option shall be redeemable by Premier at a price of $.05 per option on thirty (30) days written notice, so long as the average closing bid price, as reported by the Nasdaq Stock Market, of the Class A Common Stock exceeds $11.20 per share, for thirty (30) consecutive trading days ending within fifteen (15) days of the notice of redemption. PREMIER OPTIONS Each Premier Option shall represent the right to purchase one share of Class A Common Stock for a period commencing twelve (12) months from the Closing Date and ending of three (3) years from the Closing Date, at an exercise price equal to the Per Share Value. The Premier Options shall not be redeemable. EXHIBIT G OPERATING PLAN -2- EXHIBIT H LOANS INCLUDED IN NONINCLUDED COSTS The obligations for money borrowed included in the Nonincluded Costs shall consist of $300,000 principal amount of loans from shareholders made in 1997, together with accrued interest thereon. -3- SCHEDULE 2.1 NOTEHOLDERS EYESYS AFFILIATE NOTEHOLDERS Frontenac VI Limited Partnership Trinity Ventures II, L.P. Trinity Ventures III, L.P. Trinity Ventures Side-by-Side Fund I, L.P. American Healthcare Fund II, L.P. Robert G. Martin, M.D. Frederick Ruegseggar EYESYS NONAFFILIATE NOTEHOLDERS All other Noteholders -4- SCHEDULE 5.16 EYESYS PERSONNEL David Headlee Lisa Manis Bonnie Schwebb Chris Boyle Liz Ojeda Michel Ulsas Victor Lau Debbie Gabriel Beth Soper David Liu Eddie Phillipe James Tang Eric Serfoss John Clark Ken Carbonari Joe Wakil -5- EX-23.1 7 CONSENT OF ERNST & YOUNG Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-1680) pertaining to the 1995 Stock Option Plan of Premier Laser Systems, Inc. and related Prospectus and in the Registration Statement (Form S-8 No. 333-27151) pertaining to the February 1996 Stock Option Plan of Premier Laser Systems, Inc. and related Prospectus of our report dated May 1, 1997, with respect to the consolidated financial statements and schedule of Premier Laser Systems, Inc. included in its Annual Report (Form 10-K) for the year ended March 31, 1997. ERNST & YOUNG LLP Orange County, California May 22, 1997 EX-23.2 8 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-01680 and 333-27151) of Premier Laser Systems, of our report dated May 17, 1996 appearing on page 27 of this Form 10-K. We also consent to the application of such report to the Financial Statement Schedule for the two years ended March 31, 1996 listed in the accompanying index when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report are also included in this schedule. PRICE WATERHOUSE LLP Costa Mesa, California May 22, 1997 EX-27 9 EXHIBIT 27 - FDS
5 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 173,610 3,968,288 2,105,575 387,263 2,964,632 10,658,161 1,895,091 1,114,146 19,320,611 2,639,545 0 0 0 36,670,204 (20,038,494) 19,320,611 5,530,861 5,530,861 3,968,539 3,968,539 7,168,172 387,263 (15,493) (5,590,357) 0 (5,590,357) 0 0 0 (5,590,357) (.96) (.96)
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