-----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, HUGhwSEg8+mJ7VCIqtYrI5tR8M32JS/7ji3buhMZFcz1WMjFHwCk9QFzAn7VsrZo KjukIRRATjJ/UGnOdpGoHw== 0001019687-99-000822.txt : 19991222 0001019687-99-000822.hdr.sgml : 19991222 ACCESSION NUMBER: 0001019687-99-000822 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19991221 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: S-3/A SEC ACT: SEC FILE NUMBER: 333-92183 FILM NUMBER: 99778225 BUSINESS ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92660 BUSINESS PHONE: 9498590656 MAIL ADDRESS: STREET 1: 3 MORGAN CITY: IRVINE STATE: CA ZIP: 92660 S-3/A 1 PREMIER LASER SYSTEMS, INC. As filed with the Securities and Exchange Commission on December 21, 1999 Registration No. 333-92183 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PREMIER LASER SYSTEMS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 33-0472684 (State or other jurisdiction or (I.R.S. Employer Identification No.) incorporation or organization) 3 MORGAN IRVINE, CALIFORNIA 92618 (949) 859-0656 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROBERT V. MAHONEY WITH COPIES TO: CHIEF FINANCIAL OFFICER THOMAS G. BROCKINGTON, ESQ. PREMIER LASER SYSTEMS, INC. ALISON M. BARBAROSH, ESQ. 3 MORGAN RUTAN & TUCKER, LLP IRVINE, CALIFORNIA 92618 611 ANTON BOULEVARD, 14TH FLOOR (949) 859-0656 COSTA MESA, CALIFORNIA 92626 (Name, address, including zip code, and (714) 641-5100 telephone number, including area code, of agent for service) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. |_| If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE ==================================================================================================================================== PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED(1) PRICE PER SHARE (2) PRICE (2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------------------ Class A common stock, no par 838,667 shares(3) $1.53125 $1,284,208.80 $339.03(4) value ====================================================================================================================================
(1) In the event of a stock split, stock dividend or similar transaction involving Premier's common stock, in order to prevent dilution, the number of shares registered shall automatically be increased to cover the additional shares in accordance with Rule 416(a) under the Securities Act of 1933, as amended. (2) The aggregate offering price of shares of Premier's common stock is estimated solely for purposes of calculating the registration fee payable pursuant hereto, as determined in accordance with Rule 457(c) as of December 16, 1999. (3) Represents shares of common stock issuable following conversion of presently outstanding convertible debentures held by the registered security holders. (4) A registration fee in the amount of $405.67 has previously been paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. PROSPECTUS PREMIER LASER SYSTEMS, INC. 3 MORGAN IRVINE, CALIFORNIA 92618 (949) 859-0656 838,667 shares of (no par value) common stock The securityholders listed in this Prospectus under the section "Registered Securityholders" may offer and sell a total of 838,667 shares of our company's common stock, no par value, which shares are issuable upon conversion of convertible debentures (the "Debentures") previously issued to such securityholders. This Prospectus has been prepared for the purposes of registering the shares under the Securities Act of 1933, as amended (the "Securities Act"), and to allow the Registered Securityholders to make future sales to the public without restriction. To our knowledge, the Registered Securityholders have made no arrangement with any brokerage firm for the sale of the shares. The Registered Securityholders may sell their shares of common stock described in this Prospectus for their own benefit in public or private transactions, on or off the Nasdaq National Market, at prevailing market prices, or at privately negotiated prices. The Registered Securityholders may sell the shares directly to purchasers or through brokers or dealers. Brokers or dealers may receive compensation in the form of discounts, concessions or commissions from the Registered Securityholders. The compensation to a particular underwriter, broker-dealer or agent may be in excess of customary commissions. The Registered Securityholders will pay all commissions, transfer taxes and other expenses associated with their sales of the shares. We will pay the expenses of the preparation of this Prospectus. We have also agreed to indemnify certain Registered Securityholders against certain liabilities, including, without limitation, liabilities arising under the Securities Act. We will not receive any of the proceeds from the Registered Securityholders' sales of the shares. In addition to sales under this Prospectus, the Registered Securityholders may also engage in other sales of shares under Rule 144 or other exempt resale transactions. There can be no assurance that any or all of the Registered Securityholders will sell any or all of the shares offered pursuant this Prospectus. More information is provided in the section titled "Plan of Distribution." Our common stock is listed on the Nasdaq National Market under the symbol "PLSIA." On December 16, 1999, the last reported sale price of our common stock on the Nasdaq National Market was $1.4375 per share. __________ SEE "RISK FACTORS" BEGINNING ON PAGE 2, FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS. __________ This Prospectus is dated December __, 1999 The information in this Prospectus is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities and Exchange Commission is declared effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. __________ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. RISK FACTORS Before you invest in our common stock, you should be aware that there are various risks, including those described below. You should carefully consider these risk factors, together with all the other information included in this prospectus, before you decide whether to purchase shares of our common stock. THERE ARE RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS MADE BY US AND ACTUAL RESULTS MAY DIFFER. Some of the information in this prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," and "continue" or similar words. You should read statements that contain these words carefully because they: o discuss our future expectations o contain projections of our future results of operations or of our financial condition o state other "forward-looking" information We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors listed in this section, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial condition. RISKS RELATED TO OUR BUSINESS IF WE ARE UNABLE TO SECURE ADDITIONAL FINANCING IN THE NEAR FUTURE, WE WILL HAVE SEVERE DIFFICULTIES FINANCING OUR BUSINESS. In the future, we will require substantial additional funds for operating expenses, research and development programs, preclinical and clinical testing, development of our sales and distribution force, operating expenses, regulatory processes and manufacturing and marketing programs. Our capital requirements may vary, and will depend on both internal and external factors. Internal factors affecting our capital requirements include: o our ability to generate profits and cash flow from operations o the progress of research and development programs 2 o results of preclinical and clinical testing o the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights o developments and changes in our existing research o licensing and other relationships o the terms of any new collaborative, licensing and other arrangements that we may establish o the amount of legal, accounting and administrative costs incurred in connection with pending litigation External factors affecting our capital requirements include: o competing technological and market developments o the time and cost involved in obtaining regulatory approvals We are currently experiencing cash flow difficulties. Our currently available short-term assets are not anticipated to be sufficient to meet our operating expenses and capital expenditures past January, 2000. We are currently in the process of seeking additional financing. We do not know if additional financing will be available when needed, or if it is available, if it will be available on acceptable terms. Having insufficient funds would likely materially and adversely affect our business. For instance, we may be prevented from purchasing needed inventory and from implementing our business strategy. We may also be required to delay, scale back or eliminate research and product development programs or to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop internally. WE HAVE INCURRED NET LOSSES IN THE PAST AND EXPECT TO INCUR FUTURE LOSSES WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO SUSTAIN OUR OPERATIONS. We incurred net losses of approximately $76,343,000 from April 1, 1995 through March 31, 1999, and approximately $30,841,000 for the year ended March 31, 1999. As of September 30, 1999, we had an accumulated deficit of approximately $94,301,996. We expect to continue to incur net losses until product sales generate sufficient revenues to fund our continuing operations. We may fail to achieve significant revenues from sales or achieve or sustain profitability. Our ability to achieve profitability in the future will depend in part on our ability to continue to successfully develop clinical applications, obtain regulatory approvals for our products and sell these products on a wide scale. These risks apply to both our laser products and our ophthalmic diagnostic products. THE HIGH COST OF DENTAL LASERS, SAFETY AND EFFICACY CONCERNS OF DENTISTS AND PATIENTS AND THE SUBSTANTIAL MARKET ACCEPTANCE OF DENTAL DRILLS MAY PREVENT US FROM ACHIEVING THE BROAD MARKET ACCEPTANCE WHICH IS NECESSARY FOR OUR SUCCESS. Our products may not be accepted by the medical or dental community or by patients. We do not know if these products can be successfully commercialized on a broad basis. The acceptance of dental lasers may be adversely affected by their high cost, concerns by patients and dentists relating to their safety and efficacy, and the substantial market acceptance and penetration of alternative dental tools such as the dental drill. Our future sales and profitability depend in part on our ability to demonstrate to dentists, ophthalmologists, optometrists and other physicians the potential cost and performance advantages of our laser systems, diagnostic products and other products over traditional methods of treatment and over competitive products. Current economic pressure may make doctors and dentists reluctant to purchase substantial capital 3 equipment or invest in new technology. We currently have a limited sales force and will need to hire additional sales and marketing personnel to increase the general acceptance of our products. Of all the factors impacting our profitability, the failure of our products to achieve broad market acceptance would have the greatest negative impact on our business, financial condition and results of operations and our profitability. WE ARE INVOLVED IN PENDING LITIGATION AND A REGULATORY INVESTIGATION AND MAY BE ADVERSELY AFFECTED BY AN ADVERSE OUTCOME IN THE LAWSUIT OR BY THE COSTS OF DEFENDING THIS LAWSUIT. We have been sued in a number of related securities class action matters, generally relating to allegations of misrepresentations during the period from May 7, 1997 to April 15, 1998. We have reached an agreement in principle to settle this litigation and recorded an expense in the quarter ended December 31, 1998, relating to this settlement. In the quarter ended March 31, 1999, we recorded an additional expenses of $250,000 to cover continuing legal fees incurred in connection with this settlement. However, this settlement is subject to several conditions, and it is possible that it may not be completed, in which case the litigation would continue. An adverse judgment entered in this litigation could materially and adversely affect our business and results of operations. In addition, the Securities and Exchange Commission has commenced an investigation of our practices and procedures relating to revenue recognition issues and related matters. The Securities and Exchange Commission has begun taking depositions of past and present employees as well as our outside accountants. The costs of our continuing defense of the litigation matters and responses to the regulatory investigations, including accounting and legal fees as well as management time and effort, will be substantial, and we expect these costs to materially and adversely affect our results of operations until these matters are resolved. We do not know when these matters will be resolved. In addition, the Securities and Exchange Commission is empowered to assess substantial penalties against us in connection with its findings in the pending investigation. The imposition of any of these penalties could materially and adversely affect our business, financial condition and results of operations. IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE THE OPHTHALMIC IMAGING SYSTEMS ("OIS") BUSINESS WITH OUR OTHER OPERATIONS, WE MAY INCUR SUBSTANTIAL AND UNANTICIPATED EXPENSES AND OPERATING INEFFICIENCIES. We acquired a majority of the outstanding common stock of OIS in 1998. In March 1999, we agreed to manufacture OIS's products on an outsourcing basis. In addition, we have agreed with OIS to acquire the remaining outstanding stock of OIS, subject to satisfaction of certain conditions. We are not sure if the synergies of the two entities will allow us to reduce expenses in such a way as to make OIS profitable. In addition, members of our management will have to continue to expend time and effort on new activities relating to the OIS operations, which will detract from their time available to attend to our other activities. We cannot assure you that the expenses or dislocations that we may suffer as a result of the coordination of these businesses will not be material. BECAUSE SOME OF THE COMPONENTS WE USE ARE NOT WIDELY AVAILABLE, THERE IS A RISK THAT WE MAY NOT ALWAYS BE ABLE TO OBTAIN THESE COMPONENTS, WHICH COULD PREVENT US FROM FILLING ORDERS ON TIME AND REDUCE OUR SALES. We purchase some of the raw materials, components and subassemblies included in our products from a limited group of qualified suppliers and do not maintain long-term supply contracts with any of our key suppliers. Some of the components used by OIS are manufactured by a sole vendor, including Foresight Imaging for its prism card and Kodak for its 12 bit camera. In addition, our Arago laser product is manufactured for us by one supplier, LaserMed, Inc. Further, our components are subject to rapid innovation and obsolescence. The discontinuance of the manufacturing of these components may require us to redesign some of the hardware and software used in our products to accommodate a 4 replacement component. While we believe that suppliers could be found for all of our components and products, we cannot assure you that any supplier could be replaced in a timely manner. Any interruption in the supply of key components could materially harm our ability to manufacture our products and our business, financial condition and results of operations. IN ORDER TO CONTINUE TO SELL OUR PRODUCTS IN FOREIGN MARKETS, WE MUST DEVELOP AND MAINTAIN FOREIGN SALES DISTRIBUTION CHANNELS AND MANAGE POLITICAL AND ECONOMIC INSTABILITY IN FOREIGN MARKETS AND DEAL WITH GOVERNMENTAL QUOTAS AND OTHER REGULATIONS. A substantial portion of our sales are made in foreign markets. The primary risks to which we are exposed due to our foreign sales are the difficulty and expense of maintaining foreign sales distribution channels, political and economic instability in foreign markets and governmental quotas and other regulations. The regulation of medical devices worldwide also continues to develop, and it is possible that new laws or regulations could be enacted which would have an adverse effect on our business. In addition, we may experience additional difficulties in providing prompt and cost effective service of our medical lasers in foreign countries. We do not carry insurance against these risks. The occurrence of any one or more of these events may individually or in the aggregate have a material adverse effect upon our business, financial condition and results of operations. IF WE CANNOT ADAPT TO TECHNOLOGICAL ADVANCES, OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE AND OUR PRODUCT SALES COULD SIGNIFICANTLY DECLINE. The markets in which our medical products compete are subject to rapid technological change as well as the potential development of alternative surgical techniques or new pharmaceutical products. These changes could render our products uncompetitive or obsolete. We will be required to invest in research and development to attempt to maintain and enhance our existing products and develop new products. We do not know if our research and development efforts will result in the introduction of new products or product improvements. IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY. Our success will depend in part on our ability to obtain patent protection for products and processes, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. While we hold a number of U.S. and foreign patents and have other patent applications pending in the United States and foreign countries, we cannot assure you that any additional patents will be issued, that the scope of any patent protection will exclude competitors or that any of our patents will be held valid if subsequently challenged. Further, other companies may independently develop similar products, duplicate our products or design products that circumvent our patents. We are aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict our right to market some of our technologies without a license, including, among others, patents relating to our lens emulsification product and ophthalmic probes for the Er:YAG laser. We also rely upon unpatented trade secrets, and we cannot assure you that others will not independently develop or otherwise acquire substantially equivalent trade secrets. In addition, at each balance sheet date, we are required to review the value of our intangible assets based on various factors, such as changes in technology. Any adjustment downward in the value of our intangible assets may result in a write-off of the intangible asset and a substantial charge to earnings, which would adversely affect our operating results in the future. 5 IN OUR BUSINESS, WE COULD BECOME INVOLVED IN PATENT AND INTELLECTUAL PROPERTY LITIGATION, IN WHICH AN ADVERSE DETERMINATION COULD SUBJECT US TO SIGNIFICANT LIABILITIES AND RESTRICT OUR MANUFACTURING RIGHTS. In the past, we have received allegations that some of our laser and diagnostic products infringe on other patents. There has been significant patent litigation in the medical device industry. Adverse determinations in litigation or other patent proceedings to which we may become a party could subject us to significant legal judgments or other liabilities to third parties and could require us to seek licenses from third parties that may or may not be economically viable. We cannot assure you that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to us. If we do not obtain these licenses, we could encounter delays in product introductions while we attempt to design around these patents, or we could find that the development, manufacture or sale of products requiring such licenses could be enjoined. OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION WHICH IMPOSES SIGNIFICANT COSTS ON US AND IF NOT COMPLIED WITH COULD LEAD TO THE ASSESSMENT OF PENALTIES. Our products are regulated as medical devices by the United States Food & Drug Administration. As such, these devices require either Section 510(k) premarket clearance or approval of a premarket approval application by the FDA prior to commercialization. Satisfaction of regulatory requirements is expensive and may take several years to complete. We cannot assure you that further clinical trials of our medical products or of any future products will be successfully completed or, if they are completed, that any requisite FDA or foreign governmental approvals will be obtained. FDA or other governmental approvals of products we may develop in the future may require substantial filing fees which could limit the number of applications we seek and may entail limitations on the indicated uses for which our products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. Also, we have made modifications to some of our existing products which we do not believe require the submission of a new 510(k) notification to the FDA. However, we cannot assure you that the FDA would agree with our determination. If the FDA did not agree with our determination, they could require us to cease marketing one or more of the modified devices until the devices have been cleared. We are also required to adhere to a wide variety of other regulations governing the operation of our business. Noncompliance with state, local, federal or foreign requirements can result in serious penalties that could harm our business. THE INTENSE COMPETITION WE FACE COULD RESULT IN REDUCED SALES AND DOWNWARD PRESSURE ON THE PRICES OF OUR PRODUCTS. We are, and will continue to be, subject to intense competition in our targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies, and competitive products. Many of our competitors have substantially greater financial, marketing and manufacturing resources and experience than us. In addition, we expect that other companies will enter the laser market, particularly as medical lasers gain increasing market acceptance. Significant competitive factors which will affect future sales in the marketplace include regulatory approvals, performance, pricing and general market acceptance. The ophthalmic diagnostic market is also highly competitive. There are many companies engaged in this market, some with significantly greater resources than ours. Our competitors may be able to develop technologies, procedures or products that are more effective or economical than ours, or that would render our products obsolete or noncompetitive. 6 To continue to remain competitive, we must develop new software and hardware meeting the needs of ophthalmologists and optometrists. Our future revenues will depend, in part, on our ability to develop and commercialize these new products as well as on the success of development and commercialization efforts of our competitors. A SUCCESSFUL PRODUCT LIABILITY CLAIM ASSERTED AGAINST US DUE TO A DEFECT IN ONE OF OUR PRODUCTS IN EXCESS OF OUR INSURANCE COVERAGE WOULD HARM OUR BUSINESS. The sale of our medical products involves the inherent risk of product liability claims against us. We currently maintain product liability insurance coverage in the amount of $5 million per occurrence and $5 million in the aggregate, but this insurance is expensive, subject to various coverage exclusions and may not be obtainable in the future on terms acceptable to us. We do not know whether claims against us arising with respect to our products will be successfully defended or that our insurance will be sufficient to cover liabilities arising from these claims. A successful claim against us in excess of our insurance coverage could materially harm our business. THERE IS UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT WHICH IS CRITICAL TO MARKET ACCEPTANCE OF OUR PRODUCTS. Our laser systems and other products are generally purchased by physicians, dentists and surgical centers which then bill various third party payors, such as government programs and private insurance plans, for the procedures conducted using these products. Third-party payors carefully review and are increasingly challenging the prices charged for medical products and services, and scrutinizing whether to cover new products and evaluating the level of reimbursement for covered products. While we believe that the procedures using our products have generally been reimbursed, payors may deny coverage and reimbursement for our products if they determine that the device was not reasonable and necessary for the purpose for which it was used, was investigational or not cost-effective. As a result, we cannot assure you that reimbursement from third party payors for these procedures will be available or if available, that reimbursement will not be limited. If third party reimbursement of these procedures is not available, it will be more difficult for us to sell our products on a profitable basis. Moreover, we are unable to predict what legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation may have on us. THE COVERAGE AND SPENDING LIMITATIONS CONTAINED IN HEALTH CARE REFORM PROPOSALS WOULD, IF ADOPTED, REDUCE DEMAND FOR OUR PRODUCTS. Several states and the United States government are investigating a variety of alternatives to reform the health care delivery system and further reduce and control health care spending. These reform efforts include proposals to limit spending on health care items and services, limit coverage for new technology and limit or control the price health care providers and drug and device manufacturers may charge for their services and products. If adopted and implemented, such reforms could have a material adverse effect on our business, financial condition and results of operations. IF WE EXPERIENCE PROBLEMS WITH YEAR 2000 COMPLIANCE OUR OPERATIONS MAY BE DISRUPTED. Many existing computer programs use only two digits to identify the year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. As a result, any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in system failure or miscalculations, causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. 7 We are heavily dependent upon the proper functioning of our own computer and data-dependent systems. This includes, but it not limited to, our support/administrative and operational/production systems. Any failure or malfunctioning on the part of these or other systems could harm our business in ways that we currently do not know and cannot discern, quantify or otherwise anticipate. In addition, if our key vendors experience Year 2000 compliance issues, then our business could be harmed. Due to the interrelated nature of international commerce, if there is a failure in Year 2000 compliance by us or one of our direct or indirect business partners, we could suffer major disruptions in our ability to call on customers, obtain orders from customers, obtain parts from suppliers, manufacture products for sale, ship products to our customers, or receive payment for our sales. We are currently in the final phase of identifying and evaluating the potential impacts of the Year 2000 on our systems. We design, manufacture and sell medical products which contain computer chips and we utilize software developed by other companies. We rely on external business partners. As such, there can be no assurance that our business will not be negatively affected by Year 2000 problems experienced by these business partners. RISKS RELATED TO THIS OFFERING CHANGES IN REVENUE AND OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF OUR STOCK TO FLUCTUATE, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL. Due to the relatively high sales price of our products and low sales unit volume, minor timing differences in receipt of customer orders have produced and could continue to produce significant fluctuations in quarterly results. In addition, if anticipated sales and shipments in any quarter do not occur when expected, expenditures and inventory levels could be disproportionately high, and our operating results for that quarter, and potentially for future quarters, would be adversely affected. Quarterly results may also fluctuate based on a variety of other factors. The important factors which may cause our quarterly results to fluctuate are seasonality and production delays. During the past four fiscal quarters, our net loss has fluctuated from a low of $2.1 million to a high of $12.9 million. Such fluctuations may cause our stock price to decline and adversely affect our ability to raise additional capital. THE VOLATILITY OF OUR STOCK PRICE MAKES THESE SECURITIES RISKY FOR THOSE SEEKING A STABLE INVESTMENT. The market price of our common stock is very volatile, and our common stock therefore may not be a suitable investment for those who seek stable investment prices over the short or long term. Our common stock was first publicly traded in December 1994 and has had last reported closing sale prices ranging from a low of $1.38 per share in August 1999 to a high of $14.00 per share in May 1997. The market price of our common stock could continue to fluctuate substantially due to a variety of risk factors, including those described elsewhere in this prospectus. The market price for our common stock may also be affected by our ability to meet analysts' expectations. Any failure to meet these expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, the market prices of securities issued by many companies may change for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against the company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business, results of operations and financial condition. 8 A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE, AND IF SOLD, THESE SHARES MAY CREATE EXCESS SUPPLY IN THE MARKET CAUSING OUR STOCK PRICE TO DECLINE. Sales of a substantial number of our shares of common stock in the public market could adversely affect the market price for our common stock. At this time, approximately 7.6 million shares of our common stock are issuable upon the full exercise of our outstanding Class B Warrants, and over 7.4 million shares of our common stock are issuable upon exercise of other outstanding warrants and options and conversion of outstanding debentures. The existence of these outstanding warrants and options could adversely affect our ability to obtain future financing. We have also reserved 2,250,000 shares of our common stock for issuance in connection with the proposed settlement of outstanding litigation. The consummation of this settlement will require satisfaction of a number of conditions, and we cannot assure you that the settlement will be completed. The price which we may receive for our common stock issued upon exercise of outstanding options and warrants will likely be less than the market price of our common stock at the time these options and warrants are exercised. Moreover, the holders of the options and warrants might be expected to exercise them at a time when we would, in all likelihood, be able to obtain needed capital by a new offering of our securities on terms more favorable than those provided for by the options and warrants. OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY POSSIBLY PREVENTING YOU FROM OBTAINING HIGHER SHARE PRICES. Our articles of incorporation authorize the issuance of 8,850,000 shares of "blank check" preferred stock, which will have terms as may be determined from time to time by the board of directors. Accordingly, the board of directors is empowered, without shareholder approval, to issue preferred stock with terms which could adversely affect the rights of the holders of the common stock. The preferred stock could also be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Premier. This could have the effect of preventing others from seeking to acquire your shares in transactions at premium prices. In March 1998, we adopted a Shareholder Rights Plan, which entitles certain of our shareholders to purchase our Series A Junior Participating Preferred Stock. These rights are not exercisable until the acquisition by a person or affiliated group of 15% or more of the outstanding shares of our common stock, or the commencement or announcement of a tender offer or exchange offer which would result in the acquisition of 15% or more of our outstanding shares. Upon request, we will provide you with a copy of the Shareholder Rights Plan. The Shareholder Rights Plan may have the effect of discouraging, delaying or preventing a change of control of Premier. SHORT SELLING OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE. If a significant number of shares of common stock which are issued upon conversion of the debentures and payment of interest thereon are then sold in the market, the price of our common stock could be depressed due to the presence of these additional shares in the market. This downward pressure could encourage short sales of common stock by the selling shareholders or others. By increasing the number of shares offered for sale, material amounts of short selling could place further downward pressure on the market price of the common stock. 9 ABOUT THIS PROSPECTUS This Prospectus is part of a Registration Statement we filed with the Securities and Exchange Commission (the "SEC"). You should rely only on the information incorporated by reference or provided in this Prospectus. We have not authorized anyone else to provide you with different information. The Registered Securityholders will not make an offer of the shares in any state where the offer is not permitted. You should not assume that the information in this Prospectus is accurate as of any date other than the date on the front of the document. USE OF PROCEEDS The Registered Securityholders will directly receive the proceeds from the sale of the shares. We will not receive any proceeds from the sale of the shares offered by this Prospectus. DILUTION The following discussion and table treats our Class A Common Stock, Class E-1 Common Stock and Class E-2 Common Stock as a single class. As of September 30, 1999, we had a net tangible book value of $(2,600,000), or $(0.15) per share of common stock. Net tangible book value per share represents the amount of total tangible assets less the amount of our total liabilities, divided by the number of shares of common stock outstanding. After giving effect to the issuance and conversion of the debentures and exercise of the warrants, our adjusted pro forma net tangible book value as of September 30, 1999 would have been $(1,353,000), or $(0.07) per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $0.08 per share to our existing shareholders and an immediate dilution to the persons converting the debentures and exercising the warrants of approximately $1.57 per share. Dilution is determined by subtracting pro forma net tangible book value per share of common stock after this offering from the price paid by new investors for a share of our common stock. The following table illustrates this dilution on a per share basis and assume that all of the warrants will be exercised:
Assumed average price per share(1)...................................................$ 1.50 Net tangible book value per share before exercise ..................$(0.15) Increase per share attributable to the conversion of the debentures and exercise of the warrants ..........................$ 0.08 Pro forma net tangible book value per share after conversion and exercise............$(0.07) ------- Dilution of net tangible book value..................................................$ 1.57 =======
- ----------- (1) The debentures are convertible into common stock based on the closing sale price of the common stock on the day the debenture is converted. Accordingly, the conversion price for the debentures will fluctuate on a daily basis. For purposes of this dilution table, we have assumed a conversion price of $1.50 per share and, based on such assumed price, the outstanding debentures would be convertible into approximately 838,667 shares of common stock. The assumed average price per share equals the total amount that would be received upon conversion of the debentures and exercise of the warrants, divided by this assumed number of shares into which the debentures would have been convertible plus the number of shares issuable upon exercise of the warrants. 10 REGISTERED SECURITYHOLDERS The following table sets forth certain information as of December 16, 1999, with respect to each Registered Securityholder . The securities registered under the Registration Statement of which this Prospectus is a part include securities issuable upon the conversion of convertible debentures. The holders of such debentures are entitled to determine whether and when to convert such debentures, except that under certain conditions we may require the Registered Securityholders to convert the debentures into common stock, in accordance with their terms.. We will not receive any of the proceeds from the sale of the shares by the Registered Securityholders. None of the Registered Securityholders will beneficially own more than 1% of our outstanding shares after the sale of the securities offered hereby.
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES NAME OF REGISTERED BENEFICIALLY OWNED BEING OFFERED PURSUANT BENEFICIALLY SHAREHOLDER PRIOR TO THIS OFFERING(1) TO THIS PROSPECTUS(1) OWNED AFTER OFFERING(2) ------------------ ------------------------- ----------------------- ----------------------- Big Sky Laser 400,000 400,000 0 Technologies, Inc. Knobbe, Martens, Olson 233,333 233,333 0 & Bear, LLP Paul, Hastings, Janofsky 64,667 64,667 0 & Walker LLP Rutan & Tucker, LLP 140,667 140,667 0
----------------------- (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All of the securities being registered consist of shares of Class A Common Stock. The number of shares of common stock issuable upon conversion of the debentures is calculated by dividing the amount of the debenture by the closing sale price of the common stock on the day before the debenture is converted. For purposes of this Prospectus and the Registration Statement, we have assumed a closing sale price of $1.50 per share. For each of the Registered Securityholders, the number of shares of common stock beneficially owned and being offered under the Prospectus represents the number of shares of our common stock issuable upon conversion of convertible debentures within 60 days. (2) Assumes that all of the shares are sold pursuant to this Prospectus. Other than broker discounts and commissions, if any, we have agreed to pay the expenses in connection with this Prospectus. 11 PLAN OF DISTRIBUTION The Registered Securityholders have advised us that they will offer for sale, from time to time, all or a portion of the shares offered by this Prospectus in one or more private or negotiated transactions, in open market transactions on the Nasdaq National Market, in settlement of short sale transactions, in settlement of option transactions, or otherwise, or a combination of these methods, at prices and terms then obtainable, at fixed prices, at prices then prevailing at the time of sale, at prices related to such prevailing prices, or at negotiated prices or otherwise. The Registered Securityholders may effect these transactions by selling the shares (i) to or through underwriters; (ii) through broker-dealers or agents, which may include underwriters, including: (a) in a block trade in which the broker or dealer so engaged will attempt to sell the shares of common stock as agent, but may position and resell a portion of the block as principal to facilitate the transaction; (b) in purchases by a broker or dealer and resale by such broker or dealer as a principal for its account pursuant to this Prospectus; (c) in ordinary brokerage transactions and (d) in transactions in which the broker solicits purchasers; or (iii) directly to one or more purchasers. THE REGISTERED SECURITYHOLDERS AND ANY UNDERWRITERS, DEALERS, BROKERS OR AGENTS EXECUTING SELLING ORDERS ON BEHALF OF THE REGISTERED SECURITYHOLDERS MAY BE DEEMED TO BE "UNDERWRITERS" WITHIN THE MEANING OF THE SECURITIES ACT AND ANY PROFITS ON THE SALE OF THE SHARES BY THEM AND ANY DISCOUNTS, COMMISSIONS OR CONCESSIONS RECEIVED BY SUCH UNDERWRITERS, DEALERS, BROKERS OR AGENTS MAY BE DEEMED TO BE UNDERWRITING DISCOUNTS AND COMMISSIONS UNDER THE SECURITIES ACT. The compensation to a particular underwriter, broker-dealer or agent may be in excess of customary commissions. To our knowledge, the Registered Securityholders have made no arrangement with any brokerage firm for the sale of the shares. Any broker-dealer participating in such transactions as agent may receive commissions from the Registered Securityholders and, if they act as agent for the purchaser of such shares, from such purchaser. Broker-dealers may agree with the Registered Securityholders to sell a specified number of shares at a stipulated price per share and, to the extent such a broker-dealer is unable to do so acting as agent for the Registered Securityholder, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer commitment to the Registered Securityholder. Broker-dealers who acquire shares as principal may thereafter resell such shares from time to time in transactions, which may involve crosses and block transactions and which may involve sales to and through other broker-dealers, including transactions of the nature described above, in the over-the-counter market, in negotiated transactions or otherwise at market prices prevailing at the time of sale or at negotiated prices, and in connection with such resales may pay to or receive from the purchasers of such shares commissions computed as described above. To the extent required under the Securities Act, a supplemental prospectus will be filed, disclosing (a) the name of any such broker-dealers; (b) the number of shares involved; (c) the price at which such shares are to be sold; (d) the commissions paid or discounts or concessions allowed to such broker-dealers, where applicable; (e) that such broker-dealers did not conduct any investigation to verify the information set out or incorporated by reference in this Prospectus, as supplemented; and (f) other facts material to the transaction. The Registered Securityholders will act independently from Premier in making decisions concerning the sale of the shares, provided, however, that Premier and each of the Registered Securityholders have agreed to a maximum value of shares of common stock that each Registered Securityholder may sell in any calendar month. 12 Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended, any person engaged in a distribution of the shares may not simultaneously engage in market making activities with respect to the shares for a period beginning when such person becomes a distribution participant and ending upon such person's completion of participation in the distribution, including stabilization activities in the common stock to effect covering transactions, to impose penalty bids or to effect passive marketing making bids. In addition to and without limiting the foregoing, in connection with transactions in the shares, the Registered Securityholders and any underwriters, dealers, brokers or agents executing selling orders on behalf of the Registered Securityholders may be subject to applicable provisions of the Securities Exchange Act of 1934,as amended, and the rules and regulations thereunder, including, without limitation, Rule 10b-5 thereof and, insofar as Premier and the Registered Securityholders are distribution participants, Regulation M and Rules 100, 101, 102, 103, 104 and 105 thereof. All of the foregoing may affect the marketability of the shares. The Registered Securityholders will pay all commissions, transfer taxes and other expenses associated with their sales of the shares. The shares offered hereby are being registered pursuant to our contractual obligations, and we have agreed to pay the expenses of the preparation of this Prospectus and the filing of the Registration Statement. We have also agreed to indemnify certain Registered Securityholders against certain liabilities, including, without limitation, liabilities arising under the Securities Act. We will not receive any of the proceeds from the sale of the shares by the Registered Securityholders. Total expenses incurred in connection with the preparation of this Prospectus, consisting primarily of legal, accounting, and filing fees, are estimated to be approximately $10,840. In order to comply with the securities laws of certain states, if applicable, the shares may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be sold unless the shares have been registered or qualified for sale in these states or an exemption from registration or qualification is available and complied with. Our common stock is currently traded on the Nasdaq National Market under the symbol "PLSIA." Concurrently with sales under this Prospectus, the Registered Securityholders may effect other sales of shares under Rule 144 or other exempt resale transactions. There can be no assurance that the Registered Securityholders, or any of them, will sell any or all of the shares offered hereunder. DESCRIPTION OF CONVERTIBLE DEBENTURES The securities being offered by the Registered Securityholders consist of shares of our Class A Common Stock which are issuable upon the conversion of convertible debentures. We are not required to pay interest on the principal sum of the debentures. The debentures are convertible, at the option of the holder, into shares of our Class A Common Stock at any time and from time to time from the date they were issued. In addition, under certain circumstances, we may require the Registered Securityholders to convert their debentures into shares of common stock. The number of shares of our common stock issuable upon conversion is 13 determined by dividing the outstanding principal amount of the debenture to be converted by the closing sale price of the common stock on the date the conversion is to be effective, which date may not be prior to the date the notice of conversion is deemed to have been delivered to us under the terms of the debenture agreement. However, under certain circumstances the conversion price may not be less than $1.50. Notwithstanding the foregoing, we may not issue upon conversion a number of shares that exceeds 19.999% of the number of shares of common stock outstanding immediately prior to the issuance of the debenture, unless the common stock is then listed for trading on the Nasdaq or the Nasdaq SmallCap Market and we have obtained shareholder approval for such issuance. Since the number of shares of common stock issuable upon conversion of the debentures is dependent in part upon the market price of the common stock prior to the conversion, the actual number of shares of common stock that will then be issued in respect of such conversions and, consequently, offered for sale pursuant to this Prospectus, cannot be determined at this time. Therefore, for purposes of this Prospectus, we have assumed a conversion rate of $1.50 per share and, therefore, based upon an aggregate principal amount of the debentures of $1,258,000, we are registering an aggregate of 838,667 shares of our common stock. Each of the Registered Securityholders has agreed to a maximum value of shares of common stock that each Registered Securityholder may sell in any calendar month. LEGAL MATTERS The validity of the shares offered pursuant to this Prospectus will be passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California. As of December 16, 1999, Rutan & Tucker, LLP held convertible debentures issued by Premier in the aggregate amount of $211,000. Based upon an assumed closing sale price of our common stock of $1.50 per share, such debentures would be convertible into approximately 140,667 shares of our common stock, and Rutan & Tucker, LLP would be deemed to beneficially own approximately 140,667 shares of our common stock. EXPERTS The consolidated financial statements and related consolidated financial statement schedule, incorporated in this Prospectus by reference from our Annual Report on Form 10-K for the year ended March 31, 1999, as amended, have been audited by Haskell & White LLP, independent auditors, as stated in their report, which is incorporated in this Prospectus by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. RECENT DEVELOPMENTS Effective November 19, 1999, we appointed Michael J. Quinn as our new President and Chief Executive Officer. Effective December 13, 1999, Tom Hazen is no longer an officer or employee of our company. WHERE YOU CAN FIND MORE INFORMATION We are a public company. We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC's website at HTTP://WWW.SEC.GOV. You may also read and copy any document we file with the SEC at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Midwest Regional Offices at 500 West Madison Street, Chicago, Illinois 60606 and Northeast Regional Office at 7 World Trade Center, New York, New York 10048. You can also obtain copies of such material at prescribed rates from the Public Reference Section of the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1- 800-SEC-0330 for further information on the operation of the public references facilities. Our common stock is traded on the Nasdaq National Market under the symbol "PLSIA." You may inspect reports, proxy statements and other information concerning us at the National Association of Securities Dealers, Inc., at 1735 K Street, N.W., Washington D.C. 2006. 14 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this Prospectus and information that we file subsequently with the SEC will automatically update this Prospectus. We incorporate by reference the documents listed below: o Annual Report on Form 10-K for the fiscal year ended March 31, 1999, as filed with the SEC on June 29, 1999 pursuant to the Securities Exchange Act of 1934, as amended, and amended by Form 10-K/A filed with the SEC on October 12, 1999. o Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, as filed with the SEC on November 15, 1999. o Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, as filed with the SEC on August 16, 1999, as amended by Form 10-Q/A filed with the SEC on October 12, 1999. o Current Report on Form 8-K, as filed with the SEC on November 30, 1999. o Current Report on Form 8-K, as filed with the SEC on November 5, 1999. o Current Report on Form 8-K, as filed with the SEC on June 1, 1999. o The description of our common stock contained in our Registration Statement on Form 8-A filed under the Securities Exchange Act of 1934, as amended, on December 7, 1994, as amended January 30, 1995, together with any amendment or report filed to amend or update such description. o All other reports filed by us pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, since the end of our fiscal year ended March 31, 1999. We also incorporate by this reference any future filings we make with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended. Documents filed with the SEC after the date of this Prospectus are made a part of this Prospectus as of the date such documents are filed with the SEC. Any statement in a document incorporated or deemed to be incorporated by reference in this Prospectus is deemed to be modified or superseded to the extent that a statement contained in this Prospectus, or in any other document we subsequently file with the SEC, modifies or supersedes such statement. If any statement is so modified or superseded, it does not constitute a part of this Prospectus, except as so modified or superseded. You may request a copy of the documents incorporated by reference in this Prospectus, other than exhibits to such documents, at no cost, by writing to or telephoning us at the following address: 15 Premier Laser Systems, Inc. Attention: Robert V. Mahoney, Chief Financial Officer 3 Morgan Irvine, California 92618 (949) 859-0656 INDEMNIFICATION OF DIRECTORS AND OFFICERS The California General Corporations Law provides that California corporations may include provisions in their articles of incorporation relieving directors of monetary liability for breach of their fiduciary duty as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interests of the registrant or its shareholders or that involves the absence of good faith on the part of the director, (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the registrant or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the registrant or its shareholders in circumstances in which the director was aware or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the registrant or its shareholders, (vi) any improper transaction between a director and the registrant in which the director has a material financial interest, or (vii) the making of an illegal distribution to shareholders or an illegal loan or guaranty. Our Articles of Incorporation provide that our directors are not liable to us or our shareholders for monetary damages for breach of their fiduciary duties to the fullest extent permitted by California law. The inclusion of the above provision in the Articles of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted us and our shareholders. Our Articles of Incorporation and bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law. Since the California statute is nonexclusive, it is possible that certain claims beyond the scope of the statute may be indemnifiable. Accordingly, we have also entered into an indemnification agreement (the "Indemnification Agreement") with certain of our directors and officers that requires us to indemnify such directors and officers to the fullest extent permitted by law. Set forth below is a description of the principal provisions of the Indemnification Agreement: First, the Indemnification Agreement imposes upon us the burden of proving that the indemnified party has not met the applicable standard of conduct required for indemnification. The California statute requires a finding by the Board of Directors, independent legal counsel, or the shareholders that the applicable standard of conduct has been met. Second, the Indemnification Agreement provides that litigation expenses shall be advanced to an indemnified party at his request, against an undertaking to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses. The California statute provides that such expenses may be advanced against such an undertaking, upon authorization by the Board of Directors. 16 Third, in the event we do not pay a requested indemnification amount, the Indemnification Agreement allows such indemnified party to contest this determination by petitioning a court to make an independent determination of whether such indemnified party is entitled to indemnification under the Indemnification Agreement. The California statute does not set forth the procedure for contesting a corporation's determination of a party's right to indemnification. Finally, the Indemnification Agreement explicitly provides that actions by an Indemnified Party at our request as a director, officer or agent of an employee benefit plan, corporation, partnership, joint venture or other enterprise owned or controlled by us shall be covered by the indemnification. The California statute does not specifically address this issue. It does, however, provide that to the extent that an indemnified party has been successful on the merits, he shall be entitled to such indemnification. We are currently engaged in class action litigation in which certain current and former directors are seeking indemnification, and for which we have agreed to provide indemnification. We are also empowered under our bylaws to purchase insurance on behalf of any person we are required or permitted to indemnify. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons pursuant to the foregoing provisions, or otherwise, Premier has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 17 No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with the offering described in this Prospectus other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by Premier or any of the Registered Securityholders. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of these securities by any person in any jurisdiction in which such an offer, solicitation or sale would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of Premier since the date of this Prospectus or that the information contained in this Prospectus is correct as of any time subsequent to the date of this Prospectus. ------------------------ TABLE OF CONTENTS PAGE ---- Risk Factors..................................................................2 About this Prospectus........................................................10 Use of Proceeds..............................................................10 Dilution.....................................................................10 Registered Securityholders...................................................11 Plan of Distribution.........................................................12 Description of Convertible Debentures........................................13 Legal Matters................................................................14 Experts......................................................................14 Recent Developments..........................................................14 Where You Can Find More Information..........................................14 Incorporation of Certain Documents by Reference.................................................................15 Indemnification of Directors and Officers....................................16 ------------------------ 838,667 Shares PREMIER LASER SYSTEMS, INC. COMMON STOCK ----------------- PROSPECTUS ----------------- DECEMBER __, 1999 ================================================================================ 18 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION The following table sets forth the estimated expenses in connection with the Offering described in this Registration Statement: SEC registration fee........................ 340 Printing and engraving expenses............. 500 Legal fees and expenses..................... 5,000 Blue Sky fees and expenses.................. 500 Accounting fees and expenses................ 3,500 Miscellaneous............................... 1,000 ------- Total............................... $10,840 ======= All of the above expenses will be paid by Premier. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The California General Corporations Law provides that California corporations may include provisions in their articles of incorporation relieving directors of monetary liability for breach of their fiduciary duty as directors, except for the liability of a director resulting from (i) any transaction from which the director derives an improper personal benefit, (ii) acts or omissions involving intentional misconduct or a knowing and culpable violation of law, (iii) acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involves the absence of good faith on the part of the director, (iv) acts or omissions constituting an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders, (v) acts or omissions showing a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Registrant or its shareholders, (vi) any improper transaction between a director and the Registrant in which the director has a material financial interest, or (vii) the making of an illegal distribution to shareholders or an illegal loan or guaranty. The Registrant's Articles of Incorporation provide that the Registrant's directors are not liable to the Registrant or its shareholders for monetary damages for breach of their fiduciary duties to the fullest extent permitted by California law. The inclusion of the above provision in the Articles of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Registrant and its shareholders. The Registrant's Articles of Incorporation and bylaws provide that the Registrant shall indemnify its directors and officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law. Since the California statute is nonexclusive, it is possible that certain claims beyond the scope of the statute may be indemnifiable. Accordingly, the Registrant has also entered into an indemnification agreement (the "Indemnification Agreement") with certain of its directors and officers that requires the Registrant to indemnify such directors and officers to the fullest extent permitted by law. II-1 Set forth below is a description of the principal provisions of the Indemnification Agreement: First, the Indemnification Agreement imposes upon the Registrant the burden of proving that the indemnified party has not met the applicable standard of conduct required for indemnification. The California statute requires a finding by the Board of Directors, independent legal counsel, or the shareholders that the applicable standard of conduct has been met. Second, the Indemnification Agreement provides that litigation expenses shall be advanced to an indemnified party at his request, against an undertaking to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses. The California statute provides that such expenses may be advanced against such an undertaking, upon authorization by the Board of Directors. Third, in the event the Registrant does not pay a requested indemnification amount, the Indemnification Agreement allows such indemnified party to contest this determination by petitioning a court to make an independent determination of whether such indemnified party is entitled to indemnification under the Indemnification Agreement. The California statute does not set forth the procedure for contesting a corporation's determination of a party's right to indemnification. Finally, the Indemnification Agreement explicitly provides that actions by an Indemnified Party at the request of the Registrant as a director, officer or agent of an employee benefit plan, corporation, partnership, joint venture or other enterprise owned or controlled by the Registrant shall be covered by the indemnification. The California statute does not specifically address this issue. It does, however, provide that to the extent that an indemnified party has been successful on the merits, he shall be entitled to such indemnification. We are currently engaged in class action litigation in which certain current and former directors are seeking indemnification, and for which we have agreed to provide indemnification. The Registrant is also empowered under its bylaws to purchase insurance on behalf of any person it is required or permitted to indemnify. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. II-2 ITEM 16. EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 4.1 Form of Convertible Debenture issued to Big Sky Laser Technologies, Inc.* 4.2 Form of Convertible Debenture issued to each of Rutan & Tucker, LLP, Paul, Hastings, Janofsky & Walker LLP and Knobbe, Martens, Olson & Bear, LLP* 5 Opinion of Rutan & Tucker, LLP* 10.1 Settlement Agreement between Big Sky Laser Technologies, Inc. and Premier Laser Systems, Inc.* 10.2 Form of Exchange Agreement with each of Rutan & Tucker, LLP, Paul, Hastings, Janofsky & Walker, LLP and Knobbe, Martens, Olson & Bear LLP* 23.1 Consent of Haskell & White LLP* 23.2 Consent of Rutan & Tucker, LLP (included in Exhibit 5)* - ------------------------ * Filed herewith ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price present no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; II-3 PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the SEC by the Registrant pursuant to Section 13 or Section 15(d) of the Securities of 1934, as amended, that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities of 1934, as amended (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial BONA FIDE offering thereof. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities of 1934, as amended; and, where interim financial information requires to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. II-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on December 20, 1999. PREMIER LASER SYSTEMS, INC. By: /S/ Michael J. Quinn ------------------------------------- Michael J. Quinn, Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. Quinn and Robert V. Mahoney, jointly and severally, his attorneys-in-fact and agents, each with the power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign any amendment to this Registration Statement on Form S-3, and to file such amendments, together with exhibits and other documents in connection therewith, with the Securities and Exchange Commission, granting to each attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as he might or could do in person, and ratifying and confirming all that the attorneys-in-fact and agents, or his substitute or substitutes, may do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons, including a majority of the Board of Directors, in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /S/ Michael J. Quinn Chief Executive Officer December 20, 1999 - ------------------------------ and President (Principal Michael J. Quinn Executive Officer) /S/ Robert B. Mahoney Executive Vice President, December 20, 1999 - ------------------------------ Finance and Chief Robert B. Mahoney Financial Officer (Principal Financial and Accounting Officer) /S/ Patrick J. Day Director December 20, 1999 - ------------------------------ Patrick J. Day II-5 /S/ Frederic J. Feldman Director December 20, 1999 - ------------------------------ Frederic J. Feldman /S/ John Hunkeler, M.D. Director December 17, 1999 - ------------------------------ John Hunkeler, M.D. /S/ Lewis H. Stanton Director December 20, 1999 - ------------------------------ Lewis H. Stanton
II-6 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ------- ----------- 4.1 Form of Convertible Debenture issued to Big Sky Laser Technologies, Inc. 4.2 Form of Convertible Debenture issued to each of Rutan & Tucker, LLP, Paul, Hastings, Janofsky & Walker LLP and Knobbe, Martens, Olson & Bear, LLP 5 Opinion of Rutan & Tucker, LLP 10.1 Settlement Agreement between Big Sky Laser Technologies, Inc. and Premier Laser Systems, Inc. 10.2 Form of Exchange Agreement with each of Rutan & Tucker, LLP, Paul, Hastings, Janofsky & Walker, LLP and Knobbe, Martens, Olson & Bear, LLP* 23.1 Consent of Haskell & White LLP 23.2 Consent of Rutan & Tucker, LLP (included in Exhibit 5) EX-4.1 2 FORM OF CONVERTIBLE DEBENTURE - BIG SKY LASER Exhibit 4.1 NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. [$MONTHLY AMOUNT] NO. _____ PREMIER LASER SYSTEMS, INC. CONVERTIBLE DEBENTURE DATED NOVEMBER 22, 1999 FOR VALUE RECEIVED, Premier Laser Systems, Inc., a California corporation, having a principal place of business at 3 Morgan, Irvine, California 92618 (the "COMPANY") promises to pay to [Creditor], a [State of Incorporation] corporation (the "HOLDER"), the principal sum of [Monthly Amount] on the later of December 31, 1999 or the date of effectiveness of a registration statement filed with the Securities and Exchange Commission which registers the resale of the Common Stock into which this Debenture is convertible, but no later than February 21, 2000 (the "MATURITY DATE"). The Company shall not be required to pay interest to the Holder on such principal sum. This Debenture is one of [Required Number] debentures in the aggregate amount of [Total Amount] (hereinafter collectively or individually the "DEBENTURES"). This Debenture is subject to the following additional provisions: SECTION 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange. SECTION 2. This Debenture has been issued subject to certain investment representations of the Holder set forth in a separate agreement being entered into concurrently with this Debenture, and may be transferred or exchanged only in compliance with applicable securities laws. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person (as defined in Section 7) in whose name this Debenture is duly registered on the Company's books as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. EVENTS OF DEFAULT. (a) "EVENT OF DEFAULT", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) any default in the payment of the principal of any Debentures, free of any claim of subordination, as and when the same shall become due and payable (whether on the Maturity Date or by acceleration or otherwise); (ii) the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of any of, this Debenture, and unless otherwise provided herein such failure or breach shall not have been remedied within 10 days after the date on which notice of such failure or breach shall have been given; (iii) the Company or any of its subsidiaries (for purposes of this subsection (iii), "subsidiary" shall mean a subsidiary of the Company representing 5% or more of the consolidated revenues of the Company and its consolidated subsidiaries for the last fiscal year of the Company prior to any of the events contemplated in this paragraph) shall commence, or there shall be commenced against the Company or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary thereof shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of the foregoing; (iv) the Common Stock shall be either delisted from the NASDAQ or suspended from trading on the NASDAQ without resuming trading and/or being relisted thereon or on a Subsequent Market or having such suspension lifted for five (5) consecutive Trading Days or eight (8) Trading Days in the aggregate (which need not be consecutive days); (v) the Company shall fail for any reason to deliver certificates to a Holder prior to the twelfth (12th) day after a Conversion Date pursuant to and in accordance with Section 4(b) or the Company shall provide notice to the Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversions of any Debentures in accordance with the terms hereof; 2 (b) If any Event of Default occurs and is continuing, the full principal amount of this Debenture (and, at the Holder's option, all other Debentures then held by such Holder), together with other amounts owing in respect thereof, to the date of acceleration shall become, immediately due and payable in cash. The aggregate amount payable upon an Event of Default shall be equal to the entire unpaid principal amount of this Debenture. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. (c) If the Company has not registered the resale by Holder of the Common Stock into which this Debenture is convertible under the Securities Act of 1933, as amended, on or prior to that date ninety (90) days from the date of this Debenture, the Holder will have the option to require the Company to immediately repay upon expiration of such ninety (90) day period or refusal of registration by the SEC, whichever is earlier, the outstanding principal balance of the Debentures in monthly installments. Such payments will be made retroactively to July 1, 1999, with the first monthly payment being [Monthly Amount] and the remainder being [Monthly Amount] per month, i.e., the amounts for monthly payments between July 1, 1999 and the date of such obligation to pay the outstanding balance in monthly installments shall be immediately due and payable with the remainder of such payments to be made on the first of the following months until the principal balance of the Debentures has been fully paid. SECTION 4. CONVERSION. (a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time, after the Original Issue Date (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The number of shares of Common Stock issuable upon a conversion hereunder shall be determined by dividing the outstanding principal amount of this Debenture to be converted, by the Conversion Price. The Holder shall effect conversions by surrendering the Debentures (or such portions thereof) to be converted, together with the form of conversion notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each Conversion Notice shall specify the principal amount of Debentures to be converted and the date on which such conversion is to be effected, which date may not be prior to the date such Conversion Notice is deemed to have been delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to such Holder (in the manner and within the time set forth in Section 4(b)) a new Debenture for such principal amount as has not been converted. 3 (ii) CERTAIN CONVERSION RESTRICTIONS (A) If the Common Stock is then listed for trading on the NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the Shareholder Approval (as defined below), then the Company may not issue in excess of 3,184,676 shares of Common Stock upon conversions of Debentures or as payment of interest thereon in shares of Common Stock, which number shall be subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x) (such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals 19.999% of the number of shares of Common Stock outstanding immediately prior to the issuance of this Debenture. If on any Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion in full of all then outstanding Debentures held by Holder, together with any shares of Common Stock previously issued upon conversion of Debentures would exceed the Issuable Maximum, and (C) the Company shall not have previously obtained any vote of shareholders that may be required by the applicable rules and regulations of the Nasdaq Stock Market (or any successor entity) applicable to approve the issuance of shares of Common Stock in excess of the Issuable Maximum pursuant to the terms hereof (the "SHAREHOLDER APPROVAL"), then the Company shall issue to the Holder requesting a conversion a number of shares of Common Stock equal to the Issuable Maximum and, with respect to the remainder of the principal amount of Debentures then held by such Holder for which a conversion in accordance with the Conversion Price would result in an issuance of shares of Common Stock in excess of the Issuable Maximum (the "EXCESS PRINCIPAL"), the converting Holder shall have the option to require the Company to pay cash to the converting Holder in an amount equal to the Conversion Price for all shares of Common Stock constituting the Excess Principal (the "MANDATORY PREPAYMENT AMOUNT"). If the Company fails to pay the Mandatory Prepayment Amount in full pursuant to this Section, the Company will pay interest thereon at a rate of 15% per annum to the converting Holder, accruing daily from the Conversion Date until such amount, plus all such interest thereon, is paid in full. (b) (i) Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required under applicable securities laws) representing the number of shares of Common Stock being acquired upon the conversion of Debentures (subject to the limitations set forth in Section 4(a)(ii) hereof), and (ii) Debentures in a principal amount equal to the principal amount of Debentures not converted; PROVIDED, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of the principal amount of Debentures until Debentures are delivered for conversion to the Company, or the Holder notifies the Company that such Debentures have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the 4 Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion. (ii) If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), by the third (3rd) Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $5,000 for each Trading Day after such third (3rd) Trading Day until such certificates are delivered. Nothing herein shall limit a Holder's right to pursue actual damages for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Further, if the Company shall not have delivered any cash due in respect of conversions of Debentures by the third (3rd) Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue shares of Common Stock pursuant to Section 4(c), except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of such Holder demand. Any such shares will be subject to the provision of this Section. (iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), by the third (3rd) Trading Day after the Conversion Date, and if after such third (3rd) Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the market price of the Common Stock at the time of the sale giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in principal amount equal the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the market price of the Underlying Shares on the date of conversion was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder requires the 5 Company to make payment in respect of a Buy- In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In. (c) (i) The conversion price (the "CONVERSION PRICE") in effect on any Conversion Date shall be the closing sale price of the Common Stock on the Conversion Date which must be a Trading Day. Notwithstanding the foregoing, the Conversion Price shall not be less than the Floor (as defined in Section 7) for so long as the Floor remains in effect in accordance with Section 6; PROVIDED, that the Floor shall be subject to reduction due to operation of this Section 4(c). (ii) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holders shall have the right thereafter to, at their option, (A) convert the then outstanding principal amount only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay the aggregate of its outstanding principal amount of Debentures. The entire prepayment price shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. (iii) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (iv) If (A) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (B) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (C) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (D) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall give notice to the Holders as provided in subsection (g) below at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that the 6 failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The failure to provide such notice shall constitute an Event of Default under Section 3(a)(ii) above unless the Holder is otherwise provided the opportunity, upon conversion, to receive the dividend, redemption rights, subscription rights or warrants, voting or approval rights, securities or other consideration that would be payable or provided to Holder had Holder converted the Debentures into Common Stock prior to the consummation of any of the actions or events identified in clauses (A) through (D) above. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. (v) In case of any (1) merger or consolidation of the Company with or into another Person that would constitute a Change of Control Transaction, or (2) sale by the Company of more than one-half of the assets of the Company (on an as valued basis) in one or a series of related transactions, or (3) tender or other offer or exchange (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, stock, cash or property of the Company or another Person; then a Holder shall have the right to (A) convert its aggregate principal amount of Debentures then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted immediately prior to such merger, consolidation or sales would have been entitled, (B) in the case of a merger or consolidation, (x) require the surviving entity to issue convertible debentures in a principal amount equal to the aggregate principal amount of Debentures then held by such Holder, which newly issued debentures shall have terms identical (including with respect to conversion) to the terms of this Debenture and shall be entitled to all of the rights and privileges of a Holder of Debentures set forth herein, and (y) simultaneously with the issuance of such convertible debentures, shall have the right to convert such instrument only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation, or (C) in the event of an exchange or tender offer or other transaction contemplated by clause (3) of this Section, tender or exchange its aggregate principal amount of Debentures for such securities, stock, cash and other property receivable upon or deemed to be held by holders of Common Stock that have tendered or exchanged their shares of Common Stock following such tender or exchange, and such Holder shall be entitled upon such exchange or tender to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted immediately prior to such tender or exchange would have been entitled as would have been issued. In the case of clause (B), the conversion price applicable for the newly issued convertible debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Conversion Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale, consolidation, tender or exchange shall include such terms so as to continue to give the Holders of Debentures the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. 7 (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if a Registration Statement has been declared effective under the Securities Act, registered for public sale in accordance with such Registration Statement. (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the market value of a share of Common Stock at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Any and all notices or other communications or deliveries to be provided by the Holders of the Debentures hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 3 Morgan, Irvine, California 92618 (facsimile number (949) 859-5241), attention Chief Financial Officer, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section, with a copy to Rutan & Tucker, LLP, 611 Anton Boulevard, Costa Mesa, CA 92626 (facsimile number (714) 546-9035), attention Thomas G. Brockington, Esq. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder of the Debentures at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder, with a copy to [Name and Address] (facsimile number [___________]). Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:00 p.m. (California time), (ii) the date after the date of transmission, if such notice or 8 communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) four days after deposit in the United States mail, (iv) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. The addresses and facsimile numbers for any notices or copies of notices required under this section (g) may be changed by a written notice conforming to the requirements of this subsection (g). SECTION 5. OPTIONAL PREPAYMENT. (a) The Company shall have the right, exercisable at any time and from time to time in accordance with the terms hereof, upon five (5) business day's notice to the Holder, to prepay all or any portion of the outstanding principal amount of this Debenture which have not previously been repaid or for which Conversion Notices have not previously been delivered. The prepayment price shall be paid in cash. Any such prepayment shall be free of any claim of subordination. The Holder shall have the right to tender, and the Company shall honor, Conversion Notices delivered prior to the expiration of such one day period. SECTION 6. MANDATORY PREPAYMENT/ELIMINATION OF FLOOR. (a) If the Conversion Price for twenty-one (21) consecutive days shall be equal to or below $1.50, the Holder may, at any time thereafter, deliver a notice to the Company (the "HOLDER NOTICE") requiring the Company to act in accordance with the immediately following sentence. Within three (3) Business Days after delivery of the Holder Notice under this Section 6(a), the Company shall notify the Holder of its election to either (i) prepay the entire outstanding principal amount of the Debentures which have not previously been repaid or for which Conversion Notices have not previously been delivered no later than ten (10) Business Days from such election, or (ii) discontinue and remove permanently the Floor. The Company shall honor Conversion Notices delivered prior to the expiration of the three (3) Business Day period contemplated by this Section 6(a), provided, that such conversions shall be subject to the Floor. A failure of the Company to timely elect under this Section 6(a) shall be deemed an election to discontinue permanently the Floor. SECTION 7. DEFINITIONS. For the purposes hereof, the following terms shall have the following meanings: "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Montana or the State of California are authorized or required by law or other government action to close. "CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 3d-5(b)(1) promulgated under the Exchange Act) of in excess of 40% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company's securities continue to hold at least 60% of such securities following such transaction or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). 9 "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Class A Common Stock, no par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FLOOR" means $1.50. "ORIGINAL ISSUE DATE" shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. "PERSON" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "SECURITIES ACT" means the Securities Act of 1933, as amended. "TRADING DAY" means (a) a day on which the Common Stock is traded on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or a Subsequent Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "UNDERLYING SHARES" means the shares of Common Stock issuable upon conversion of Debentures. SECTION 8. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks PARI PASSU with all other Debentures now or hereafter issued under the terms set forth herein. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. The Company represents and warrants that the issuance of the Debentures to BSLT is not now, and will not be in the future, a fraudulent conveyance as defined by applicable law and that the issuance of the Debentures will not otherwise give rise to a claim by any other of the creditors of PLSI or affiliated entities to set aside and/or recover the Debentures for the benefit of such creditors. 10 SECTION 9. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. SECTION 10. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. SECTION 11. This Debenture shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of laws thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the County of Orange, California for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. SECTION 12. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. SECTION 13. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. SECTION 14. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. SECTION 15. In the event either the Holder or Company commences litigation to enforce the provisions of this Debenture, the prevailing party in such litigation shall be entitled to be reimbursed for all of its reasonable attorneys' fees and costs incurred in connection with such action. 11 IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. PREMIER LASER SYSTEMS, INC. By:__________________________________ Name:________________________________ Title:_______________________________ ATTEST: By:__________________________________ Name:________________________________ Title:_______________________________ 12 EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert the attached Debenture into shares of Class A Common Stock, no par value per share (the "Common Stock"), of Premier Laser Systems, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ______________________________________________ Date to Effect Conversion ______________________________________________ Principal Amount of Debentures to be Converted ______________________________________________ Number of shares of Common Stock to be Issued ______________________________________________ Applicable Conversion Price ______________________________________________ Signature ______________________________________________ Name ______________________________________________ Address EX-4.2 3 FORM OF CONVERTIBLE DEBENTURE - LAW FIRMS Exhibit 4.2 NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. [$MONTHLY AMOUNT] NO. ____ PREMIER LASER SYSTEMS, INC. CONVERTIBLE DEBENTURE FOR VALUE RECEIVED, Premier Laser Systems, Inc., a California corporation, having a principal place of business at 3 Morgan, Irvine, California 92618 (the "COMPANY") promises to pay to [CREDITOR], a [STATE OF INCORPORATION] corporation (the"HOLDER"), the principal sum of [MONTHLY AMOUNT] on ________________ (the "MATURITY DATE"). The Company shall not be required to pay interest to the Holder on such principal sum. This Debenture is one of [REQUIRED NUMBER] debentures in the aggregate amount of [TOTAL AMOUNT] (hereinafter collectively or individually the "DEBENTURES"). This Debenture is subject to the following additional provisions: SECTION 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange. SECTION 2. This Debenture has been issued subject to certain investment representations of the Holder set forth in a separate agreement being entered into concurrently with this Debenture, and may be transferred or exchanged only in compliance with applicable securities laws. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person (as defined in Section 7) in whose name this Debenture is duly registered on the Company's books as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. EVENTS OF DEFAULT. (a) "EVENT OF DEFAULT", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (i) any default in the payment of the principal of any Debentures issued to Holder or in the performance of any other debentures issued to any other creditor of the Company, free of any claim of subordination, as and when the same shall become due and payable (whether on the Maturity Date or by acceleration or otherwise); (ii) the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of any of, this Debenture, and unless otherwise provided herein such failure or breach shall not have been remedied within 10 days after the date on which notice of such failure or breach shall have been given; (iii) the Company or any of its subsidiaries (for purposes of this subsection (iii), "subsidiary" shall mean a subsidiary of the Company representing 5% or more of the consolidated revenues of the Company and its consolidated subsidiaries for the last fiscal year of the Company prior to any of the events contemplated in this paragraph) shall commence, or there shall be commenced against the Company or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary thereof shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of the foregoing; (iv) the Common Stock shall be either delisted from the NASDAQ or suspended from trading on the NASDAQ without resuming trading and/or being relisted thereon or on a Subsequent Market or having such suspension lifted for five (5) consecutive Trading Days or eight (8) Trading Days in the aggregate (which need not be consecutive days); (v) the Company shall fail for any reason to deliver certificates to a Holder prior to the twelfth (12th) day after a Conversion Date pursuant to and in accordance with Section 4(b) or the Company shall provide notice to the Holder, -2- including by way of public announcement, at any time, of its intention not to comply with requests for conversions of any Debentures in accordance with the terms hereof. (b) If any Event of Default occurs and is continuing, the full principal amount of this Debenture (and, at the Holder's option, all other Debentures then held by such Holder), together with other amounts owing in respect thereof, to the date of acceleration shall become, immediately due and payable in cash. The aggregate amount payable upon an Event of Default shall be equal to the entire unpaid principal amount of this Debenture. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. (c) If the Company has not registered the resale by Holder of the Common Stock into which this Debenture is convertible under the Securities Act of 1933, as amended, on or prior to that date ninety (90) days from the date of this Debenture, the Holder will have the option to require the Company to immediately repay upon expiration of such ninety (90) day period or refusal of registration by the SEC, whichever is earlier, the outstanding principal balance of the Debentures in monthly installments. Such payments will be made monthly commencing March 6, 2000, with an initial payment of $120,000 and each subsequent monthly payment being $40,000.00, until the principal balance of the Debentures has been fully paid. SECTION 4. CONVERSION. (a) (i) CONVERSION AT OPTION OF HOLDER. This Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time, after the Original Issue Date (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The number of shares of Common Stock issuable upon a conversion hereunder shall be determined by dividing the outstanding principal amount of this Debenture to be converted, by the Conversion Price. The Holder shall effect conversions by surrendering the Debentures (or such portions thereof) to be converted, together with the form of conversion notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE") to the Company. Each Conversion Notice shall specify the principal amount of Debentures to be converted and the date on which such conversion is to be effected, which date may not be prior to the date such Conversion Notice is deemed to have been delivered hereunder (a "CONVERSION DATE"). If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. Subject to Section 4(b), each Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to such Holder (in the manner and within the time set forth in Section 4(b)) a new Debenture for such principal amount as has not been converted. -3- (ii) CERTAIN CONVERSION RESTRICTIONS (A) If the Common Stock is then listed for trading on the NASDAQ or the Nasdaq SmallCap Market and the Company has not obtained the Shareholder Approval (as defined below), then the Company may not issue in excess of 3,319,281 shares of Common Stock upon conversions of Debentures or as payment of interest thereon in shares of Common Stock, which number shall be subject to adjustment pursuant to Sections 4(c)(ii), (iii), (v), (vi) and (x) (such number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals 19.999% of the number of shares of Common Stock outstanding immediately prior to the issuance of this Debenture. If on any Conversion Date (A) the Common Stock is listed for trading on the NASDAQ or the Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion in full of all then outstanding Debentures held by Holder, together with any shares of Common Stock previously issued upon conversion of Debentures would exceed the Issuable Maximum, and (C) the Company shall not have previously obtained any vote of shareholders that may be required by the applicable rules and regulations of the Nasdaq Stock Market (or any successor entity) applicable to approve the issuance of shares of Common Stock in excess of the Issuable Maximum pursuant to the terms hereof (the "SHAREHOLDER APPROVAL"), then the Company shall issue to the Holder requesting a conversion a number of shares of Common Stock equal to the Issuable Maximum and, with respect to the remainder of the principal amount of Debentures then held by such Holder for which a conversion in accordance with the Conversion Price would result in an issuance of shares of Common Stock in excess of the Issuable Maximum (the "EXCESS PRINCIPAL"), the converting Holder shall have the option to require the Company to pay cash to the converting Holder in an amount equal to the Conversion Price for all shares of Common Stock constituting the Excess Principal (the "MANDATORY PREPAYMENT AMOUNT"). If the Company fails to pay the Mandatory Prepayment Amount in full pursuant to this Section, the Company will pay interest thereon at a rate of 15% per annum to the converting Holder, accruing daily from the Conversion Date until such amount, plus all such interest thereon, is paid in full. -4- (b) (i) Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required under applicable securities laws) representing the number of shares of Common Stock being acquired upon the conversion of Debentures (subject to the limitations set forth in Section 4(a)(ii) hereof), and (ii) Debentures in a principal amount equal to the principal amount of Debentures not converted; PROVIDED, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of the principal amount of Debentures until Debentures are delivered for conversion to the Company, or the Holder notifies the Company that such Debentures have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the third (3rd) Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion. (ii) If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), by the third (3rd) Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $1,000 for each Trading Day after such third (3rd) Trading Day until such certificates are delivered. Nothing herein shall limit a Holder's right to pursue actual damages for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Further, if the Company shall not have delivered any cash due in respect of conversions of Debentures by the third (3rd) Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue shares of Common Stock pursuant to Section 4(c), except that for such purpose the Conversion Price applicable thereto shall be the lesser of the Conversion Price on the Conversion Date and the Conversion Price on the date of such Holder demand. Any such shares will be subject to the provision of this Section. (iii) In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i), by the third (3rd) Trading Day after the Conversion Date, and if after such third (3rd) Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Underlying Shares which the Holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's -5- total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the market price of the Common Stock at the time of the sale giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in principal amount equal the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the market price of the Underlying Shares on the date of conversion was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In. (c) (i) The conversion price (the "CONVERSION PRICE") in effect on any Conversion Date shall be the closing sale price of the Common Stock on the Conversion Date which must be a Trading Day. Notwithstanding the foregoing, the Conversion Price shall not be less than the Floor (as defined in Section 7) for so long as the Floor remains in effect in accordance with Section 6; PROVIDED, that the Floor shall be subject to reduction due to operation of this Section 4(c). (ii) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holders shall have the right thereafter to, at their option, (A) convert the then outstanding principal amount only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay the aggregate of its outstanding principal amount of Debentures. The entire prepayment price shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. (iii) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. -6- (iv) If (A) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (B) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (C) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (D) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall give notice to the Holders as provided in subsection (g) below at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The failure to provide such notice shall constitute an Event of Default under Section 3(a)(ii) above unless the Holder is otherwise provided the opportunity, upon conversion, to receive the dividend, redemption rights, subscription rights or warrants, voting or approval rights, securities or other consideration that would be payable or provided to Holder had Holder converted the Debentures into Common Stock prior to the consummation of any of the actions or events identified in clauses (A) through (D) above. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. (v) In case of any (1) merger or consolidation of the Company with or into another Person that would constitute a Change of Control Transaction, or (2) sale by the Company of more than one-half of the assets of the Company (on an as valued basis) in one or a series of related transactions, or (3) tender or other offer or exchange (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, stock, cash or property of the Company or another Person; then a Holder shall have the right to (A) convert its aggregate principal amount of Debentures then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate -7- principal amount of Debentures could have been converted immediately prior to such merger, consolidation or sales would have been entitled, (B) in the case of a merger or consolidation, (x) require the surviving entity to issue convertible debentures in a principal amount equal to the aggregate principal amount of Debentures then held by such Holder, which newly issued debentures shall have terms identical (including with respect to conversion) to the terms of this Debenture and shall be entitled to all of the rights and privileges of a Holder of Debentures set forth herein, and (y) simultaneously with the issuance of such convertible debentures, shall have the right to convert such instrument only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation, or (C) in the event of an exchange or tender offer or other transaction contemplated by clause (3) of this Section, tender or exchange its aggregate principal amount of Debentures for such securities, stock, cash and other property receivable upon or deemed to be held by holders of Common Stock that have tendered or exchanged their shares of Common Stock following such tender or exchange, and such Holder shall be entitled upon such exchange or tender to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted immediately prior to such tender or exchange would have been entitled as would have been issued. In the case of clause (B), the conversion price applicable for the newly issued convertible debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Conversion Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale, consolidation, tender or exchange shall include such terms so as to continue to give the Holders of Debentures the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if a Registration Statement has been declared effective under the Securities Act, registered for public sale in accordance with such Registration Statement. -8- (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the market value of a share of Common Stock at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Any and all notices or other communications or deliveries to be provided by the Holders of the Debentures hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 3 Morgan, Irvine, California 92618 (facsimile number (949) 859-5241), attention Chief Financial Officer, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section, with a copy to Rutan & Tucker, LLP, 611 Anton Boulevard, Costa Mesa, CA 92626 (facsimile number (714) 546-9035), attention Thomas G. Brockington, Esq. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder of the Debentures at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:00 p.m. (California time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) four days after deposit in the United States mail, (iv) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. The addresses and facsimile numbers for any notices or copies of notices required under this section (g) may be changed by a written notice conforming to the requirements of this subsection (g). -9- SECTION 5. OPTIONAL PREPAYMENT. (a) The Company shall have the right, exercisable at any time and from time to time in accordance with the terms hereof, upon five (5) business day's notice to the Holder, to prepay all or any portion of the outstanding principal amount of this Debenture which have not previously been repaid or for which Conversion Notices have not previously been delivered. The prepayment price shall be paid in cash. Any such prepayment shall be free of any claim of subordination. The Holder shall have the right to tender, and the Company shall honor, Conversion Notices delivered prior to the expiration of such one day period. SECTION 6. MANDATORY PREPAYMENT/ELIMINATION OF FLOOR. (a) If the Conversion Price for twenty-one (21) consecutive days shall be equal to or below $1.50, the Holder may, at any time thereafter, deliver a notice to the Company (the "HOLDER NOTICE") requiring the Company to act in accordance with the immediately following sentence. Within three (3) Business Days after delivery of the Holder Notice under this Section 6(a), the Company shall notify the Holder of its election to either (i) prepay the entire outstanding principal amount of the Debentures which have not previously been repaid or for which Conversion Notices have not previously been delivered no later than ten (10) Business Days from such election, or (ii) discontinue and remove permanently the Floor. The Company shall honor Conversion Notices delivered prior to the expiration of the three (3) Business Day period contemplated by this Section 6(a), provided, that such conversions shall be subject to the Floor. A failure of the Company to timely elect under this Section 6(a) shall be deemed an election to discontinue permanently the Floor. SECTION 7. DEFINITIONS. For the purposes hereof, the following terms shall have the following meanings: "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of California are authorized or required by law or other government action to close. "CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 3d-5(b)(1) promulgated under the Exchange Act) of in excess of 40% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions, unless following such transaction, the holders of the Company's securities continue to hold at least 60% of such securities following such transaction or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). "COMMISSION" means the Securities and Exchange Commission. -10- "COMMON STOCK" means the Class A Common Stock, no par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FLOOR" means $1.50. "ORIGINAL ISSUE DATE" shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. "PERSON" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "SECURITIES ACT" means the Securities Act of 1933, as amended. "TRADING DAY" means (a) a day on which the Common Stock is traded on the NASDAQ or on such Subsequent Market on which the Common Stock is then listed or quoted, or (b) if the Common Stock is not listed on the NASDAQ or a Subsequent Market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in the event that the Common Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close. "UNDERLYING SHARES" means the shares of Common Stock issuable upon conversion of Debentures. SECTION 8. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks PARI PASSU with all other Debentures now or hereafter issued under the terms set forth herein. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. -11- SECTION 9. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. The Company represents and warrants that the issuance of the Debentures to Creditor is not now, and will not be in the future, a fraudulent conveyance as defined by applicable law and that the issuance of the Debentures will not otherwise give rise to a claim by any other of the creditors of PSLI or affiliated entities to set aside and/or recover the Debentures to the benefit of such creditors. SECTION 10. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. SECTION 11. This Debenture shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of laws thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the County of Orange, California for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. SECTION 12. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. SECTION 13. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. SECTION 14. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day. SECTION 15. In the event either the Holder or Company commences litigation to enforce the provisions of this Debenture, the prevailing party in such litigation shall be entitled to be reimbursed for all of its reasonable attorneys' fees and costs incurred in connection with such action. -12- IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. PREMIER LASER SYSTEMS, INC. By:__________________________________ Name:________________________________ Title:_______________________________ ATTEST: By:__________________________________ Name:________________________________ Title:_______________________________ EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert the attached Debenture into shares of Class A Common Stock, no par value per share (the "Common Stock"), of Premier Laser Systems, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ______________________________________________ Date to Effect Conversion ______________________________________________ Principal Amount of Debentures to be Converted ______________________________________________ Number of shares of Common Stock to be Issued ______________________________________________ Applicable Conversion Price ______________________________________________ DTC# (for electronic transfers) ______________________________________________ Signature ______________________________________________ Name ______________________________________________ Address EX-5 4 OPINION OF RUTAN & TUCKER, LLP Exhibit 5 December 6, 1999 Premier Laser Systems, Inc. 3 Morgan Irvine, California 92618 Re: REGISTRATION STATEMENT ON FORM S-3 --- ---------------------------------- Ladies and Gentlemen: At your request, we have examined the form of Registration Statement on Form S-3 (the "Registration Statement") to be filed by Premier Laser Systems, Inc. (the "Company") with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, for the purpose of registering the sale of certain shares of Class A Common Stock of the Company (the "Common Stock") by the securityholders set forth therein. We are familiar with the proceedings taken and proposed to be taken in connection with the issuance and sale of the securities in the manner set forth in the Registration Statement. Subject to completion of the proceedings contemplated in connection with the foregoing matters, we are of the opinion that all of the Common Stock to be sold pursuant to the Registration Statement has been duly authorized and, when issued and sold in the manner set forth in the Registration Statement will, upon such issuance and sale, be validly and legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement or any amendment thereto. Respectfully submitted, /s/ RUTAN & TUCKER, LLP EX-10.1 5 SETTLEMENT AGREEMENT Exhibit 10.1 SETTLEMENT AGREEMENT -------------------- This Settlement Agreement (the "Agreement") entered into as of the last date written below by and between Big Sky Laser Technologies, Inc. ("BSLT"), a Montana Corporation with its principal place of business at 601 Haggarty Lane, Bozeman, Montana, and Premier Laser Systems, Inc. ("PLSI"), a California corporation, having its principal place of business at 3 Morgan, Irvine, California WITNESSETH: WHEREAS, PLSI entered into various agreements with BSLT to purchase OEM laser components (the "Goods") from BSLT destined to be integrated into dental lasers produced by PLSI; WHEREAS, pursuant to such agreements, PLSI has not yet paid for all of the Goods manufactured by, or manufactured and shipped to PLSI by, BSLT within the time agreed previously by the parties; and WHEREAS, PLSI and BSLT wish to agree upon a payment mechanism that would permit PLSI to pay for the Goods and to settle the difference among themselves over the payment for the Goods in order to avoid further discussions, potential litigation, and the additional expense of further time and money by the parties to resolve these issues; NOW, THEREFORE, in consideration of the mutual promises contained herein, IT IS HEREBY AGREED: 1. LIQUIDATION OF DEBT. The parties hereby agree that, as of the date of this Agreement, the total amount due and owing by PLSI to BSLT in connection with the purchase of the Goods is the sum of Five Hundred Ninety-One Thousand Nine Hundred Sixteen and 6/100 Dollars ($591,916.06) (hereafter the "Liquidated Debt"). This sum may not be reduced by any claim for reduction or set-off that PLSI may have had, has now, or will have against BSLT other than as set forth herein; and PLSI agrees to pay this sum to BSLT pursuant to, and only pursuant to, the terms and conditions set forth in this Agreement 2. ISSUANCE OF CONVERTIBLE DEBENTURES. 2.1. AMOUNT OF DEBENTURES ISSUED. Simultaneously with the execution of this Agreement, PLSI shall issue to BSLT a series of six debentures (the "Debentures") as follows: five debentures in the amount of One Hundred Thousand Dollars and 00/100 U.S. Dollars (US$ 100,000.00) and one debenture in the amount of Ninety-One Thousand Nine Hundred Sixteen and 06/100 U.S. Dollars (US$ 91,916.00) each in the form set forth in Exhibit A. The Debentures shall be convertible into the Common Stock of PLSI (the "Underlying Shares" or "Shares") pursuant to the terms and conditions set forth in the Debentures. Following the issuance of the Debentures, the Debentures shall thereafter represent the Liquidated Debt, and thereafter there shall be no independent debt from PLSI to BSLT with respect to the payment of the purchase price of the Goods. 2.2. REGISTRATION OF THE DEBENTURES. Within five (5) Business Days of the execution of this Agreement and issuance of the Debentures (or in the case of issuance of New Debentures as provided in subparagraph 2.3 below, within five (5) days of the issuance of the New Debentures), PLSI agrees to file the necessary documentation with the SEC to register the Underlying Shares under the Act, and to thereafter prosecute such application in good faith and with its best efforts. A copy of all filings by PLSI with respect to the Underlying Shares shall be provided to BSLT by the notice procedures set forth in subparagraph 10.1 below within two (2) Business Days on which the filing was made with the SEC. In addition, Notice of the effectiveness of such registration shall be given by PLSI to BSLT within two (2) Business Days of the effectiveness of such Registration. 2.3. APPLICABLE PROCEDURES IF LIQUIDATED DEBT IS NOT SATISFIED. If, after the conversion of all the Debentures and sale of all the Underlying Shares, the Liquidated Debt, as reduced by the price received by BSLT from the sale of the Underlying Shares and any cash payments made by PLSI to BSLT in lieu of conversion or under the terms of the Debentures, is not reduced to an amount less than $50,000 (Fifty Thousand Dollars), BSLT shall have the option, at its sole discretion and after Notice as provided in subparagraph 10.1 below, (a) to require PLSI to issue immediately new Debentures (in the form of the Debenture attached as Exhibit A) to satisfy the remainder of the Liquidated Debt, (b) to pay immediately in cash to BSLT the remainder of the Liquidated Debt, or (c) both to issue immediately new Debentures (the "New Debentures") and to pay immediately in cash the Liquidated Debt, with the amounts to be allocated between the new Debentures and cash payments in a proportion determined at the sole discretion of BSLT and as set forth in the Notice. The procedure set forth in this subparagraph 2.3 may be repeated as many times as necessary until the Liquidated Debt has been satisfied or paid in full. For purposes of computing whether or not the Liquidated Debt has been satisfied through the sale of the Debentures, any sales of the Underlying Shares more than two (2) trading days after the conversion of such Underlying Shares (other than sales that were made later than such period because of causes beyond BSLT's control) shall be deemed to have been made at the higher of (a) the closing price of the Underlying Shares two (2) days after conversion or (b) the actual sale price of the Underlying Shares. 2 2.4. ABSENCE OF RESTRICTIONS ON THE NEW DEBENTURES. Underlying Shares obtained by BSLT as a result of the conversion of New Debentures shall not be subject to the limitation set forth in paragraph 3 below. 3. LIMITATION ON SALE OF SHARES Commencing on the effective date of the registration of the Underlying Shares, BSLT agrees that it will not sell on any public exchange an amount of the Underlying Shares for a sales price in excess of Two Hundred Thousand U.S. Dollars (US$ 200,000) in any calendar month, except as provided in subparagraph 2.4 above. For purpose of this paragraph 3, the value of Shares sold in any calendar month shall be calculated by multiplying the number of Shares sold during such month times the sale price of one share in the last sale of the Shares by BSLT during that calendar month. 4. MANDATORY CONVERSION. PLSI shall have the option, but not the obligation, to require BSLI, upon five (5) business days notice, to convert any or all of the Debentures, provided that 4.1. The Underlying Shares are covered by a registration statement freely permitting BSLI to sell the Underlying Shares on a public market; 4.2. The Underlying Shares shall not have been delisted from NASDAQ or any other securities exchange; 4.3. The Underlying Shares, at the time of conversion, shall have a bid value no less than $1.50; 4.4. The conversion of the Debentures will not result in BSLI having sold more than $200,000 of the Underlying Shares in any calendar month; 5. RELEASES AND WAIVERS. 5.1. GENERAL RELEASE BY PLSI. PLSI, its parents, subsidiaries, affiliates, their officers, directors, shareholders, employees. agents, successors in interest, and predecessors in interests (hereafter the "PLSI Releasors") hereby release BSLT, its parents, subsidiaries, affiliates, their officers, directors, shareholders, employees. agents, successors in interest, and predecessors in interest (hereafter the "BSLT Releasees") from (i) any and all claims for damages, suits, causes of action, liability, or obligations of any kind or nature whatsoever which the PLSI Releasors may have hade against the BSLT Releasees from the beginning of time up to an including the date of this Release and (ii) any and all claims for damages, suits, causes of action, liability, or obligations of any kind or nature whatsoever which the PLSI Releasors may have, in the past, present or future, against the BSLT Releasees arising from the BSLT's sale of the Goods to PLSI (the "PLSI Claims"). Notwithstanding the foregoing, this release shall not affect: (A) any obligations that BSLT may have under any product liability theories (including indemnification or contribution obligations to PLSI) with respect to any Goods that BSLT has previously delivered to PLSI, or which it may deliver in the future; (B) any obligations to replace or repair the Goods under 3 warranties provided by BSLT where by their terms such warranties have not yet expired; or (C) any obligations BSLT may have to PLSI under any agreement, under the Uniform Commercial Code, or otherwise, with respect to Goods which have not yet been delivered. For purposes of determining the warranty period under clause (B) above, the warranty period shall be deemed to have commenced upon delivery of the goods to PLSI. 5.2. RELEASE BY BSLT. Upon issuance of the Debentures to BSLT (the fulfillment of this condition to be hereafter referred to as the ("Release Event"), BSLT, its parents, subsidiaries, affiliates, their officers, directors, shareholders, employees. agents, successors in interest, and predecessors in interests (hereafter the "BSLT Releasors") hereby release PLSI, its parents, subsidiaries, affiliates, their officers, directors, shareholders, employees, agents, successors in interest, and predecessors in interest (hereafter the "PLSI Releasees") from any and all claims for damages, suits, causes of action, liability, or obligations of any kind or nature whatsoever which the BSLT Releasors may have, in the past, present or future, against the PLSI Releasees arising from BSLT's sale of the Goods to PLSI (the "BSLT Claims"). 5.3. ACKNOWLEDGMENTS AND WAIVERS. The parties each acknowledge their joint intention that this Agreement shall be effective as a full and final accord and satisfaction, and settlement of, and as a bar to, each and every of the BSLT Claims and the PLSI Claims (the "Claims") which each of the BSLT Releasors or the PLSI Releasors (the "Releasing Parties") now has or has had in the past, or might have in the future against any of the BSLT Releasees and the PSLI Releasees (the "Releasing Parties"). In connection with such waiver and relinquishment, on behalf of each other, the parties acknowledge that they or their attorneys now know or believe to be true with respect to the subject matters of this Agreement, but that it is their intention that the general releases herein given shall be and remain in full force and effect, notwithstanding the discovery of any such different or additional facts. Therefore, they severally acknowledge that they have been informed by their attorneys of, and that they are familiar with, Section 1542 of the CIVIL CODE of the State of California, which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The parties, on behalf of themselves, and each other, hereby waive and relinquish all rights and benefits they have or might have under Section 1542 of the CIVIL CODE of the State of California, to the full extent that they may lawfully waive all such rights and benefits pertaining to the subject matters of this Agreement. 4 6. REMEDIES. Prior to the Release Event, and in the event of any default by PLSI under this Agreement or under Section 3 of the Debentures, BSLT will be entitled to seek against PLSI any or all available legal or equitable remedies arising from such default . It is further agreed that, if BSLI or PLSI shall prevail in any suit against the other , this Agreement, and or the Debentures, the prevailing party shall be entitled to its costs and attorneys fees. 7. REPRESENTATIONS AND WARRANTIES OF PLSI. PLSI hereby represents and warrants to BSLT as follows: 7.1. CORPORATE QUALIFICATIONS. PLSI is a California corporation in good standing, is qualified to do business in the State of California, and is subject to no legal disability which would prevent it from entering into this Agreement 7.2. CORPORATE APPROVALS. PLSI has taken all steps necessary to receive, and has received, all approvals of shareholders, officers and directors required by its Articles, By-Laws, and any other understandings among its shareholders, officers and directors in order to enter into this Agreement and to issue the Convertible Debentures as provided herein. 7.3. BREACH OF OTHER AGREEMENTS. Entry by PLSI into this Agreement and issuance by PLSI of the Convertible Debentures as provided herein will not breach any rights of any third parties by law or agreement and will not breach any understandings or agreements, whether oral or written, by and among PLSI, its parents, subsidiaries, affiliates and any third parties. 7.4. ABSENCE OF UNDISCLOSED LIABILITIES. PLSI does not have any material liability, claim or obligation of any nature (whether accrued contingent or otherwise) which (a) as of the date of the latest PLSI financial statements, is not disclosed or reserved for in the latest PLSI financial statements and which is required to be disclosed or reserved for in accordance with accounting principles applied by PLSI on a consistent basis in past years or (b) arose after the date of latest PLSI financial statements other than in the ordinary course of business. 7.5. FRAUDULENT CONVEYANCE. PLSI represents and warrants that neither the issuance of the Debentures to BSLT nor the payment of any sums to BSLT is now, or will be in the future, a fraudulent conveyance as defined by applicable law and that neither the transfer of the Debentures nor the payment of any sums to BSLT will otherwise give rise to a claim by any other of the creditors of PSLI or affiliated entities to set aside and/or recover the Debentures or payments to BSLT to the benefit of such creditors. 7.6. COMPLIANCE WITH THE ACT. PLSI has been, is now, and will continue to remain in compliance with the Act in connection with the issuance of the Debentures and all other actions required to be taken by it under this Agreement. PLSI does not know of any fact or condition that has not already been reported to the Commission in its public filings and that would have any bearing upon the ability of PLSI to register Underlying Shares under the Act. 5 7.7. OPINION OF COUNSEL. Simultaneously with the execution of this Settlement Agreement, Rutan and Tucker will provide its legal opinion, which shall be binding on Rutan and Tucker as to BSLT, that the representations and warranties of PSLI as set forth in sections 7.1 and 7.2 above, to the best of its knowledge, after the exercise of due diligence, are true, accurate and are not rendered misleading by the omission of PLSI to disclose any additional material fact to BSLT in connection with said warranties and representations and that said Debentures are exempt from registration under the Act. 8. REPRESENTATIONS AND WARRANTIES OF BSLT. BSLT hereby represents and warrants to PLSI as follows: 8.1. CORPORATE QUALIFICATIONS. BSLT is a Delaware corporation in good standing, is qualified to do business in the State of California, and is subject to no legal disability which would prevent it from entering into this Agreement 8.2. CORPORATE APPROVALS. BSLT has taken all steps necessary to receive, and has received, all approvals of shareholders, officers and directors required by its Articles, By-Laws, and any other understandings among its shareholders, officers and directors in order to enter into this Agreement. 8.3. BREACH OF OTHER AGREEMENTS. Entry by BSLT into this Agreement will not breach any rights of any third parties by law or agreement and will not breach any understandings or agreements, whether oral or written, by and among BSLT, its parents, subsidiaries, affiliates and any third parties. 8.4. KNOWLEGE OF, AND CAPACITY TO ASSUME, ECONOMIC RISK. BSLT acknowledges and represents that: 8.4.1. BSLT is an "accredited investor" as defined in 17 U.S.Css.230.501(a); 8.4.2. BSLT has reviewed the annual report on form 10-K/A for the fiscal year ended March 31, 1999, and the quarterly report on form 10-Q for the quarter ended June 30, 1999; 8.4.3. BSLT is in a financial position to hold the Shares for an indefinite period of time, is able to bear the economic risk of an investment in the Shares and is able to withstand a complete loss of its investment in the Shares; 8.4.4. BSLT has the knowledge and experience in business and financial matters that make it capable of evaluating the merits and risks of an investment in the Shares; 6 8.4.5. BSLT understands that an investment in the Shares is highly speculative and involves a high degree of risk but believes that an investment in the Shares is suitable based upon its investment objectives and financial needs, and that it has adequate means to undertake the risk and for providing for its current financial needs and has no need for liquidity of investment with respect to the Shares; 8.4.6. BSLT has been given access to full and complete information regarding PLSI and has utilized that access to its satisfaction for the purpose of obtaining information concerning PLSI, an investment in the Shares and the terms and conditions of this offering of the Shares, and has had the opportunity to ask questions of, and receive answers from, representatives of PLSI, for the purpose of obtaining any additional information to the extent reasonably available that is necessary to verify the information provided; 8.4.7. BSLT recognizes that an investment in the Shares involves significant risks, including but not limited to, the risk of economic loss from the operations of PLSI due to the limited operating history of PLSI and the risk of economic loss from the operations of PLSI; 8.4.8. BSLT understands that the Shares may be sold only (i) upon registration of the Shares pursuant to the Securities Act of 1933 (the "Act") or (ii) in a transaction either (a) not subject to the Act or (b) in compliance with the terms and conditions of an exemption from the Act. 9. DEFINITIONS. In addition to the capitalized terms (such as "Liquidated Debt") defined elsewhere, the below terms, whether capitalized or not, will have the meanings ascribed to them in this paragraph 9 as follows. 9.1. "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Montana or the State of California are authorized or required by law or other government action to close. 9.2. "Commission" means the Securities and Exchange Commission. 9.3. "Common Stock" means the Class A Common Stock, no par value per share, of PLSI and stock of any other class into which such shares may hereafter have been reclassified or changed. 9.4. "Person"means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. 7 9.5. "Act" means the Securities Act of 1933, as amended. 9.6. "Underlying Shares" means the shares of Common Stock issuable upon conversion of any or all of the Debentures. 10. MISCELLANEOUS. 10.1. NOTICE. Whenever notice is permitted or required by this Agreement, it shall be deemed given as of the date of receipt if sent by facsimile transmission to the numbers shown below, or by a nationally recognized overnight courier, signature required, and addressed to the party at such address shown below, or at such other address or facsimile numbers as the party may time to time give by written notice. For notice to PLSI: Premier Laser Systems, Inc Attn: Chief Financial Officer. 3 Morgan Irvine, California 92618 Fax: 949.859.5241 with a copy to Rutan & Tucker, LLP 611 Anton Boulevard Costa Mesa, CA 92626 Fax: 714-546-9035 For notice to BSLT Ed Teppo Big Sky Laser International, Inc. 601 Haggarty Lane, Suite C Bozeman, MT 59715 Fax: 406-586-1797 with a copy to Robert Clifton Burns Barkats & Associates, Chartered 1250 Eye Street, N.W. Washington, D.C. 20005 Fax: 202-789-0895 8 Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this subparagraph prior to 4:00 p.m. (P.S.T, or P.D.S.T when applicable), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:00 p.m. (P.S.T, or P.D.S.T when applicable) on any date and earlier than 11:59 p.m. (P.S.T, or P.D.S.T when applicable) on such date, (iii) the Business Day following the date of sending, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. 10.2. ASSIGNMENT. This Agreement may not be assigned in whole or part by either party without the prior written approval by the other party; provided that the Agreement may be assigned, in the case of corporate reorganization, to an entity controlled by the assigning party or under common control with the assigning party. 10.3. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties and is intended expressly to supercede the letter agreement signed by the parties on September 1, 1999. In addition, this Agreement may not be modified except by a subsequent writing duly executed by all parties. 10.4. GOVERNING LAW. The internal law, without regard to conflicts of laws principles, of the State of California will govern all questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement. 10.5. VENUE AND JURISDICTION. All actions brought against PLSI under this Agreement, including any of the actions set forth in paragraph 6 above, may be brought in the state or federal courts located in the State of Montana. PLSI hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to PLSI at the address in effect for notices to it in subparagraph 10.1 above and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right by BSLT to serve process in any manner permitted by law. 10.6. COUNTERPARTS. This Agreement may be executed in counterparts with any two counterparts signed by each party having the full force, effect and authority of an original document signed by all parties. 10.7. NO WAIVER. No failure or delay by any party in the exercise of any of its rights hereunder will be deemed to be a waiver of any of its rights. 9 10.8. SEVERANCE. In the event that any provision or provisions are found by any tribunal of competent jurisdiction to be null or void, such provisions will be deemed to be severed from this Agreement and the remainder of the Agreement will remain in full force and effect. 10.9. HEADINGS. The headings contained in this Agreement are for reference only and shall not be used to resolve any questions of interpretation or construction. 10.10. RULES OF CONSTRUCTION. All parties have entered into this Agreement upon the advice of counsel and with full participation in the drafting of this Agreement. Accordingly, the parties agree that the principle that would construe a contract strictly against the party who drafted such contract shall have no application to this Agreement. IN WITNESS WHEREOF, the undersigned officers of the party, having been duly authorized to bind their respective parties, have executed this Agreement on behalf of their respective parties as of the date last below written. BIG SKY LASER INTERNATIONAL, INC. PREMIER LASER SYSTEMS, INC. By:________________________________ By:_____________________________ Ed Teppo Colette Cozeen President President Dated: Dated: 10 EX-10.2 6 EXCHANGE AGREEMENT DATED DECEMBER 3, 1999 Exhibit 10.2 EXCHANGE AGREEMENT ------------------ This Exchange Agreement (the "AGREEMENT") entered into as of the last date written below by and between ___________________ ("CREDITOR"), a California limited liability partnership with its principal place of business at __________ ________________________________________, and Premier Laser Systems, Inc. ("PLSI"), a California corporation, having its principal place of business at 3 Morgan, Irvine, California. WITNESSETH: WHEREAS, PLSI is indebted to Creditor in an amount in excess of ____________ as a result of products or services provided by Creditor to PLSI; WHEREAS, PLSI and Creditor wish to agree upon a payment mechanism that would permit PLSI to pay a portion of such debt; NOW, THEREFORE, in consideration of the mutual promises contained herein, IT IS HEREBY AGREED: 1. LIQUIDATION OF DEBT. The parties hereby agree that, as of the date of this Agreement, the total amount due and owing by PLSI to Creditor is at least equal to the sum of _________________________ (___________) (such sum being hereafter referred to as the "LIQUIDATED DEBT"). PLSI agrees to pay the Liquidated Debt to Creditor pursuant to the terms and conditions set forth in this Agreement. As used herein, the term "Liquidated Debt" does NOT refer to any amount of debt in excess of __________________________ (___________). 2. ISSUANCE OF CONVERTIBLE DEBENTURES. 2.1 AMOUNT OF DEBENTURES ISSUED. Simultaneously with the execution of this Agreement, PLSI shall issue to Creditor a series of ____ (_) convertible debentures (the "DEBENTURES") in the amount of __________________ Dollars and 00/100 U.S. Dollars (US$______) each in the form set forth in EXHIBIT A. The Debentures shall be convertible into the Common Stock of PLSI (the "UNDERLYING SHARES" or "SHARES") pursuant to the terms and conditions set forth in the Debentures. Following the issuance of the Debentures, the Debentures shall thereafter represent the Liquidated Debt, and thereafter there shall be no independent debt from PLSI to Creditor with respect to the Liquidated Debt. The parties acknowledge, however, that the total indebtedness of PLSI to Creditor may exceed the Liquidated Debt, and the exchange of the Debentures for the Liquidated Debt shall not extinguish or otherwise affect any additional indebtedness that PLSI may have to Creditor. 2.2 REGISTRATION OF THE UNDERLYING SHARES. Within ten (10) Business Days of the execution of this Agreement and issuance of the Debentures, PLSI agrees to file a Registration Statement with the Commission to register the resale of the Underlying Shares under the Act, and to thereafter prosecute such application in good faith and with its best efforts. PLSI will keep such Registration Statement effective until the earlier of that date 18 months from its effective date or the date that the selling securityholders named therein have converted all of the Debentures held by them AND sold all of the Common Stock received by them upon conversion. During this period, PLSI shall amend the Registration Statement and the prospectus included therein, and any documents incorporated by reference therein, as necessary to ensure that it does include any misstatement of a material fact or omit to state a fact necessary to make the other statements contained therein not misleading. A copy of all filings by PLSI with respect to the Underlying Shares shall be provided to Creditor by the notice procedures set forth in subparagraph 8.1 below within five (5) Business Days on which the filing was made with the Commission. In addition, Notice of the effectiveness of such registration shall be given by PLSI to Creditor within five (5) Business Days of the effectiveness of such Registration. 2.3 INDEMNIFICATION. PLSI agrees to indemnify and hold harmless Creditor and its officers, directors, agents, partners and any person who may be deemed to control Creditor under the Act or the Securities Exchange Act of 1934, to the fullest extent permitted by law, from and against any and all losses, claims, damages, liabilities, costs and expenses (including without limitation attorneys' fees), as incurred, arising out or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement or the prospectus contained therein, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding the Creditor furnished in writing by the Creditor to PLSI expressly for use therein. 3. LIMITATION ON SALE OF SHARES. Commencing on the effective date of the registration of the Underlying Shares, Creditor agrees that it will not sell on any public exchange (including without limitation the Nasdaq National Market) an amount of the Underlying Shares for an aggregate sales price in excess of ______________ U.S. Dollars (US$________) in any calendar month. 4. MANDATORY CONVERSION. PLSI shall have the option, but not the obligation, to require Creditor, upon five (5) business days notice, to convert any or all of the Debentures, provided that: 4.1 The Underlying Shares are covered by an effective registration statement freely permitting Creditor to sell the Underlying Shares on a public market; 4.2 The Common Stock of PLSI is listed on the NASDAQ National Market or Nasdaq Small Cap Market; 2 4.3 The Underlying Shares, at the time of conversion, shall have a bid price no less than $1.50; AND 4.4 The conversion of the Debentures in accordance with such notice from PLSI will not result in Creditor having converted more that $______ of the Debentures in any calendar month. 5. REPRESENTATIONS AND WARRANTIES OF PLSI. PLSI hereby represents and warrants to Creditor as follows: 5.1 CORPORATE QUALIFICATIONS. PLSI is a California corporation in good standing, is qualified to do business in the State of California, and is subject to no legal disability which would prevent it from entering into this Agreement. 5.2 CORPORATE APPROVALS. PLSI has received all approvals of shareholders, officers and directors required by its Articles, Bylaws, and applicable law in order to enter into this Agreement and to issue the Debentures as provided herein. The Debentures, when issued in accordance herewith, shall be the valid and binding obligations of PLSI, enforceable in accordance with their terms. The issuance of the Underlying Shares upon the conversion of the Debentures in accordance with their terms has been approved by all necessary corporate action on the part of PLSI, and upon such conversion the Underlying Shares shall be duly and validly authorized, fully paid and nonassessable 6. REPRESENTATIONS AND WARRANTIES OF CREDITOR. Creditor hereby represents and warrants to PLSI as follows: 6.1 CORPORATE QUALIFICATIONS. Creditor is a limited liability partnership in good standing, is qualified to do business in the State of California, and is subject to no legal disability which would prevent it from entering into this Agreement. 6.2 CORPORATE APPROVALS. Creditor has received all approvals of partners required by its partnership agreement and applicable law and any other understandings among its partners in order to enter into this Agreement. 6.3 KNOWLEDGE OF, AND CAPACITY TO ASSUME, ECONOMIC RISK. Creditor acknowledges and represents that: 6.3.1 Creditor is an "accredited investor" as defined in Exhibit B hereto; 6.3.2 Creditor has received and reviewed PLSI's Annual Report on Form 10-K/A for the fiscal year ended March 31, 1999, and its quarterly reports on Form 10-Q for the quarters ended June 30, 1999 and September 30, 1999; 6.3.3 Creditor is in a financial position to hold the Shares for an indefinite period of time, is able to bear the economic risk of an investment in the Shares and is able to withstand a complete loss of its investment in the Shares; 3 6.3.4 Creditor has such knowledge and experience in business and financial matters that make it capable of evaluating the merits and risks of an investment in the Shares; 6.3.5 Creditor understands that an investment in the Shares is highly speculative and involves a high degree of risk but believes that an investment in the Shares is suitable based upon its investment objectives and financial needs, and that it has adequate means to undertake the risk and to provide for its current financial needs and has no need for liquidity of investment with respect to the Shares; Creditor has reviewed and understands the Risk Factors attached hereto as EXHIBIT A; 6.3.6 Creditor has had the opportunity to ask questions of, and receive answers from, representatives of PLSI, for the purpose of obtaining any additional information to the extent reasonably available that is necessary to verify the information provided; 6.3.7 Creditor understands that the Shares may be resold by it only (i) upon registration of the Shares pursuant to the Act or (ii) in a transaction that is exempt from registration under the Act. Creditor understands that until the resale of the Underlying Shares is registered under the Act, the certificates representing the Underlying Shares will bear a legend restricting the sale or other disposition thereof. 6.3.8 Creditor is acquiring the Debentures and the Underlying Shares for purposes of investment, and without a view to the distribution or resale thereof except where such distribution or resale is registered under the Act or otherwise permitted by applicable securities laws. 6.3.9 Creditor is a resident of or domiciled in the state set forth under its name in Section 8.1 hereof. 7. DEFINITIONS. In addition to the capitalized terms (such as "LIQUIDATED DEBT") defined elsewhere, the below terms, whether capitalized or not, will have the meanings ascribed to them in this paragraph 9 as follows. 7.1 "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of California are authorized or required by law or other government action to close. 7.2 "COMMISSION" means the Securities and Exchange Commission. 7.3 "COMMON STOCK" means the Class A Common Stock, no par value per share, of PLSI and stock of any other class into which such shares may hereafter have been reclassified or changed. 7.4 "PERSON"means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. 4 7.5 "ACT" means the Securities Act of 1933, as amended. 7.6 "UNDERLYING SHARES" means the shares of Common Stock issuable upon conversion of any or all of the Debentures. 8. MISCELLANEOUS. 8.1 NOTICE. Whenever notice is permitted or required by this Agreement, it shall be deemed given as of the date of receipt if sent by facsimile transmission to the numbers shown below, or by a nationally recognized overnight courier, signature required, and addressed to the party at such address shown below, or at such other address or facsimile numbers as the party may time to time give by written notice. For notice to PLSI: Premier Laser Systems, Inc Attn: Chief Financial Officer. 3 Morgan Irvine, California 92618 Fax: 949.859.5241 For notice to Creditor: _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this subparagraph prior to 4:00 p.m. (California time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the Business Day following the date of sending, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. 8.2 ASSIGNMENT. This Agreement may not be assigned in whole or part by either party without the prior written approval by the other party. 8.3 ENTIRE AGREEMENT. This Agreement and the Debentures referred to herein constitutes the entire agreement among the parties with respect to the subject matter hereof. In addition, this Agreement may not be modified except by a subsequent writing duly executed by all parties. 8.4 GOVERNING LAW. The internal law of the State of California, without regard to conflicts of laws principles, will govern all questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement. 5 8.5 COUNTERPARTS. This Agreement may be executed in counterparts with any two counterparts signed by each party having the full force, effect and authority of an original document signed by all parties. 8.6 NO WAIVER. No failure or delay by any party in the exercise of any of its rights hereunder will be deemed to be a waiver of any of its rights. 8.7 SEVERANCE. In the event that any provision or provisions are found by any tribunal of competent jurisdiction to be null or void, such provisions will be deemed to be severed from this Agreement and the remainder of the Agreement will remain in full force and effect. 8.8 HEADINGS. The headings contained in this Agreement are for reference only and shall not be used to resolve any questions of interpretation or construction. 8.9 ATTORNEYS' FEES. If either party commences litigation to enforce or interpret this Agreement or the Debentures, the nonprevailing party in such litigation shall reimburse the prevailing party for the prevailing party's expenses in connection with such litigation, including without limitation the prevailing party's attorneys' fees. 8.10 WAIVER OF CONFLICT OF INTEREST. PLSI ACKNOWLEDGES THAT THE CREDITOR IS ITS LEGAL COUNSEL, AND THAT AS A RESULT THE CREDITOR HAS A CONFLICT OF INTEREST INSOFAR AS IT HAS PARTICIPATED IN THE NEGOTIATION AND PREPARATION OF THIS AGREEMENT AND THE DEBENTURES REFERRED TO HEREIN. PLSI IRREVOCABLY AND PERMANENTLY WAIVES ANY SUCH CONFLICT ON INTEREST ON THE PART OF CREDITOR, AND ACKNOWLEDGES THAT IT HAS BEEN ADVISED TO OBTAIN SEPARATE LEGAL REPRESENTATION IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the undersigned officers of the party, having been duly authorized to bind their respective parties, have executed this Agreement on behalf of their respective parties as of the date last below written. "CREDITOR" ___________________________ PREMIER LASER SYSTEMS, INC. By:________________________ By:___________________________ Its:_________________ Its:___________________ 6 EXHIBIT A FORM OF DEBENTURE 7 EXHIBIT B DEFINITION OF ACCREDITED INVESTOR (A) Any bank as defined in Section 3(a)(2) of the Securities Act of 1933 (the "Act"), or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivision, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan as defined in ERISA (i) for which the investment decision is made by a plan fiduciary which is a bank, savings and loan association, insurance company or registered investment adviser, or (ii) where the plan has total assets in excess of $5,000,000 or, (iii) which is a self-directed plan (including an individual retirement account), with investment decisions made solely by "accredited investors" as defined in this Exhibit B; (B) Any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940; (C) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar trust, or partnership, not formed for the specific purpose of acquiring the Debentures or the Shares, with total assets in excess of $5,000,000; (D) Any director or executive officer of the Company; (E) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; (F) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; (G) Any trust with total assets in excess of $5,000,000 not formed for the specific purpose of acquiring the Debentures or the Shares, whose purchase is directed by a person who, either alone or with his purchaser representative has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment; (H) Any entity in which all the equity owners are accredited investors as defined in subparagraphs (A) through (G) above. 8 EXHIBIT C RISK FACTORS RISKS RELATED TO OUR BUSINESS IF WE ARE UNABLE TO SECURE ADDITIONAL FINANCING IN THE FUTURE, WE WILL HAVE TO DELAY OR HALT OUR PRODUCT DEVELOPMENT PROGRAMS. In the future, we will require substantial additional funds for research and development programs, preclinical and clinical testing, development of our sales and distribution force, operating expenses, regulatory processes and manufacturing and marketing programs. Our capital requirements may vary, and will depend on both internal and external factors. Internal factors affecting our capital requirements include: o the progress of research and development programs o results of preclinical and clinical testing o the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights o developments and changes in our existing research o licensing and other relationships o the terms of any new collaborative, licensing and other arrangements that we may establish. o the amount of legal, accounting and administrative costs incurred in connection with pending litigation External factors affecting our capital requirements include: o competing technological and market developments o the time and cost involved in obtaining regulatory approvals WE ARE CURRENTLY EXPERIENCING CASH FLOW DIFFICULTIES. OUR CURRENTLY AVAILABLE SHORT-TERM ASSETS ARE NOT ANTICIPATED TO BE SUFFICIENT TO MEET OUR OPERATING EXPENSES AND CAPITAL EXPENDITURES PAST JANUARY, 2000. WE ARE CURRENTLY IN THE PROCESS OF SEEKING ADDITIONAL FINANCING. WE DO NOT KNOW IF ADDITIONAL FINANCING WILL BE AVAILABLE WHEN NEEDED, OR IF IT IS AVAILABLE, IF IT WILL BE AVAILABLE ON ACCEPTABLE TERMS. HAVING INSUFFICIENT FUNDS WOULD LIKELY MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS. FOR INSTANCE, WE MAY BE PREVENTED FROM PURCHASING NEEDED INVENTORY AND FROM IMPLEMENTING OUR BUSINESS STRATEGY. WE MAY ALSO BE REQUIRED TO DELAY, SCALE BACK OR ELIMINATE RESEARCH AND PRODUCT DEVELOPMENT PROGRAMS OR TO LICENSE TO THIRD PARTIES RIGHTS TO COMMERCIALIZE PRODUCTS OR TECHNOLOGIES THAT WE WOULD OTHERWISE SEEK TO DEVELOP INTERNALLY. WE HAVE INCURRED NET LOSSES IN THE PAST AND EXPECT TO INCUR FUTURE LOSSES WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO SUSTAIN OUR OPERATIONS. 9 We incurred net losses of approximately $76,343,000 from April 1, 1995 through March 31, 1999, and approximately $30,841,000 for the year ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately $89,207,000. We have incurred additional losses since that date, and expect to continue to incur net losses until product sales generate sufficient revenues to fund our continuing operations. We may fail to achieve significant revenues from sales or achieve or sustain profitability. Our ability to achieve profitability in the future will depend in part on our ability to continue to successfully develop clinical applications, obtain regulatory approvals for our products and sell these products on a wide scale. These risks apply to both our laser products and our ophthalmic diagnostic products. THE HIGH COST OF DENTAL LASERS, SAFETY AND EFFICACY CONCERNS OF DENTISTS AND PATIENTS AND THE SUBSTANTIAL MARKET ACCEPTANCE OF DENTAL DRILLS MAY PREVENT US FROM ACHIEVING THE BROAD MARKET ACCEPTANCE WHICH IS NECESSARY FOR OUR SUCCESS. Our products may not be accepted by the medical or dental community or by patients. We do not know if these products can be successfully commercialized on a broad basis. The acceptance of dental lasers may be adversely affected by their high cost, concerns by patients and dentists relating to their safety and efficacy, and the substantial market acceptance and penetration of alternative dental tools such as the dental drill. Our future sales and profitability depend in part on our ability to demonstrate to dentists, ophthalmologists, optometrists and other physicians the potential cost and performance advantages of our laser systems, diagnostic products and other products over traditional methods of treatment and over competitive products. Current economic pressure may make doctors and dentists reluctant to purchase substantial capital equipment or invest in new technology. We currently have a limited sales force and will need to hire additional sales and marketing personnel to increase the general acceptance of our products. Of all the factors impacting our profitability, the failure of our products to achieve broad market acceptance would have the greatest negative impact on our business, financial condition and results of operations and our profitability. WE ARE INVOLVED IN PENDING LITIGATION AND A REGULATORY INVESTIGATION AND MAY BE ADVERSELY AFFECTED BY AN ADVERSE OUTCOME IN THE LAWSUIT OR BY THE COSTS OF DEFENDING THIS LAWSUIT. We have been sued in a number of related securities class action matters, generally relating to allegations of misrepresentations during the period from May 7, 1997 to April 15, 1998. In addition, the Securities and Exchange Commission has commenced an investigation of our practices and procedures relating to revenue recognition issues and related matters. The costs of our continuing defense of the litigation matters and responses to the regulatory investigations, including accounting and legal fees as well as management time and effort, will be substantial, and we expect these costs to materially and adversely affect our results of operations until these matters are resolved. We do not know when these matters will be resolved. We have reached an agreement in principle to settle the class action litigation and recorded an expense in the quarter ended December 31, 1998, relating to this settlement. We have recorded substantial additional expense since that date to cover continuing legal fees incurred in connection with this settlement. However, this settlement is subject to several conditions, and it is possible that it may not be completed, in which case the litigation would continue. An adverse judgment entered in this litigation could materially and adversely affect our business and results of operations. In addition, the Securities and Exchange Commission is empowered to assess substantial penalties against us in connection with its findings in the pending investigation. The imposition of any of these penalties could materially and adversely affect our business, financial condition and results of operations. 10 IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE THE OPHTHALMIC IMAGING SYSTEMS ("OIS") BUSINESS WITH OUR OTHER OPERATIONS, WE MAY INCUR SUBSTANTIAL AND UNANTICIPATED EXPENSES AND OPERATING INEFFICIENCIES. We acquired a majority of the outstanding common stock of OIS in 1998. In March 1999, we agreed to manufacture OIS's products on an outsourcing basis. In addition, we have agreed with OIS to acquire the remaining outstanding stock of OIS, subject to satisfaction of certain conditions. We are not sure if the synergies of the two entities will allow us to reduce expenses in such a way as to make OIS profitable. In addition, members of our management will have to continue to expend time and effort on new activities relating to the OIS operations, which will detract from their time available to attend to our other activities. We cannot assure you that the expenses or dislocations that we may suffer as a result of the coordination of these businesses will not be material. BECAUSE SOME OF THE COMPONENTS WE USE ARE NOT WIDELY AVAILABLE, THERE IS A RISK THAT WE MAY NOT ALWAYS BE ABLE TO OBTAIN THESE COMPONENTS, WHICH COULD PREVENT US FROM FILLING ORDERS ON TIME AND REDUCE OUR SALES. We purchase some of the raw materials, components and subassemblies included in our products from a limited group of qualified suppliers and do not maintain long-term supply contracts with any of our key suppliers. Some of the components used by OIS are manufactured by a sole vendor, including Foresight Imaging for its prism card and Kodak for its 12 bit camera. In addition, our Arago laser product is manufactured for us by one supplier, LaserMed, Inc. Further, our components are subject to rapid innovation and obsolescence. The discontinuance of the manufacturing of these components may require us to redesign some of the hardware and software used in our products to accommodate a replacement component. While we believe that suppliers could be found for all of our components and products, we cannot assure you that any supplier could be replaced in a timely manner. Any interruption in the supply of key components could materially harm our ability to manufacture our products and our business, financial condition and results of operations. IN ORDER TO CONTINUE TO SELL OUR PRODUCTS IN FOREIGN MARKETS, WE MUST DEVELOP AND MAINTAIN FOREIGN SALES DISTRIBUTION CHANNELS AND MANAGE POLITICAL AND ECONOMIC INSTABILITY IN FOREIGN MARKETS AND DEAL WITH GOVERNMENTAL QUOTAS AND OTHER REGULATIONS. A substantial portion of our sales are made in foreign markets. The primary risks to which we are exposed due to our foreign sales are the difficulty and expense of maintaining foreign sales distribution channels, political and economic instability in foreign markets and governmental quotas and other regulations. The regulation of medical devices worldwide also continues to develop, and it is possible that new laws or regulations could be enacted which would have an adverse effect on our business. In addition, we may experience additional difficulties in providing prompt and cost effective service of our medical lasers in foreign countries. We do not carry insurance against these risks. The occurrence of any one or more of these events may individually or in the aggregate have a material adverse effect upon our business, financial condition and results of operations. IF WE CANNOT ADAPT TO TECHNOLOGICAL ADVANCES, OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE AND OUR PRODUCT SALES COULD SIGNIFICANTLY DECLINE. 11 The markets in which our medical products compete are subject to rapid technological change as well as the potential development of alternative surgical techniques or new pharmaceutical products. These changes could render our products uncompetitive or obsolete. We will be required to invest in research and development to attempt to maintain and enhance our existing products and develop new products. We do not know if our research and development efforts will result in the introduction of new products or product improvements. IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY. Our success will depend in part on our ability to obtain patent protection for products and processes, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. While we hold a number of U.S. and foreign patents and have other patent applications pending in the United States and foreign countries, we cannot assure you that any additional patents will be issued, that the scope of any patent protection will exclude competitors or that any of our patents will be held valid if subsequently challenged. Further, other companies may independently develop similar products, duplicate our products or design products that circumvent our patents. We are aware of certain patents which, along with other patents that may exist or be granted in the future, could restrict our right to market some of our technologies without a license, including, among others, patents relating to our lens emulsification product and ophthalmic probes for the Er:YAG laser. We also rely upon unpatented trade secrets, and we cannot assure you that others will not independently develop or otherwise acquire substantially equivalent trade secrets. In addition, at each balance sheet date, we are required to review the value of our intangible assets based on various factors, such as changes in technology. Any adjustment downward in the value of our intangible assets may result in a write-off of the intangible asset and a substantial charge to earnings, which would adversely affect our operating results in the future. IN OUR BUSINESS, WE COULD BECOME INVOLVED IN PATENT AND INTELLECTUAL PROPERTY LITIGATION, IN WHICH AN ADVERSE DETERMINATION COULD SUBJECT US TO SIGNIFICANT LIABILITIES AND RESTRICT OUR MANUFACTURING RIGHTS. In the past, we have received allegations that some of our laser and diagnostic products infringe on other patents. There has been significant patent litigation in the medical device industry. Adverse determinations in litigation or other patent proceedings to which we may become a party could subject us to significant legal judgments or other liabilities to third parties and could require us to seek licenses from third parties that may or may not be economically viable. We cannot assure you that any licenses required under these or any other patents or proprietary rights would be available on terms acceptable to us. If we do not obtain these licenses, we could encounter delays in product introductions while we attempt to design around these patents, or we could find that the development, manufacture or sale of products requiring such licenses could be enjoined. OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION WHICH IMPOSES SIGNIFICANT COSTS ON US AND IF NOT COMPLIED WITH COULD LEAD TO THE ASSESSMENT OF PENALTIES. Our products are regulated as medical devices by the United States Food & Drug Administration. As such, these devices require either Section 510(k) premarket clearance or approval of a premarket approval application by the FDA prior to commercialization. Satisfaction of regulatory requirements is expensive and may take several years to complete. We cannot assure you that further clinical trials of our medical products or of any future products will be successfully completed or, if they are completed, that any requisite FDA or foreign governmental approvals will be obtained. 12 FDA or other governmental approvals of products we may develop in the future may require substantial filing fees which could limit the number of applications we seek and may entail limitations on the indicated uses for which our products may be marketed. In addition, approved or cleared products may be subject to additional testing and surveillance programs required by the FDA and other regulatory agencies, and product approvals and clearances could be withdrawn for failure to comply with regulatory standards or by the occurrence of unforeseen problems following initial marketing. Also, we have made modifications to some of our existing products which we do not believe require the submission of a new 510(k) notification to the FDA. However, we cannot assure you that the FDA would agree with our determination. If the FDA did not agree with our determination, they could require us to cease marketing one or more of the modified devices until the devices have been cleared. We are also required to adhere to a wide variety of other regulations governing the operation of our business. Noncompliance with state, local, federal or foreign requirements can result in serious penalties that could harm our business. THE INTENSE COMPETITION WE FACE COULD RESULT IN REDUCED SALES AND DOWNWARD PRESSURE ON THE PRICES OF OUR PRODUCTS. We are, and will continue to be, subject to intense competition in our targeted markets, principally from businesses providing other traditional surgical and nonsurgical treatments, including existing and developing technologies, and competitive products. Many of our competitors have substantially greater financial, marketing and manufacturing resources and experience than us. In addition, we expect that other companies will enter the laser market, particularly as medical lasers gain increasing market acceptance. Significant competitive factors which will affect future sales in the marketplace include regulatory approvals, performance, pricing and general market acceptance. The ophthalmic diagnostic market is also highly competitive. There are many companies engaged in this market, some with significantly greater resources than ours. Our competitors may be able to develop technologies, procedures or products that are more effective or economical than ours, or that would render our products obsolete or noncompetitive. To continue to remain competitive, we must develop new software and hardware meeting the needs of ophthalmologists and optometrists. Our future revenues will depend, in part, on our ability to develop and commercialize these new products as well as on the success of development and commercialization efforts of our competitors. A SUCCESSFUL PRODUCT LIABILITY CLAIM ASSERTED AGAINST US DUE TO A DEFECT IN ONE OF OUR PRODUCTS IN EXCESS OF OUR INSURANCE COVERAGE WOULD HARM OUR BUSINESS. The sale of our medical products involves the inherent risk of product liability claims against us. We currently maintain product liability insurance coverage in the amount of $5 million per occurrence and $5 million in the aggregate, but this insurance is expensive, subject to various coverage exclusions and may not be obtainable in the future on terms acceptable to us. We do not know whether claims against us arising with respect to our products will be successfully defended or that our insurance will be sufficient to cover liabilities arising from these claims. A successful claim against us in excess of our insurance coverage could materially harm our business. 13 THERE IS UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT WHICH IS CRITICAL TO MARKET ACCEPTANCE OF OUR PRODUCTS. Our laser systems and other products are generally purchased by physicians, dentists and surgical centers which then bill various third party payors, such as government programs and private insurance plans, for the procedures conducted using these products. Third-party payors carefully review and are increasingly challenging the prices charged for medical products and services, and scrutinizing whether to cover new products and evaluating the level of reimbursement for covered products. While we believe that the laser procedures using our products have generally been reimbursed, payors may deny coverage and reimbursement for our products if they determine that the device was not reasonable and necessary for the purpose for which it was used, was investigational or not cost-effective. As a result, we cannot assure you that reimbursement from third party payors for these procedures will be available or if available, that reimbursement will not be limited. If third party reimbursement of these procedures is not available, it will be more difficult for us to sell our products on a profitable basis. Moreover, we are unable to predict what legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation may have on us. THE COVERAGE AND SPENDING LIMITATIONS CONTAINED IN HEALTH CARE REFORM PROPOSALS WOULD, IF ADOPTED, REDUCE DEMAND FOR OUR PRODUCTS. Several states and the United States government are investigating a variety of alternatives to reform the health care delivery system and further reduce and control health care spending. These reform efforts include proposals to limit spending on health care items and services, limit coverage for new technology and limit or control the price health care providers and drug and device manufacturers may charge for their services and products. If adopted and implemented, such reforms could have a material adverse effect on our business, financial condition and results of operations. IF WE EXPERIENCE PROBLEMS WITH YEAR 2000 COMPLIANCE OUR OPERATIONS MAY BE DISRUPTED. Many existing computer programs use only two digits to identify the year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. As a result, any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in system failure or miscalculations, causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. We are heavily dependent upon the proper functioning of our own computer and data- dependent systems. This includes, but it not limited to, our support/administrative and operational/production systems. Any failure or malfunctioning on the part of these or other systems could harm our business in ways that we currently do not know and cannot discern, quantify or otherwise anticipate. In addition, if our key vendors experience Year 2000 compliance issues, then our business could be harmed. Due to the interrelated nature of international commerce, if there is a failure in Year 2000 compliance by us or one of our direct or indirect business partners, we could suffer major disruptions in our ability to call on customers, obtain orders from customers, obtain parts from suppliers, manufacture products for sale, ship products to our customers, or receive payment for our sales. 14 We have not developed a formal assessment of all potential impacts of the Year 2000. We design, manufacture and sell medical products which contain computer chips and we utilize software developed by other companies. While our engineers are developing new software which they expect to complete by December 31, 1999, there can be no assurance that their efforts will be successful. We rely on external business partners. As such, there can be no assurance that our business will not be negatively affected by Year 2000 problems experienced by these business partners. RISKS RELATED TO THIS OFFERING CHANGES IN REVENUE AND OPERATING RESULTS MAY CAUSE THE MARKET PRICE OF OUR STOCK TO FLUCTUATE, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL. Due to the relatively high sales price of our products and low sales unit volume, minor timing differences in receipt of customer orders have produced and could continue to produce significant fluctuations in quarterly results. In addition, if anticipated sales and shipments in any quarter do not occur when expected, expenditures and inventory levels could be disproportionately high, and our operating results for that quarter, and potentially for future quarters, would be adversely affected. Quarterly results may also fluctuate based on a variety of other factors. The important factors which may cause our quarterly results to fluctuate are seasonality and production delays. During the past four fiscal quarters, our net loss has fluctuated from a low of $2.1 million to a high of $12.9 million. Such fluctuations may cause our stock price to decline and adversely affect our ability to raise additional capital. THE VOLATILITY OF OUR STOCK PRICE MAKES THESE SECURITIES RISKY FOR THOSE SEEKING A STABLE INVESTMENT. The market price of our common stock is very volatile, and our common stock therefore may not be a suitable investment for those who seek stable investment prices over the short or long term. Our common stock was first publicly traded in December 1994 and has had last reported closing sale prices ranging from a low of $1.38 per share in August 1999 to a high of $14.00 per share in May 1997. The market price of our common stock could continue to fluctuate substantially due to a variety of risk factors, including those described elsewhere in this prospectus. The market price for our common stock may also be affected by our ability to meet analysts' expectations. Any failure to meet these expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, the market prices of securities issued by many companies may change for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against the company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business, results of operations and financial condition. A SIGNIFICANT NUMBER OF SHARES ARE ELIGIBLE FOR SALE, AND IF SOLD, THESE SHARES MAY CREATE EXCESS SUPPLY IN THE MARKET CAUSING OUR STOCK PRICE TO DECLINE. Sales of a substantial number of our shares of common stock in the public market could adversely affect the market price for our common stock. At this time, approximately 7.6 million shares of our common stock are issuable upon the full exercise of our outstanding Class B Warrants, and over 6.4 million shares of our common stock are issuable upon exercise of other outstanding warrants and options and conversion of outstanding debentures. The existence of these outstanding warrants and options could adversely affect our ability to obtain future financing. We have also reserved 2,250,000 shares of our common stock for issuance in connection with the proposed settlement of outstanding litigation. The consummation of this settlement will require satisfaction of a number of conditions, and we cannot assure you that the settlement will be completed. 15 The price which we may receive for our common stock issued upon exercise of outstanding options and warrants will likely be less than the market price of our common stock at the time these options and warrants are exercised. Moreover, the holders of the options and warrants might be expected to exercise them at a time when we would, in all likelihood, be able to obtain needed capital by a new offering of our securities on terms more favorable than those provided for by the options and warrants. OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY POSSIBLY PREVENTING YOU FROM OBTAINING HIGHER SHARE PRICES. Our articles of incorporation authorize the issuance of 8,850,000 shares of "blank check" preferred stock, which will have terms as may be determined from time to time by the board of directors. Accordingly, the board of directors is empowered, without shareholder approval, to issue preferred stock with terms which could adversely affect the rights of the holders of the common stock. The preferred stock could also be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Premier. This could have the effect of preventing others from seeking to acquire your shares in transactions at premium prices. In March 1998, we adopted a Shareholder Rights Plan, which entitles certain of our shareholders to purchase our Series A Junior Participating Preferred Stock. These rights are not exercisable until the acquisition by a person or affiliated group of 15% or more of the outstanding shares of our common stock, or the commencement or announcement of a tender offer or exchange offer which would result in the acquisition of 15% or more of our outstanding shares. Upon request, we will provide you with a copy of the Shareholder Rights Plan. The Shareholder Rights Plan may have the effect of discouraging, delaying or preventing a change of control of Premier. SHORT SELLING OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE. If a significant number of shares of common stock which are issued upon conversion of the debentures and payment of interest thereon are then sold in the market, the price of our common stock could be depressed due to the presence of these additional shares in the market. This downward pressure could encourage short sales of common stock by the selling shareholders or others. By increasing the number of shares offered for sale, material amounts of short selling could place further downward pressure on the market price of the common stock. 16 EX-23.1 7 CONSENT OF HASKELL & WHITE LLP Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Pre-Effective Amendment No. 1 to the Registration Statement on Form S-3 of Premier Laser Systems, Inc. of our report dated June 9, 1999, except for notes 2, 3 and 8, as to which the date is October 4, 1999, appearing in the prospectus, which is part of this Registration Statement, and to the reference to our firm under the heading "Experts" in the prospectus. /s/ HASKELL & WHITE LLP Newport Beach, California December 20, 1999 -----END PRIVACY-ENHANCED MESSAGE-----