FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-22340
PALOMAR MEDICAL TECHNOLOGIES, INC.
-------------------------------------------------
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3128178
- -------------------------------------------------------------- ---------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
66 Cherry Hill Drive, Beverly, MA 01915
(Address of principal executive offices)
(508) 921-9300
------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
As of July 30, 1997, 33,149,170 shares of Common Stock, $.01 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- --
1
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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Consolidated Condensed Balance Sheets - December 31, 1996 and June 30, 1997 P. 3
Consolidated Statements of Operations - For the Three and Six Months Ended
June 30, 1996 and 1997 P. 4
Consolidated Statement of Stockholders' Equity - For the Six Months Ended
June 30, 1997 P. 5
Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 1996 and 1997 P. 6
Notes to Consolidated Financial Statements P. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS P. 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 22
ITEM 2. CHANGES IN SECURITIES P. 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS P. 23
ITEM 5. OTHER INFORMATION P. 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 23
SIGNATURES P. 24
</TABLE>
2
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PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
The accompanying notes are an integral part
of these consolidated financial statements.
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<S> <C> <C>
December 31, June 30,
1996 1997
-------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $16,172,731 $21,085,277
Marketable securities 2,893,792 2,401,550
Accounts receivable 18,308,077 22,825,978
Inventories 18,790,484 21,199,188
Loans to officers 995,331 1,841,816
Notes receivable related parties 464,153 746,199
Other notes receivable 899,937 883,406
Other current assets 7,623,161 3,486,380
-------------- ---------------
Total current assets 66,147,666 74,469,794
-------------- ---------------
Property and Equipment, at Cost, Net 8,404,605 12,844,959
-------------- ---------------
Other Assets:
Cost in excess of net assets acquired, net 5,024,299 4,619,424
Intangible assets, net 2,286,058 1,632,293
Deferred costs 2,895,803 1,766,671
Long-term investments 3,179,554 4,340,134
Loan to related party 1,100,000 244,270
Other assets 1,719,211 1,480,403
-------------- ---------------
Total other assets 16,204,925 14,083,195
-------------- ---------------
$90,757,196 $101,397,948
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving lines of credit $4,558,052 $5,168,674
Current portion of long-term debt 2,783,683 2,646,537
Accounts payable 14,304,285 12,378,982
Accrued expenses 14,669,893 18,729,575
-------------- ---------------
Total current liabilities 36,315,913 38,923,768
-------------- ---------------
Long-Term Debt, Net of Current Portion 16,204,692 20,011,215
-------------- ---------------
Minority Interest 160,000 7,086,050
-------------- ---------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value- 182 298
Authorized - 5,000,000 shares Issued and outstanding - 18,151 shares
and 29,707 shares at December 31, 1996 and June 30, 1997
Common stock, $.01 par value- 305,968 330,832
Authorized - 100,000,000 shares
Issued and outstanding - 30,596,812 shares
and 33,083,190 shares at December 31, 1996 and June 30, 1997
Additional paid-in capital 104,900,551 134,274,308
Accumulated deficit (64,971,200) (95,876,557)
Unrealized loss on marketable securities (342,500) (1,409,263)
Subscriptions receivable from related party (604,653) (504,653)
Less: Treasury stock-
(200,000 and 275,000 shares at cost, respectively) (1,211,757) (1,438,050)
-------------- ---------------
Total stockholders' equity 38,076,591 35,376,915
-------------- ---------------
$90,597,196 $101,397,948
============== ===============
</TABLE>
3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
The accompanying notes are an integral part
of these consolidated financial statements.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
------------------------------ -------------------------------
Revenues $17,538,019 $24,773,595 $24,463,020 $44,900,033
Cost of Revenues 14,821,014 23,198,121 22,104,780 43,204,343
------------------------------ -------------------------------
Gross profit 2,717,005 1,575,474 2,358,240 1,695,690
------------------------------ -------------------------------
Operating Expenses
Research and development 2,374,494 3,076,085 4,091,297 5,923,891
Sales and marketing 2,604,532 4,622,186 4,171,670 7,872,598
General and administrative 4,555,102 5,756,053 8,211,756 11,084,838
Business development and other financing 1,444,822 807,919 1,942,096 1,464,158
costs
Pooling-of-interest expenses 443,780 --- 443,780 ---
Settlement and litigation costs --- 400,000 --- 3,550,000
------------------------------ -------------------------------
Total operating expenses 11,422,730 14,662,243 18,860,599 29,895,485
------------------------------ -------------------------------
Loss from operations (8,705,725) (13,086,769) (16,502,359) (28,199,795)
Interest Expense (414,197) (1,904,807) (738,879) (3,569,584)
Interest Income 597,253 325,303 1,203,447 523,557
Net Gain (Loss) on Trading Securities 613,234 (529,940) 728,318 549,977
Other Expense --- (585,147) --- (450,660)
Minority Interest in Loss of Subsidiary 15,096 968,372 45,671 968,372
------------------------------ -------------------------------
Net loss $(7,894,339) $(14,812,988) $(15,263,802) $(30,178,133)
============================== ===============================
Net Loss Per Common Share (Note 6) $(0.32) $(0.49) $(0.66) $(1.01)
============================== ===============================
Weighted Average Number of
Common Shares Outstanding 25,643,137 32,699,944 23,892,331 31,528,613
============================== ===============================
</TABLE>
4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
The accompanying notes are an
integral part of these consolidated financial statements.
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<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
----------------------------------------------------------------
Number $0.01 Number $0.01 Number
of Par of Par of Cost
Shares Value Shares Value Shares
----------------------------------------------------------------
Balance, December 31, 1996 18,151 $182 30,596,812 $305,968 (200,000) ($1,211,757)
Sale of common stock pursuant to warrants and options -- -- 589,879 5,899 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock 16,000 160 -- -- -- --
Issuance of common stock for 1996 employer 401(k) -- -- 41,425 414 -- --
matching contribution
Conversion of preferred stock (4,444) (44) 695,683 6,957 -- --
Conversion of convertible debentures -- -- 896,657 8,967 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 5,000 50 -- --
Value ascribed to the discount feature of convertible -- -- -- -- -- --
debentures issued
Issuance of common stock for Employee Stock Purchase Plan -- -- 2,414 24 -- --
Compensation expense related to warrants issued to
non-employees under Statement of
Financial Accounting Standards No. 123 -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Issuance of common stock for technology -- -- 255,320 2,553 -- --
Purchase of treasury stock -- -- -- -- (75,000) (226,293)
Gain related to the issuance of common stock by Nexar -- -- -- -- -- --
Technologies, Inc.
Net loss -- -- -- -- -- --
---------------------------------------------------------------
Balance, June 30, 1997 29,707 $298 33,083,190 $330,832 (275,000) ($1,438,050)
===============================================================
Additional Unrealized (Loss) Total
Paid-in Accumulated Gain on Subscription Stockholders'
Capital Deficit marketable Receivable Equity
securities
-------------------------------------------------------------------
Balance, December 31, 1996 $104,900,551 ($64,971,200) ($342,500) ($604,653) $38,076,591
Sale of common stock pursuant to warrants and options 1,139,229 -- -- -- 1,145,128
Payments received on subscriptions receivable -- -- -- 100,000 100,000
Issuance of preferred stock 14,999,840 -- -- -- 15,000,000
Issuance of common stock for 1996 employer 401(k) 268,848 -- -- -- 269,262
matching contribution
Conversion of preferred stock 179,579 -- -- -- 186,492
Conversion of convertible debentures 3,057,848 -- -- -- 3,066,815
Issuance of common stock for investment banking and merger
and acquisition consulting services 38,075 -- -- -- 38,125
Value ascribed to the discount feature of convertible 787,582 -- -- -- 787,582
debentures issued
Issuance of common stock for Employee Stock Purchase Plan 13,525 -- -- -- 13,549
Compensation expense related to warrants issued to non-employees
under Statement of Financial Accounting 332,977 -- -- -- 332,977
Standards No. 123
Unrealized loss on marketable securities -- -- (1,066,763) -- (1,066,763)
Preferred stock dividends -- (727,224) -- -- (727,224)
Issuance of common stock for technology 1,146,388 -- -- -- 1,148,941
Purchase of treasury stock -- -- -- -- (226,293)
Gain related to the issuance of common stock by Nexar 7,409,866 -- -- -- 7,409,866
Technologies, Inc.
Net loss -- (30,178,133) -- -- (30,178,133)
----------------------------------------------------------------
Balance, June 30, 1997 $134,274,308 ($95,876,557) ($1,409,263) ($504,653) $35,376,915
================================================================
</TABLE>
5
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PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
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<S> <C> <C>
Six Months Ended June 30,
---------------------------
1996 1997
------------- -----------
Cash Flows from Operating Activities
Net loss $(15,263,802) $(30,178,133)
Adjustments to reconcile net loss to net cash
used in operating
activities-
Depreciation and amortization 1,327,467 2,144,952
Settlement and litigation costs -- 2,900,000
Write-off of in-process research and development 57,212 --
Write-off of deferred financing costs associated with
redemption of convertible debentures 201,500 27,554
Valuation allowances for notes and investments -- 435,912
Minority interest in loss of subsidiary (30,572) (948,372)
Accrued interest receivable on trading securities
and subscription receivable (269,092) --
Foreign currency exchange gain -- (608,357)
Noncash interest expense related to convertible 117,105 2,302,012
debentures
Noncash compensation related to common stock and warrants 903,584 371,102
Realized gain on marketable securities -- 49,693
Unrealized gain on marketable securities 172,880 (599,639)
Changes in assets and liabilities, net of effects
from business combinations;
Purchases of marketable securities (8,737,890) (152,938)
Sale of marketable securities and
interest received on marketable securities 7,936,148 1,189,501
Accounts receivable (5,768,220) (5,098,122)
Inventories (7,674,475) (2,538,166)
Other current assets and loans to officers (1,287,632) (2,240,096)
Accounts payable 7,633,792 (675,242)
Accrued expenses 2,310,158 557,656
------------- -----------
Net cash used in operating activities (18,371,837) (33,060,683)
------------- -----------
Cash Flows from Investing Activities
Cash paid for purchase of Comtel Electronics, Inc., net of (146,586) --
cash acquired
Net proceeds received from sale of subsidiary stock -- 3,925,000
Purchases of property and equipment (1,009,162) (5,893,602)
Increase in intangible assets (325,000) (351,059)
(Increase) Decrease in other assets (1,227,981) 238,808
Loans to related parties (5,924,314) (1,250,000)
Deferred offering costs -- (199,541)
Payments received on loans to related parties 1,491,301 871,288
Repurchase of Nexar Technologies, Inc. common stock -- (2,777,484)
Investment in nonmarketable securities (4,946,479) (2,257,631)
------------- -----------
Net cash (used in) provided by investing (12,088,221) (7,694,221)
activities
------------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
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<S> <C> <C>
Six Months Ended June 30,
--------------------------
1996 1997
------------- -----------
Cash Flows from Financing Activities
Net proceeds from Nexar Technologies, Inc. initial public offering 19,667,910
Proceeds from issuance of convertible debentures -- 10,225,169
Proceeds from issuance of notes payable -- 1,500,000
Redemption of convertible debentures (930,000) (196,000)
Payments of notes payable and capital lease obligations (502,367) (2,159,077)
Net proceeds from revolving lines of credit 460,644 610,622
Proceeds from sale of common stock 3,276,380 13,549
Proceeds from exercise of warrants and stock options 5,893,179 1,145,128
Issuance of preferred stock 15,435,227 15,000,000
Payment of contingent note payable (500,000) --
Redemption of preferred stock, including accrued dividends (3,194,375) --
of $71,223
Purchase of treasury stock -- (139,851)
Payments received on subscriptions receivable 2,009,591 --
------------- -----------
Net cash provided by financing activities 21,948,279 45,667,450
------------- -----------
Net increase (decrease) in cash and cash equivalents (8,511,779) 4,912,546
Cash and cash equivalents, beginning of period 17,138,178 16,172,731
------------- -----------
Cash and cash equivalents, end of period $8,626,399 $21,085,277
============= ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $383,393 $549,822
============= ============
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $1,172,763 $3,066,815
============= ============
Amortization of deferred financing costs $54,167 $--
============= ============
Conversion of preferred stock $233,842 $186,492
============= ============
Dividends payable $508,344 $727,224
============= ============
Issuance of common stock for employer 401(k)
matching contribution $160,598 $269,262
============= ============
Common stock issued for repurchase of minority interest $1,710,000 $--
============= ============
Issuance of common stock for technology $-- $1,148,941
============= ============
Acquisition of Comtel Electronics, Inc.
Liabilities assumed (258,144) $--
Fair value of assets acquired 72,661 --
Cash paid, net of cash acquired (146,586) --
------------- ------------
Cost In Excess of Net Assets Acquired (332,069) $--
============= ============
</TABLE>
7
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PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
(the "Company" or "Palomar") believes that the quarterly information presented
includes all adjustments (consisting of normal, recurring adjustments) necessary
for a fair presentation in accordance with generally accepted accounting
principles. The accompanying financial statements and notes should be read in
conjunction with the Company's Form 10-KSB, as amended, as of and for the year
ended December 31, 1996.
The Company has incurred significant losses since inception. The Company
continues to seek additional financing from issuances of common stock and/ or
other prospective sources in order to fund future operations. The Company has
financed current operations, expansion of its core business and outside
short-term financial investments primarily through the private sale of debt and
equity securities of the Company. The Company anticipates that it will require
additional financing throughout the year to continue to fund operations and
growth. The Company may from time to time be required to raise additional funds
through additional private sales of the Company's debt or equity securities
and/or the liquidation of some of its marketable and long-term investments. The
sale by the Company of some of its marketable securities could result in
additional losses depending on market conditions at the time of these sales.
Sales of securities to private investors are sold at a discount to the public
market for similar securities. It has been the Company's experience that private
investors require that the Company make its best effort to register these
securities for resale to the public at some future time.
2. INVESTMENTS
The fair values for the Company's marketable equity securities are based
on quoted market prices. The fair values of nonmarketable equity securities,
which represent equity investments in early stage technology companies, are
based on the financial information provided by these ventures and other factors.
The amount that the Company realizes from these investments may differ
significantly from the amounts recorded in the accompanying unaudited
consolidated financial statements.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, securities that
the Company has the positive intent and ability to hold to maturity will be
reported at amortized cost and are classified as held-to-maturity. There were no
held-to-maturity securities as of December 31, 1996 and June 30, 1997.
Securities purchased to be held for indefinite periods of time and not intended
at the time of purchase to be held until maturity are classified as
available-for-sale securities and any unrealized gains or losses are recorded as
a component of stockholders' equity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities. Realized and unrealized gains and losses relating to trading
securities are included currently in the accompanying unaudited statements of
operations.
8
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<S> <C> <C> <C> <C>
June 30, 1997
-------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ------------ ------------
Trading Securities:
Investments in publicly
traded companies $684,327 $1,801,223 $84,000 $2,401,550
------------ ------------ ------------ ------------
Available-for-Sale:
Investments in publicly
traded companies $2,494,550 --- $1,409,263 $1,085,287
------------ ------------ ------------ ------------
Total $3,178,877 $1,801,223 $1,493,263 $3,486,837
- ------------- ============ ============ ============ ============
</TABLE>
3. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
Work in process and finished goods inventories consist of material, labor and
manufacturing overhead and consist of the following:
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<S> <C> <C> <C>
December 31, June 30,
1996 1997
---------------- ----------------
Raw materials $13,266,204 $11,383,310
Work in process and finished goods 5,524,280 9,815,878
---------------- ----------------
$18,790,484 $21,199,188
================ ================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and Equipment consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1996 1997
----------------- ---------------
Equipment under capital leases $2,261,339 $2,519,933
Machinery and equipment 5,429,764 9,371,762
Furniture and fixtures 1,926,948 3,162,539
Leasehold improvements 1,160,814 1,556,344
----------------- ---------------
10,778,865 16,610,578
Less: Accumulated depreciation
and amortization 2,374,260 3,765,619
----------------- ---------------
$8,404,605 $12,844,959
================= ===============
</TABLE>
9
<PAGE>
5. ACCRUED EXPENSES
Accrued Expenses consist of the following:
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<S> <C> <C> <C>
December 31, June 30,
1996 1997
---------------- ---------------
Payroll and consulting costs $3,456,311 $2,496,769
Professional fees 961,815 667,563
Settlement costs 1,755,000 3,780,000
Warranty 2,854,401 3,169,532
Deferred revenue/gain 256,912 2,987,912
Other 5,385,454 5,627,799
================ ===============
Total $14,669,893 $18,729,575
================ ===============
</TABLE>
6. NET LOSS PER COMMON SHARE
For the three and six months ended June 30, 1996 and 1997, net loss per
common share has been computed by dividing the net loss, as adjusted for
preferred stock dividends and amortization of the value ascribed to the discount
feature of the Series H Preferred stock, by the weighted average number of
shares of common stock outstanding during the period. Common stock equivalents
are not considered as outstanding, as the result would be antidilutive.
The calculation of the Company's net loss per common share for the three
and six months ended June 30, 1996 and 1997 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1997 1996 1997
----------------- --------------- ---------------- ---------------
Net Loss $(7,894,339) $(14,812,988) $(15,263,802) $(30,178,133)
Preferred stock dividends (265,222) (432,228) (508,344) (727,224)
Amortization of value ascribed to
preferred stock conversion discount --- (941,176) --- (941,176)
----------------- --------------- ---------------- ---------------
Adjusted net loss $(8,159,561) $(16,186,392) $(15,772,146) $(31,846,533)
================= =============== ================ ===============
Net Loss Per Common Share $(0.32) $(0.49) $(0.66) $(1.01)
================= =============== ================ ===============
Weighted Average Number of
Common shares outstanding 25,643,137 32,699,944 23,892,331 31,528,613
================= =============== ================ ===============
</TABLE>
In March of 1997, SFAS No. 128, Earnings Per Share, was issued which
established new standards for calculating and presenting earnings per share. The
Company is required to adopt this new standard in its 1997 financial statements.
In accordance with this new standard, basic and diluted earnings per share for
the three months ended June 30, 1996 and 1997 are $(0.32) and $(0.49),
respectively, and the six months ended June 30, 1996 and 1997 are $(0.66) and
$(1.01), respectively.
10
<PAGE>
7. NOTES PAYABLE AND DEMAND LINE OF CREDIT
Notes payable consist of the following:
<TABLE>
<S> <C> <C>
December 31, June 30,
1996 1997
---------------- --------------
Dollar denominated convertible debentures $7,288,063 $12,305,678
Swiss franc denominated convertible debentures 7,222,846 6,414,642
7.4% to 21% Capital lease obligations, maturities ranging from August 1997 to May 2001 2,290,847 2,296,093
Margin loan collateralized by subsidiary stock --- 1,500,000
Other notes payable 2,186,619 141,339
---------------- --------------
18,988,375 22,657,752
Less - current maturities 2,783,683 2,646,537
--------------- --------------
$16,204,692 $20,011,215
================ ==============
</TABLE>
On January 13, 1997 the Company issued $1,000,000 of 5% convertible
debentures. The convertible debentures have a conversion price which represents
a discount of 15% from the price of the Company's common stock at the time of
conversion. The Company has ascribed a value of $176,471 for the 15% discount
conversion feature.
On March 10, 1997 the Company issued $5,500,000 of 5% convertible
debentures. The convertible debentures have a conversion price of 100% of the
Company's average stock price, as defined, within the first 90 days and 90% of
the average stock price, as defined, thereafter. In addition, after 90 days, the
debentureholder may convert no more than 1/3 of the debenture in any 30 day
period. The Company has ascribed a value of $611,111 for the 10% conversion
discount.
The Company has credited this ascribed value for the discount feature
described above to additional paid-in capital, and this amount is being
amortized to interest expense over the expected life of the convertible
debenture. In addition, the Company incurred deferred financing costs of
$375,000 relating to the issuance of these debentures. These costs have been
reflected in deferred costs in the accompanying consolidated balance sheet as of
March 31, 1997 and are amortized to interest expense over the term of the
related convertible debentures. Any remaining unamortized deferred financing
costs are recorded to additional paid-in capital upon conversion.
On March 13, 1997 the Company issued $500,000 of 6% convertible
debentures. The convertible debentures have a conversion price of $11.00. In
addition, after 90 days, the debentureholder may convert no more than 1/3 of the
debenture in any 30 day period. The Company has accounted for these debentures
at face value.
During the second quarter, investors converted $1,600,000 in face value
of 4.5% convertible debentures into 543,466 shares of common stock with
unamortized deferred financing costs of $131,778.
During the first quarter, the Company's Comtel Electronics, Inc.
("Comtel") subsidiary failed to satisfy certain financial covenants for its line
of credit with a bank due on November 30, 1998. The total amount outstanding at
June 30, 1997 was $3,430,867. The Company has had discussions with this bank
during and subsequent to the second quarter to amend these financial covenants
so that Comtel will be in compliance. Since Comtel does not have a definitive
agreement, the Company has classified the amount outstanding in current
liabilities as a demand line of credit.
During the second quarter the Company repaid an existing $1,200,000
bridge loan plus accrued interest. In addition, the bridge loan holders were
given 99,001 shares of Nexar Technologies, Inc. ("Nexar") common stock and a
warrant to purchase 95,625 shares of Dynaco Corp. common stock at $1.20 per
share in exchange for their Palomar Electronic Corporation warrants. This
exchange was consummated based on the relative fair values of Dynaco and Nexar
common stock.
During the second quarter the Company borrowed on margin $1,500,000 from
an investment banker. The Company pledged its shares of Nexar's common stock as
collateral. This loan bears interest at 8.875% and was repaid subsequent to
quarter end.
11
<PAGE>
On July 3, 1996, the Company raised $7,669,442 through the issuance of
9,675 units in a convertible debenture financing. These units are traded on the
Luxembourg Stock Exchange. Each unit consists of a convertible debenture
denominated in 1,000 Swiss Francs and a warrant to purchase 24 shares of the
Company's common stock at $16.50 per share and is due July 3, 2003. The warrants
are non-detachable and may be exercised only if the related debentures are
simultaneously converted, redeemed or purchased. Interest on the convertible
debentures accrues at a rate of 4.5% per annum and is payable quarterly in Swiss
Francs. The convertible debentures may be converted by the holder or the Company
commencing October 1, 1996 at a conversion price equal to from 100% to 77.5% of
the price per share of the Company's common stock, calculated as defined. This
conversion price decreases from the third anniversary to the seventh anniversary
of the Swiss Franc convertible debentures but in no event is less than $9.60 per
share. The Company ascribed a value of $1,917,360 to this discount conversion
feature of this convertible debenture. This amount will be amortized to interest
expense over the remaining life of the Swiss Franc convertible debenture. As of
June 30, 1997, the carrying value of the Swiss Franc convertible debentures was
$6,414,142 based on the exchange rate as of that date.
8. STOCKHOLDERS' EQUITY
(a) Options
During the six months ended June 30, 1997 the Company issued options to
purchase 160,000 shares of common stock at prices ranging from $4.125 to $6.50
per share to certain employees. One individual exercised an option to purchase
25,000 shares of common stock at a price of $3.00. The total proceeds received
by the Company were $75,000.
(b) Warrants
During the six months ended June 30, 1997 the Company issued to certain
directors warrants to purchase 500,000 shares of common stock at prices ranging
from $3.25 to $4.00. This includes a warrant to purchase 400,000 shares of the
Company's common stock issued to the Company's newly appointed Chief Executive
Officer. During the six months ended June 30, 1997, certain warrantholders
exercised warrants to purchase 559,192 shares of common stock at prices ranging
from $.60 to $2.25. The Company received total proceeds of $1,070,128 related to
the exercise of the warrants. In addition, net warrants to purchase 5,687 share
of common stock were exercised in the six months ending June 30, 1997.
(c) Reserved Shares
At June 30, 1997, the Company has reserved shares of its common stock
for the following:
June 30,
1997
---------------
Convertible debentures 4,498,407
Stock option plans 3,897,500
Warrants 9,577,940
Employee 401(k) plan 212,690
Employee stock purchase plan 997,586
Convertible preferred stock 7,755,358
---------------
Total 26,939,481
===============
(d) Convertible Preferred Stock
During the second quarter of 1997, the Company completed the issuance of
10,000 shares of Series H Convertible Preferred Stock ("Series H Preferred") for
$10,000,000. The Series H Preferred accrues interest at varying rates of 6% to
8% per annum, as defined. The Series H Preferred may be converted into common
12
<PAGE>
stock, including any accrued but unpaid interest, at 100% of the average stock
price for the first 179 days from the closing date, 90% of the average stock
price for the following 90 days and 85% of the average stock price thereafter.
The average stock price for the Series H Preferred is the average closing bid
price for the ten trading days immediately preceding the conversion date, but in
no event less than $6.00 on or prior to September 27, 1997 and, thereafter, at
the lower of $6.00 or the average closing bid price for the 20 consecutive
trading days prior to September 27, 1997. The conversion price is also
adjustable for certain antidilutive events, as defined. The holder is restricted
for the first 209 days following the closing date to converting no more than 33%
of the Series H Preferred in any 30 day period (or 34% in the last 30 day
period). Under certain conditions, the Company has the right to redeem the
Series H Preferred. The Company has ascribed a value of $2,823,529 to this
discount conversion feature of the Series H Preferred. This amount is being
amortized as an adjustment to earnings available to common shareholders over the
most favorable conversion period attainable to the holders of the Series H
Preferred (270 days from the date of issuance of the Series H Preferred). See
Note 6.
(e) Stock Purchase Program
During the second quarter of 1997, the Company purchased 75,000 shares
of its common stock at an aggregate cost of $226,293 as part of a treasury stock
purchase program approved by its Board of Directors in May of 1997. Subsequent
to June 30, 1997 the Company purchased an additional 70,000 shares of its common
stock under this program at an aggregate price of $200,809.
(f) Purchased Technology
On February 28, 1997, Nexar entered into an Asset Purchase and
Settlement Agreement as discussed in Note 15 of the Company's Form 10-KSB, as
amended, as of and for the year ended December 31, 1996. Under the terms of this
agreement the Company previously paid $1,250,000 in cash, and paid $351,060 in
cash and issued 255,320 shares of Palomar's common stock during the second
quarter ended June 30, 1997. The total value of this purchased technology of
$2,750,000 will be amortized over a period of three years.
(g) Nexar Initial Public Offering
On April 14, 1997 Nexar completed an initial public offering of
2,500,000 shares at $9.00 per share, for net proceeds of $19,592,910. The
Company has recorded an increase in stockholders' equity of $7,409,866, in
accordance with Staff Accounting Bulletin No. 51 (SAB No. 51) as a result of
Nexar's initial public offering. The Company's accounting policy for gains
arising under SAB No. 51 is to recognize these gains in its statement of
operations to the extent that such gains are realizable at the date of each
transaction.
As of the effective date of Nexar's initial public offering, the Company
owned 6,100,000 shares of Nexar's common stock and 45,684 shares of Nexar's
convertible preferred stock. The convertible preferred stock is convertible into
408,080 shares of Nexar's common stock. Pursuant to an agreement between the
Company and Nexar, 1,200,000 common shares ( the Contingent Shares) of the total
6,508,080 common and common equivalent shares of Nexar that are owned by the
Company are to be placed in escrow and subject to a mandatory repurchase, in
whole or part, by Nexar at $0.01 per share after the 48 month anniversary of the
initial public offering of Nexar' common stock unless these shares are released
from escrow. The Contingent Shares are subject to the release to the Company in
installments of 400,000 shares each upon the achievement of any 3 of the 4
milestones as specified in the agreement between the Company and Nexar. The
milestones are based on Nexar achieving certain revenue and net income levels as
defined in the agreement.
In April 1997, the Company purchased 300,000 shares of Nexar's newly
issued publicly registered common stock for $2,777,484 from Nexar's underwriter
in a private placement transaction.
9. RELATED PARTY TRANSACTIONS
Included in current assets at December 31, 1996 and June 30, 1997 is
$1,459,484 and $2,588,015, respectively, of notes receivable from various
officers and related entities. Also included in trading securities at December
31, 1996 and June 30, 1997 is a $1,912,614 investment and a $2,086,488
investment, respectively, in a related entity.
13
<PAGE>
At December 31, 1996 and June 30, 1997, $578,680 and $1,509,254,
respectively, including accrued interest at the rate of 7% per annum, was
outstanding to certain officers/directors under the (now terminated) corporate
loan policy.
At June 30, 1997, the Company had loans receivable of $186,156 and
$146,406, including accrued interest, from two officers of Dynaco Corp., which
are evidenced by promissory notes due upon demand, with accrued interest at the
rate of 7% per annum. The $146,406 is partially collateralized with a certain
amount of vested stock options in the Company owned by the officer with a market
price in excess of the exercise price.
During the six months ended June 30, 1997, the Company invested an
additional $250,000 in a privately held medical and cosmetic services company.
The Company's cumulative investment as of June 30, 1997 totaled approximately
$750,000 and represents approximately 12% of the total equity ownership of this
company. An officer of CTI is a director of the privately held company. In
return for the $250,000 investment, the Company received 250,000 shares of
common stock and a promissory note for $249,900 accruing interest at 12% per
annum.
During the six months ended June 30, 1997, the Company sold of all the
issued and outstanding common stock of its wholly owned subsidiary, CD Titles,
Inc. ("CD Titles"). In exchange, the Company received three promissory notes for
an aggregate total of $600,000 and warrants to purchase 750,000 shares of CD
Titles common stock at various exercise prices ranging from $6.00 to $10.00 per
share. The sale of CD Titles did not have a material effect on the Company's
financial position or results of operations.
10. PRO FORMA INFORMATION
The results of operations related to Comtel have been included with
those of the Company since March 20, 1996.
Unaudited pro forma operating results for the Company, assuming the
Comtel acquisition had been made as of January 1, 1996, are as follows:
<TABLE>
<S> <C> <C>
Six Months Ended June 30,
------------------------------------------------------
1996 1997
------------------------------- -----------------------------
Revenue $16,758,266 $44,900,033
Net loss $(15,293,802) $(30,178,133)
Net loss per common share $(0.66) $(1.01)
</TABLE>
11. COMMITMENTS
The Company has issued guarantees to several of its subsidiaries for
payment of trade payables. The total amount guaranteed at June 30, 1997 was
$750,000.
The Company is a defendant in a lawsuit filed by Commonwealth Associates
("Commonwealth") on March 14, 1996 in the United States District Court for the
Southern District of New York. In its suit, Commonwealth alleges that the
Company breached a contract with Commonwealth in which Commonwealth was to
provide certain investment banking services in return for certain compensation.
In January 1997, Commonwealth's motion for summary judgment on its breach of
contract claim was granted, and in April 1997, the District Court awarded
Commonwealth $3,174,070 in damages. That judgment has been appealed by Palomar.
During the three months ended March 31, 1997, the Company accrued an
additional $2,900,000 related to the above matter and another $650,000 for other
smaller claims and litigation costs.
[This space intentionally left blank.]
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Three Months Ended June 30, 1997, Compared to Three Months Ended
June 30, 1996
For the three months ended June 30, 1997, the Company had revenues of
$24.8 million as compared to $17.5 million for the three months ended June 30,
1996. The 41% increase in revenues from the quarter ended June 30, 1996 to the
quarter ended June 30, 1997 is due to increased sales volume generated in both
the electronics and medical segments. Net revenues by the Company's business
segments are as follows:
<TABLE>
<S> <C> <C> <C>
Three months ended
June 30,
----------------------------------
1996 1997
----------------------------------
Medical $5,219,193 $7,120,743
Electronics 12,318,826 17,652,852
----------- -----------
Total $17,538,019 $24,773,595
=========== ===========
</TABLE>
The increase in the Company's medical segment of $1.9 million or 36.4%
was mainly due to additional sales volume of approximately $4.9 million
associated with the EpiLaser(TM) product. The Company obtained FDA clearance to
market and sell this product for hair removal in the United States in March
1997. This increase was offset by a decline of approximately $2.8 million in
sales volume for the Company's TruPulse(R) laser product and approximately
$200,000 in government contract revenue. The Company believes that overall
revenues from its medical segment will continue to increase due to its improved
manufacturing process and market demand for its EpiLaser product. The expected
increase in EpiLaser product revenue should offset the overall decrease in
TruPulse revenue which has been caused by a diminishing demand in the worldwide
CO2 skin resurfacing laser market.
The increase in the Company's electronics segment of approximately $5.4
million was principally due to an increase in Nexar sales volume of $7.1 million
and an increase in Dynaco revenues of $1.9 million offset by a decline of
approximately $3.3 million in sales volume at Dynaco. Nexar continues to
increase its revenue since the introduction in April 1996 of its proprietary
upgradeable PC, and revenue at Nexar is expected to continue to grow with the
introduction of its proprietary upgradeable XPA PC in the third quarter. Dynaco
generated sales of approximately $8.6 million for the quarter ended June 30,
1997 compared to sales of approximately $10 million for the quarter ended June
30, 1996, due mainly to a decrease in revenue generated by Dynaco's Comtel
subsidiary. The revenue at Comtel, a contract electronics manufacturer,
decreased due to changes in its customer mix, lower volume sales from its
exiting customers and restructuring of its management team.
Gross margin for the three months ended June 30, 1997 was $1.6 million
(6% of revenues) versus $2.7 million (15% of revenues) for the three months
ended June 30, 1996. Gross margin by the Company's business segments are as
follows:
Three months ended June 30,
----------------------------------
1996 1997
----------------------------------
Medical $1,270,316 $ 695,149
Electronics 1,446,689 880,325
---------- ---------
Total $2,717,005 $1,575,474
========== ===========
The Company's medical products' gross margin decreased to a gross margin
of $695,149 (9.8% of revenues) for the three months ended June 30, 1997 compared
to a gross margin of $1,270,316 (24% of revenues) in 1996. The decline in gross
margin dollars in 1997 occurred mainly due to lower revenues associated with the
Company's TruPulse product, as discussed above. The decline in gross margin
percentage was caused by lower margins attained on the Company's EpiLaser
product due to initial manufacturing and production of this product. The Company
believes that the gross margins for its EpiLaser product should improve as the
Company obtains manufacturing efficiencies and volume production.
In the electronics segment of the Company's business, gross margin
decreased to $880,325 (5.0% of revenues) for the quarter ended June 30, 1997 as
compared to a gross margin of $1,446,689 (11.7% of revenues) for the three
15
<PAGE>
months ended June 30, 1996. This decrease in gross margin is primarily the
result of a decrease in gross margin at Dynaco. Comtel, a subsidiary of Dynaco,
incurred a negative gross margin of $.7 million (29.0% of revenues) for the
three months ended June 30, 1997. This gross loss was attributable to unabsorbed
overhead costs caused by Comtel's lower volume and change in customer base.
Nexar had a gross margin of 7.2% for the three months ended June 30, 1997. This
low margin was the result of continuous competitive market pressure on personal
computer ("PC") prices.
Research and development costs increased to $3.1 million (12% of
revenues) for the three months ended June 30, 1997, from $2.4 million (14% of
revenues) for the three months ended June 30, 1996. This 30% increase in
research and development reflects the Company's continuing commitment to
research and development for medical devices and delivery systems for cosmetic
laser applications and other medical applications using a variety of lasers,
while continuing dermatology research utilizing the Company's ruby and diode
lasers. Approximately $2.7 million of the $3.1 million expended in the quarter
ended June 30, 1997 is attributed to the medical segment. Management believes
that research and development expenditures will increase over the next year as
the Company continues clinical trials of its medical products and develops
additional applications for its lasers and delivery systems. However, management
anticipates that research and development as a percentage of net revenues will
decrease as revenues increase with the commercialization of its laser medical
products. The remaining $0.4 million expended in the current year's second
quarter was in the electronics segment, mainly due to the continued development
and improvement of Nexar PC products.
General and Administrative expenses increased to $5.8 million (23% of
revenues) for the three months ended June 30, 1997, from $4.6 million (26% of
revenues) for the three months ended June 30, 1996. This 26% increase is
attributable to increased administrative resources required to oversee the
growth of the Company's medical and electronics business segments. Approximately
54% of the general and administrative expense increase for the three month ended
June 30, 1997 compared to the three months ended June 30, 1996 is attributed to
the Company's Cosmetic Technology International, Inc. ("CTI") subsidiary. CTI is
in the process of opening and establishing revenue sharing sites with partners
such as Columbia/HCA, as well as with various international partners. To date,
CTI has opened two wholly-owned sites as well as four revenue-sharing sites with
partners other than Columbia/HCA; CTI is scheduled to open three sites in
conjunction with Columbia/HCA in the third quarter of this year.
Selling and Marketing expenses increased to $4.6 million (19% of
revenues) for the three months ended June 30, 1997, from $2.6 million (15% of
revenues) for the three months ended June 30, 1996. This increase in
substantially all areas of selling and marketing is attributable to the increase
in sales volume throughout the Company, particularly in the medical products
segment as revenues have begun to increase now that the Company has a suite of
FDA-cleared laser products.
Business Development and Financing Costs decreased to $0.8 million (3%
of revenues) for the three months ended June 30, 1997, from $1.4 million (8% of
revenues) for the three months ended June 30, 1996. This 44% decrease is
attributable to the Company's maturation. The Company has decreased its
acquisition and financing activities and is now focused on developing and
growing its existing core medical products.
Pooling-of-interest expenses totaled $443,780 for the three months ended
June 30, 1996 and are comprised of primarily of professional fees associated
with the merger of Tissue Technologies, Inc. ("Tissue") and the Company.
Settlement and Litigation costs were $400,000 (2% of revenues) for the
three months ended June 30, 1997. There were no settlement costs during the
three months ended June 30, 1996. The costs are attributable to an additional
legal settlement accrual of $400,000 recorded by the Company in the second
quarter of 1997 related to a lawsuit filed by Commonwealth Associates
("Commonwealth"). In the lawsuit, Commonwealth alleges that the Company breached
a contract with Commonwealth in which Commonwealth was to provide certain
investment banking services in return for certain compensation. See Part II,
Item 1.
Interest expense increased to $1.9 million for the three months ended
June 30, 1997, from $0.4 million for the three months ended June 30, 1996. This
amount includes $1.3 million of non-cash interest expense related to the value
ascribed to the discount of the convertible debentures. This 360% increase is
primarily the result of an increase in convertible debenture financings and an
16
<PAGE>
additional outstanding line of credit financing at Dynaco's Comtel subsidiary
which was entered into in December 1996.
Interest income decreased to $0.3 million for the three months ended
June 30, 1997, from $0.6 million for the three months ended June 30, 1996. This
decrease is primarily the result of a decrease in the Company's average
outstanding cash and cash equivalents balances.
Net realized and unrealized trading losses were $0.5 million for the
three months ended June 30, 1997, down from gains of $0.6 million for the three
months ended June 30, 1996. These losses resulted from the sale and/or loss of
value of certain marketable securities during the second quarter of the current
year. It is the Company's intention to continue to liquidate a portion of its
trading investments in the near term, which may result in additional trading
gains or losses in the future.
Minority interest in the loss of subsidiary was $968,372 for the three
months ended June 30, 1997 compared to $15,096 for the three months ended June
30, 1996. This increase in the minority interest in the loss of a subsidiary is
due to the successful completion of Nexar's initial public offering in which
approximately 35% of Nexar's common stock was sold to the public.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
For the six months ended June 30, 1997, the Company had revenues of
$44.9 million as compared to $24.5 million for the six months ended June 30,
1996. The 84% increase in revenues from the six months ended June 30, 1996 to
the six months ended June 30, 1997 is due to increased sales volume generated in
both the electronics and medical segments. Net revenues by the Company's
business segments are as follows:
Six months ended
June 30,
--------------------------------
1996 1997
--------------------------------
Medical $7,625,612 $9,733,508
Electronic 16,837,408 35,166,525
---------- -----------
Total $24,463,020 $44,900,033
=========== ===========
The increase in the Company's medical products business of $2.1 million
or 27.6% was due to additional sales volume of the Company's EpiLaser product of
approximately $5.7 million. The Company obtained FDA clearance to market and
sell this product for hair removal in the United States in March 1997. This
increase was offset by a decline of approximately $3.6 million in sales volume
for the Company's TruPulse laser product. The Company believes that overall
revenues from its medical segment will continue to increase due to its improved
manufacturing process and market demand for its EpiLaser product. The expected
increased EpiLaser product revenue should offset the overall decrease in
TruPulse revenue which has been caused by a diminishing demand in the worldwide
CO2 skin resurfacing laser market.
The increase in the Company's electronics business of approximately
$18.3 million was principally due to an increase in Nexar sales volume of $15.8
million, with the remaining revenue increase attributable to Dynaco. Nexar
continues to increase its revenue since the introduction in April 1996 of its
proprietary upgradeable PC and revenue at Nexar is expected to continue to grow
with the introduction of its proprietary upgradeable XPA PC in the third
quarter.
Gross margin for the six months ended June 30, 1997, was $1.7 million
(4% of revenues) versus $2.4 million (10% of revenues) for the six months ended
June 30, 1996. Gross margin by the Company's business segments are as follows:
17
<PAGE>
Six months ended
June 30,
-------------------------
1996 1997
-------------------------
Medical $953,405 $ 423,888
Electronics 1,404,835 1,271,802
--------- ----------
Total $2,358,240 $1,695,690
========== ===========
The decline in gross margin dollars in the Company's medical products
business in 1997 occurred mainly due to lower revenues associated with the
Company's TruPulse product as discussed above. The decline in gross margin
percentage was caused by lower margins attained on the Company's EpiLaser
product due to initial manufacturing and production of this product. The Company
believes that the gross margins for its EpiLaser product should improve as the
Company obtains manufacturing efficiencies and volume production.
In the electronics segment of the Company's business, gross margin
decreased to $1,271,802 (3.6% of revenues) for the six months ended June 30,
1997 as compared to a gross margin of $1,404,835 (8.3% of revenues) for the six
months ended June 30, 1996. This decrease in gross margin is primarily the
result of a decrease in gross margin at Dynaco's Comtel subsidiary. Comtel
incurred a negative gross margin of $2.0 million (33.8% of revenues) for the six
months ended June 30, 1997. This gross loss was attributable to unabsorbed
overhead costs caused by Comtel's volume shortfall and a change in customer
base. This negative gross margin was partially offset by the increase in gross
margin dollars provided by Nexar of approximately $1 million. Nexar gross margin
percentage was 7.5%. This low margin was the result of continuous competitive
market pressure on PC prices.
Research and development costs increased to $5.9 million (13% of
revenues) for the six months ended June 30, 1997, from $4.1 million (17% of
revenues) for the six months ended June 30, 1996. This 45% increase in research
and development reflects the Company's continuing commitment to research and
development for medical devices and delivery systems for cosmetic laser
applications and other medical applications using a variety of lasers, while
continuing dermatology research utilizing the Company's ruby and diode lasers.
Approximately $4.9 million of the $5.9 million expended in the six months ended
June 30, 1997 is attributed to the medical segment. Management believes that
research and development expenditures will increase over the next year as the
Company continues clinical trials of its medical products and develops
additional applications for its lasers and delivery systems. However, management
anticipates that research and development as a percentage of net revenues will
decrease as revenue increases with the commercialization of its laser medical
products and continued penetration of its electronic products. The remaining $1
million expended in the current year's six months ended June 30, 1997 was in the
electronics segment, mainly due to the continued development and improvement of
Nexar PC products.
General and Administrative expenses increased to $8.2 million (25% of
revenues) for the six months ended June 30, 1997, from $8.7 million (34% of
revenues) for the six months ended June 30, 1996. This 35% increase is
attributable to increased administrative resources required to oversee the
growth of the Company's medical and electronics business segments. Approximately
57% of the general and administrative expense increase for the six months ended
June 30, 1997 compared to the six months ended June 30, 1996 is attributed to
the Company's CTI subsidiary. CTI is in the process of opening and establishing
revenue sharing sites with established partners such as Columbia/HCA, as well as
with various international partners. To date, CTI has opened two wholly-owned
sites as well as four revenue-sharing sites with partners other than
Columbia/HCA; CTI is scheduled to open three sites in conjunction with
Columbia/HC in the third quarter of this year.
Selling and Marketing expenses increased to $7.9 million (18% of
revenues) for the six months ended June 30, 1997, from $4.2 million (17% of
revenues) for the six months ended June 30, 1996. This increase in substantially
all areas of selling and marketing is attributable to the increase in sales
volume throughout the Company, particularly in the medical products segment as
revenues have begun to increase now that the Company has a suite of FDA-cleared
laser products.
Business Development and Financing Costs decreased to $1.5 million (3%
of revenues) for the six months ended June 30, 1997, from $1.9 million (8% of
revenues) for the six months ended June 30, 1996. This 25% decrease is
18
<PAGE>
attributable to the Company's maturation. The Company has decreased its
acquisition and financing activities and is now focused on developing and
growing its existing core medical products.
Pooling-of-interest expenses totaled $443,780 for the six months ended
June 30, 1996 and are comprised primarily of professional fees associated with
the merger of Tissue and the Company.
Settlement and Litigation costs were $3.6 million (8% of revenues) for
the six months ended June 30, 1997; there were no settlement costs during the
six months ended June 30, 1996 . The costs are attributable to an additional
legal settlement accrual of $3.2 million recorded by the Company in the first
six months of 1997 related to a former investment banking consultant. In the
suit, the former investment banking consultant alleges that the Company breached
a contract with the consultant in which the consultant was to provide certain
investment banking services in return for certain compensation.
Interest expense increased to $3.6 million for the six months ended June
30, 1997, from $0.7 million for the six months ended June 30, 1996. This amount
includes $2.3 million of non-cash interest expense related to the value ascribed
to the discount feature of the convertible debenture. This 383% increase is
primarily the result of an increase in convertible debenture financings and an
additional outstanding line of credit financing at Dynaco's Comtel subsidiary
which was entered into in December 1996.
Interest income decreased to $0.5 million for the six months ended June
30, 1997, from $1.2 million for the six months ended June 30, 1996. This
decrease is primarily the result of a decrease in the Company's average
outstanding cash and cash equivalents.
Net realized and unrealized trading gains were $0.5 million for the six
months ended June 30, 1997, down from $0.7 million for the six months ended June
30, 1996. These gains resulted from the sale and/or appreciation of certain
marketable securities during the first half of the current year. It is the
Company's intention to continue to liquidate a portion of its trading
investments in the near term, which may result in additional trading gains or
losses in the future.
Minority interest in the loss of subsidiary was $968,372 for the six
months ended June 30, 1997 compared to $45,671 for the six months ended June 30,
1996. This increase in the minority interest in the loss of subsidiary is due to
the successful completion of Nexar's initial public offering in which
approximately 35% of Nexar was sold to the public.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had $23.4 million in cash, cash
equivalents and trading securities including $7.0 million of cash and cash
equivalents held at the Company's Nexar subsidiary. During the six months ended
June 30,1997 the Company generated $10 million, $15.0 million, $19.6 million and
$4 million in net proceeds from the issuance of convertible debentures, the sale
of its preferred stock, the initial public offering of Nexar and the sale of
Palomar owned Nexar common stock, respectively.
The Company's net loss for the six months ended March 31, 1997 included
the following noncash items: $2.1 million of depreciation and amortization
expense; $2.3 million of additional interest expense relating to the
amortization of the discounts on the convertible debentures; $371,102 in
investment banking fees paid with common stock and warrants; and a legal
settlement accrual of $2.9 million in connection with a breach of contract case,
involving a former investment banking consultant.
The Company anticipates that capital expenditures for the remaining six
months of 1997 will total approximately $10 million, of which $8.2 million is
attributed the purchase of laser products for CTI's laser centers. The Company
will finance these expenditures with cash on hand and equipment leasing lines,
or the Company will seek to raise additional funds. However, there can be no
assurance that the Company will be able to raise the funds.
19
<PAGE>
Dynaco has a three-year revolving credit and security agreement with a
financial institution. The agreement provides for the revolving sale of
acceptable accounts receivable, as defined in the agreement, with recourse at
85% of face value, up to a maximum commitment of $3,000,000. As of June 30,
1997, the amount of accounts receivable sold that remained uncollected totaled
$1,737,808 net of related reserves and fees, as defined in the agreement. This
amount is classified as a revolving line of credit in the accompanying balance
sheet as of June 30, 1997. The interest rate on such outstanding amounts is the
bank's prime rate plus 1.5%, and interest is payable monthly in arrears. The
financing is collateralized by the purchased accounts receivable and
substantially all of Dynaco's assets. Borrowings under this loan agreement are
guaranteed by the Company.
On December 5, 1996, Comtel entered into a loan agreement with a loan
association which provided for borrowings up to $4,500,000 in the form of
revolving receivable and inventory loans. Borrowings under the loan agreement
are limited by a borrowing base calculation on eligible accounts receivable and
inventory, and are collateralized by accounts receivable, inventory, and certain
other assets. Borrowings bear interest at the lender's prime rate plus 2.25% and
amounted to $3,430,867 as of June 30, 1997. The loan agreement terminates on
November 30, 1998. Comtel is in default of a financial covenant under this line
related to the aging of accounts receivable. The terms of the loan agreement are
presently under negotiation. Borrowings under this loan agreement are guaranteed
by the Company.
A large part of the Company's medical products businesses are still in
the developmental stage, with significant research and development costs and
regulatory constraints that currently limit sales of its medical products. These
activities are an important part of the Company's business plan. Due to the
nature of clinical trials and research and development activities, it is not
possible to predict with any certainty the timetable for completion of these
research activities or the total amount of funding required to commercialize
products developed as a result of such research and development. The rate of
research and the number of research projects underway are dependent to some
extent upon external funding. While the Company is regularly reviewing potential
funding sources in relation to these ongoing and proposed research projects,
there can be no assurance that the current levels of funding or additional
funding will be available, or, if available, on terms satisfactory to the
Company.
The Company has had significant losses to date and expects these losses
to continue for the near future. Therefore, the Company must continue to secure
additional financing to complete its research and development activities,
commercialize its current and proposed medical products and services, and fund
ongoing operations. There can be no assurance that events in the future will not
require the Company to seek additional financing sooner. The Company continues
to investigate several financing alternatives, including additional government
research grants, strategic partnerships, additional bank financing, private debt
and equity financing and other sources. The Company believes that it has
adequate cash reserves or it will be successful in obtaining additional
financing in order to fund current operations in the near future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements
made by its employees may contain "forward-looking" information, as that term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Act").
This report may also contain information that is deemed to be forward looking
information under the Act. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including but not limited to the factors identified in the
Company's Form 10-KSB, as amended, for the year ended December 31, 1996, and the
following:
The Company and certain of its subsidiaries have a history of losses,
and the Company expects its losses to continue. The Company must secure
additional financing to complete its research and development
activities, commercialize its current and proposed medical products and
services, and fund ongoing operations.
The Company's future operating results are dependent on its ability to
develop, produce and achieve Food and Drug Administration approval for
certain medical products and market new and innovative products and
services. There are numerous risks inherent in this complex process,
20
<PAGE>
including rapid technological change and the requirement that the
Company bring to market in a timely fashion new products and services
which meet customers' changing needs.
The Company's business segments operate in a highly competitive
environment and in highly competitive industries, which include
significant competitive pricing pressures and intense competition for
skilled employees.
The market price of the Company's securities could be subject to
fluctuations in response to quarter to quarter variations in operating
results, changes in analysts' earnings estimates, market conditions in
the information technology industry, as well as general economic
conditions and other factors external to the Company.
In July 1997, one of Nexar's two outside turn-key manufacturers notified
Nexar of its inability to timely manufacture on a going forward basis
Nexar's proprietary motherboards. Nexar has made arrangements with two
new manufacturers to assume timely production of the motherboards. Nexar
does not believe that the transition to the new manufacturers will have
a long-term material adverse effect on Nexar, but the several weeks it
may take to resume full production of these key components could have a
short-term negative impact on Nexar's results of operations in the third
quarter due to the possibility of limited delays in the initial
shipments of Nexar's new XPA product.
[This space intentionally left blank]
21
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 7, 1996 the Company filed a declaratory judgment action in
the United States District Court for the District of Massachusetts against
MEHL/Biophile ("MEHL") seeking (i) a declaration that MEHL is without right or
authority to threaten or maintain suit against the Company or its customers for
alleged infringement of the patent held by MEHL's subsidiary Selvac Acquisitions
Corp. ("Selvac" and the "Selvac Patent"), that the Selvac Patent is invalid,
void and unenforceable, and that the Company does not infringe the Selvac
patent; (ii) a preliminary and permanent injunction enjoining MEHL from
threatening the Company or its customers with infringement litigation or
infringement; and (iii) an award to the Company of damages suffered in
connection with MEHL's conduct. On March 7, 1997, Selvac filed a complaint for
injunctive relief and damages for patent infringement and for unfair competition
against the Company, its Spectrum Medical Technologies and Spectrum Financial
Services subsidiaries, and a New Jersey dermatologist, in the United States
District Court for the District of New Jersey. Selvac's complaint alleges that
the Company's EpiLaser infringes the Selvac Patent and that the Company unfairly
competed by promoting the EpiLaser for hair removal before it had received FDA
approval for that specific application. The Company and Selvac have agreed to
dismiss the Massachusetts litigation without prejudice. Palomar has brought in
the New Jersey action its claims that the Selvac patent is invalid, that the
Company has not infringed the Selvac patent, that MEHL should be enjoined from
making further assertions concerning infringement and unfair competition, and
that the Company should be awarded attorney fees and other appropriate relief.
Thus, both the Company's and MEHL's claims will be tried on the merits in New
Jersey. As of August 12, 1997, apart from automatic disclosure as required under
the Federal Rules of Civil Procedure, discovery has not yet commenced. The
extent of exposure of the Company cannot be determined at this time.
The Company is a defendant in a lawsuit filed by Commonwealth Associates
("Commonwealth") on March 14, 1996 in the United States District Court for the
Southern District of New York. In its suit, Commonwealth alleges that the
Company breached a contract with Commonwealth in which Commonwealth was to
provide certain investment banking services in return for certain compensation.
In January 1997, Commonwealth's motion for summary judgment on its breach of
contract claim was granted, and in April 1997, the District Court awarded
Commonwealth $3,174,070 in damages. That judgment has been appealed by Palomar.
.
ITEM 2. CHANGES IN SECURITIES
Preferred Stock
Pursuant to Section 4(2) of the Act, the Company sold 10,000 shares of
Series H Convertible Preferred Stock ("Series H Preferred") to three investors
for a total of $10,000,000. Credit Suisse First Boston Corporation purchased
4,000 shares on May 5, 1997, CC Investments, LDC purchased 3,000 shares on May
5, 1997 and Southbrook International purchased 3,000 shares on May 23, 1997. The
Series H Preferred may be converted into common stock, including any accrued but
unpaid interest, at 100% of the average stock price for the first 179 days from
the closing date, 90% of the average stock price for the following 90 days and
85% of the average stock price thereafter. The average stock price ("Average
Stock Price") for the Series H Preferred is the average closing bid price for
the ten trading days immediately preceding the conversion date but in no event
less than $6.00 for the first 210 ten days following the closing date and
thereafter no less than the lower of $6.00 or 65% of the conversion ceiling
price, as defined. The holder is restricted for the first 209 days following the
closing date to converting no more than 33% of the Series H Preferred in any
thirty day period (or 34% in the last thirty day period available for
conversion). Interest shall be accrued at 6% per annum for the first 179 days
following the closing date, 7% for the following 80 days and at 8% thereafter.
Interest shall cease to be accrued if, at any time, the Average Stock Price is
greater than 175% of the Conversion Ceiling Price. The Company has a right to
redeem 50% of the Series H Preferred if, at any time after April 1, 1999, the
Average Stock Price is greater than 150% of the Conversion Ceiling Price and any
and all of the Series H Preferred if, at any time after March 31, 1999, the
Average Stock Price is greater than 200% of the Conversion Ceiling Price. The
redemption amount shall be calculated by multiplying the sum of the Series H
Preferred and the premium by 150% and 200% respectively divided by the
Conversion Ceiling Price and a redemption notice must be received by the Holder
no less than 10 and no more than 20 trading days priors to the date which the
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<PAGE>
Company intends to redeem the Series H Preferred. Notwithstanding the foregoing,
the Holder would be entitled to convert any or all of the Series H Preferred
prior to 10 days after the Company's redemption notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1 Patent License Agreement by and between the Company and Patlex
Corporation, effective as of January 1, 1992.
10.2 Employment Agreement dated as of May 15, 1997, between the
Company and Louis P. Valente
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
* Previously filed over five years ago on April 27, 1992 as an
exhibit to Registration Statement No. 33-47479.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Beverly in the
Commonwealth of Massachusetts on August 14, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Registrant)
DATE: August 14, 1997 By: /s/ Louis P. Valente
--------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive Officer)
DATE: August 14 , 1997 /s/ Joseph P. Caruso
--------------------
Joseph P. Caruso
Chief Financial Officer and
Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
PATENT LICENSE AGREEMENT
This Agreement by and between Palomar Medical Technologies, Inc. a
corporation organized and existing under the laws of the State of Delaware
having its principal place of business at 489 Groton Road, Westford,
Massachusetts 01886 (hereinafter designated "LICENSEE") and Patlex Corporation,
a corporation organized and existing under the laws of the Commonwealth of
Pennsylvania, having its principal place of business at 250 Cotorro Court, Las
Cruces, New Mexico 88005 (hereinafter designated "PATLEX").
WHEREAS, Gordon Gould, an individual residing at P.O. Box 112, Route 1,
Kinsale, Virginia, 22488 (hereinafter designated "GOULD") is the owner, along
with PATLEX, of various patents in the United States and Canada relating to
lasers and laser systems. Such patents are listed in Exhibit "A" annexed hereto;
and
WHEREAS, GOULD has granted to PATLEX the exclusive right to license
others under any and all of the aforesaid GOULD patents; and
WHEREAS, LICENSEE desires to obtain a license from PATLEX under the
aforesaid GOULD patents; and
WHEREAS, it is the intention of the parties that this Agreement
prescribe the rights and obligations among the parties and GOULD regarding all
patents issued to or partially owned by GOULD relating to lasers and laser
systems and which are licensable by PATLEX; and
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<PAGE>
WHEREAS, PATLEX desires to license LICENSEE under the aforesaid GOULD
patents;
NOW, THEREFORE, PATLEX and LICENSEE agree as follows:
ARTICLE I - DEFINITIONS
For the purposes of this Agreement, the terms specified shall have the
meanings as defined below:
A. "Subsidiary"
Subsidiary shall mean a corporation, company or other entity,
foreign or domestic, at least fifty percent (50%) of whose
outstanding shares or securities (representing the right to
vote for the election of directors or other managing
authority) are, now or hereafter, owned or controlled by
LICENSEE. Whenever the term LICENSEE is used throughout this
Agreement, it is intended to include Subsidiaries of LICENSEE
unless such inclusion would be inappropriate to this
Agreement. A complete list of LICENSEE's Subsidiaries as of
the Effective Date of this Agreement is annexed hereto as
Exhibit "B."
B. "Licensed Patents"
Licensed Patents shall mean the patents set forth in Exhibit
"A," and all reissues and renewals thereof. It shall not
include other inventions of GOULD or PATLEX or patents based
on applications filed subsequent to the Effective Date of this
Agreement and not relating back to a patent set forth in
Exhibit "A."
2
<PAGE>
C. "Low Power Laser Tube"
Low Power Laser Tube shall mean a sealed gas-filled laser tube
having an output power of one (1) Watt or less, with or
without optical elements at the ends thereof, which is not a
staple article or commodity of commerce suitable for
substantial noninfringing use but is especially made or
especially adapted for use in a gas discharge laser or laser
system and which is sold or leased other than as part of a
laser or laser system.
D. "High Power Laser Tube"
High Power Laser Tube shall mean a sealed gas-filled laser
tube other than a Low Power Laser Tube, with or without
optical elements at the ends thereof, which is not a staple
article or commodity of commerce suitable for substantial
noninfringing use but is especially made or especially adapted
for use in a gas discharge laser or laser system and which is
sold or leased other than as part of a laser or laser system.
E. "Licensed Laser"
Licensed Laser shall mean the royalty base items of all
lasers, laser systems and Low and High Power Laser Tubes
manufactured, used, leased or sold by LICENSEE which infringe
(see 35 U.S.C. 271) any one or more of the valid claims of any
Licensed Patent and upon which the requisite royalties have
accrued as a royalty under this Agreement.
3
<PAGE>
F. "Excluded Uses"
Excluded Uses shall mean any and all uses of Licensed Lasers
for the manufacture or mastering of laser discs, compact
discs, laser memories, or similar products on which a laser or
laser system is used to record sound, visual matter, or data.
G. "Net Selling Price"
Net Selling Price shall mean the price at which LICENSEE
invoices the sale or lease of Licensed Lasers to its
customers, less any reasonable charges for packing, shipping,
installation, import duties, brokerage, and use or sales
taxes. It is further understood and agreed that in respect of
inter-company sales between the LICENSEE and its related
companies, the Net Selling Price shall mean the price at which
the LICENSEE ordinarily sells to its distributors under
similar circumstances. In such event no royalty shall accrue
or be payable in respect of any subsequent resale of such
equipment to a third party.
H. "Effective Date"
The Effective Date of this Agreement shall be January 1, 1992.
4
<PAGE>
ARTICLE II - PATENT RIGHTS GRANTED
A. Licenses and Immunities
1. Lasers and Laser Systems
PATLEX hereby grants to LICENSEE a non-exclusive,
worldwide license to make, use, lease, or sell lasers
and laser systems which would infringe any valid
claim of one or more of the Licensed Patents upon
which royalties are accrued under this Agreement,
provided such lasers and laser systems are not used
or intended for use in Excluded Uses. All of the
Licenses Patents are covered by this Agreement at the
specific request of LICENSEE in preference to
licensing less than all of the patents which PATLEX
was willing to do.
This Agreement does not apply to, nor require royalty
payments for, components of lasers and laser systems,
which components are staple articles or commodities
of commerce suitable for substantial noninfringing
use, when such components are sold by LICENSEE other
than as part of a laser or laser system.
2. Low Power Laser Tubes
(a) License
PATLEX hereby grants to LICENSEE a
non-exclusive, worldwide license under U.S.
Patent No. 4,704,583 to make, use, lease or sell
5
<PAGE>
Low Power Laser Tubes which would infringe any
valid claim of U.S. Patent No. 4,704,583
provided:
i) such Low Power Laser Tubes are not used or
intended for use in Excluded Uses, and
ii) LICENSEE's customer either resells the Low
Power Laser Tube as part of a Larger System or
uses it for its own internal use. For purposes
of this Article II, Section A, subsection 2, a
"Larger System" shall mean a system including a
Low Power Laser Tube, in which at least fifty
percent (50%) of the selling price of the system
is attributable to other than the Low Power
Laser Tube and associated power supply.
PATLEX hereby covenants not to sue customers of
LICENSEE under U.S. Patent No. 4,704,583 for
using Low Power Laser Tubes licensed under this
Article II, Section A, subsection (2)(a) upon
which the requisite royalties are accrued.
6
<PAGE>
(b) Immunity
LICENSEE is hereby granted an immunity from suit
under the Licensed Patents with regard to the
sale of a Low Power Laser Tube to a customer who
resells said Low Power Laser Tube without
incorporating the same into a Larger System. In
such circumstances, PATLEX reserves the right to
pursue LICENSEE's customer for royalties under
the Licensed Patents on said Low Power Laser
Tube and all equipment added thereto. However,
LICENSEE may, at its discretion, pay PATLEX a
fee equal to the amount set forth in Article
III, Section B, subsection (2), and such payment
shall relieve the customer of any obligation to
pay a royalty to PATLEX for said Low Power Laser
Tube.
3. High Power Laser Tubes LICENSEE is hereby granted an
immunity from suit under the Licensed Patents with
regard to the sale of High Power Laser Tubes. LICENSEE
shall pay PATLEX a fee equal to the amount set forth in
Article III, Section B, subsection (2) for such immunity
and such payment shall relieve LICENSEE's customer of
any obligation to pay a royalty to PATLEX for said High
Power Laser Tube. PATLEX expressly reserves the right to
pursue LICENSEE's customer for royalties under the
7
<PAGE>
Licensed Patents on any equipment added to said High
Power Laser Tube that taken together with such tube
would infringe any valid claim of a Licensed Patent.
B. Customer Use
PATLEX hereby covenants not to sue customers of LICENSEE for
using lasers and laser systems sold or leased by LICENSEE upon
which the requisite royalties are accrued provided such lasers
and laser systems are not used in Excluded Uses. This covenant
does not extend to customers who incorporate such lasers and
laser systems into new systems, the use of which infringes U.S.
Patent No. 4,161,436, and who sell such new systems.
C. Release of Past Infringement:
(1) Optically Pumped Lasers -
U.S. Patent No. 4,053,854 Payment of the requisite
royalties by LICENSEE under Article III, Section A,
subsection (1) hereof shall be in full settlement of any
claim of infringement liability arising under U.S.
Patent No. 4,0453,845 incurred prior to the Effective
Date of this Agreement.
(2) Use Patent -
U.S. Patent No. 4,161,436 Payment of the requisite
royalties by LICENSEE under Article III, Section A,
subsection (1)
8
<PAGE>
hereof shall be in full settlement of any claim of
infringement liability arising under U.S. Patent No.
4,161,436 incurred prior to the Effective Date of this
Agreement and shall release customers of the LICENSEE
for the use of Licensed Lasers leased or purchased from
LICENSEE prior to the Effective Date hereof, the use of
which would infringe any valid claim of U.S. Patent No.
4,161,436. PATLEX will not sue any customer of LICENSEE
for the use of Licensed Lasers purchased or leased from
the LICENSEE, provided that such uses are not Excluded
Uses. The aforesaid covenant does not extend to
customers who incorporate Licensed Lasers into new
systems the use of which infringes any valid claim of
U.S. Patent No. 4,161,436 and sell such new systems.
(3) Other Patents
Except as provided in Article II, Section C, subsections
(1) and (2) LICENSEE represents that it has not sold or
leased any lasers or laser systems prior to the
Effective Date of this Agreement, the manufacture, use
or sale of which would infringe any valid claim of U.S.
Patent No. 3,388,314; 3,562,662; 3,576,500; 3,586,998;
4,704,583 or 4,746,201 or Canadian Patent No. 907,110.
Accordingly, no release for past infringement of these
seven (7) patents is
9
<PAGE>
provided and no payment for past infringement of these
seven (7) patents is required.
ARTICLE III - ROYALTY PAYMENTS
A. Past Infringement
U.S. Patent NO. 4,053,845
U.S. Patent No. 4,161,436
Within thirty (30) days of the execution of this Agreement,
LICENSEE shall pay to PATLEX the sum of Nine Thousand Eight
Hundred Dollars ($9,800.00). This sum is equivalent to five
percent (5%) of the Net Selling Price of all Licensed Lasers
sold or leased by LICENSEE, the manufacture, sue or sale of
which would infringe any valid claim of U.S. Patent No.
4,053,845 or 4,161,436.
B. Future Royalty Payments
(1) Optically Pumped Lasers -
U.S. Patent No. 4,053,845
LICENSEE shall pay to PATLEX a royalty of five percent
(5%) of the Net Selling Price for all Licensed Lasers
sold or leased by LICENSEE from the Effective Date of
this Agreement to the expiration of U.S. Patent NO.
4,053,845, the manufacture, use or sale of which would
infringe any valid claim of U.S. Patent No. 4,053,845.
10
<PAGE>
(2) Gas Discharge Lasers -
U.S. Patent No. 4,704,583
LICENSEE shall pay to PATLEX a royalty of five percent
(5%) of the Net Selling Price for all Licensed Lasers
sold or leased by LICENSEE from the Effective Date of
this Agreement to the expiration of U.S. Patent
4,704,583, the manufacture, use or sale of which would
infringe any valid claim of U.S. Patent No. 4,704,583.
(3) Use Patent -
U.S. Patent No. 4,161,436
(a) LICENSEE shall pay to PATLEX a royalty of five
percent (55%) of the Net Selling Price for all Licensed
Lasers sold or leased by LICENSEE from the Effective
Date of this Agreement to the expiration date of U.S.
Patent NO. 4,161,436, the use of which would infringe
any valid claim of U.S. Patent No. 4,161,436.
(b) LICENSEE shall have the right to use lasers, laser
systems and Low and High Power Laser Tubes for its own
internal use provided such lasers, laser systems and Low
and High Power Laser Tubes are not used for Excluded
Uses and are manufactured by LICENSEE or are purchased
from a vendor who is licensed by PATLEX under all of the
11
<PAGE>
Licensed Patents applicable thereto and, if manufactured
by LICENSEE, LICENSEE pays the requisite royalties or
fees based upon the equivalent Net Selling Price thereon
and, if purchased from a licensed vendor, said licensed
vendor paid the requisite royalties or fees thereon. If
LICENSEE purchases a laser, laser system, or Low or High
Power Laser Tube for its internal use from a vendor not
licensed y PATLEX, LICENSEE shall pay to PATLEX a
royalty of six percent (6%) of the purchase price of
said laser, laser system or Low or High Power Laser
Tube.
(4) Brewster's Angle Window -
U.S. Patent No. 4,746,201
LICENSEE shall pay to PATLEX a royalty of three and
one-half percent 3 1/2%) of the Net Selling Price for
all Licensed Lasers sold or leased by LICENSEE from the
Effective Date of this Agreement to the expiration date
of U.S. Patent No. 4,746,201, the manufacture, use or
sale of which would infringe any valid claim of U.S.
Patent No. 4,746,201.
(5) Other Patents
No additional royalty shall accrue for any Licensed
Laser sold or leased by LICENSEE, the manufacture, use
or sale of which would infringe
12
<PAGE>
any valid claim of any patent listed in Exhibit "A" and
not described heretofore in Article III, Section B,
subsections (1) to (4) hereof.
(6) Foreign Sales
Notwithstanding the royalty rates set forth in Article
III, Section B, if the sale or lease of any Licensed
Laser is directly to an end user in a country other than
the United States or to a distributor who warrants in
writing to LICENSEE that the end user is in a country
other than the United States, then the royalty rate
shall be reduced to two percent (2%) of the Net Selling
Price for said sale or lease.
C. Multiple Patents
In the event that the manufacture, lease, sale or use of a
Licensed Laser by LICENSEE infringes a valid claim or more than
one Licensed Patent, then the royalty payable to PATLEX shall be
computed in accordance with the greatest of the applicable
royalty rates, if they are different, with regard to those
portions of the Licensed Laser wherein the royalty bases as
defined herein overlap. With regard to the remaining portions of
the Licensed Laser, the individual royalty rates still apply.
D. When Accrued
Royalties as aforesaid shall accrue hereunder when income from
the lease of Licensed Lasers shall have
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<PAGE>
been received or invoiced by LICENSEE, whichever is sooner, and
when the sale of Licensed Lasers shall have been invoiced by
LICENSEE to its customers or if invoices are not issued, when
Licensed Lasers shall have been shipped by LICENSEE.
E. Trial Shipments
With respect to Licensed Lasers shipped to customers under lease
or on a trial basis, LICENSEE shall have six (6) months from the
date of such shipment to designate each such transaction as a
sale or lease, unless fifty percent (50%) or more of the
purchase price shall have been paid to LICENSEE in which event
the transaction shall be deemed a sale.
F. Resale
LICENSEE shall have the right to acquire and resell lasers,
laser systems, and Low and High Power Laser Tubes manufactured
by others. If the laser, laser system or Low or High Power Laser
Tube is acquired from a vendor who is licensed by PATLEX under
all of the patents in Exhibit "A" applicable thereto and pays
the requisite royalties or fees to PATLEX, then LICENSEE need
not pay royalties hereunder for the laser, laser system, or Low
or High Power Laser Tube so acquired with respect to which
royalties or fees have been previously paid. LICENSEE shall pay
all applicable royalties required under Article III, Section B
hereof for whatever additional royalty base
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<PAGE>
items are combined with said so acquired laser or laser system.
Where LICENSEE combines additional royalty base items with such
a Low or High Power Laser Tube, LICENSEE' payment of additional
royalties for the additional royalty base items shall be
determined in accordance with the provisions of Article II,
Section A, subsections 2 and 3.
G. Adjustments
LICENSEE shall have the right to adjust royalties payable
hereunder for returns, bona fide price reductions and allowances
of Licensed Lasers sold or leased by LICENSEE on which the
requisite royalties or fees shall previously have been paid
hereunder.
H. Calculations
Subject to provisions specifically herein set forth, all
calculations and procedures related tot he determination of
royalties and fees payable hereunder shall be in accordance with
recognized standards of good accounting practice consistently
applied.
ARTICLE IV - ROYALTY BASE
For purposes of paying and/or computing royalties and fees hereunder the
following shall apply:
A. Optically Pumped Lasers
U.S. Patent No. 4,053,845
The royalty base shall include the lasing medium, and means for
containing the same where applicable, a
15
<PAGE>
bright pumping light source (save that if such light source is a
gas discharge laser the appropriate royalty called for under
Article III, Section B, subsection (2) hereof shall apply), and
means (including power supply, lamp and optical system) for
activating and using same, together with at least any and all of
the following functionally combined components:
(1) means for mounting the lasing medium and the bright
pumping light source to enable the desired functional
relationship, for example including base and housing;
(2) means that enable the optically pumped medium to emit
light in a wave train that has a sharply rising
intensity with an intensity rise time of less than
approximately 10-7 seconds;
(3) means for conveying the stimulating light beam through
the amplification region including mirrors employed for
this purpose; and
(4) means integral with the apparatus of this Article IV,
Section A hereof such as meters, shutters, controls and
cooling system.
B. Gas Discharge Lasers -
U.S. Patent No. 4,704,583
The royalty base shall include the lasing medium if supplied by
the LICENSEE, including means for containing the same and means,
including power supply, for activating same, together with at
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<PAGE>
least any and all of the following functionally combined
components:
(1) means for producing an electrical discharge in the
lasing medium and for delivering a gas discharge mixture
to the discharge region at partial and total pressure
such that a population inversion is initiated in the
lasing medium;
(2) means for conveying the stimulating light beam through
the amplification region including mirrors employed for
this purpose;
(3) means for mounting the lasing medium and electrical
discharge producing means to enable the desired
functional relationship, for example including base and
housing; and
(4) means integral with the apparatus of this Article IV,
Section B hereof such as meters, shutters, controls and
cooling systems.
C. Use Patent -
U.S. Patent No. 4,161,436
The royalty base shall include all assemblies, sub-assemblies,
components, and portions thereof necessary to produce coherent
light, to transport such light to a particular point on a
workpiece, and to control the physical parameters of such light
in such a way as to make it efficient in performing its intended
end use.
17
<PAGE>
D. Brewster's Angle -
U.S. Patent No. 4, 746,201
The royalty base shall include: a source of light rays including
means to contain and energize said source; means for directing
certain unpolarized light rays from said source to multiply
traverse a predetermined path; an optical element having a first
surface; and means for mounting said optical element to
intersect said unpolarized light rays with a line perpendicular
to said first surface inclined to said path substantially at
Brewster's Angle thereby passing one polarization of said light
rays and reflecting some of the light rays of the other
polarization upon each traversal of said predetermined path.
E. Other Patents
The royalty base shall include any laser or part thereof
conforming to any valid claim contained in any of the patents
cited in Exhibit "A" not described in Sections A through D of
this Article.
ARTICLE V - MARKING
LICENSEE shall mark in appropriate locations all Licensed Lasers
manufactured and the packages and containers in which such Licensed Lasers are
sold, leased or shipped, and all advertisements, literature and promotional
material in which such Licensed lasers shall be mentioned or described, as
follows: "Licensed by PATLEX Corporation Under U.S. Patent
18
<PAGE>
No(s). _______." Here LICENSEE shall insert the appropriate U.S. Patent No. or
Nos. applicable to the equipment so marked, with the exception that LICENSEE
shall not be required to include U.S. Patent No. 4,161,436 in its marking. Said
marking requirement may from time to time be altered by PATLEX as the applicable
patent law and practice may require.
ARTICLE VI - DURATION OF AGREEMENT
A. Expiration
This Agreement shall continue in full force and effect until the
expiration of the last of the Licensed Patents unless this
Agreement is sooner terminated as herein provided.
B. Termination
If either party to this Agreement should default in the
performance of any of the terms of this Agreement (including a
breach of this Agreement which can be cured), the non-defaulting
party may terminate this Agreement by providing written notice
of termination to the defaulting party and the termination shall
be effective thirty (30) days from said notice unless the
defaulting party cures such default within said thirty (30) day
period. Should LICENSEE terminate this Agreement, said notice of
termination shall be accompanied by a statement of all
royalty-based activities performed by LICENSEE on which
royalties or fees are due hereunder for such period as had
elapsed
19
<PAGE>
since the last report under the Licensed patents. Said statement
shall be accompanied by payment of all monies reported as being
due.
ARTICLE VII - RECORDS AND REPORTING
A. Within thirty (30) days after the close of each calendar
quarter, LICENSEE shall deliver to PATLEX a statement of all
royalty-based activities performed by LICENSEE on which
royalties or fees are due hereunder for such calendar quarter,
and each such statement shall generally be in accord with the
sample royalty reports annexed hereto as Exhibit "C" and "D" and
shall also contain such other information as PATLEX may
reasonably require.
B. Simultaneously with the delivery of each statement covering any
calendar quarter, LICENSEE shall pay to PATLEX all monies
reported as being due. In the event the monies due are not paid,
interest at the rate of one and one-half percent (1 1/2%) per
month shall be assessed on all amounts due and unpaid. It is
expressly understood by LICENSEE that it is a breach of this
Agreement not to pay all monies reported as being due. It is
expressly understood that PATLEX, by accepting interest on all
unpaid amounts, does not waive any rights, powers or privileges
under this Agreement.
C. LICENSEE shall keep at its principal place of business accrue
and complete records of all Licensed Lasers manufactured,
leased, sold, used or otherwise delivered to other parties by
LICENSEE and of all details in connection with the aforesaid
activities necessary to enable LICENSEE to comply with this
Agreement. PATLEX shall have the right, upon ten (10) days
written notice and during regular business hours, and at the
expense of PATLEX, and not more than once in each calendar year,
to have an independent auditor, audit at the place of business
of LICENSEE or other place agreeable to the parties, the
aforesaid records, and to report compliance or non-compliance
with the payment, record maintenance and all other reporting
requirements herein.
D. Audit
If an audit shall reveal that in each of two successive years
the LICENSEE has made an error of 10% or more in its favor in
any payment due to PATLEX, the LICENSEE shall be obligated to
pay the audit fee in respect of such audits.
ARTICLE VIII - WAIVER
A. Waiver in Writing
During the life of this Agreement, neither party shall be deemed
to have waived any right, power or privilege under this
Agreement or any provision thereof unless
20
<PAGE>
such waiver shall have been duly executed in writing and
acknowledged by the party to be charged with such waiver. B. No
Implied Waiver The failure of PATLEX to act or exercise its
rights hereunder upon the breach of any of the terms or
conditions hereof by LICENSEE shall not be construed as a waiver
of such breach, nor shall it prevent PATLEX from hereafter
enforcing strict compliance with any and all of the terms and
conditions herein set forth.
ARTICLE IX - TRANSFERABILITY
Notwithstanding anything herein to the contrary, this Agreement, and all
of the rights, licenses and obligations contained herein, may not be transferred
without permission in writing by PATLEX, which permission shall not be
unreasonably withheld.
ARTICLE X - ACQUISITION
If LICENSEE shall acquire in whole or in part the laser business of an
unlicensed third party engaged in the manufacture, lease, sale or use of lasers,
laser systems, or Low or High Power Laser Tubes, neither the acquisition nor
this Agreement shall extinguish the third party's liability for past
infringement, but the same shall be assumed by LICENSEE.
If LICENSEE shall acquire in whole or in part the laser business of a
third party which was previously licensed by PATLEX
21
<PAGE>
under the Licensed Patents applicable to such laser business and said third
party has made all required royalty and fee payments to PATLEX, then LICENSEE
shall have no liability for acts of said party covered by said previous license
and the terms of this Agreement shall apply to all further transactions of the
laser business so acquired.
ARTICLE XI - COMMUNICATIONS
Any payment, notice or other communication required by, or permitted to
be made by or given to, either party pursuant to this Agreement shall be sent to
such party by registered, certified or express mail, postage prepaid, or prepaid
courier service, addressed to such party at its address set forth below, or to
such other addresses as such party shall designate by written notice given to
the other party, and shall be deemed to have been made, given or provided on the
date of mailing. The addresses are as follows:
PATLEX: for royalty statements and payments -
Patlex Corporation
Chief Financial Officer
250 Cotorro Court
Las Cruces, New Mexico 88005
for all other correspondence -
General Counsel
Patlex Corporation
250 Cotorro Court
Las Cruces, New Mexico 88005
Palomar Medical Technologies, Inc.:
Mr. Paul DeVos, President
Palomar Medical Technologies, Inc.
489 Groton Road
Westford, MA 01886
22
<PAGE>
ARTICLE XII - MOST FAVORED LICENSEE
If subsequent to the Effective Date of this Agreement another
manufacturer of lasers, laser systems, or Low or High Power Laser Tubes
similarly situated to LICENSEE is granted a license by PATLEX which provides to
said another manufacturer a combined royalty rate and royalty base materially
more favorable to said another manufacturer with respect to any of the Licensed
Patents than that provided herein to LICENSEE for lasers, laser systems and Low
or High Power Laser Tubes sold or leased in the United States, then LICENSEE
may, at its option, adopt the subsequent license in its entirety, mutatis
mutandis, as of the effective date of such subsequent license. PATLEX shall
notify LICENSEE of any such subsequent license and provide LICENSEE an
opportunity to exercise the option provided herein.
ARTICLE XIII - GOVERNMENT SALES
No royalty or fee shall accrue or be payable in respect of sales or
leases of lasers, laser systems, or Low or High Power Laser Tubes authorized and
consented to by the Government of the United States or its agencies. This
provisions shall not inhibit PATLEX from seeking such compensation as the law
permits from the Government of the United States or its agencies arising out of
such sales or leases.
Since the parties recognize that LICENSEE may have difficulty in
determining when sales to certain entities may constitute sales to the United
States government which are excludable from the payment of royalties and fees
under this
Article XIII, PATLEX agrees that lasers, laser systems, or Low or High Power
Laser Tubes sold by LICENSEE will be excludable under this Article XIII if any
of the following conditions are met:
A. If the sale is made directly to the U.S. Government or an agency
or research facility thereof;
B. If the sale is made to a U.S. government contractor who lists
the contract number under which the sale is made on the purchase
order;
C. If the sale is made to a U.S. government contractor who provides
a written statement that the sale is under a U.S. government
contract which provides authorization and consent to the
contractor's purchase and use of the equipment; and
D. If the sale is made to a University which provides a written
statement that the equipment has been purchased with U.S.
government funds under a grant requiring the purchase of a
laser, laser system or Low or High Power Laser Tube such as the
one supplied by LICENSEE.
If, however, a court of competent jurisdiction from which no appeal can
be or has been taken, shall determine that the Government of the United States
is not liable for the purchase, use or lease of such lasers, laser systems, or
Low or High Power Laser Tubes by reason of the failure or inapplicability of
said authorization and consent, or a determination that the Government of the
United States is not a real party in interest or for any other reason indicating
that the LICENSEE is the appropriate party from which a royalty or fee should be
sought, PATLEX shall
23
<PAGE>
notify LICENSEE accordingly and with the next quarterly report and payment
required under Article VII hereof, LICENSEE shall include a full statement and
payment as required.
ARTICLE XIV - REPRESENTATIONS
PATLEX and GOULD represent that PATLEX has the full rights and power to
grant the licenses and releases set forth in this Agreement, and that there are
no outstanding agreements, assignments or encumbrances inconsistent with the
provisions of this Agreement. PATLEX and GOULD further represent that there are
no patent applications pending in any Patent Office in the world relating to
lasers, laser systems, or Low or High Power Laser Tubes which are fully or
partially owned by GOULD and which are licensable by PATLEX. PATLEX represents
that it has the exclusive right to license others under the Licensed patents and
to collect royalties and fees under the Licensed Patents on behalf of all
entities entitled to receipt of the same. PATLEX makes no other representation,
express or implied, nor does PATLEX assume any liability in respect of any
infringement of patents or other rights of third parties due to LICENSEE's
operation under the license herein granted.
ARTICLE XV - HEADINGS
The headings of the several articles and sections are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
24
<PAGE>
GORDON GOULD acknowledges that he has read, approves and accepts this
Agreement between LICENSEE and PATLEX CORPORATION as set forth above, including
the patent rights granted herein.
GORDON GOULD
Date: February 13, 1992 By: /s/
-------------------------
Gordon Gould
IN WITNESS WHEREOF, the parties hereto affix their respective hands as
of the date indicate:
PATLEX CORPORATION
Date: February 12, 1992 By: /s/
-------------------------
J. Henry Muetterties
PALOMAR MEDICAL TECHNOLOGIES, INC.
Date: February 7, 1992 By: /s/
-------------------------
Paul DeVos
25
<PAGE>
EXHIBIT "A"
-----------
Expired U.S. Patents
- --------------------
U.S. Patent No. 3,388,314 (expired June 11, 1985)
"Apparatus for Generating Radiation of Frequencies
Higher than those of Light"
U.S. Patent No. 3,526,662 (expired February 9, 1988)
"Laser Utilizing Collision Depopulation"
U.S. Patent No. 3,576,500 (expired April 27, 1988)
"Low Lever Laser with Cyclic Excitation and
Relaxation"
U.S. Patent No. 3,586,998 (expired June 22, 1988)
"Pulsed Laser with Output Control"
Unexpired U.S. Patents:
- ----------------------
U.S. Patent No. 4,053,845 (expires October 11, 1994)
"Optically Pumped Laser Amplifier"
U.S. Patent No. 4,161,436 (expires July 17, 1996)
"Method of Energizing a Material"
U.S. Patent No. 4,704,583 (expires November 3, 2004)
"Light Amplifier Employing Collisions to Produce
a Population Inversion"
U.S. Patent No. 4,746,201 (expires May 24, 2005)
"Polarizing Apparatus Employing an Optical Element
Inclined at Brewster's Angle"
Expired Canadian Patent:
- -----------------------
Canadian Patent No. 907,110 (expired August 8, 1989)
"Light Generating and Amplifying Apparatus"
<PAGE>
EXHIBIT "B"
LIST LICENSEE'S SUBSIDIARIES
None
<PAGE>
EXHIBIT "C"
Royalty Report of Palomar Medical Technologies, Inc.
For Period From to
----------- -------------
Lasers and Laser Systems
Type --
*Total Gas, Use, Domestic
Product # Units Total Royalty Optical- or Royalty
Model-Type Sold Sales Price Base $ Pumped Export Rate % Due $
- ---------- ------- ----------- ------- --------- --------- ------- -----
* If a different royalty rate applies to portions of a sale or
group of sales, please separate the royalty base of such sales
according to the different royalty rates.
<PAGE>
EXHIBIT "D"
-----------
Royalty Report of Palomar medical Technologies, Inc.
For Period From to
Sealed Gas-Filled Laser Tubes
- -----------------------------
*Total Domestic
Product Power # Units Royalty or Royalty
Model-Type Output Sold Customer Base $ Export Rate % Due $
- ---------- ------- -------- -------- --------- --------- ------- -----
<PAGE>
EXHIBIT 10.2
KEY EMPLOYEE AGREEMENT
To: Louis P. Valente
The undersigned, Palomar Medical Technologies, Inc., a Delaware
corporation (the "Company" or "PMTI"), with its principal place of business
located at 66 Cherry Hill Drive, Beverly, MA 01915, hereby agrees with you as
follows:
l. Position and Responsibilities.
1.1 You shall serve as Chief Executive Officer and President of the
Company, or in such other executive capacity as shall be designated by the Board
of Directors or Executive Committee of the Company.
1.2 You will devote your full time and best efforts to the performance
of your duties hereunder and the business and affairs of the Company. You agree
to perform such executive duties as may be assigned to you by or on authority of
the Company's Chief Executive Officer ("CEO"), President or Chairman of the
Board from time to time. After receipt of notice of termination of your
employment hereunder, you shall continue to be available to the Company on a
part-time basis at reasonable and customary hourly rates to assist in any
necessary transition, lawsuits, or other carry-over issues.
1.3 You will duly, punctually, and faithfully perform and observe any
and all rules and regulations that the Company may now or shall hereafter
reasonably establish governing your conduct as an employee and the conduct of
its business.
2. Term of Employment
2.1 The initial term of this Agreement shall be for the period of years
set forth on Exhibit A annexed hereto commencing with the date hereof.
Thereafter, this Agreement shall be automatically renewed for successive periods
of one (1) year, unless you or the Company shall give the other party not less
than two (2) months prior written notice of non-renewal. During the initial term
of this Agreement, your employment with the Company may be terminated as
provided in Sections 2.2 or 2.3.
1
<PAGE>
2.2 The Company shall have the right to terminate your employment at any
time under this Agreement prior to the stated term in any of the following ways:
(a) on ten (10) days prior written notice to you upon your disability
(disability shall be defined as your inability to perform with or
without reasonable accommodation all of your essential duties under this
Agreement) (if any question shall arise as to whether during any period
you are disabled, so as to be unable to perform all of your essential
duties hereunder, you may, and at the request of the Company shall,
submit to a medical examination by a physician selected by the Company
to whom you or your duly appointed guardian, if any, have no reasonable
objections to determine whether you are so disabled, and such
determination shall for the purposes of this Agreement be conclusive of
the issue; if such question shall arise and you shall fail to submit to
such medical examination, the Company's determination of the issue shall
be binding on you);
(b) immediately without prior notice to you upon your death; if your
employment is terminated because of your death, pursuant to subsection
2.2 (a), all obligations of the Company hereunder cease, except with
respect to amounts and obligations accrued to you, through 30 days from
the date during which your death has occurred;
(c) immediately without prior notice to you by the Company for Cause, as
hereinafter defined;
(d) immediately without prior notice to you or Cause, in the event of
the liquidation or reorganization of the Company under the federal
Bankruptcy Act or any state insolvency or bankruptcy law;
(e) at any time without prior notice to you or Cause, provided that
during the initial term of this Agreement the Company shall be obligated
to pay to you upon notice of termination, as severance pay, your Base
Salary as then in effect in a lump sum payment in addition to all earned
incentive compensation in accordance with Exhibit A attached, less
applicable taxes and other required withholdings and any amounts you may
owe to the Company and continuation of all benefits and insurance
payments to the extent permitted by the Company's plans or policies for
one year. If your employment is terminated without Cause at anytime
after the initial term, the Company shall be obligated to pay a lump sum
amount equal to one-half your Base Salary as then in effect in addition
to all earned incentive compensation in accordance with Exhibit A
attached, less applicable taxes and other required withholdings and any
amount you may owe to the Company and continuation of all benefits and
insurance payments by the Company to the extent permitted by the
Company's plans or policies for six months. If, however, a change in
control of the Company should occur causing termination of your
employment without Cause at any time during the term of this Agreement,
then you shall be entitled to receive as severance pay four times your
Base Salary as then in effect in a lump sum payment in addition to all
earned incentive compensation in accordance with Exhibit A attached. For
purposes of this Agreement "change in control" shall be deemed to be the
sale of all or substantially all of the assets of the Company or the
merger of the Company with another entity where the other entity
survives the merger.
2
<PAGE>
2.3 During the initial term of this Agreement, you shall have the right
to terminate your employment hereunder for any reason, upon not less than ninety
(90) days' prior written notice to the Company.
2.4 "Cause" for the purpose of Section 2 of this Agreement shall mean:
(i) the falseness or material inaccuracy of any of your warranties or
representations herein; (ii) your failure, refusal or inability satisfactorily
to perform the services required of you hereby, or to comply with reasonable
explicit directives of the President, Board of Directors or Executive Committee
with respect to the services to be rendered hereunder; (iii) fraud or
embezzlement involving assets of the Company, its customers, suppliers or
affiliates or other misappropriation of the Company's assets or funds; (iv) your
conviction of a criminal felony offense; (v) any material breach of the terms
hereof; provided however, that the Company provides you with 20 days written
notice specifying the breach relied on for such termination, and only if such
breach has not been cured within such 20-day period; (vi) habitual use of drugs;
or (vii) conduct by you that is materially harmful to the business interest or
reputation of the Company or any of its affiliates.
Any dispute, controversy, or claim arising out of, in connection with,
or in relation to this definition of "Cause" shall be settled by arbitration as
provided in Section 9 hereof. The cost of arbitration, exclusive of the cost of
each party's legal representation (which, except as hereinafter otherwise
provided, shall be borne by the party incurring the expense), shall be borne by
the instigating party; provided, however, that the arbitrators' award may
require either party to reimburse the other for the reasonable cost of legal
representation in the arbitration proceedings.
3. Compensation
You shall receive the compensation and benefits set forth on Exhibit A
attached hereto ("Compensation") for all services to be rendered by you
hereunder and for your transfer of property rights pursuant to an agreement
relating to proprietary information and inventions of even date herewith
attached hereto as Exhibit C between you and the Company (the "Proprietary
Information and Inventions Agreement").
4. Other Activities During Employment
4.1 Except for any outside employment and directorships currently held
by you as listed on Exhibit B attached hereto, and except with the prior written
consent of a disinterested majority of the Company's Board of Directors, which
consent will not be unreasonably withheld, you will not, during the term of this
Agreement, undertake or engage in any other employment, occupation or business
enterprise other than one in which you are an inactive investor.
4.2 You hereby agree that, except as disclosed on Exhibit B attached
hereto, during your employment hereunder, you will not, directly or indirectly,
engage (i) individually, (ii) as an officer, (iii) as a director, (iv) as an
employee, (v) as a consultant, (vi) as an advisor, (vii) as an agent (whether a
salesperson or otherwise), (viii) as a broker, or (ix) as a partner, covenanter,
stockholder or other proprietor owning directly or indirectly more than five
percent (5) interest in any firm, corporation, partnership, trust, association,
or other organization which is engaged
3
<PAGE>
in the planning, research, development, production, manufacture, marketing,
sales, or distribution of products, equipment, or services similar to those
produced by the Company, (such firm, corporation, partnership, trust,
association, or other organization being hereinafter referred to as a
"Prohibited Enterprise"). Except as may be shown on Exhibit B attached hereto,
you hereby represent that you are not engaged in any of the foregoing capacities
(i) through (ix) in any Prohibited Enterprise.
5 Former Employers
5.1 You represent and warrant that your employment by the Company will
not conflict with and will not be constrained by any prior or current
employment, consulting, confidentiality, non-competition or other agreement or
relationship, whether oral or written. You represent and warrant that you do not
possess confidential information arising out of any such employment, consulting
agreement or relationship which, in your best judgment, would be utilized in
connection with your employment by the Company in the absence of Section 5.2.
5.2 If, in spite of the second sentence of Section 5.1, you should find
that confidential information belonging to any other person or entity might be
usable in connection with the Company's business, you will not intentionally
disclose to the Company or use on behalf of the Company any confidential
information belonging to any of your former employers; but during your
employment by the Company you will use in the performance of your duties all
information which is generally known and used by persons with training and
experience comparable to your own all information which is common knowledge in
the industry or otherwise legally in the public domain.
6. Proprietary Information and Inventions
You agree to execute, deliver and be bound by the provisions of the
Proprietary Information and Inventions Agreement attached hereto as Exhibit C.
7. Post-Employment Activities
7.1 For a period of one (1) year after the termination or expiration of
your employment, for cause or if you terminated the employment with the Company
hereunder (the "Non-Competition Period"), absent the Board of Directors' prior
written approval, you will not directly or indirectly engage in activities
similar to those described in Section 4.2, nor render services similar or
reasonably related to those which you shall have rendered hereunder to, any
person or entity whether now existing or hereafter established which directly
competes with (or proposes or plans to directly compete with) the Company
("Direct Competitor") in the same or similar business. Nor shall you (i) entice,
induce or encourage any of the Company's other employees to engage in any
activity which, were it done by you, would violate any provision of the
Proprietary Information and Inventions Agreement or this Section 7, or (ii)
directly or indirectly solicit or accept business or orders from customers of
the Company (including end users whom the Company's products or services are
sold through distributors, licensees and the like) for any business which is
similar to or competitive with the business of the Company as then being
conducted. As used in this Agreement, the term "any line of business engaged in
or under
4
<PAGE>
demonstrable development by the Company" shall be applied as at the date of
termination of your employment, or, if later, as at the date of termination of
any post-employment consultation.
7.2 During the Non-Competition Period, the provisions of Section 4.2
shall be applicable to you and you shall comply therewith.
7.3 Until the conclusion of the Non-Competition Period, you shall give
notice to Company of each new business activity you plan to undertake, at least
fourteen (14) days prior to beginning any such activity. Such notice shall state
the name and address of the person for whom such activity is undertaken and the
nature of your business relationship(s) and position(s) with such persons. You
shall provide the Company with such other pertinent information concerning such
business activity as the Company may reasonably request in order to determine
your continued compliance with your obligations hereunder.
7.4 No provision of this Agreement shall be construed to preclude you
from performing the same services which the Company hereby retains you to
perform for any person or entity which is not a Direct Competitor of the Company
upon the expiration or termination of your employment (or any post-employment
consultation) so long as you do not thereby violate any term of this Agreement
or the Proprietary Information and Inventions Agreement.
7.5 You and the Company are of the belief that the period of time, the
area specified and the nature and scope of the restrictions in Section 7.1 are
reasonable in view of the nature of the business in which the Company is engaged
and proposes to engage, the state of its business development and your knowledge
of this business. However, if such period, such area or the nature and scope of
the restrictions should be adjudged unreasonable in any judicial proceeding,
then the period of time shall be reduced by such number of months, such area
shall be reduced by elimination of such portion of such area, or such nature and
scope of the restrictions shall be modified, as are deemed unreasonable, so that
this covenant may be enforced in such area and during such period of time as is
adjudged to be reasonable.
7.6 You agree and covenant that you will not, unless acting with the
Company's express written consent, directly or indirectly, during the
Non-Competition Period, solicit, entice away or interfere with the Company's
contractual relationships with any customer, client, officer or employee of the
Company.
7.7 You recognize and agree that the injury that the Company will suffer
in the event of your breach of any covenant or agreement contained in this
Section 7 cannot be compensated by monetary damages alone, and you therefore
agree that the Company, in addition to and without limiting any other remedies
or rights that it may have, either under this Agreement or otherwise, shall have
the right to obtain an injunction against you, enjoining any such breach, and
that you shall reimburse the Company for its costs and attorneys' fees of such
action.
5
<PAGE>
8. Survival of Terms and Remedies
Your obligations under the Proprietary Information and Inventions
Agreement and the provisions of Sections 7, 8, 9, and 11 of this Agreement (as
modified by Section 4, if applicable) shall survive the expiration or
termination of your employment (whether through your resignation or otherwise)
with the Company. You acknowledge that a remedy at law for any breach or
threatened breach by you of the provisions of the Proprietary Information and
Inventions Agreement or Sections 4 or 7 hereof would be inadequate and you
therefore agree that the Company shall be entitled to such injunctive relief in
case of any such breach or threatened breach. Should you engage in any
activities prohibited by this Agreement, you agree to pay over to the Company
all compensation, remuneration or monies or property of any sort received in
connection with such activities; such payment shall not impair any other rights
or remedies of the Company or your obligations or liabilities which you and the
Company may have under this Agreement or applicable law.
9. Arbitration
Any dispute concerning this Agreement including, but not limited to, its
existence, validity, interpretation, performance or non-performance, arising
before or after termination or expiration of this Agreement, shall be settled by
a single arbitrator in Boston, Massachusetts, in accordance with the expedited
procedures of the commercial rules then in effect of the American Arbitration
Association; provided, however, that claims or disputes involving the (i)
unauthorized use or disclosure of Confidential Information (as defined in
Exhibit C), or (ii) the breach or alleged breach by you of any obligations set
forth in Section 7, shall be settled by either a Federal or state court sitting
in Massachusetts and shall not be decided by arbitration pursuant to this
Section, unless you and the company expressly agree otherwise in writing.
Judgment upon any arbitration award may be entered in the highest court, state
or federal, having jurisdiction. Except as otherwise provided in Section 2.4,
the cost of such arbitration shall be borne equally between the parties thereto
unless otherwise determined by such arbitrator; each party shall separately pay
its or his own counsel fees and other costs in connection with the arbitration.
10. Assignment
This Agreement and the rights and obligations of the parties hereto
shall bind and inure to the benefit of any successor or successors of the
Company by reorganization, merger or consolidation and any assignee of all or
substantially all of its business and properties, but, except as to any such
successor or assignee of the Company, neither this Agreement nor any rights or
benefits hereunder may be assigned by the Company or by you, except by operation
of law or by a further written agreement by the parties hereto.
11. Interpretation
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions
6
<PAGE>
of this Agreement, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. MOREOVER, IT
IS THE INTENT OF THE PARTIES THAT if any one or more of the provisions contained
in this Agreement is or becomes or is deemed invalid, illegal or unenforceable
or in case any shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
12. Notices
Any notice which the Company is required to or may desire to give you
shall be given by registered or certified mail, return receipt requested,
addressed to you at your address of record with the Company, or at such other
place as you may from time to time designate in writing. Any notice which you
are required or may desire to give to the Company hereunder shall be given by
registered or certified mail, return receipt requested, addressed to the
Chairman of the Board of the Company at its principal office, or at such other
office as the Company may from time to time designate in writing, with a copy to
the General Counsel of Palomar Medical Technologies, Inc. at its principal
office.
13. Waivers
Failure by the Company to insist upon strict compliance with any of the
terms, covenants, or conditions hereof shall not be deemed a waiver of such
terms, covenants or conditions. No waiver of any right under this Agreement
shall be deemed effective unless contained in a writing signed by the party
charged with such waiver, and no waiver of any right arising from any breach or
failure to perform shall be deemed to be a waiver of any future such right or of
any other right arising under this Agreement.
14. Complete Agreement; Amendments
The foregoing, including Exhibits A, B and C attached hereto, is the
entire agreement of the parties with respect to the subject matter hereof,
superseding any previous oral or written communications, representations,
understandings, or agreements with the Company or any officer or representative
thereof. This Agreement may be amended or modified or certain provisions waived
only by a written instrument signed and agreed to by the parties hereto, upon
authorization of the Company's Board of Directors.
15. Headings
The headings of the Sections contained in this Agreement are inserted
for convenience and reference only and in no way define, limit, extend or
describe the scope of this Agreement, the intent of any provisions hereof, and
shall not be deemed to constitute a part hereof nor to affect the meaning of
this Agreement in any way.
7
<PAGE>
16. Counterparts
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
17. Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts without regard to its principles of
conflict of laws.
18. Effective Date
The effective Date of this Agreement is May 15, 1997.
If you are in agreement with the foregoing, please sign your name below
and also at the bottom of the Proprietary Information and Inventions Agreement,
whereupon both Agreements shall become binding in accordance with their terms.
Please then return this Agreement to the Company. (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith.)
Very truly yours,
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
---------------------------------
Name:
Title:
Accepted and Agreed:
- ----------------------
Louis P. Valente
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
Louis P. Valente
Chief Executive Officer and President
1. Term
The term of the Agreement to which this Exhibit A is annexed and
incorporated shall be for two (2) years from the effective date of this
Agreement, unless renewed in accordance with Section 2.1 of the Agreement or
terminated prior thereto in accordance with Section 2.2 or 2.3 of the Agreement.
2. Compensation
(a) Base Salary. Your Base Salary shall TWO HUNDRED SEVENTY-FIVE
THOUSAND DOLLARS ($275,000) per annum, to be paid in accordance with the
Company's payroll policies, and if the Agreement is renewed in
accordance with Section 2.1, to be subject to increases thereafter as
determined by the Company's Board of Directors or Compensation
Committee.
(b) Performance Compensation. You will be eligible for a bonus at the
end of each fiscal year that is up to 100% of your Base Salary, to be
determined by the Company's Compensation Committee.
(c) Options. You shall receive an option to purchase 400,000 shares of
the common stock, $.01 par value per share, of the Company, on the terms
and conditions set forth in the Stock Option Agreement between you and
the Company of even date herewith.
3. Vacation
You shall be paid for and entitled to all legal holidays, and three (3)
weeks paid vacation per annum. You shall arrange for vacations in advance at
such time or times as shall be mutually agreeable to you and the Company. Any
vacation time not used in any particular year may be carried forward into the
subsequent year. You may not receive pay in lieu of vacation.
4. Insurance and Benefits
You shall be eligible for participation in any health or other group
insurance plan which may be established by the Company or which the Company is
required to maintain by law. You
1
<PAGE>
shall also be entitled to participate in any
employee benefit program which the Company may establish for its key employees
or for its employees generally, including, but in no way limited to, bonuses and
stock purchase or option plans. The Company may alter, modify, add to or delete
its employee benefit plans at any time as it, in its sole judgment, determines
to be appropriate, without recourse by you. The Company shall provide
comprehensive health insurance for you and your dependents. Should your
employment be terminated for any reason, the Company will use its best efforts
to allow you to assume these policies.
5. Expenses
The Company shall reimburse you promptly for all reasonable and ordinary
business and out-of-pocket expenses incurred by you in connection with the
Company's business and in the scope of your employment hereunder, as approved by
the Company, including, without limitation, reasonable and necessary travel
expenses incurred by you during the term of this Agreement, provided the
expenses are incurred in furtherance of the Company's business and at the
request of the Company. You agree to keep and maintain records of the aforesaid
expenses as may be requested by the Company and to account to the Company for
the expenses prior to reimbursement.
The Company shall lease a vehicle for you for the initial term of this
Agreement.
<PAGE>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
LOUIS P. VALENTE
<PAGE>
EXHIBIT C
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
As of May 15, 1997
To: Louis P. Valente
The undersigned, in consideration of and as a condition of my
employment or continued employment by you and/or by your parent company or
companies which you own, control, or are affiliated with or their successors in
business (collectively, the "Company"), hereby agrees as follows:
1. All Business to be the Property of the Company
I agree that any and all presently existing business of the Company and
all business developed by me or any other employee of the Company including
without limitation all contracts, fees, commissions, compensation, records,
customer or client lists, agreements and any other incident of any business
developed, earned or carried on by me for the Company is and shall be the
exclusive property of the Company, and (where applicable) shall be payable
directly to the Company.
2. Confidentiality
I recognize that my relationship with the Company is one of high trust and
confidence by reason of my access to and contact with the trade secrets and
confidential and proprietary information of the Company. I agree to keep
confidential, except to the extent authorized by the Company in writing for its
benefit, not to disclose or make any use of at any time either during or
subsequent to my employment, any Inventions (as hereinafter defined), trade
secrets and confidential information, knowledge, data or other information of
the Company which is either not generally known outside the Company or is
proprietary and confidential information of the Company or any of its customers
or suppliers relating to products, processes, know-how, techniques, methods,
designs, formulas, test data, customer, employee and supplier lists, business
plans, budgets, costs, markets, marketing plans and strategies, pricing
strategies, operations or other subject matter pertaining to any existing or
contemplated business of the Company or any of its affiliates, which I may
produce, obtain, or otherwise acquire during the course of my employment,
whether I have such information in my memory or embodied in writing or other
tangible form, except as herein provided. I further agree not to deliver,
reproduce or in any way allow any such trade secrets and confidential
information, knowledge, data or other information, or any documentation relating
thereto, to be delivered to or used by any third parties without specific
direction or consent of a duly authorized representative of the Company.
1
<PAGE>
3. Return of Confidential Material
In the event my employment with the Company terminates for any reason
whatsoever, I agree to promptly surrender and deliver to the Company all of the
tangible forms of Confidential Information listed in Section 2, all records,
information, materials, equipment, drawings, computer disks, documents and data
of which I may obtain or produce during the course of my employment, and I will
not take with me any description containing or pertaining to any confidential
information, knowledge or data of the Company which I may produce or obtain
during the course of my employment.
4. Assignment of Inventions
4.1 I hereby acknowledge and agree that the Company is the owner of all
Inventions. In order to protect the Company's rights to such Inventions, by
executing this Agreement I hereby irrevocably assign to the Company all my
right, title and interest in and to all Inventions (without any separate
remuneration or compensation other than that received from time to time in the
course of my employment).
4.2 For purposes of this Agreement, "Inventions" shall mean all
research information, inventions, technical innovations, writings, tabulations,
procedures, developments, know-how, plans, programs, trade secrets, discoveries,
processes, designs, methods, techniques, technology, devices, or improvements in
any of the foregoing or other ideas, whether or not patentable or copyrightable
and whether or not reduced to practice, made or conceived by me (whether solely
or jointly with others) during the period of my employment with the Company
which relate in any manner to the actual or demonstrably anticipated business,
work, or research and development of the Company, or result from or are
suggested by any task assigned to me or any work performed by me for or on
behalf of the Company.
4.3 Any discovery, process, design, method, technique, technology,
device, or improvement in any of the foregoing or other ideas, whether or not
patentable or copyrightable and whether or not reduced to practice, made or
conceived by me whether solely or jointly with others which I develop entirely
on my own time not using any of the Company' equipment, supplies, facilities, or
trade secret information ("Personal Invention") is excluded from this Agreement
provided such Personal Invention (i) does not relate to the actual or
demonstrably anticipated business, research and development of the Company, and
(ii) does not result, directly or indirectly, from any work performed by me for
or on behalf of the Company.
5. Disclosure of Inventions
I agree that in connection with any Invention, I will promptly disclose
such Invention to the President, Board of Directors and the Executive Committee
of the Company in order to permit the Company to enforce its property rights to
such Invention in accordance with this Agreement. My disclosure shall be
received in confidence by the Company.
2
<PAGE>
6. Patents and Copyrights: Execution of Documents
6.1 Upon request, I agree to assist the Company or its nominee (at its
expense) during and at any time subsequent to my employment in every reasonable
way to obtain for its own benefit patents and copyrights for Inventions in any
and all countries. Such patent and copyrights shall be and remain the sole and
exclusive property of the Company or its nominee. I agree to perform such lawful
acts as the Company deems to be necessary to allow it to exercise all right,
title and interest in and to such patents and copyrights.
6.2 In connection with this Agreement, I agree to execute, acknowledge
and deliver to the Company or its nominee upon request and at its expense all
documents, including assignments of title, patent or copyright applications,
assignments of such applications, assignments of patents or copyrights upon
issuance, as the Company may determine necessary or desirable to protect the
Company's or its nominee's interest in Inventions, and/or to use in obtaining
patents or copyrights in any and all countries and to vest title thereto in the
Company or its nominee to any of the foregoing.
7. Maintenance of Records
It is understood that all Personal Inventions if any, whether patented
or unpatented, which I made prior to my employment by the Company, are excluded
from this Agreement. To preclude any possible uncertainty, I have set forth on
Schedule A attached hereto a complete list of all of my prior Personal
Inventions, including numbers of all patents and patent applications and a brief
description of all unpatented Personal Inventions which are not the property of
a previous employer. I represent and covenant that the list is complete and
that, if no items are on the list, I have no such prior Personal Inventions. I
agree to notify the Company in writing before I make any disclosure or perform
any work on behalf of the Company which appears to threaten or conflict with
proprietary rights I claim in any Personal Invention. In the event of my failure
to give such notice, I agree that I will make no claim against the Company with
respect to any such Personal Invention.
8. Other Obligations
I acknowledge that the Company from time to time may have agreements
with other persons, companies, entities, the U.S. Government or agencies
thereof, which impose obligations or restrictions on the Company regarding
Inventions made during the course of work thereunder or regarding the
confidential nature of such work. I agree to be bound by all such obligations
and restrictions and to take all action necessary to discharge the Company's
obligations.
9. Injunctive Relief
You recognize and agree that the injury that the Company will suffer in
the event of your breach of any covenant or agreement contained in this
Proprietary Information and Confidentiality Agreement cannot be compensated by
monetary damages alone, and you therefore agree that the Company, in addition to
and without limiting any other remedies or rights that it may have, either under
this Proprietary Information and Confidentiality Agreement
3
<PAGE>
or otherwise, shall have the right to obtain an injunction against you,
enjoining any such breach, and that you shall reimburse the Company for its
costs and attorneys' fees of such action.
10. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives and successors. I
expressly consent to be bound by the provisions of this Agreement for the
benefit of the Company or any parent, subsidiary or affiliate thereof to whose
employ I may be transferred without the necessity that this Agreement be
resigned at the time of such transfer.
11. Interpretation
IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the
provisions contained in this Agreement shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect the other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE
PARTIES THAT if any provision of this Agreement is or becomes or is deemed
invalid, illegal or unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid and enforceable or, if it cannot be so amended without
materially altering the intention of the parties, it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.
12. Waivers
Failure by the Company to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such
terms, covenants or conditions. No waiver of any right under this Agreement
shall be deemed effective unless contained in a writing signed by the party
charged with such waiver, and no waiver of any right arising from any breach or
failure to perform shall be deemed to be a waiver of any future such right or of
any other right arising under this Agreement.
13. Entire Agreement; Modification
This Agreement constitutes the entire agreement between the parties and
supersedes any prior oral or written communications, representations,
understandings or agreements concerning the subject matter hereof with the
Company or any officer or representative thereof. This Agreement does not
constitute an employment agreement, and no changes in any compensation, title or
duties or any other terms or conditions of my employment, including, without
limitation, the termination of my employment, shall affect the provisions of
this Agreement, except as stated herein. This Agreement may be amended,
modified, or certain provisions waived only by a written instrument signed by
the parties hereto, upon authorization of the Company's Board of Directors.
4
<PAGE>
14. Headings
The headings of the Sections contained in this Agreement are inserted for
convenience and reference only and in no way define, limit, extend or describe
the scope of this Agreement, the intent of any provisions hereof, and shall not
be deemed to constitute a part hereof nor to affect the meaning of this
Agreement in any way.
15. Counterparts
This Agreement may be signed in two counterparts, each of which shall be
deemed an original and both of which shall together constitute one agreement.
16. Governing Law
This Agreement shall be deemed to be a sealed instrument and shall be
governed and construed in accordance with the laws of the Commonwealth of
Massachusetts, without regard to its principles of conflict of laws.
17. Notices
Any notice which the Company is required to or may desire to give you
shall be given by registered or certified mail, return receipt requested,
addressed to you at your address of record with the Company, or at such other
place as you may from time to time designate in writing. Any notice which you
are required or may desire to give to the Company hereunder shall be given by
registered or certified mail, return receipt requested, addressed to the
Chairman of the Board of the Company at its principal office, or at such other
office as the Company may from time to time designate in writing, with a copy to
the General Counsel of Palomar Medical Technologies, Inc. at its principal
office.
EMPLOYEE
/s/
----------------------------------
Louis P. Valente
Accepted and Agreed:
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
LOUIS P. VALENTE
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000881695
<NAME> PALOMAR MEDICAL TECHNOLOGIES
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,085,277
<SECURITIES> 2,401,550
<RECEIVABLES> 25,504,978
<ALLOWANCES> 2,679,000
<INVENTORY> 21,199,188
<CURRENT-ASSETS> 74,469,794
<PP&E> 16,610,578
<DEPRECIATION> 3,765,619
<TOTAL-ASSETS> 101,397,948
<CURRENT-LIABILITIES> 38,923,768
<BONDS> 20,011,215
0
298
<COMMON> 330,832
<OTHER-SE> 35,045,785
<TOTAL-LIABILITY-AND-EQUITY> 101,397,948
<SALES> 44,900,033
<TOTAL-REVENUES> 44,900,033
<CGS> 43,204,343
<TOTAL-COSTS> 43,204,343
<OTHER-EXPENSES> 450,660
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,569,584
<INCOME-PRETAX> (30,178,133)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,178,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,178,133)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
