FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1997
Commission file number: 0-22340
[OBJECT OMITTED]
PALOMAR MEDICAL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 04-3128178
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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45 Hartwell Avenue, Lexington, Massachusetts 02173
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(Address of principal executive offices)
(781) 676-7300
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
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Name of each exchange on
Title of each class which registered
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Not Applicable Not Applicable
Securities registered pursuant to Section 12 (g) of the Act:
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 20, 1998, 59,553,243 shares of Common Stock were outstanding.
The aggregate market value of the voting shares (based upon the closing price
reported by Nasdaq on March 20, 1998) of Palomar Medical Technologies, Inc.,
held by nonaffiliates was $66,009,188. For purposes of this disclosure, shares
of Common Stock held by entities who own 5% or more of the outstanding Common
Stock, as reported in Amendment No. 3 to a Schedule 13G filed on March 10, 1998,
and shares of Common Stock held by each officer and director have been excluded
in that such persons may be deemed to be "affiliates" as that term is defined
under the Rules and Regulations of the Securities Exchange Act of 1934. This
determination of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed prior to April 30,
1998, pursuant to Regulation 14A of the Securities Exchange Act of 1934 are
incorporated by reference into Part III of this Form 10-K
Transitional Small Business Disclosure Format: Yes X No
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PART I
ITEM 1. BUSINESS.
(a) INTRODUCTION
Palomar Medical Technologies, Inc. (the "Company" or "Palomar" or the
"Registrant") was organized in 1987 to design, manufacture and market lasers,
delivery systems and related disposable products for use in medical procedures.
In December 1992 the Company went public. Subsequently, the Company pursued an
aggressive acquisition program, acquiring companies in its core laser business
as well as others, principally in the electronics industry, in order to spread
risk and bolster operating assets, among other reasons. By the beginning of
1997, the Company had more than a dozen subsidiaries. At the same time, having
obtained FDA clearance to market its EpiLaser(R) hair removal laser system in
March 1997, the Company was well positioned to focus on what it believes is the
most promising product in its core laser business. Hence, under the direction of
a new Board and management, the Company undertook an ambitious program in 1997
of exiting all non-core businesses and investments and focusing only on those
businesses which it believes hold the greatest promise for maximizing
stockholder value. Currently, the Company has four subsidiaries, one of which,
Dynaco Corp. ("Dynaco"), the only remaining electronics subsidiary, the Company
anticipates exiting in 1998. (See Report on Form 8-K filed December 23, 1997 and
incorporated herein by reference.) The remaining three subsidiaries are Palomar
Medical Products, Inc. ("PMP"), in Lexington, Massachusetts, where the Company's
ruby hair removal laser system is manufactured, Star Medical Technologies, Inc.
("Star") in Pleasanton, California, where the Company's diode hair and leg vein
removal laser is manufactured, and Cosmetic Technology International, Inc.
("CTI"), also headquartered in Lexington, Massachusetts, which provides cosmetic
laser services.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company conducts business in one industry segment, medical products
and services. In 1997, the Company began a program of divesting all of its
noncore electronics subsidiaries. The Company expects to complete this program
in 1998. (See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview" and Note 2 to Financial
Statements.)
(c) DESCRIPTION OF BUSINESS
(i) PRINCIPAL PRODUCTS AND SERVICES
Lasers for Hair Removal
The word "laser" is the acronym for "light amplification by stimulated
emission of radiation." The emitted radiation oscillates within an optical
resonator and is amplified by an active medium, resulting in a monochromatic
beam of light, which is narrow, highly coherent and thus can be focused to a
small spot with a high degree of precision. In recent years, scientists and
clinicians have developed a concept called tissue optics to describe how the
unique properties of the laser can be used to treat human tissue selectively and
more precisely. By careful selection of laser parameters, such as wavelength
(color), energy and pulse width (exposure time), and with a detailed
understanding of the physical and optical properties of the target tissue, the
clinician can selectively treat the target tissue while minimizing or
eliminating damage to surrounding tissue. The concept of color selectivity has
been useful in developing a number of successful dermatological applications.
The patented hair removal technology utilized by Palomar targets the pigment in
a hair follicle and was developed by Dr. R. Rox Anderson at Massachusetts
General Hospital ("MGH"). Pigment, called melanin, is found in the upper layer
of the skin and in the hair shaft and hair follicle deeper below the surface of
the skin. With the appropriate selection of wavelength (color), energy and pulse
width to allow for the preferential absorption of laser energy by the melanin
present in the hair, there is negligible absorption by the surrounding tissue.
Energy from ruby lasers is particularly well absorbed by melanin and absorption
by other cells and tissue is particularly low. Palomar uses a patented and
proprietary contact cooling technology to protect the upper layer of the skin
while the ruby or diode laser light is targeting and destroying the follicle
deeper within the skin tissue. In addition, Palomar's patented contact cooling
handpiece enables the laser light to penetrate to the correct depth while at the
same time limiting the amount of discomfort associated with the procedure. This
method of hair removal using the cooling handpiece allows for selective
destruction of the target follicle
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without harming the surrounding skin or surface of the skin. The laser light is
pulsed at a rapid rate covering approximately one-eighth square inch at each
pulse. This treatment method allows for a large area of treatment over a
relatively short period of time.
Using its core ruby laser technology, originally developed for tattoo
removal and pigmented lesions, Palomar developed a long pulse ruby laser, the
EpiLaser(R) laser system, that is specifically configured to allow the
appropriate wavelength, energy level and pulse duration to be absorbed
effectively by the hair follicle without being absorbed by the surrounding
tissue. That, combined with the patented ChillTip(TM) cooling handpiece, allows
for safe and effective hair removal.
In an effort to find a way to allow the laser light to pass through top
skin layers and be deeply absorbed in the hair follicle below, a contact cooling
handpiece was developed by MGH and licensed to Palomar on an exclusive
world-wide perpetual basis. This unique cooling handpiece is key to the success
and safety of Palomar's laser hair removal systems, as it permits laser
applications of higher power with better targeting and greater safety. The cold
sapphire tip protects the epidermis while allowing the laser light to
efficiently destroy the target follicles. The Company believes its unique
delivery system enables the user to address a potentially larger market than
electrolysis currently does by offering to treat large areas of the body such as
back, chest, abdomen, legs, arms and other areas. (See "Research and
Development.")
In March 1997, Palomar was the first company to receive FDA clearance
to sell and market a ruby laser in the U.S. for hair removal. In December 1997
and January 1998 respectively, Palomar was also the first company to receive FDA
clearance for a diode laser for hair removal and for leg vein treatment, the
Company's LightSheer(TM) diode laser system.
During 1998, Palomar may upgrade its ruby laser system to include a
fiber delivery system, a higher energy head and a new handpiece. Palomar will
continue to make improvements to the ruby laser systems including higher energy
(for even more effective hair reduction), colder cooling and user selectable
pulse widths (for more comfort and safety with darker skin), and faster pulse
rate (for faster hair removal).
Throughout 1997, the Company's Star subsidiary continued work on the
Company's latest hair removal system, the LightSheer(TM) diode laser. This
revolutionary device incorporates state-of-the-art laser diode technology into a
2,000 watt system that the Company feels will be the ideal complement to the
current ruby laser technology for hair removal. The LightSheer(TM) diode laser
weighs approximately one-eighth the weight of the EpiLaser(R) laser system, can
complete a treatment more rapidly than the ruby laser, and plugs into any wall
outlet. Clinical results after 18 months of testing show comparable results to
the EpiLaser(R) laser system for most hair and skin types. The new system uses
Palomar's exclusive patented contact cooling technology to provide greater
efficacy while maintaining epidermal safety.
The Hair Removal Market
The market for laser-based hair removal is in its early stages and is
rapidly growing. The final size of that market cannot yet be determined;
however, the Company believes that the current electrolysis market is a good
model. Last year, more than one million women in the United States underwent
treatment using electrolysis, spending on average more than $1,000 each,
representing a market of approximately $1 billion annually. In addition, surveys
indicate as many as 15% of men would also like to remove unwanted hair
especially from back and chest areas. Electrolysis is a commonly used method for
the long-term removal of body hair. Other methods of hair removal include
waxing, depilatories, tweezing, depilatory creams and shaving, all resulting in
only short-term hair removal. (See Item 7. "Risk Factors - Dependence on
Developing Market; Product Concentration.")
Electrolysis is a process in which an electrologist inserts a needle
directly into a hair follicle and activates an electric current in the needle,
which disables the hair follicle. The tiny blood vessels in each hair follicle
are heated and coagulated, presumably cutting off the blood supply to the hair
matrix, or are destroyed by chemical action depending upon modality used. The
success rate for electrolysis is variable depending upon the skill of the
electrologist and always requires a series of treatments. Electrolysis is
time-consuming, expensive and sometimes painful. There is also some risk of skin
blemishes and a rising concern relating to needle infection. Since electrolysis
only treats one hair follicle at a time and can only treat visible hair
follicles, the treatment of an area as small as an upper lip may require
numerous visits at an aggregate cost of up to $1,000. Although 70% of all
electrolysis treatments are for facial hair, the neck, breasts and bikini line
are also
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treated. Because hair follicles are disabled one at a time, electrolysis is
rarely used to remove hair from large areas such as the back, chest, abdomen and
legs.
Market surveys report that more than 70% of women in the United States
employ one or more techniques for temporary hair removal from various parts of
the body. Pulling hair from the follicle produces the longest-term temporary
results, but is painful and may cause skin irritation. A number of techniques
are used to pull hair from the follicle including waxing, depilatories and
tweezing. In the waxing process, a lotion, generally beeswax-based, is spread on
the area to be treated and allowed to harden, thereby trapping the hairs. The
hardened film is then rapidly peeled off, pulling out the entrapped hairs.
Depilatories employ rotating spring coils or slotted rubber rolls to trap and
pull out the hairs. Tweezing involves removing individual hairs with a pair of
tweezers. Depilatory creams, which contain chemicals to separate hair from the
follicle, frequently leave a temporary, unpleasant odor and may also cause skin
irritation. Shaving is the most widely used method of hair removal, especially
for legs and underarms, but produces the shortest-term results. Hair bleaches do
not remove hair, but instead lighten the color of hair so that it is less
visible. A principle drawback of all of these methods is that they require
frequent treatment.
Studies using Palomar's laser hair removal process demonstrated
significant permanent reduction of hair following treatment with the EpiLaser(R)
laser system. The first treatment causes a portion of the hair (typically the
hair in the growth mode) to be reduced in size, color and/or quantity (based on
studies followed for up to three years) and causes significant growth delay
(three to six months) of most of the rest of the hair. Since the partial
re-growth tends to occur in synchrony, the follow-up treatment is often more
effective than the first treatment. An FDA submission seeking to allow Palomar
to claim permanent reduction of hair from treatments with its EpiLaser(R) laser
system was filed in January of 1998. Benefits of Palomar's laser hair removal
process include: significant long term cosmetic improvement, treatment of larger
areas in each treatment session, relatively painless procedure, reduced risk of
scarring, non-invasive procedure, no risk of cross-contamination, and higher
success rates than with previous methods.
Marketing, Distribution and Service
Pursuant to an agreement executed in November 1997, Coherent, Inc.
("Coherent") is the exclusive distributor for Palomar's hair removal lasers. If
Coherent fails to meet certain minimums sales quotas specified in its agreement
with Palomar, it loses its exclusive distribution rights. Coherent is the
largest medical laser company in the world, with over 200 sales persons
worldwide. Under its agreement with Palomar, Coherent is responsible for sales,
marketing, service, training and education. Coherent has over 50 service
representatives in the US, and over 100 worldwide. (See Item 7. "Risk Factors -
Dependence on New Relationship with Coherent" and Note 12(e) to Financial
Statements.)
Laser for Tattoo and Pigmented Lesion Removal
The Company also sells a Q-switched ruby laser for tattoo removal and
treating pigmented lesions, the RD-1200(TM). In 1997, RD-1200(TM) sales
constituted approximately 10% of the Company's sales, and were primarily
overseas, in Japan, Korea and other parts of the world. Palomar sells and
services the RD-1200(TM) through distributors internationally. In the United
States, Palomar has provided service through its own service organization, but
expects to arrange for third party service beginning in the middle of 1998.
The RD-1200(TM) Q-switched ruby laser has been on the market for nearly
nine years. Competition in the medical device industry is intense and technology
developments have continued at a rapid pace over the past decade. While the
RD-1200(TM) Q-switched ruby laser is still recognized as the "gold standard" for
performance in this market, there are less expensive products now available for
this purpose. Palomar expects sales of this product to continue in 1998 at a low
volume to foreign countries where the advantages of ruby laser for treatment of
pigmented lesions is especially important.
Cosmetic Laser Services
An additional avenue that the Company has explored for its laser
technology is the service business conducted through its CTI subsidiary, which
was incorporated in 1996 for that purpose. During 1997, CTI established a number
of test sites to explore business models.
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In early 1997, CTI entered into a binding letter of intent with
Columbia/HCA, one of the world's largest owners and operators of medical
facilities, to establish revenue-sharing cosmetic laser service sites in
existing Columbia/HCA facilities. To date, three such sites have been
established. CTI provides each of its sites with a turnkey package of laser and
medical device technology, equipment, training and service, operations
personnel, strategic advertising and marketing programs, patient financial
credit programs and management assistance. To date, ten CTI revenue-sharing
sites in addition to the Columbia/HCA sites are open and under development.
During 1997, CTI generated revenues of approximately $1,000,000 and incurred
operating expenses of approximately $4,500,000.
(ii) PRODUCTS UNDER DEVELOPMENT
Burn Diagnosis Laser System
In 1994, the Company's Star subsidiary was awarded a $60,000 Phase I
Small Business Innovation Research Grant ("SBIR") entitled "High Energy Diode
Laser for Burn Diagnosis" by the U.S. Air Force, Phillips Laboratory. In 1994,
Star obtained an exclusive, worldwide license to a patent relating to the
measurement of burn depth in skin from the Office of Technology Affairs at MGH.
In 1995, Star was granted a $743,000 follow-on Phase II SBIR contract by
Phillips Laboratory for the research and development of the burn diagnostic
system. During the fiscal years ended December 31, 1997, 1996 and 1995, Star
recognized $149,251, $281,991 and $307,000 of government contract revenue,
respectively. In 1996, Star began initial clinical testing of the burn diagnosis
system at the Shriner Burn Center in Boston, Massachusetts and at the Augusta
Medical Center in Augusta, Georgia. The system is designed to illuminate the
wound site with near infrared light from a diode laser and to image the blood
flow using a fluorescence dye as an aid to the doctor in determining the extent
of blood flow within the dermis to more accurately diagnose the degree of a burn
and to enable physicians to improve treatment of burn patients. To date the
system has been tested on a small number of burn patients and has demonstrated
the ability to detect the absence or presence of blood flow deep in the dermis.
The system has also been used clinically to determine blood flow surrounding
skin ulcers and in surgical flaps, again, on a very limited number of patients.
Clinical testing continues at the Augusta Medical Center. The Company expects
that it may take several years before a commercial blood flow diagnostic product
is available.
Laser Tonsillectomy
In June 1994, the Company signed an agreement with the Otolaryngology
Research Center for Advanced Endoscopic Applications at New England Medical
Center, Boston, Massachusetts (the "NEMC Agreement"), to provide a research
grant and to sponsor investigations and development of laser applications,
advanced delivery systems and disposable products in the area of dye and diode
laser applications in otolaryngology and related specialties. Under the NEMC
Agreement, the Company provided a total of $150,000 in funding and $50,000 in
the form of laser hardware. The parties have reached an understanding that the
Company will obtain ownership rights or the right of first refusal to exclusive
worldwide licenses to sell and market any inventions developed with the grant
funding. In August 1994, the NEMC Agreement was amended to support animal
testing with one of the Company's diode lasers in connection with performing
tonsillectomies. In the year ended December 31, 1997, the Company provided
$54,000 in funding. The animal studies were completed successfully in 1997. The
Company intends to fund human clinical studies in this area over the next twelve
month period. The Company expects that it may take several years before a
commercial product for tonsillectomy is available.
Dye Laser
During 1995, the Company entered into a two year cost plus fixed fee
contract with the U.S. Army for the investigation of compact, wavelength
diverse, high efficiency solid-state dye lasers. In 1997, the Company, which
does not anticipate this research will result in a commercial product within the
next few years, concluded with the U.S. Army a Novation Agreement which novates
this contract to Physical Sciences, Inc. ("PSI"). Upon completion of the
contract, PSI has agreed to offer the Company a right of first refusal for a
commercial license to sell, manufacture or otherwise dispose of solid-state dye
laser technology as developed by PSI under the contract for use in medical
products.
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Laser Thrombolysis
In 1993, the Company entered into an agreement with the Edwards LIS
Division of Baxter (the "Baxter Agreement") regarding an integrated system
utilizing lasers and catheters for the removal of blood clots. Under the Baxter
Agreement, Baxter licensed its proprietary technology to the Company, and the
Company cross-licensed its laser thrombolysis technology to Baxter. The Company
also granted to Baxter a license to sell and market products incorporating such
technology. Baxter agreed to transfer its interest in the agreement to Advanced
Cardiovascular Systems, Inc. ("ACS"), a division of Eli Lilly, as part of a
purchase by Eli Lilly of the Baxter LIS division. Eli Lilly subsequently sold
ACS to Guidant Corp.
In January 1997, Palomar became an equity partner in the formation of a
new company, LaTIS, Inc., created to use Palomar's laser thrombolysis technology
to develop a pulsed-dye laser system for treating strokes. All licenses relating
to this technology have been transferred to LaTIS. With the formation of this
new venture, laser thrombolysis is no longer part of Palomar's strategic agenda,
although the Company can still derive some benefits from its research due to its
equity participation.
(iii) PRODUCTION AND SOURCES AND AVAILABILITY OF MATERIALS
Palomar's manufacturing and research and development operations are
located in two locations, Lexington, Massachusetts and Pleasanton, California.
The ruby laser system is manufactured in Massachusetts and the diode laser
system is manufactured in California. Manufacturing consists of the assembly and
testing of components purchased from outside suppliers and contract
manufacturers. Palomar maintains control of and manufactures key components
in-house. The entire fully assembled system is subjected to a rigorous set of
tests prior to shipment to the customer or distributors.
Palomar depends and will depend upon a number of outside suppliers for
components used in its manufacturing process. Most of Palomar's components and
raw materials are available from a number of qualified suppliers. Two critical
components that are available through only one qualified supplier each are ruby
rods for the ruby lasers and diode bars for the diode lasers. To date, the
Company has not experienced, nor does it expect to experience, any significant
delays in obtaining component parts or raw materials. Palomar has expanded its
manufacturing capabilities to satisfy projected demand. Palomar has the approval
for the CE Mark for the EpiLaser(R) laser system, and is working towards
completion of ISO 9001 registrations for both facilities. (See "Risk Factors -
Dependence on Suppliers.")
(iv) PATENTS AND LICENSES
Certain processes by which the Company is able to produce its products
are largely proprietary. The Company believes that patent protection of its
technology and products that result from the Company's research and development
efforts is important to the possible commercialization of the Company's
technology. The Company continually attempts to protect its proprietary
technology by obtaining patent application protection and relying on trade
secret laws and non-disclosure and confidentiality agreements with its employees
and persons that have access to its proprietary technology.
To date, the Company and its subsidiaries have filed eleven patent
applications related to its laser products with the United States Patent and
Trademark Office in order to protect its current technology. This includes two
applications that are continuations of previous applications. To date, two of
these patents have been issued. Additionally, the Company extends many of its
domestic filings into foreign applications. To date, four foreign applications
have been filed, and no foreign patents have been issued. The Company intends to
aggressively pursue any person or company that offers products that the Company
believes infringe on one or more of its patents or on patents licensed
exclusively to the Company.
The Company believes it owns, or has the right to use, the basic
patents covering its products. However, each year there are hundreds of patents
granted worldwide related to lasers and their applications. In the past, the
Company has been able to obtain patent licenses for patents related to its
products on commercially reasonable terms. The failure to obtain a key patent
license from a third party could cause the Company to incur liabilities for
patent infringement and, in the extreme case, to discontinue the manufacturing
of products that infringe upon the patent. Management believes that none of the
Company's current products infringe upon a valid claim of any patents owned by
third parties, where the failure to license the patent would have a material and
adverse effect on the Company's financial position or results of operations.
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In March 1997, one of Palomar's competitors, Selvac Acquisitions Corp.
("Selvac"), filed a complaint alleging, among other things, that the EpiLaser(R)
laser system infringes a patent held by Selvac.
Another company has recently informally notified the Company's
distributor that it believes that the Company's contact cooling method as used
in connection with the Company's diode laser for vascular lesions infringes a
patent owned by that company. The Company is evaluating this contention. Based
upon the Company's review to date, it does not appear that this patent should be
successfully assertable against the Company.
Other than the two matters described above, the Company has not been
notified that it is currently infringing on any patents nor has it been the
subject of any patent infringement action. Defense of a claim of infringement is
costly and could have a material adverse effect on the Company's business, even
if the Company were to prevail. (See Item 3. "Legal Proceedings" and Item 7.
"Risk Factors - Patents/Possible Patent Infringements.")
The Company also entered into a four year agreement with MGH whereby
MGH agreed to conduct clinical trials on a laser treatment for hair
removal/reduction invented by Dr. R. Rox Anderson, Wellman Laboratories of
Photomedicine, MGH. As part of the agreement, MGH provided the Company with
prior data already generated by Dr. Anderson with respect to the ruby laser
device at MGH. This information was the basis for the Company's application
filed with the FDA for approval of the Company's EpiLaser(R) laser system for
treating unwanted hair. The Company is obligated to fund the clinical research
in the aggregate amount of approximately $917,000 over the term of its contract
with MGH. Effective February 14, 1997, the Company amended the 1995 agreement
with MGH. Under the terms of this amendment, the Company agreed to provide MGH
with a grant of $203,757 to perform research and evaluation in the field of hair
removal. During 1997, the Company incurred approximately $1,100,000 under its
clinical research agreement with MGH and other clinical studies.
In August 1995, the Company entered into a worldwide exclusive
agreement with MGH to license (with the right to sublicense) U.S. Patent No.
5,595,568 ("Permanent Hair Removal Using Optical Pulses") as well as any other
patents arising out of the Palomar-funded clinical trials. As consideration for
this license, the Company is obligated to pay MGH royalties of 5% of net
revenues on products covered by valid patents licensed to the Company
exclusively; 2.5% of net revenues on products covered by valid patents licensed
to the Company non-exclusively; no less than 2.5% of net revenues for products
sold for hair removal as well as other uses, and a royalty to be negotiated on
services or commercial dispositions (other than sales) involving products
covered by valid patents licensed to the Company.
On February 24, 1993, the principals of the Company's Star subsidiary
applied for a patent. This application was subsequently transferred to Star in
connection with the technology underlying the use of a high-powered diode laser
for the treatment of psoriasis and other derma vascular malformation. The patent
was issued on June 18, 1996. Star has applied for additional patents regarding
the design and use of high-powered diode lasers. On June 22, 1995, the New
England Medical Center ("NEMC") filed a patent application for Coagulation Laser
Tonsillectomy; which application was issued as a patent on May 28, 1996. The
Company has exclusive rights to the NEMC patent. MGH has filed a number of
patents surrounding technology involving laser hair removal. The first patent
was issued on January 21, 1997, and a continuation-in-part of this patent was
issued on April 7, 1998. The Company has licensed this laser hair removal
technology from MGH in accordance with a certain license and research agreement
as previously discussed.
(v) SEASONAL INFLUENCES
There is no significant seasonal influence on the Company's sales.
(vi) FINANCING OF OPERATIONS AND INCREASE IN OUTSTANDING SHARES
The Company has financed current operations and past expansion of its
core business with short-term financial borrowings and investments through the
private sale of debt and equity securities of the Company. The Company raised a
total of $31,197,709 and $53,534,990 in such financings during the years ended
December 31, 1997, and December 31, 1996, respectively. The Company anticipates
that it will require substantial additional financing during the next twelve
month period. 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. Sales of securities to private investors have been sold at a
discount to the current
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or future 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 their securities for resale to the public at some future time. There
can be no assurance that the Company will be successful in raising additional
capital on favorable terms. (See Notes 1, 6, 7 and 13 to Financial Statements,
Item 5. "Market for Common Equity and Related Stockholder Matters," and Item 7.
"Risk Factors - Substantial Continuing Losses; Doubt About Ability to Continue
as a Going Concern.")
As a result of financing activities, business developments, mergers and
acquisitions, issuance of incentive stock options and warrants to purchase
common stock to attract and retain key employees, the Company's issued and
outstanding shares of common stock have increased to 45,792,585 at December 31,
1997. The Company also had additional reserved but unissued shares of common
stock of 31,149,432 shares at December 31, 1997. The Company's issued and
outstanding shares of common stock increased subsequent to December 31, 1997 to
59,553,243 shares with additional reserved but unissued shares of common stock
of 28,180,020 shares as of March 20, 1998. A substantial number of the Company's
reserved shares are registered and could be resold into the public market. (See
Item 7. "Risk Factors - Issuance of Reserved Shares; Registration Rights;
Issuance of Preferred Stock and Debenture Could Affect Rights of Common
Stockholders; and Significant Outstanding Indebtedness; - Subordination of
Debentures.")
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on the Company's working
capital.
(vii) DEPENDENCY ON A SINGLE CUSTOMER
Sales pursuant to the Company's Sales Agency, Development and License
Agreement with Coherent accounted for approximately 11% of the Company's total
revenues in fiscal 1997. (See - Marketing, Distribution and Service, "Risk
Factors - Dependence on New Relationship with Coherent" and Notes 3(i) and 12(e)
to Financial Statements.)
(viii) BACKLOG
The Company's backlog of firm orders for its continuing operations at
December 31, 1997, and December 31, 1996, was approximately $2.5 million and
$2.2 million, respectively. The backlog as of year-end has already been filled
in 1998. As of March 31, 1998, the Company's backlog of firm orders related to
its laser hair removal systems was approximately $7,000,000.
(ix) GOVERNMENT CONTRACTS
Not applicable.
(x) COMPETITION
The markets in which the Company is engaged are subject to keen
competition and rapid technological change. Four other companies, ThermoLase
Corporation, Laser Industries, Ltd., MEHL/Biophile International and Cynosure,
Inc. have received market clearance from the FDA for laser hair removal and
another company, ESC Medical Systems Limited, has received FDA clearance to
market a laser-like system using filtered intense light to remove hair. The
Company expects that other hair removal devices will be developed and/or
introduced in 1998, making laser hair removal the most competitive application
within the cosmetic laser marketplace. The Company also expects that there will
be further consolidation of companies within the laser hair removal industry via
acquisitions, partnering arrangements or joint ventures; ESC Medical Systems
Limited recently completed the acquisition of Laser Industries. The Company's
products will also compete with other hair removal products and methods. The
Company competes primarily on the basis of technology, product performance,
price, quality, reliability, distribution and customer service and support. To
remain competitive, the Company will be required to continue to develop new
products, periodically enhance its existing products and compete effectively in
the areas described above. (See Item 7. "Risk Factors - Dependence on New
Products; Highly Competitive Industries.")
In the cosmetic laser services industry, the Company's CTI subsidiary
competes not only with other laser companies which also either revenue-share
with physicians and/or operate their own centers, but also with healthcare
providers. CTI's services will also compete for business with other aesthetic
service providers such as electrologists, beauty
7
<PAGE>
salons, spas, and aestheticians, among others. Product efficacy, location,
marketing, a wide offering of laser procedures, price and customer service are
all important competitive factors. (See Item 7. "Risk Factors - New Ventures.")
(xi) RESEARCH AND DEVELOPMENT
During fiscal 1997, fiscal 1996, and fiscal 1995, the Company incurred
approximately $11,990,332, $6,297,477 and $3,964,920, respectively, of
internally sponsored research and development programs. Due to the intense
competition and rapid technological changes in the laser industry, the Company
believes that it must continue to improve and refine its existing products and
services, and develop new applications for its technology.
Wellman Laboratories ("Wellman Labs"), the world's largest biomedical
laser research facility and part of the MGH Laser Center located in Boston,
Massachusetts, was created to oversee and speed the flow of biomedical laser
research from the laboratory to patient care. Funded in part by a grant from the
Department of Energy, the MGH Laser Center brings together two strengths of MGH:
its clinical departments and the Wellman Labs. The MGH Laser Center works
together with industry, academia and the Department of Energy Laboratories to
access information and technology across a broad spectrum of laser and medical
capabilities. The principals at Wellman Labs study the fundamental photophysical
and photochemical properties and processes of biomolecules excited by
ultraviolet, visible and near infrared radiation. Engineers, laser physicists
and physicians familiar with all aspects of biomolecules, cells and tissue in
vitro staff the labs. The scientists work side by side with the clinicians to
understand the basic principles involved in the complex interactions of light
and tissue. In 1994, the Company began a number of studies for the treatment of
certain dermatological conditions using its diode laser at Wellman Labs. In
1995, those studies were expanded to include the Company's ruby lasers for
cosmetic procedures. In 1997, those studies were again expanded to include the
Company's diode lasers for cosmetic purposes. Wellman Labs and the Company are
currently evaluating the data associated with these treatments. The Company
works closely with Dr. R. Rox Anderson, the Research Director of the MGH Laser
Center and Associate Professor of Dermatology at Harvard Medical School, who is
a recognized expert in laser tissue interaction and the inventor of a number of
laser procedures in use today. Dr. Anderson has authored over 60 papers in
peer-reviewed publications relating to the use of lasers in dermatology, is the
recipient of numerous awards in the field of laser medicine and serves as a
member of the Blue Ribbon Government Liaison Committee of the American Society
for Laser Medicine and Surgery. Dr. Anderson holds ten U.S. patents and has
pending applications for an additional eleven. The Company feels that these
types of relationships are critical in developing effective products for
widespread use in the market on a timely basis, and that this method of
conducting research and development provides a higher level of technical and
clinical expertise than it could provide on its own and in a more cost-efficient
manner.
PMP's Vice President of Research and Development, Gregory Altshuler, is
the former Director of the Laser Center of the St. Petersburg (Russia) Institute
of Fine Mechanics and Optics (the "St. Petersburg Laser Center)" and the Company
continues to work closely with the St. Petersburg Laser Center, contracting out
research and development tasks to them on a project basis. Palomar owns all
inventions, developments and patents which result from the work performed at the
St. Petersburg Laser Institute and funded by Palomar. In 1997, the Company spent
approximately $100,000 on research and development conducted at the St.
Petersburg Laser Institute. Dr. Altshuler holds approximately 50 patents in
Russia in the field of lasers and the application of lasers in medicine, and has
authored approximately 130 papers relating to laser physics, engineering and
medicine.
While MGH focuses on the biological aspects of laser hair removal, Dr.
Altshuler's in-house research and development team focuses on the physical
aspects. Approximately 40 employees of the Company and its subsidiaries were
engaged full time in research and development activities at December 31, 1997.
Pursuant to the Sales Agency, Development and License Agreement that
the Company entered into with Coherent in November 1997, the Company has
committed to spend the following amounts on research and development over the
next three years: at least $5,000,000 in 1998, at least 10% of its 1998 gross
revenues (minus commissions to Coherent) from cosmetic laser products ("Product
Revenues") in 1999, and at least 10% of its 1999 Product Revenues in 2000.
(See Item 7. "Risk Factors - Dependence on Third Party Researchers" and
Note 8 to Financial Statements.)
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(xii) ENVIRONMENTAL PROTECTION REGULATIONS
The Company believes that compliance with federal, state and local
environmental regulations will not have a material adverse effect on its capital
expenditures, earnings or competitive position.
(xiii) IMPACT OF MEDICAL DEVICE REGULATIONS
The Company's products are subject to regulation and control by the Center
for Devices and Radiological Health, a branch of the Food and Drug
Administration (FDA) within the Department of Health and Human Services. The FDA
medical device regulations require either an Investigational Device Exemption,
Pre-Market Approval or 510(K) clearance before new products can be marketed to,
or utilized by, the physician. The Company's products are subject to similar
regulations in its major international markets. Complying with these regulations
is necessary for the Company's strategy of expanding the markets for and sales
of its products into these countries. These approvals may necessitate clinical
testing, limitations on the number of sales and controls of end user purchase
price, among other things. In certain instances, these constraints can delay
planned shipment schedules as design and engineering modifications are made in
response to regulatory concerns and requests. The Company's competitors are
subject to the same regulations. (See Item 7. "Risk Factors - Government
Regulation.")
(xiv) NUMBER OF EMPLOYEES
As of December 31, 1997, the Company and its PMP, CTI and Star
subsidiaries employed 165 people, two independent contractors and three
temporary employees. In addition, as of December 31, 1997, the Company's Dynaco
subsidiary employed 187 people.
The Company's ability to develop, manufacture and market its products
and to establish and maintain a competitive position in the industry will
depend, in large part, upon its ability to attract and retain qualified
technical, marketing and managerial personnel. The Company believes that its
relations with its employees are good. None of the Company's employees are
represented by a union. (See Item 7. "Risk Factors - Need for Additional
Qualified Personnel.")
(d) FINANCIAL INFORMATION ABOUT EXPORTS BY DOMESTIC OPERATIONS
Aggregate export sales for the Company's continuing operations were
approximately $2,468,000 for 1995, $3,935,000 for 1996 and $4,978,000 for 1997.
The 1995 export sales consisted primarily of the RD-1200(TM) tattoo removal
laser, the 1996 export sales of a combination of both the RD-1200(TM) and the
EpiLaser(R) laser system, and the 1997 export sales primarily of the EpiLaser(R)
laser system. (See Note 3(h) to Financial Statements.)
ITEM 2. PROPERTIES.
The Company and its PMP and CTI subsidiaries occupy approximately
25,000 square feet of office, manufacturing and research space in Lexington,
Massachusetts under a lease expiring in May 2000. The Company's Star subsidiary
occupies approximately 15,000 square feet of office, manufacturing and research
space under a lease expiring in April 1999 in Pleasanton, California. The
Company believes that these facilities are in good condition and are suitable
and adequate for its current operations. (See Note 12(a) to Financial
Statements.)
ITEM 3. 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. (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 in the United States District
Court for the District of New Jersey against the Company, two of its
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subsidiaries and a New Jersey dermatologist. Selvac's complaint alleges that the
Company's EpiLaser(R) laser system infringes the Selvac Patent and that the
Company unfairly competed by promoting the EpiLaser(R) laser system for hair
removal before it had received FDA approval for that specific application. The
Company and Selvac agreed to dismiss the Massachusetts litigation without
prejudice. The Company 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 presented on the merits in New Jersey. The court has granted the
Company's motion to dismiss Selvac's federal unfair competition claim so far as
it depends on the Company's supposed violations of FDA rules. The court has also
granted the Company's motion to amend its complaint to allege that Selvac's
patent was obtained by inequitable conduct. The Company has moved for summary
judgment on the grounds that the Selvac patent is invalid and was obtained by
inequitable conduct. Discovery in the case has been stayed by court order
pending a ruling on the Company's dispositive motion. The Company believes that
MEHL's claims are without merit.
On October 16, 1997, the Company brought a declaratory judgment action
in United States District Court for the District of Massachusetts against the
holders and the indenture trustee of the Company's 4.5% Subordinated Convertible
Debentures due 2003, denominated in Swiss francs (the "Swiss Franc Debentures").
The defendants in this action are Banque SCS Alliance SA, Arbuthnot Fund
Managers, Ltd., Banca Commerciale Lugano, Privatinvest Bank AG (these four
defendants being referred to collectively as the "Asserting Holders"), CUF
Finance S.A., Fibi Bank (Schweiz) AG, Teawood Nominees, Ltd., JS Gadd & CIE, SA,
Swedbank (Luxembourg) SA, Christiana Bank Luxembourg SA, (now known as Credit
Agricole Indosuez), Landatina Financiera SA and American Stock Transfer & Trust
Co., as trustee ("Trustee"). Just prior to this suit, the Asserting Holders had
alleged that the Company is in breach of certain protective covenants under the
indenture. The Company believes that it is not in default under any protective
covenants, and the Company's action seeks a declaration from the Court to that
effect. All payments on the Swiss Franc Debentures were current to the time of
suit. On October 22, 1997, the Asserting Holders sued the Company and all of its
principal subsidiaries in the same court; the October 16th and October 22nd
cases have been assigned to the same judge, and the dispute between the
Asserting Holders and the Company is proceeding under the October 22nd case. The
Asserting Holders claim that the Company has breached certain protective
indenture covenants and that the Asserting Holders are entitled to immediate
payment of their indebtedness under the Swiss Franc Debentures (which amounts to
approximately US$5,087,000 at current exchange rates). The Asserting Holders
sought a temporary restraining order attaching bank accounts and barring the
Company from transferring any interest in securities of its subsidiaries. The
Court denied this motion, and the Asserting Holders withdrew a preliminary
injunction motion concerning essentially the same issues. As of November 13,
1997, acting under applicable provisions of the indenture, the Company notified
the holders of the Swiss Franc Debentures that it is causing the conversion of
all of the Swiss Franc Debentures into an aggregate of 914,028 shares of the
Company's common stock. The court thereafter denied without prejudice the
Company's motion to dismiss the complaint on the ground the Asserting Holders
had failed to proceed through the Trustee, as required, and denied without
prejudice the Company's motion for summary judgment as to its conversion. The
Asserting Holders' summary judgment motion, arguing that an event of default has
occurred as a matter of law, is under advisement. The court has schedule a
time-limited evidentiary hearing, further to clarify the legal and factual
issues. If there remain disputed issues after that hearing, the case will be
tried before a factfinder. The Company believes that its position in these
matters is correct and intends to contest the claims of the Asserting Holders
vigorously. (See Note 6(a) to Financial Statements.)
On August 27, 1997, Pamela Siegman, as Trustee for the Pamela Siegman
Trust, filed an action in the Court of Chancery of the State of Delaware in and
for New Castle County against the Company and each of its current directors and
two former directors. Siegman, purportedly on behalf of similarly situated
shareholders, claimed disclosure errors and omissions in the Company's annual
meeting proxy statement, and sought a declaration that the Company's preferred
stock is void because of a purported deficiency in the Company's Certificate of
Incorporation. On March 9, 1998, the Court of Chancery ruled against Siegman on
all of her claims (she had abandoned some of her claims prior to the Court's
ruling). The Company does not know whether Siegman will appeal the ruling, as
the court's final order has not of this date been entered.
(See "Risk Factors - Risks Associated with Pending Litigation" and Note
12(d) to Financial Statements.)
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
11
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is currently traded on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
symbol PMTI. The following table sets forth the high and low bid prices quoted
on NASDAQ for the Common Stock for the periods indicated. Such quotations
reflect inter-dealer prices, without retail markup, markdown or commission and
do not necessarily represent actual transactions.
Fiscal Year Ended
December 31, 1996
-----------------
High Low
-----------------
Quarter Ended March 31, 1996 13 1/8 5
Quarter Ended June 30, 1996 16 3/8 8 7/8
Quarter Ended September 30, 1996 14 5/8 7 7/8
Quarter Ended December 31, 1996 9 1/8 5 7/8
Fiscal Year Ended
December 31, 1997
-----------------
High Low
-----------------
Quarter Ended March 31, 1997 9 1/4 5 7/16
Quarter Ended June 30, 1997 5 3/4 2 3/8
Quarter Ended September 30, 1997 4 7/16 1 15/16
Quarter Ended December 31, 1997 2 31/32 25/32
As of March 20, 1998, the Company had 751 holders of record of common
stock. This does not include holdings in street or nominee names.
The Company has not paid dividends to its common stockholders since its
inception and does not plan to pay dividends to its common stockholders in the
foreseeable future. The Company intends to retain any earnings to finance the
operations of the Company.
PRIVATE PLACEMENTS OF COMMON STOCK
Pursuant to Section 4(2) of the Act, on December 29, 1997, the Company
sold 700,000 shares of Nexar Technologies, Inc. ("Nexar") common stock and
300,000 shares of the Company's common stock for an aggregate of $1,750,000 to
Clearwater Fund IV, LLC.
Pursuant to Section 4(2) of the Act, on February 20, 1998 the Company
sold 2,000,000 shares, 1,500,000 shares, 1,100,000 shares, 1,000,000 shares,
250,000 shares and 1,350,000 shares of the Company's common stock to the
Travelers Insurance Company, AIM Overseas Ltd., TJJ Corporation, PAR Investment
Partners L.P., Pequot Scout Fund L.P., and other individual investors,
respectively, for an aggregate of $7,200,000. In addition, for every share
purchased the investor received a warrant to purchase the Company's common stock
for $3 per share. These warrants expire five years from the closing date and are
exercisable beginning six months after the closing date.
CONVERTIBLE DEBENTURES
Pursuant to Section 4(2) of the Act, the Company sold a total of
$1,000,000 5% Convertible Debentures on January 13, 1997 to High Risk
Opportunities Hub Fund Ltd. The debentures, due January 13, 2002, are
convertible into shares of
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common stock at a conversion price equal to 85% of the average closing bid price
of the Company's common stock price during the ten trading days preceding the
date of conversion, provided that in any thirty day period the holder of these
debentures may convert no more than 33% (or 34% in the last thirty day period
available for conversion) of the debentures.
Pursuant to Section 4(2) of the Act, the Company sold a total of
$5,500,000 5% Convertible Debentures on March 10, 1997 to 16 domestic and
overseas entities and individuals. The debentures, due March 10, 2002, are
convertible into shares of common stock at a conversion price equal to 100% of
the Average Stock Price through June 7, 1997 and 90% of the Average Stock Price
thereafter, provided that between June 8, 1997 and October 5, 1997 the holders
of these debentures may convert no more than one-third of the debentures. The
Average Stock Price for the debentures is the lesser of i) the average of the
closing bid of the Company's common stock during the five trading days preceding
each conversion; or ii) the average of the closing bid of the Company's common
stock during the ten trading days preceding each conversion.
Pursuant to Section 4(2) of the Act, the Company sold a total of
$500,000 6% Convertible Debentures on March 13, 1997 to Soginvest Bank. The
debentures, due March 13, 2002, are convertible into shares of common stock at a
conversion price of $11.00, provided that in any thirty day period after June
11, 1997 the holder of these debentures may convert no more than 33% (or 34% in
the last thirty day period available for conversion) of the debentures.
Pursuant to Section 4(2) of the Act, the Company sold a total of
$7,000,000 6%, 7% and 8% Convertible Debentures on September 30, 1997 to JNC
Opportunity Fund Ltd., Diversified Strategies Fund, L.P. and Southbrook
International Investment Ltd. The coupon is payable in kind upon conversion at
6% from September 30, 1997 through March 28, 1998, 7% from March 29 through June
26, 1998 and 8% thereafter. The debentures, due September 30, 2002, are
convertible into shares of common stock at a conversion price equal to the
average of the closing bid price of the Company's common stock during the ten
trading days preceding each conversion, provided that in any thirty day period
from the closing date to April 27, 1998 the holder of these debentures may
convert no more than 33% (or 34% in the last thirty day period available for
conversion) of the debentures. In addition, the holder of the debentures were
issued 413,109 shares of the Company's common stock in lieu of a discount. (See
Note 6 to Financial Statements.)
Pursuant to Section 4(2) of the Act, the Company sold a $2,000,000
convertible debenture on March 27, 1998 to an individual. The debenture is due
the earlier of May 26, 1998 or one day following the sale of Dynaco or any other
Palomar assets outside the normal course of business or any other financing
where the use of proceeds to pay back debt is not prohibited. If the debenture
is not repaid by the maturity date, the debenture becomes convertible at market
value at the option of the debentureholder, as defined. If the note is not paid
by the maturity date and/or June 23, 1998, penalties of $100,000 and $125,000,
payable in the Company's common stock, will be owed on May 26, 1998 and June 23,
1998, respectively, if the note has not been repaid by those dates. Interest on
this debenture is in the form of a warrant to purchase 125,000 shares of common
stock for $.01 per share exercisable over five years.
PREFERRED STOCK
Pursuant to Section 4(2) of the Act, the Company sold 16,000 shares of
Series H Convertible Preferred Stock to RGC International Investors, LDC,
Proprietary Convertible Investment Group, Inc. (an affiliate of Credit Suisse
First Boston Corp.), CC Investments, LDC and Southbrook International
Investments, Ltd. in three separate tranches for an aggregate of $16,000,000.
The first tranche consisted of 6,000 shares sold on March 31, 1997, the second
tranche of 7,000 shares sold on May 5, 1997 and the third tranche of 3,000
shares sold on May 23, 1997. The premium for all tranches is payable at 6% from
March 31, 1997 through September 26, 1997, 7% from September 27, 1997 through
December 25, 1997 and 8% thereafter. The Series H Preferred Stock is convertible
at a conversion price equal to 100% of the Average Stock Price from March 31,
1997 through September 26, 1997, 90% of the Average Stock Price from September
27, 1997 through December 25, 1997, and 85% of the Average Stock Price
thereafter. The Average Stock Price is the average closing bid price of the
Company's common stock price during the ten trading days preceding the date of
conversion, provided that in any thirty day period from the closing date to
October 26, 1997 the holders may convert no more than 33% (or 34% in the last
thirty day period available for conversion) of the Preferred Stock. (See Note
7(b) to Financial Statements.)
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial and
other information (in thousands except per share data) on a consolidated
historical basis for the Company and its subsidiaries as of and for each of the
fiscal years in the five year period ended December 31, 1997. Pursuant to
Accounting Principles Board Opinion ("APB") No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the
consolidated financial statements of the Company have been reclassified to
reflect the dispositions of its subsidiaries that comprise the electronics
segment. (See Note 2 to Consolidated Financial Statements.) (Note that in 1994
the Company changed its fiscal year end from March 31 to December 31.) This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and the Notes thereto included elsewhere in this Annual Report on
Form 10-K.
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<TABLE>
<S> <C> <C> <C> <C> <C>
Year ended Nine months ended Year ended
March 31, December 31, December 31,
------------------------ ------------------ ---------------------------------------------
Income Statement Data 1994 1994 1995 1996 1997
------------------------ ------------------ ------------ ------------- ----------------
Revenues $10 $40 $5,610 $17,607 $20,995
Cost of Revenues -- 18 3,464 14,169 20,056
----------------------- ------------------ ------------ ------------- ----------------
Gross profit 10 22 2,146 3,438 939
----------------------- ------------------ ------------ ------------- ----------------
Operating Expenses
Research and development 1,911 2,939 3,965 6,297 11,990
Sales and marketing -- -- 2,769 5,077 6,960
General and administrative 1,630 1,561 2,142 9,753 15,332
Business development -- 1,240 1,409 2,880 2,061
Restructuring and Asset -- -- -- 1,661 3,325
Write-off
Settlement and Litigation -- -- 700 880 3,199
Costs
----------------------- ------------------ ------------ ------------- ----------------
Total operating expenses 3,541 5,740 10,985 26,548 42,867
----------------------- ------------------ ------------ ------------- ----------------
Loss from operations (3,531) (5,718) (8,839) (23,110) (41,928)
Interest Expense (33) (76) (766) (271) (6,994)
Interest Income 53 38 912 1,355 456
Net Gain on Trading Securities -- -- 201 2,033 (52)
Asset Write-off -- -- -- (1,397) (9,658)
Other Income (Expense) 82 67 102 592 (193)
----------------------- ------------------ ------------ ------------- ----------------
Net Loss from Continuing
Operations (3,429) (5,689) (8,390) (20,798) (58,369)
----------------------- ------------------ ------------ ------------- ----------------
Loss from Discontinued Operations:
Loss from Operations (634) (3) (4,231) (20,896) (29,509)
Gain on Dispositions, net -- -- -- 3,830 2,074
----------------------- ------------------ ------------ ------------- ----------------
Net Loss from Discontinued
Operations (634) (3) (4,231) (17,066) (27,435)
----------------------- ------------------ ------------ ------------- ----------------
Net Loss $(4,063) $(5,692) $(12,621) $(37,864) $(85,804)
======================= ================== ============ ============= ================
Basic and Diluted Net Loss
Per Common Share:
Continuing Operations $(0.85) $(0.84) $(0.60) $(0.84) $(1.79)
Discontinued Operations (0.15) 0.00 (0.30) (0.65) (0.78)
----------------------- ------------------- ------------ ------------- ----------------
Total Loss Per Common Share $(1.00) $(0.84) $(0.90) $(1.49) $(2.57)
======================= =================== ============ ============= ================
Weighted Average Number of
Common Shares Outstanding 4,053 6,759 14,165 26,167 35,105
======================= =================== ============ ============= ================
Balance Sheet Data:
Working Capital 279 2,491 12,998 15,203 (9,139)
Total Assets 2,581 6,551 33,656 67,533 28,968
Long-term obligations 37 2,322 1,765 14,665 12,446
Stockholders' Equity (Deficit) 1,466 2,794 25,289 38,077 (6,184)
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(a) OVERVIEW
In the third and fourth quarter of 1997, the Board of Directors
authorized management to focus the Company on its core laser products and
services business principally related to cosmetic hair removal and to proceed
with a restructuring plan to reorganize the Company and divest its electronic
subsidiaries, Dynaco, Dynamem, Inc. ("Dynamem"), Comtel Electronics, Inc.
("Comtel") and Nexar (the "Electronic Subsidiaries"), and other noncore
businesses.
Pursuant to Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, the consolidated financial statements of the Company have been
reclassified to reflect the dispositions of the Electronic Subsidiaries.
Accordingly, the revenues, cost and expenses, assets and liabilities and cash
flows of the Electronics Subsidiaries have been reported as discontinued
operations in these consolidated financial statements. (See Note 2 to Financial
Statements.)
As part of the Company's overall restructuring efforts implemented in
the fourth quarter of 1997, the Company made the strategic decision to focus its
operations principally on its cosmetic hair removal products. Accordingly, the
Company also divested its wholly-owned subsidiary Tissue Technologies, Inc.
("Tissue Technologies") due in part to a significant decline in revenues for
Tissue Technologies' Tru-Pulse(R) CO2 skin resurfacing laser caused by an
overall decline in the worldwide CO2 skin resurfacing laser market. This
restructuring also included a reduction in the Company's work force and closing
of the Company's manufacturing facility in Hull, England due to underutilized
plant capacity. The Company has simplified its organization and now conducts
business in only two locations, Lexington, Massachusetts and Pleasanton,
California. Prior to this restructuring, the Company conducted business in over
a dozen different locations. (See Item 1. "Introduction.")
(b) RESULTS
(i) YEAR ENDED DECEMBER 31, 1997, COMPARED TO
YEAR ENDED DECEMBER 31, 1996
Revenues from continuing operations for the year ended December 31,
1997, were $20,994,546 as compared to $17,606,871 for the year ended December
31, 1996. The 19.2% increase mainly was due to additional sales volume of
approximately $11.3 million associated with the EpiLaser(R) laser system and
service revenue and RD-1200(TM) ruby laser manufactured by the Company. The
Company obtained FDA clearance to market and sell the EpiLaser(R) laser system
for hair removal in the United States in March 1997. This increase in revenues
was offset by a decline of approximately $7.9 million in sales volume for the
Company's Tru-Pulse(R) CO2 laser product. The Company believes that overall
revenues from its medical products will increase in 1998 due to its improved
manufacturing process, growing market demand for its EpiLaser(R) laser system
and recently FDA cleared LightSheer(TM) laser system and an improved
distribution network as a result of the Company's exclusive distribution
arrangement with Coherent. (See "Risk Factors - Dependence on New Relationship
With Coherent.")
Gross margin for the year ended December 31, 1997 was $938,583 (4.5% of
revenues) versus $3,437,400 (19.5% of revenues) for the year ended December 31,
1996. The decline in gross margin percentage was caused mainly by lower margins
attained on the Company's EpiLaser(R) laser system due to manufacturing and
production inefficiencies in the initial manufacturing stage of this product as
well as underabsorbed overhead costs incurred during the fourth quarter of 1997
as the Company transitioned to its exclusive distribution arrangement with
Coherent. The decline in gross margin dollars was due principally to a reduction
in revenues related to the Company's Tru-Pulse(R) CO2 laser product. The
Company's overall strategy was to first demonstrate and prove the overall
efficacy of its proprietary cosmetic hair removal technology licensed from MGH
and gain early entrance to the market. This resulted in higher than anticipated
costs of materials and manufacturing techniques. As a result of this strategy,
the Company believes that during 1997 it demonstrated to the medical community
the efficacy of its technology and its long term benefits and advantages. The
Company believes that its gross margins will improve throughout 1998 as the
Company introduces its successor hair removal laser products in the first and
second quarter. The Company expects to obtain manufacturing efficiencies and
volume production related to these successor laser products. In addition, the
Company anticipates an increase in revenues
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due to an improved distribution network related to its arrangement with
Coherent. (See "Risk Factors - Dependence on New Products; Dependence on New
Relationship with Coherent.")
Research and development costs increased to $11,990,332 (57.1% of
revenues) for the year ended December 31, 1997, from $6,297,477 (35.8% of
revenues) for the year ended December 31, 1996. This 90.4% increase in research
and development reflects the Company's strategic decision to accelerate its
research and development efforts during 1997 to develop and obtain FDA clearance
for its successor hair removal and other cosmetic products using the Company's
proprietary cooling technology licensed from MGH. The Company also continued to
concentrate on the development of additional products for other medical laser
applications. Although as part of its agreement with Coherent, the Company has
committed to certain minimum research and development spending levels,
management believes that research and development expenditures in the aggregate
and as a percentage of revenues will substantially decrease over the next year
as the Company introduces to the market its successor hair removal products.
(See Item 1. "Description of Business - Research and Development.")
Selling and marketing expenses increased to $6,959,750 (33.2% of
revenues) for the year ended December 31, 1997, from $5,076,941 (28.8% of
revenues) for the year ended December 31, 1996. This 37.1% increase reflected
the Company's effort to expand its marketing and distribution for the Company's
EpiLaser(R) laser system. The Company anticipates that its aggregate selling and
marketing expenses will increase as revenues increase due to the costs
associated with its distribution agreement with Coherent. (See "Risk Factors -
Dependence on New Relationship With Coherent.")
General and administrative expenses increased to $15,332,241 (73.0% of
revenues) for the year ended December 31, 1997, from $9,752,922 (55.4% of
revenues) for the year ended December 31, 1996. This 57.2% increase was the
result of additional administrative resources required at the Company's now
closed corporate offices and subsidiaries to oversee the growth of the Company's
medical products and service businesses, the initial public offering of common
stock of Nexar, and divestiture efforts substantially completed during 1997,
combined with the transformation of the Company from the development stage to
product commercialization stage. The Company anticipates that general and
administrative expenses will decrease in the aggregate amount and as a
percentage of revenues in 1998 as a result of the third quarter restructuring
effort.
Business development and financing costs decreased to $2,060,852 (9.8%
of revenues) for the year ended December 31, 1997, from $2,879,603 (16.4% of
revenues) for the year ended December 31, 1996. This 28.4% decrease is
attributable to the Company's restructuring efforts to focus on its core medical
product and service businesses. The Company anticipates that business
development expense will decrease substantially in 1998 as a result of the
restructuring.
Restructuring and asset write-off costs totaling $12,983,000 were
incurred for the year ended December 31, 1997. These charges reflect
restructuring and asset write-off costs for certain operating and nonoperating
assets that the Company believes were not fully realizable for both the
Company's medical business and other nonmedical investments. Included in this
charge is a $2.7 million charge for severance costs associated with
consolidating the selling, general and administrative functions, including the
closing of certain facilities.
Settlement and litigation costs totaled $3,199,000 for the year ended
December 31, 1997, an increase from $880,000 for the year ended December 31,
1996. These costs are attributable to a lawsuit brought by an investment bank
and other claims made against the Company. In this suit, the investment bank
alleged that the Company breached a contract in which the bank was to provide
certain investment banking services in return for certain compensation. This
case was settled on August 18, 1997 for $1.875 million.
Interest expense from continuing operations increased to $6,993,898 for
the year ended December 31, 1997, from $271,619 for the year ended December 31,
1996. This amount for 1997 includes $5.4 million of noncash interest expense
related to the value ascribed to the discount features of the convertible
debentures issued by the Company.
Interest income decreased to $456,945 for the year ended December 31,
1997, from $1,355,488 for the year ended December 31, 1996. This decrease is
primarily the result of a reduction in interest received due to a decrease in
other loans and investments and a decrease in the Company's average cash
position during 1997.
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Loss from discontinued operations was $29,508,755 for the year ended
December 31, 1997 as compared with a loss of $20,895,534 for the year ended
December 31, 1996. The Company also reported a gain of $2,073,943 on the
disposition of its discontinued operations. This amount includes a gain of
$6,221,689 related to the disposition of 1,960,736 shares of Nexar common stock
which was offset by losses incurred and accrued of $4,148,000 on the disposition
of Dynaco and its wholly owned subsidiaries. The Company completed the
disposition of Comtel and Dynamem on December 9, 1997. The Company anticipates
that the disposition of Dynaco and the remainder of its Nexar stock will be
completed by the fourth quarter of 1998.
(ii) YEAR ENDED DECEMBER 31, 1996, COMPARED TO
YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, the Company had revenues from
continuing operations of $17,606,871 as compared to $5,610,280 for the year
ended December 31, 1995. The 214% increase in revenues from 1995 to 1996 is
principally attributable to $10.1 million of revenues generated from sales of
Tissue Technologies' Tru-Pulse(R) CO2 skin resurfacing laser in 1996 as compared
to only $114,000 of revenues generated from the Tru-Pulse(R) laser for the year
ended December 31, 1995. The Company began commercial shipment of the
Tru-Pulse(R) laser in the fourth quarter of 1995. Furthermore, revenues
increased approximately $2.3 million for the year ended December 31, 1996 as a
result of the Company's introduction and initial shipments of its EpiLaser(R)
laser system during the third and fourth quarters of 1996.
Gross margin for the year ended December 31, 1996 was $3,437,400 (19.5%
of revenues) versus $2,145,808 (38.2% of revenues) for the year ended December
31, 1995. This decrease in gross profit was due to the novation of the Company's
research and development contract with the U.S. Army in anticipation of the
commercialization of its medical products. (See Item 1. "Description of Business
- - Products Under Development; Dye Laser.") The gross profit percent also
decreased due to underutilization of increased production capacity in
preparation for the anticipated increase in demand for the EpiLaser(R) laser
system in fiscal 1997. A portion of this decrease in gross margins was offset by
an increase in gross margins attributed to the introduction of the Tru-Pulse(R)
laser to the commercial marketplace in the first quarter of 1996.
Research and development costs increased to $6,297,477 (35.8% of
revenues) for the year ended December 31, 1996, from $3,964,920 (70.7% of
revenues) for the year ended December 31, 1995. This 58.8% increase in research
and development reflects the Company's focused efforts during 1996 to obtain FDA
clearance for hair removal using the EpiLaser(R) laser system. The Company
received FDA clearance to market its EpiLaser(R) laser system for hair removal
in March 1997. The Company also continued to concentrate on the development of
additional products for medical and cosmetic laser applications. (See Item 1.
"Description of Business - Research and Development.")
Selling and marketing expenses increased to $5,076,941 (28.8% of
revenues) for the year ended December 31, 1996, from $2,768,541 (49.3% of
revenues) for the year ended December 31, 1995. This 83.4% increase reflects the
Company's effort to expand its marketing and distribution to support its new
internally developed EpiLaser(R) and Tru-Pulse(R) laser product lines.
General and administrative expenses increased to $9,752,922 (55.4% of
revenues) for the year ended December 31, 1996, from $2,141,798 (38.2% of
revenues) for the year ended December 31, 1995. This 355.4% increase is
primarily due to acquisition efforts during 1996 and the transformation of the
Company from the development stage to commercialization combined with the
increased administrative resources required at the Company's now closed
corporate offices and subsidiaries to oversee the growth of the Company's
business. The Company expanded its general and administrative support staff to
accommodate the forecasted growth in the fourth quarter of 1996 and in 1997
Business development and financing costs increased to $2,879,603 (16.4%
of revenues) for the year ended December 31, 1996, from $1,409,303 (25.1% of
revenues) for the year ended December 31, 1995. This 104.3% increase was
attributable to the Company's continuing acquisitions and financing activities.
Restructuring and asset write-off costs of $3.06 million were incurred
for the year ended December 31, 1996. These charges reflect restructuring and
asset write-off costs for certain operating and nonoperating assets that the
Company believes were not fully realizable for both the Company's medical
business and other nonmedical investments.
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Settlement and litigation costs totaled $880,000 for the year ended
December 31, 1996 up from $700,000 for the year ended December 31, 1995. The
$700,000 of settlement and litigation costs incurred during 1995 resulted from
the pledge of 2,860,000 shares of the Company's common stock as collateral for a
$5,000,000 debt financing that was canceled before it was consummated; the
Company was required to pay $700,000 to a third party in order to secure the
return of these common shares. The $880,000 of settlement and litigation costs
incurred during 1996 was associated with the lawsuit filed by the investment
bank. In this suit, the investment bank alleged that the Company breached a
contract with it in which the bank was to provide certain investment banking
services in return for certain compensation. The Company settled this lawsuit on
August 18, 1997 for $1.875 million.
Interest expense from continuing operations decreased to $271,619 for
the year ended December 31, 1996, from $766,079 for the year ended December 31,
1995. This decrease was principally attributable to the Company's increased use
of preferred stock financing in 1996.
Interest income increased to $1,355,488 for the year ended December 31,
1996, from $912,019 for the year ended December 31, 1995. This increase is
primarily the result of interest received from subscriptions receivable and
other loans and investments made as a result of the Company's improved cash
position as of December 31, 1996.
Net gain on trading securities represents realized and unrealized
trading gains and losses of $2,033,371 for the year ended December 31, 1996.
Included in this amount is an unrealized gain totaling approximately $1,547,000
related to the Company's investment in a publicly traded company and a realized
gain totaling approximately $827,000 related to the Company's investment in
another publicly traded company offset by various unrealized losses aggregating
approximately $340,000. The Company had a net realized trading gain of $201,067
for the year ended December 31, 1995.
Other income totaled $591,853 for the year ended December 31, 1996 as
compared to $102,305 for the year ended December 31, 1995. Included in other
income for the year ended December 31, 1996 is a foreign currency exchange gain
of $446,596.
Loss from discontinued operations was $20,895,534 for the year ended
December 31, 1996 as compared with a loss of $4,231,326 for the year ended
December 31, 1995. The Company also reported a gain on disposition of $3,380,000
on the disposition of 400,000 shares of Nexar common stock that was consummated
during the fourth quarter of 1996.
(c) LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had approximately $4,453,000
million in cash, cash equivalents and trading securities. During the year ended
December 31, 1997, the Company generated $16.7 million, $15.0 million and $5.6
million in net proceeds from the issuance of convertible debentures, the sale of
its preferred stock, and the private placement of Palomar-owned Nexar common
stock, respectively.
The Company's net loss for the year ended December 31, 1997 included
the following noncash items: $2.2 million of depreciation and amortization
expense; $5.4 million of additional interest expense relating to the
amortization of the discounts on the convertible debentures and $13.0 million in
restructuring and asset write-off costs.
The Company anticipates that capital expenditures in the normal course
of manufacturing operations and administrative requirements related thereto for
1998 will total approximately $2 million. The Company will finance these
expenditures with cash on hand and equipment leasing lines or the Company will
seek to raise additional funds. If necessary, the Company can reduce these
expenditures. There can be no assurance that the Company will be able to raise
the necessary funds.
The Company has entered into a Loan Agreement with Coherent, pursuant
to which Coherent has agreed to loan the Company money to help finance the
Company's working capital requirements, which loans are collateralized by the
Company's accounts receivable where Coherent has acted as the Company's sales
agent. (See "Risk Factors - Dependence on New Relationship With Coherent.")
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The Company has marketable securities for two of its investments in
publicly traded companies whose market value was $17.2 million as of December
31, 1997. The sale of some of these securities may be subject to volume
limitations. As part of the Company's ongoing strategic financing plan, the
Company is evaluating sale of these securities in an effort to raise funds for
ongoing operations.
During 1997, the Company funded its CTI service business in the amount
of $5,097,000. The Company is in the process of evaluating its strategic
business plan related to the cosmetic laser service business in an effort to
ascertain the risks and benefits of investing additional resources in this
business. If the Company believes that additional investments in CTI contribute
toward its overall goal of maximizing shareholder value, then the Company may
continue to make substantial additional investments in CTI.
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 million. As of December 31,
1997, the amount of accounts receivable sold that remained uncollected totaled
$2.1 million net of related reserves and fees, as defined in the agreement. This
amount is included in the net assets of discontinued operations in the
accompanying balance sheet as of December 31, 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. The Company guarantees
borrowings under this loan agreement.
In connection with the disposition of Comtel, the Company assumed a
note issued by Comtel to a loan association that totals $3,233,000. This note
bears interest at the loan association's prime rate plus 2.25% and is payable in
24 monthly installments of principal and interest totaling approximately
$150,000, beginning in March 1998. This note is secured by a pledge of 3,250,000
shares of the Company's common stock. In addition, the Company has also
guaranteed up to an additional maximum amount of $2,500,000 under a line of
credit extended by this loan association to Biometric Technologies Corp. (BTC),
the buyer of Comtel. The stockholders of BTC have personally guaranteed to the
Company payment for any amounts borrowed under this line of credit in excess of
approximately $1,500,000 in the event that the Company is obligated to honor
this guarantee. The stockholders of BTC have collateralized this guarantee by
the Company with certain assets personally owned by the stockholders.
The Company's strategic plan is to continue to fund research and
development for its medical products. This research and development effort
entails extensive clinical trials leading up to FDA submissions. 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. (See Item 1. "Description of Business - Research and Development.")
The Company has had significant losses to date and expects these losses
to continue through 1998. Therefore, the Company must continue to secure
additional financing to continue to complete its research and development
activities, commercialize its current and proposed medical products and
services, and fund ongoing operations for the next twelve months. 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 strategic partnerships, additional bank
financing, private debt and equity financing, sale of assets, including the
Company's marketable securities consisting of Nexar and The American Materials &
Technology Corporation ("AMTK"), and other sources. Based on its historical
ability to raise funds as necessary and ongoing preliminary discussions with
potential financing sources, the Company believes that it will be successful in
obtaining additional financing in order to fund current operations in the near
future. Although the Company believes that it will be successful in obtaining
additional financing, there can be no assurance that any such financing will be
available on terms satisfactory to the Company. (See "Risk Factors Substantial
Continuing Losses; Doubt About Ability to Continue as a Going Concern.")
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Subsequent to December 31, 1997, the Company entered into a financing
agreement with a Series G Preferred shareholder to sell this investor 500,000
shares of Nexar common stock for $2,000,000. Under the terms of this agreement,
the Company has guaranteed a $2,000,000 aggregate value to be realized by this
entity. To the extent this amount is not realized by this investor, the Company
will repay any deficiency two years from the date of closing. In connection with
this financing, the Company also agreed to certain amendments of the Series G
Preferred Stock, as defined in the agreement.
In February 1998, the Company sold 7,200,000 shares of its common stock
to a group of investors for $7,200,000. In addition, the Company also issued
warrants to the investors to purchase 7,200,000 shares of common stock at an
exercise price of $3.00 per share.
On March 27, 1998, the Company borrowed $2,000,000. This bridge loan is
payable the earlier of May 26, 1998 or (i) one day following the sale of Dynaco
(ii) the sale of any other Palomar assets in a transaction outside the normal
course of business or (iii) any financing where the use of proceeds to pay back
debt is not prohibited. The Company issued 125,000 warrants to the lender to
purchase 125,000 shares of common stock at an exercise price of $.01 per share
in lieu of interest.
(d) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, Disclosure of
Information about Capital Structure. In June 1997, FASB issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 129, 130 and 131 are effective
for fiscal years beginning after December 15, 1997. The Company believes that
the adoption of these new accounting standards will not have a material impact
on the Company's financial statements.
STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
In addition to the other information in this Annual Report on Form 10-K
the following cautionary statements should be considered carefully in evaluating
the Company and its business. Statements contained in this Form 10-K that are
not historical facts (including, without limitation, statements concerning
anticipated operational and capital expense levels and such expense levels
relative to the Company's total revenues) and other information provided by the
Company and its employees from time to time may contain certain forward-looking
information, as defined by (i) the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and (ii) releases by the SEC. The factors identified in
the cautionary statements below, among other factors, could cause actual results
to differ materially from those suggested in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events. The
cautionary statements below are being made pursuant to the provisions of the
Reform Act and with the intention of obtaining the benefits of safe harbor
provisions of the Reform Act.
RISK FACTORS
SUBSTANTIAL CONTINUING LOSSES; DOUBT ABOUT ABILITY TO CONTINUE AS A
GOING CONCERN. The Company incurred a net loss from continuing operations of
$58,369,079 for the year ended December 31, 1997. The Company expects to incur
losses for the near term and through the third quarter of 1998. However, there
can be no assurance that the Company will achieve profitable operations or that
profitable operations will be sustained if achieved. At December 31, 1997, the
Company's accumulated deficit and working capital deficit was $6,183,687 and
$9,138,915, respectively. The Company's Star, PMP and CTI subsidiaries each have
had a history of losses. There can be no assurance that these companies will
achieve profitable operations or that profitable operations will be sustained if
achieved. As a result, the report of the Company's independent public
accountants in connection with the Company's Consolidated Balance Sheets at
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the three years
ended December 31, 1997 includes an explanatory paragraph stating that the
Company's recurring losses, working capital deficiency and stockholders' deficit
raises substantial doubts about the Company's ability to continue as a going
concern. The Company must continue to secure additional financing to complete
its research and development activities, commercialize its current and proposed
cosmetic laser products, and fund ongoing operations. The Company anticipates
that it will require substantial additional financing during the next
twelve-month period. The Company believes that the cash generated to date from
its financing activities, continued sale of assets and the Company's ability to
raise cash in future financing activities will be sufficient to satisfy its
working capital requirements through the next twelve-month period. The Company
bases its belief that it has the ability to raise cash in future financings on
its demonstrated historical ability to raise money and its ongoing preliminary
discussions with financing sources. However, there can be no assurance that this
assumption will prove to be accurate or that events in the future will not
require the Company to obtain additional financing sooner than presently
anticipated. The Company may also determine, depending upon the opportunities
available to it, to seek additional debt or equity financing to fund the costs
of acquisitions or expansion. To the extent that the Company finances an
acquisition with a combination of cash and equity securities, any such issuance
of equity securities
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could result in dilution to the interests of the Company's shareholders.
Additionally, to the extent that the Company incurs indebtedness to fund
increased levels of accounts receivable or to finance the acquisition of capital
equipment or issues debt securities in connection with any acquisition, the
Company will be subject to risks associated with incurring substantial
additional indebtedness, including the risks that interest rates may fluctuate
and cash flow may be insufficient to pay principal and interest on any such
indebtedness. The Company continues to investigate several financing
alternatives, including strategic partnerships, additional bank financing,
private, debt and equity financing and other sources, including the liquidation
of its marketable securities (Nexar and AMTK). While the Company regularly
reviews potential funding sources in relation to its ongoing and proposed
projects, there can be no assurance that the current levels of funding or
additional funding will be available, or if available will be on terms
satisfactory to the Company. Failure to obtain additional financing could have a
material adverse effect on the Company, including requiring it to significantly
curtail its operations. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 1. "Description of Business -
Financing of Operations and Increase in Outstanding Shares," and Notes 1, 6 and
7 to Financial Statements.)
DEPENDENCE ON NEW RELATIONSHIP WITH COHERENT. The Company has entered
into a Sales Agency, Development and License Agreement with Coherent (the
"Agreement") pursuant to which Coherent serves as exclusive distributor for the
Company's laser based hair removal systems. As a result, the Company no longer
has its own sales force. Coherent receives a marketing and sales commission,
based on the end-user price, for each Palomar laser it sells. There can be no
assurance that Coherent will be successful in distributing the Company's hair
removal lasers or that it will give sufficient priority to marketing the
Company's products. In addition, Coherent may develop, market and manufacture
its own lasers that incorporate the Company's proprietary technology and compete
with the Company's lasers, in which case it must pay the Company a royalty on
such sales. If Coherent proves unable to sell Palomar's hair removal lasers in
the volume anticipated, it could have a material adverse effect on the Company's
business, financial condition and results of operations. Pursuant to the
Agreement, if Palomar is unable (as defined) or unwilling to manufacture the
cosmetic laser products to be distributed by Coherent, then Palomar will license
to Coherent the technology necessary to make such products. The initial term of
the Agreement is for three years, commencing on November 17, 1997. At the end of
each year, the Agreement automatically renews for another year, unless either
party provides written notice of its nonrenewal 30 days prior to the renewal
date. In the Agreement, the Company has agreed to upgrade all its EpiLaser(R)
laser systems sold prior to the date of the Agreement. The unanticipated loss of
Coherent as a distributor, any significant reduction in orders from Coherent,
the introduction by Coherent of competitive products, and unanticipated costly
product upgrades would have a material adverse effect on the Company's business,
financial condition and results of operations. (See Notes 3(i) and 12(e) to
Financial Statements.)
DEPENDENCE ON NEW PRODUCTS. The Company expects that a significant
portion of future revenue will continue to be derived from sales of newly
introduced products. The Company must continue to make significant investments
in research and development in order to continue to develop new products,
enhance existing products and achieve market acceptance for such products.
However, there can be no assurance that development stage products will be
successfully completed or, if developed, will achieve significant customer
acceptance. If the Company were unable to successfully define, develop and
introduce competitive new products, and enhance its existing products, its
future results of operations would be adversely affected. Development and
manufacturing schedules for technology products are difficult to predict, and
there can be no assurance that the Company will achieve timely initial customer
shipments of new products. The timely availability of these products in volume
and their acceptance by customers are important to the future success of the
Company. Delays, whether due to manufacturing delays, lack of market acceptance,
delays in regulatory approval, or otherwise, could have a material adverse
effect on the company's results of operations. From time to time, the Company or
its competitors may announce new products, capabilities or technologies that
have the potential to replace or shorten life cycles of the Company's existing
products. No assurance can be given that announcements of currently planned or
other new products will not cause customers to defer purchasing existing Company
products. To the extent that new products are not developed in a timely manner,
do not achieve customer acceptance or do not generate higher sales prices and
margins than existing products, the Company's business, financial condition and
results of operations could be materially adversely affected.
DEPENDENCE ON DEVELOPING MARKET; PRODUCT CONCENTRATION. The market for
laser hair removal is new and rapidly evolving. The Company currently derives
substantially all of its revenues from its laser hair removal products and
expects that revenues from these products will continue to account for
substantially all of its revenues in the foreseeable
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future. Broad market acceptance of laser hair removal and, in particular, the
Company's EpiLaser(R) and LightSheer(TM) laser hair removal systems is critical
to the Company's future success.
NEXAR. As of March 20, 1998, the Company owned approximately 31% of the
voting capital stock of Nexar. In order to successfully execute its business
plan, the Company is to a certain degree dependent on the success of Nexar and
Nexar's ability to fund its operations and achieve profitability in the near
term. The Company intends to reduce its ownership of Nexar over time as the
Company continues to focus on its core cosmetic laser business. (See Note 2 to
Financial Statements.)
HOLDING COMPANY STRUCTURE. The Company has no significant operations
other than those incidental to its ownership of the capital stock of its
subsidiaries. As a holding company, the Company is dependent on dividends or
other intercompany transfers of funds from its subsidiaries to meet the
Company's debt service and other obligations. Claims of creditors of the
Company's subsidiaries, including trade creditors, will generally have priority
as to the assets of such subsidiaries over the claims of the Company and the
holders of the Company's indebtedness.
LIMITED OPERATING HISTORY. The Company's subsidiaries have limited
operating histories and are in the development stage, and the Company is subject
to all of the risks inherent in the establishment of a new business enterprise.
The likelihood of success of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the establishment of a new business and
development of new technologies in the cosmetic laser products industry. These
include, but are not limited to, government regulation, competition, the need to
expand manufacturing capabilities and market expertise, and setbacks in
production, product development, market acceptance and sales and marketing. (See
Item 1. "Description of Business.")
NEW VENTURES. The Company's CTI subsidiary has entered into agreements
with healthcare providers to provide cosmetic laser services at laser treatment
centers and plans to enter into more such agreements in the future. While the
Company believes these new partnerships are strategically important, there are
substantial uncertainties associated with the development of new products,
technologies and services for evolving markets. The success of these ventures
will be determined not only by the Company's efforts, but also by those of its
partners. Initial timetables for the development and introduction of new
technologies, products or services may not be achieved, and price/performance
targets may not prove feasible. External factors, such as the development of
competitive alternatives or government regulation, may cause new markets to
evolve in unanticipated directions. (See "- Highly Competitive Industries," and
Item 1. "Description of Business - Cosmetic Laser Services.")
INVESTMENTS IN UNRELATED BUSINESSES. The Company has investments in
marketable securities (consisting principally of Nexar and AMTK common stock).
The Company's basis for financial reporting in these investments totals
approximately $5.1 million. The Company's current market value of these
investments totals approximately $14.0 million. The amount that the Company may
ultimately realize from these investments could differ materially from the value
of these investments recorded in the Company's financial statements, and the
ultimate disposition of these investments could result in a loss to the Company.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Notes 2 and 3(b) and (c) to Financial Statements.)
HIGHLY COMPETITIVE INDUSTRIES. The cosmetic laser industry is highly
competitive and is characterized by the frequent introduction of new products.
The Company competes in the development, manufacture, marketing and servicing of
cosmetic laser products with numerous other companies, certain of which have
substantially greater financial, marketing and other resources than the Company.
In addition, the Company's cosmetic laser products face competition from
alternative medical products and procedures, such as electrolysis and waxing,
among others. There can be no assurance that the Company will be able to
differentiate its products from the products of its competitors or that the
marketplace will consider the Company's products to be superior to competing
products or medical procedures. There can be no assurance that competitors will
not develop products or that new technologies will not be developed that render
the Company's products obsolete or less competitive. (See "- Technological
Obsolescence.") In addition, in entering areas of business in which it has
little or no experience, such as the opening of laser treatment centers, the
Company may not be able to compete successfully with competitors that are more
established in such areas. (See "- New Ventures," and Item 1. "Description of
Business - Cosmetic Laser Services.")
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FLUCTUATIONS IN QUARTERLY PERFORMANCE. The Company's results of
operations have fluctuated substantially and can be expected to continue to vary
significantly. The Company's quarterly operating results depend on a number of
factors, including the timing of the introduction or acceptance of new products
offered by the Company or its competitors, changes in the mix of products sold
by the Company, changes in regulations affecting the cosmetic laser products
industry, changes in the Company's operating expenses, personnel changes and
general economic conditions.
VOLATILITY OF SHARE PRICE. Factors such as announcements of
developments related to the Company's business, announcements by competitors,
quarterly fluctuations in the Company's financial results and other factors have
caused the price of the Company's stock to fluctuate, in some cases
substantially, and could continue to do so in the future. If revenues or
earnings in any quarter fail to meet the investment community's expectations,
there could be an immediate impact on the price of the Company's common stock.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many
technology companies and that have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company's common stock.
GOVERNMENT REGULATION. The Company's laser product business segment is
subject to regulation in the United States and abroad. Failure to comply with
applicable regulatory requirements can result in fines, denial or suspension of
approvals, seizures or recall of products, operating restrictions and criminal
prosecutions, any or all of which could have a material adverse effect on the
Company. Furthermore, changes in existing regulations or adoption of new
regulations could prevent the Company from obtaining, or could affect the timing
of, future regulatory approvals. (See Item 1. "Description of Business - Impact
of Medical Device Regulations.")
All laser medical devices, including those sold by the Company, are
subject to regulation by the FDA under the Medical Device Amendments of the
United States Food, Drug and Cosmetics Act of 1976, as amended (the "FDA Act"),
pursuant to which the FDA regulates the clinical testing, manufacture, labeling,
sale, distribution and promotion of medical devices. Before a new device can be
introduced into the market, the manufacturer must obtain market clearance
through either the 510(k) premarket notification process or the lengthier
premarket approval ("PMA") application process. Compliance with this process is
expensive and time-consuming. Three of the Company's lasers have received
clearance from the FDA through the 510(k) process for certain dermatological
applications: the Q-switched RD-1200(TM) ruby laser for tattoo removal, the
StarLight(TM) diode laser for hair and leg vein removal and the EpiLaser(R) hair
removal laser. The Company is also investigating other applications in
dermatology for its laser systems. It will be required to obtain FDA clearance
before commercially marketing any other application. The Company believes that
it will be able to seek such clearance under the 510(k) application process;
however, no assurance can be given that the FDA will not require the Company to
follow the more extensive and time-consuming PMA process. FDA review of a 510(k)
application currently averages about seven to twelve months and requires limited
clinical data based on substantial equivalence to a product marketed prior to
1976, while a PMA review can last for several years and require substantially
more clinical data. There can be no assurance that the appropriate clearances
from the FDA will be granted, that the process to obtain such clearances will
not be excessively expensive or lengthy or that the Company will have sufficient
funds to pursue such clearances. The Company's business, financial condition and
operations are, and will continue to be, critically dependent upon timely
receipt of FDA clearance for its current and proposed cosmetic laser products.
Delays or failure to obtain such approval would have a material adverse effect
on the Company.
The FDA also imposes various requirements on manufacturers and sellers
of products under its jurisdiction, such as labeling, good manufacturing
practices, record keeping and reporting requirements. The FDA may require
postmarket testing and surveillance programs to monitor a product's effects. The
Company is subject to the laser radiation safety regulations of the FDA Act
administered by the National Center for Devices and Radiological Health ("CDRH")
of the FDA. These regulations require a laser manufacturer to file new product
and annual reports, to maintain quality control, product testing and sales
records, to distribute appropriate operation manuals, to incorporate certain
design and operating features in lasers sold to end-users and to certify and
label each laser sold to end-users as one of four classes of lasers (based on
the level of radiation from the laser). In addition, various warning labels must
be affixed on the product and certain protective devices must be installed
depending upon the class of product. Under the Act, the Company is also required
to register with the FDA as a medical device manufacturer and is subject to
inspection on a routine basis by the FDA for compliance with Quality Systems
Regulations ("QSR"). QSR impose certain procedural and documentation
requirements upon the Company relevant to its manufacturing, testing and quality
control activities. Noncompliance with applicable
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FDA regulations, including QSR, can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for devices, withdrawal of marketing approvals and
criminal prosecution. The FDA also has the authority to request repair,
replacement or refund of the cost of any medical device manufactured or
distributed by the Company. The Company believes that it is currently in
compliance with these regulations.
In order to be sold outside the United States, the Company's products
are subject to FDA permit requirements that are conditioned upon clearance by
the importing country's appropriate regulatory authorities. Many countries also
require that imported products comply with their own or international electrical
and safety standards. Additional approvals may be required in other countries.
The Company's EpiLaser(R) laser system has received the CE Mark pursuant to the
European Medical Device Directive which allows that laser to be sold in all
countries that recognize the CE Mark, including the countries that comprise the
European Community. The Company has not yet sought international approval for
its diode laser for use in cosmetic surgery and dermatology, because it has not
yet begun to ship this laser overseas.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company continually develops new
products intended for use in the cosmetic laser market. As with any new
products, there is substantial risk that the marketplace may not accept or be
receptive to the potential benefits of such products. Market acceptance of the
Company's current and proposed products will depend, in large part, upon the
ability of the Company or any marketing partners to demonstrate to the
marketplace the advantages of the Company's products over other types of
products. There can be no assurance that the marketplace will accept
applications or uses for the Company's current and proposed products or that any
of the Company's current or proposed products will be able to compete
effectively. (See Item 1. "Description of Business - Competition.")
UNCERTAINTY OF HEALTHCARE REIMBURSEMENT AND REFORM. The healthcare
industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operations of healthcare industry
participants. During the past several years, state and federal government
regulation of reimbursement rates and capital expenditures in the United States
healthcare industry has increased. Lawmakers continue to propose programs to
reform the United States healthcare system, which may contain programs to
increase governmental involvement in healthcare, lower Medicare and Medicaid
reimbursement rates or otherwise change the operating environment for the
Company's customers. Healthcare industry participants may react to these
proposals by curtailing or deferring investments, including investments in the
Company's products.
DEPENDENCE ON THIRD PARTY RESEARCHERS. The Company is substantially
dependent upon third party researchers and others, over which the Company will
not have absolute control, to satisfactorily conduct and complete research on
behalf of the Company and to grant to the Company favorable licensing terms for
products which may be developed. The Company has entered into research
agreements with recognized research hospitals and clinical laboratories. At
present, the Company's principal research partner is the Wellman Labs at MGH.
The Company provides research funding, laser technology and optics know-how in
return for licensing agreements with respect to specific medical applications
and patents. Management believes that this method of conducting research and
development provides a higher level of technical and clinical expertise than it
could provide on its own and in a more cost efficient manner. The Company's
success will be highly dependent upon the results of the research, and there can
be no assurance that such research agreements will provide the Company with
marketable products in the future or that any of the products developed under
these agreements will be profitable for the Company. (See Item 1. "Description
of Business - Research and Development" and Note 8 to Financial Statements.)
TECHNOLOGICAL OBSOLESCENCE. The markets for the Company's products are
characterized by rapid and significant technological change, evolving industry
standards and frequent new product introductions and enhancements. Many of the
Company's products and products under development are technologically
innovative, and require significant planning, design, development and testing at
the technological, product and manufacturing process levels. These activities
require significant capital commitments and investment by the Company. The
Company's failure to develop products in a timely manner in response to changes
in the industry, whether for financial, technological or other reasons, will
have a material adverse effect on the Company's business, financial condition
and results of operations. (See Item 1. "Description of Business.")
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PATENTS/POSSIBLE PATENT INFRINGEMENTS. The Company currently holds
several patents and intends to pursue various additional avenues that it deems
appropriate to protect its technology. There can be no assurance, however, that
the Company will file any additional patent applications or that any patent
applications that have been, or may be, filed will result in issued patents, or
that any patent, patent application, know-how, license or cross-license will
afford any protection or benefit to the Company. (See Item 1. "Description of
Business - Patents and Licenses.")
The laser industry is characterized by frequent litigation regarding
patent and other intellectual property rights. Because patent applications are
maintained in secrecy in the United States until such patents are issued and are
maintained in secrecy for a period of time outside the United States, the
Company can conduct only limited searches to determine whether its technology
infringes any patents or patent applications. Any claims for patent infringement
could be time-consuming, result in costly litigation, diversion of technical and
management personnel, cause shipment delays, require the Company to develop
noninfringing technology or to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the laser industry have
often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and often require the payment of
ongoing royalties, which could have a negative impact on gross margins. There
can be no assurance that necessary licenses would be available to the Company on
satisfactory terms, or that the Company could redesign its products or processes
to avoid infringement, if necessary. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling some of its products.
This could have a material adverse effect on the Company's business, results of
operations and financial condition. Conversely, costly and time consuming
litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others.
The Company is aware of patents relating to laser technologies used in
certain applications. The Company intends to pursue such laser technologies in
the future; hence, if the patents relating to those technologies are valid and
enforceable, they may be infringed by the Company. After consulting with outside
counsel to the Company, the Company believes that it is not infringing currently
on patents held by others; however, were the issue ever to be litigated, a court
could reach a different opinion. If the Company's current or proposed products
are, in the opinion of patent counsel, infringing on any of these patents, the
Company intends to seek nonexclusive, royalty-bearing licenses to such patents
but there can be no assurance that any such license would be available on
favorable terms, if at all. One of the Company's competitors has filed suit
against the Company alleging patent infringement, among other things. No
assurance can be given that other infringement claims will not be made or that
the Company would prevail in any legal action with respect thereto. Defense of a
claim of infringement would be costly and could have a material adverse effect
on the Company's business, even if the Company were to prevail. (See Item 3.
"Legal Proceedings.")
DEPENDENCE ON PROPRIETARY RIGHTS. The Company relies on trade secrets
and proprietary know-how which it seeks to protect, in part, by confidentiality
agreements with its collaborators, employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
RISKS ASSOCIATED WITH PENDING LITIGATION. The Company and its
subsidiaries are involved in disputes with third parties. Such disputes have
resulted in litigation with such parties and, although the Company is a
plaintiff in several matters, the Company is subject to claims and counterclaims
for damages and has incurred, and likely will continue to incur, legal expenses
in connection with such matters. There can be no assurance that such litigation
will result in favorable outcomes for the Company. An adverse result in either
the MEHL patent litigation or the action relating to the Swiss Franc Debentures
(both described in detail in Item 3) could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is unable to determine the total expense or possible loss, if any, that may
ultimately be incurred in the resolution of these proceedings. These matters may
result in diversion of management time and effort from the operations of the
business. (See Item 3. "Legal Proceedings" and Note 12(d) to Financial
Statements.)
NEED FOR ADDITIONAL QUALIFIED PERSONNEL. The Company's ability to
develop, manufacture and market all of its products, and to attain a competitive
position within the laser products industry, will depend, in large part, on its
ability to attract and retain qualified personnel. Competition for qualified
personnel in these industries is intense and the Company will be required to
compete for such personnel with companies which may have greater financial and
other resources.
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There can be no assurance that the Company will be successful in attracting,
assimilating and retaining the personnel it requires to grow and operate
profitably. The Company's inability to attract and retain such personnel could
have a material adverse effect upon its business.
ISSUANCE OF PREFERRED STOCK AND DEBENTURES COULD AFFECT RIGHTS OF
COMMON SHAREHOLDERS. The Company is authorized to issue up to five million
shares of Preferred Stock, $.01 par value. The Preferred Stock may be issued in
one or more series, the terms of which may be determined at the time of issuance
by the Board of Directors, without further action by shareholders, and may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. In July 1996, the Company issued 9,675 units
in a convertible debenture financing. Each unit consisted 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. In February 1997, the Company
redeemed 300 units for an aggregate price of $195,044. In November 1997, the
remaining 9,375 units were converted into 914,028 shares of common stock. (See
Item 3. "Legal Proceedings.") In October 1996, the Company issued $5,000,000 in
4.5% Convertible Subordinated Promissory Notes. As of March 20, 1998, $5,000,000
principal amount was converted into 1,442,073 shares of common stock. In
December 1996 and January 1997, the Company issued a total of $6,000,000 in 5%
Convertible Debentures. As of March 20, 1998, $5,533,356 principal amount was
converted into 3,707,292 shares of common stock. In March 1997, the Company
issued $5,500,000 in 5% Convertible Debentures. As of March 20, 1998, $5,500,000
principal amount was converted into 4,355,735 shares of common stock. In March
1997, the Company issued $500,000 in 6% Convertible Debentures. In September
1997, the Company issued $7,000,000 in 6%, 7% and 8% Convertible Debentures. The
holders were issued 413,109 shares upon issuance in lieu of a discount. In
addition, as of March 20, 1998, $160,000 principal amount was converted into
103,021 shares of common stock. The Company also redeemed $2,000,000 principal
amount for $2,196,667. In July 1996, the Company issued 6,000 shares of Series F
Convertible Preferred Stock at a price of $1,000 per share. In September 1996,
the Company issued 10,000 shares of Series G Convertible Preferred Stock at a
price of $1,000 per share. As of March 20, 1998, 7,316 shares of the Series G
Convertible Preferred Stock were converted into 602,824 shares of common stock,
956,388 shares of common stock of Nexar and $47,731 in cash dividends. In March
1997, the Company issued 6,000 shares of Series H Convertible Preferred Stock at
a price of $1,000 per share. In May 1997, the Company issued 10,000 shares of
Series H Convertible Preferred Stock at a price of $1,000 per share. As of March
20, 1998, 11,100 shares of the Series H Convertible Preferred Stock were
converted into 8,289,013 shares of common stock. In addition, 2,950 shares of
the Series H Convertible Preferred Stock were redeemed for $3,588,715. The
issuance of any such additional Preferred Stock or Debentures could affect the
rights of the holders of common shares, and could reduce the market price of the
common shares. In particular, specific rights granted to future holders of
Preferred Stock or Debentures could be used to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by the existing control group. (See Item 1. "Description of
Business," Item 5. "Market for Common Equity and Related Stockholder Matters,"
and Notes 6, 7 and 13 to Financial Statements.)
ISSUANCE OF RESERVED SHARES; REGISTRATION RIGHTS. As of March 20, 1998,
the Company had 59,553,243 shares of common stock outstanding. The Company has
reserved an additional 28,180,020 shares for issuance as follows: (1) 3,707,655
shares for issuance to key employees, officers, directors, consultants and
advisors pursuant to the Company's Stock Option Plans; (2) 166,674 shares for
issuance to employees, officers and directors pursuant to the Company's 401(k)
Plan; (3) 966,014 shares for issuance pursuant to the Company's Employee Stock
Purchase Plan; (4) 9,998,030 shares for issuance upon exercise of three-, four-,
five- and seven year warrants issued to certain lenders, investors, consultants,
directors and officers (a portion of which are subject to certain antidilutive
adjustments); (5) 530,217 shares for issuance upon conversion of $466,644
principal amount of a 5% Convertible Debentures; (6) 45,455 shares for issuance
upon conversion of $500,000 principal amount of 6% Convertible Debentures; (7)
6,396,979 shares for issuance upon conversion of $4,840,000 principal amount of
a 6%, 7% and 8% Convertible Debenture; (8) 600,000 shares for issuance upon
conversion of the 6,000 shares of Series F Convertible Preferred Stock; (9)
3,611,659 shares for issuance upon conversion of the 2,684 shares of Series G
Convertible Preferred Stock; and (10) 2,157,337 shares for issuance upon
conversion of the 1,950 shares of Series H Convertible Preferred Stock. All of
the foregoing reserved shares are, or the Company intends for them shortly to
be, registered with the Securities and Exchange Commission and therefore freely
salable on Nasdaq or elsewhere.
PRODUCT LIABILITY EXPOSURE. Cosmetic laser product companies face an
inherent business risk of financial exposure to product liability claims in the
event that the use of their products results in personal injury. The Company's
products are
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and will continue to be designed with numerous safety features, but it is
possible that patients could be adversely affected by use of one of the
Company's products. Further, in the event that any of the Company's products
prove to be defective, the Company may be required to recall and redesign such
products. Although the Company has not experienced any material losses due to
product liability claims to date, there can be no assurance that it will not
experience such losses in the future. The Company maintains general liability
insurance in the amount of $1,000,000 per occurrence and $2,000,000 in the
aggregate and maintains umbrella coverage in the aggregate amount of
$25,000,000; however, there can be no assurance that such coverage will continue
to be available on terms acceptable to the Company or that such coverage will be
adequate for liabilities actually incurred. In the event the Company is found
liable for damages in excess of the limits of its insurance coverage, or if any
claim or product recall results in significant adverse publicity against the
Company, the Company's business, financial condition and results of operations
could be materially and adversely affected. In addition, although the Company's
products have been and will continue to be designed to operate in a safe manner,
and although the Company attempts to educate medical personnel with respect to
the proper use of its products, misuse of the Company's products by medical
personnel over whom the Company cannot exert control may result in the filing of
product liability claims or significant adverse publicity against the Company.
INTERNATIONAL OPERATIONS. Because the Company has minimal experience in
marketing and distributing its products internationally, it engaged Coherent, a
company with particular experience in international markets, to serve as its
distributor in international markets. (See "- Dependence on New Relationship
with Coherent" and Item 1. "Description of Business - Marketing, Distribution
and Service.") Accordingly, the Company's success in international markets will
be substantially dependent upon the skill and expertise of Coherent in marketing
the Company's products. There can be no assurance that Coherent will be able to
successfully market, sell and deliver the Company's products in these markets.
In addition, there are certain risks inherent in doing business in international
markets, such as unexpected changes in regulatory requirements, export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, management's lack of international expertise,
political instability and fluctuations in currency exchange rates and
potentially adverse tax consequences, which could adversely impact the success
of the Company's international operations. There can be no assurance that one or
more of such factors will not have a material adverse effect on the Company's
future international operations and, consequently, on the Company's business,
financial condition or operating results. (See Item 1. "Financial Information
About Exports by Domestic Operations.")
NEED FOR CONTINUED PRODUCT DEVELOPMENT. Although the Company received
FDA clearance in March and December 1997, respectively, to commercially market
its EpiLaser(R) and diode laser systems for hair removal, the Company is
continuing its development of both products. The Company is continuing to study
both laser systems to optimize performance and treatment parameters. (See Item
1. "Description of Business.")
DEPENDENCE ON SUPPLIERS. The Company relies on outside suppliers for
substantially all of its manufacturing supplies, parts and components. Several
component parts of the Company's cosmetic laser products are manufactured
exclusively by one supplier. There can be no assurance that the Company will be
able to obtain a sufficient supply of such components at commercially reasonable
prices or at all. A shortage of necessary parts and components or the inability
of the Company to obtain such parts and components would have a material adverse
effect on the Company's business, financial condition and results of operations.
(See Item 1. "Description of Business - Production and Sources and Availability
of Materials.")
SIGNIFICANT OUTSTANDING INDEBTEDNESS; SUBORDINATION OF DEBENTURES. The
Company has incurred substantial indebtedness in relation to its equity capital
and will be subject to all of the risks associated with substantial leverage,
including the risk that available cash may not be adequate to make required
payments to the holders of the Company's debentures. The Company's ability to
satisfy its obligations under the debentures from cash flow will be dependent
upon the Company's future performance and will be subject to financial, business
and other factors affecting the operation of the Company, many of which may be
beyond the Company's control. In the event the Company does not have sufficient
cash resources to satisfy quarterly interest or other repayment obligations to
the holders of the debentures, the Company will be in default under the
debentures, which would have a material adverse effect on the Company. To the
extent that the Company is required to use cash resources to satisfy interest
payments to the holders of the debentures, it will have fewer resources
available for other purposes. Inability of the Company to repay the debentures
upon maturity would have a material adverse effect on the Company, which could
result in a reduction of the price of the Company's shares. The debentures will
be unsecured and subordinate in right of payment to all senior indebtedness of
the Company. The
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debentures do not restrict the Company's ability to incur additional senior
indebtedness and most other indebtedness. The terms of senior indebtedness now
existing or incurred in the future could affect the Company's ability to make
payments of principal and/or interest to the holders of debentures. (See Item 5.
"Market for Registrant's Common Equity and Related Shareholder Matters" and Note
6 to Financial Statements.)
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibit the Company from engaging in a business combination with an
interested stockholder for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. The Company's stock option grants generally provide for an
exercise of some or all of the optioned stock, including nonvested shares, upon
a change of control or similar event. The Board of Directors has authority to
issue up to 5,000,000 shares of Preferred Stock and to fix the rights,
preference, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the stockholders. The rights of the
holders of the common stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights senior to the
common stock, and, as a result, the issuance of such Preferred Stock could have
a material adverse effect on the market value of the common stock. (See "-
Issuance of Preferred Stock and Debentures Could Affect Rights of Common
Shareholders.")
YEAR 2000. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. The Company is at this time utilizing internal resources
to identify, correct or reprogram, and test the systems for year 2000
compliance. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will also be converted in a timely
manner or that any such failure to convert by another company would not have an
adverse effect on the Company's systems. Management is in the process of
assessing the year 2000 compliance costs; however, based on information to date
(excluding the possible impact of vendor systems), management does not believe
that it will have a material effect on the Company's earnings. (See Note 12(c)
to Financial Statements.)
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ITEM 8. FINANCIAL STATEMENTS.
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for
the years ended December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Stockholders' Equity (deficit)
for the years ended December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for
the years ended December 31, 1995, 1996 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palomar Medical Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Palomar
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The summarized
financial data for Nexar Technologies, Inc. contained in Note 2 are based on the
financial statements of Nexar Technologies, Inc. which were audited by other
auditors. Their report has been furnished to us and our opinion, insofar as it
relates to the data in Note 2, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Palomar Medical Technologies, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company has suffered recurring losses from operations and has a working
capital deficiency and a stockholders' deficit that raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 6, 1998 (except for the
matters discussed in Note 13,
as to which the date is
March 31, 1998)
F-2
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, December 31,
1996 1997
---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $12,292,406 $3,003,300
Marketable securities 2,893,792 1,449,326
Accounts receivable, net of allowance for doubtful accounts of
approximately $1,129,000 and $746,000, respectively 2,171,086 2,248,680
Inventories 5,205,954 4,711,474
Loans to former officers 948,198 478,343
Notes receivable from related parties for sale of Dynaco subsidiary --- 855,379
Subscription receivable 3,500,000 ---
Other current assets 2,983,209 820,219
---------------- ----------------
Total current assets 29,994,645 13,566,721
---------------- ----------------
Net Assets of Discontinued Operations (Note 2) 22,971,380 5,825,602
---------------- ----------------
Property and Equipment, at Cost, Net 3,827,990 6,455,586
---------------- ----------------
Other Assets:
Cost in excess of net assets acquired, net of accumulated amortization of
approximately $725,000 and $1,280,000, respectively 2,856,616 2,302,348
Deferred financing costs 1,943,420 591,609
Other noncurrent assets 5,938,826 225,706
---------------- ----------------
Total other assets 10,738,862 3,119,663
---------------- ----------------
$67,532,877 $28,967,572
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt $497,377 $1,640,465
Accounts payable 3,318,460 4,150,982
Accrued liabilities 10,975,309 16,914,249
---------------- ----------------
Total current liabilities 14,791,146 22,705,696
---------------- ----------------
Long-Term Debt, Net of Current Portion 14,665,140 12,445,563
---------------- ----------------
Commitments and Contingencies (Notes 2, 6 and 10)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
18,151 shares and 16,397 shares
at December 31, 1996 and December 31, 1997, respectively
(Liquidation preference of $17,714,474 as of December 31, 1997) 182 164
Common stock, $.01 par value-
Authorized - 100,000,000 shares
Issued - 30,596,812 shares and 45,792,585 shares
at December 31, 1996 and December 31, 1997, respectively 305,968 457,926
Additional paid-in capital 104,900,551 147,356,579
Accumulated deficit (64,971,200) (152,359,497)
Unrealized loss on marketable securities (342,500) ---
Subscriptions receivable from related party (604,653) ---
Less: Treasury stock - (200,000 shares and 345,000 shares at cost, respectively) (1,211,757) (1,638,859)
---------------- ----------------
Total stockholders' equity (deficit) 38,076,591 (6,183,687)
---------------- ----------------
$67,532,877 $28,967,572
================ ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
---------------- -------------- --------------
Revenues $5,610,280 $17,606,871 $20,994,546
Cost of Revenues 3,464,472 14,169,471 20,055,963
---------------- -------------- --------------
Gross profit 2,145,808 3,437,400 938,583
---------------- -------------- --------------
Operating Expenses
Research and development 3,964,920 6,297,477 11,990,332
Sales and marketing 2,768,541 5,076,941 6,959,750
General and administrative 2,141,798 9,752,922 15,332,241
Business development 1,409,303 2,879,603 2,060,852
Restructuring and asset write-off (Note 4) -- 1,660,808 3,325,000
Settlement and litigation costs 700,000 880,000 3,199,000
---------------- -------------- --------------
Total operating expenses 10,984,562 26,547,751 42,867,175
---------------- -------------- --------------
Loss from operations (8,838,754) (23,110,351) (41,928,592)
Interest Expense (766,079) (271,619) (6,993,898)
Interest Income 912,019 1,355,488 456,945
Net Gain (Loss) on Trading Securities 201,067 2,033,371 (52,272)
Asset Write-off (Note 4) -- (1,397,000) (9,658,000)
Other Income (Expense) 102,305 591,853 (193,262)
---------------- -------------- --------------
Net Loss from Continuing Operations (8,389,442) (20,798,258) (58,369,079)
---------------- -------------- --------------
Loss from Discontinued Operations (Note 2):
Loss from operations (4,231,326) (20,895,534) (29,508,755)
Gain on dispositions, net -- 3,830,000 2,073,943
---------------- -------------- --------------
Net Loss from Discontinued Operations (4,231,326) (17,065,534) (27,434,812)
---------------- -------------- --------------
Net Loss $(12,620,768) $(37,863,792) $(85,803,891)
================ ============== ==============
Basic and Diluted Net Loss Per Common Share:
Continuing operations $(0.60) $(0.84) $(1.79)
Discontinued operations (0.30) (0.65) (0.78)
---------------- -------------- --------------
Total Loss Per Common Share $(0.90) $(1.49) $(2.57)
================ ============== ==============
Weighted Average Number of
Common Shares Outstanding 14,164,901 26,166,538 35,105,272
================ ============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-------------------------------------------------------------------
Number 0.01 Number 0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-------------------------------------------------------------------
Balance, December 31, 1994 -- $-- 9,464,963 94,649 -- $--
Sale of common stock pursuant to warrants and options -- -- 2,925,093 29,251 -- --
Sale of common stock -- -- 1,622,245 16,223 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 21,295 213 300,000 3,000 -- --
Purchase of treasury stock -- -- -- -- (200,000) (1,211,757)
Issuance of common stock in lieu of payment of notes -- -- -- -- -- --
payable -- -- 632,144 6,321 -- --
Repayment of convertible debentures -- -- -- -- -- --
Conversion of convertible debentures -- -- 1,943,870 19,438 -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Value ascribed to warrant in exchange for license
technology -- -- -- -- -- --
Issuance of common stock for technology -- -- 739,546 7,395 -- --
Conversion of preferred stock (7,435) (74) 1,775,691 17,757 -- --
Exercise of underwriter's warrants -- -- 200,000 2,000 -- --
Issuance of common stock for Spectrum Medical Tech., Inc. -- -- 364,178 3,642 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 167,676 1,677 -- --
Amortization of deferred financing costs -- -- -- -- -- --
Compensation expense related to warrants issued to
consultants and investment bankers -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------------------------------------------------------------------
Balance, December 31, 1995 $13,860 $139 $20,135,406 $201,353 $(200,000) $(1,211,757)
===================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Unrealized Total
Additional Loss on Stockholders'
Paid-in Accumulated Marketable Subscriptions Equity
Capital Deficit Securities Receivable (Deficit)
------------------------------------------------------------------
Balance, December 31, 1994 $15,773,109 (13,119,279) $-- $-- 2,748,479
Sale of common stock pursuant to warrants and options 7,588,888 -- -- (4,633,975) 2,984,164
Sale of common stock 2,935,921 -- -- -- 2,952,144
Payments received on subscriptions receivable -- -- -- 3,694,840 3,694,840
Issuance of preferred stock, including common stock
issued as as a placement fee, net of issuance costs 19,382,750 -- -- -- 19,385,963
Purchase of treasury stock -- -- -- -- (1,211,757)
Issuance of common stock in lieu of payment of notes payable 1,873,611 -- -- -- 1,879,932
Repayment of convertible debentures (321,533) -- -- -- (321,533)
Conversion of convertible debentures 3,071,302 -- -- -- 3,090,740
Value ascribed to convertible debentures 899,813 -- -- -- 899,813
Value ascribed to warrant in exchange for license technology 100,000 -- -- -- 100,000
Issuance of common stock for technology 292,605 -- -- -- 300,000
Conversion of preferred stock 68,377 -- -- -- 86,060
Exercise of underwriter's warrants 1,049,574 -- -- (1,049,574) 2,000
Issuance of common stock for Spectrum Medical Tech., Inc. 996,358 -- -- -- 1,000,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 416,823 -- -- -- 418,500
Amortization of deferred financing costs (70,583) -- -- -- (70,583)
Compensation expense related to warrants issued to
consultants and investment bankers 95,370 -- -- -- 95,370
Preferred stock dividends -- (124,610) -- -- (124,610)
Net loss -- (12,620,768) -- -- (12,620,768)
-------------------------------------------------------------------
Balance, December 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709) $25,288,754
===================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-------------------------------------------------------------------
Number 0.01 Number 0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-------------------------------------------------------------------
Balance, December 31, 1995 $13,860 $139 $20,135,406 $201,353 ($200,000) ($1,211,757)
Sale of common stock pursuant to warrants and options -- -- 2,967,996 29,681 -- --
Sale of common stock -- -- 1,176,205 11,762 -- --
Payments received on subscriptions receivable -- -- -- -- -- --
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 32,000 320 115,000 1,150 -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution -- -- 45,885 459 -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 (25,209) (252) 4,481,518 44,815 -- --
Conversion of convertible debentures -- -- 34,615 346 -- --
Redemption of convertible debentures -- -- -- -- -- --
Value ascribed to convertible debentures -- -- -- -- -- --
Redemption of preferred stock (2,500) (25) -- -- -- --
Exercise of underwriter's warrants -- -- 500,000 5,000 -- --
Exercise of stock options in majority controlled subsidiary -- -- -- -- -- --
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. -- -- 813,431 8,134 -- --
Issuance of common stock for minority interest in
Star Medical subsidiary -- -- 224,054 2,241 -- --
Issuance of common stock in exchange for license rights -- -- 56,900 569 -- --
Issuance of common stock for acquisition of Dermascan, Inc. -- -- 35,000 350 -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services -- -- 56,802 568 -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 -- -- -- -- -- --
Return of escrowed shares -- -- (46,000) (460) -- --
Amortization of deferred financing costs -- -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------------------------------------------------------------------
Balance, December 31, 1996 $18,151 $182 $30,596,812 $305,968 ($200,000) ($1,211,757)
===================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Total
Additional Unrealized Subscriptions Stockholders'
Paid-in Accumulated Loss on Receivable Equity
Capital Deficit Marketable Securities (Deficit)
---------------------------------------------------------------------
Balance, December 31, 1995 $54,152,385 ($25,864,657) $-- ($1,988,709) $25,288,754
Sale of common stock pursuant to warrants and options 7,569,226 -- -- -- 7,598,907
Sale of common stock 6,049,618 -- -- -- 6,061,380
Payments received on subscriptions receivable -- -- -- 2,441,556 2,441,556
Issuance of preferred stock, including common stock
issued as a placement fee, net of issuance costs 30,821,677 -- -- -- 30,823,147
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,139 -- -- -- 160,598
Conversion of preferred stock, including accrued
dividends and interest of $782,602 744,124 -- -- -- 788,687
Conversion of convertible debentures 145,260 -- -- -- 145,606
Redemption of convertible debentures (41,530) -- -- -- (41,530)
Value ascribed to convertible debentures 2,757,860 -- -- -- 2,757,860
Redemption of preferred stock (3,123,127) -- -- -- (3,123,152)
Exercise of underwriter's warrants 1,057,500 -- -- (1,057,500) 5,000
Exercise of stock options in majority controlled subsidiary 50,000 -- -- -- 50,000
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,019,022 -- -- -- 1,027,156
Issuance of common stock for minority interest in
Star Medical subsidiary 1,747,482 -- -- -- 1,749,723
Issuance of common stock in exchange for license rights 369,574 -- -- -- 370,143
Issuance of common stock for acquisition of Dermascan, Inc. 489,650 -- -- -- 490,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,156 -- -- -- 476,724
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758 -- -- -- 532,758
Return of escrowed shares 460 -- -- -- --
Amortization of deferred financing costs (77,683) -- -- -- (77,683)
Unrealized loss on marketable securities -- -- (342,500) -- (342,500)
Preferred stock dividends -- (1,242,751) -- -- (1,242,751)
Net loss -- (37,863,792) -- -- (37,863,792)
----------------------------------------------------------------------
Balance, December 31, 1996 $104,900,551 ($64,971,200)($342,500) ($604,653) $38,076,591
======================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Treasury Stock
-----------------------------------------------------------------------------
Number 0.01 Number 0.01 Number
of Shares Par Value of Shares Par Value of Shares Cost
-----------------------------------------------------------------------------
Balance, December 31, 1996 18,151 182 30,596,812 $305,968 (200,000) (1,211,757)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan -- -- 815,101 8,151 -- --
Reduction in subscriptions receivable -- -- -- -- -- --
Sale of preferred stock, net of issuance cost
of approximately $1,000,000 16,000 160 -- -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution -- -- 87,441 874 -- --
Conversion and redemption of preferred stock (17,754) (178) 6,139,841 61,399 -- --
Conversion of convertible debentures and issuance
of common stock to an investor -- -- 7,464,961 74,650 -- --
Issuance of common stock for investment banking,
merger and acquisition and consulting services -- -- 20,000 200 -- --
Value ascribed to the discount feature of
convertible debentures issued -- -- 413,109 4,131 -- --
Unrealized gain on marketable securities -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Guaranteed value of common stock associated
with Dermascan Acquisition -- -- -- -- -- --
Issuance of common stock for technology -- -- 255,320 2,553 -- --
Purchase of stock for treasury -- -- -- -- (145,000) (427,102)
Gain related to the issuance of common
stock by Nexar Technologies, Inc. -- -- -- -- -- --
Value ascribed to warrant to purchase
common stock issued to Coherent, Inc. -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance, December 31, 1997 16,397 $164 45,792,585 $457,926 (345,000) (1,638,859)
============================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Unrealized Total
Additional (Loss) Gain Stockholders'
Paid-in Accumulated on Marketable Subscriptions Equity
Capital Deficit Securities Receivable (Deficit)
----------------------------------------------------------------------------
Balance, December 31, 1996 104,900,551 $(64,971,200) (342,500) $(604,653) $38,076,591
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,606,083 -- -- -- 1,614,234
Reduction in subscriptions receivable -- -- -- 604,653 604,653
Sale of preferred stock, net of issuance
cost of approximately $1,000,000 14,999,840 -- -- -- 15,000,000
Issuance of common stock for 1996 employer
401(k) matching contribution 317,280 -- -- -- 318,154
Conversion and redemption of preferred stock (3,926,317) -- -- -- (3,865,096)
Conversion of convertible debentures and
issuance of common stock to an investor 16,935,713 -- -- -- 17,010,363
Issuance of common stock for investment
banking, merger and acquisition
and consulting services 52,925 -- -- -- 53,125
Value ascribed to the discount feature of
convertible debentures issued 3,750,812 -- -- -- 3,754,943
Unrealized gain on marketable securities -- -- 342,500 -- 342,500
Preferred stock dividends -- (1,584,406) -- -- (1,584,406)
Guaranteed value of common stock associated
with Dermascan Acquisition (216,562) -- -- -- (216,562)
Issuance of common stock for technology 1,146,388 -- -- -- 1,148,941
Purchase of stock for treasury -- -- -- -- (427,102)
Gain related to the issuance of common stock
by Nexar Technologies, Inc. 7,409,866 -- -- -- 7,409,866
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000 -- -- -- 380,000
Net loss -- (85,803,891) -- -- (85,803,891)
-----------------------------------------------------------------------------
Balance, December 31, 1997 147,356,579 $(152,359,497) $-- $-- $(6,183,687)
=============================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
-------------- ------------- ------------
Cash Flows from Operating Activities
Net loss $(12,620,768) $(37,863,792) $(85,803,891)
Less: Net Loss from Discontinued Operations (4,231,326) (17,065,534) (27,434,812)
------------- ------------- ------------
Net Loss from Continuing Operations (8,389,442) (20,798,258) (58,369,079)
------------- ------------- ------------
Adjustments to reconcile net loss from continuing
operations to net cash
used in operating activities-
Depreciation and amortization 1,006,055 2,343,013 2,246,412
Restructuring and asset write-off costs -- 3,057,808 12,983,000
Write-off of in-process research and development -- 57,212 --
Write-off of intangible assets -- 631,702 --
Loss on sale of wholly owned subsidiary -- -- 165,845
Write-off of deferred financing costs associated with
redemption of convertible debentures -- 201,500 27,554
Valuation allowances for notes and investments -- -- 1,035,912
Accrued interest receivable on note
and subscription receivable -- (568,917) --
Foreign currency exchange gain -- (446,596) (651,970)
Noncash interest expense related to debt 220,280 163,680 5,473,077
Noncash compensation related to common stock
and warrants 95,370 836,982 205,238
Realized gain on marketable securities -- (835,197) (577,969)
Unrealized (gain) loss on marketable securities (133,568) (1,198,174) 669,293
Changes in assets and liabilities, net of effects
from business combinations
Purchases of marketable trading securities (615,842) (10,355,055) (152,938)
Sale of marketable trading securities and
interest received on marketable trading
securities 50,000 10,244,044 2,234,436
Accounts receivable (734,080) (82,025) (1,809,371)
Inventories (614,364) (4,661,443) (3,390,396)
Other current assets and loans to officers (407,575) (1,514,858) (1,005,781)
Accounts payable 1,046,192 1,243,161 1,378,637
Accrued liabilites 2,141,429 4,762,781 6,494,790
------------- ------------- -------------
Net cash used in operating activities (6,335,545) (16,918,640) (33,043,310)
------------- ------------- -------------
Cash Flows from Investing Activities
Cash acquired from purchase of Spectrum Medical 75,087 -- --
Technologies, Inc.
Purchases of property and equipment (649,642) (3,180,112) (5,777,446)
Increase in other assets (828,569) (1,176,527) (95,830)
Loans to related parties (3,861,375) (7,338,625) (1,250,000)
Loans to nonrelated parties -- (2,236,531) --
Payments received on loans to related parties -- 9,322,284 941,288
Guaranteed value associated with --rmascan Acquisition -- -- (216,562)
Investment in nonmarketable securities (500,000) (2,077,054) (1,057,631)
Increase in organizational costs (500,000) -- --
------------- ------------- -------------
Net cash used in investing activities (6,264,499) (6,686,565) (7,456,181)
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Years Ended December 31,
1995 1996 1997
Cash Flows from Financing Activities ---------- ---------- ----------
Proceeds from issuance of convertible debentures 4,150,000 14,169,441 16,715,169
Proceeds from notes payable 1,280,000 -- 3,500,000
Deferred financing costs incurred related to
convertible debentures (182,000) (1,365,217) --
Redemption of convertible debentures (1,048,967) (930,000) (196,000)
Payments of notes payable and capital lease
obligations (1,291,350) (260,224) (4,856,479)
Proceeds from issuance of common stock 9,631,148 13,715,287 1,462,121
Issuance of preferred stock 19,385,963 30,823,147 15,000,000
Purchase of treasury stock (1,211,757) -- (427,102)
Payment of contingent note payable -- (500,000) --
Redemption of preferred stock, including accrued
dividends of $71,223 -- (3,194,375) --
Payments received on subscriptions receivable -- 2,009,592 --
Deferred costs -- (932,661) --
------------ ------------ ------------
Net cash provided by financing
activities 30,713,037 53,534,990 31,197,709
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 18,112,993 29,929,785 (9,301,782)
Net cash (used in) provided by discontinued operations (8,677,687) (30,073,633) 12,676
Cash and cash equivalents, beginning of year 3,000,948 12,436,254 12,292,406
------------ ------------ ------------
Cash and cash equivalents, end of year $12,436,254 $12,292,406 $3,003,300
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $125,702 $280,659 $534,037
=========== =========== ============
Supplemental Disclosure of Noncash Financing
and Investing Activities
Conversion of convertible debentures and
related accrued interest, net of
financing fees $3,190,740 $1,172,762 $17,010,363
=========== =========== ============
Subscriptions received in connection with warrant
exercises
notes payable $1,988,709 $1,057,500 $--
=========== =========== ============
Issuance of common stock in lieu of payment of
notes payable $1,879,932 $-- $--
=========== =========== ============
Conversion of preferred stock $86,060 $788,687 $414,904
=========== =========== ============
Exchange of preferred stock for investment in a
discontinued operation $-- $-- ($4,280,000)
=========== =========== ============
Issuance of common stock for purchase of technology
related to a discontinued operation $-- $-- $1,148,941
=========== =========== ============
Investment banking and consulting fees for services
related to the issuance of common stock and
convertible debentures $120,000 $709,224 $53,125
=========== =========== ============
Issuance of common stock for 1995 and 1996 employer 401(k)
matching contribution $-- $160,598 $318,154
=========== =========== ============
Issuance of common stock for minority interest
in Star Medical subsidiary $-- $1,749,723 $--
=========== =========== ============
Acquisition of Spectrum Medical Technologies, Inc.
Liabilities assumed $(1,128,139) $-- $--
Fair value of assets acquired 1,456,920 -- --
Fair value of 364,178 shares of common stock issued (1,000,000) -- --
Promissory note issued (700,000) -- --
Cash paid (300,000) -- --
Acquisition costs incurred (161,138)
------------ ----------- ------------
Cost in Excess of Net Assets Acquired $(1,832,357) $-- $--
============ =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
Palomar Medical Technologies, Inc. and subsidiaries ("Palomar" or the
"Company") are engaged in the commercial sale and development of cosmetic and
medical laser systems and services. During the year ended December 31, 1997, the
Company formed and began execution of a plan to dispose of its electronics
segment (see Note 2).
Some of the Company's medical laser products are in various stages of
development, and as such, the success of future operations is subject to a
number of risks similar to those of other companies in similar stages of
development. Principal among these risks are the successful development and
marketing of the Company's products, proper regulatory approval, the need to
achieve profitable operations, competition from substitute products and larger
companies, the need to obtain adequate financing to fund future operations and
dependence on key individuals.
The Company has incurred significant losses since inception. The
Company continues to seek additional financing from issuances of common stock
and/or other potential sources in order to fund its operations over the next
twelve months. 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 raised a
total of approximately $30,713,000, $53,535,000 and $31,198,000 in such
financings during the years ended December 31, 1995, 1996 and 1997,
respectively. The Company believes that it will require additional financing
during the next twelve-month period to continue to fund operations and growth.
The Company may raise additional funds through private sales of the Company's
debt or equity securities and sales of its investment in Nexar Technologies,
Inc. ("Nexar") (see below). Sales of securities to private investors are
generally 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) DISCONTINUED OPERATIONS
During the fourth quarter of 1997, the Company's Board of Directors
approved a plan to dispose of the electronics business segment. The electronics
segment consists of the manufacture and sale of personal computers, high-density
flexible electronics circuitry and memory modules.
Included in the electronics business segment is Nexar. Nexar is an
early-stage company that manufactures, markets and sells personal computers with
a unique circuit board that enables end users to upgrade and replace the
microprocessor, memory and hard drive components. On April 14, 1997, Nexar
completed an initial public offering of 2,500,000 shares at $9.00 per share, for
net proceeds of approximately $19,593,000. The Company recorded an increase in
stockholders' equity of $7,409,866, in accordance with Staff Accounting Bulletin
("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
beneficially owned 6,100,000 shares of Nexar's common stock and 45,684 shares of
Nexar's convertible preferred stock. In April 1997, the Company purchased
300,000 shares of Nexar's newly issued publicly registered common stock for
approximately $2,777,000 from Nexar's underwriter in a private placement
transaction. The convertible preferred stock is convertible into 406,080 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 6,506,080 common
and common equivalent shares of Nexar owned by the Company were placed in escrow
and are subject to a mandatory repurchase, in whole or part, by Nexar at $0.01
per share (or $12,000) after the 48 month anniversary of the initial public
offering of Nexar's common stock unless these shares are released from escrow.
The Contingent Shares are subject to release to the Company in installments of
400,000 shares each upon the achievement of any three of the four milestones as
specified in the agreement between the Company and Nexar. The
F-10
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
milestones are based on Nexar achieving certain revenue and net income levels as
defined in the agreement. On December 10, 1997, the Company sold these
contingent shares for $5,000 to an investor. However, if the investor sells the
escrow shares for a price in excess of $240,000, the excess will be paid to
Palomar.
During the fourth quarter of 1997, the Company reduced its ownership in
Nexar through the sale of common stock to private investors. At December 31,
1997, the Company beneficially owned 3,746,343 shares of Nexar's common stock,
representing approximately a 36% ownership. Subsequent to year-end, the Company
further reduced its ownership through the sale of 500,000 shares to a private
investor for $2,000,000; 400,000 of these shares will be held by a custodian and
released for sale by the investor over the next two years. The Company has
guaranteed the investor a minimum selling price of $5.00 a share. The Company
has deferred the gain on the sale of Nexar stock to the investor and will
recognize gains related to these shares as the investor sells them. The Company
plans to liquidate its remaining position in Nexar within the next year. The
Company has accounted for its investment in Nexar as a Discontinued Operation
using the equity method. During the years ended December 31, 1996 and 1997, the
Company has recognized gains on the disposition of Nexar of $3,830,000 and
$6,221,689, respectively. These amounts are included in "Gain on Dispositions"
in the Consolidated Statements of Operations.
The other entities included in the electronics business segment are
Dynaco Corp. ("Dynaco") and Dynaco's wholly owned subsidiaries Comtel
Electronics, Inc. ("Comtel") and Dynamem, Inc. ("Dynamem"). On December 9, 1997,
the Company entered into a two-phase stock purchase agreement with Biometric
Technologies Corporation ("BTC"). BTC was formed jointly by Dynaco's President
and its Chairman of the Board. The first phase was consummated on December 9,
1997 and consisted of the sale of all of the issued and outstanding common stock
of Comtel and Dynamem in exchange for $3,654,000 payable in two installments.
The first installment is an $850,000 promissory note due February 15, 1998
bearing interest at a rate of prime plus two percent and secured by a Pledge and
Security Agreement. The second installment is a $2.8 million promissory note due
in forty-eight monthly installments, beginning February 1, 1999. The note bears
interest at the prime rate. This promissory note was fully reserved by the
Company during 1997, as its ultimate collectability is uncertain.
As part of phase I, the Company entered into a Loan and Subscription
Agreement with a creditor of Comtel for $3,233,000. This promissory note
represents the settlement of amounts owed the creditor by Comtel and guaranteed
by Palomar. Principal and interest payments will be made over twenty-four months
and interest will accrue at the bank's prime rate plus 2.25%. This promissory
note has been collateralized by 3,250,000 shares of the Company's common stock.
The Company also guarantees $2,500,000 of Comtel's borrowings from this creditor
until October 31, 1998. The stockholders of BTC have personally guaranteed to
the Company payment for any amounts borrowed under this line of credit in excess
of approximately $1,500,000 in the event that the Company is obligated to honor
this guarantee. The Company also restructured all assets and investments related
to a significant customer of Comtel into a $4,000,000 note receivable. This
receivable was fully reserved by the Company during 1997, as its ultimate
collectability is uncertain.
In phase II, which shall occur upon the earlier of BTC's initial public
offering of stock or June 30, 1998, BTC will purchase all of the issued and
outstanding stock of Dynaco. The phase II purchase price is $5,346,000, of which
$2,673,000 will be paid in cash and $2,673,000 will be paid in BTC common stock
of equal value. Alternatively, the Company may elect to have the entire phase II
purchase paid in cash at a value of $3,500,000. If phase II is not completed by
June 30, 1998, the Company will exercise alternative options for disposing of
and /or liquidating Dynaco. BTC also has the option to sell Dynaco to a third
party in which case any proceeds greater than $3,500,000 will be split evenly
between BTC and Palomar. The Company recognized a loss of approximately
$4,148,000 related to the phase I and phase II dispositions. The Company has
estimated Dynaco's 1998 operating loss through June 30, 1998 to be approximately
$850,000. These charges have been netted in "Gain on Disposition" in the
accompanying Consolidated Statement of Operations. The Company guarantees
$3,000,000 of amounts borrowed by Dynaco to a creditor. This guarantee expires
in May 1999.
Pursuant to Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the consolidated financial statements of the Company
have been reclassified to reflect the
F-11
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
dispositions of the aforementioned subsidiaries that comprise the electronics
segment. Accordingly, the assets and liabilities, revenues and expenses, and
cash flows of the electronics segment have been excluded from the respective
captions in the Consolidated Balance Sheets, Consolidated Statements of
Operations and Consolidated Statements of Cash Flows. The net assets of these
entities have been reported as "Net Assets of Discontinued Operations" in the
accompanying Consolidated Balance Sheets; the net operating losses of these
entities have been reported as "Net Loss from Discontinued Operations" in the
accompanying Consolidated Statements of Operations; the net cash flows of these
entities have been reported as "Net Cash (Used in) Provided by Discontinued
Operations" in the accompanying Consolidated Statements of Cash Flows.
Summarized financial information for the discontinued operations were
as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
-------------- --------------
Current Assets $36,153,021 $5,683,694
Total Assets 46,195,699 11,506,145
Current Liabilities 21,524,767 5,375,353
Total Liabilities 23,224,319 5,680,543
-------------- --------------
Net Assets of Discontinued Operations $22,971,380 $5,825,602
============== ==============
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Year Ended December 31,
1995 1996 1997
--------------- ---------------- ----------------
Revenues $16,296,224 $52,491,572 $57,663,080
Net Loss from Discontinued Operations ($4,231,326) ($17,065,534) ($27,434,812)
</TABLE>
The following is the summarized financial information for Nexar:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
------------------------- ------------------------
Current Assets $16,966,851 $17,810,564
Non-Current Assets 2,622,270 2,098,495
Current Liabilities 6,542,296 7,886,594
Non-Current Liabilities 22,817,998 883,613
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Period Ended December 31,
1995 1996 1997
----------------- ---------------- -----------------
Net Revenues $619,629 $18,695,364 $33,608,063
Gross Profit 45,018 2,302,881 740,151
Net Loss (2,261,434) (7,510,139) (13,346,380)
</TABLE>
F-12
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below and elsewhere in the
Notes to Consolidated Financial Statements.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and all wholly owned and majority-owned subsidiaries. Nexar, a
discontinued entity, has been accounted for in consolidation under the equity
method in accordance with APB No. 30 as described in Note 2. All other
investments are accounted for using the cost method as the Company owns less
than 20% of the common stock outstanding for these investments. All intercompany
transactions have been eliminated in consolidation.
(b) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. As of
December 31, 1997, the Company has investments in marketable securities totaling
approximately $5,054,000, including amounts totaling $3,604,880 in net assets of
discontinued operations. Included in the amount of $3,604,880 is the Company's
financial reporting basis for 3,746,343 shares of Nexar common stock that the
Company beneficially owns. The amount that the Company may ultimately realize
from these investments could differ materially from the value of these
investments recorded in the accompanying consolidated financial statements as of
December 31, 1997.
(c) INVESTMENTS
The Company accounts for marketable securities 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 are reported at amortized cost and classified as held-to-maturity.
There were no held-to-maturity securities as of December 31, 1996 and 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 reported at fair market
value and classified as available-for-sale securities. Unrealized gains and
losses related to available-for-sale securities are included as a separate
component of stockholders' equity. Securities that are bought and held
principally for the purpose of selling them in the near term are reported at
fair market value and classified as trading securities. Realized and unrealized
gains and losses related to trading securities are included in the Consolidated
Statements of Operations. The Company's investment portfolios at December 31,
1996 and 1997 consist of the following:
F-13
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1996
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- -------------
Trading Securities:
Equity investments in publicly
traded companies $1,695,618 $1,537,614 $339,440 $2,893,792
Available-for-Sale (long-term):
Equity investments in publicly
traded companies 1,000,000 --- 342,500 657,500
------------ ------------ ------------- -------------
$2,695,618 $1,537,614 $681,940 $3,551,292
============ ============ ============= =============
December 31, 1997
--------------------------------------------------------
Trading Securities:
Equity investments in publicly
traded companies $1,050,649 $479,177 $80,500 $1,449,326
============ ============ ============= =============
</TABLE>
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods inventories consist of material,
labor and manufacturing overhead. At December 31, 1996 and 1997, inventories
consist of the following:
December 31,
1996 1997
---------------- ----------------
Raw materials $4,076,381 $2,928,350
Work-in-process and finished goods 1,129,573 1,783,124
---------------- ----------------
$5,205,954 $4,711,474
================ ================
(e) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization on property and
equipment using the straight-line method by charging to operations amounts that
allocate the cost of assets over their estimated useful lives as follows:
Estimated
Asset Classification Useful Life
------------------------------------ ----------------------
Machinery and equipment 5-8 Years
Furniture and fixtures 5 Years
Leasehold improvements Term of Lease
F-14
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 1996 and 1997, property and equipment consist of the following:
<TABLE>
<S> <C> <C> <C>
December 31,
1996 1997
---------------- -----------------
Machinery and equipment $3,177,828 $6,328,442
Furniture and fixtures 1,047,942 1,018,931
Leasehold improvements 407,334 480,453
---------------- -----------------
4,633,104 7,827,826
Less: Accumulated depreciation
and amortization 805,114 1,372,240
---------------- -----------------
$3,827,990 $6,455,586
================ =================
</TABLE>
Included in machinery and equipment as of December 31, 1996 and 1997 is
approximately $884,000 and $3,470,000, respectively, of equipment manufactured
by the Company and used in its service business.
(f) COST IN EXCESS OF NET ASSETS ACQUIRED
The costs in excess of net assets for acquired businesses are being
amortized on a straight-line basis over 5 to 7 years. Amortization expense for
the years ended December 31, 1995, 1996 and 1997 amounted to approximately
$189,000, $536,000 and $554,000, respectively, and is included in general and
administrative expenses in the Consolidated Statements of Operations.
The Company accounts for long-lived assets in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of." Under SFAS No. 121, the Company is required to assess
the valuation of its long-lived assets, including cost in excess of net assets
acquired, based on the estimated future cash flows to be generated by such
assets (see Note 4). The Company has assessed the realizability of its
long-lived assets as of December 31, 1997 and believes them to be realizable.
(g) DEFERRED FINANCING COSTS
During the years ended December 31, 1996 and 1997, the Company incurred
financing costs related to several issuances of convertible debentures. Deferred
financing costs are amortized by a charge to interest expense over the period
that the debt is outstanding (see Note 6).
(h) REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. Provisions are
made at the time of revenue recognition for any applicable warranty costs
expected to be incurred. Revenues from services, which have not been significant
to date, are recognized as the services are provided. International sales for
the years ended December 31, 1995, 1996 and 1997 were approximately 44%, 22% and
24%, respectively, of total revenue.
(i) SIGNIFICANT CUSTOMERS
For the year ended December 31, 1997, one customer accounted for 11% of
revenues and 51% of accounts receivable. This customer is the Company's
worldwide distributor of laser systems (see Note 12(e)).
(j) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
F-15
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(k) NET LOSS PER COMMON SHARE
In March 1997, the FASB issued SFAS No. 128, Earnings per Share. This
statement establishes standards for computing and presenting earnings per share
and applies to entities with publicly traded common stock or potential common
stock. This statement is effective for fiscal years ending after December 15,
1997. Basic net loss per share was determined by dividing net income by the
weighted average shares of common stock outstanding during the year. Diluted net
loss per share is the same as basic earnings per share because the Company's
potentially dilutive securities, primarily stock options, warrants, redeemable
preferred stock and convertible debentures are antidilutive. The calculation of
the Company's net loss per common share from continuing operations for the years
ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
--------------- --------------- ----------------
Net loss from continuing operations $(8,389,442) $(20,798,258) $(58,369,079)
Preferred stock dividends (124,610) (1,242,751) (1,584,406)
Amortization of value ascribed to preferred
stock conversion discount --- --- (2,823,529)
--------------- --------------- ----------------
Adjusted net loss from continuing operations $(8,514,052) $(22,041,009) $(62,777,014)
=============== =============== ================
Basic net loss per common share from
continuing operations $(0.60) $(0.84) $(1.79)
=============== =============== ================
Weighted average number of
common shares outstanding 14,164,901 26,166,538 35,105,272
=============== =============== ================
</TABLE>
Net loss from discontinued operations per common share is computed by
dividing the net loss from discontinued operations by the weighted average
number of common shares outstanding for the period.
In 1995, 1996 and 1997, 11,275,200, 17,636,423 and 29,271,031 weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding as they were antidilutive.
(l) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information about Financial Instruments
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet and credit
risk concentrations. Financial instruments that subject the company to credit
risk consist primarily of cash and trade accounts receivable. The Company places
its cash in highly rated financial institutions. The Company has no significant
off-balance-sheet concentration of credit risk such as foreign exchange
contracts, options contracts or other foreign hedging arrangements. To reduce
its accounts receivable risk, the Company relies on its worldwide distributor to
assess the financial strength of its end customers and, as a consequence,
believes that its accounts receivable credit risk exposure is limited. The
Company maintains an allowance for potential credit losses. The Company's
accounts receivable credit risk is not concentrated within any one geographic
area.
(m) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure about Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. At December 31, 1996 and 1997, financial instruments consisted of
principally convertible debentures and preferred stock financings. The fair
value of financial instruments pursuant to SFAS No. 107
F-16
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
approximated their carrying values at December 31, 1996 and 1997. Fair values
have been determined through information obtained from market sources and
management estimates.
(n) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996
consolidated financial statements to conform with the current year's
presentation.
(o) RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure. In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 129, 130 and 131 are effective
for fiscal years beginning after December 15, 1997. The Company believes that
the adoption of these new accounting standards will not have a material impact
on the Company's financial statements.
(4) ASSET WRITE-OFF AND RESTRUCTURING
In accordance with SFAS No. 121, the Company determined during the
third quarter of 1997 that certain investments' carrying values for both its
continuing and discontinued operations will not be realizable due to the
Company's change in strategy. The Company has fully reserved for all such
investments from continuing operations resulting in a charge of approximately
$10,283,000.
In the third quarter of 1997, the Company recognized a restructuring
charge of $2,700,000 based on the decision to discontinue certain medical
product and service business units and consolidate others. The majority of these
amounts relate to severance benefits. All expenses accounted for as
restructuring charges were in accordance with the criteria set forth in Emerging
Task Force Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring), and are exclusive of the charges related to discontinued
operations, as disclosed in Note 2. During the three months ended December 31,
1997, the Company paid out approximately $718,000 of severance resulting in a
restructuring liability balance of approximately $1,982,000 at December 31,
1997. This restructuring liability will be paid in 1998. As part of this
restructuring, the Company disposed of the following medical businesses:
(a) TISSUE TECHNOLOGIES, INC.
On December 16, 1997, the Company sold assets and certain liabilities
of Tissue Technologies, Inc. ("Tissue Technologies"), a manufacturer of a
dermatological laser product for the treatment of wrinkles to a newly formed
medical laser manufacturer. This medical laser manufacturer was formed by former
executives of Tissue Technologies Inc. In exchange, the Company received a
$500,000 note receivable due in monthly installments over the next year,
royalties ranging from 2% to 5% on product revenue over the next ten years, a
15% equity position in the newly formed company and a warrant to purchase 10% of
the common stock of the newly formed company at $.50 per share. This transaction
did not have a material effect on the Company's operations for the year ended
December 31, 1997.
(b) DERMASCAN, INC.
Subsequent to year end, the Company sold Dermascan, an electrology
marketing subsidiary, back to a Dermascan shareholder for $167,000. This amount
was offset against amounts owed to the Dermascan shareholder under an agreement
terminated in connection with the Company's sale of Dermascan. This transaction
did not have a material effect on the Company's operations for the year ended
December 31, 1997.
F-17
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(c) PALOMAR TECHNOLOGIES, LTD.
On January 1, 1998 the Company sold substantially all of the business
assets and liabilities of Palomar Technologies, Ltd., a foreign manufacturer, to
a publicly traded company. The Company received cash of approximately $200,000
and was relieved of obligations related to the building lease and all employment
agreements. This transaction did not have a material effect on the Company's
operations for the year ended December 31, 1997.
(5) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. At
December 31, 1997, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $85,000,000 to be used to offset future taxable
income, if any. This net operating loss carryforward will begin to expire in
2003. The Internal Revenue Code contains provisions that limit the net operating
loss carryforwards due to changes in ownership, as defined by the Internal
Revenue Code. The Company believes that its net operating loss carryforwards
will be limited due to its reorganization in 1991 and subsequent stock
offerings. The Company has not recorded a deferred tax asset for the net
operating losses, due to uncertainty relating to the Company's ability to
utilize such carryovers.
(6) LONG-TERM DEBT
At December 31, 1996 and 1997, long-term debt consisted of the
following:
December 31,
1996 1997
-------------- ---------------
Dollar denominated convertible debentures $7,288,063 $10,683,440
Swiss franc denominated convertible debentures 7,222,846 --
Note payable in connection with guarantee on
behalf of discontinued subsidiary (See Note 2) -- 3,233,000
Other notes payable 651,608 169,588
-------------- ---------------
15,162,517 14,086,028
Less - current maturities (497,377) (1,640,465)
-------------- ---------------
$14,665,140 $12,445,563
============== ===============
F-18
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(a) CONVERTIBLE DEBENTURES
The following table summarizes the issuance and conversion of the
convertible debentures for the years ended December 31, 1996 and 1997.
<TABLE>
<S> <C> <C> <C> <C>
Common
Shares
Outstanding at Issued
Face December 31, Upon
-----------------------------
Series Value 1996 1997 Conversion
---------------------------------------------------- -------------- -------------- ------------- -------------
3% Series due September 30, 1996 $ 750,000 $ -- $ -- 370,189
6% Series due November 21, 1997 2,000,000 -- -- 1,172,132
7% Series due March 31, 2000 1,100,000 -- -- --
7% Series due July 1, 2000 1,200,000 -- -- 401,549
8% Series due October 26, 1997 1,000,000 -- -- 34,615
4.5% Series due October 21, 1999, 2000, 2001 5,000,000 3,761,038 100,000 1,381,264
5% Series due December 31, 2001 5,000,000 3,527,025 923,439 2,074,992
5% Series due January 13, 2002 1,000,000 -- 1,000,000 --
5% Series due March 10, 2002 5,500,000 -- 1,160,001 3,094,677
6% Series due March 13, 2002 500,000 -- 500,000 --
6%, 7% and 8% Series due September 30, 2002 7,000,000 -- 7,000,000 --
4.5% Series denominated in Swiss francs
due July 3, 2003 7,669,442 7,222,846 -- 914,028
-------------- -------------- ------------- -------------
$37,719,442 $14,510,909 $10,683,440 9,443,446
============== ============== ============= =============
</TABLE>
On January 13, 1997, the Company issued $1,000,000 of 5% convertible
debentures due January 13, 2002. The convertible debentures have a conversion
price equal to 85% of the average closing bid price of the Company's common
stock price as defined, provided that in any thirty-day period, the holder of
these debentures may convert no more than 33% (or 34% in the last thirty-day
period available for conversion) of the debentures. The Company has ascribed a
value of $176,471 for the discount conversion feature.
On March 10, 1997, the Company issued $5,500,000 of 5% convertible
debentures due March 10, 2002. 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. The Company
has ascribed a value of $611,111 for the 10% conversion discount.
It is the Company's policy to discount convertible debentures based on
the discount conversion price and amortize the discount to operations over the
expected life of the convertible debentures, which in most cases is less than
the term of the debentures. Accordingly, the Company has credited the ascribed
value for the discount features described above to additional paid-in capital.
On March 13, 1997, the Company issued $500,000 of 6% convertible
debentures due March 13, 2002. The convertible debentures have a conversion
price of $11.00. In addition, after 90 days, the debentureholder may convert no
more than one-third of the debenture in any thirty-day period. The Company has
accounted for these debentures at face value.
On September 30, 1997, the Company issued $7,000,000 of convertible
debentures due September 30, 2002. The debentures bear interest at a rate of 6%
for the first 179 days, 7% for days 180-269 and 8% thereafter. The
debentureholders were also issued 413,109 shares of common stock related to this
financing. The fair market value of the
F-19
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
common stock was $1,050,000 and this amount is being treated as debt discount
and amortized to interest expense. The convertible debentures have a conversion
price of 100% of the Company's average stock price as defined. In addition, the
debentureholder may convert no more than 33% in any thirty-day period (or 34% of
the debentures in the last thirty day period). The Company also has redemption
rights related to this financing. (See Note 13.) The Company incurred deferred
financing costs of $350,000 relating to the issuance of these debentures.
On July 3, 1996, the Company raised approximately $7,669,000 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 are convertible by the holder or the Company
commencing October 1, 1996 at a conversion price equal to from 100% to 77.5% of
the applicable conversion price, calculated as defined. The Company ascribed a
value of $1,917,360 to the discount conversion feature of the convertible
debenture. This amount was being amortized to interest expense over the life of
the Swiss franc convertible debenture. During 1997, the Company redeemed 300
units of this convertible debenture financing for $195,044.
On October 16, 1997, the Company brought a declaratory judgment action
in the United States District Court against certain of the Swiss franc
debentureholders. Prior to this suit, those debentureholders had alleged that
the Company was in breach of certain protective covenants and on October 22,
1997, they brought suit based on these claims. On November 13, 1997, the Company
exercised its right to convert 9,375 units into 914,028 shares of common stock
and cash of approximately $36,000. The unamortized discount totaling
approximately $1,784,000 was amortized to interest expense upon conversion. The
Company has accounted for these debentures as converted in the accompanying
financial statements. The ongoing litigation will be accounted for under SFAS
No. 5, Accounting for Contingencies (see Note 12(d)).
The Company incurred deferred financing costs of approximately
$2,038,000 and $769,000 relating to the issuance of convertible debentures
during the years ended December 31, 1996 and 1997, respectively. These costs
have been reflected as deferred financing costs in the accompanying consolidated
balance sheets and are being amortized to interest expense over the term of the
related convertible debentures. During the years ended December 31, 1995, 1996
and 1997, the Company amortized approximately $71,000, $78,000 and $276,000 to
interest expense, respectively. Any remaining unamortized deferred financing
costs are recorded to additional paid-in capital upon conversion. During the
years ended December 31, 1996 and 1997, the Company amortized approximately
$41,000 and $1,820,000, respectively, of unamortized deferred financing costs to
additional paid-in-capital.
During the years ended December 31, 1995, 1996 and 1997, the Company
recorded approximately $168,000, $77,000 and $5,444,000, respectively, of
interest expense related to the amortization of the discount of convertible
debentures.
(b) FUTURE MATURITIES OF LONG-TERM DEBT
Future maturities of notes payable, capital lease obligations and
convertible debentures reflected at face value as of December 31, 1997 are as
follows:
1998 $ 1,640,465
1999 1,699,740
2000 65,237
2001 1,988,679
2002 8,691,907
=============
$14,086,028
=============
F-20
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) STOCKHOLDERS' EQUITY
(a) COMMON STOCK
On February 28, 1997, the Company entered into an Asset Purchase and
Settlement Agreement with a former officer of Nexar. Under the terms of this
agreement, Palomar paid approximately $1,601,000 in cash and issued 255,320
shares of its common stock in exchange for rights to technology. The total value
of this purchased technology of $2,750,000 was transferred to Nexar, a
discontinued entity, in accordance with the Asset Purchase and Settlement
Agreement between the Company and Nexar.
During the year ended December 31, 1997, the Company issued 20,000
shares of common stock in connection with advisory services.
On December 31, 1997, in connection with the discontinuation of
Dynaco's operations, the Company entered a Security Agreement-Stock Pledge with
a bank. Pursuant to this agreement, the Company pledged 3,250,000 shares of its
common stock to the bank as security for a guaranty by the Company (Note 2).
These shares are held in escrow, are not entitled to vote and are not considered
outstanding as of December 31, 1997.
(b) PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred
stock, $.01 par value. As of December 31, 1996 and 1997, preferred stock
authorized, issued and outstanding consists of the following:
<TABLE>
<S> <C> <C> <C>
1996 1997
---- ----
Redeemable convertible preferred stock, Series E, $.01 par value per
share Authorized - 10,000 shares
Issued and outstanding - 2,151 shares in 1996, liquidation preference of $2,235,615 $ 22 $ --
Redeemable convertible preferred stock, Series F, $.01 par value per share
Authorized - 6,000 shares
Issued and outstanding - 6,000 shares in 1997, liquidation preference of $6,748,500
at December 31, 1997 60 60
Redeemable convertible preferred stock, Series G, $.01 par value per
share Authorized - 10,000 shares Issued and outstanding - 2,684 shares
in 1997, liquidation preference of $2,934,742
at December 31, 1997 100 27
Redeemable convertible preferred stock, Series H, $.01 par value per
share Authorized - 16,000 shares Issued and outstanding - 7,690 shares
in 1997, liquidation preference of $8,031,232
at December 31, 1997 -- 77
---- ----
Total preferred stock $182 $164
==== ====
</TABLE>
The Series F redeemable convertible preferred stock ("Series F
Preferred"), together with any accrued but unpaid dividends, may be converted
into common stock at 80% of the average closing bid price for the ten trading
days preceding the conversion date, but in no event less than $3.00 or more than
$16.00. This conversion floor was decreased by the two parties from an original
price of $7.00. The Series F Preferred may be redeemed at the Company's option
as defined, with no less than 10 days' and no more than 30 days' notice or when
the stock price exceeds $16.80 per share for sixty consecutive trading days, at
an amount equal to the amount of liquidation preference determined as of the
applicable
F-21
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
redemption date. Dividends are payable quarterly at 8% per annum in arrears on
March 31, June 30, September 30 and December 31. Dividends not paid on the
payment date, whether or not such dividends have been declared, will bear
interest at the rate of 10% per annum until paid.
The Series G redeemable convertible preferred stock ("Series G
Preferred"), together with any accrued but unpaid dividends, may be converted
into common stock at 85% of the average closing bid price for the five trading
days preceding the conversion date, but in no event less than $.01. On December
31, 1997, the Company and the holder of the remaining 2,684 shares of Series G
Preferred entered into an Exchange Agreement. The conversion floor was decreased
by the two parties from an original floor of $6.00. In addition, beginning on
March 1, 1998, for any thirty-day period, the holder may exchange a limited
amount of the Series G Preferred ("exchangeability amount") and any accrued but
unpaid dividends for common stock at 85% of the average closing bid price for
the five trading days preceding the conversion date ("exchange date"). The
exchangeability amount increases as the exchange rate increases. The
exchangeability amount ranges from 268 shares of preferred stock for an exchange
rate below $2.00 to 1,072 shares of preferred stock for an exchange rate in
excess of $4.00. The Series G Preferred may be redeemed at the Company's option
at any time, with no less than 15 days' and no more than 20 days' notice, at an
amount equal to the sum of (a) the amount of liquidation preference determined
as of the applicable redemption date plus (b) $176.50. Dividends are payable
quarterly at 7% per annum in arrears on January 1, April 1, July 1 and October
1. Dividends not paid on the payment date, whether or not such dividends have
been declared, will bear interest at the rate of 12% per annum until paid.
The conversion price for the Series F and G Preferred is adjustable for
certain dilutive events, as defined. The Series F and G Preferred have a
liquidation preference equal to $1,000 per share of redeemable convertible
preferred stock, plus accrued but unpaid dividends and accrued but unpaid
interest. The Series F and G Preferred stockholders do not have any voting
rights except on matters affecting the Series F and G Preferred.
During the first and second quarters of 1997, the Company issued 16,000
shares of Series H redeemable convertible preferred stock ("Series H Preferred")
for $16,000,000 with attendant financing costs of $1,000,000. The Series H
Preferred accrues dividends at rates varying from 6% to 8% per annum, as
defined. The Series H Preferred, including any accrued but unpaid dividends, may
be converted into common stock at 100% of the average stock price, as defined,
for the first 179 days from the closing date, 90% of the average stock price, as
defined, for the following 90 days and 85% of the average stock price, as
defined, thereafter. The conversion price is adjustable for certain dilutive
events, as defined. The holders are 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). 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 the discount conversion feature of
the Series H Preferred, which is being amortized as an adjustment to earnings
available to common shareholders over the most favorable conversion period
attainable to the holders (270 days from the date of issuance).
During the year ended December 31, 1997, the following shares of
preferred stock, accrued premium, dividends, interest and other related costs
were converted into shares of common stock as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Series Converted Converted and Other Related Costs Amount Converted Into
- ------------ --------------- --------------------- --------------------------------- --------------------- -------------------
E 2,128 $2,128,000 $126,366 $2,254,366 332,859
G 7,316 7,316,000 438,234 7,754,234 602,824
H 8,310 8,310,000 228,411 8,538,411 5,204,158
--------------- --------------------- --------------------------------- --------------------- -------------------
17,754 $17,754,000 $793,011 $18,547,011 6,139,841
</TABLE>
F-22
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to the 602,824 shares of common stock issued related to the
Series G Preferred conversion, the Company issued to the Series G Preferred
stockholder $47,731 in cash dividends and 956,388 shares of Nexar common stock
valued at $4,671,597.
(c) STOCK OPTION PLANS AND WARRANTS
(i) STOCK OPTIONS
The Company has several Stock Option Plans (the "Plans") that provide
for the issuance of a maximum of 4,350,000 shares of common stock, which may be
issued as incentive stock options ("ISOs") or nonqualified options. Under the
terms of the Plans, ISOs may not be granted at less than the fair market value
on the date of grant (and in no event less than par value); in addition, ISO
grants to holders of 10% of the combined voting power of all classes of Company
stock must be granted at an exercise price of not less than 110% of the fair
market value at the date of grant. Pursuant to the Plans, options are
exercisable at varying dates, as determined by the Board of Directors, and have
terms not to exceed 10 years (five years for 10% or greater stockholders). The
Board of Directors, at the request of the optionee, may, at its discretion,
convert the optionee's ISOs into nonqualified options at any time prior to the
expiration of such ISOs.
During the year ended December 31, 1997, the Company granted options to
certain Tissue Technologies employees to purchase an aggregate of 60,845 shares
of common stock at an exercise price of $.01 per share in settlement of a stock
option dispute. The employees simultaneously exercised these options. The fair
market value of the common stock issued totals approximately $152,000, which has
been reflected as a charge in the accompanying Consolidated Statements of
Operations.
The Company's Star subsidiary, manufacturer of the Company's diode
laser, also has established a stock option plan that provides for the issuance
of both nonqualified options and ISOs. In the year ended December 31, 1996, Star
granted a total of 140,000 options to purchase Star's common stock to officers
and employees at exercise prices ranging from $2.50 to $9.50 per share. In the
year ended December 31, 1996, an individual exercised 20,000 shares at $2.50 per
share; in addition, 12,000 shares at $6.00 per share were canceled. In the year
ended December 31, 1997, Star granted a total of 50,500 options to purchase its
common stock to employees at an exercise price of $19.00 per share. During the
year ended December 31, 1997, no options were exercised or canceled. As of
December 31, 1997, options to purchase 255,500 shares of Star common stock at
prices ranging from $2.50 to $19.00 per share are outstanding.
F-23
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes all stock option activity of the Company
for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<S> <C> <C> <C>
Number of Exercise Weighted Average
Shares Price Exercise Price
------------- ---------------- ----------------------
Outstanding, December 31, 1994 1,047,500 $1.00-$3.50 $2.25
Granted 820,235 0.40-3.00 1.75
Exercised (285,000) 1.00-3.50 1.76
Canceled (75,000) 2.375 2.375
------------- ---------------- ----------------------
Outstanding, December 31, 1995 1,507,735 $0.40-$3.50 $2.06
Granted 1,520,000 6.00-10.50 7.08
Exercised (366,735) 0.40-3.50 1.28
Canceled (5,000) 3.00 3.00
------------- ---------------- ----------------------
Outstanding, December 31, 1996 2,656,000 $2.00-$10.50 $5.03
Granted 1,747,345 0.01-6.50 2.53
Exercised (214,845) 0.01-3.00 1.62
Canceled (1,206,100) 2.375-10.50 6.23
------------- ---------------- ----------------------
Outstanding, December 31, 1997 2,982,400 $1.50-$8.00 $3.33
============= ================ ======================
Exercisable, December 31, 1997 1,657,565 $2.00-$8.00 $3.48
============= ================ ======================
Available for future issuances under the Plans
as of December 31, 1997 725,255
=============
</TABLE>
The range of exercise prices for options outstanding and options
exercisable at December 31, 1997 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------ --------------------------------------
Weighted Average
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------- ---------------- ---------------------- ----------------------- -------------- -----------------------
$1.50 - $2.50 2,415,900 3.39 years $2.36 1,257,733 $2.30
$3.00 - $3.50 66,500 1.65 years 3.23 66,500 3.23
$8.00 500,000 3.65 years 8.00 333,332 8.00
- -------------------- ---------------- ---------------------- ----------------------- -------------- -----------------------
2,982,400 3.40 years $3.33 1,657,565 $3.48
================ ====================== ======================= ============== =======================
</TABLE>
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the
FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 123
established a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative under SFAS No.
123 which requires disclosure of the pro forma effects on earnings per share as
if SFAS No. 123 had been adopted, as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all stock options granted to employees of the Company in the years
ended December 31, 1996 and 1997 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The pro forma disclosure for the Company's results
of operations related to stock option plans at its Star subsidiary were
immaterial for the years ended December 31, 1996 and 1997.
F-24
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The assumptions used to calculate the SFAS No. 123 pro forma disclosure
and the weighted average information for the years ended December 31, 1995, 1996
and 1997 for the Company are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
------------------- ----------------- -------------------
Risk-free interest rate 6.08% 6.37% 6.09%
Expected dividend yield - - -
Expected lives 3.2 years 4.4 years 3.69 years
Expected volatility 55% 79% 79%
Weighted-average grant date fair value of
Options granted during the period $3.92 $4.57 $2.06
</TABLE>
The weighted fair market value and weighted exercise price of options
granted for the Company in the years ended December 31, 1995, 1996 and 1997 are
as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
-------------- ----------------- -----------------
Weighted average exercise price for options:
Whose exercise price exceeded fair market value at
the date of grant $3.00 $10.00 $2.53
Whose exercise price was equal to fair market
value at the date of grant $1.614 $6.875 $-
Weighted Average Fair Market Value for options:
Whose exercise price exceeded fair market value at
the date of grant $2.125 $8.875 $1.87
Whose exercise price was equal to fair market
value at the date of grant $5.265 $6.875 $-
</TABLE>
(ii) WARRANTS
The following table summarizes all warrant activity of the Company for
the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<S> <C> <C> <C>
Weighted
Number of Exercise Average
Shares Price Exercise Price
---------------- ---------------- ------------------
Outstanding, December 31, 1994 4,554,862 $0.60-$15.00 $5.39
Granted 4,835,155 0.01-7.50 2.36
Exercised (2,840,093) 0.60-5.00 3.86
---------------- ---------------- ------------------
Outstanding, December 31, 1995 6,549,924 $0.01-$15.00 $3.82
Granted 6,527,576 4.88-16.50 8.16
Exercised (3,101,261) 0.01-7.69 2.66
---------------- ---------------- ------------------
Outstanding, December 31, 1996 9,976,239 $0.60-$16.50 $7.02
Granted 2,793,187 2.50-8.875 4.29
Exercised (584,879) 0.60-7.50 2.10
Canceled (2,186,517) 1.00-16.50 6.65
---------------- ---------------- ------------------
Outstanding, December 31, 1997 9,998,030 $2.00-$15.00 $6.65
================ ================ ==================
Exercisable, December 31, 1997 8,233,020 $2.00-$15.00 $7.01
================ ================ ==================
</TABLE>
F-25
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The range of exercise prices for warrants outstanding and exercisable
at December 31, 1997 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Warrants Outstanding Warrants Exercisable
- ------------------------------------------------------------------------------------ --------------------------------------
Weighted Average
Range of Warrants Remaining Weighted Average Warrants Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------- ---------------- ---------------------- ----------------------- -------------- ----------------------
$2.00 - $3.50 2,535,452 3.29 years $2.68 1,970,452 $2.52
$4.00 - $5.25 1,802,420 2.85 years 4.89 1,402,412 4.99
$6.00 - $7.50 3,000,000 3.25 years 6.83 2,399,999 7.03
$7.69 - $15.00 2,660,158 3.25 years 6.83 2,460,157 7.03
---------------- ---------------------- ----------------------- -------------- ----------------------
9,998,030 3.19 years $6.65 8,233,020 $7.01
================ ====================== ======================= ============== ======================
</TABLE>
The Company has computed the pro forma disclosures required under SFAS
No. 123 for all warrants granted in the years ended December 31, 1996 and 1997
using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used to calculate the SFAS No. 123 pro forma disclosure
and the weighted average information for the years ended December 31, 1995, 1996
and 1997 for the Company are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
---------------- ------------------ ------------------
Risk-free interest rate 6.01% 5.93% 6.13%
Expected dividend yield - - -
Expected lives 4.8 years 5.9 years 4.44 years
Expected volatility 56% 79% 79%
Weighted-average grant date fair value of
warrants granted during the period $1.81 $5.39 $2.17
Weighted-average exercise price of warrants
granted during the period $2.36 $8.16 $4.29
</TABLE>
The weighted average fair-value and weighted average exercise price of
warrants granted by the Company for the years ended December 31, 1995, 1996 and
1997 are as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
---------------- --------------- -----------------
Weighted average exercise price for warrants:
Whose exercise price exceeded fair market value at
date of grant $2.72 $11.76 $4.30
Whose exercise price was less than fair market value
at date of grant $3.17 $7.07 $7.50
Whose exercise price was equal to fair market value at
date of grant $1.98 $6.67 $3.25
Weighted average fair market value for warrants:
Whose exercise price exceeded fair market value at
date of grant $2.18 $9.34 $2.09
Whose exercise price was less than fair market value
at date of grant $4.96 $8.82 $8.13
Whose exercise price was equal to fair market value at
date of grant $2.86 $6.67 $3.25
</TABLE>
F-26
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(iii) PRO FORMA DISCLOSURE
The pro forma effect on the Company of applying SFAS No. 123 for all
options and warrants to purchase common stock would be as follows:
<TABLE>
<S> <C> <C> <C>
December 31,
1995 1996 1997
-------------------- ---------------------- ----------------
Pro forma net loss from continuing operations $(18,499,644) $(48,292,780) $(62,020,782)
Pro forma basic and dilutive net loss per share from
continuing operations $(1.31) $(1.89) $(1.89)
</TABLE>
(d) RESERVED SHARES
At December 31, 1997, the Company has reserved shares of its common
stock for the following:
Warrants 9,998,030
Stock option plans 3,709,504
Convertible debentures 8,212,815
Preferred stock 8,077,786
Employee Stock Purchase Plan 984,623
Employee 401(k) Plan 166,674
---------------
Total 31,149,432
===============
From January 1, 1998 through February 6, 1998, 5,473,265 shares of
common stock were issued in connection with the items above.
(e) STOCK PURCHASE PROGRAM
During the year ended December 31, 1997, the Company purchased 145,000
shares of its common stock at an aggregate cost of $427,102 as part of a
treasury stock purchase program approved by its Board of Directors in May of
1997.
(f) EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board of Directors established the Palomar Medical
Technologies, Inc. 1996 Employee Stock Purchase Plan (the "Purchase Plan").
Under the Purchase Plan, all employees, as defined, are eligible to purchase the
Company's common stock at an exercise price equal to 85% of the fair market
value of the common stock with a lookback provision of three months. The
Purchase Plan provides for issuance of up to 1,000,000 shares under the Purchase
Plan. During the year ended December 31, 1997, employees purchased 15,377 shares
of the Company's common stock for approximately $40,000 pursuant to the Purchase
Plan.
(8) RESEARCH & PRODUCT DEVELOPMENT AGREEMENTS
During 1995, the Company entered into a multiyear agreement with
Massachusetts General Hospital ("MGH"), whereby MGH agreed to conduct clinical
trials on a laser treatment for hair removal/reduction invented by Dr. R. Rox
Anderson, Wellman Laboratories of Photomedicine, MGH. MGH will provide the
Company with data previously generated by Dr. Anderson and further clinical
research on the ruby laser device at MGH and other sites and remit ownership of
all case report forms and data resulting from the study.
F-27
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Effective February 14, 1997, the Company amended the 1995 agreement
with MGH. The Company agreed to provide MGH with a grant of $203,757 to perform
research and evaluation in the field of hair removal. The Company immediately
paid $50,090 upon execution of this agreement, and the Company paid a license
fee of $10,000 within thirty days of this amendment. As consideration for this
amended license, the Company is obligated to pay to MGH royalties of up to 5% on
net revenues as defined (See Note 12 (b)). In March 1997, the U.S. Patent Office
issued a patent protecting the laser-based hair removal technology developed by
Dr. Anderson at MGH, for which Palomar is the exclusive worldwide licensee.
(9) ACCRUED LIABILITIES
At December 31, 1996 and 1997, accrued liabilities consist of the
following:
<TABLE>
<S> <C> <C>
December 31,
1996 1997
---------------- ---------------
Payroll and consulting costs $2,596,867 $1,535,013
Royalties 843,345 853,808
Settlement costs 1,755,000 1,457,020
Warranty 2,854,401 2,583,677
Deferred revenue 256,912 3,154,395
Restructuring -- 1,981,907
Interest and preferred stock dividends 579,739 1,659,709
Other 2,089,045 3,688,720
---------------- ---------------
Total $10,975,309 $16,914,249
================ ===============
</TABLE>
(10) RELATED PARTY TRANSACTIONS
At December 31, 1996 and 1997, approximately $948,000 and $478,000 of
loans receivable with interest at the rate of 7% per annum were outstanding from
the former CEO and President, respectively. No amounts are currently outstanding
under these loans. During the fourth quarter of 1997, the Company's former CEO
paid back his outstanding loan balance, which totaled approximately $1,029,000
as of September 30, 1997. The former CEO made payments in both cash and
marketable securities. In the first quarter of 1998, the Company's former
President paid back his outstanding loan.
(11) 401(K) PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "Profit Sharing
Plan") which covers substantially all employees who have attained the age of 18
and are employed at year-end. Employees may contribute up to 15% of their
salary, as defined, subject to restrictions defined by the Internal Revenue
Service. The Company is obligated to make a matching contribution, in the form
of the Company's common stock, of 50% of all employee contributions effective
January 1, 1995. The Company contributions vest over a three-year period.
During 1997, the Company issued 87,441 shares of its common stock to
the Profit Sharing Plan in satisfaction of its $318,154 employer match of the
1996 employee contributions. For the year ended December 31, 1997, the Company
has accrued $250,000 for the 1997 match, which will be made in common stock in
April 1998.
F-28
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(12) COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
The Company has entered into various operating leases for its corporate
office, research facilities and manufacturing operations. These leases have
monthly rents ranging from approximately $2,000 to $34,000, adjusted annually
for certain other costs such as inflation, taxes and utilities, and expire
through May 31, 2000. The Company guarantees certain subsidiaries' operating
leases.
Future minimum payments under the Company's operating leases at
December 31, 1997 are approximately as follows:
December 31,
1998 $683,000
1999 549,000
2000 246,000
-------------
$1,478,000
=============
(b) ROYALTIES
The Company is required to pay a royalty of up to 5% of "net laser
sales," as defined, under a royalty agreement with MGH (see Note 8). For the
years ended December 31, 1995, 1996 and 1997, approximately $167,000, $175,000
and $854,000 of royalty expense, respectively, was incurred under this
agreement. These amounts are included in cost of sales in the accompanying
consolidated statement of operations.
A former employee and previous owner of one of the Company's
subsidiaries is paid a 1% commission on the net sales of certain ruby lasers and
diode lasers, as defined. These commissions will be paid through March 31, 2000
and are to be no less than $450,000. In accordance with the settlement agreement
with this individual, the Company paid advances on commissions totaling
$450,000: $200,000 in 1997 and $250,000 in January 1998. (See Note 10.)
(c) YEAR 2000 (UNAUDITED)
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. An
internal study was completed to determine the full scope and related costs to
insure that the Company's systems continue to meet its internal needs and those
of its customers. Anticipated spending for this modification will be expensed as
incurred and is not expected to have a significant impact on the Company's
ongoing results of operations.
(d) LITIGATION
The Company was a defendant in a lawsuit filed on March 14, 1996 in the
United States District Court for the Southern District of New York by
Commonwealth Associates ("Commonwealth"). In its suit, Commonwealth alleged that
the Company had 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 was appealed by
Palomar and on August 18, 1997 the case was settled for $1.875 million. During
the year ended December 31, 1997, the Company incurred $1.875 million in
settlement costs related to the above matter and another $1.324 million related
to several other claims and associated litigation costs.
The Company is involved in litigation regarding an alleged infringement
of a competitor's patent (the "Selvac Patent"). The Company believes that the
Selvac Patent is invalid, void and unenforceable, and that the Company does not
infringe the Selvac Patent. The court has granted Palomar's motion to amend its
complaint previously filed to allege that
F-29
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Selvac Patent was obtained by inequitable conduct, and the Company has moved
for summary judgment on the grounds that the Selvac Patent is invalid and was
obtained by inequitable conduct. The Company believes that competitor's claims
are wholly without merit. Nonetheless, an adverse result could have a material
adverse effect on the Company.
On October 16, 1997, the Company brought a declaratory judgment action
in U.S. District Court for the District of Massachusetts against the holders and
the indenture trustee of the Company's 4.5% Subordinated Convertible Debentures
due 2003, denominated in Swiss francs (the "Swiss Franc Debentures"). Just prior
to this suit, certain of the debenture holders (the "Asserting Holders") had
alleged that the Company was in breach of certain protective covenants under the
indenture, and on October 22, 1997 they sued the Company and all of its
principal subsidiaries in the same court; the October 16 and October 22 cases
have been assigned to the same judge, and the dispute between the Asserting
Holders and the Company is proceeding under the October 22 case. The Asserting
Holders claim that the Company has breached certain protective indenture
covenants and that the Asserting Holders are entitled to immediate payment of
their indebtedness under the Swiss Franc Debentures (which amounts to
approximately US$5,087,000 at current exchange rates). As of November 13, 1997,
acting under applicable provisions of the indenture, the Company notified the
holders of the Swiss Franc Debentures that it is causing the conversion of all
of the Swiss Franc Debentures into an aggregate of 914,028 shares of the
Company's common stock. The Company believes that it has not breached any of the
protective covenants under this indenture and that its position in these matters
is correct, and intends to contest the claims of the Asserting Holders
vigorously. Nonetheless, an adverse result could have a material adverse effect
on the Company.
The Company is involved in other legal and administrative proceedings
and claims of various types. While any litigation contains an element of
uncertainty, management, in consultation with the Company's general counsel,
presently believes that the outcome of each such other proceeding or claim which
is pending or known to be threatened, or all of them combined, will not have a
material adverse effect on the Company.
The Company is also aware of a claim alleging that the Company had
previously committed to make an additional capital contribution to Nexar. The
Company believes that this claim is without merit.
(e) DISTRIBUTION AGREEMENT
On November 17, 1997, the Company entered into an exclusive
distribution, sales and service agreement with an established, worldwide laser
company ("the Distributor"). The Distributor has the exclusive right to sell the
EpiLaser(R) and LightSheer(TM) laser systems and future generation products
worldwide. The Company pays the Distributor a per unit commission, adjusted for
certain events as defined. During the year ended 1997, the Company incurred
approximately $800,000 of commission expense to this Distributor. Upon execution
of this agreement, the Distributor made a lump sum payment of $3,500,000 and
received a warrant to purchase one million shares of the Company's common stock
at a share price of $5.25. The valuation of the warrant using the Black-Scholes
option pricing model was approximately $380,000. The value was credited to
additional paid-in-capital during the year ended December 31, 1997. The
remaining amount of $3,120,000, included in deferred revenue, will be amortized
to revenue over the three year life of the agreement.
On January 20, 1998, the Distributor made a loan to the Company of
approximately $2,211,000. This loan is collateralized by the Company's accounts
receivable. Payments against this loan will be made as the Distributor collects
receivables from the end user of the Company's products. Any unpaid principal
will be paid on July 26, 1998 at an interest rate of 1.5% per month or the
highest interest rate permitted by law.
(f) EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with
certain executive officers that provide for annual bonuses to the officers and
expire on various dates through 2001. Each of these agreements provides for 12
months severance upon termination of employment.
F-30
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(g) CORPORATE GUARANTEES
The Company has issued guarantees for payment of various vendor
liabilities for several electronic subsidiaries that have been accounted for as
discontinued operations (see Note 2). Outstanding guarantees totaled
approximately $7,000,000 as of December 31, 1997.
(13) SUBSEQUENT EVENTS
In February 1998, the Company sold 7,200,000 shares of its common stock
to a group of investors for $7,200,000. In addition, the Company also issued
warrants to the investors to purchase 7,200,000 shares of common stock at an
exercise price of $3.00 per share.
Subsequent to year-end the Company redeemed 2,950 shares of Series H
Preferred and paid related dividends and interest for a total of approximately
$3,589,000. The Company also redeemed 6%, 7% and 8% convertible debentures with
a face value of $2,000,000 and related interest for a total of approximately
$2,197,000. On March 30, 1998, in resolution of a dispute regarding the
redemption of certain Series H Preferred shares, the Company agreed with one of
the Series H Preferred stockholders to issue 766,725 shares of common stock for
$914,864 in lieu of redeeming 750 shares of Sheries H Preferred previously
redeemed.
In the first quarter of 1998, debentureholders converted debentures
with a face value of $3,344,344 into 3,809,922 shares of convertible debentures.
Also in the first quarter of 1998, preferred stockholders converted 268 shares
of Series G Preferred and 3,840 shares of Series H Preferred into 287,908 and
4,103,650 shares of common stock, respectively.
On March 27, 1998, the Company borrowed $2,000,000. This bridge loan is
payable the earlier of May 26, 1998 or (i) one day following the sale of Dynaco
(ii) the sale of any other Palomar assets in a transaction outside the normal
course of business or (iii) any financing where the use of proceeds to pay back
debt is not prohibited. The Company issued 125,000 warrants to the lender to
purchase 125,000 shares of common stock at an exercise price of $.01 per share
in lieu of interest.
F-31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the heading
"Election of Directors" in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not later than 120 days after the close of the fiscal year. The information
concerning delinquent filers pursuant to Item 405 of Regulation S-K is
incorporated herein by reference from the material contained under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's
definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the close
of the fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by
reference from the material contained under the heading "Executive Compensation"
in the Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by
reference from the material contained under the heading "Stock Ownership" in the
Registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by
reference from the material contained under the heading "Relationship with
Affiliates" in the Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C> <C>
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS. Page
----
The following Consolidated Financial Statements of the Company and its
subsidiaries are filed as part of this report on Form 10-K:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets -
December 31, 1997 and December 31, 1996 F-3
Consolidated Statements of Income -
Years ended December 31, 1997, December 31, 1996 and December 31, 1995 F-4
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1997, December 31, 1996 and December 31, 1995 F-5-8
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, December 31, 1996 and December 31, 1995 F-8
Notes to Consolidated Financial Statements F-10
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Schedule II 36
Schedule II - Valuation and Qualifying Accounts 37
</TABLE>
Schedules not listed above have been omitted because the
matter or conditions are not present or the information
required to be set forth therein is included in the
Consolidated Financial Statements hereto.
(b) REPORTS ON FORM 8-K.
Form 8-K filed December 23, 1997.
32
<PAGE>
(c) EXHIBITS.
The following exhibits required to be filed herewith are incorporated
by reference to the filings previously made by the Company where so indicated
below.
<TABLE>
<S> <C>
Exhibit
No. Title
^^^^2.1 Stock Purchase Agreement Between and Among Biometric Technologies, Corp.,
Palomar Medical Technologies, Inc. and Dynaco Corp.,
dated November 17, 1997.
-3.1 Restated Certificate of Incorporation.
&3.2 Certificate of Designation of Series G Convertible Preferred Stock as filed
with the Delaware Secretary of State on September 26, 1996.
&&3.3 Certificate of Amendment to Certificate of Incorporation, as filed with
the Delaware Secretary of State on December 16, 1996.
##3.4 Certificate of Designation of Series H Convertible Preferred Stock as filed
with the Delaware Secretary of State on March 26, 1997.
3.5 Certificate of Correction to Certificate of Incorporation, as filed with
the Delaware Secretary of State on September 23, 1997.
^3.6 Bylaws, as amended.
^4.1 Common Stock Certificate.
*10.1 Patent License Agreement by and between the Company and Patlex Corporation,
effective as of January 1, 1992.
10.2 Amended 1991 Stock Option Plan.
10.3 Amended 1993 Stock Option Plan.
10.4 Amended 1995 Stock Option Plan.
10.5 Amended 1996 Stock Option Plan.
10.6 Amended 1996 Employee Stock Purchase Plan.
**10.7 Form of Stock Option Grant under the 1991, 1993 and 1995 Stock Option Plans.
##10.8 Form of Stock Option Agreement under the 1996 Stock Option Plan.
#10.9 Form of Company Warrant to Purchase Common Stock.
10.10 Lease for premises at 45 Hartwell Avenue, Lexington, Massachusetts,
dated March, 1996.
--10.11 The Company's 401(k) Plan.
33
<PAGE>
10.12 Sales Agency, Development and License Agreement between the Company and Coherent, Inc.,
dated November 17, 1997. (Portions omitted pursuant to a request for confidential treatment.)
10.13 Loan Agreement between the Company and Coherent, Inc., dated January 20, 1998.
10.14 Stock Purchase Agreement, dated December 29, 1997.
10.15 Stock Purchase Agreement, dated December 31, 1997.
10.16 Exchange Agreement, dated December 31, 1997.
^^10.17 Form of 6%, 7% and 8% Convertible Debentures Due September 30, 2002
^^10.18 Form of Registration Rights Agreement, dated September 30, 1997.
^^10.19 Form of Securities Purchase Agreement dated September 30, 1997.
^^^10.20 Securities Purchase Agreement dated December 29, 1997.
&&&10.27 High Risk Opportunities Hub Fund, Ltd. Subscription Agreement,
dated January 14, 1997.
&&&10.28 High Risk Opportunities Hub Fund, Ltd. Debenture,
dated January 13, 1997.
##10.29 Form of Subscription Agreement, dated as of March 10, 1997.
##10.30 Form Registration Rights Agreement, dated as of March 10, 1997.
##10.31 Form of 5% Convertible Debenture due March 10, 2002.
##10.32 Subscription Agreement between the Company and Soginvest Bank,
dated as of March 13, 1997.
##10.33 6% Convertible Debenture due March 13, 2002.
##10.34 Asset Purchase and Settlement Agreement by and among the Company,
Nexar Technologies, Inc., Technovation Computer Labs, Inc. and
Babar I. Hamirani, dated February 28, 1997.
##10.35 List of exhibits omitted from the Asset Purchase and Settlement Agreement.
(The Company hereby undertakes and agrees to furnish copies of
the exhibits and schedules set forth in exhibit 10.34 above to
the Commission upon its request.)
10.36 Employment Agreement, dated as of September 1, 1997,
between the Company and Steven Georgiev.
10.37 Employment Agreement, dated as of January 1, 1997,
between the Company and Joseph P. Caruso.
10.38 Employment Agreement, dated as of May 15, 1997,
between the Company and Louis P. Valente.
##10.39 Securities Purchase Agreement between the Company and
RGC International Investors, LDC, dated March 27, 1997.
##10.40 Registration Rights Agreement between the Company and
RGC International Investors, LDC, dated March 27, 1997.
10.41 Binding Term Sheet between the Company and Hechtor Wiltshire,
dated March 27, 1998.
10.42 Securities Purchase Agreement between the Company and various entities,
dated February 20, 1998
10.43 Security Agreement - Stock Pledge between the Company and
Coast Business Credit, dated December 31, 1997.
10.44 Secured Promissory Note between the Company and
Coast Business Credit, dated December 31, 1997.
23 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule, Restated, for the Period Ended
December 31, 1996.
27.2 Financial Data Schedule for the Period Ended
December 31, 1997.
34
<PAGE>
^ Previously filed as an exhibit to Form 10-KSB/A-4 filed on July 11, 1997, and
incorporated herein by reference.
^^ Previously filed as an exhibit to Registration Statement No. 333-42129
filed on December 12, 1997, and incorporated herein by reference.
^^^ Previously filed as an exhibit to Registration Statement No. 333-42129/A-2
filed on January 9, 1998, and incorporated herein by reference.
^^^^ Previously filed as an exhibit to Form 8-K filed on December 23, 1997
and incorporated herein by reference.
* Previously filed as an exhibit to Registration Statement No. 33-47479
filed on April 27, 1992, and incorporated herein by reference.
** Previously filed as and exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479
filed on October 5, 1992, and incorporated herein by reference.
# Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995, and incorporated herein by reference.
## Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996, and incorporated herein by reference.
- - Previously filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996, and incorporated herein by reference.
- -- Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710
filed on October 4, 1995, and incorporated herein by reference.
& Previously filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1996, and incorporated herein by reference.
&& Previously filed as an exhibit to Form S-3 Registration Statement No. 333-18003
filed on December 16, 1996, and incorporated herein by reference.
&&& Previously filed as an exhibit to Form S-3 Registration Statement No. 333-22725
filed on March 4, 1997, and incorporated herein by reference.
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To Palomar Medical Technologies, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements of Palomar Medical
Technologies, Inc. and subsidiaries included in this Form 10-K and have issued
our report thereon dated February 6, 1998 (except with respect to the matters
discussed in Note 13, as to which the date is March 31, 1998). Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 14(2) above is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
February 6, 1998 (except with respect
to the matters discussed in Note 13,
as to which the date is
March 31, 1998)
36
<PAGE>
SCHEDULE II
PALOMAR MEDICAL TECHNOLOGIES, INC.
Valuation and Qualifying Accounts
<TABLE>
<S> <C> <C> <C> <C>
Balance,
Beginning of Balance, End of
Period Increases Deductions Period
Allowance for Doubtful Deductions:
December 31, 1995 $18,000 $ - $11,000 $7,000
================ ================= ================ =================
December 31, 1996 $7,000 $1,122,000 $ - $1,129,000
================ ================= ================ =================
December 31, 1997 $1,129,000 $933,000 $(1,316,000) $746,000
================ ================= ================ =================
</TABLE>
37
<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 Lexington in the
Commonwealth of Massachusetts on April 14, 1998.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-------------------------------
Louis P. Valente
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
Name Capacity Date
-------------------------------- ------------------------------------- ---------------
/s/ Louis P. Valente President, Chief Executive April 14, 1998
---------------------------------
Louis P. Valente Officer and Director
/s/ Joseph P. Caruso Chief Financial Officer and Treasurer April 14, 1998
---------------------------------
Joseph P. Caruso (Principal Financial Officer and
Principal Accounting Officer)
/s/ Nicholas P. Economou Director April 14, 1998
---------------------------------
Nicholas P. Economou
/s/ A. Neil Pappalardo Director April 14, 1998
---------------------------------
A. Neil Pappalardo
/s/ James G. Martin Director April 14, 1998
---------------------------------
James G. Martin
</TABLE>
CERTIFICATE OF CORRECTION
OF THE
CERTIFICATE OF INCORPORATION
OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
PALOMAR MEDICAL TECHNOLOGIES, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Company") does hereby certify pursuant to Section 103(f) thereof that:
FIRST: The Company, then known as Dynamed, Inc., filed a Certificate of
Incorporation with the Office of the Secretary of State of the State of Delaware
(the "Secretary of State") on August 16, 1991.
SECOND: The Certificate of Incorporation set forth an inaccurate record of
the corporate action referred to therein.
THIRD: The Certificate of Incorporation inaccurately reflected the text of
Article FOURTH thereof in that the relevant portion of Article FOURTH
inaccurately states as follows:
Additional designations and powers, the rights and preferences and the
qualifications, limitations or restrictions with respect to each class
of stock of the corporation shall be as determined by the Board of
Directors from time to time.
FOURTH: The correct text of Article FOURTH of the Certificate of
Incorporation intended to be effected by this Certificate of Correction is as
follows:
Additional designations and powers, the rights and preferences and the
qualifications, limitation or restrictions with respect to each series of
such class of stock of the Corporation shall be as determined by the Board
of Directors from time to time.
IN WITNESS WHEREOF, said Palomar Medical Technologies, Inc. has caused this
Certificate of Correction to be signed by its duly authorized officer this 23rd
day of September, 1997.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-------------------------------
Name: Louis P. Valente
Title: President and Chief
Executive Officer
PALOMAR MEDICAL TECHNOLOGIES, INC.
AMENDED 1991 STOCK OPTION PLAN
ARTICLE I
Purpose of the Plan
The purpose of this plan is to encourage and enable employees, consultants,
directors and others who are in a position to make significant contributions to
the success of PALOMAR MEDICAL TECHNOLOGIES, INC. and of its affiliated
corporations upon whose judgment, initiative, and efforts the Corporation
depends for the successful conduct of its business, to acquire a closer
identification of their interests with those of the corporation by providing
them with opportunities to purchase stock in the Corporation pursuant to options
granted hereunder, thereby stimulating their efforts on behalf of the
Corporation and strengthening their desire to remain involved with the
Corporation.
ARTICLE II
Definitions
2.1 "Affiliated Corporation" means any stock corporation of which a
majority of the voting common or capital stock is owned directly or indirectly
by the Corporation.
2.2 "Award" means an Option granted under Article V.
2.3 "Board" means the Board of Directors of the Corporation.
1
<PAGE>
2.4 "Code" means the Internal Revenue Code of 1986, as amended form time to
time.
2.5 "Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, each of whom is a "disinterested
person" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, or any successor provision.
2.6 "Corporation" means PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, or its successor.
2.7 "Employee" means any person who is a regular full-time or part-time
employee of the Corporation or an Affiliated Corporation on or after August 30,
1991.
2.8 "Option" means an Incentive Stock Option or Non-Qualified Option
granted by the Committee under Article V of this Plan in the form of a right to
purchase Stock evidenced by an instrument containing such provisions as the
Committee may establish.
2.9 "Participant" means a person selected by the Committee to receive an
award under the Plan.
2.10 "Plan" means this 1991 Stock Option Plan.
2.11 "Incentive Stock Option" ("ISO") means an option which qualifies as an
incentive stock option as defined in Section 422 of the Code, as amended.
2.12 "Non-Qualified Option" means any option not intended to qualify as an
Incentive Stock Option.
2
<PAGE>
2.13 "Stock" means the Common Stock, $.01 par value, of the Corporation or
any successor, including any adjustments in the event of changes in capital
structure of the type described in Article IX.
2.14 "Reporting Person" means a person subject to Section 16 of the
Securities Exchange Act of 1934 or any successor provision.
2.15 "Restricted Period" means the period of time selected by the Committee
during which an Award may be forfeited by the person.
ARTICLE III
Administration of the Plan
3.1 ADMINISTRATION BY THE COMMITTEE. This Plan shall be administered by the
Committee as defined herein. From time to time the Board may increase the size
of the Committee and appoint additional members thereto, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any options
granted under it.
3.2 POWERS. The Committee shall have full and final authority to operate,
manage, and administer the Plan on behalf
3
<PAGE>
of the Corporation. This authority includes, but is not limited to:
(a) The power to grant Awards conditionally or unconditionally,
(b) The power to prescribe the form or forms of the instruments
evidencing Awards granted under this Plan,
(c) The power to interpret the Plan,
(d) The power to provide regulations for the operation of the
incentive features of the Plan, and otherwise to prescribe and
rescind regulations for interpretation, management and
administration of the Plan,
(e) The power to delegate responsibility for Plan operation,
management and administration of the Plan,
(f) The power to delegate to other persons the responsibility of
performing ministerial acts in furtherance of the Plan's purpose,
and
(g) The power to engage the services of persons, companies, or
organizations in furtherance of the Plan's purpose, including but
not limited to, banks, insurance companies, brokerage firms, and
consultants.
3.3 ADDITIONAL POWERS. In addition, as to each Option to buy Stock of the
Corporation, the Committee shall have full and
4
<PAGE>
final authority in its discretion: (a) to determine the number of shares of
Stock subject to each Option; (b) to determine the time or times at which
Options will be granted; (c) to determine the option price of the shares of
Stock subject to each Option, which price shall be not less than the minimum
price specified in Article V of this Plan; (d) to determine the time or times
when each Option shall become exercisable and the duration of the exercise
period (including the acceleration of any exercise period), which shall not
exceed the maximum period specified in Article V; and (e) to determine whether
each Option granted shall be an Incentive Stock Option or a Non-qualified
Option.
In no event may the Corporation grant an Employee any Incentive Stock
Option that is first exercisable during any one calendar year to the extent the
aggregate fair market value of the Stock (determined at the time the options are
granted) exceeds $100,000 (under all stock options plans of the Corporation and
any Affiliated Corporation); provided, however, that this paragraph shall have
no force and effect if its inclusion in the Plan is not necessary for Incentive
Stock Options issued under the Plan to qualify as such prusuant to Section
422(d)(1) of the Code.
ARTICLE IV
Eligibility
4.1 ELIGIBLE EMPLOYEES. All Employees (including Directors and Officers who
are Employees and who have not irrevocably
5
<PAGE>
elected to be ineligible to participate in the Plan) are eligible to be granted
Incentive Stock Optona and Non-Qualified Option Awards under this Plan.
4.2 CONSULTANTS, DIRECTORS AND OTHER NON-EMPLOYEES. Any Consultant,
Director (whether or not an Employee) and any other Non-Employee is eligible to
be granted Non-Qualified Option Awards under the Plan provided the person has
not irrevocably elected to be ineligible to participate in the Plan, and
provided further that upon appointment to the Committee at the first Board of
Directors meeting following the Annual Meeting of the Shareholders, each
non-employee director appointed to the Committee shall be deemed to be
ineligible to participate under the Plan during his or her period of service on
the Committee.
4.3 RELEVANT FACTORS. In selecting individual Employees, Consultants,
Directors, and other Non-Employees to whom Awards shall be granted, the
Committee shall weigh such factors as are relevant to accomplish the purpose of
the Plan as stated in Article I. An individual who has been granted an Award may
be granted one or more additional Awards, if the Committee so determines. The
granting of an Award to any individual shall neither entitle that individual to,
nor disqualify him from, participation in any other grant of Awards.
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ARTICLE V
Stock Option Awards
5.1 NUMBER OF SHARES. Subject to the provisions of Article X of this Plan,
the aggregate number of shares of stock for which Options may be granted under
this Plan shall not exceed 350,000 shares. The shares to be delivered upon
exercise of Options under this Plan shall be made available, at the discretion
of the Committee, either from authorized but unissued shares or from previously
issued and reacquired shares of Stock held by the Corporation as treasury
shares, including shares purchased in the open market.
Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee.
5.2 EFFECT OF EXPIRATION, TERMINATION OR SURRENDER. If an Option under this
Plan shall expire or terminate unexercised as to any shares covered thereby, or
shall cease for any reason to be exercisable in whole or in part, or if the
Company shall reacquire any unvested shares issued pursuant to Options under the
Plan, such shares shall thereafter be available for the granting of other
Options under this Plan.
5.3 TERM OF OPTIONS. The full term of each Option granted hereunder shall
be for such period as the Committee shall determine. In the case of Incentive
Stock Options granted hereunder, the term shall not exceed ten (10) years from
the date
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of granting thereof. Each Option shall be subject to earlier termination as
provided in Section 6.3 and 6.4. Notwithstanding the foregoing, the term of
options intended to qualify as "Incentive Stock Options" shall not exceed five
(5) years from the date of granting thereof if such option is granted to any
employee who at the time such option is granted owns more than ten percent (10%
of the total combined voting power of all classes of stock of the Corporation.
5.4 OPTION PRICE. The option price shall be determined by the Committee at
the time any Option is granted. In the case of Incentive Stock Options, the
exercise price shall not be less than 100% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted (but in
no event less than par value), provided that in the case where an Incentive
Stock Option is granted hereunder to any Employee who at the time of grant owns
Stock possessing more than 10% of the combined voting power of all classes of
stock of the Corporation and its Affiliated Corporations, the Incentive Stock
Option price shall equal not less than 110% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted. In the
case of Non-Qualified Stock Options, the exercise price shall not be less than
par value.
5.5 FAIR MARKET VALUE. If, at the time an Option is granted under the Plan,
the Corporation's Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this
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sentence are available prior to the date such Option is granted and shall mean
(i) the average (on that date) of the high and low prices of the Stock on the
principal national securities exchange on which the Stock is traded, if the
Stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Stock on the NASDAQ National Market
List, if the Stock is not the traded on a national securities exchange; or (iii)
the closing bid price (or average of bid prices) last quoted (on that date) by
an established quotation service for over-the-counter securities, if the Stock
is not reported on the NASDAQ National Market List. However, if the Stock is not
publicly traded at the time an Option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Stock as determined by the
Committee under Section 3.3.
5.6 NON-TRANSFERABILITY OF OPTIONS. No Option granted under this Plan shall
be transferable by the grantee otherwise than by will or the laws of descent and
distribution, and such Option may be exercised during the grantee's lifetime
only by the grantee.
5.7 FOREIGN NATIONALS. Awards may be granted to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.
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ARTICLE VI
Exercise of Option
6.1 EXERCISE. Each Option granted under the Plan shall be exercisable on
such date or dates and during such period and for such number of shares as shall
be determined pursuant to the provisions of the instrument evidencing such
Option. The Committee shall have the right to accelerate the date of exercise of
any option.
6.2 NOTICE OF EXERCISE. A person electing to exercise an Option shall give
written notice to the Corporation of such electino and of the number of shares
he or she has elected to purchase and shall at the time of exercise tender the
full purchase price of the shares he or she has elected to purchase.
6.3 DELIVER OF STOCK. No shares shall be delivered pursuant to any exercise
of an Option until payment in full of the option price therefor is received by
the Corporation. Such payment may be made in whole or in part in cash or, to the
extent permitted by the Committee at or after the grant of an Option, by
delivery of a note or shares of the Stock owned by the optionee, including
Restricted Stock, valued at their fair market value on the date of delivery, or
such other lawful consideration as the Committee may determine. Until such
person has been issued a certificate or certificates for the shares so
purchased, he or she shall possess no rights of a record holder with respect to
any of such shares.
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6.4 OPTION UNAFFECTED BY CHANGE IN DUTIES. No Incentive Stock Option, and,
unless otherwise determined by the Committee, no Non-Qualified Option granted to
a person who is, on the date of the grant, an Employee of the Corporation or an
Affiliated Corporation, shall be affected by any change of duties or position of
the optionee (including transfer to or from an Affiliated Corporation), so long
as he or she continues to be an Employee. Employment shall be considered as
continuing and uninterrupted during any bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to reemployment is guaranteed by
statute. A bona fide leave of absence with the written approval of the Committee
shall not be considered an interruption of employment under the Plan, provided
that such written approval contractually obligates the Corporation or any
Affiliated Corporation to continue the employment of the optionee after the
approved period of absence.
If the optionee shall cease to be an Employee for any reason other than
death, such Option shall thereafter be exercisable only to the extent of the
purchase rights, if any, which have ac rued as of the date of such cessation;
provided that (i) the Committee may provide in the instrument evidencing any
Option that the Committee may in its absolute discretion, upon any such
cessation of employment, determine (but be under no obligation to
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determine) that such accrued purchase rights shall be deemed to include
additional shares covered by such Option; and (ii) unless the Committee shall
otherwise provide in the instrument evidencing any Option, upon any such
cessation of employment, such remaining rights to purchase shall in any event
terminate upon the earlier of (A) the expiration of the original term of the
Option; or (B) where such cessation of employment is on account of disability,
the expiration of one year from the date of such cessation of employment and,
otherwise, the expiration of three months from such date. For purposes of the
Plan, the term "disability" shall mean "permanent and total disability" as
defined in Section 22(e)(3) of the Code.
6.5 DEATH OF OPTIONEE. Should an optionee die while in possession of the
legal right to exercise an Option or Options under this Plan, such persons as
shall have acquired, by will or by the laws of descent and distribution, the
right to exercise any Options theretofore granted, may, unless otherwise
provided by the Committee in any instrument evidencing any Option, exercise such
Options at any time prior to one year from the ate of death; provided, that such
Option or Options shall expire in all events no later than the last day of the
original term of such Option; provided, further, that any such exercise shall be
limited to the purchase rights that have accrued as of the date when the
optionee ceased to be an Employee, whether by death or otherwise, unless the
Committee provides in the instrument evidencing such Option that, in the
discretion of the Committee,
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additional shares covered by such Option may become subject to purchase
immediately upon the death of the optionee.
ARTICLE VII
Reporting Person Limitations
Notwithstanding any other provision of the Plan, to the extent required to
qualify for the exemption provided by Rule 16b-3 under the Securities Exchange
Act of 1934, and any successor provision, (i) any Stock or other equity security
offered under the Plan to a Reporting Person may not be sold for at least six
(6) months after acquisition, except in case of death or disability and (ii) any
Option, or other similar right related to an equity security, issued under the
Plan to a Reporting Person shall not be transferable other than by will or the
laws of descent and distribution, shall not be exercisable for at least six (6)
months except in the case of death or disability, and shall be exercisable
during the Participant's lifetime only by the Participant or the Participant's
guardian or legal representative.
ARTICLE VIII
Terms and Conditions of Options
Options shall be evidenced by instruments (which need not be identical) in
such forms as the Committee may from time to time approve. Such instruments
shall conform to the terms and conditions set forth in Article 5 and 6 hereof
and may contain
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such other provisions as the Committee deems advisable that are not inconsistent
with the Plan, including restrictions applicable to shares of Stock issuable
upon exercise of Options. In granting any Non-Qualified Option, the Committee
may specify that such Non-Qualified Option shall be subject to the restrictions
set forth herein with respect to Incentive Stock Options, or to such other
termination and cancellation provisions as the Committee may determine. The
Committee may from time to time confer authority and responsibility on one or
more of its own members and/or one or more officers of the Corporation to
execute and deliver such instruments. The proper officers of the Corporation are
authorized and directed to take any and all action necessary or advisable from
time to time to carry out the terms of such instruments.
ARTICLE IX
Benefit Plans
Awards under the Plan are discretionary and are not a part of regular
salary. Awards may not be used in determining the amount of compensation for any
purpose under the benefit plans of the Corporation, or an Affiliated
Corporation, except as the Committee may from time to time expressly provide.
Neither the Plan, an Option or any instrument evidencing an Option confers upon
any Employee the right to continued employment with the Corporation or an
Affiliated Corporation.
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ARTICLE X
Amendment, Suspension or Termination of the Plan
The Board may suspend the Plan or any part thereof at any time or may
terminate the Plan in its entirety. Awards shall not be granted after Plan
termination.
The Board may also amend the Plan from time to time, except that amendments
which affect the following subjects must be approved by stockholders of the
Corporation:
(a) Except as provided in Article XI relative to capital changes, the
number of shares as to which Options may be granted pursuant to Article V;
(b) The maximum term of Options granted;
(c) The minimum price at which Options may be granted;
(d) The term of the Plan; and
(e) The requirements as to eligibility for participation in the Plan.
Awards granted prior to suspension or termination of the Plan may not be
cancelled solely because of such suspension or termination, except with the
consent of the grantee of the Award.
ARTICLE XI
Changes in Capital Structure
The instruments evidencing Options granted hereunder shall be subject to
adjustment in the event of changes in the outstanding Stock of the Corporation
by reason of stock dividends, stock splits, recapitalizations, reorganizations,
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mergers, consolidations, combinations, exchanges or other relevant changes in
capitalization occurring after the date of an Award to the same extent as would
affect an actual share of stock issued and outstanding on the effective date of
such change. Such adjustment to outstanding Options shall be made without change
in the total price applicable to the unexercised portion of such options, and a
corresponding adjustment in the applicable option price per share shall be made.
In the event of any such change, the aggregate number and classes of shares for
which Options may thereafter be granted under Section 5.1 of this Plan may be
appropriately adjusted as determined by the Committee so as to reflect such
change.
Notwithstanding the foregoing, any adjustments made pursuant to this
Article XI with respect to Incentive Stock Options shall be made only after the
Committee, after consulting with counsel for the Corporation, determines whether
such adjustments would constitute a "modification" of such Incentive Stock
Options (as that term is defined in Section 425 of the Code) or would cause any
adverse tax consequences for the holders of such Incentive Stock Options. If the
Committee determines that such adjustments made with respect to Incentive Stock
Options would constitute a modification of such Incentive Stock Options, it may
refrain from making such adjustments.
In the event of the proposed dissolution or liquidation of the Corporation,
each Option will terminate immediately prior to the consummation of such
proposed action or at such other time
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and subject to such other conditions as shall be determined by the Committee.
Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Corporation.
No fractional shares shall be issued under the Plan and the optionee shall
receive from the Corporation cash in lieu of such fractional shares.
ARTICLE XII
Effective Date and Term of the Plan
The Plan shall become effective on August 30, 1991. The Plan shall continue
until such time as it may be terminated by action of the Board; provided,
however, that no Options may be granted under this Plan on or after the tenth
anniversary of the effective date hereof.
ARTICE XIII
Conversion of ISO's into Non-Qualified Options;
Termination of ISO's
The Committee, at the written request of any optionee, may in its
discretion take such actions as may be necessary to
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convert such optionee's Incentive Stock Options, that have not been exercised on
the date of conversion, into Non-Qualified Options at any time prior to the
expiration of such Incentive Stock Options, regardless of whether the optionee
is an employee of the Corporation or an Affiliated Corporation at the time of
such conversion. Such actions may include, but not be limited to, extending the
exercise period or reducing the exercise price of such Options. At the time of
such conversion, the Committee (with the consent of the optionee) may impose
such conditions on the Exercise of the resulting Non-Qualified Options as the
Committee in its discretion may determine, provided that such conditions shall
be not inconsistent with the Plan. Nothing in the Plan shall be deemed to give
any optionee the right to have such optionee's Incentive Stock Options converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Committee takes appropriate action. The Committee, with the consent of the
optionee, may also terminate any portion of any Incentive Stock Option that has
not been exercised at the time of such termination.
ARTICLE XIV
Application of Funds
The proceeds received by the Corporation from the sale of shares pursuant
to Options granted under the Plan shall be used for general corporate purposes.
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ARTICLE XV
Governmental Regulation
The Corporation's obligation to sell and deliver shares of Stock under this
Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
ARTICLE XVI
Withholding of Additional Income Taxes
Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition (as defined in Article XVI) the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includible in such person's gross income. The Committee in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.
ARTICLE XVII
Notice to Company of Disqualifying Disposition
Each employee who receives an Incentive Stock Option must agree to notify
the Corporation in writing immediately after the employee makes a Disqualifying
Disposition of any Stock acquired pursuant to the exercise of an Incentive Stock
Option. A Disqualifying Disposition is any disposition (including any sale) of
such Stock before the later of (a) two years after the date
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the employee was granted the Incentive Stock Option or (b) one year after the
date the employee acquired Stock by exercising the Incentive Stock Option. If
the employee has died before such stock is sold, these holding period
requirements do not apply and no Disqualifying Disposition can occur thereafter.
ARTICLE XVIII
Governing Law; Construction
The validity and construction of the Plan and the instruments evidencing
Options shall be governed by the laws of the State of Delaware. In construing
this Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
PALOMAR MEDICAL TECHNOLOGIES, INC.
AMENDED 1993 STOCK OPTION PLAN
ARTICLE I
Purpose of the Plan
The purpose of this plan is to encourage and enable employees, consultants,
directors and others who are in a position to make significant contributions to
the success of PALOMAR MEDICAL TECHNOLOGIES, INC. and of its affiliated
corporations upon whose judgment, initiative, and efforts the Corporation
depends for the successful conduct of its business, to acquire a closer
identification of their interests with those of the corporation by providing
them with opportunities to purchase stock in the Corporation pursuant to options
granted hereunder, thereby stimulating their efforts on behalf of the
Corporation and strengthening their desire to remain involved with the
Corporation.
ARTICLE II
Definitions
2.1 "Affiliated Corporation" means any stock corporation of which a
majority of the voting common or capital stock is owned directly or indirectly
by the Corporation.
2.2 "Award" means an Option granted under Article V.
2.3 "Board" means the Board of Directors of the Corporation.
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2.4 "Code" means the Internal Revenue Code of 1986, as amended form time to
time.
2.5 "Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, each of whom is a "disinterested
person" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, or any successor provision.
2.6 "Corporation" means PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, or its successor.
2.7 "Employee" means any person who is a regular full-time or part-time
employee of the Corporation or an Affiliated Corporation on or after August 30,
1991.
2.8 "Option" means an Incentive Stock Option or Non-Qualified Option
granted by the Committee under Article V of this Plan in the form of a right to
purchase Stock evidenced by an instrument containing such provisions as the
Committee may establish.
2.9 "Participant" means a person selected by the Committee to receive an
award under the Plan.
2.10 "Plan" means this 1991 Stock Option Plan.
2.11 "Incentive Stock Option" ("ISO") means an option which qualifies as an
incentive stock option as defined in Section 422 of the Code, as amended.
2.12 "Non-Qualified Option" means any option not intended to qualify as an
Incentive Stock Option.
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2.13 "Stock" means the Common Stock, $.01 par value, of the Corporation or
any successor, including any adjustments in the event of changes in capital
structure of the type described in Article XI.
2.14 "Reporting Person" means a person subject to Section 16 of the
Securities Exchange Act of 1934 or any successor provision.
2.15 "Restricted Period" means the period of time selected by the Committee
during which an Award may be forfeited by the person.
ARTICLE III
Administration of the Plan
3.1 ADMINISTRATION BY THE COMMITTEE. This Plan shall be administered by the
Committee as defined herein. From time to time the Board may increase the size
of the Committee and appoint additional members thereto, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any options
granted under it.
3.2 POWERS. The Committee shall have full and final authority to operate,
manage, and administer the Plan on behalf
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of the Corporation. This authority includes, but is not limited to:
(a) The power to grant Awards conditionally or unconditionally,
(b) The power to prescribe the form or forms of the instruments evidencing
Awards granted under this Plan,
(c) The power to interpret the Plan,
(d) The power to provide regulations for the operation of the incentive
features of the Plan, and otherwise to prescribe and rescind
regulations for interpretation, management and administration of the
Plan,
(e) The power to delegate responsibility for Plan operation, management
and administration of the Plan,
(f) The power to delegate to other persons the responsibility of
performing ministerial acts in furtherance of the Plan's purpose, and
(g) The power to engage the services of persons, companies, or
organizations in furtherance of the Plan's purpose, including but not
limited to, banks, insurance companies, brokerage firms, and
consultants.
3.3 ADDITIONAL POWERS. In addition, as to each Option to buy Stock of the
Corporation, the Committee shall have full and
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final authority in its discretion: (a) to determine the number of shares of
Stock subject to each Option; (b) to determine the time or times at which
Options will be granted; (c) to determine the option price of the shares of
Stock subject to each Option, which price shall be not less than the minimum
price specified in Article V of this Plan; (d) to determine the time or times
when each Option shall become exercisable and the duration of the exercise
period (including the acceleration of any exercise period), which shall not
exceed the maximum period specified in Article V; and (e) to determine whether
each Option granted shall be an Incentive Stock Option or a Non-qualified
Option.
In no event may the Corporation grant an Employee any Incentive Stock
Option that is first exercisable during any one calendar year to the extent the
aggregate fair market value of the Stock (determined at the time the options are
granted) exceeds $100,000 (under all stock options plans of the Corporation and
any Affiliated Corporation); provided, however, that this paragraph shall have
no force and effect if its inclusion in the Plan is not necessary for Incentive
Stock Options issued under the Plan to qualify as such prusuant to Section
422(d)(1) of the Code.
ARTICLE IV
Eligibility
4.1 ELIGIBLE EMPLOYEES. All Employees (including Directors and Officers who
are Employees and who have not irrevocably
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elected to be ineligible to participate in the Plan) are eligible to be gratned
Incentive Stock Optona and Non-Qualified Option Awards under this Plan.
4.2 CONSULTANTS, DIRECTORS AND OTHER NON-EMPLOYEES. Any Consultant,
Director (whether or not an Employee) and any other Non-Employee is eligible to
be granted Non-Qualified Option Awards under the Plan provided the person has
not irrevocably elected to be ineligible to participate in the Plan, and
provided further that upon appointment to the Committee at the first Board of
Directors meeting following the Annual Meeting of the Shareholders, each
non-employee director appointed to the Committee shall be deemed to be
ineligible to participate under the Plan during his or her period of service on
the Committee.
4.3 RELEVANT FACTORS. In selecting individual Employees, Consultants,
Directors, and other Non-Employees to whom Awards shall be granted, the
Committee shall weigh such factors as are relevant to accomplish the purpose of
the Plan as stated in Article I. An individual who has been granted an Award may
be granted one or more additional Awards, if the Committee so determines. The
granting of an Award to any individual shall neither entitle that individual to,
nor disqualify him from, participation in any other grant of Awards.
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ARTICLE V
Stock Option Awards
5.1 NUMBER OF SHARES. Subject to the provisions of Article XI of this Plan,
the aggregate number of shares of stock for which Options may be granted under
this Plan shall not exceed 500,000 shares. The shares to be delivered upon
exercise of Options under this Plan shall be made available, at the discretion
of the Committee, either from authorized but unissued shares or from previously
issued and reacquired shares of Stock held by the Corporation as treasury
shares, including shares purchased in the open market.
Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee.
5.2 EFFECT OF EXPIRATION, TERMINATION OR SURRENDER. If an Option under this
Plan shall expire or terminate unexercised as to any shares covered thereby, or
shall cease for any reason to be exercisable in whole or in part, or if the
Company shall reacquire any unvested shares issued pursuant to Options under the
Plan, such shares shall thereafter be available for the granting of other
Options under this Plan.
5.3 TERM OF OPTIONS. The full term of each Option granted hereunder shall
be for such period as the Committee shall determine. In the case of Incentive
Stock Options granted hereunder, the term shall not exceed ten (10) years from
the date
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of granting thereof. Each Option shall be subject to earlier termination as
provided in Section 6.3 and 6.4. Notwithstanding the foregoing, the term of
options intended to qualify as "Incentive Stock Options" shall not exceed five
(5) years from the date of granting thereof if such option is granted to any
employee who at the time such option is granted owns more than ten percent (10%
of the total combined voting power of all classes of stock of the Corporation.
5.4 OPTION PRICE. The option price shall be determined by the Committee at
the time any Option is granted. In the case of Incentive Stock Options, the
exercise price shall not be less than 100% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted (but in
no event less than par value), provided that in the case where an Incentive
Stock Option is granted hereunder to any Employee who at the time of grant owns
Stock possessing more than 10% of the combined voting power of all classes of
stock of the Corporation and its Affiliated Corporations, the Incentive Stock
Option price shall equal not less than 110% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted. In the
case of Non-Qualified Stock Options, the exercise price shall not be less than
par value.
5.5 FAIR MARKET VALUE. If, at the time an Option is granted under the Plan,
the Corporation's Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this
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sentence are available prior to the date such Option is granted and shall mean
(i) the average (on that date) of the high and low prices of the Stock on the
principal national securities exchange on which the Stock is traded, if the
Stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Stock on the NASDAQ National Market
List, if the Stock is not the traded on a national securities exchange; or (iii)
the closing bid price (or average of bid prices) last quoted (on that date) by
an established quotation service for over-the-counter securities, if the Stock
is not reported on the NASDAQ National Market List. However, if the Stock is not
publicly traded at the time an Option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Stock as determined by the
Committee under Section 3.3.
5.6 NON-TRANSFERABILITY OF OPTIONS. No Option granted under this Plan shall
be transferable by the grantee otherwise than by will or the laws of descent and
distribution, and such Option may be exercised during the grantee's lifetime
only by the grantee.
5.7 FOREIGN NATIONALS. Awards may be granted to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.
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ARTICLE VI
Exercise of Option
6.1 EXERCISE. Each Option granted under the Plan shall be exercisable on
such date or dates and during such period and for such number of shares as shall
be determined pursuant to the provisions of the instrument evidencing such
Option. The Committee shall have the right to accelerate the date of exercise of
any option.
6.2 NOTICE OF EXERCISE. A person electing to exercise an Option shall give
written notice to the Corporation of such electino and of the number of shares
he or she has elected to purchase and shall at the time of exercise tender the
full purchase price of the shares he or she has elected to purchase.
6.3 DELIVER OF STOCK. No shares shall be delivered pursuant to any exercise
of an Option until payment in full of the option price therefor is received by
the Corporation. Such payment may be made in whole or in part in cash or, to the
extent permitted by the Committee at or after the grant of an Option, by
delivery of a note or shares of the Stock owned by the optionee, including
Restricted Stock, valued at their fair market value on the date of delivery, or
such other lawful consideration as the Committee may determine. Until such
person has been issued a certificate or certificates for the shares so
purchased, he or she shall possess no rights of a record holder with respect to
any of such shares.
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6.4 OPTION UNAFFECTED BY CHANGE IN DUTIES. No Incentive Stock Option, and,
unless otherwise determined by the Committee, no Non-Qualified Option granted to
a person who is, on the date of the grant, an Employee of the Corporation or an
Affiliated Corporation, shall be affected by any change of duties or position of
the optionee (including transfer to or from an Affiliated Corporation), so long
as he or she continues to be an Employee. Employment shall be considered as
continuing and uninterrupted during any bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to reemployment is guaranteed by
statute. A bona fide leave of absence with the written approval of the Committee
shall not be considered an interruption of employment under the Plan, provided
that such written approval contractually obligates the Corporation or any
Affiliated Corporation to continue the employment of the optionee after the
approved period of absence.
If the optionee shall cease to be an Employee for any reason other than
death, such Option shall thereafter be exercisable only to the extent of the
purchase rights, if any, which have ac rued as of the date of such cessation;
provided that (i) the Committee may provide in the instrument evidencing any
Option that the Committee may in its absolute discretion, upon any such
cessation of employment, determine (but be under no obligation to
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determine) that such accrued purchase rights shall be deemed to include
additional shares covered by such Option; and (ii) unless the Committee shall
otherwise provide in the instrument evidencing any Option, upon any such
cessation of employment, such remaining rights to purchase shall in any event
terminate upon the earlier of (A) the expiration of the original term of the
Option; or (B) where such cessation of employment is on account of disability,
the expiration of one year from the date of such cessation of employment and,
otherwise, the expiration of three months from such date. For purposes of the
Plan, the term "disability" shall mean "permanent and total disability" as
defined in Section 22(e)(3) of the Code.
6.5 DEATH OF OPTIONEE. Should an optionee die while in possession of the
legal right to exercise an Option or Options under this Plan, such persons as
shall have acquired, by will or by the laws of descent and distribution, the
right to exercise any Options theretofore granted, may, unless otherwise
provided by the Committee in any instrument evidencing any Option, exercise such
Options at any time prior to one year from the ate of death; provided, that such
Option or Options shall expire in all events no later than the last day of the
original term of such Option; provided, further, that any such exercise shall be
limited to the purchase rights that have accrued as of the date when the
optionee ceased to be an Employee, whether by death or otherwise, unless the
Committee provides in the instrument evidencing such Option that, in the
discretion of the Committee,
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additional shares covered by such Option may become subject to purchase
immediately upon the death of the optionee.
ARTICLE VII
Reporting Person Limitations
Notwithstanding any other provision of the Plan, to the extent required to
qualify for the exemption provided by Rule 16b-3 under the Securities Exchange
Act of 1934, and any successor provision, (i) any Stock or other equity security
offered under the Plan to a Reporting Person may not be sold for at least six
(6) months after acquisition, except in case of death or disability and (ii) any
Option, or other similar right related to an equity security, issued under the
Plan to a Reporting Person shall not be transferable other than by will or the
laws of descent and distribution, shall not be exercisable for at least six (6)
months except in the case of death or disability, and shall be exercisable
during the Participant's lifetime only by the Participant or the Participant's
guardian or legal representative.
ARTICLE VIII
Terms and Conditions of Options
Options shall be evidenced by instruments (which need not be identical) in
such forms as the Committee may from time to time approve. Such instruments
shall conform to the terms and conditions set forth in Article V and VI hereof
and may contain
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such other provisions as the Committee deems advisable that are not inconsistent
with the Plan, including restrictions applicable to shares of Stock issuable
upon exercise of Options. In granting any Non-Qualified Option, the Committee
may specify that such Non-Qualified Option shall be subject to the restrictions
set forth herein with respect to Incentive Stock Options, or to such other
termination and cancellation provisions as the Committee may determine. The
Committee may from time to time confer authority and responsibility on one or
more of its own members and/or one or more officers of the Corporation to
execute and deliver such instruments. The proper officers of the Corporation are
authorized and directed to take any and all action necessary or advisable from
time to time to carry out the terms of such instruments.
ARTICLE IX
Benefit Plans
Awards under the Plan are discretionary and are not a part of regular
salary. Awards may not be used in determining the amount of compensation for any
purpose under the benefit plans of the Corporation, or an Affiliated
Corporation, except as the Committee may from time to time expressly provide.
Neither the Plan, an Option or any instrument evidencing an Option confers upon
any Employee the right to continued employment with the Corporation or an
Affiliated Corporation.
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ARTICLE X
Amendment, Suspension or Termination of the Plan
The Board may suspend the Plan or any part thereof at any time or may
terminate the Plan in its entirety. Awards shall not be granted after Plan
termination.
The Board may also amend the Plan from time to time, except that amendments
which affect the following subjects must be approved by stockholders of the
Corporation:
(a) Except as provided in Article XI relative to capital changes, the
number of shares as to which Options may be granted pursuant to Article V;
(b) The maximum term of Options granted;
(c) The minimum price at which Options may be granted;
(d) The term of the Plan; and
(e) The requirements as to eligibility for participation in the Plan.
Awards granted prior to suspension or termination of the Plan may not be
cancelled solely because of such suspension or termination, except with the
consent of the grantee of the Award.
ARTICLE XI
Changes in Capital Structure
The instruments evidencing Options granted hereunder shall be subject to
adjustment in the event of changes in the outstanding Stock of the Corporation
by reason of stock dividends, stock splits, recapitalizations, reorganizations,
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mergers, consolidations, combinations, exchanges or other relevant changes in
capitalization occurring after the date of an Award to the same extent as would
affect an actual share of stock issued and outstanding on the effective date of
such change. Such adjustment to outstanding Options shall be made without change
in the total price applicable to the unexercised portion of such options, and a
corresponding adjustment in the applicable option price per share shall be made.
In the event of any such change, the aggregate number and classes of shares for
which Options may thereafter be granted under Section 5.1 of this Plan may be
appropriately adjusted as determined by the Committee so as to reflect such
change.
Notwithstanding the foregoing, any adjustments made pursuant to this
Article XI with respect to Incentive Stock Options shall be made only after the
Committee, after consulting with counsel for the Corporation, determines whether
such adjustments would constitute a "modification" of such Incentive Stock
Options (as that term is defined in Section 425 of the Code) or would cause any
adverse tax consequences for the holders of such Incentive Stock Options. If the
Committee determines that such adjustments made with respect to Incentive Stock
Options would constitute a modification of such Incentive Stock Options, it may
refrain from making such adjustments.
In the event of the proposed dissolution or liquidation of the Corporation,
each Option will terminate immediately prior to the consummation of such
proposed action or at such other time
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and subject to such other conditions as shall be determined by the Committee.
Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Corporation.
No fractional shares shall be issued under the Plan and the optionee shall
receive from the Corporation cash in lieu of such fractional shares.
ARTICLE XII
Effective Date and Term of the Plan
The Plan shall become effective on April 23, 1993. The Plan shall continue
until such time as it may be terminated by action of the Board; provided,
however, that no Options may be granted under this Plan on or after the tenth
anniversary of the effective date hereof.
ARTICE XIII
Conversion of ISO's into Non-Qualified Options;
Termination of ISO's
The Committee, at the written request of any optionee, may in its
discretion take such actions as may be necessary to
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convert such optionee's Incentive Stock Options, that have not been exercised on
the date of conversion, into Non-Qualified Options at any time prior to the
expiration of such Incentive Stock Options, regardless of whether the optionee
is an employee of the Corporation or an Affiliated Corporation at the time of
such conversion. Such actions may include, but not be limited to, extending the
exercise period or reducing the exercise price of such Options. At the time of
such conversion, the Committee (with the consent of the optionee) may impose
such conditions on the Exercise of the resulting Non-Qualified Options as the
Committee in its discretion may determine, provided that such conditions shall
be not inconsistent with the Plan. Nothing in the Plan shall be deemed to give
any optionee the right to have such optionee's Incentive Stock Options converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Committee takes appropriate action. The Committee, with the consent of the
optionee, may also terminate any portion of any Incentive Stock Option that has
not been exercised at the time of such termination.
ARTICLE XIV
Application of Funds
The proceeds received by the Corporation from the sale of shares pursuant
to Options granted under the Plan shall be used for general corporate purposes.
ARTICLE XV
Governmental Regulation
The Corporation's obligation to sell and deliver shares of Stock under this
Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
ARTICLE XVI
Withholding of Additional Income Taxes
Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition (as defined in Article XVI) the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includible in such person's gross income. The Committee in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.
ARTICLE XVII
Notice to Company of Disqualifying Disposition
Each employee who receives an Incentive Stock Option must agree to notify
the Corporation in writing immediately after the employee makes a Disqualifying
Disposition of any Stock acquired pursuant to the exercise of an Incentive Stock
Option. A Disqualifying Disposition is any disposition (including any sale) of
such Stock before the later of (a) two years after the date
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the employee was granted the Incentive Stock Option or (b) one year after the
date the employee acquired Stock by exercising the Incentive Stock Option. If
the employee has died before such stock is sold, these holding period
requirements do not apply and no Disqualifying Disposition can occur thereafter.
ARTICLE XVIII
Governing Law; Construction
The validity and construction of the Plan and the instruments evidencing
Options shall be governed by the laws of the State of Delaware. In construing
this Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
PALOMAR MEDICAL TECHNOLOGIES, INC.
AMENDED 1995 STOCK OPTION PLAN
ARTICLE I
Purpose of the Plan
The purpose of this plan is to encourage and enable employees, consultants,
directors and others who are in a position to make significant contributions to
the success of PALOMAR MEDICAL TECHNOLOGIES, INC. and of its affiliated
corporations upon whose judgment, initiative, and efforts the Corporation
depends for the successful conduct of its business, to acquire a closer
identification of their interests with those of the corporation by providing
them with opportunities to purchase stock in the Corporation pursuant to options
granted hereunder, thereby stimulating their efforts on behalf of the
Corporation and strengthening their desire to remain involved with the
Corporation.
ARTICLE II
Definitions
2.1 "Affiliated Corporation" means any stock corporation of which a
majority of the voting common or capital stock is owned directly or indirectly
by the Corporation.
2.2 "Award" means an Option granted under Article V.
2.3 "Board" means the Board of Directors of the Corporation.
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2.4 "Code" means the Internal Revenue Code of 1986, as amended form time to
time.
2.5 "Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, each of whom is a "disinterested
person" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, or any successor provision. In the event that two "disinterested persons"
are not available to administer the Plan, the Board may appoint to the Committee
two members of the Board, either or both of whom are not "disinterested
persons," in which event this Plan shall not qualify under Rule 16b-3, but this
Plan shall be valid and operative in all other respects.
2.6 "Corporation" means PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, or its successor.
2.7 "Employee" means any person who is a regular full-time or part-time
employee of the Corporation or an Affiliated Corporation on or after August 3,
1994.
2.8 "Option" means an Incentive Stock Option or Non-Qualified Option
granted by the Committee under Article V of this Plan in the form of a right to
purchase Stock evidenced by an instrument containing such provisions as the
Committee may establish.
2.9 "Participant" means a person selected by the Committee to receive an
award under the Plan.
2.10 "Plan" means this 1995 Stock Option Plan.
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2.11 "Incentive Stock Option" ("ISO") means an option which qualifies as an
incentive stock option as defined in Section 422 of the Code, as amended.
2.12 "Non-Qualified Option" means any option not intended to qualify as an
Incentive Stock Option.
2.13 "Stock" means the Common Stock, $.01 par value, of the Corporation or
any successor, including any adjustments in the event of changes in capital
structure of the type described in Article XI.
2.14 "Reporting Person" means a person subject to Section 16 of the
Securities Exchange Act of 1934 or any successor provision.
2.15 "Restricted Period" means the period of time selected by the Committee
during which an Award may be forfeited by the person.
ARTICLE III
Administration of the Plan
3.1 ADMINISTRATION BY THE COMMITTEE. This Plan shall be administered by the
Committee as defined herein. From time to time the Board may increase the size
of the Committee and appoint additional members thereto, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan. No member of the Committee shall be liable for any action
or determination made in
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good faith with respect to the Plan or any options granted under it.
3.2 POWERS. The Committee shall have full and final authority to operate,
manage, and administer the Plan on behalf of the Corporation. This authority
includes, but is not limited to:
(a) The power to grant Awards conditionally or unconditionally,
(b) The power to prescribe the form or forms of the instruments evidencing
Awards granted under this Plan,
(c) The power to interpret the Plan,
(d) The power to provide regulations for the operation of the incentive
features of the Plan, and otherwise to prescribe and rescind
regulations for interpretation, management and administration of the
Plan,
(e) The power to delegate responsibility for Plan operation, management
and administration of the Plan,
(f) The power to delegate to other persons the responsibility of
performing ministerial acts in furtherance of the Plan's purpose, and
(g) The power to engage the services of persons, companies, or
organizations in furtherance of the Plan's purpose, including but not
limited to,
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banks, insurance companies, brokerage firms, and consultants.
3.3 ADDITIONAL POWERS. In addition, as to each Option to buy Stock of the
Corporation, the Committee shall have full and final authority in its
discretion: (a) to determine the number of shares of Stock subject to each
Option; (b) to determine the time or times at which Options will be granted; (c)
to determine the option price of the shares of Stock subject to each Option,
which price shall be not less than the minimum price specified in Article V of
this Plan; (d) to determine the time or times when each Option shall become
exercisable and the duration of the exercise period (including the acceleration
of any exercise period), which shall not exceed the maximum period specified in
Article V; and (e) to determine whether each Option granted shall be an
Incentive Stock Option or a Non-qualified Option.
In no event may the Corporation grant an Employee any Incentive Stock
Option that is first exercisable during any one calendar year to the extent the
aggregate fair market value of the Stock (determined at the time the options are
granted) exceeds $100,000 (under all stock options plans of the Corporation and
any Affiliated Corporation); provided, however, that this paragraph shall have
no force and effect if its inclusion in the Plan is not necessary for Incentive
Stock Options issued under the Plan to qualify as such pursuant to Section
422(d)(1) of the Code.
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ARTICLE IV
Eligibility
4.1 ELIGIBLE EMPLOYEES. All Employees (including Directors and Officers who
are Employees and who have not irrevocably elected to be ineligible to
participate in the Plan) are eligible to be gratned Incentive Stock Optona and
Non-Qualified Option Awards under this Plan.
4.2 CONSULTANTS, DIRECTORS AND OTHER NON-EMPLOYEES. Any Consultant,
Director (whether or not an Employee) and any other Non-Employee is eligible to
be granted Non-Qualified Option Awards under the Plan provided the person has
not irrevocably elected to be ineligible to participate in the Plan, and
provided further that upon appointment to the Committee at the first Board of
Directors meeting following the Annual Meeting of the Shareholders, each
non-employee director appointed to the Committee shall be deemed to be
ineligible to participate under the Plan during his or her period of service on
the Committee.
4.3 RELEVANT FACTORS. In selecting individual Employees, Consultants,
Directors, and other Non-Employees to whom Awards shall be granted, the
Committee shall weigh such factors as are relevant to accomplish the purpose of
the Plan as stated in Article I. An individual who has been granted an Award may
be granted one or more additional Awards, if the Committee so determines. The
granting of an Award to any individual shall neither entitle that individual to,
nor disqualify him from, participation in any other grant of Awards.
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ARTICLE V
Stock Option Awards
5.1 NUMBER OF SHARES. Subject to the provisions of Article XI of this Plan,
the aggregate number of shares of stock for which Options may be granted under
this Plan shall not exceed 1,000,000 shares. The shares to be delivered upon
exercise of Options under this Plan shall be made available, at the discretion
of the Committee, either from authorized but unissued shares or from previously
issued and reacquired shares of Stock held by the Corporation as treasury
shares, including shares purchased in the open market.
Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee.
5.2 EFFECT OF EXPIRATION, TERMINATION OR SURRENDER. If an Option under this
Plan shall expire or terminate unexercised as to any shares covered thereby, or
shall cease for any reason to be exercisable in whole or in part, or if the
Company shall reacquire any unvested shares issued pursuant to Options under the
Plan, such shares shall thereafter be available for the granting of other
Options under this Plan.
5.3 TERM OF OPTIONS. The full term of each Option granted hereunder shall
be for such period as the Committee shall determine. In the case of Incentive
Stock Options granted
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hereunder, the term shall not exceed ten (10) years from the date of granting
thereof. Each Option shall be subject to earlier termination as provided in
Section 6.3 and 6.4. Notwithstanding the foregoing, the term of options intended
to qualify as "Incentive Stock Options" shall not exceed five (5) years from the
date of granting thereof if such option is granted to any employee who at the
time such option is granted owns more than ten percent (10% of the total
combined voting power of all classes of stock of the Corporation.
5.4 OPTION PRICE. The option price shall be determined by the Committee at
the time any Option is granted. In the case of Incentive Stock Options, the
exercise price shall not be less than 100% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted (but in
no event less than par value), provided that in the case where an Incentive
Stock Option is granted hereunder to any Employee who at the time of grant owns
Stock possessing more than 10% of the combined voting power of all classes of
stock of the Corporation and its Affiliated Corporations, the Incentive Stock
Option price shall equal not less than 110% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted. In the
case of Non-Qualified Stock Options, the exercise price shall not be less than
par value.
5.5 FAIR MARKET VALUE. If, at the time an Option is granted under the Plan,
the Corporation's Stock is publicly traded, "fair market value" shall be
determined as of the last
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business day for which the prices or quotes discussed in this sentence are
available prior to the date such Option is granted and shall mean (i) the
average (on that date) of the high and low prices of the Stock on the principal
national securities exchange on which the Stock is traded, if the Stock is then
traded on a national securities exchange; or (ii) the last reported sale price
(on that date) of the Stock on the NASDAQ National Market List, if the Stock is
not the traded on a national securities exchange; or (iii) the closing bid price
(or average of bid prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Stock is not reported
on the NASDAQ National Market List. However, if the Stock is not publicly traded
at the time an Option is granted under the Plan, "fair market value" shall be
deemed to be the fair value of the Stock as determined by the Committee under
Section 3.3.
5.6 NON-TRANSFERABILITY OF OPTIONS. No Option granted under this Plan shall
be transferable by the grantee otherwise than by will or the laws of descent and
distribution, and such Option may be exercised during the grantee's lifetime
only by the grantee. Notwithstanding the above, in the event the federal
securities laws and the relevant tax laws change so as to permit the
transferability of the options provided by this Plan, then to such extent
permitted by law, such options may be transferred in accordance with this Plan.
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5.7 FOREIGN NATIONALS. Awards may be granted to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Committee considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.
ARTICLE VI
Exercise of Option
6.1 EXERCISE. Each Option granted under the Plan shall be exercisable on
such date or dates and during such period and for such number of shares as shall
be determined pursuant to the provisions of the instrument evidencing such
Option. The Committee shall have the right to accelerate the date of exercise of
any option.
6.2 NOTICE OF EXERCISE. A person electing to exercise an Option shall give
written notice to the Corporation of such electino and of the number of shares
he or she has elected to purchase and shall at the time of exercise tender the
full purchase price, in cash, Corporation Stock, the exchange of exercisable
options, or by such other means as is authorized by the Board of Directors, for
the shares he or she has elected to purchase.
6.3 DELIVER OF STOCK. No shares shall be delivered pursuant to any exercise
of an Option until payment in full of the option price therefor is received by
the Corporation. Such
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payment may be made in whole or in part in cash or, to the extent permitted by
the Committee at or after the grant of an Option, by delivery of a note or
shares of the Stock owned by the optionee, including Restricted Stock, valued at
their fair market value on the date of delivery, or such other lawful
consideration as the Committee may determine. Until such person has been issued
a certificate or certificates for the shares so purchased, he or she shall
possess no rights of a record holder with respect to any of such shares.
6.4 OPTION UNAFFECTED BY CHANGE IN DUTIES. No Incentive Stock Option, and,
unless otherwise determined by the Committee, no Non-Qualified Option granted to
a person who is, on the date of the grant, an Employee of the Corporation or an
Affiliated Corporation, shall be affected by any change of duties or position of
the optionee (including transfer to or from an Affiliated Corporation), so long
as he or she continues to be an Employee. Employment shall be considered as
continuing and uninterrupted during any bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to reemployment is guaranteed by
statute. A bona fide leave of absence with the written approval of the Committee
shall not be considered an interruption of employment under the Plan, provided
that such written approval contractually obligates the Corporation or any
Affiliated Corporation to
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continue the employment of the optionee after the approved period of absence.
If the optionee shall cease to be an Employee for any reason other than
death, such Option shall thereafter be exercisable only to the extent of the
purchase rights, if any, which have ac rued as of the date of such cessation;
provided that (i) the Committee may provide in the instrument evidencing any
Option that the Committee may in its absolute discretion, upon any such
cessation of employment, determine (but be under no obligation to determine)
that such accrued purchase rights shall be deemed to include additional shares
covered by such Option; and (ii) unless the Committee shall otherwise provide in
the instrument evidencing any Option, upon any such cessation of employment,
such remaining rights to purchase shall in any event terminate upon the earlier
of (A) the expiration of the original term of the Option; or (B) where such
cessation of employment is on account of disability, the expiration of one year
from the date of such cessation of employment and, otherwise, the expiration of
three months from such date. For purposes of the Plan, the term "disability"
shall mean "permanent and total disability" as defined in Section 22(e)(3) of
the Code.
6.5 DEATH OF OPTIONEE. Should an optionee die while in possession of the
legal right to exercise an Option or Options under this Plan, such persons as
shall have acquired, by will or by the laws of descent and distribution, the
right to exercise any Options theretofore granted, may, unless otherwise
provided
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by the Committee in any instrument evidencing any Option, exercise such Options
at any time prior to one year from the ate of death; provided, that such Option
or Options shall expire in all events no later than the last day of the original
term of such Option; provided, further, that any such exercise shall be limited
to the purchase rights that have accrued as of the date when the optionee ceased
to be an Employee, whether by death or otherwise, unless the Committee provides
in the instrument evidencing such Option that, in the discretion of the
Committee, additional shares covered by such Option may become subject to
purchase immediately upon the death of the optionee.
6.6 RELOAD OPTION GRANTS. The Committee, in its discretion, may also grant
stock options with "reload provisions" that permit the option holder to exercise
his or her stock options and receive new stock option grants for the equivalent
amount of stock underlying the option exercised, at the fair market value on the
date of such exercise. The reload options shall have the same expiration date as
the options they replace.
ARTICLE VII
Reporting Person Limitations
Notwithstanding any other provision of the Plan, to the extent required to
qualify for the exemption provided by Rule 16b-3 under the Securities Exchange
Act of 1934, and any successor provision, (i) any Stock or other equity security
offered under the Plan to a Reporting Person may not be sold for
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at least six (6) months after grant of an Option to acquire such Stock or other
equity security, except in case of death or disability and (ii) any Option, or
other similar right related to an equity security, issued under the Plan to a
Reporting Person shall not be transferable other than by will or the laws of
descent and distribution or in accordance with section 5.6 hereof, shall not be
exercisable for at least six (6) months except in the case of death or
disability, provided in the provisions of section 5.6 hereof, shall be
exercisable during the Participant's lifetime only by the Participant or the
Participant's guardian or legal representative.
ARTICLE VIII
Terms and Conditions of Options
Options shall be evidenced by instruments (which need not be identical) in
such forms as the Committee may from time to time approve. Such instruments
shall conform to the terms and conditions set forth in Article V and VI hereof
and may contain such other provisions as the Committee deems advisable that are
not inconsistent with the Plan, including restrictions applicable to shares of
Stock issuable upon exercise of Options. In granting any Non-Qualified Option,
the Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to Incentive Stock Options, or to
such other termination and cancellation provisions as the Committee may
determine. The Committee may from time to time
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confer authority and responsibility on one or more of its own members and/or one
or more officers of the Corporation to execute and deliver such instruments. The
proper officers of the Corporation are authorized and directed to take any and
all action necessary or advisable from time to time to carry out the terms of
such instruments.
ARTICLE IX
Benefit Plans
Awards under the Plan are discretionary and are not a part of regular
salary. Awards may not be used in determining the amount of compensation for any
purpose under the benefit plans of the Corporation, or an Affiliated
Corporation, except as the Committee may from time to time expressly provide.
Neither the Plan, an Option or any instrument evidencing an Option confers upon
any Employee the right to continued employment with the Corporation or an
Affiliated Corporation.
ARTICLE X
Amendment, Suspension or Termination of the Plan
The Board may suspend the Plan or any part thereof at any time or may
terminate the Plan in its entirety. Awards shall not be granted after Plan
termination.
The Board may also amend the Plan from time to time, except that amendments
which affect the following subjects must be approved by stockholders of the
Corporation, unless and to such
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extent, that applicable federal or state law of regulation permit an amendment
thereto:
(a) Except as provided in Article XI relative to capital changes, and
except as permitted by law or regulation where such change is not deemed
material, the number of shares as to which Options may be granted pursuant to
Article V;
(b) The maximum term of Options granted;
(c) The minimum price at which Options may be granted;
(d) The term of the Plan; and
(e) The requirements as to eligibility for participation in the Plan.
Awards granted prior to suspension or termination of the Plan may not be
cancelled solely because of such suspension or termination, except with the
consent of the grantee of the Award.
ARTICLE XI
Changes in Capital Structure
The instruments evidencing Options granted hereunder shall be subject to
adjustment in the event of changes in the outstanding Stock of the Corporation
by reason of stock dividends, stock splits, recapitalizations, reorganizations,
mergers, consolidations, combinations, exchanges or other relevant changes in
capitalization occurring after the date of an Award to the same extent as would
affect an actual share of stock issued and outstanding on the effective date of
such change. Such adjustment to outstanding Options shall be made without
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change in the total price applicable to the unexercised portion of such
options, and a corresponding adjustment in the applicable option price per share
shall be made. In the event of any such change, the aggregate number and classes
of shares for which Options may thereafter be granted under Section 5.1 of this
Plan may be appropriately adjusted as determined by the Committee so as to
reflect such change. Notwithstanding the foregoing, any adjustments made
pursuant to this Article XI with respect to Incentive Stock Options shall be
made only after the Committee, after consulting with counsel for the
Corporation, determines whether such adjustments would constitute a
"modification" of such Incentive Stock Options (as that term is defined in
Section 425 of the Code) or would cause any adverse tax consequences for the
holders of such Incentive Stock Options. If the Committee determines that such
adjustments made with respect to Incentive Stock Options would constitute a
modification of such Incentive Stock Options, it may refrain from making such
adjustments.
In the event of the proposed dissolution or liquidation of the Corporation,
each Option will terminate immediately prior to the consummation of such
proposed action or at such other time and subject to such other conditions as
shall be determined by the Committee.
Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to,
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the number or price of shares subject to Options. No adjustments shall be made
for dividends paid in cash or in property other than securities of the
Corporation.
No fractional shares shall be issued under the Plan and the optionee shall
receive from the Corporation cash in lieu of such fractional shares.
ARTICLE XII
Effective Date and Term of the Plan
The Plan shall become effective on August 3, 1994. The Plan shall continue
until such time as it may be terminated by action of the Board; provided,
however, that no Options may be granted under this Plan on or after the tenth
anniversary of the effective date hereof.
ARTICE XIII
Conversion of ISO's into Non-Qualified Options;
Termination of ISO's
The Committee, at the written request of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's
Incentive Stock Options, that have not been exercised on the date of conversion,
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the optionee is an employee of the
Corporation or an Affiliated Corporation at the time of such conversion. Such
actions may include, but not be limited
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to, extending the exercise period or reducing the exercise price of such
Options. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the Exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall be not inconsistent with the Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's
Incentive Stock Options converted into Non-Qualified Options, and no such
conversion shall occur until and unless the Committee takes appropriate action.
The Committee, with the consent of the optionee, may also terminate any portion
of any Incentive Stock Option that has not been exercised at the time of such
termination.
ARTICLE XIV
Application of Funds
The proceeds received by the Corporation from the sale of shares pursuant
to Options granted under the Plan shall be used for general corporate purposes.
ARTICLE XV
Governmental Regulation
The Corporation's obligation to sell and deliver shares of Stock under this
Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
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ARTICLE XVI
Withholding of Additional Income Taxes
Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition (as defined in Article XVII) the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includible in such person's gross income. The Committee in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.
ARTICLE XVII
Notice to Company of Disqualifying Disposition
Each employee who receives an Incentive Stock Option must agree to notify
the Corporation in writing immediately after the employee makes a Disqualifying
Disposition of any Stock acquired pursuant to the exercise of an Incentive Stock
Option. A Disqualifying Disposition is any disposition (including any sale) of
such Stock before the later of (a) two years after the date the employee was
granted the Incentive Stock Option or (b) one year after the date the employee
acquired Stock by exercising the Incentive Stock Option. If the employee has
died before such stock is sold, these holding period requirements do not apply
and no Disqualifying Disposition can occur thereafter.
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ARTICLE XVIII
Governing Law; Construction
The validity and construction of the Plan and the instruments evidencing
Options shall be governed by the laws of the State of Delaware. In construing
this Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
PALOMAR MEDICAL TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
TABLE OF CONTENTS
Page
ARTICLE I. Purpose of the Plan 1
ARTICLE II. Definitions 1
ARTICLE III. Administration of the Plan 2
ARTICLE IV. Eligibility 3
ARTICLE V. Stock Option Awards 4
ARTICLE VI. Exercise of Option 5
ARTICLE VII. Reporting Person Limitations 7
ARTICLE VIII. Terms and Conditions of Options 7
ARTICLE IX. Benefit Plans 8
ARTICLE X. Amendment, Suspension or Termination
of the Plan 8
ARTICLE XI. Changes in Capital Structure 9
ARTICLE XII. Effective Date and Term of the Plan 10
ARTICLE XIII. Conversion of ISOs into Non-Qualified
Options; Termination of ISOs 10
ARTICLE XIV. Application of Funds 10
ARTICLE XV. Governmental Regulation 11
ARTICLE XVI. Withholding of Additional Income Taxes 11
ARTICLE XVII. Notice to Company of Disqualifying
Disposition 11
ARTICLE XVIII. Governing Law; Construction 11
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
1996 STOCK OPTION PLAN
ARTICLE I
Purpose of the Plan
The purpose of this Plan is to encourage and enable employees, consultants,
directors and others who are in a position to make significant contributions to
the success of PALOMAR MEDICAL TECHNOLOGIES, INC. and of its affiliated
corporations upon whose judgment, initiative, and efforts the Corporation
depends for the successful conduct of its business, to acquire a closer
identification of their interests with those of the Corporation by providing
them with opportunities to purchase stock in the Corporation pursuant to options
granted hereunder, thereby stimulating their efforts on behalf of the
Corporation and strengthening their desire to remain involved with the
Corporation.
ARTICLE II
Definitions
2.1 "Affiliated Corporation" means any stock corporation of which a
majority of the voting common or capital stock is owned directly or
indirectly by the Corporation.
2.2 "Award" means an Option granted under Article V.
2.3 "Board" means the Board of Directors of the Corporation.
2.4 "Code" means the internal Revenue Code of 1986, as amended from time
to time.
2.5 "Committee" means a committee of not less than two members of the
Board appointed by the Board to administer the Plan, each of whom is a
"disinterested person" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or any successor
provision. In the event that two "disinterested persons" are not
available to administer the Plan, the Board may appoint to the
Committee two members of the Board, either or both of whom are not
"disinterested persons," in which event this Plan shall not qualify
under Rule 16b-3, but this Plan shall be valid and operative in all
other respects.
2.6 "Corporation" means PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, or its successor.
2.7 "Employee" means any person who is a regular full-time or part-time
employee of the Corporation or an Affiliated
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Corporation on or after May 17, 1996.
2.8 "Option" means an Incentive Stock Option or Non-Qualified Option
granted by the Committee under Article V of this Plan in the form of a
right to purchase Stock evidenced by an instrument containing such
provisions as the Committee may establish.
2.9 "Participant" means a person selected by the Committee to receive an
award under the Plan.
2.10 "Plan" means this 1996 Stock Option Plan.
2.11 "Incentive Stock Option" ("ISO") means an option which qualifies as an
incentive stock option as defined in Section 422 of the Code, as
amended.
2.12 "Non-Qualified Option" means any option not intended to qualify as an
Incentive Stock Option.
2.13 "Stock" means the Common Stock, $.01 par value, of the Corporation or
any successor, including any adjustments in the event of changes in
capital structure of the type described in Article XI.
2.14 "Reporting Person" means a person subject to Section 16 of the
Securities Exchange Act of 1934, as amended, or any successor
provision.
2.15 "Restricted Period" means the period of time selected by the Committee
during which an Award may be forfeited by the person.
ARTICLE III
Administration of the Plan
3.1 ADMINISTRATION BY THE COMMITTEE. This Plan shall be administered by the
Committee as defined herein. From time to time the Board may increase the size
of the Committee and appoint additional members thereto, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any options
granted under it.
3.2 POWERS. The Committee shall have full and final authority to operate,
manage, and administer the Plan on behalf of the Corporation. This authority
includes, but is not limited to:
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(a) The power to grant Awards conditionally or unconditionally,
(b) The power to prescribe the form or forms of the instruments evidencing
Awards granted under this Plan,
(c) The power to interpret the Plan,
(d) The power to provide regulations for the operation of the incentive
features of the Plan, and otherwise to prescribe and rescind
regulations for interpretation, management and administration of the
Plan,
(e) The power to delegate responsibility for Plan operation, management
and administration on such terms, consistent with the Plan, as the
Committee may establish,
(f) The power to delegate to other persons the responsibility of
performing ministerial acts in furtherance of the Plan's purpose, and
(g) The power to engage the services of persons, companies, or
organizations in furtherance of the Plan's purpose, including but not
limited to, banks, insurance companies, brokerage firms, and
consultants.
3.3 ADDITIONAL POWERS. In addition, as to each Option to buy Stock of the
Corporation, the Committee shall have full and final authority in its
discretion: (a) to determine the number of shares of Stock subject to each
Option; (b) to determine the time or times at which Options will be granted, (c)
to determine the option price of the shares of Stock subject to each Option,
which price shall be not less than the minimum price specified in Article V of
this Plan; (d) to determine the time or times when each Option shall become
exercisable and the duration of the exercise period (including the acceleration
of any exercise period), which shall not exceed the maximum period specified in
Article V; and (e) to determine whether each Option granted shall be an
Incentive Stock Option or a Non-Qualified Option.
In no event may the Corporation grant an Employee any Incentive Stock
Option that is first exercisable during any one calendar year to the extent the
aggregate fair market value of the Stock (determined at the time the options are
granted) exceeds $100,000 (under all stock options plans of the Corporation and
any Affiliated Corporation); provided, however, that this paragraph shall have
no force and effect if its inclusion in the Plan is not necessary for Incentive
Stock Options issued under the Plan to qualify as such pursuant to Section
422(d)(1) of the Code.
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ARTICLE IV
Eligibility
4.1 ELIGIBLE EMPLOYEES. All Employees (including Directors and Officers who
are Employees and who have not irrevocably elected to be ineligible to
participate in the Plan) are eligible to be granted Incentive Stock Option and
Non-Qualified Option Awards under this Plan.
4.2 CONSULTANTS, DIRECTORS AND OTHER NON-EMPLOYEES. Any Consultant,
Director (whether or not an Employee) and any other Non-Employee is eligible to
be granted Non-Qualified Option Awards under the Plan provided the person has
not irrevocably elected to be ineligible to participate in the Plan, and
provided further that upon appointment to the Committee at the first Board of
Directors meeting following the Annual Meeting of the Shareholders, each
non-employee director appointed to the Committee shall be deemed to be
ineligible to participate under the Plan during his or her period of service on
the Committee.
4.3 RELEVANT FACTORS. In selecting individual Employees, Consultants,
Directors, and other Non-Employees to whom Awards shall be granted, the
Committee shall weigh such factors as are relevant to accomplish the purpose of
the Plan as stated in Article 1. An individual who has been granted an Award may
be granted one or more additional Awards, if the Committee so determines. The
granting of an Award to any individual shall neither entitle that individual to,
nor disqualify him from, participation in any other grant of Awards.
ARTICLE V
Stock Option Awards
5.1 NUMBER OF SHARES. Subject to the provisions of Article XI of this Plan,
the aggregate number of shares of Stock for which Options may be granted under
this Plan shall not exceed 2,500,000 shares. The shares to be delivered upon
exercise of Options under this Plan shall be made available, at the discretion
of the Committee, either from authorized but unissued shares or from previously
issued and reacquired shares of Stock held by the Corporation as treasury
shares, including shares purchased in the open market.
Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee.
5.2 EFFECT OF EXPIRATION, TERMINATION OR SURRENDER. If an Option under this
Plan shall expire or terminate unexercised as to any shares covered thereby, or
shall cease for any reason to be exercisable in whole or in part, or if the
Company shall reacquire any unvested shares issued pursuant to Options under the
Plan, such shares shall thereafter be available for the granting of other
Options under this Plan,
5.3 TERM OF OPTIONS. The full term of each Option granted hereunder shall
be for such period as the Committee shall determine. In the case of incentive
Stock Options granted hereunder, the term shall not exceed ten (10) years from
the date of granting thereof. Each Option shall be
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subject to earlier termination as provided in Sections 6.4 and 6.5.
Notwithstanding the foregoing, the term of options intended to qualify as
"Incentive Stock Options" shall not exceed five (5) years from the date of
granting thereof if such option is granted to any employee who at the time such
option is granted owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Corporation.
5.4 OPTION PRICE. The option price shall be determined by the Committee at
the time any Option is granted. In the case of Incentive Stock Options, the
exercise price shall not be less than 100% of the fair market value of the
shares covered thereby at the time the Incentive Stock Option is granted (but in
no event less than par value), provided that in the case where an Incentive
Stock Option is granted hereunder to any Employee who at the time of grant owns
Stock possessing more than 10% of the combined voting power of all classes of
stock of the Corporation and its Corporations, the Incentive Stock Option price
shall equal not less than 110% of the fair market value of the shares covered
thereby at the time the Incentive Stock Option is granted. In the case of
Non-Qualified Stock Options, the exercise price shall not be less than par
value.
5.5 FAIR MARKET VALUE. If, at the time an Option is granted under the Plan,
the Corporation's Stock is publicly traded, "fair market shall be determined as
of the last business day for which the prices or quotes discussed in this
sentence are available prior to the date such Option is granted and shall mean
(i) the average (on that date) of the high and low prices of the Stock on the
principal national securities exchange on which the Stock is traded, if the
Stock is then traded on a national securities exchange; or (ii) the last
reported sale price (on that date) of the Stock on the NASDAQ National Market
List, if the Stock is not then traded on a national securities exchange; or
(iii) the closing bid price (or average of bid prices) last quoted (on that
date) by an established quotation service for over-the-counter securities, if
the Stock is not reported on the NASDAQ National Market List. However, if the
Stock is not publicly traded at the time in Option is granted under the Plan,
"fair market value" shall be deemed to be the fair value of the Stock as
determined by the Committee under Section 3.3.
5.6 NON-TRANSFERABILITY OF OPTIONS. Except as provided below, no Option
granted under this Plan shall be transferable by the grantee otherwise than by
will or the laws of descent and distribution, and such Option may be exercised
during the grantee's lifetime only by the grantee. Notwithstanding the above, in
the event the federal securities laws and the relevant tax laws change so as to
permit the transferability of the options provided by this Plan then to such
extent permitted by law, such options may be transferred in accordance with this
Plan.
5.7 FOREIGN NATIONALS. Awards may be granted to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the plan as the Committee considers
necessary or advisable to achieve the purpose of the Plan or comply with
applicable laws.
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ARTICLE VI
Exercise of Option
6.1 EXERCISE. Each Option granted under the Plan shall be exercisable on
such date or dates and during such period and for such number of shares as shall
be determined pursuant to the provisions of the instrument evidencing such
Option. The Committee shall have the right to accelerate the date of exercise of
any option.
6.2 NOTICE OF EXERCISE AND PAYMENT. A person electing to exercise an Option
shall give written notice to the Corporation of such election and of the number
of shares he or she has elected to purchase and shall at the time of exercise
tender the full purchase price, in cash, Corporation Stock owned by him or her
for at least six months, or by such other means as is authorized by the Board of
Directors, for the shares he or she has elected to purchase.
6.3 DELIVERY OF STOCK. No shares shall be delivered pursuant to any
exercise of an Option until payment in full of the option price therefor is
received by the Corporation. Such payment may be made in whole of in part in
cash or, to the extent permitted by the Committee at or after the grant of an
Option, by delivery of a note or shares of the Stock owned by the optionee,
including Restricted Stock, valued at their fair market value on the date of
delivery, or such other lawful consideration as the Committee may determine.
Until such person has been issued a certificate or certificates for the shares
so purchased, he or she shall possess no rights of a record holder with respect
to any of such shares.
6.4 OPTION UNAFFECTED BY CHANGE IN DUTIES. No Incentive Stock Option, and,
unless otherwise determined by the Committee, no Non-Qualified Option granted to
a person who is, on the date of the grant, an Employee of the Corporation or an
Affiliated Corporation, shall be affected by any change of duties or position of
the optionee (including transfer to or from an Affiliated Corporation), so long
as he or she continues to be an Employee. Employment shall be considered as
continuing and uninterrupted during any bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of such leave does not exceed 90 days or, if longer,
any period during which such optionee's right to reemployment is guaranteed by
statute. A bona fide leave of absence with the written approval of the Committee
shall not be considered an interruption of employment under the Plan, provided
that such written approval contractually obligates the Corporation or any
Affiliated Corporation to continue the employment of the optionee after the
approved period of absence.
If the optionee shall cease to be an Employee for any reason other than
death, such Option shall thereafter be exercisable only to the extent of the
purchase rights, if any, which have accrued as of the date of such cessation;
provided that (i) the Committee may in its absolute discretion, upon any
cessation of employment, determine (but be no under no obligation to determine)
that such accrued purchase rights shall be deemed to include additional shares
covered by such Option, and (ii) unless the Committee shall otherwise provide in
the instrument evidencing
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any Option, upon any such cessation of employment, such remaining rights to
purchase shall in any event terminate upon the earlier of (A) the expiration of
the original term of the Option; or (B) where such cessation of employment is on
account of disability, the expiration of one year from the date of such
cessation of employment and, otherwise, the expiration of three months from such
date. For purposes of the Plan, the term "disability" shall mean "permanent and
total disability" as defined in Section 22(e)(3) of the Code.
6.5 DEATH OF OPTIONEE. Should an optionee die while in possession of the
legal right to exercise an Option or Options under this Plan, such persons as
shall have acquired, by will or by the laws of descent and distribution, the
right to exercise any Options theretofore granted, may, unless otherwise
provided by the Committee in any instrument evidencing any Option, exercise such
Options at any time prior to one year from the date of death; provided, that
such Option or Options shall expire in all events no later than the last day of
the original term of such Option; provided, further, that any such exercise
shall be limited to the purchase rights that have accrued as of the date when
the optionee ceased to be an Employee, whether by death or otherwise, unless the
Committee provides in the instrument evidencing such Option that, in the
discretion of the Committee, additional shares covered by such Option may become
subject to purchase immediately upon the death of the optionee.
6.6 RELOAD OPTION GRANTS. The Committee, in its discretion, may also grant
stock options with "reload provisions" that permit the option holder to exercise
his or her stock options and receive new stock option grants for the equivalent
amount of stock underlying the option exercise at the fair market value on the
date of such exercise. The reload options shall have the same expiration date as
the options they replace.
ARTICLE VII
Reporting Person Limitations
Notwithstanding any other provision of the Plan, to the extent required to
qualify for the exemption provided by Rule 16b-3 under the Securities Exchange
Act of 1934, as amended, and any successor provision, (i) any Stock or other
equity security offered under the Plan to a Reporting Person may not be sold for
at least six (6) months after grant of an option acquire such Stock or other
equity security, except in case of death or disability and (ii) any Option, or
other similar right related to an equity security, issued under the Plan to a
Reporting Person shall not be transferable other than by will or the laws of
descent and distribution or in accordance with section 5.6 hereof, shall not be
exercisable for at least six (6) months except in the case of death or
disability, provided in the provisions of section 5.6 hereof, shall be
exercisable during the Participant's lifetime only by the Participant or the
Participant's guardian or legal representative.
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ARTICLE VIII
Terms and Conditions of Options
Options shall be evidenced by instruments (which need not be identical) in
such forms as the Committee may from time to time approve. Such instruments
shall conform to the terms and conditions set forth in Articles V and VI hereof
and may contain such other provisions as the Committee deems advisable that are
not inconsistent with the Plan, including restrictions applicable to shares of
Stock issuable upon exercise of Options. In granting any Non-Qualified Option,
the Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to Incentive Stock Options, or to
such other termination and cancellation provisions as the Committee may
determine. The Committee may from time to time confer authority and
responsibility on one or more of its own members and/or one or more officers of
the Corporation to execute and deliver such instruments. The proper officers of
the Corporation are authorized and directed to take any and all action necessary
or advisable from time to time to carry out the terms of such instruments.
ARTICLE IX
Benefit Plans
Awards under the Plan are discretionary and are not a part of regular
salary. Awards may not be used in determining the amount of compensation for any
purpose under the benefit plans of the Corporation, or an Affiliated
Corporation, except as the Committee may from time to time expressly provide.
Neither the Plan, an Option or any instrument evidencing an Option confers upon
any Employee the right to continued employment with the Corporation or an
Affiliated Corporation.
ARTICLE X
Amendment, Suspension or Termination of the Plan
The Board may suspend the Plan or any part thereof at any time or may
terminate the Plan in its entirety. Awards shall not be granted after Plan
termination.
The Board may also amend the Plan from time to time, except that amendments
which affect the following subjects must be approved by stockholders of the
Corporation, unless and to such extent, that applicable federal or state law or
regulation permit amendment thereto:
(a) Except as provided in Article XI relative to capital changes, and
except as permitted by law or regulation where such change is not
deemed material, the number of shares as to which Options may be
granted pursuant to Article V;
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(b) The maximum term of Options granted;
(c) The minimum price at which Options may be granted;
(d) The term of the Plan; and
(e) The requirements as to eligibility for participation in the Plan.
Awards granted prior to suspension or termination of the Plan may not be
cancelled solely because of such suspension or termination, except with the
consent of the grantee of the Award.
ARTICLE XI
Changes in Capital Structure
The instruments evidencing Options granted hereunder shall be subject to
adjustment in the event of changes in the outstanding Stock of the Corporation
by reason of stock dividends, stock splits, recapitalizations, reorganizations,
mergers, consolidations, combinations, exchanges or other relevant changes in
capitalization occurring after the date of an Award to the same extent as would
affect an actual share of stock issued and outstanding on the effective date of
such change. Such adjustment to outstanding Options shall be made without change
in the total price applicable to the unexercised portion of such options, and a
corresponding adjustment in the applicable option price per share shall be made.
In the event of any such change, the aggregate number and classes of shares for
which Options may thereafter be granted under Section 5.1 of this Plan may be
appropriately adjusted as determined by the Committee so as to reflect such
change. Notwithstanding the foregoing, any adjustments made pursuant to this
Article XI with respect to Incentive Stock Options shall be made only after the
Committee, after consulting with counsel for the Corporation, determines whether
such adjustments would constitute a "modification" of such Incentive Stock
Options (as that term is defined in Section 425 of the Code) or would cause any
adverse tax consequences for the holders of such Incentive Stock Options. If the
Committee determines that such adjustments made with respect to Incentive Stock
Options would constitute a modification of such Incentive Stock Options, it may
refrain from making such adjustments.
In the event of the proposed dissolution or liquidation of the Corporation,
each Option will terminate immediately prior to the consummation of such
proposed action or at such other time and subject to such other conditions as
shall be determined by the Committee.
Except as expressly provided herein, no issuance by the Corporation of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Corporation.
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No fractional shares shall be issued under the Plan and the optionee shall
receive from the Corporation cash in lieu of such fractional shares,
ARTICLE XII
Effective Date and Term of the Plan
The Plan shall become effective upon its adoption the Board, PROVIDED THAT
the stockholders of the Corporation shall have approved this Plan within twelve
months following the adoption of this Plan by the Board. The Plan shall continue
until such time as it may be terminated by action of the Board; provided,
however, that no Options may be granted under this Plan on or after the tenth
anniversary of the effective date hereof.
ARTICLE XIII
Conversion of ISO's into Non-Qualified Options;
Termination of ISO's
The Committee, at the written request of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's
Incentive Stock Options, that have not been exercised on the date of conversion,
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the optionee is an employee of the
Corporation or an Affiliated Corporation at the time of such conversion. Such
actions may include, but not be limited to, extending the exercise period or
reducing the exercise price of such Options. At the time of such conversion, the
Committee (with the consent of the optionee) may impose such conditions on the
exercise of the resulting Non-Qualified Options as the Committee in its
discretion may determine, provided that such conditions shall not be
inconsistent with the Plan. Nothing in the Plan shall be deemed to give any
optionee the right to have such optionee's Incentive Stock Options converted
into Non-Qualified Options, and no such conversion shall occur until and unless
the Committee takes appropriate action. The Committee, with the consent of the
optionee, may also terminate any portion of any Incentive Stock Option that has
not been exercised at the time of such termination.
ARTICLE XIV
Application of Funds
The proceeds received by the Corporation from the sale of shares pursuant
to Options granted under the Plan shall be used for general corporate purposes.
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ARTICLE XV
Governmental Regulation
The Corporation's obligation to sell and deliver shares of Stock under this
Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such shares.
ARTICLE XVI
Withholding of Additional Income Taxes
Upon the exercise of a Non-Qualified Option or the making of a
Disqualifying Disposition as defined in Article XVII the Corporation, in
accordance with Section 3402(a) of the Code, may require the optionee to pay
additional withholding taxes in respect of the amount that is considered
compensation includable in such person's gross income. The Committee in its
discretion may condition the exercise of an Option on the payment of such
additional withholding taxes.
ARTICLE XVII
Notice to Company of Disqualifying Disposition
Each employee who receives an Incentive Stock Option must agree to notify
the Corporation in writing immediately after the employee makes a Disqualifying
Disposition of any Stock acquired pursuant to the exercise of an Incentive Stock
Option. A Disqualifying Disposition is any disposition (including any sale) of
such Stock before the later of (a) two years after the date the employee was
granted the Incentive Stock Option or (b) one year after the date the employee
acquired Stock by exercising the Incentive Stock Option. If the employee has
died before such stock is sold, these holding period requirements do not apply
and no Disqualifying Disposition can occur thereafter.
ARTICLE XVIII
Governing Law; Construction
The validity and construction of the Plan and the instruments evidencing
Options shall be governed by the laws of the State of Delaware. In construing
this Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
PALOMAR MEDICAL TECHNOLOGIES, INC.
AMENDED 1996 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose of the Plan
The purpose of the Palomar Medical Technologies, Inc. Employee Stock
Purchase Plan is to encourage ownership of the common stock of Palomar Medical
Technologies, Inc. ("Palomar") by its eligible employees and any and each of its
participating subsidiaries, thereby enhancing such employees' personal interest
in the continued success and progress of Palomar. The plan is intended to
facilitate regular investment in the common stock of Palomar by offering
employees a convenient means to make purchases at a discounted price through
payroll deductions. The Plan is intended to comply with the provisions of
Section 423 of the Internal Revenue Code of 1986, as amended.
2. Definitions
For purposes of the Plan, the following terms shall have the meanings
indicated below:
(a) "Business Day" shall mean a day on which there is trading on the New
York Stock Exchange.
(b) "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
(c) "Committee" shall mean the Compensation Committee of the Board of
Directors of Palomar.
(d) "Common Stock" shall mean Palomar's common stock, par value $.01 per
share.
(e) "Company" shall mean Palomar and any of its subsidiaries (within the
meaning of Section 424(f) of the Code) whose Board of Directors has adopted the
Plan, with approval of the Board of Directors of Palomar, and which has not
terminated participation in or withdrawn from the Plan by action of such
subsidiary's Board of Directors or the Board of Directors of Palomar.
(f) "Compensation" shall mean the amount of a Participant's base wages,
overtime, commissions, cash bonuses, premium pay and shift differential, before
giving effect to any compensation reductions made in connection with any plans
described in Section 401(k) or Section 125 of the Code.
(g) "Custodian" shall mean the custodian appointed by the Committee
pursuant to Section 7 hereof to hold the shares of Common Stock purchased under
the Plan and subsequent Dividends reinvested or paid to Participant in cash.
(h) "Dividends" shall mean all cash dividends paid on shares of Common
Stock held in any Employee's Account.
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(i) "Account" shall mean a separate account maintained by the Custodian for
each Participant which reflects, at any time, the number of shares of Common
Stock purchased under the Plan by such Participant as well as reinvested
Dividends held by the Custodian.
(j) "Entry Date" shall mean the first Business Day of each Purchase Period.
(k) "Eligible Employee" shall mean, with respect to any Purchase Period, an
employee of the Company who is eligible to participate in the Plan in such
Purchase Period under the rules set forth in Sections 5 and 8 hereof.
(l) The "Fair Market Value" of a share of Common Stock on any Business Day
shall be the closing bid price for such day of the Common Stock on the principal
securities market on which the Common Stock is traded. If on the date for which
Fair Market Value is to be determined the Common Stock is no eligible for
trading on any securities market, the Fair Market Value of a share of Common
Stock shall be determined by the Committee.
(m) "Participant" shall mean, with respect to any Purchase Period, each
Eligible Employee who has elected to have amounts deducted from his or her
Compensation pursuant to Section 6 hereof for such Purchase Period.
(n) "Plan" shall mean this 1996 Employee Stock Purchase Plan, as the same
may be amended from time to time.
(o) "Purchase Date" shall mean the last Business Day of each Purchase
Period.
(p) "Purchase Period" shall mean each of the three month periods ending on
the last days of March, June, September and December during the period when the
Plan is in effect. The first Purchase Period shall begin on October 1, 1996 and
end on December 31, 1996.
3. Common Stock Available Under the Plan
The maximum number of shares of Common Stock which may be purchased under
the Plan shall be 1,000,000 shares, except as such maximum number may be
adjusted as provided in Section 12 hereof. Shares of Common Stock purchased
under the Plan may be authorized and previously unissued shares, treasury shares
(including shares purchased from time to time by Palomar), or any combination
thereof.
4. Administration of Plan
The Plan shall be administered by the Committee. The Committee shall have
the authority, consistent with the Plan, to interpret the Plan, to adopt, amend
and rescind rules and regulations for the administration of the Plan and to make
all determinations in connection therewith which may be necessary or advisable,
and all such actions shall be binding for all purposes under the Plan. The Plan
shall be administered at the expense of the Company.
5. Eligibility
Each employee of the Company shall be eligible to participate in the Plan
during each Purchase Period, provided that he or she is not, as of the Entry
Date for such Purchase Period:
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(a) an employee who is customarily employed by the Company for fewer than
20 hours per week, or for five or fewer months in any calendar year; or
(b) an employee who owns (within the meaning of Section 424(d) of the Code)
stock possessing 5% or more of the total combined voting power or value of all
classes of stock of Palomar, treating as owned on Entry Date, for purposes of
this clause, Common Stock which such employee would be entitled to purchase on
Purchase Date for such Purchase Period but for this Section 5(c).
6. Participation
(a) On the Entry date for each Purchase Period, Palomar shall grant to each
Participant in the Plan for such Purchase Period an option to purchase on the
Purchase Date for such Purchase Period, at the applicable price specified in
Section 7 hereof, the number of shares of Common Stock, including any fractional
share, which may be purchased, at such price, with such participant's payroll
deductions received during such Purchase Period, subject to the terms and
conditions of the Plan.
(b) Eligible Employees may elect to participate in the Plan as follows:
(i) Each Eligible Employee may elect to participate in the Plan,
effective on the Entry Date for any Purchase Period, by making an election to
participate at least 15 days prior to such entry Date. Such election shall
authorize the Company to deduct an amount chosen by the employee equal to any
whole percentage between 1 and 15 percent, inclusive from such Employee's
Compensation paid during such Purchase Period.
(ii) After making the election pursuant to Section 6(b)(i) hereof, a
Participant shall automatically continue to participate in the Plan during
subsequent Purchase Periods until the Participant either withdraws from the Plan
or ceases to be an Eligible Employee. The percentage of the Participant's
Compensation deducted in subsequent Purchase Periods shall be the percentage
specified in the election made pursuant to Section 6(b)(i), as it may be changed
from time to time pursuant to Section 6(b)(iii) or 6(b)(iv) hereof.
(iii) Except as provided in Section 6(b)(iv) hereof, after the last
date for making an election described in Section 6(b)(i) hereof for the Purchase
Period, a Participant shall not be permitted to increase or reduce the
percentage of Compensation deducted from his or her Compensation paid during
each purchase period. A Participant may elect to reduce or increase the
percentage of his or her Compensation deducted pursuant to the Plan to any whole
percentage between 1 and 15, inclusive, effective for a subsequent Purchase
Period by filing an election not later than 15 days prior to the Entry Date for
such Purchase Period.
(iv) A Participant may elect at any time to reduce the percentage of
his or her Compensation deducted pursuant to the Plan to zero, effective
commencing with the next payroll period beginning after the making of such
election. All cash amounts already deducted during a Purchase Period prior to
the effectiveness of any such election shall be refunded to the Participant.
(c) No interest will be paid to Participants on any payroll deductions.
(d) A Participant may at any time elect to withdraw from further
participation in the Plan, effective as of the next Business day following such
election. Any Participant whose employment with the Company terminates for any
reason (including without limitation termination by reason of death or
disability) shall be deemed to have made a withdrawal, effective the next
Business Day following such
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termination of employment. Upon any withdrawal, (i) no further amounts shall be
deducted from such Participant's Compensation effective for any payroll period
beginning after the effective date of withdrawal, (ii) any outstanding option
granted to such Participant under the Plan shall terminate as of the effective
date of the withdrawal, and no further purchases of Common Stock under the Plan
shall be made for such Participant or after such date, and (iii) as soon as
possible the Company will refund all cash deducted during the Purchase Period.
Following any such withdrawal from the Plan, an employee's eligibility to
participate again in the Plan will be subject to all provisions of Section 5 and
8 hereof.
(e) Notwithstanding any other provision of the Plan, an employee who has
withdrawn from the Plan pursuant to Section 6(d) hereof shall be deemed to have
made an irrevocable election not to participate in the Plan during the two
consecutive Purchase Periods immediately following the one in which such
withdrawal was made.
(f) Any election permitted by this Section 6 (other than an election deemed
made pursuant to Section 6(e)) shall be made in writing on the form prescribed
for such purpose by the Committee from time to time and shall be delivered to
the person or persons designated by the Committee. Any such election shall be
deemed made when such form is completed, signed by the Participant and received
by such designee.
7. Purchases of Common Stock
On the Purchase Date for each Purchase Period, all options granted under
the Plan on the first Business Day of such Purchase Period shall be deemed to be
exercised, and all amounts deducted pursuant to Section 6 hereof from the
Participant's Compensation during such Purchase Period shall be applied on such
date to purchase whole and fractional shares of Common Stock from the Company,
unless such Participant has withdrawn from the Plan during such Purchase Period
effective on or prior to such Purchase Date. With respect to shares of Common
Stock purchased, the purchase price per share shall be the lesser of (i)
eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on
the Entry Date of the Purchase Period, or (ii) eighty-five percent (85%) of the
Fair Market Value of a share of Common Stock on the Purchase Date of the
Purchase Period. The Committee shall appoint the Custodian for the Plan and to
hold all whole and fractional shares purchased under the Plan and to maintain a
separate Account for each Participant, in which Common Stock purchased by such
Participant under the Plan shall be held and Dividends received will be
reinvested. Each Participant shall receive a statement as soon as practicable
after the end of each Purchase Period reflecting purchases for his or her
account under the Plan through the end of such Purchase Period.
8. Limitation on Number of Shares purchased
Notwithstanding any other provision of the Plan, the maximum number of
whole and fractional shares of Common Stock which a Participant may purchase in
a Purchase Period under the Plan and under all other "employee stock purchase
plans" (within the meaning of Section 423 of the Code) maintained by Palomar and
its subsidiaries (within the meaning of Section 424(f) of the Code) shall be the
number determined by dividing $6,250 by the Fair Market Value of a share of
Common Stock on the Entry Date for such Purchase Period. In the event that the
amount of payroll deductions is greater than $6,250 in any given Purchase
Period, the Company will refund the excess to the Participant as soon as
practicable after such Purchase Date.
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9. Rights as a Stockholder
From and after the Purchase Date on which shares of Common Stock are
purchased by the Participant under the Plan, such Participant shall have all of
the rights and privileges of a stockholder of Palomar with respect to such
shares. Prior to the Purchase Date on which shares of Common Stock may be
purchased by a Participant, such Participant shall not have any rights as a
stockholder of Palomar.
10. Notice of Disposition of Stock
Each Participant agrees, by his or her participation in the Plan, to
promptly notify Palomar in writing of any disposition of any Common Stock
purchased under the Plan occurring within 2 years after the Entry Date of the
Purchase Period in which such stock was purchased.
11. Rights Not Transferrable
Rights under the Plan are not transferrable, except that the right to
receive shares pursuant to the Plan may be transferred by will or the laws of
descent and distribution. Options granted to a Participant hereunder may be
exercised only by such Participant.
12. Adjustment for Capital Changes
In the event of any capital change by reason of any stock dividend or
split, recapitalization, merger in which Palomar is the surviving entity,
combination or exchange of shares or similar corporate change, the number and
type of shares or other securities of Palomar which Participants may purchase
under the Plan, and the maximum aggregate number of such shares or securities
which may be purchased under the Plan, shall be appropriately adjusted by the
Board of Directors of Palomar.
13. Amendments
The Board of Directors of Palomar may at any time, or from time to time,
amend the Plan in any respect, except that, without stockholder approval, no
amendment shall be made (a) increasing the number of shares which may be
purchased under the Plan (other than as provided in Section 12 herein), (b)
materially increasing the benefits accruing to Participants or (c) materially
modifying the requirements as to eligibility for participation in the Plan.
14. Laws and Regulations
(a) Notwithstanding any other provision of the Plan, the rights of
Participants to purchase Common Stock hereunder shall be subject to compliance
with all applicable Federal, state and foreign laws, rules and regulations and
the rules of each stock exchange upon which the Common Stock is from time to
time listed.
(b) The Plan and the purchase of Common Stock hereunder shall be subject to
additional rules and regulations, not inconsistent with the Plan, that may be
promulgated from time to time by the Committee regarding purchases and sales of
Common Stock.
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15. Employment
The Plan shall not confer any right to continued employment upon any
employee of the Company.
16. Effective Date of the Plan; Termination
(a) The Plan shall become effective on October 1, 1996, subject to approval
by the shareholders of Palomar in accordance with applicable law and the
requirements of Section 423 of the Code.
(b) The Plan and all rights hereunder shall terminate on the earliest to
occur of:
(i) the date on which the maximum number of shares of Common Stock
available for purchase under the Plan as specified in Section 3 hereof has been
purchased;
(ii) the termination of the Plan by the Board of Directors of Palomar;
or
(iii) the effective date of any consolidation or merger in which
Palomar is not the surviving entity, any exchange or conversion of outstanding
shares of Palomar for or into securities of another entity or other
consideration, or any complete liquidation of Palomar.
In the event that on any Purchase Date the remaining shares of Common Stock
available for purchase under the Plan are insufficient to fully satisfy
Participants' outstanding options, such remaining available shares shall be
apportioned among and sold to such Participant in proportion to the amounts of
payroll deductions and the excess payroll deduction shall be returned to the
Participant as soon as practicable thereafter.
Upon any termination of the Plan, any shares in the employee's Account
shall be delivered by the Custodian to the employee or his or her legal
representative as soon as practicable following such termination.
DUFFY HARTWELL LIMITED PARTNERSHIP
COMMERCIAL LEASE
1. PARTIES:
DUFFY HARTWELL LIMITED PARTNERSHIP, a Massachusetts limited partnership located
at 411 Waverley Oaks Rd. Waltham MA., LESSOR, which expression shall include
its, successors, and assigns where the context so admits, does hereby lease to
SPECTRUM MEDICAL TECHNOLOGIES, INC. a Delaware corporation located at 4-B
Strathmore Rd. Natick MA. LESSEE, which expression shall include its heirs,
successors, executors, administrators, and assigns where the context so admits,
and the LESSEE hereby leases the following described Premises:
2. PREMISES:
Twenty-five Thousand (25,000) sq. ft., more or less, (the "Leased Premises") in
the LESSOR'S Building located at 45 Hartwell Ave. Lexington MA, including
exclusive use of the loading platform all as shown on Exhibit A, "Floor Plan",
attached hereto, together with the right to use in common, with others entitled
thereto, any hallways, and stairways necessary for access to said Leased
Premises.
Appurtenant to the Premises the LESSEE shall have the right, in common with
others entitled thereto, to access ways, walkways and any other common
facilities necessary for access to or beneficial use of the Leased Premises.
LESSEE shall have right to use Eighty-eight unassigned parking spaces in the
parking areas adjacent to the Buildings on the site. LESSEE shall have rights in
common with other lessees to use of the common entrance serving the Leased
Premises.
3. TERM:
The term of this lease shall be for Five (5) years commencing on the
Commencement Date (defined below) and ending on May 31, 2000.
The Commencement Date shall be the later of completion of the Lessor's work,
Exhibit B, or June 1, 1995. The Lessor's work shall be deemed complete upon
issuance of a certificate of occupancy for the Premises by the Town of Lexington
MA.
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4. RENT:
The LESSEE shall pay to LESSOR rent at the rates per year, shown below,
which rent shall be payable in advance in the monthly installments shown below
on the first day of each month.
YEARS ANNUAL RENT MO. RENT $/SF RATE
1 - 5 $412,500 $34,375.00 $16.50
5. SECURITY DEPOSIT:
Upon the execution of this lease, the LESSEE shall pay to the LESSOR the amount
of $34,375, which shall be held as a security for the LESSEE'S performance as
herein provided and promptly refunded to the LESSEE at the end of this lease
subject to the LESSEE'S satisfactory compliance with the conditions hereof.
6. RENT ADJUSTMENT:
A. TAX ADJUSTMENT
If in any tax year commencing with the fiscal year 1997 (the fiscal year ending
June 30, 1997), the real estate taxes on the land and buildings, of which the
Leased Premises are a part, are in excess of the amount of the real estate taxes
thereon for the fiscal year 1996 (hereinafter called the "Base Year"), LESSEE
will pay to LESSOR as additional rent hereunder, when and as designated by
notice in writing by LESSOR, Fifty (50%) percent of such excess that may occur
in each year of the term of this lease or any extension or renewal thereof and
proportionately for any part of a fiscal year. LESSOR'S demand shall be
accompanied by a copy of the applicable tax bill or bills and a statement
showing the manner of calculation of LESSEE'S proportionate share of such taxes.
If the LESSOR obtains an abatement of any such excess real estate tax, a
proportionate share of such abatement, less the reasonable fees and costs
incurred in obtaining the same, if any, shall be refunded to the LESSEE. LESSEE
may itself, or with any co-tenant, seek review of the assessed valuation of the
property of witch the Leased Premises are a part, or otherwise seek abatement of
real estate taxes in any year in which the LESSOR declines to seek such review
or reduction, provided it shall do so at its own cost or expense.
For purposes of this adjustment the fiscal year 1996 tax rate shall be $1.08 per
square foot, or $54,472.08 for the land and building of which the lease premises
are a part.
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B. OPERATING COSTS:
The LESSEE shall pay to the LESSOR as additional rent hereunder when and as
designated by notice in writing by LESSOR, Fifty (50%) per cent of any operating
costs incurred during the calendar year which are in excess of $4.00 per square
foot. LESSOR'S demand shall be accompanied by a statement of the applicable
operating costs and a statement showing the manner of calculation of LESSEE'S
proportionate share of such costs. In the event LESSEE wishes verification of
the costs and its share, LESSOR will authorize its' independent C.P.A. to
provide certification of the statement and charges to the LESSEE, and LESSEE
shall bear the expense of the C.P.A. certification. The operating costs increase
shall be prorated should this lease be in effect with respect to only a portion
of any calendar year, or which pertain to less than a fully occupied building.
Operating costs are defined for the purpose of this agreement as:
Water and Sewer Charges for the Premises
Heating, Ventilation and Air Conditioning
Maintenance Expenses of Lessor
Cleaning Expenses
Management Expenses (allocated at Five (5%) percent of rent)
Insurance
Exceptions to Operating Expenses are defined in Exhibit E.
C. BUILDING ACCESS AND OPERATING EXPENSES
The LESSEE shall have unlimited access to the Building. However, Operating
Expenses are calculated based upon daily operating hours of 7:00 AM to 6:00 PM
five days a week. In the event LESSEE usage outside those hours may be subject
to additional operating expenses.
7. UTILITIES:
The LESSEE shall pay, as they become due, all bills for electricity and other
utilities (whether they are used for furnishing heat or other purposes) that are
furnished to the Leased Premises and which are separately metered. The LESSOR
agrees to provide utility services to the leased premises, all subject to
interruption due to any accident, to the making of repairs, alterations, or
improvements, to labor difficulties, to trouble in obtaining fuel, electricity,
service, or supplies from the sources from which they are usually obtained for
said building, or to any cause beyond the LESSOR'S control.
LESSOR shall have no obligation to provide utilities or equipment other than the
utilities and equipment within the premises as of the Commencement Date of this
lease which include the HVAC now serving the Leased Premises. In the event
LESSEE requires additional utilities or equipment, the installation and
maintenance thereof shall be the LESSEE'S sole obligation,
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provided that such installation shall be the subject to the written consent of
the LESSOR. Costs for the installation of separate metering for utilities shall
be borne by the LESSOR.
8. USE OF LEASED PREMISES:
The LESSEE shall use the Leased Premises only for the purpose of office, light
manufacturing and R&D purposes.
9. COMPLIANCE WITH LAW:
The LESSEE acknowledges that no trade or occupation shall be conducted in the
Leased Premises or use made thereof which will be unlawful, improper, noisy or
offensive, or contrary to any law or any municipal by-law or ordinance in force
in the Town of Lexington in which the premises are situated.
10. FIRE INSURANCE:
The LESSEE shall not permit any use of the Leased Premises which will make
voidable any insurance on the property of which the Leased Premises are a part,
or on the contents of said property or which shall be contrary to any law or
regulation from time to time established by the New England Fire Insurance
Rating Association, or any similar body succeeding to its powers. The LESSEE
shall on demand reimburse the LESSOR, and all other tenants all extra insurance
premiums caused by the LESSEE'S use of the premises.
11. MAINTENANCE:
A. LESSEE'S OBLIGATIONS
The LESSEE agrees to maintain the Leased Premises in as good condition as at the
beginning of the term, fair wear and tear and damage by fire and other casualty
only excepted, and whenever necessary, to replace plate glass and other glass
therein, and upon occupancy the LESSEE acknowledges that the Leased Premises are
then in good order and the glass whole. The LESSEE shall not permit the Leased
Premises to be overloaded, damaged, stripped, or defaced, nor suffer any waste.
LESSEE shall obtain written consent of LESSOR before erecting any sign on the
exterior of the Leased Premises, which consent shall not be unreasonably
withheld or delayed.
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B. LESSOR'S OBLIGATIONS
The LESSOR agrees to maintain the structure of the building of which the Leased
Premises are a part, the HVAC, mechanical, electrical and plumbing facilities,
fire protection, parking lot, exterior lighting, exterior window frames and the
common areas of the building in the same condition as it is at the commencement
of the term or as it may be put in during the term of this lease, reasonable
wear and tear, damage by fire and other casualty only excepted, unless such
maintenance is required because of the LESSEE or those for whose conduct the
LESSEE is legally responsible. LESSOR shall maintain access ways and common
areas of the land in neat and orderly condition including clearance of snow and
ice in the walk ways and parking lot. LESSOR shall keep the building and common
areas under its control in compliance with all current and future zoning laws
and other applicable municipal laws, regulations and ordinances.
12. ALTERATIONS/ADDITIONS:
The LESSEE shall not make structural alterations or additions to the Leased
Premises, but may make non-structural alterations provided the LESSOR consents
thereto in writing, which consent shall not be unreasonably withheld or delayed.
All such allowed alterations shall be at LESSEE'S expense and shall be in
quality at least equal to the present construction. LESSEE shall not permit any
mechanics' liens, or similar liens, to remain upon the Leased Premises for labor
and material furnished to LESSEE or claimed to have been furnished to LESSEE in
connection with work of any character performed or claimed to have been
performed at the direction of LESSEE and shall cause any such lien to be
released of record forthwith without cost to LESSOR. Any alterations or
improvements made by the LESSEE shall become the property of the LESSOR at the
termination of occupancy as provided herein. Notwithstanding the foregoing
sentence, LESSEE may, at its sole option, submit its plans for any alteration or
improvement to LESSOR in writing before installation with a request for removal
at LESSEE'S expense upon termination of this lease, and LESSOR'S approval of
such request, which may require restoration of damages caused by the removal,
shall not be unreasonably withheld or delayed.
13. ASSIGNMENT SUBLEASING:
The LESSEE shall not assign or sublet the whole or any part of the Leased
Premises without LESSOR'S prior written consent which shall not be unreasonably
withheld or delayed. Notwithstanding such consent, LESSEE shall remain liable to
LESSOR for the payment of all rent and for the full performance of the covenants
and conditions of this lease.
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14. SUBORDINATION:
This lease shall be subject and subordinate to any and all mortgages, deeds of
trust and other instruments in the nature of a mortgage, now or any time
hereafter, which may constitute a lien or liens on the property of which the
Leased Premises are a part and the LESSEE shall, when requested, promptly
execute and deliver such written instruments as shall be necessary to show the
subordination of this lease to said mortgages, deeds, of trust or other such
instruments in the nature of a mortgage, provided, however, that the LESSEE may
thereupon request and receive the mortgagee's reciprocal non-disturbance
agreement.
15. LESSOR'S ACCESS:
The LESSOR or agents of the LESSOR may, at reasonable times and upon appropriate
notice, (normally one day's prior notice) enter to view the Leased Premises and
may remove placards and signs not approved and affixed to the exterior of the
Leased Premises as herein provided, and make repairs and alterations as LESSOR
should elect to do. The LESSOR may show the Leased Premises to others, and at
any time within six (6) months before the expiration of the term, may affix to
any suitable part of the lease premises a notice for letting or selling the
Leased Premises or property of which the Leased Premises are a part and keep the
same so affixed without hindrance or molestation. LESSOR shall use best effort
to minimize inconvenience and interference with LESSEE and LESSEE'S business
operations.
16. INDEMNIFICATION & LIABILITY:
The LESSEE shall save the LESSOR harmless from all loss and damage occasioned by
the use or escape of water or by the bursting of pipes, as well as from any
claim or damage resulting from neglect in not removing snow and ice from the
roof of the building or from the sidewalks bordering upon the premises so
leased, or by any nuisance made or suffered on the Leased Premises, unless such
loss is caused by the neglect of the LESSOR. The removal of snow and ice from
the sidewalks bordering upon the Leased Premises shall be LESSOR'S
responsibility. LESSOR shall save the LESSEE harmless from loss or damage
occasioned by acts or omissions of the LESSOR, its employees or agents.
17. LESSEE'S LIABILITY INSURANCE:
The LESSEE shall maintain with respect to the Leased Premises and the property
of which the Leased Premises are a part comprehensive public liability insurance
in the amount of $1 million Combined Single Limit with property damage insurance
in the same limit in responsible companies qualified to do to persons or damage
to property as provided. The LESSEE shall deposit with the LESSOR certificates
for such insurance at or prior to the commencement of the term, and thereafter
within (30) days prior to the expiration of any such policies. All such
insurance certificates shall provide that such policies shall not be canceled
without at least ten (10) days prior written notice to each assured named
therein.
18. FIRE, CASUALTY AND EMINENT DOMAIN:
Should a substantial portion of the Leased Premises, or the property of which
they are a part, be substantially damaged by fire or other casualty, or be taken
by eminent domain, the LESSOR may elect to terminate this lease. When such fire,
casualty, or taking renders the Leased
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Premises substantially unsuitable for their intended use, a just and
proportionate abatement of rent shall be made, and the LESSEE, may elect to
terminate this lease if:
(a) the LESSOR fails to give written notice within thirty (30) days of
intention to restore Leased Premises, or
(b) the LESSOR fails to restore the Leased Premises to a condition
substantially suitable for their intended use within ninety (90) days of
said fire, casualty or taking.
The LESSOR reserves, and the LESSEE grants to the LESSOR, all rights which the
LESSEE may have for damages or injury to the Leased Premises for any taking by
eminent domain, except for damage to the LESSEE'S fixtures, property, or
equipment.
19. DEFAULT & BANKRUPTCY:
In the event that:
(a) The LESSEE shall default in the payment of any installment of rent or
other sum herein specified and such default shall continue for ten (10)
days after written notice thereof; or
(b) The LESSEE shall default in the observance of performance of any other
of the LESSEE'S covenants, agreements, or obligations hereunder and such
default shall not be corrected within thirty (30) days after written notice
thereof (except if such default is not cured due to governmental
restrictions or other causes beyond the control of LESSEE, then such thirty
(30) day period shall be extended for a reasonable additional period); or
(c) The LESSEE shall be declared bankrupt or insolvent according to law,
or, if any assignment shall be made of LESSEE'S property for the benefit of
creditors, then the LESSOR shall have the right thereafter, while such
default continues, to re-enter and take complete possession of the Leased
Premises, to declare the term of this lease ended, and remove the LESSEE'S
effects, without prejudice to any remedies which might be otherwise used
for arrears of rent or other default. The LESSOR shall use reasonable
efforts to relet the Premises. The LESSEE shall indemnify the LESSOR
against all loss of rent and other payments which the LESSOR may incur by
reason of such termination during the residue of the term. If the LESSEE
shall default, after reasonable notice thereof, in the observance or
performance of any conditions or covenants on LESSEE'S part to be observed
or performed under or by virtue of any of the provisions in any article of
this lease, the LESSOR without being under any obligation to do so and
without thereby waiving such default, may remedy such default for the
account and at the expense of the LESSEE. If the LESSOR makes any
expenditures or incurs any obligations for the payment of money in
connection therewith, including but not limited to, reasonable attorneys's
fees in instituting, prosecuting or defending any action or proceeding,
such sums paid or obligations incurred, with interest at the rate of 12%
percent per annum and costs, shall be
7
<PAGE>
paid to the LESSOR by the LESSEE as additional rent.
20. NOTICE:
Any notice from the LESSOR to the LESSEE relating to the Leased Premises or to
the occupancy thereof, shall be deemed duly served, if left at the Leased
Premises addressed to the LESSEE, or if mailed to the Leased Premises,
registered or certified mail, return receipt requested, postage prepaid,
addressed to the LESSEE. Any notice from the LESSEE to the LESSOR relating to
the Leased Premises or to the occupancy thereof, shall be deemed duly served, if
mailed to the LESSOR by registered or certified mail, return receipt requested,
postage prepaid, addresses to the LESSOR at such address as the LESSOR may from
time to time advise in writing. Until such advice all rent shall be paid and all
notices sent to the LESSOR at 411 Waverley Oaks Road, Waltham MA 02154.
21. SURRENDER:
The LESSEE shall at the expiration or other termination of this lease remove all
LESSEE'S goods and effects from the Leased Premises, (including, without hereby
limiting the generality of the foregoing all signs and lettering affixed or
painted by the LESSEE, either inside or outside the Leased Premises). LESSEE
shall deliver to the LESSOR the Leased Premises and all keys, locks thereto, and
other fixtures connected therewith and all alterations and additions made to or
upon the Leased Premises, in good condition, fair wear and tear and damage by
fire or other casualty only excepted. In the event of the LESSEE'S failure to
remove any of LESSEE'S property from the premises, LESSOR is hereby authorized,
without liability to LESSEE for loss or damage thereto, and at the sole risk of
LESSEE, to remove and store any of the property at LESSEE'S expense, or to
retain same under LESSOR'S control or to sell at public or private sale, without
notice, any or all of the property not so removed and to apply the net proceeds
of such sale to the payment of any sum hereunder, or to destroy such property.
22. BROKERAGE:
The Brokers named herein: Cushman & Wakefield and Leggat McCall Grubb and Ellis
warrant that they are duly licensed as such by the Commonwealth of
Massachusetts, and join in this agreement and become parties hereto, insofar as
any provisions of this agreement expressly apply to them, and to any amendments
or modifications of such provisions to which they agree in writing.
LESSOR agrees to pay the above named Brokers upon the term commencement date a
fee for
8
<PAGE>
professional services as agreed between LESSOR and Brokers under a separate
agreement.
Each party represents and warrants that it has not retained or dealt with any
other broker or brokers in connection with this Lease, and each party agrees to
indemnify, defend and save harmless the other party from any claims for fees or
commissions arising out of its dealings with a broker with respect to this
Lease.
23. LATE FEES:
LESSEE agrees that because actual damages for a late payment or a dishonored
check are difficult to fix or ascertain, but recognizing that damage and injury
result therefore, LESSEE agrees that if payments of rent and other obligations
are not received in hand by LESSOR five (5) days after the due date, LESSEE
agrees to pay liquidated damages of $100.00 plus 18% per annum on the delinquent
amount from the due date. The postmark on the payment received plus two (2)
days, shall be conclusive evidence of whether the payment is delinquent.
However, LESSOR is not responsible for late deliveries by U.S. Mail. Provided,
however, that on a first occasion of such late payment, LESSOR shall give five
days written notice to LESSEE prior to application of the liquidated damages
charge for late payment. LESSEE agrees to pay a liquidated damage of $25.00 for
each dishonored check. In the event that two or more of the LESSEE'S checks are
dishonored in a 12 month period, the LESSOR, in addition to other Rights, shall
have the right to demand payment by Certified Check or Money Order.
24. OTHER PROVISIONS:
It is also understood and agreed that:
(a) The attached Addendum and Exhibits A., B., C., D., and E. are part of
this Agreement.
(b) LESSEE shall have a Five Year option to renew at market rates
prevailing at the time of exercise of such option(s). Such an option shall
be exercised by written notice to LESSOR six months prior to the expiration
of the then current term. See Addendum Part D for procedure.
(c) LESSOR shall perform the work outlined in Exhibit B, "Build Out
Specifications", at LESSOR'S expense, prior to the Commencement Date.
(d) LESSEE shall have a Right of First Refusal on additional space in the
building, in accordance with provisions of Exhibit D.
IN WITNESS WHEREOF, the said parties hereunto set their hand and seal as of this
day of March, 1996.
SPECTRUM MEDICAL TECHNOLOGIES, INC. DUFFY HARTWELL LIMITED PARTNERSHIP
LESSEE LESSOR
_________________________ _____________________________
NORMAN J. DUFFY,
General Partner
9
<PAGE>
DUFFY HARTWELL LIMITED PARTNERSHIP
COMMERCIAL LEASE ADDENDUM
A. LESSEE OBLIGATIONS
1. Lessee shall not change the color or appearance of the outside of the Leased
Premises except upon the prior written consent of the Lessor.
2. Lessee shall not post signs on or about the Premises except that Lessee shall
be entitled to sign space where provided by Lessor in common with other lessees
in the Building.
3. The parking areas shall not be used for storage of unused, damaged or
unregistered vehicles, nor shall the Lessee store merchandise or other materials
in the parking areas.
4. Lessee shall not otherwise store vehicles, containers, or refuse outside the
Leased Premises, except for routine parking of vehicles and delivery or pickup
of products or materials.
5. Lessee shall be responsible to dispose of Lessee trash and refuse which
emanates from its manufacturing or R&D operations.
6. The Lessee may maintain insurance required by this Lease under a blanket
policy of insurance which insures the Lessee and any affiliates of the Lessee.
7. No animals, reptiles or pets of any kind shall be kept in or about the
building.
B. LESSOR OBLIGATIONS
1. Lessor shall, at its own cost and expense, maintain in good condition and
repair all structural components of the building containing the Leased Premises,
including the foundation, floor, walls and roof, common areas of the Building,
landscaping, parking areas and access ways.
2. Lessor shall remove snow and ice from the access roadway, the parking areas,
and the walkways which serve the building, and Lessor will remove snow or ice
from the roof of the building if, as and when the conditions cause roof leakage
or threaten ice falls over access ways.
3. Lessor shall maintain with insurance companies, licensed in Massachusetts,
all risk fire insurance policies with extended coverage insuring the property
containing the Leased Premises
<PAGE>
against loss or damage caused by fire or casualty in an amount equal to the full
replacement cost of the Building.
4. Lessor shall clean the Leased Premises and common areas in conformance with
Exhibit C. attached hereto.
C. SUBLEASING PROVISION
In the event Lessee requests consent of Lessor for sublease or assignment of all
or a material portion of the Lease Premises, Lessor may refuse consent for the
purpose of re-lease of the Leased Premises or the portion thereof to the
assignee, the sub-lessee or to a third party. Upon the mutual agreement of the
parties, hereto, this lease shall then terminate at a mutually agreed date as to
the Leased Premises or the portion thereof, as if the Lease had expired on its
termination date.
The Lessor shall be deemed to approve any assignment or sub-lease to a parent,
subsidiary or affiliate of the Lessee upon written assurance by Lessee that the
subsequent use will be in conformance with and subject to section 8, above, "USE
OF LEASED PREMISES".
D. MARKET RATE RENT FOR RENEWAL OPTIONS
Upon receipt of written notice from the Lessee of intent to renew, Lessor shall
respond within thirty days with a quote for market rate rent. The Lessee shall
respond within thirty (30) days agreeing to the quotation, rejecting the renewal
or requesting third party determination of market rate. In the later event each
party shall then appoint a realty broker who is familiar with similar commercial
property in the Lexington area, they shall confer, and each shall recommend a
market rate by writing to the parties. In the event their recommendations are
joint or equal, this shall be market rate. If the recommendations differ by 5%
or less, their average shall be deemed market rate. In the event their rates
differ by a greater amount they shall jointly nominate a third such broker who
shall make an independent recommendation of market rate. The two closest of the
three recommendations shall then be averaged to establish the market rate. Each
party hereto shall pay the expense of it nominee broker, and each shall share
equally the expense of a third, if required. However, in no event shall market
rate be less than the rate then payable by the Lessee.
<PAGE>
EXHIBIT B.
BUILDOUT SPECIFICATIONS
The Lessor shall deliver the layout and location of offices, rooms, corridors,
lighting, bathrooms, plumbing, electrical services, floors, dock area and
climate controls as presently located, in good operating condition. The Lessor
shall repaint wall surfaces, replace carpet and damaged tile flooring up to an
allowance of $15.00 per square yard, replace damaged or stained ceiling tile,
and shall install new light bulbs where applicable, all to building standard, at
Lessor's sole cost.
The Lessor shall provide the building and facilities in compliance with ADA
requirements for accessibility.
The Lessor shall remove cafeteria venting presently in place.
The Lessor shall also provide kitchen cabinets, counter, sink and dishwasher
equipment for the area marked cafeteria, to Lessee specification, at Lessee's
cost. Such costs shall be payable to Lessor upon Occupancy.
The Lessor shall take all necessary steps to correct the condition that has
caused the odor of oil in the Leased Premises.
<PAGE>
EXHIBIT C
CLEANING SCHEDULE
NIGHTLY Between the hours of 5:00 p.m. and 6:00 a.m. Monday through Friday,
Legal Holidays excepted
1. Clean Lavatories as follows:
(a) Sweep and wash floors, using a disinfectant in wash water.
(b) Wash and polish all mirrors, powder shelves, bright work, and enamel
surfaces.
(c) Thoroughly scour, wash and disinfect all basins, bowls and urinals.
(d) Wash and disinfect all toilet seats, both sides.
(e) Wash all partitions, tile walls, towel, paper, and sanitary napkin
dispensers, and receptacles, as required.
(f) Empty and clean paper towel and sanitary disposal receptacles.
(g) Fill toilet tissue holders, soap dispensers and towel dispensers,
materials to be furnished by LESSOR.
2. Empty and clear all waste receptacles, ash trays and sand urns.
3. Wash, clean and disinfect water fountains and water coolers.
4. Remove rubbish and trash from LESSEE'S premises resulting from business
office use, but this shall not include manufacturing or product packaging
materials, the removal of which is LESSEE'S responsibility.
5. Vacuum LESSEE'S carpeted areas as needed.
6. Damp mop floors in entrance foyers, elevator lobbies, and public corridors
if applicable.
7. Wet sponge wipe table tops in LESSEE'S employee lounge, including cleaning
of any spills, if applicable.
8. Keep sidewalks, and parking area clean and rubbish free.
<PAGE>
WEEKLY
1. Damp mop all uncarpeted areas.
2. Keep lawn and landscaping properly maintained, if applicable.
SEMI ANNUALLY
1. Clean all ceiling and wall air supply and exhaust diffusers or grills.
ANNUALLY
1. Wash all windows inside and out.
NOTE:
Manufacturing and Lab areas, and storage sections to be omitted.
HOLIDAYS
During the 10 legal holidays of the year no cleaning will be performed.
<PAGE>
EXHIBIT D.
RIGHT OF FIRST REFUSAL ON ADDITIONAL SPACE
Lessee shall have a right of first refusal on additional lease space as it
becomes available during the term of this Lease Agreement or any extension of
such term. This right is subject to any preexisting rights of other lessees. The
Lessor will use its best efforts to accommodate Lessee's space requirements.
The procedure for effecting the Right of First Refusal shall be exercised in the
following manner:
(i) Lessee shall in any quarter year of the lease term or its
extension give to Lessor written notice of its projected space
requirements and its interest in space that is available or may
become available for lease.
(ii) Lessor, within ten days of Lessee's notice, shall give written
response describing to Lessee the availability of or the
projected availability of floor space. "Availability" shall mean
and include any vacant space and any space which is or may become
free of leasehold commitment. Such Lessor notice will contain the
rental rate for which such space will be offered.
(iii)If the Lessor can provide such space by relocation of an
existing lessee, Lessor shall, at the earliest reasonable date
consistent with discussion with the existing lessee, respond to
the Lessee's notice as set forth in the first paragraph of this
Section.
(iv) Lessee shall have fourteen (14) days to exercise its right by
written notice to Lessor to accept or reject Lessor's notice and
proposal.
(v) In the event Lessee, by writing, accepts such additional space
the parties will forthwith, within 30 days of Lessee's written
response, execute a lease agreement or lease modification to
reflect the additional space, its rental rate, the adjusted term
of Lease, if any, and such other changes as may be required to
reflect the additional space.
(vi) In the event Lessee does not accept the Lessor's proposal within
the 14 day period, or in the event the parties are unable to
conclude a lease agreement for the additional premises within the
above thirty day period, the Lessee shall be deemed to have
refused the space and Lessor may offer and contract for lease of
the space to third parties, the Lessee's rights under this
provision having lapsed as to the proposed premises.
<PAGE>
EXHIBIT E
EXCLUSIONS FROM OPERATING EXPENSES
The following items shall be excluded in computing LESSEE's share of operating
expenses applicable to the Leased Premises:
1. Any ground lease rental;
2. Costs of capital repairs or capital replacements (except as specifically
permitted herein), capital improvements and equipment; except those: (a)
required by laws enacted on or after the date the temporary certificate of
occupancy issued for the LESSEE work shall be validly issued with the cost of
any such improvements and equipment depreciated over the usual life of the
improvement and/or equipment, or (b) installed at the Leased Premises to reduce
operating expenses, with the cost of any such improvements and equipment
depreciated at an annual rate reasonably calculated to equal the amount of
operating expenses to be saved in each calendar year throughout the term (as
determined at the time LESSOR elected to proceed with the capital improvement or
acquisition of the capital equipment to reduce operating expenses);
3. Rentals for items (except when needed in connection with normal repairs
and maintenance of the building which shall be permitted) which if purchased,
rather than rented, would constitute a capital improvement specifically excluded
in Subsection 2, above;
4. Costs incurred by LESSOR for the repair for replacement of damage to the
building or its contents caused by fire or other casualty;
5. Depreciation, amortization, lender's fees and interest payments except
as permitted pursuant to Subsection 2, above, and, if permitted, then determined
in accordance with generally accepted accounting principles, consistently
applied (as applied to commercial real estate) in accordance with the
anticipated useful life of such item (as reasonably determined by LESSOR);
6. Overhead and profit increments paid to LESSOR or to subsidiaries or
affiliates of LESSOR for goods and/or services in the building to the extent the
same exceeds the cost of such goods and/or services rendered by unaffiliated
third parties on a competitive basis;
7. Advertising and promotional expenditures, and the costs of acquiring and
installing signs in or on the building identifying the owner of the building;
8. Interest, principal, points and fees on debts or amortization on any
mortgage or mortgages or any other debt instrument encumbering the building;
<PAGE>
9. Any costs associated with gift taxes, excise taxes, profit taxes or
capital levies;
10. Costs incurred in connection with upgrading the building to comply with
handicap, hazardous material, fire and safety codes which were in effect prior
to the date of the lease or which become effective after lease commencement;
11. Tax penalties incurred as a result of LESSOR's negligence, inability or
unwillingness to make payments when due, not attributable to LESSEE's failure to
make payments to LESSOR for such items in accordance with the lease;
12. Any and all costs arising from the presence of hazardous materials or
substances (as defined by applicable Federal, Massachusetts and local laws) now
or hereafter pertaining to the building ("Hazardous Substances") in or about the
building including, without limitation, Hazardous Substances in the ground,
water, or soil;
13. Costs to repair defects in the construction of improvements described
in Exhibit B. or defects in the building structure.
14. LESSOR's general corporate overhead and general and administrative
expenses except as contained and allowed in the 5% Management Fee per provision
in Clause 6.B., above.
15. Costs of any items for which LESSOR is reimbursed by insurance, or
otherwise compensated by parties other than LESSEE's of the building;
16. Any legal fees associated with the sale or refinancing of the building;
17. Costs for any separate utility meters LESSOR may install in the
building, unless the installation is required by a utility company or
governmental entity.
18. Costs for construction in compliance, or penalties assessed for
non-compliance with the Americans with Disabilities Act of 1990 (42. U.S.C.
1281-1283).
SALES AGENCY, DEVELOPMENT AND LICENSE AGREEMENT
between
COHERENT, INC.
and
PALOMAR MEDICAL TECHNOLOGIES, INC.
COHERENT ADDRESS: 5100 Patrick Henry Drive
Santa Clara, CA 95054 U.S.A.
PALOMAR ADDRESS: 45 Hartwell Avenue
Lexington, MA 02173 U.S.A.
EFFECTIVE DATE: November 17, 1997
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE NUMBER
AGREEMENT......................................................................1
DEFINITIONS....................................................................1
APPOINTMENT OF SALES AGENT.....................................................4
RESPONSIBILITIES OF COHERENT...................................................6
RESPONSIBILITIES OF PALOMAR....................................................6
COMMISSIONS;TERMS OF PURCHASE OF PRODUCTS BY COHERENT..........................9
COMPLIANCE WITH GOVERNMENT REGULATIONS........................................11
WARRANTY......................................................................11
SERVICE.......................................................................12
LIMITED LIABILITY TO COHERENT AND OTHERS......................................12
PROPERTY RIGHTS...............................................................13
TRADEMARKS AND TRADE NAMES....................................................13
PATENTS AND TRADE SECRETS.....................................................14
INFRINGEMENT..................................................................15
INDEMNIFICATION...............................................................16
DEVELOPMENT PROJECTS..........................................................17
MANUFACTURING RIGHTS..........................................................18
PATENT LICENSE GRANT..........................................................19
INTELLECTUAL PROPERTY NOTICES.................................................21
TERM AND TERMINATION..........................................................21
GENERAL PROVISIONS............................................................22
<PAGE>
EXHIBITS
A Palomar Patents
B Wire Instructions
C Form of Warrant
D Terms and Conditions of Purchase
E Product Warranty
F Confidentiality Agreement
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<PAGE>
AGREEMENT
THIS AGREEMENT is made and entered into as of November 17, 1997 by and
between Palomar Medical Technologies, Inc., a Delaware corporation having a
place of business at 45 Hartwell Avenue, Lexington, Massachusetts 02173
(hereinafter "Palomar") and Coherent, Inc., a Delaware corporation having a
principal place of business at 5100 Patrick Henry Drive, Santa Clara, California
95054 ("Coherent").
WHEREAS, Palomar is a diverse technology company that promotes the
development and sale of various high-technology products, including a medical
hair laser removal device known as the EpiLaser;
WHEREAS, Coherent is an established company in laser technology with an
established worldwide network for distribution, sales and service of laser
technology and related products;
WHEREAS, Coherent and Palomar perceive mutual advantage to Palomar
providing Coherent with EpiLaser and successor versions of the EpiLaser for
distribution, sales and service through Coherent's worldwide network;
WHEREAS, Coherent desires to collaborate with Palomar in the development of
lasers for hair removal applications, and distribute such products pursuant to
the terms of this Agreement;
NOW THEREFORE, in consideration of the premises and of the faithful
performance of the covenants herein contained, the parties hereto agree as
follows:
1. DEFINITIONS
Terms not otherwise defined herein shall have the meanings set forth below:
1.1 "Affiliate" shall mean any corporation or other legal entity other than
Coherent in whatever country organized, controlling, controlled by or under
common control with Coherent. The term "control" means possession, direct or
indirect, of the powers to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities, by
contract or otherwise.
1.2 "Anderson Patent" shall mean U.S. Patent No. 5,595,698, including any
division, continuation or any foreign patent application or letters patent or
equivalent thereof issuing thereon or reissue, reexamination or extensions
thereof.
1.3 "Clinical Trial Agreement" shall mean the agreement entered into
between Massachusetts General Hospital, Dr. R. Rox Anderson and Palomar on
August 18, 1995 relating to the use of lasers for the removal of hair.
-1-
<PAGE>
1.4 "Development Projects" shall mean the development work done by Palomar
pursuant to Section 15 of this Agreement.
1.5 "Distributed Products" shall mean Palomar's current EpiLaser laser
system ("Epi1"), its next generation EpiLaser in development ("Epi2"), the
StarLight diode laser in development, any upgrades thereto, and any future
Products added to this list by mutual agreement of the parties or pursuant to
Section 16.2 hereof.
1.6 "Effective Date" shall mean November 17, 1997.
1.7 "GAAP" shall mean generally accepted accounting principles.
1.8 "Gross Margin" shall mean the difference between the purchase price and
the cost of goods, calculated in accordance with GAAP.
1.9 "Invention" shall mean any new and useful process, manufacture, or
composition of matter in the field of laser hair removal conceived or first
reduced to practice during the conduct of Development Projects. The term does
not include any invention made solely by one or more Coherent employees.
1.10 "Licensed Field" shall mean hair reduction and/or hair removal.
1.11 "Licensed Product" shall mean any article, device or composition, the
manufacture, use or sale of which, absent the licenses granted herein, would
infringe a Valid Claim of any of the Palomar Patents.
1.12 "License Term" shall be the period of time during which this Agreement
is in effect.
1.13 "Net Revenues" shall mean the price at which Coherent invoices the
sale or lease of the Licensed Products to its customers, less any reasonable
charges for shipping, import duties, brokerage and use or sales taxes. It is
further understood and agreed that in respect of inter-company sales between
Coherent and any Affiliate, Net Revenues be calculated off the price at which
the Affiliate invoices the sale or lease of the Licensed Products to its
customer. If the competitive product has more than one application, "Net
Revenues" shall be only that portion allocated to the hair removal product based
upon the average sales price of a stand-alone Distributed Product.
1.14 "Palomar Developments" shall mean any invention, improvement,
modification, enhancement, creation, design, method, documentation, know-how or
other development or information of any kind made or acquired by Palomar during
the life of this Agreement that would infringe one or more of the Palomar's
Patents if made, used or sold by an unlicensed person or entity.
1.15 "Palomar Patents" shall mean any rights owned by Palomar in (i) the
patents and patent applications listed on the attached Exhibit A, including,
without limitation, the Anderson Patent, (ii) patents issued from the
applications listed in Exhibit A or from any division or continuation of those
applications, (iii) claims of continuation-in-part applications, and of any
resulting patents, that claim an invention claimed or specifically described in
the applications listed on Exhibit A, and (iv) any reissues of or patents
issuing upon reexamination of any patents described in preceding clauses (i),
(ii), or (iii).
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<PAGE>
1.16 "Palomar Technology" shall include the Palomar Patents and Palomar
Developments.
1.17 "Patent Right" shall mean any United States or foreign patent
application, or the equivalent of such applications, including any division,
continuation, or continuation-in-part, thereof, or any Letters Patent or the
equivalent thereof issuing thereon or reissue or extension thereof, containing
one or more claims to an Invention.
1.18 "Products" shall mean laser products for cosmetic applications,
including the Distributed Products.
1.19 "Territory" shall mean all countries of the world, except Canada.
1.20 "Valid Claim" shall mean any claim of any Palomar Patent that has not
been finally rejected or declared invalid, in the jurisdiction in question, by a
patent office or court of competent jurisdiction in any unappealable decision.
2. APPOINTMENT OF SALES AGENT
2.1 Subject to the terms and conditions set forth in this Agreement,
Palomar hereby appoints Coherent as its exclusive sales agent for the
Distributed Products in the Territory; provided, however, that Palomar retains
the right to sell Distributed Products in the Territory to existing
representatives and distributors until the effective date their termination by
Palomar. Upon the signing of this Agreement, Palomar agrees to use its
commercially reasonable best efforts to terminate all representatives and
distributors for its Distributed Products consistent with its contractual
obligations and governing legal authority. As these relationships are
terminated, they shall automatically be added to the definition of Territory.
For so long as this Agreement is in effect, Palomar shall not appoint any other
sales agent or distributor with responsibility for the sale of Distributed
Products in the Territory, or otherwise license other parties to manufacture the
Distributed Products; provided, however, that this limitation shall not apply to
third parties that contract with Palomar to manufacture the Distributed Products
or parts thereof for sale hereunder.
2.2 In order to remain the exclusive sales agent, Coherent shall be
required to achieve a customer order level of a minimum of 75 Distributed
Products per quarter during the term of the Agreement, except that the minimums
shall be 30 units per quarter until such time as Palomar notifies Coherent in
writing that it can deliver at least 30 units per quarter of either the Epi2 or
Starlight diode laser system. The minimums shall then increase to 50 units for
the next quarter before increasing to 75 per quarter. Orders that are already in
house at the time the Agreement is signed, and orders that are received from
Palomar's distributors and representatives until their rights are terminated,
shall not count towards these minimums. In the event that Coherent fails to
achieve such minimum customer order level during any quarter during the term of
this Agreement, until such time as Palomar notifies Coherent in writing that it
can deliver at least 30 units per quarter of either the Epi2 or Starlight diode
laser system, Coherent may, in its sole discretion, pay Palomar the sum of
$25,000 per unit short of the minimums within ten (10) days of the end of any
such quarter, and maintain exclusivity. Any such payments after such time as
Palomar notifies Coherent in writing that it can deliver at least 30 units per
quarter of either the Epi2 or Starlight diode laser system, will be negotiated
by the parties in good faith at a later date, but in no event shall such
payments be less than $25,000. If Coherent fails to achieve such minimum
customer order level during any quarter during the term of this Agreement and
elects not to make this payment within the ten day period after the end of such
quarter, this Agreement may become non-exclusive, at Palomar's sole discretion,
which shall be exercised within sixty (60) days of the end of any quarterly
period that Coherent fails to achieve such minimum customer order level.
-3-
<PAGE>
2.3 The relationship of Palomar and Coherent established by this Agreement
is that of independent contractors, and nothing contained herein shall be
construed to (i) give either party the power to direct and control the
day-to-day activities of the other, (ii) constitute the parties as partners,
joint venturers, co-owners or otherwise as participants in a joint or common
undertaking, or (iii) allow one party to create or assume any obligation on
behalf of the other for any purpose whatsoever. Under no circumstances,
including without limitation for purposes of this Section 2.3, will Coherent be
deemed to be an employee or agent of Palomar. Each party shall be solely
responsible for, and shall indemnify, defend and hold the other party free and
harmless from, any and all claims, damages, liabilities, fees, losses, claims,
allegations, or lawsuits, threatened or pending, (including attorneys' fees)
arising from or relating to the acts of their employees or its agents.
2.4 Coherent may appoint an independent representative or distributor to
handle its responsibilities under this Agreement in any particular Territory, in
which case Coherent's obligations hereunder shall be satisfied if such
representative or distributor is in compliance with such obligations.
3. RESPONSIBILITIES OF COHERENT
3.1 LUMP SUM PAYMENT. Upon execution of this Agreement, Coherent shall pay
Palomar a lump sum of Three Million Five Hundred Thousand Dollars ($3,500,000)
by wire transfer in accordance with the instructions attached hereto as Exhibit
B.
3.2 PROMOTION OF PRODUCTS. During the term of the Agreement, Coherent shall
use its reasonable best efforts to fully and actively promote the purchase and
use of the Distributed Products in the Territory and to supply Palomar with
regular reports regarding these activities. Without limiting the foregoing,
Coherent shall have the following responsibilities throughout the Territory:
3.2.1 Maintain active contacts with all potential and actual customers
and users of the Distributed Products.
3.2.2 Coherent shall pay sales commissions to its sales
representatives for the sale of Distributed Products which, calculated as a
percentage of the sales price, shall be at least as favorable as that paid
for sales of its own comparable products it may sell from time to time
during the term of this Agreement.
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3.2.3 Obtain customer orders for the Distributed Products and provide
assistance to customers in fulfilling them.
3.2.4 Use its reasonable best efforts to promote the Distributed
Products by training its sales and service forces, and organizing,
implementing and funding physician training courses and preceptorship
programs.
3.2.5 Undertake publicity in journals for the Distributed Products and
exhibit the Products at suitable trade fairs.
3.2.6 Achieve a sufficient level of understanding of the Distributed
Products to enable Coherent to provide technical support to the customer
and effectively sell and service the Distributed Products.
3.2.7 Provide technical liaison between Palomar and the customer.
3.2.8 On or before the 15th of each month during the term of this
Agreement commencing January 1, 1998, Coherent will provide Palomar with
six-month rolling forecasts of predicted sales by Distributed Product
("Forecast"). It is understood that these Forecasts are good-faith
estimates only, and Coherent shall not be obligated to purchase any
Distributed Products set forth in the Forecast. However, if during the term
of this Agreement Coherent fails to sell to its customers, or purchase for
its own account, at least fifty percent (50%) of the number of Distributed
Products set forth in the first three months of the Forecasts for the
months of January, April, July and October, it shall pay Palomar a deposit
equal to * times the number of Distributed Products set forth in the
first three-months of such Forecast minus the number actually sold during
that period. This deposit shall be either returned to Coherent or used as a
credit against future remittances to Palomar, at Coherent's option, at such
time as Coherent thereafter sells or purchases at least the number of
Distributed Products set forth in the three months of any such Forecast
after any such deposit. Any amounts on deposit on termination of this
Agreement shall be promptly returned to Coherent, without the right of set
off.
3.2.9 Coherent will perform the necessary research, including, without
limitation, legal research, to determine what limitations exist, if any,
for selling the Distributed Products in the Territory.
3.2.10 Keep Palomar fully informed of all governmental, commercial,
and industrial activities, plans and regulations which do or could affect
the sale of Distributed Products in the Territory.
3.2.11 Coherent shall reimburse Palomar for Palomar's out-of-pocket
expenses for advertisements, trade show participation and marketing
materials related to the Products when such marketing activities were
requested to be undertaken by Coherent in writing. Such reimbursements
shall be paid within ten (10) days of date of invoice.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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3.3 SALES INFORMATION. Coherent shall maintain and provide to Palomar
during the term of the Agreement, a complete record of all sales of the
Distributed Products, showing customer name, date of sale, shipping date,
instrument model, serial number, and sales order acknowledgment and invoices for
all Distributed Products covered by this Agreement, as well as special terms of
the sale, including warranty, installation date and other appropriate
information.
3.4 MATERIALS. Coherent shall promptly provide Palomar with examples of
marketing and technical information concerning the Distributed Products, that
have been prepared to support the Distributed Products within the Territory.
Coherent shall be responsible for preparing any foreign language verions of
operating manuals for the Disbtibuted Products.
3.5 RESPONSE TO INQUIRIES. Coherent shall promptly respond to all inquiries
from Palomar concerning matters pertaining to this Agreement.
3.6 NEW DEVELOPMENTS. Coherent Medical shall inform Palomar of new Product
developments in the field of hair removal.
3.7 COMPLIANCE WITH LAWS. Coherent shall comply with all applicable laws
relating to the sale and distribution of the Distributed Products in the
Territory.
3.8 CUSTOMER COMPLAINTS. Coherent shall promptly advise Palomar in writing
of any customer complaints reported to it relating to the Products that would
require Palomar, as manufacturer of the Products, to file reports with any
governmental agency.
3.9 SALES AND USE TAX. Coherent shall be responsible for collecting and
remitting any sales and use tax for Distributed Products sold under this
Agreement.
4. RESPONSIBILITIES OF PALOMAR
4.1 WARRANT. Upon execution of this Agreement, Palomar shall provide to
Coherent a three-year warrant to purchase one million shares of the common
stock, par value $.01 per share, of Palomar, with an exercise price of $5.25 per
share in the form attached hereto as Exhibit C.
4.2 MATERIALS. Palomar shall promptly provide Coherent with marketing and
technical information concerning the Distributed Products, that have been
prepared by Palomar and its agents to support the Distributed Products within
the Territory. Palomar agrees to prepare, with Coherent's collaboration and
assistance, and thereafter deliver to Coherent, one copy of the service manual
and operator's manual for each Distributed Product, which Coherent may then
copy.
4.3 RESPONSE TO INQUIRIES. Palomar shall promptly respond to all inquiries
from Coherent concerning matters pertaining to this Agreement.
4.4 TESTING. Palomar shall test all Distributed Products before shipment to
Coherent and provide a copy to Coherent of such test results with the
Distributed Product.
4.5 DELIVERY TIME. Palomar shall use its reasonable best efforts to
minimize delivery time as much as possible and to fulfill delivery obligations
as committed in acceptances.
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4.6 TERRITORIAL INQUIRIES. Palomar shall submit to Coherent any inquiry
(other than inquiries from or related to House Accounts (as hereinafter defined)
regarding the purchase or potential purchase of Distributed Products)
originating from the Territory rather than answering the inquiry directly.
4.7 QUOTATIONS TO EXPORTERS. Palomar shall refrain from giving quotations
to exporters for Distributed Products to be shipped to the Territory (other than
those relating to House Accounts).
4.8 NEW DEVELOPMENTS. Palomar shall inform Coherent of new Product
developments in the field of hair removal.
4.9 TRAINING. At Coherent's request, Palomar will provide the training
necessary for Coherent to in turn train its sales and service forces and its
clinical educators in the operation and service of the Distributed Products.
Coherent shall reimburse Palomar for its reasonable out-of-pocket expenses for
such training. Cost for transport and living expenses for Coherent's personnel
to attend such seminars will also be borne by Coherent. Coherent shall pay for
any training sessions in excess of two per new Product or upgrade at Palomar's
standard rates.
4.10 CTI CENTERS. In connection with its CTI business, Palomar agrees to
include Coherent's cosmetic laser systems on its list of preferred equipment and
use its commercially reasonable best efforts to place these laser systems in the
CTI center if Coherent has the technology needed.
4.11 UPGRADE OBLIGATIONS. Palomar agrees to upgrade all Epi1 products sold
prior to the Effective Date by providing the following upgrade (including any
replacement parts deemed necessary to complete the upgrade) the Epi1 to Coherent
at no cost:
- Flexible fiber-optic delivery system
- Higher energy output for enhanced effectiveness
- 50 J/cm(2) with a 7 mm spot (+/- 10%)
- 25 J/cm(2) with a 10 mm spot (+/- 10%)
- Streamlined handpiece with improved ergonomics
If the upgrade can be done in the field, Coherent shall provide up to one day's
labor at no cost to Palomar to install the upgrade on a next call basis. If
installing the upgrade takes longer than one day, Palomar shall pay Coherent its
standard and customary rates to complete the upgrade. Palomar shall train
Coherent service personnel in installing the upgrade at no cost to Coherent
other than its out-of-pocket travel expenses. Coherent shall have the exclusive
right to contact customers to schedule the service calls and to explain the
upgrade policy. Palomar agrees to use its commercially reasonable best efforts
to manufacture parts for at least ten (10) upgrades per month until all Epi1
units are upgraded, and to incorporate the upgrades into the Epi1 by April 1,
1998.
4.13 FDA REPORTING OF CUSTOMER COMPLAINTS. Palomar agrees to file any
required reports with the FDA relating to customer complaints forwarded to
Palomar by Coherent where Palomar is the manufacturer of the Distributed Product
in question.
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5. COMMISSIONS; TERMS OF PURCHASE OF PRODUCTS BY COHERENT
5.1 Except as set forth in Sections 5.2 and 5.3 below, Palomar shall pay
Coherent a commission of $* for each Distributed Product sold by Palomar to
Coherent's customers, subject to adjustment as set forth below:
5.1.1 For Distributed Products sold after April 1, 1998, Coherent's
commission shall be increased by *% of any excess over a $* sales price and
reduced by *% of any shortfall under $*.
5.1.2 For Epi1 products sold between the Effective Date and March 30,
1998 with the upgrades described in Section 4.12 above, Coherent's
commission shall be increased by *% of any excess over a $* sales price and
reduced by *% of any shortfall under $*.
5.1.3 For Epi1 products sold between the Effective Date and March 30,
1998 without the upgrades described in Section 4.12 above, Coherent's
commission shall be increased by *% of any excess over a $* sales price and
reduced by *% of any shortfall under $*.
5.1.4 Notwithstanding the foregoing, Palomar agrees to sell
Distributed Products to Coherent's independent international sales
representatives for $* for the non-upgraded version and $* for the upgraded
version, in both cases Coherent's commission shall be $* (which shall
include the cost of service). Coherent's commission shall be increased by
*% of any excess over a $* sales price for the non-upgraded version and $*
for the upgraded version, except that Coherent shall be entitled to its
full $* commission on sales to independent international sales
representatives pursuant to quotes at lower prices given by Palomar prior
to the Effective Date. Except as set forth above, without the written
approval of Palomar, no non-upgraded Epi1 shall be sold under this Section
for less than $*, and no upgraded Epi1 shall be sold under this Section for
less than $*.
5.1.5 Except as set forth in Section 5.1.4 above, in no event shall
the Epi1 be sold for less than $*.
5.1.6 Subject to the limitations set forth in this Section 5.1,
Coherent shall have the right to set the sales price to the end-customer,
and will inform Palomar of the end-customer price and the corresponding
payment to Palomar at the time the order is placed with Palomar.
5.1.7 For Distributed Products with a list price to the end-customer
below $*, the parties shall negotiate a fair and reasonable commission
based upon the same principles they used to establish the $* commission
herein.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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5.2 For orders that have been received by Palomar and not shipped by the
Effective Date, Coherent shall receive a $* commission, less Palomar's sales and
distribution expenses and commissions (not to exceed $*) on each such order.
5.3 For sales by Palomar to House Accounts within the Territory during the
term of this Agreement, Coherent shall be entitled to receive $5,000 per
Distributed Product. House Accounts shall be defined as revenue sharing sites
that are (i) existing as of the date of this Agreement; and/or (ii) chains that
have at least ten sites (at different geographic locations), including, but not
limited to, Columbia/HCA, where, unless the chain requires otherwise, the laser
system is used under the direction of only one doctor (who can designate a
substitute when he or she is out of the office). Palomar covenants that it will
not require, encourage, advocate or suggest that CTI centers permit doctors from
the surrounding community to use the laser system for their patients. If this
happens at any previously designated House Account, notwithstanding Palomar's
efforts, any such site shall be disqualified as a House Account and Coherent
shall be entitled to receive an additional $15,000 per site. Palomar shall also
be permitted to place Distributed Products into accounts that don't fall within
the definition of House Accounts, provided that Palomar provides marketing
services for such account, does not transfer ownership of the laser, and shares
in the revenues generated from its use. For these sales, Coherent shall be
entitled to receive $20,000 per unit. In no event shall Palomar be permitted to
place Distributed Products into more than 300 of the sites referenced in this
paragraph during the first three years of this Agreement. The parties shall
negotiate additions to this number as part of the annual evergreening renewal
process, which shall not be less than 50 additional sites in year four (4), if
this Agreement is extended.
5.4 PURCHASE OF DEMO UNITS. From time to time during the term of this
Agreement, Coherent may require demonstration units to bring to trade shows, as
well as demonstration units for its sales and service force. Accordingly, during
the term of this Agreement, Coherent shall be entitled to purchase up to 25
Distributed Products for demonstration purposes. The purchase of these
demonstration units shall count towards the minimum purchase requirements set
forth in Section 2.2. The purchase price for the demonstration units ("Purchase
Price") shall be $* per unit, payable within ten (10) days of date of invoice by
check or wire transfer, at Coherent's election. If Coherent resells a
demonstration unit within six months of its purchase, it shall pay Palomar any
additional amounts as would be required to be paid pursuant to Section 5.1.
5.5 TERMS AND CONDITIONS. All purchases of Distributed Products by Coherent
from Palomar during the term of this Agreement shall be subject to Coherent's
standard terms and conditions, a copy of which are attached as Exhibit C to this
Agreement. In the event of any inconsistencies between the terms and conditions
contained in Exhibit C and the terms and conditions contained in this Agreement,
this Agreement shall govern.
5.6 SHIPPING. All prices are F.O.B. Palomar's plant. In the absence of
specific instructions, Palomar will select the carrier and ship freight prepaid
and added to the price of the Distributed Product. Coherent shall insure all
shipments to Coherent's customers. Palomar will not be deemed to assume any
liability in connection with any shipment because of the selection of a carrier
or the failure of Coherent to obtain insurance. Title and risk of loss or damage
to each of the Distributed Products will pass to Coherent or its customer when
delivery is made to the possession of the carrier.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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5.7 ORDER AND ACCEPTANCE. All orders for Distributed Products submitted by
Coherent shall be initiated by written purchase orders sent to Palomar and
requesting a delivery date during the term of this Agreement; provided, however,
that an order may initially be placed orally or electronically if a
conformational written purchase order is received by Palomar within a reasonable
time after said oral or electronic order but in any case before shipment. No
order shall be binding upon Palomar until accepted by Palomar in writing, and
Palomar shall have no liability to Coherent with respect to purchase orders that
are not accepted. Once Palomar has accepted an order, it may not be cancelled by
Coherent. Palomar shall notify Coherent of the acceptance or rejection of an
order and of the assigned delivery date for accepted orders within ten (10)
working days of receipt of the order. Palomar shall use its reasonable best
efforts to deliver Distributed Products at the times specified either in its
quotation or in its written acceptance of Coherent's purchase orders. Preprinted
language in a purchase order is of no effect to modify this Agreement.
5.8 PAYMENTS TO PALOMAR. Coherent shall invoice its customers for the sale
of the Distributed Products on Palomar's behalf and act as collection agent for
the accounts receivable. When collected, Coherent shall remit the purchase price
to Palomar within five (5) business days, less its commission as set forth
herein. Customer deposits shall be forwarded to Palomar within five (5) business
days of receipt. Coherent makes no representations or guarantees relating to the
collection of accounts receivables hereunder. The parties agree that the credit
risk is with the manufacturer of the Distributed Product. Coherent shall apply
its customary and standard policies and procedures for evaluating customers'
credit worthiness before such customers are permitted to purchase Distributed
Products under this Agreement. Any variances shall be approved in advance by
Palomar in writing, at its discretion. The parties acknowledge that neither of
them is under any obligation to pay the other for any sales of Distributed
Products where the customer fails to pay for the Distributed Product.
5.9 LATE CHARGES. If Coherent fails to pay the price or any other payment
due to Palomar promptly and when due, Palomar may recover, in addition to the
price or payment, interest thereon at a rate equal to the lesser of 1-1/2% per
month and the maximum rate of interest allowable under applicable law.
6. COMPLIANCE WITH GOVERNMENT REGULATIONS
6.1 Coherent shall not sell any Products to, or for the use of, any
ultimate purchaser with which Palomar could not deal under the laws or
regulations of the United States, including, without limitation, the regulations
of the United States Food and Drug Administration. Coherent shall comply with
all other laws and regulations of the United States and any other cognizant
jurisdiction relating to the marketing and sale of the Products.
6.2 Palomar and Coherent shall comply with all other laws and regulations
of the United States and any other cognizant jurisdiction relating to the
manufacturing and labeling of the Distributed Products.
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6.3 During the term of this Agreement, Palomar shall use its commercially
reasonable best efforts to maintain in full force and effect all governmental
approvals necessary for the sale and manufacture of the Distributed Products in
the Territory, except for Japan, including, without limitation, the United
States and Europe (CE Mark). The parties shall meet within the next 90 days to
determine whether to apply for the necessary licenses to sell any of the
Distributed Products in Japan. Within that 90 day period, Coherent may notify
Palomar that it will undertake to obtain such licenses, in which case, all costs
thereof shall be borne by Coherent, the licenses shall be in both Coherent's and
Palomar's name. If Coherent has obtained such licenses, upon termination of this
Agreement Palomar may either (i) reimburse Coherent for its out of pocket
expenses incurred in procuring these licenses, in which case Coherent shall
assign its interest in the licenses to Palomar or (ii) elect not to reimburse
Coherent, in which case Palomar shall not sell Distributed Products in Japan
pursuant to such licenses. Nothing contained herein shall restrict Palomar's
ability to obtain its own licenses in Japan.
6.4 During the term of this Agreement, if Coherent determines to sell
Distributed Products in a country within the Territory where regulatory approval
is required but not obtained, Coherent shall use its commercially reasonable
best efforts to obtain, at its sole cost and expense, any such governmental
approvals necessary for the sale of Distributed Products in such country.
7. WARRANTY
For so long as Palomar manufactures the Distributed Product, Palomar warrants
such Distributed Product to the end-user under the terms of Palomar's standard
warranty set forth in Exhibit E, as it may be modified or superceded from time
to time by Palomar. All service work for Distributed Products under warranty
shall be performed by Coherent in accordance with Section 8.
8. SERVICE
8.1 Coherent shall maintain the services of a sufficient number of
certified service engineers, and shall use its best efforts to adequately
service and maintain (both in and out of warranty) all Distributed Products in
the Territory. Coherent shall purchase parts inventory and any specialized tools
necessary for the proper and prompt service of the Distributed Products sold by
Coherent. Palomar agrees to use its commercially reasonable best efforts to ship
parts to Coherent as soon as possible after receipt of order. In regards to
specialized tools, Palomar agrees to sell them to Coherent for its costs plus
25% for tools it manufactures, and at its cost for tools it buys from third
parties, plus shipping and standard handling charges. Coherent shall provide
Palomar with service reports as to the work performed in each instance. During
the term of this Agreement, all warranty and service work on the Products shall
be performed by Coherent personnel. In addition, following the expiration of
this Agreement, Coherent shall continue to perform all warranty and service work
on Distributed Products sold by Coherent pursuant to this Agreement.
8.1.1 For Distributed Products sold by Palomar prior to the date of
this Agreement and still under warranty, Palomar shall supply the parts at
no charge, and Coherent the labor. Palomar shall pay Coherent its standard
and customary service labor rates and out-of-pocket expenses within 30 days
of date of invoice.
8.1.2 For Distributed Products manufactured by Palomar and sold by
Coherent that are under warranty, Palomar shall supply the parts at no
charge, and Coherent the labor. Coherent shall be permitted to deduct
$4,000 for each such Epi1 manufactured and sold in the United States during
the term of this Agreement,
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from the payments due Palomar under Section 5 and, if applicable, Section
16.2 hereof. Palomar shall pay Coherent $* for each Epi1 it manufactures
and places in a CTI under Section 5.3 within 30 days of such placement.
Coherent shall be responsible for providing the labor for warranty service
for these Distributed Products. When the Epi2 and StarLight laser products
are manufactured and sold, the parties shall negotiate an appropriate sum
to be paid for domestic warranty service to be provided by Coherent. If
Coherent manufactures a Product, then Coherent shall bear the entire cost
of parts and service, including warranty service, for such Product.
8.1.3 For Distributed Products not under warranty, Palomar shall be
the exclusive supplier of critical parts (e.g. parts that are not otherwise
generally available) which Coherent shall purchase from Palomar at its cost
plus 25%.
9. LIMITED LIABILITY TO COHERENT AND OTHERS
IN NO EVENT SHALL PALOMAR BE LIABLE TO COHERENT OR ANY OTHER ENTITY FOR ANY
SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED, WHETHER FOR BREACH OF
CONTRACT, NEGLIGENCE OR OTHERWISE, AND WHETHER OR NOT PALOMAR HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGE. THE ESSENTIAL PURPOSE OF THIS PROVISION IS TO
LIMIT THE POTENTIAL LIABILITY OF PALOMAR ARISING OUT OF THIS AGREEMENT. NOTHING
IN THIS CLAUSE SHALL LIMIT PALOMAR'S OBLIGATION TO INDEMNIFY COHERENT AS SET
FORTH IN SECTION 14.
10. PROPERTY RIGHTS
10.1 PROPERTY RIGHTS. Coherent agrees that Palomar owns all right, title,
and interest in the product lines that include the Products now or hereafter
subject to this Agreement and in all of Palomar's patents, trademarks, trade
names, inventions, copyrights, know-how, and trade secrets relating to the
design, manufacture, operation or service of the Products. The use by Coherent
of any of these property rights is authorized only for the purposes herein set
forth, and upon termination of this Agreement for any reason such authorization
shall cease. Coherent shall not challenge Palomar's attempt to register any
name, mark or logo in use as of the effective date of the Agreement or any name,
mark, or logo substantially similar thereto, except as expressly set forth
herein.
10.2 SALE CONVEYS NO RIGHT TO MANUFACTURE OR COPY. The Products are offered
for sale and are sold by Palomar subject in every case to the condition that
such sale does not convey any license, expressly or by implication, to
manufacture, duplicate or otherwise copy or reproduce, either in whole or in
part, any of the Products, except as expressly set forth herein.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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11. TRADEMARKS AND TRADE NAMES
11.1 USE. During the term of this Agreement, Coherent shall have the right
to indicate to the public that it is an authorized sales agent for the
Distributed Products. Palomar hereby grants Coherent permission to us any
trademarks, trade names, service marks and logos owned or claimed by Palomar and
used in connection with the Distributed Products ("Palomar Trademarks") solely
in conjunction with the performance by Coherent of its rights and obligations
under this Agreement. To the extent that Coherent is permitted under this
Agreement to use, sell, promote and/or distribute Products, this permission
shall apply and pass through to Coherent's distributors who distribute Products
(i.e., without any modification to the Product, product packaging,
documentation, or other materials) ("Distributor"). Coherent shall provide
notice of these trademark license terms of this Agreement to, and enforce such
terms with and against, Coherent's Distributors. Palomar is a third party
beneficiary of any agreement between Coherent and Coherent's Distributors
arising from or relating to the use by Coherent or Distributor of Palomar
Trademarks, and any such agreement will so provide in express terms. Palomar
shall be entitled to enforce the terms of this Trademark License directly
against any Distributor in the event Coherent fails to do so. At Palomar's sole
cost and expense, Coherent agrees to assist in the registration of the Palomar
Trademarks in the Territory in the name of Palomar, in renewal and maintenance
of such registration and in such recording of Coherent as a registered user as
Palomar may reasonably request. Effective upon the termination of this
Agreement, Coherent shall cease to use all trademarks, marks, and trade names of
Palomar.
11.2 MANUFACTURING BY COHERENT. To the extent Coherent is permitted to make
Products under this Agreement, Coherent agrees to insure that the Palomar
Trademarks are only associated with goods of equal or higher value than the
Products produced by Palomar. Palomar retains the right to inspect goods
manufactured by Coherent for quality to ensure this provision is observed.
11.3 LIMITATIONS ON USAGE. Coherent shall use the Palomar Trademarks only
as approved by Palomar (which approval shall not be unreasonably withheld) and
in conformity with any guidelines or policies as provided by Palomar to Coherent
from time to time. Coherent agrees not to modify, alter or remove any Palomar
Trademark.
11.4 USE OF THE PARTY'S NAME. The parties agree that all Licensed Products
sold under this Agreement and all related materials, including, without
limitation, brochures and advertising materials, shall be labeled with both
Coherent and Palomar's names, each equally prominently displayed. Coherent
expressly disclaims any rights to the goodwill and intellectual property
resident in such Distributed Products, except as expressly set forth herein.
11.5 TRADEMARKS OF SUPPLIERS TO PALOMAR. Palomar may incorporate into or
bundle with the Distributed Products branded products of Palomar's suppliers,
and Palomar may enter into agreements requiring Palomar to use or display the
marks or brand identifiers of suppliers in a manner specified in such agreement;
provided, however, that the foregoing shall not apply to competitors of Coherent
without Coherent's prior written approval. Upon Coherent's receipt of notice of
such agreements from Palomar and thereafter, Coherent agrees to comply with the
applicable terms and conditions of any agreement between Palomar and its
suppliers relating to the use of the trademarks, trade names, service marks
and/or logo(s) of such suppliers.
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12. PATENTS AND TRADE SECRETS
12.1 Any Invention conceived or reduced to practice solely by Palomar
employees or anyone working with Palomar other than Coherent in the performance
of any Development Project, shall be owned by Palomar. Palomar shall promptly
advise Coherent in writing of each Invention disclosed to Palomar. In the event
of joint inventorship between Coherent and Palomar employees, the Invention will
be deemed to be jointly owned. Patent applications for Inventions owned jointly
by Palomar and Coherent shall be filed as mutually agreed upon by the parties,
except that any such agreement must be reached on terms reasonably calculated to
obtain such patents.
12.2 All patent costs pertaining to any Palomar Patent Rights, including
preparation, filing, prosecution, issuance and maintenance costs, shall be borne
by Palomar, except for Patent Rights owned jointly by the parties, which shall
be shared equally, and which shall be reimbursed as incurred.
13. INFRINGEMENT
13.1 Palomar will protect the Palomar Patent Rights from infringement and
prosecute infringers when, in its sole judgement, such action may be reasonably
necessary, proper and justified.
13.2 If Coherent shall have supplied Palomar with written evidence
demonstrating to Palomar's reasonable satisfaction prima facie infringement of a
claim of a Palomar Patent Right by a third party, Coherent may by notice request
Palomar to take steps to protect such Patent Right. Palomar shall notify
Coherent within sixty (60) days of the receipt of such notice whether Palomar
intends to prosecute the alleged infringement. If Palomar notifies Coherent that
it intends to so prosecute, Palomar shall, within three (3) months of its notice
to Coherent either (i) cause infringement to terminate or (ii) initiate legal
proceedings against the infringer. In the event that Palomar notifies Coherent
that Palomar does not intend to prosecute said infringement, Coherent may, upon
notice to Palomar, initiate legal proceedings against the infringer at
Coherent's expense and in Palomar's name if so required by law. No settlement,
consent judgment or other voluntary final disposition of the suit which
invalidates or restricts the claims of such Patent Rights will be entered into
without the consent of Palomar, which consent shall not be unreasonably
withheld, and shall not be withheld unless Palomar assumes responsibility for
future expenses in litigation. Coherent shall indemnify Palomar against any
order for payment that may be made against Palomar as a result of any
settlement, consent judgment or other voluntary final disposition of the suit
entered into without Palomar's consent.
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13.3 In the event that one party shall initiate or carry on legal
proceedings to enforce any Patent Right against any alleged infringer, the other
party shall fully cooperate with and supply all assistance reasonably requested
by the party initiating or carrying on such proceedings. The party which
institutes any suit to protect or enforce a Patent Right shall have sole control
of that suit and shall bear the reasonable expenses (excluding legal fees)
incurred by said other party in providing such assistance and cooperation as is
requested pursuant to this paragraph. The party initiating or carrying on such
legal proceedings shall keep the other party informed of the progress of such
proceedings and said other party shall be entitled to counsel in such
proceedings but at its own expense. Any award paid by third parties as the
result of such proceedings (whether by way of settlement or otherwise) shall
first be applied to reimbursement of the unreimbursed legal fees and expenses
incurred by either party, including reimbursement to Palomar, and then the
remainder shall be divided between the parties as follows:
13.3.1 (i) If the amount is based on lost profits, Coherent shall
receive an amount equal to the damages the court determines
Coherent has suffered as a result of the infringement less the
amount of any royalties and other payments that would have been
due Palomar on sales of products lost by Coherent as a result of
the infringement had Coherent made such sales; and
(ii) Palomar shall receive an amount equal to the royalties and
other payments it would have received if such sales had been made
by Coherent, or
13.3.2 As to awards other than those based on lost profits, sixty (60)
percent to the party initiating such proceedings and forty (40)
percent to the other party, provided that in the event that
Palomar has paid for further litigation subsequent to Palomar's
refusal to agree to a settlement, consent judgement or voluntary
final disposition of a suit pursuant to paragraph 13.2, such
awards shall be divided equally between the parties.
13.4 For the purposes of the proceedings referred to in this Section 13,
Palomar and Coherent shall permit the use of their names and shall execute such
documents and carry out such other acts as may be necessary. The party
initiating or carrying on such legal proceedings shall keep the other party
informed of the progress of such proceedings and said other party shall be
entitled to counsel in such proceedings but at tits own expense, said expenses
to be off-set against any damages received by the party bringing suit in
accordance with the foregoing paragraph 13.3
14. INDEMNIFICATION
14.1 DESIGN DEFECT. The party that develops a Product shall indemnify,
defend and hold harmless the other party and its officers, employees and agents
and their respective successors, heirs and assigns (the "Design Defect
Indemnitees"), against any liability, damage, loss or expense (including
reasonable attorney's fees and expenses of litigation) incurred by or imposed
upon the Design Defect Indemnitees or any one of them in connection with any
claims, suits, actions, demands or judgment arising out of any theory of design
defect (including, but not limited to, actions in the form of tort, warranty or
strict liability) concerning such Product.
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<PAGE>
14.2 MANUFACTURING DEFECT. The party that manufactures a Product shall
indemnify, defend and hold harmless the other party and its officers, employees
and agents and their respective successors, heirs and assigns (the
"Manufacturing Defect Indemnitees"), against any liability, damage, loss or
expense (including reasonable attorney's fees and expenses of litigation)
incurred by or imposed upon the Manufacturing Defect Indemnitees or any one of
them in connection with any claims, suits, actions, demands or judgment arising
out of any theory of manufacturing defect (including, but not limited to,
actions in the form of tort, warranty or strict liability) concerning such
Product.
14.3 BREACH OF WARRANTY. The party that sells a Product to the end user
under this Agreement shall indemnify, defend and hold harmless the other party
and its officers, employees and agents and their respective successors, heirs
and assigns (the "Breach of Warranty Indemnitees"), against any liability,
damage, loss or expense (including reasonable attorney's fees and expenses of
litigation) incurred by or imposed upon the Breach of Warranty Indemnitees or
any one of them in connection with any claims, suits, actions, demands or
judgment arising out of any theory of breach of warrant (including, but not
limited to, actions in the form of tort, warranty or strict liability)
concerning such Product.
14.4 LIMITATION. The indemnifications above shall not apply to any
liability, damage, loss or expense to the extent that it is directly
attributable to (i) the negligent activities, reckless misconduct or intentional
misconduct of the Indemnitees; or (ii) a claim that the manufacture, use or sale
of a Product infringes upon a patent or other intellectual property owned by a
third party.
14.5 ATTORNEYS. The indemnifying party agrees, at its own expense, to
provide attorneys reasonably acceptable to the indemnified party to defend
against any actions brought or filed against any party indemnified hereunder
with respect to the subject of indemnity contained herein, whether or not such
actions are rightfully brought.
14.6 PATENT, COPYRIGHT AND TRADEMARK INDEMNIFICATION. Subject to Section
14.7 below, Coherent agrees that Palomar has the right to defend, or at its
option to settle, and Palomar agrees, at its own expense, to defend or at its
option to settle, any claim, suit or proceeding brought against Coherent or its
customer on the issue of infringement of any patent, copyright or trademark by
the Products sold hereunder or the use thereof, subject to the limitations
hereinafter set forth. Palomar shall have sole control of any such action or
settlement negotiations, and Palomar agrees to pay, subject to the limitations
hereinafter set forth, any final judgment entered against Coherent or its
customer on such issue in any such suit or proceeding defended by Palomar. If
Palomar receives any damage award and/or attorneys' fees in any such claim, suit
or proceeding, it shall not be obligated to share any portion thereof with
Coherent. Palomar's obligation under this Section to indemnify, defend and hold
harmless Coherent shall not apply in the case of any Products or Palomar
Trademarks (i) manufactured to Coherent's design or modified by Coherent without
Palomar's permission (except in the situation where the modification did not
cause the Products to infringe the patent, copyright, trademark at issue); (ii)
used in combination with other technology or products not supplied by Palomar
(except in the situation where the combination did not cause the Products to
infringe the patent, copyright, trademark at issue); or (iii) not used pursuant
to Palomar's existing instructions. Coherent agrees that Palomar at its sole
option shall be relieved of the foregoing obligations unless Coherent or its
customer notifies Palomar promptly in writing of such claim, suit or proceeding
and gives Palomar authority to proceed as contemplated herein, and, at Palomar's
expense, gives Palomar proper and full information and assistance to settle
and/or defend any such claim, suit or proceeding for infringement of any patent,
copyright or trademark, or it is adjudicatively determined that the Products, or
any part thereof, infringe any patent, copyright or trademark, or it the sale or
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<PAGE>
use of the Products, or any part thereof, is, as a result, enjoined, then
Palomar may, at its option and expense: (i) procure for Coherent and its
customers the right under such patent, copyright or trademark to sell or use, as
appropriate, the Products or such part thereof; or (ii) replace the Products
with suitable non-infringing Products; (iii) suitably modify the Products; or
(iv) if the use of the Products, or part thereof, is prevented by injunction
during the first three years of this Agreement, remove the Products, or part
thereof, and pay Coherent an amount equal to $3.0 million multiplied by a
fraction, the numerator of which is thirty-six (36) minus the number of months
expired from the Effective Date as of the date of the injunction, and the
denominator is thirty-six (36). Palomar shall not be liable for any costs or
expenses incurred by Coherent without its prior written authorization.
14.7 ENTIRE LIABILITY. The foregoing provisions of this Section 14 state
the entire liability and obligations of Palomar and the exclusive remedy of
Coherent and its customers, with respect to any alleged infringement of patents,
copyrights, trademarks or other intellectual property rights by the Products or
any part thereof.
15. DEVELOPMENT PROJECTS
15.1 During the term of this Agreement, Coherent and Palomar shall
collaborate on the definition of Products to be developed hereunder. Palomar
agrees to use its reasonable best efforts to develop Products, and to share the
results of such development work with Coherent during the term of this
Agreement.
15.2 Palomar agrees to spend at least the following amounts (based on GAAP)
for the development of Products during the next three full years ending December
31:
Year 1: $5,000,000
Year 2: 10% of Palomar's gross revenues (after
deducting commissions paid to Coherent) in
Year 1 from Products developed by Palomar
and/or Coherent, and sold by Coherent.
Year 3: 10% of Palomar's gross revenues (after
deducting commissions paid to Coherent) in
Year 2 from Products developed by Palomar
and/or Coherent, and sold by Coherent.
15.3 The parties shall keep each other reasonably informed on the status of
their development efforts related to hair removal products. At least once per
quarter, each party shall prepare a written report and send it to the other
party summarizing the development work done relating to the Products during the
preceding quarter. In addition, Palomar's chief financial officer shall prepare
and deliver to Coherent a certificate on or before January 31 of each year,
certifying to the level of development expenditures by Palomar for the Products
for the preceding 12 months ending December 31.
15.4 Palomar shall use its reasonable best efforts to maintain in full
force and effect its Clinical Trial Agreement with Massachusetts General
Hospital during the term of this Agreement, and not to modify or amend the
Clinical Trial Agreement without Coherent's consent, which will not be
unreasonably withheld.
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16. MANUFACTURING RIGHTS
16.1 From time to time during the term of this Agreement, as Palomar
develops a prototype Product, it shall notify Coherent in writing and Coherent
shall have 30 days thereafter to notify Palomar in writing whether or not it is
interested in having an exclusive right to sell such Product. For purposes of
this provision, the term prototype Product shall be defined as a Product
delivered to a clinical investigator and tested on no less than three patients.
16.2 If Coherent notifies Palomar that it wishes to distribute the
prototype Product, such Product shall automatically be included in the
definition of "Distributed Products" and Palomar and Coherent shall meet to
discuss who shall manufacture the Product. Palomar may choose to (i) manufacture
the Product, in which case it shall pay Coherent a sales commission of *% of the
selling price (other terms, such as purchase minimums and prices shall be
negotiated at that time) or (ii) offer Coherent the right to manufacture the
Product, in which case, if Coherent decides to manufacture, Coherent shall pay
Palomar *% of the Gross Margin for such Product. For purposes of calculating the
Gross Margin, the fully burdened cost of sales (exclusive of royalties under the
Anderson Patent) shall be determined at the time of Palomar's election, and
shall not be revised thereafter. If the parties are unable to agree on terms for
manufacturing or selling future Products developed hereunder, Palomar may
appoint another company to distribute such Products on terms no more favorable
than those offered to Coherent under this Section 16.2, or sell any non-hair
removal Products directly. Palomar shall be prohibited from directly selling
hair removal products to physicians during the term of this Agreement.
16.3 In the event Palomar is unable or unwilling to manufacture any of the
Distributed Products for any reason, including Palomar's bankruptcy, Coherent
shall have the right to manufacture them, on the same terms as set forth in
Section 16.2. If Coherent acquires a license under this Section 16, it shall pay
a royalty to Palomar in the amount of *% of the Gross Margin (as hereinafter
defined) less out of pocket expenses incurred by Coherent to transfer
manufacturing and lost profits on sales to customers who cancel their order due
to the delay. Coherent shall not include any such reimbursed capitalized out of
pocket expenses or lost profits in such Gross Margin. For purposes of this
paragraph, "unable to manufacture" shall be defined as when the backlog for hair
removal products exceeds three months for a period of at least three months, so
long as the orders were within 10% of Coherent's Forecast during the
corresponding period, and provided that such backlog is not attributable to
failure by third parties to perform, including, without limitation, failure to
supply necessary parts.
16.4 If during the term of this Agreement, Coherent manufactures, sells or
otherwise distributes hair removal products that are competitive to any
Distributed Product, it shall pay Palomar a royalty of *% of the Net Revenues of
any such hair removal product sold during the first year of any such sales and
*% for such product sold in each successive year during the term of this
Agreement. These percentages shall be reduced by one-half in the event Palomar
defaults in its obligations to spend money to develop new cosmetic laser
products as set forth in Section 15. Coherent's royalty obligations under this
Section 16 shall survive the termination of this Agreement if it is terminated
by Palomar for cause, for a period of time equal to the remaining term of this
Agreement if it weren't terminated by Palomar and not otherwise extended by the
parties.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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<PAGE>
16.5 Palomar shall cooperate with Coherent in good faith for the purpose of
allowing Coherent to exercise its rights hereunder, including, without
limitation, providing Coherent with copies of all technical data, manufacturing
know-how, drawings and supplier information necessary to manufacture the
Products, all of which shall be subject to the Confidentiality Agreement
attached hereto as Exhibit F.
17. PATENT LICENSE GRANT.
17.1 On the terms and subject to the conditions set forth herein, Palomar
hereby grants to Coherent a non-exclusive, royalty-bearing sublicense (without
the right to sublicense others) under the Palomar Patents to make, have made,
use and sell Distributed Products and competitive Coherent products for which
royalties are paid to Palomar under Section 16.4 ("Coherent Products") in the
Territory during the License Term. For Distributed Products manufactured by
Palomar and sold by Coherent, Palomar shall be solely responsible for paying all
royalty obligations to MGH relating to the Anderson Patent that may arise as a
result of the manufacture, use or sale of Distributed Products during the
License Term. Licensed Products manufactured by Coherent shall bear a royalty of
* of Net Revenues. During the term of this Agreement, such royalty obligations
shall be fulfilled by payment to Palomar of the amounts set forth in Section 16.
17.2 All rights not expressly granted are reserved to Palomar. Nothing
herein shall be construed as granting Coherent, by implication, estoppel or
otherwise, including the first sale doctrine, any license or other right under
any patent or other intellectual property right of Palomar, except for the
licenses expressly granted in Section 17.
17.3 Upon termination of this Agreement, Palomar agrees to grant Coherent
any licenses required for Distributed Products distributed by Coherent pursuant
to this Agreement to any other patents it licenses or owns, on commercially
reasonable terms to be negotiated. The parties shall negotiate in good faith,
but no license shall be granted if the parties are unable to reach agreement on
reasonable terms.
17.4 In addition to the license granted under Section 17.1 above, from and
after the termination date of this Agreement, Palomar hereby grants Coherent a
non-exclusive, worldwide, royalty-bearing license in the License Field to make,
have made, use and sell Licensed Products that infringe the Anderson Patent. The
sublicense shall include the right to grant to the purchasers of Licensed
Products from Coherent and its Affiliates, the right to use such Licensed
Products in a method coming within the scope of the Anderson Patent. Coherent
shall have no right to grant further sublicenses to the Anderson Patent, except
that it shall be permitted to transfer its rights in connection with the sale of
its hair removal product line.
17.4.1 After termination of this Agreement, and in no event less than
three years, Coherent shall pay Palomar running royalties of
*% of Net Revenues so long as the Licensed Product, its
manufacture, use or sale is covered by a Valid Claim of the
Anderson Patent, until such time as Palomar licenses three
companies with sales of aesthetic laser products in excess of $20
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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<PAGE>
million per year at rates in excess of *%, at which time the
running royalty rate shall be adjusted to the average of such
higher prices. However, if Palomar licenses the Anderson Patent
at a rate less than the amount Coherent is then paying, Coherent
shall be entitled to such lower rate for sales occurring after
such lower rate is effective. The sublicense to the Anderson
Patent granted in this Section 17.4, and Coherent's royalty
obligations in connection therewith, shall survive termination of
the Agreement.
17.4.2 Royalties due shall be calculated as of the last day of each
month with respect to transactions made during that month and
within 30 days thereafter Coherent shall remit to Palomar full
payment of royalties due, accompanied by a detailed report of the
calculation thereof, Whenever conversion from any foreign
currency shall be required, such conversion shall be at the rate
of exchange thereafter published in the Wall Street Journal for
the business day closest to the end of the applicable Accounting
Period.
17.4.3 With each payment, Coherent shall deliver to Palomar a full and
accurate accounting to include at least the following information
to the extent necessary to determine royalties:
(a) Quantity of each Licensed Product sold or leased (by
country) by Coherent and its Affiliates;
(b) Total billing for each Licensed Product (by country);
(c) Quantities of each Licensed Product used by Coherent and its
Affiliates;
(d) Revenues from Services paid to Coherent and its Affiliates;
and
(e) Total royalties payable to Palomar.
17.4.4 Unless otherwise terminated as provided for in this Section 17,
the license to the Anderson Patent granted hereunder will
continue until the expiration of the Anderson Patent. Palomar has
the right to terminate this sublicense upon fifteen (15) days
prior written notice to Coherent in the event of any material
breach of the obligation to make royalty payments hereunder,
unless such breach is cured prior to the expiration of such
fifteen (15) day period. Upon termination of the sublicense
granted hereunder, Coherent shall pay Palomar all royalties due
or accrued on the Net Revenues up to and including the date of
termination. In the event of any termination, Coherent shall also
have the right to fill all existing orders for Licensed Products,
provided the royalties set forth herein are paid on such orders.
*Indicates that material has been omitted pursuant to a request for confidential
treatment, and separately filed with the SEC.
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17.5 Upon termination of this Agreement, Coherent agrees to grant Palomar
any licenses under any patents it licenses or owns to make, use, offer for sale
or sell any Licensed Products, on commercially reasonable terms to be
negotiated. The parties shall negotiate in good faith, but no license shall be
granted if the parties are unable to reach agreement on reasonable terms.
18. INTELLECTUAL PROPERTY NOTICES.
Coherent shall reproduce on all copies of any documentation or Confidential
Information, all copyright, trademark, confidentiality and other notices on the
original. Coherent shall reproduce Palomar's patent notices on Distributed
Products. Coherent shall place on all brochures, flyers, advertisements, all
other promotional, instructional or merchandising materials collateral to
Products sold by Coherent a notice stating that the Products are "Manufactured
and sold under patent license from Palomar Medical Technologies, Lexington, MA."
20. TERM AND TERMINATION
19.1 TERM. This Agreement shall commence on the date hereof and continue
for an initial period of three years, unless terminated earlier under the
provisions of this Section 19. At the end of each year, this Agreement shall
automatically be renewed for an additional one year period, unless either party
provides the other with written notice of its intention not to renew the
Agreement at least thirty (30) days prior to the renewal date.
19.2 TERMINATION FOR CAUSE. If either party defaults in the performance of
any provision of this Agreement, or violates the covenant of good faith and fair
dealing implied by law, then the non-defaulting party may give written notice to
the defaulting party that if the default is not cured within thirty (30) days
the Agreement will be terminated. If the non-defaulting party gives such notice
and the default is not cured during the thirty-day period, or reasonable action
isn't taken to cure any default that can not be cured during the thirty-day
period, then the Agreement shall automatically terminate at the end of that
period.
19.3 TERMINATION FOR INSOLVENCY. This Agreement shall terminate, at the
election of the other party, (i) upon the institution by or against either party
of insolvency, receivership or bankruptcy proceedings or any other proceedings
for the settlement of debts, (ii) upon either party making an assignment for the
benefit of creditors, or (iii) upon either party dissolution or ceasing to do
business.
19.4 FULFILLMENT OF ORDERS UPON TERMINATION. Upon termination of this
Agreement for other than Coherent's breach, Palomar shall continue to fulfill
all orders accepted by Palomar prior to the date of termination, and Coherent's
payment obligations to Palomar hereunder for such orders shall continue.
19.5 RETURN OF MATERIALS. All trademarks, trade names, patents, copyrights,
designs, drawings, formulas or other data, photographs, samples, literature, and
sales aids of every kind provided by Palomar shall remain the property of
Palomar. Within thirty (30) days after the termination of this Agreement,
Coherent shall prepare all such items in its possession for shipment, as Palomar
may direct, at Palomar's expense.
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19.6 LIMITATION ON LIABILITY. In the event of termination by either party
in accordance with any of the provisions of this Agreement, neither party shall
be liable to the other, because of such termination, for compensation,
reimbursement or damages on account of the loss of prospective profits or
anticipated sales or on account of expenditures, inventory, investments, leases
or commitments in connection with the business or goodwill of Palomar or
Coherent. Termination shall not, however, relieve either party of obligations
incurred prior to the termination.
19.7 SURVIVAL OF CERTAIN TERMS. The provisions of Sections 1, 2.3, 3.2.11,
3.3, 3.8, 3.9, 4.12, 5.5, 5.8, 5.9, 7, 8, 9, 10, 11, 12, 13, 14, 16.4, 17.2,
17.3, 17.4, 17.5, 18, 19, and 20 shall survive the termination of this Agreement
for any reason. All other rights and obligations of the parties shall cease upon
termination of this Agreement. It is the intent of the parties that the licenses
of intellectual propoerty as contemplated by Section 16 and Section 17 by
Palomar shall be considered licenses of intellectual property as contemplated by
Section 325(n) of the Bankruptcy Code (11 U.S.C. section 356(n)).
20. GENERAL PROVISIONS
20.1 CONFIDENTIALITY. The parties agree to enter into a Confidentiality
Agreement in substantially the form attached hereto as Exhibit F.
20.2 DISPUTE RESOLUTION. For any and all claims, disputes, or controversies
arising under, out of, or in connection with this Agreement, (other than those
relating to patent rights, which shall be brought in the United States District
Court for the District of Massachusetts), which the parties shall be unable to
resolve within sixty (60) days, the party raising such dispute shall promptly
advise the other party of such claim, dispute, or controversy in a writing which
describes in reasonable detail the nature of such dispute. By not later than
five (5) business days after the recipient has received such notice of dispute,
each party shall have selected for itself a representative who shall have the
authority to bind such party and shall additionally have advised the other party
in writing of the name and title of such representative. By not later than ten
(10) business days after the date of such notice of dispute, such
representatives shall agree upon a third party which is in the business of
providing Alternative Dispute Resolution (ADR) services (hereinafter, "ADR
Provider") and shall schedule a date with such ADR Provider to engage in ADR.
Thereafter, the representatives of the parties shall engage in good faith in an
ADR process under the auspices of the selected ADR Provider, and each party
shall pay fifty percent (50%) of the ADR expenses. If within the aforesaid
thirty (30) business days after the date of the notice of dispute the
representatives of the parties have not been able to agree upon an ADR Provider
and schedule a date to engage in ADR, or if they have not been able to resolve
the dispute within thirty (30) business days after the termination of ADR, the
parties shall have the rights to pursue any other remedies legally available to
resolve such dispute in either the courts of the Commonwealth of Massachusetts
or in the United States District Court for the District of Massachusetts, to
whose jurisdiction for such purposes the parties hereby irrevocably consent. Any
written evidence originally in a language other than English shall be submitted
in English translation accompanied by the original or true copy thereof.
20.3 INSURANCE. Each party will obtain comprehensive general liability
insurance in amounts reasonable to ensure the performance of their obligations
hereunder, and Coherent will
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cause Palomar to be named as an additional insured. Each party
shall provide the other with written evidence of such insurance upon request.
Each party shall maintain such comprehensive general liability insurance beyond
the expiration or termination of this Agreement during (i) the period that any
product, process or service, relating to, or developed pursuant to, this
Agreement is being commercially distributed or sold (other than for the purpose
of obtaining regulatory approvals) and (ii) a reasonable period after the period
referred to above which in no event shall be less than five (5) years.
20.4 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter herein and merges
all prior discussions between them. No modification of or amendment to this
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing signed by the party to be charged.
20.5 NOTICES. Any notice required or permitted by this Agreement shall be
in writing and shall be sent by prepaid express courier, addressed to the other
party at the address shown at the beginning of this Agreement or at such other
address for which such party gives notice hereunder. Such notice shall be deemed
to have been given three (3) days after deposit with such courier service.
20.6 FORCE MAJEURE. Nonperformance of either party shall be excused to the
extent that performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, failure of suppliers, or any other
reason where failure to perform is beyond the control and not caused by the
negligence of the non-performing party.
20.7 NONASSIGNABILITY AND BINDING EFFECT. A mutually agreed consideration
for the parties' entering into this Agreement is the reputation, business
standing, and goodwill already honored and enjoyed by them, and accordingly, the
parties agree that, except as otherwise provided herein, their rights and
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other party, except that
either party shall be permitted to assign its rights and obligations under the
Agreement, without the other's consent, in connection with the sale of the
company, or substantially all of its assets relating to its cosmetic laser
business. Subject to the foregoing sentence, this Agreement shall be binding
upon and inure to the benefit of the parties hereto, their successors and
assigns.
20.8 SEVERABILITY. If any provision of this Agreement or any part thereof
shall be found to be invalid, illegal or otherwise unenforceable by a court of
competent jurisdiction, such provision shall to such extent be deemed null and
void and severed from this Agreement, and the remainder of the Agreement shall
remain in full force and effect.
20.9 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, and the relations of the parties shall be
determined in accordance with, the substantive laws of the Commonwealth of
Massachusetts without regard to its principles of conflicts of laws.
20.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
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20.11 AUDIT RIGHTS. Each party shall keep accurate records and books of
account sufficient to permit verification of the other party's obligations under
this Agreement. The parties shall have the right, at their own expense, and
under reasonable conditions of time and place, to have an independent auditor,
reasonably acceptable to the other party, audit from time to time all records of
the other party relating to any of such party's obligations under this
Agreement. In the event any such audit discloses any breach of this Agreement by
such party or its employees or agents, the audited party shall, in addition to
such other rights and remedies as may be available to the auditing party as the
result of such breach, pay the full cost of such audit to the auditing party.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the day and year first above written.
COHERENT, INC. PALOMAR MEDICAL TECHNOLOGIES, INC.
By:/s/ Bernard Couillard By:/s/ Louis P. Valente
---------------------- ---------------------
Title: Chief Executive Officer Title: Chief Executive Officer
Date: November 17, 1997 Date: November 17, 1997
<PAGE>
2
EXHIBIT A
PALOMAR PATENTS
Issued Patents:
Patent Number Title Issue Date
- ------------------- -------------- ----------
5,595,568
Patent Applications:
Serial Number Title Filing Date
- ---------------------- ------------ ---------------
US 08/314,082 METHOD OF HAIR REMOVAL 9/28/94
PCT/US95/12275 METHOD OF HAIR REMOVAL 9/25/95
US PERMANENT HAIR REMOVAL 2/1/95
USING OPTICAL PULSES
<PAGE>
EXHIBIT B
WIRE INSTRUCTIONS
Bank: Citibank
ABA Routing No.: 021000089
Account Name: Dean Witter Reynolds, Inc.
Account Number: 40611172
For Further Credit to: Palomar Medical Technologies, Inc.
Account No.: 593-109782
<PAGE>
EXHIBIT C
FORM OF WARRANT
<PAGE>
EXHIBIT D
TERMS AND CONDITIONS OF PURCHASE
<PAGE>
EXHIBIT E
PRODUCT WARRANTY
<PAGE>
EXHIBIT F
CONFIDENTIALITY AGREEMENT
LOAN AGREEMENT
This Loan Agreement is made and entered into this 20th day of January, 1998
by and between Coherent, Inc., a Delaware corporation ("Coherent"), and Palomar
Medical Technologies, Inc., a Delaware corporation ("PMTI").
Subject to the terms and conditions contained herein, the parties agree as
follows:
1. LOAN. At Coherent's sole election and discretion, Coherent shall loan
PMTI from time to time amounts to be agreed upon between them, to help finance
PMTI's working capital requirements (the "Loans"), which loans shall be
evidenced by one or more promissory notes in the form set forth in Exhibit A.
The parties agree that the initial loan shall be $_________. The promissory
notes, together with any other promissory notes issued by PMTI to Coherent that
recite that they are secured by this Agreement, are collectively referred to
herein as the "Notes".
1.5. PAYMENT. In accordance with the Sales Agency, Development and
License Agreement entered into between parties on November 17, 1997 (the
"Agreement"), Coherent will be using its reasonable best efforts to collect
PMTI's accounts receivable that are Collateral for this note. As such
accounts receivable are collected by Coherent, the amounts due PMTI under
the Agreement shall be credited against the outstanding principal balance
of the promissory note. Any unpaid principal shall be due and payable six
months after the last due date of the accounts receivable set forth on
Schedule A to each promissory note. Should the principal not be paid in a
timely manner, interest shall accrue on the outstanding principal balance
at the lesser of 1 1/2 % per month or the highest rate permitted by law.
2. SECURITY INTEREST. PMTI hereby creates and grants to Coherent a security
interest in the collateral described in Section 3 hereof to secure the payment
and performance of the following obligations of PMTI to Coherent:
(a) Payment of the indebtedness evidenced by the Notes and any and all
modifications, extensions or renewals thereof,
(b) Performance and discharge of each and every obligation, covenant,
condition and agreement of PMTI herein contained.
3. COLLATERAL. The collateral in which the security interest is created
(the "Collateral") shall consist of those PMTI's accounts receivable identified
on Schedule A to each Note where Coherent has acted as PMTI's sales agent
pursuant to the Agreement, together with all proceeds thereto.
4. RECORDING. PMTI will execute, deliver and cause to be recorded or filed
in the manner and place required by law, any document or instrument that may be
requested by Coherent, including financing statements or other instruments of
similar character, to perfect and protect the lien of this Security Agreement
upon any and all of the Collateral.
1
<PAGE>
5. EVENTS OF DEFAULT. An Event of Default (as hereinafter defined) of any
Note issued under this Agreement shall cause all Notes to be immediately due and
payable. As used herein, an "Event of Default" shall be any of the following:
(a) The failure of PMTI to punctually and properly pay the
indebtedness evidenced by the Notes in accordance with their terms.
(b) The failure of PMTI punctually and properly to observe, keep or
perform any covenant, agreement or condition required to be observed, kept
or performed by this Security Agreement.
6. RIGHTS OF SECURED PARTY. Coherent shall have all the rights as a secured
party under the laws of California, including the right to sell any part of the
Collateral at a public or private sale or bid as a purchaser of the Collateral.
7. APPLICATION OF PROCEEDS OF SALE. The proceeds of the sale of any
Collateral sold pursuant to Section 6 hereof shall be applied as follows:
FIRST: To the payment of costs and expenses of such sale, including the
fees and out-of-pocket expenses of counsel employed in connection therewith, and
the payment of all other costs and expenses incurred by Coherent and in
connection with the administration and enforcement of this Agreement;
SECOND: To the payment and discharge in full of all obligations
described in Section 2 hereof including, without limitation, the unpaid
principal and interest and other sums then owing in respect of the Notes; and
THIRD: The balance (if any) of such proceeds shall be paid to PMTI, its
successors and assigns, or as a court of competent jurisdiction may direct.
8. COVENANTS OF PMTI. PMTI covenants and warrants that, unless compliance
is waived by Coherent in writing:
(a) PMTI will not further encumber, sell, contract for sale or
otherwise dispose of any of the Collateral until such time as the security
interest created by this Agreement has terminated.
(b) PMTI will take all actions necessary or appropriate to preserve
and defend its title to the Collateral and the validity of the lien created
by this Agreement.
(c) PMTI will promptly notify Coherent in writing of any event which
materially and adversely affects the ability of PMTI or Coherent to dispose
of the Collateral, or the rights or remedies of Coherent in relation
thereto, including, but not limited to, the levy of any legal process
against the Collateral.
(d) PMTI will, without expense to Coherent, do, execute, acknowledge
and deliver, or cause to be done, executed, acknowledged and delivered, all
such further acts and instruments as Coherent shall from time to time
require in order to facilitate the performance of this Agreement.
9. MISCELLANEOUS.
(a) No failure or delay by Coherent in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, and no single or
partial exercise
2
<PAGE>
thereof shall preclude any other of further exercise of the exercise of any
other right, power or privilege.
(b) Should any one or more of the provisions hereof be determined to
be illegal or unenforceable, all other provisions hereof shall be give
effect separately therefrom and shall not be affected thereby.
(c) The security interest created by this Security Agreement shall
fully terminate immediately upon the full and complete satisfaction and
discharge of all of the Obligations set forth in paragraph 3 hereof. Upon
such termination, Coherent shall execute and deliver to PMTI such
termination statements and other instruments of release of such security
interest as PMTI may reasonably require.
(d) All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if
delivered or mailed first class, postage prepaid, to the parties at the
following addresses (or such other address as shall be given in writing by
either party to the other):
To Coherent:
Coherent, Inc.
5100 Patrick Henry Drive
Santa Clara, CA 95054
Attn: General Counsel
Facsimile No.: (408) 970-9998
To PMTI:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Attn: General Counsel
Facsimile No.: (781) 676-7377
(e) This Loan Agreement and security interest created hereby shall
inure to the benefit of the Coherent, its successor and assigns and any
transferee of any of the Obligations secured hereby, and shall be binding
upon PMTI and its successors and heirs.
(f) The laws of the State of California shall govern the validity of
this Agreement, the construction of its terms and the interpretation of the
rights and duties of the parties.
The foregoing Agreement is hereby executed as of the date first above
written.
COHERENT, INC.
a Delaware corporation
By:
Title:
PALOMAR MEDICAL TECHNOLOGIES, INC.
a Delaware corporation
By: /s/ Louis P. Valente
--------------------------------
Title: President and Chief
Executive Officer
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$2,210,638 Santa Clara, California
January 20, 1998
FOR VALUE RECEIVED, the undersigned, Palomar Medical Technologies, Inc., a
Delaware corporation ("PMTI"), promises to pay to Coherent, Inc., a Delaware
corporation ("Coherent"), or order, the principal sum of Two Million, Two
Hundred Ten Thousand Six Hundred Thirty-Eight Dollars ($2,210,638.00). No
interest shall accrue on this promissory note, except as set forth below.
In accordance with the Sales Agency, Development and License Agreement
entered into between parties on November 17, 1997 (the "Agreement"), Coherent
will be using its reasonable best efforts to collect PMTI's accounts receivable
that collateralize this note. As such accounts receivable are collected, the
amounts due PMTI under the Agreement shall be credited against the outstanding
principal balance of this promissory note. Any unpaid principal shall be due and
payable on July 26, 1998 (which shall be a date six months after the latest due
date of the accounts receivable set forth on Schedule A). Should the principal
not be paid in a timely manner, interest shall accrue on the outstanding
principal balance at the lesser of 1 1/2 % per month or the highest rate
permitted by law. This promissory note shall be immediately due and payable in
the Event of Default (as defined in the Agreement).
PMTI shall reimburse Coherent for all costs and expenses incurred by it and
shall pay the reasonable fees and disbursements of counsel to Coherent in
connection with the enforcement of Coherent's rights hereunder.
No amendment, modification or waiver of any provision of this Note nor
consent to any departure by PMTI therefrom shall be effective unless the same
shall be in writing and signed by Coherent and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given.
PMTI hereby waives any requirement of notice of dishonor, notice of protest
and protest.
This Note shall be deemed to be a contract made under the laws of the State
of California and shall be construed in accordance with the laws of said State.
This Note shall be binding upon PMTI and its successors and assigns and the
terms hereof shall inure to the benefit of Coherent and its successors and
assigns, including subsequent holders hereof. The holding of any provision of
this Note to be invalid or unenforceable by a court of competent jurisdiction
shall not affect any other provisions and the other provisions of this Note
shall remain in full force and effect.
This note is secured with certain collateral pursuant to the terms of an
agreement between the undersigned and Coherent, Inc. dated January __, 1998. A
description of the accounts receivables constituting the collateral for this
promissory note is set forth on the attached Schedule A.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of December 29, 1997
by and among Palomar Medical Technologies, Inc., a Delaware corporation, with
headquarters located at 45 Hartwell Avenue, Lexington, Massachusetts 02173 (the
"Company"), and Clearwater Fund IV, LLC, a Delaware limited liability company
with offices at 611 Druid Road East, Suite 200, Clearwater, Florida, 34616 (the
"Buyer").
WHEREAS:
A. The Buyer wishes to purchase, in the amounts and upon the terms and
conditions stated in this Agreement, shares of the Company's common stock, par
value $.01 per share ("PMTI Common Stock"), and shares of Nexar Technologies,
Inc. common stock, par value $.01 per share ("Nexar Common Stock"); and
B. The Company and the Buyer are executing and delivering this Agreement
with respect to the issuance of PMTI Common Stock in reliance upon the exemption
from securities registration afforded by Sections 4(2) and 4(6) under the
Securities Act of 1933, as amended (the "1933 Act") and/or Rule 506 promulgated
under Regulation D ("Regulation D") by the United States Securities and Exchange
Commission (the "Commission"); and
C. As further inducement to the Buyer to enter into this Agreement, the
parties hereto desire that the Company provide certain registration rights to
the Buyer upon the terms and conditions stated in this Agreement.
NOW THEREFORE, the Company and the Buyer hereby agree as follows:
1. PURCHASE AND SALE OF PMTI COMMON STOCK AND NEXAR COMMON STOCK.
-------------------------------------------------------------
a. Purchase of PMTI Common Stock. The Company shall issue and sell to the
Buyer and the Buyer shall purchase 300,000 shares of PMTI Common Stock for an
aggregate purchase price of $75,000.
b. Purchase of Nexar Common Stock. The Company shall sell to the Buyer and
the Buyer shall purchase 700,000 shares of Nexar Common Stock for an aggregate
purchase price of $1,675,000.
c. Form of Payment. The Buyer shall pay the purchase price for the shares
of PMTI Common Stock and the shares of Nexar Common Stock (the "Purchase Price")
by wire transfer of immediately available United States Dollars to the Company
on the Closing Date (as defined below). The Company shall promptly deliver to
the Buyer (a) a stock certificate, duly executed on behalf of the Company,
representing 300,000 shares of PMTI Common Stock (the "PMTI Stock Certificate"),
(b) a stock certificate representing 700,000 shares of Nexar Common Stock, duly
endorsed for transfer (the "Nexar Stock Certificate") and (c) a copy of the
currently effective registration statement on Form S-1 filed with the
Commission, as amended and supplemented to date, registering the resale of all
shares of Nexar Common Stock acquired pursuant to this Agreement (the "Nexar
Registration Documentation").
<PAGE>
d. Closing Date. The date and time of the issuance and sale of the shares
of PMTI Common Stock, the sale of the shares of Nexar Common Stock and the
delivery of the Nexar Registration Documentation shall be 5:00 p.m. Eastern
Standard Time on December 30, 1997 or such other date and time as may be
mutually agreed to by the parties hereto (the "Closing Date"). The Company shall
deliver the PMTI Stock Certificate as soon as reasonably practicable after the
Closing Date, provided, however, that in no event shall the delivery of said
PMTI Stock Certificate occur later than 30 days after the Closing Date.
2. REGISTRATION RIGHTS
-------------------
a. Best Efforts.
(i) PMTI agrees to use its commercially reasonable best efforts to
amend or supplement its Registration Statement on Form S-3 filed with the
Commission on December 12, 1997 so as to cause as quickly as practicable
the registration of the resale by the Buyer of all shares of PMTI Common
Stock issuable pursuant to this Agreement or otherwise currently owned by
the Buyer.
(ii) PMTI hereby represents and warrants that a registration statement
has been filed with the Commission registering the resale of all shares of
Nexar Common Stock transferred pursuant to this Agreement, and that said
registration statement is currently in effect.
b. Damage Shares. If either (A) the amended or supplemented Registration
Statement which PMTI is required to use its best efforts to file pursuant to
Section 2(a) of this Agreement (the "PMTI Registration Statement") has not been
filed on or before the expiration of 30 days from the date hereof; or (B) said
PMTI Registration Statement has not been declared effective by the Commission on
or before three months from the date hereof, or if, after the PMTI Registration
Statement has been declared effective by the Commission, the Buyer cannot make
sales pursuant to the PMTI Registration Statement by reason of stop order,
PMTI's failure to update the Registration Statement in accordance with the rules
and regulations of the Commission or otherwise, or if the PMTI Common Stock is
not listed or included for quotation on the National Market of the National
Association of Securities Dealers Automated Quotation System ("NASDAQ-NM"), the
New York Stock Exchange (the "NYSE"), the American Stock Exchange (the "AMEX"),
or the NASDAQ SmallCap Market ("NASDAQ SmallCap") then, as partial relief for
the damages to the Buyer by reason of any such delay in or reduction of its
ability to sell its shares of PMTI Common Stock (which remedy shall not be
exclusive of any other remedies available at law or in equity) PMTI shall issue
to the Buyer such additional shares of PMTI Common Stock (the "Damage Shares")
<PAGE>
equal to 10,000 multiplied by the sum of: (A) the number of months (prorated for
partial months) after the expiration of 30 days from the date hereof, prior to
the date the PMTI Registration Statement is so filed by PMTI; (B) the number of
months (prorated for partial months) after three months from the date hereof,
and prior to the date the PMTI Registration Statement is declared effective by
the Commission; (C) the number of months (prorated for partial months) that
sales cannot be made pursuant to the PMTI Registration Statement (by reason of
stop order, PMTI's failure to update the PMTI Registration Statement or
otherwise) after the PMTI Registration Statement has been declared effective;
and (D) the number of months (prorated for partial months) that the PMTI Common
Stock is not listed or included for quotation on the NASDAQ-NM, NYSE, AMEX, or
NASDAQ SmallCap after the PMTI Registration Statement has been declared
effective; provided, however, that in no event shall the number of Damage Shares
issued pursuant to this Section 2 exceed 120,000.
Notwithstanding anything to the contrary set forth in this Section 2, PMTI
shall not be required to keep the PMTI Registration Statement effective for a
period greater than six months; provided sales can be made pursuant thereto
during such six month period.
3. BUYER'S REPRESENTATIONS AND WARRANTIES
--------------------------------------
The Buyer represents and warrants to the Company that:
a. Non-Distribution. The Buyer is purchasing the shares of PMTI Common
Stock for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof except pursuant to
sales registered under the 1933 Act.
b. Accredited Investor Status. The Buyer is an "accredited investor"
as that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. The Buyer understands that the shares of
PMTI Common Stock are being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States federal and
state securities laws and that the Company is relying upon the truth and
accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein in order to determine the availability of such exemptions and
the eligibility of the Buyer to acquire the shares of PMTI Common Stock.
d. Information. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of
the aforementioned shares of PMTI Common Stock which have been requested by
the Buyer. The Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries. The Buyer understands that its
investment in the PMTI Common Stock involves a high degree of risk. The
Buyer has sought such accounting, legal and tax advice as it has considered
necessary to an informed investment decision with respect to its
acquisition of such securities.
<PAGE>
e. Governmental Review. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the aforementioned
shares of PMTI Common Stock or the fairness or suitability of the
investment in the aforementioned shares of PMTI Common Stock, nor have such
authorities passed upon or endorsed the merits of the offering of the
aforementioned shares of PMTI Common Stock.
f. Transfer or Resale. The Buyer understands that (i) except as
provided in Section 2 of this Agreement the PMTI Common Stock and the
Damage Shares have not been and are not being registered under the 1933 Act
or any state securities laws, and may not be transferred unless (a)
subsequently registered thereunder, or (b) the Buyer shall have delivered
to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the securities to be
sold or transferred may be sold or transferred pursuant to an exemption
from such registration; (ii) any sale of such securities made in reliance
on Rule 144 promulgated under the 1933 Act may be made only in accordance
with the terms of said Rule and further, if said Rule is not applicable,
any resale of such securities under circumstances in which the seller (or
the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the Commission thereunder; and (iii) neither the Company nor
any other person is under any obligation to register such securities (other
than pursuant to Section 2 of this Agreement) under the 1933 Act or any
state securities laws or to comply with the terms and conditions of any
exemption thereunder.
g. Legends. The Buyer understands that unless, and until such time as
the PMTI Common Stock and the Damage Shares have been registered under the
1933 Act as contemplated by Section 2 of this Agreement, the certificates
representing such securities shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS,
OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE COMPANY THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.
ANY SUCH SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY WITH OR
BE EXEMPT FROM APPLICABLE STATE SECURITIES LAWS.
<PAGE>
The legend set forth above as it appears on the PMTI Stock Certificate and on
any certificate representing the Damage Shares shall be removed and the Company
shall issue a certificate without such legend to the holder of such shares of
PMTI Common Stock or the Damage Shares upon which it is stamped, if, unless
otherwise required by federal or state securities laws, (a) the sale of such
shares of PMTI Common Stock or the Damage Shares is registered under the 1933
Act, or (b) in connection with a sale transaction, such holder provides the
Company with an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, to the effect that a public sale or transfer of the
shares of PMTI Common Stock or the Damage Shares may be made without
registration under the 1933 Act, or (c) such holder provides the Company with
reasonable assurances that the shares of PMTI Common Stock or Damage Shares can
be sold pursuant to Rule 144 under the 1933 Act (or a successor rule thereto)
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold.
h. Authorization; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Buyer and is a
valid and binding agreement of the Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally.
i. Residency. The Buyer is a resident of the United States.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to the Buyer that:
a. Organization and Qualification. The Company and each of its
subsidiaries are corporations duly organized and existing in good standing
under the laws of the jurisdiction in which they are incorporated, except,
in the case of any such subsidiaries, as would not have a Material Adverse
Effect (as defined below), and have the requisite corporate power to own
their properties and to carry on their business as now being conducted. The
Company and each of its subsidiaries are duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "Material Adverse Effect" means any material adverse effect on the
operations, properties or financial condition of the Company and its
subsidiaries taken as a whole.
<PAGE>
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and
to issue the aforementioned shares of PMTI Common Stock and the Damage
Shares and to sell the aforementioned shares of Nexar Common Stock in
accordance with the terms hereof and thereof, (ii) the execution and
delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by the Company's
Board of Directors and no further consent or authorization of the Company,
its Board of Directors, or its stockholders is required, (iii) this
Agreement has been duly executed and delivered by the Company, and (iv)
this Agreement constitutes the valid and binding obligations of the Company
enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies or
by other equitable principles of general application.
c. Issuance of Securities. The aforementioned shares of PMTI Common
Stock are duly authorized, validly issued and non-assessable, and free from
all taxes, liens and charges with respect to the issue thereof. To the best
knowledge of the Company, the aforementioned shares of Nexar Common Stock
are duly authorized, validly issued, fully paid and non-assessable, and
free from all taxes, liens and charges with respect to the issue thereof.
The Damage Shares, if any, will be duly authorized, validly issued, fully
paid and non-assessable, and free from all taxes, liens and changes with
respect to the issue thereof.
d. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby will not (i) result in a violation of the
Articles of Incorporation or Bylaws, as amended, as in effect on the date
hereof or (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give
to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the
Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations) applicable to the Company or any of
its subsidiaries or by which any property or asset of the Company or any of
its subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as
would not, individually or in the aggregate, have a Material Adverse
Effect). The business of the Company or its subsidiaries is not being
conducted, and shall not be conducted through the Registration Period (as
defined herein), in violation of any law, ordinance, regulation of any
governmental entity, except for possible violations which either singly or
in the aggregate do not have a Material Adverse Effect. The Company is not
required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for
it to execute, deliver or perform any of its obligations under this
Agreement in accordance with the terms hereof, except as required under the
1933 Act and any applicable state securities laws which have been or shall
be duly made.
<PAGE>
e. Commission Documents, Financial Statements. The Company has filed
all reports, schedules, forms, statements and other documents required to
be filed by it with the Commission pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of
the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents (other
than exhibits) incorporated by reference therein, being hereinafter
referred to herein as the "SEC Documents"). As of their respective dates,
the SEC Documents complied in all material respects with the requirements
of the 1934 Act and the rules and regulations of the Commission promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents
(as amended) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. As of their respective dates, the
financial statements of the Company included in the SEC Documents complied
as to form in all material respects with applicable accounting requirements
and the published rules and regulations of the Commission with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material
respects the financial position of the Company as of the dates thereof and
the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company
to the Buyer and referred to in Section 3(d) of this Agreement contains any
untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading.
f. Absence of Certain Changes. Since September 30, 1997 there has been
no material adverse change and no material adverse development in the
business, properties, operations, financial condition, results of
operations or prospects of the Company.
g. Absence of Litigation. Except as set forth in the SEC Documents for
the quarter ended September 30, 1997, there is no action, suit, proceeding,
inquiry or investigation before or by any court, public board or body
pending or, to the knowledge of the Company, threatened against or
affecting the Company, wherein an unfavorable decision, ruling or finding
would have a Material Adverse Effect or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company
to perform its obligations under, this Agreement or any of the documents
contemplated herein.
5. COVENANTS.
---------
a. Best Efforts. The parties shall use their commercially reasonable
best efforts timely to satisfy each of the conditions described in Sections
7 and 8 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to the
aforementioned shares of PMTI Common Stock, if required, and, if filed to
provide a copy thereof to the Buyer promptly after such filing.
<PAGE>
c. Reporting Status. Until the earlier of (i) the date as of which the
Buyer may sell all of the aforementioned shares of PMTI Common Stock and
the Damage Shares without restriction pursuant to Rule 144(k) promulgated
under the 1933 Act (or successor thereto), or (ii) the date on which the
Buyer has sold all the aforementioned shares of PMTI Common Stock and the
Damage Shares (the "Registration Period"), the Company shall file all
reports required to be filed with the Commission pursuant to the 1934 Act,
and the Company shall not terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale of
the aforementioned shares of PMTI Common Stock for the Company's internal
working capital purposes and shall not, directly or indirectly, use such
proceeds for any loan to or investment in any other corporation,
partnership, enterprise or other person except as the Company's board of
directors deems necessary in order to develop and commercialize the
Company's technology.
e. Reservation of Shares. The Company shall at times have authorized,
and reserved for the purpose of issuance, a sufficient number of shares of
PMTI Common Stock and, when required, to provide for the issuance of the
Damage Shares.
f. Listing. The Company shall promptly secure the listing of the
aforementioned shares of PMTI Common Stock and, if and when issued, the
Damage Shares upon each national securities exchange or automated quotation
system, if any, upon which shares of PMTI Common Stock are then listed
(subject to official notice of issuance) (the "Stock Exchange") and shall
maintain, so long as any other shares of PMTI Common Stock shall be so
listed, such listing of all shares of PMTI Common Stock from time to time
issuable under the terms of this Agreement.
6. TRANSFER AGENT INSTRUCTIONS.
---------------------------
The Company shall instruct its transfer agent to issue certificates,
registered in the name of the Buyer or its nominee, for the Damage Shares, if
any, in such amounts as the Company may be required to issue pursuant to this
Agreement. Prior to registration of the aforementioned shares of PMTI Common
Stock and the Damage Shares pursuant to an effective registration statement, all
such certificates shall bear the restrictive legend specified in Section 3(g) of
this Agreement. Within two (2) business days after the date on which the PMTI
Registration Statement is declared effective or in the case of the Damage
Shares, any registration statement or amended registration statement covering
the resale of such shares is declared effective, the Company shall deliver to
its transfer agent instructions, accompanied by any reasonably required opinion
of counsel, that permit sales of securities in a timely fashion that complies
with the securities settlement procedures for regular way market transactions
and any prospectus delivery requirements. The Company warrants that no
instruction other than such instructions referred to in this Section 6, and stop
transfer instructions to give effect to Section 3(f) hereof, in the case of the
shares of PMTI Common Stock and the Damage Shares, prior to registration of the
<PAGE>
shares of PMTI Common Stock and the Damage Shares under the 1933 Act, will be
given by the Company to its transfer agent and that the aforementioned shares of
PMTI Common Stock and the Damage Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement. Nothing in this Section shall affect in any way the Buyer's
obligations and agreement to comply with all applicable securities laws upon
resale of the aforementioned shares of PMTI Common Stock or the Damage Shares.
If the Buyer provides the Company with an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, that registration of a
resale by the Buyer of any of the shares of PMTI Common Stock and the Damage
Shares is not required under the 1933 Act, the Company shall permit the
transfer, and promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by the Buyer.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ASSIGN.
---------------------------------------------------------
The obligation of the Company hereunder to sell and assign PMTI Common
Stock and Nexar Common Stock is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
a. The parties shall have executed this Agreement and delivered the
same to each other.
b. The Buyer shall have delivered the Purchase Price to the Company by
wire transfer of immediately available funds pursuant to the wiring
instructions provided by the Company.
c. The representations and warranties of each Buyer shall be true and
correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations. and
warranties that speak as of a specific date), and the Buyer shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Buyer at or prior to the
Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
------------------------------------------------
The obligation of the Buyer to purchase the aforementioned shares of PMTI
Common Stock and Nexar Common Stock is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for the Buyer's sole benefit and may be waived by the Buyer at
any time in its sole discretion:
a. The parties shall have executed this Agreement and delivered the
same to each other.
b. Until the Closing Date, the PMTI Common Stock shall be authorized
for quotation on the NASDAQ-NM, the NYSE, the AMEX or the NASDAQ SmallCap
and trading in the Common Stock on such quotation system or exchange, as
the case may be, shall not have been suspended by the Commission or
otherwise.
<PAGE>
c. The representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the
Closing Date. The Buyer shall have received a certificate, executed by the
Chief Executive Officer of the Company, dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably
requested by the Buyer.
d. The Company shall have filed the appropriate documents necessary to
secure the prompt listing of the aforementioned shares of PMTI Common Stock
upon the Stock Exchange and shall have delivered to the Buyer appropriate
documentation evidencing the fact that such filing has occurred.
e. The Company shall have executed and delivered the Nexar Stock
Certificate.
f. The Company shall have delivered the Nexar Registration
Documentation.
9. GOVERNING LAW: MISCELLANEOUS.
-----------------------------
a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of New York without regard to the
principles of conflict of laws.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party. In the event any signature
page is delivered by facsimile transmission, the party using such means of
delivery shall cause four (4) additional original executed signature pages
to be physically delivered to the other party within five (5) days of the
execution and delivery hereof.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability
shall not affect the validity or enforceability of the remainder of this
Agreement or the validity or enforceability of this Agreement in any other
jurisdiction.
<PAGE>
e. Entire Agreement: Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with
respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to
such matters. No provision of this Agreement may be waived or amended other
than by an instrument in writing signed by the party to be charged with
enforcement.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by mail or delivered personally or by
courier and shall be effective five days after being placed in the mail, if
mailed, certified or registered, return receipt requested, or upon receipt,
if delivered personally or by courier or by telefacsimile, in each case
addressed to a party. The addresses for such communications shall be:
If to the Company:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, Massachusetts 02173
Telephone: (781) 676-7300
Telecopy: (781) 676-7330
Attention: Chief Executive Officer
With copy to: General Counsel and Director of Finance
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, Massachusetts 02173
Telephone: (781) 676-7300
Telecopy: (781) 676-7330
If to the Buyer, at the address on the signature page.
With copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 10022
Telephone: (212) 940-8873
Telecopy: (212) 940-8776
Attention: Todd J. Emmerman, Esq.
Each party shall provide notice to the other party of any change in address.
<PAGE>
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns.
Neither the Company nor the Buyer shall assign this Agreement or any rights
or obligations hereunder without the prior written consent of the other
(which consent may be withheld for any reason in the sole discretion of the
party from whom consent is sought). Notwithstanding the foregoing, a Buyer
may assign its rights hereunder to any of its "affiliates," as that term is
defined under the 1934 Act, without the consent of the Company, provided,
however, that any such assignment shall not release such Buyer of its
obligations hereunder unless such obligations are assumed by such affiliate
and the Company has consented to such assignment and assumption.
h. Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
i. Survival. The representations and warranties of the Company and the
Buyer contained in Sections 3, 4(d), 4(e) and 4(f) and the agreements and
covenants set forth in Sections 5, 6, 9(g), 9(h), 9(k) and 9(l), and this
subsection shall survive the closing.
k. Publicity. The Company and the Buyer shall have the right to
approve before issuance any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however,
that the Company shall be entitled, without the prior approval of the
Buyer, to make any press release with respect to such transactions as is
required by applicable law and regulations (although the Buyer shall be
consulted by the Company in connection with any such press release prior to
its release and shall be provided with a copy thereof).
l. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
m. Termination. In the event that the transactions contemplated hereby
shall not have occurred within five (5) days after the date hereof, Buyer
shall have the right to terminate this Agreement at any time thereafter.
(Signature page follows)
<PAGE>
IN WITNESS WHEREOF, the Buyer and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-----------------------------
Name: Louis P. Valente
Its: Chief Executive Officer
and President
CLEARWATER FUND IV LLC
By: /s/ Hans F. Heye
-----------------------------
Name: Hans F. Heye
Its: Managing Member
Address: c/o Clearwater Funds
611 Druid Road East
Suite 200
Clearwater, FL 33756
Attn: Gerard P. Melia
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of December 31, 1997 (this
"Agreement"), by and between PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware
corporation, with headquarters located at 45 Hartwell Avenue, Lexington,
Massachusetts 02173 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, outstanding shares of Common Stock, $.01 par value
(the "Nexar Common Stock"), of Nexar Technologies, Inc., a Delaware corporation
("Nexar"), held by the Company, upon the terms and subject to the conditions of
this Agreement; and
WHEREAS, in connection herewith the Company and the Buyer have executed and
delivered, one to the other, an Exchange Agreement, dated as of the date hereof
(the "Exchange Agreement");
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
(a) PURCHASE OF SHARES. The Buyer hereby agrees to purchase from the
Company on the Closing Date the number of shares (the "Nexar Shares") of Nexar
Common Stock set forth on the signature page of this Agreement for the purchase
price set forth on the signature page of this Agreement.
(b) DELIVERIES TO ESCROW AGENT AND FORM OF PAYMENT. Promptly after the
execution and delivery of this Agreement by the parties hereto, but in no event
later than the Closing Date, the Buyer shall deposit the purchase price for the
Nexar Shares by delivering good funds in United States Dollars to the escrow
agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached
hereto as ANNEX I (the "Joint Escrow Instructions") against delivery of the
Nexar Shares to the Buyer at the closing. Promptly after the execution and
delivery of this Agreement by the parties hereto, but in no event later than the
Closing Date, the Company shall deliver a certificate for the Nexar Shares
(which will include 39,264 shares of Common Stock which are not included in the
Nexar Shares and which are not being sold or transferred to the Buyer pursuant
to this Agreement) to the Escrow Agent against delivery of the purchase price
for the Nexar Shares to the Escrow Agent. By signing this Agreement, the Buyer
and the Company each agrees to all of the terms and conditions of, and becomes a
party to, the Joint Escrow Instructions, all of the provisions of which are
incorporated herein by this reference as if set forth herein in full.
(c) METHOD OF PAYMENT. Deposit of the purchase price for the Nexar Shares
by the Buyer with the Escrow Agent shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
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<PAGE>
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch
Attorney Escrow Account
Reference: Advantage/Palomar
(d) CLOSING DELIVERIES. At the closing, the Nexar Shares shall be held by
the Escrow Agent until the Escrow Release Date (as defined herein) and an amount
equal to the purchase price to be paid by the Buyer for the Nexar Shares shall
be held by the Escrow Agent until the Escrow Release Date.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is acquiring the rights under
Section 8 of this Agreement (the "Price Guarantee Rights") for its own account
for investment only and not with a view towards the public sale or distribution
thereof;
(b) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that term
is defined in Rule 501 of the General Rules and Regulations under the Securities
Act of 1933, as amended (the "1933 Act"), by reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of the Price
Guarantee Rights by the Buyer shall be made pursuant to registration of the
Price Guarantee Rights under the 1933 Act or pursuant to an exemption from
registration;
(d) COMPANY RELIANCE. The Buyer understands that the Company is agreeing
with the Buyer concerning the Price Guarantee Rights in reliance on exemptions
from the registration requirements of the 1933 Act and exemptions from state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to receive the Price Guarantee Rights;
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the Price Guarantee Rights which have
been requested by the Buyer; the Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and have received
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996, (2) Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, June 30 and September 30, 1997, (3) Current Report on Form 8-K dated
December 9, 1997, and (4) Amendment No. 1 to the Company's Registration
Statement on Form S-3 (Registration No. 333-42129) (the "Company Registration
Statement") filed with the SEC on December 18, 1997 (collectively, the "SEC
Reports"); the Buyer has had the opportunity to obtain and to review the
Prospectus, dated April 15, 1997 as supplemented to the date of this Agreement,
of Nexar relating to the Nexar Shares (the "Nexar Prospectus"); and the Buyer
understands that the Price Guarantee Rights and its investment in the Nexar
Shares involve a high degree of risk;
(f) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Nexar Shares or the
Price Guarantee Rights;
2
<PAGE>
(g) AGREEMENT. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally; and
(h) FORWARD-LOOKING INFORMATION. The Buyer acknowledges that, except for
the historical material contained herein or in the SEC Reports, the matters
disclosed herein and therein regarding the Company and its subsidiaries are
forward-looking statements under the federal securities laws that involve risks
and uncertainties, including, but not limited to, product demand and market
acceptance risks, the effect of economic conditions, the impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, the results of
financing efforts, actual purchases under agreements, the effect of the
Company's accounting policies, and other risks detailed in the SEC Reports.
Actual results could differ materially from those estimated or anticipated in
these forward-looking statements. Without limiting the generality of the
foregoing, the Buyer acknowledges the Risk Factors set forth in the Company
Registration Statement.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with, the
Buyer that:
(a) ORGANIZATION AND AUTHORITY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority (i) to own, lease
and operate its properties and to carry on its business as now being conducted,
and (ii) to execute, deliver and perform its obligations under this Agreement
and the other agreements to be executed and delivered by the Company in
connection herewith, and to consummate the transactions contemplated hereby. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in all jurisdictions wherein such qualification is necessary and where
failure so to qualify could have a material adverse effect on the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company.
(b) CONCERNING THE NEXAR SHARES. The Nexar Shares have been duly authorized
by Nexar and are fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder. The Nexar Shares
are owned beneficially and of record by the Company, free and clear of all
liens, pledges, charges, equities, encumbrances, claims and rights of others of
any nature whatsoever and, upon transfer of the Nexar Shares to the Buyer
pursuant to this Agreement, the Buyer will acquire good and marketable title to
such shares, free and clear of all liens, pledges, charges, equities,
encumbrances, claims and rights of others of any nature whatsoever. There are no
preemptive rights or similar rights of any stockholder of the Company, as such,
to acquire any of the Nexar Shares or the Price Guarantee Rights.
(c) AGREEMENT. This Agreement has been duly and validly authorized,
executed and delivered by the Company and this Agreement is a valid and binding
agreement of the Company enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally.
3
<PAGE>
(d) NON-CONTRAVENTION. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated by
this Agreement do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
or any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
(e) APPROVALS. No authorization, approval or consent of, or filing with,
any court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required to be
obtained or made by the Company for (x) the execution, delivery and performance
by the Company of this Agreement, (y) the transfer and delivery of the Nexar
Shares to the Buyer pursuant to this Agreement and (z) the incurrence or
performance by the Company of its obligations with respect to the Price
Guarantee Rights, other than the requirements of any applicable blue sky laws.
(f) INFORMATION PROVIDED. The information provided by or on behalf of the
Company to the Buyer in connection with the transactions contemplated by this
Agreement (other than the Nexar Prospectus), including, without limitation, the
information referred to in Section 2(e) of this Agreement, does not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they are made, not misleading.
(g) ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company and its subsidiaries taken as a whole, except as
disclosed in the SEC Reports.
(h) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC Reports,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, condition (financial or
other), results of operations or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by this Agreement or any of
the documents contemplated hereby or which would adversely affect the validity
or enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents.
(i) PROPERTIES. The Company and its subsidiaries have good title to all
property real and personal (tangible and intangible) and other assets owned by
them, free and clear of all security interests, charges, mortgages, liens or
other encumbrances, except such as are described in the SEC Reports or such as
do not materially interfere with the use of such property made, or proposed to
be made, by the Company or its subsidiaries. The leases, licenses or other
contracts or instruments under which the Company and its subsidiaries lease,
hold or are entitled to use any property, real or personal, are valid,
subsisting and enforceable with only such exceptions as do not materially
interfere with the use of such property made, or proposed to be made, by the
Company or its subsidiaries. Neither the Company nor any of its subsidiaries has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties.
4
<PAGE>
(j) LABOR RELATIONS. No material labor problem exists or, to the knowledge
of the Company, is imminent with respect to any of the employees of the Company
or any of its subsidiaries.
(k) SEC FILINGS. The Company has timely filed all required forms, reports
and other documents with the SEC since December 31, 1996. All of such forms,
reports and other documents complied, when filed, in all material respects, with
all applicable requirements of the 1933 Act and the Securities Exchange Act of
1934, as amended (the "1934 Act").
(l) CONCERNING THE NEXAR SHARES. The Nexar Shares may be sold by the
Company to the Buyer pursuant to the Registration Statement of which the Nexar
Prospectus forms a part and upon acquisition of the Nexar Shares from the
Company pursuant to this Agreement, the Buyer may resell such shares without
registration under the 1933 Act and without restriction on the volume or manner
of sale thereof so long as the Buyer is not an "affiliate" (as such term is
defined for purposes of the 1933 Act) of Nexar, subject to applicable
limitations on trading in securities while in possession of material non-public
information concerning Nexar.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Buyer acknowledges that the Price Guarantee
Rights have not been and are not being registered under the provisions of the
1933 Act and may not be transferred unless (A) subsequently registered
thereunder for resale or (B) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Price Guarantee Rights or portion thereof to be
sold or transferred may be sold or transferred without such registration; (2)
any sale of the Price Guarantee Rights made in reliance on Rule 144 promulgated
under the 1933 Act may be made only in accordance with the terms of said Rule
and further, if said Rule is not applicable, any resale of the Price Guarantee
Rights or any portion thereof under circumstances in which the seller, or the
person through whom the sale is made, may be deemed to be an underwriter, as
that term is used in the 1933 Act, may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC thereunder;
and (3) neither the Company nor any other person is under any obligation to
register the Price Guarantee Rights under the 1933 Act or to comply with the
terms and conditions of any exemption thereunder (other than pursuant to Section
4(d) hereof).
(b) REPORTING STATUS. So long as the Company shall have any obligation
under this Agreement with respect to the Price Guarantee Rights, the Company
shall file all reports required to be filed with the SEC pursuant to Section 13
or 15(d) of the 1934 Act, and the Company shall not, prior to the date which is
two years after the Closing Date, terminate its status as an issuer required to
file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would permit such termination.
(c) USE OF PROCEEDS. Neither the Company nor any subsidiary of the Company
owns or has any present intention of acquiring any "margin stock" as defined in
Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve
System ("margin stock"). The proceeds of sale of the Nexar Shares will be used
for general working capital purposes and in the operation of the Company's
business. None of such proceeds will be used, directly or indirectly (1) to make
any loan to or investment in any other person or (2) for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any margin stock or
for the purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on
5
<PAGE>
its behalf has taken or will take any action which might cause this Agreement or
the transactions contemplated hereby to violate Regulation G, Regulation T or
any other regulation of the Board of Governors of the Federal Reserve System or
to violate the 1934 Act, in each case as in effect now or as the same may
hereafter be in effect.
(d) BLUE SKY LAWS. On or before the Closing Date, the Company shall take
such action as shall be necessary to qualify, or to obtain an exemption for, the
Price Guarantee Rights under such of the securities or "blue sky" laws of
jurisdictions in the United States as shall be applicable to the sale of the
Price Guarantee Rights to the Buyer pursuant to this Agreement. The Company
shall furnish copies of all filings, applications, orders and grants or
confirmations of exemptions relating to such securities or "blue sky" laws on or
before the Closing Date.
(e) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall
pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby. For purposes of this provision, invoices of the Buyer's legal counsel
in the form customarily given by such counsel to the Buyer shall be satisfactory
detail and evidence of the same.
(f) BEST EFFORTS. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to complete the
closing of the transactions contemplated by this Agreement set forth in Section
6 or 7, as the case may be, of this Agreement on or before the Closing Date and
to satisfy each of the other party's conditions to escrow release in Section
5(b)(2) or 5(b)(3), as the case may be, on or before the applicable date.
5. CLOSING DATE; ESCROW RELEASE.
(a) CLOSING DATE. The date of the sale of the Nexar Shares (the "Closing
Date") shall be January 8, 1998. Such closing shall occur on the Closing Date at
the offices of the Escrow Agent. The Buyer and the Company agree that, upon
completion of the closing on the Closing Date, the Nexar Shares shall be deemed
to be sold by the Company and purchased by the Buyer and only delivery of the
Nexar Shares to the Buyer upon release from escrow by the Escrow Agent and
delivery of the purchase price to the Company upon release from escrow by the
Escrow Agent shall not have occurred.
(b) ESCROW RELEASE. (1) The Buyer hereby instructs the Escrow Agent to
submit to Nexar or its transfer agent the certificate for the Nexar Shares
promptly after the Closing Date to register the transfer thereof to the Buyer
and to dispatch the balance of the shares of Common Stock represented by such
certificate to the Company.
(2) The release by the Escrow Agent of the Nexar Shares to the Buyer
shall be subject to the following conditions precedent, any or all of which may
be waived by the Company:
(A) on or before January 15, 1998, the Buyer and the custodian
(the "Custodian") identified in the Custody Agreement, dated as of the
date hereof in the form attached hereto as ANNEX II (the "Custody
Agreement") shall have executed and delivered, one to the other, the
Custody Agreement and the Buyer shall have furnished a copy thereof to
the Company;
(B) on or before January 15, 1998, the closing under the Exchange
Agreement shall have occurred and the Buyer shall have executed and
delivered to the Company a general release and waiver in the form
specified in the Exchange Agreement;
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(C) on or before January 29, 1998, the Nexar Shares shall have
been transferred of record to, and registered in the name of, the
Buyer, without restrictive legend; and
(D) on or before January 29, 1998, a certificate for the 39,264
shares of Common Stock included in the certificate for the Nexar
Shares shall have been returned to the Company.
(3) The release by the Escrow Agent to the Company of the purchase
price for the Nexar Shares shall be subject to satisfaction of the following
conditions precedent any or all of which may be waived by the Buyer:
(A) the representations and warranties of the Company in this
Agreement made as of the date of this Agreement and as of the Closing
Date shall have been true and correct in all material respects as of
the date of this Agreement and as of the Closing Date;
(B) the Company shall have performed on or before the Escrow
Release Date all covenants and agreements of the Company required to
be performed on or before the Escrow Release Date.
(C) on or before January 15, 1998, a notification by the Buyer to
the Attorney General of the Commonwealth of Massachusetts pursuant to
G.L. c. 271, Sec. 49(d) of the laws of the Commonwealth of
Massachusetts making the provisions of G.L. c. 271, Sec. 49(a)
inapplicable to the transactions contemplated by this Agreement shall
have been given to and accepted by the Attorney General of the
Commonwealth of Massachusetts;
(D) on or before January 15, 1998, the Buyer shall have received
a certificate, dated the Closing Date, of the Secretary of the Company
certifying (1) the certificate of incorporation and by-laws of the
Company as in effect on the Closing Date, (2) all resolutions of the
Board of Directors (and committees thereof) of the Company relating to
this Agreement and the transactions contemplated hereby and (3) such
other matters as reasonably requested by the Buyer;
(E) on or before January 29, 1998, the Nexar Shares shall have
been transferred of record to, and registered in the name of, the
Buyer, without restrictive legend; and
(F) on or before January 15, 1998, the Buyer shall have received
an opinion of counsel for the Company, dated the Closing Date, in
form, scope and substance reasonably satisfactory to the Buyer, to the
effect set forth in ANNEX III attached hereto.
(G) on or before January 15, 1998, the Buyer shall have received
a certificate, dated the Closing Date, of the Chief Executive Officer
or the Chief Financial Officer of the Company confirming the matters
set forth in Section 7(b).
(4) The date on which all of the conditions precedent in Sections
5(b)(2) and 5(b)(3) are satisfied or waived is referred to herein as the "Escrow
Release Date."
(5) On the Escrow Release Date, the Company and the Buyer shall
instruct the Escrow Agent that the Escrow Release Date has occurred.
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(6) If the Escrow Release Date does not occur on or before January 29,
1998, then the Escrow Agent shall release to the Company all shares of Nexar
Common Stock in the possession of the Escrow Agent and shall release an amount
equal to the purchase price for the Nexar Shares to the Buyer. If the Nexar
Shares have been issued in the name of the Buyer, the Buyer shall cooperate in
causing such shares to be re-issued in the Company's name.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The Buyer understands that the Company's obligation to sell the Nexar
Shares to the Buyer pursuant to this Agreement on the Closing Date is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Company in its
sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Escrow Agent of good funds as payment in
full of an amount equal to the purchase price for the Nexar Shares in accordance
with Section 1(c) hereof; and
(c) The accuracy on the Closing Date of the representations and warranties
of the Buyer contained in this Agreement as if made on the Closing Date and the
performance by the Buyer on or before the Closing Date of all covenants and
agreements of the Buyer required to be performed on or before the Closing Date.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligations to purchase and pay
for the Nexar Shares pursuant to this Agreement on the Closing Date are
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) Delivery by the Company to the Escrow Agent of the Nexar Shares in
accordance with this Agreement; and
(b) The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date and
the performance by the Company on or before the Closing Date of all covenants
and agreements of the Company required by this Agreement and all other documents
and instruments relating hereto to be performed on or before the Closing Date.
8. PRICE GUARANTEE RIGHTS.
(a) CUSTODY DEPOSIT. If the Nexar Shares are released by the Escrow Agent
to the Buyer on the Escrow Release Date in accordance with the Joint Escrow
Instructions, immediately following such release on the Escrow Release Date, the
Buyer shall deposit 400,000 of the Nexar Shares with the Custodian pursuant to
the Custody Agreement. Such deposit shall be made solely for purposes of
administering the provisions of this Section 8 with respect to the Price
Guarantee Rights and shall not in any way limit or affect the ownership of the
Nexar Shares by the Buyer and shall not in any manner create any lien, pledge,
charge, equity, encumbrance, claim or right of the Company of any nature
whatsoever in or with respect to the Nexar Shares. For purposes of this Section
8, the Nexar Shares shall be deemed to include any
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additional shares of Nexar Common Stock distributed to or received by the
Custodian as a stock dividend, stock split or other distribution on the Nexar
Shares held by the Custodian.
(b) RELEASE FROM CUSTODY. The Buyer shall have the right from time to time
to direct the Custodian to release from custody the Nexar Shares by notice to
the Custodian in the form attached as Exhibit A to the Custody Agreement (each,
a "Release Notice"); PROVIDED, HOWEVER, that the aggregate Release Price (as
defined herein) of all Nexar Shares released from custody by the Buyer during
any period of 30 consecutive days may not exceed $666,667.00; and PROVIDED
FURTHER, HOWEVER, that the Buyer shall be required to direct the Custodian to
release all of the Nexar Shares to the Buyer on or before the date which is two
years after the Closing Date. The Buyer shall furnish to the Company a copy of
each Release Notice given by the Buyer to the Custodian within one Business Day
after the Buyer gives such Release Notice to the Custodian. A Release Notice
given by the Buyer to the Custodian shall be deemed for all purposes to be in
proper form unless the Company notifies the Buyer in writing within three
Business Days after such Release Notice has been given (which notice shall
specify all defects in such Release Notice), and any Release Notice containing
any such defect shall nonetheless be effective on the date given if the Buyer
promptly undertakes to correct all such defects. No such claim of error shall
limit or delay the buyer's right to release of the Nexar Shares to which such
Release Notice relates. Any Nexar Shares as to which the Buyer has not given a
Release Notice on or before the date which is two years after the Closing Date
shall be automatically released on the date which is two years after the Closing
Date (the "Automatic Release") and the Redemption Price for such shares shall be
calculated as of such date.
(C) RELEASE PRICE. For purposes of computing the amount of the Price
Guarantee Rights, a Release Price shall be determined for each Nexar Share
released pursuant to a Release Notice or the Automatic Release. As used herein,
the following terms shall have the following meanings:
"Market Price" of any security on any date means the closing bid price
of such security on such date on the Nasdaq National Market or such other
securities exchange or other market on which such security is listed for trading
which constitutes the principal securities market for such security, as reported
by Bloomberg, L.P. (subject to equitable adjustments from time to time on terms
reasonably acceptable to the Buyer and the Company for (1) stock splits, (2)
stock dividends, (3) combinations, (4) capital reorganizations, (5) issuance to
all holders of Nexar Common Stock rights or warrants to purchase shares of Nexar
Common Stock, (6) the distribution by Nexar to all holders of Nexar Common Stock
of evidences of indebtedness of Nexar or cash (other than regular quarterly cash
dividends), (7) repurchases of shares of Nexar Common Stock in one or more
transactions which, individually or in the aggregate, result in the purchase of
more than ten percent of the Nexar Common Stock outstanding and (8) similar
events relating to the Nexar Common Stock, in each such case which occur, or
with respect to which "ex-" trading of the Nexar Common Stock begins during a
period of five consecutive Trading Days used for determining the Release Price
of any Nexar Shares).
"Release Date" means any date on which a Release Notice is given by
the Buyer pursuant to the Custody Agreement and the date of the Automatic
Release, if any.
"Release Percentage" means, with respect to any Release Date, the
applicable percentage set forth opposite such date below:
DATE RELEASE PERCENTAGE
Closing Date through 30th day thereafter 100%
31st through 60th day after Closing Date 95%
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61st through 90th day after Closing Date 90%
91st day after Closing Date and thereafter 85%
"Release Price" means, for any Release Date, the product of (x) the
arithmetic average of the Market Price of the Nexar Common Stock for the five
consecutive Trading Days ending on the Trading Day prior to such Release Date
TIMES (y) the Release Percentage applicable to such Release Date.
"Trading Day" means a day on whichever of (x) the national securities
exchange or (y) the Nasdaq National Market which at the time constitutes the
principal securities market for the Common Stock is open for general trading.
(d) PAYMENT OF PRICE GUARANTEE RIGHTS. If after release of all of the Nexar
Shares by the Custodian under the Custody Agreement the ("Final Release Date"),
the aggregate Release Price for all of the Nexar Shares shall be less than
$2,000,000.00 then the Company shall pay to the Buyer as and when required by
this Agreement an amount equal to the amount by which $2,000,000.00 exceeds the
aggregate Release Price for all of the Nexar Shares. The amount, if any, payable
by the Company to the Buyer pursuant to this Section 8(d) shall be paid by wire
transfer in immediately available funds on the date which is two years after the
Closing Date, to such account as shall be specified for such purpose by notice
from the Buyer to the Company. Any amount due under this Section 8(d) which is
not paid when due shall accrue interest at the rate of 14% per annum until paid.
9. MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
(b) This Agreement may be executed in counterparts and by the parties
hereto on separate counterparts, all of which together shall constitute one and
the same instrument. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such party.
Although this Agreement is dated as of the date first set forth above, the
actual date of execution and delivery of this Agreement by each party is the
date set forth below such party's signature on the signature page hereof. Any
reference in this Agreement or in any of the documents executed and delivered by
the parties hereto in connection herewith to the date of execution and delivery
of this Agreement shall be deemed a reference to the later of such dates set
forth below each party's respective signature on the signature page hereof.
(c) The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(e) This Agreement may be amended only by an instrument in writing signed
by the party to be charged with enforcement.
(f) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings
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between the parties, shall not operate as a waiver thereof or an amendment
hereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or exercise of any other right or
power.
(g) Any notices required or permitted to be given under the terms of this
Agreement shall be sent by mail or delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective five days after being placed in the mail, if
mailed, or upon receipt, if delivered personally or by courier, in the case of
the Company addressed to the Company at its address shown in the introductory
paragraph of this Agreement, Attention: Director of Finance (telephone line
facsimile transmission number (781) 676-7330) or, in the case of the Buyer, at
its address shown on the signature page of this Agreement, with a copy to
Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue,
Washington 98004-4332 (telephone line facsimile transmission number (425)
462-4645) or such other address as a party shall have provided by notice to the
other party in accordance with this provision.
(h) Prior to the Closing Date, the Buyer shall have the right to assign its
rights and obligations under this Agreement with respect to the purchase of all
or any portion of the Nexar Shares, provided any such assignee, by written
instrument duly executed by such assignee, assumes all obligations of the Buyer
hereunder with respect to the purchase of the portion of the Nexar Shares so
assigned and makes the same representations and warranties with respect thereto
as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of
any further obligations, responsibilities and liabilities with respect to the
purchase of all or the portion of the Nexar Shares the obligation for the
purchase of which has been so assigned. Any transfer of Nexar Shares by the
Buyer of rights under this Agreement after the Closing Date shall be made in
accordance with Section 4(a).
(i) The respective representations, warranties, covenants and agreements of
the Buyer and the Company contained in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall survive the delivery of
payment for the Preferred Shares and shall remain in full force and effect
regardless of any investigation made by or on behalf of them or any person
controlling or advising any of them.
(j) This Agreement and its Annexes set forth the entire agreement between
the parties hereto with respect to the subject matter hereof and supersede all
prior agreements and understandings, whether written or oral, with respect
thereto.
(k) The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto by their respective officers thereunto duly authorized as of the date
first set forth above.
NUMBER OF NEXAR SHARES: 500,000
PURCHASE PRICE: $2,000,000.00
ADVANTAGE FUND LIMITED
By: /s/ A.P. de Groot
---------------------
A.P. de Groot
President
Address:
c/o CITCO
Kaya Flamboyan 9
Curatao, Netherlands Antilles
Facsimile No.: 011-599-97322008
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Joseph P. Caruso
-------------------------------
Title: Chief Financial Officer
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT, dated as of December 31, 1997, by and between
PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware corporation, with headquarters
located at 45 Hartwell Avenue, Lexington, Massachusetts 02173 (the "Company"),
and ADVANTAGE FUND LIMITED a British Virgin Islands corporation, with
administrative offices located at c/o CITCO, Kaya Flamboyan 9, Curatao,
Netherlands Antilles (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and Genesee Fund Limited, a British Virgin Islands
corporation ("GFL") have executed and delivered, one to the other, a
Subscription Agreement, dated as of September 26, 1996 (the "Subscription
Agreement"), pursuant to which the Company issued and sold to GFL, and GFL
purchased from the Company 10,000 shares of Series G Convertible Preferred Stock
(the "Series G Preferred Stock") of the Company, of which 2,684 shares (the
"Series G Preferred Shares") are issued and outstanding and held by the Buyer;
WHEREAS, pursuant to the Securities Purchase Agreement, dated as of
December 31, 1996, by and between Palomar Electronics Corporation, a Delaware
corporation, the Company and the Buyer, the Company sold to the Buyer and the
Buyer purchased from the Company 200,000 shares (the "Outstanding Nexar Shares")
of Common Stock, $.01 par value (the "Nexar Common Stock"), of Nexar
Technologies, Inc., a Delaware corporation ("Nexar") and in connection therewith
the Company and the Buyer executed and delivered, one to the other, an Option
Agreement, dated as of December 31, 1996 (the "Option Agreement"), pursuant to
which, among other things, the Company granted to the Buyer the right, upon the
terms and subject to the conditions of the Option Agreement, to exchange the
Outstanding Nexar Shares for shares of Common Stock, $.01 par value (the "Common
Stock") of the Company;
WHEREAS, the Company and the Buyer wish to provide the Buyer the right to
exchange the Series G Preferred Shares for shares of Common Stock upon the terms
and subject to the conditions of this Agreement;
WHEREAS, disputes have arisen regarding the exercise by the Buyer of its
rights under the Option Agreement and the performance by the Company of its
obligations under the Option Agreement and the Buyer and the Company wish to
resolve such disputes as provided in this Agreement; and
WHEREAS, the Company and the Buyer have executed and delivered one to the
other a Stock Purchase Agreement, dated as of the date hereof (the "Stock
Purchase Agreement") pursuant to which the Buyer is purchasing, upon the terms
and subject to the conditions of the Stock Purchase Agreement, shares of Nexar
Common Stock owned by the Company;
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
(a) ACCREDITED INVESTOR. The Buyer is an oaccredited investoro as that term
is defined in Rule 501 of the General Rules and Regulations under the Securities
Act of 1933, as amended (the "1933 Act") by reason of Rule 501(a)(3);
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(b) REOFFERS AND RESALES. All subsequent offers and sales by the Buyer of
the shares of Common Stock issuable upon exchange of the Series G Preferred
Shares pursuant to this Agreement (the "Common Shares") shall be made pursuant
to registration of such Common Shares under the 1933 Act or pursuant to an
exemption from registration;
(c) COMPANY RELIANCE. The Buyer understands that the Common Shares are
being offered to it in reliance on the exemption from the registration
requirements of the 1933 Act provided by Section 3(a)(9) of the 1933 Act and may
also be offered in reliance on Regulation D under the 1933 Act ("Regulation D"}
and exemptions from state securities laws, including exemptions available by
reason of satisfying the requirements of Regulation D, and that the Company is
relying upon the truth and accuracy of, and the Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings of
the Buyer set forth herein in order to determine the availability of such
exemptions;
(d) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and its Subsidiaries and materials relating to the offer of the
Common Shares which have been requested by the Buyer; the Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received satisfactory answers to any such inquiries. Without
limiting the generality of the foregoing, the Buyer has had the opportunity to
obtain and to review the Company's (1) Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996, (2) Quarterly Reports on Form 10-Q for the
fiscal quarters ended March 31, June 30 and September 30, 1997, (3) Current
Report on Form 8-K dated December 9, 1997, and (4) Amendment No. 2 to the
Company's Registration Statement on Form S-3 (Registration No. 333-42129) (the
"Company Registration Statement") filed with the Securities and Exchange
Commission (the "SEC") on January 9, 1998 (collectively, the "SEC Reports"); and
the Buyer understands that its investment in the Common Shares involves a high
degree of risk;
(e) ABSENCE OF APPROVALS. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Common Shares; and
(f) AGREEMENT. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
(g) The Buyer acknowledges that, except for the historical material
contained herein or in the SEC Reports, the matters disclosed herein and therein
are forward-looking statements under the federal securities laws that involve
risks and uncertainties, including, but not limited to, product demand and
market acceptance risks, the effect of economic conditions, the impact of
competitive products and pricing, product development, commercialization and
technological difficulties, capacity and supply constraints or difficulties, the
results of financing efforts, actual purchases under agreements, the effect of
the Company's accounting policies, and other risks detailed in the SEC Reports.
Actual results could differ materially from those estimated or anticipated in
these forward-looking statements. Without limiting the generality of the
foregoing, the Buyer acknowledges the Risk Factors set forth in the Company
Registration Statement.
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2. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with, the
Buyer that:
(a) ORGANIZATION AND AUTHORITY. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to (i) own, lease
and operate its properties and to carry on its business as now being conducted,
and (ii) to execute, deliver and perform its obligations under this Agreement
and the other agreements to be executed and delivered by the Company in
connection herewith, and to consummate the transactions contemplated hereby. The
Company is duly qualified to do business as a foreign corporation and is in good
standing in all jurisdictions wherein such qualification is necessary and where
failure so to qualify could have a material adverse effect on the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company.
(b) CONCERNING THE COMMON SHARES. The Common Shares have been duly
authorized and, when issued in exchange for the Series G Preferred Shares in
accordance with this Agreement, will be duly and validly issued, fully paid and
non-assessable and will not subject the holder thereof to personal liability by
reason of being such holder. There are no preemptive rights of any stockholder
of the Company, as such, to acquire any of the Common Shares. The Common Stock
has been duly listed for trading on the Nasdaq SmallCap Market ("Nasdaq") and is
currently listed for trading thereon and (1) the Company has not been notified
since December 31, 1994 by Nasdaq of any failure or potential failure to meet
the criteria for continued listing and trading on Nasdaq and (2) no suspension
of trading in the Common Stock is in effect. The transactions contemplated by
this Agreement will not be subject to the rules adopted by Nasdaq which require
stockholder approval of certain transactions, including issuances of common
stock below the lower of book value or market price (the "Nasdaq Stockholder
Approval Rule").
(c) EXCHANGE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT. This Agreement
has been duly and validly authorized, executed and delivered by the Company and
this Agreement is the valid and binding agreement of the Company enforceable in
accordance with its terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium and other similar laws
affecting the enforcement of creditors' rights generally. The Subscription
Agreement and the Registration Rights Agreement, dated as of September 26, 1996,
by and between the Company and the Buyer (the "Registration Rights Agreement"),
are in full force and effect and are valid and binding agreements of the Company
enforceable in accordance with their respective terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
(d) NON-CONTRAVENTION. The execution and delivery of this
Agreement by the Company and the issuance of the Common Shares and the
consummation by the Company of the other transactions contemplated by this
Agreement, do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
or any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
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(e) APPROVALS. No authorization, approval or consent of, or filing with,
any court, governmental body, regulatory agency, self-regulatory organization,
or stock exchange or market or the stockholders of the Company is required to be
obtained or made by the Company for the issuance of the Common Shares upon
exchange of the Series G Preferred Shares pursuant to this Agreement, other than
the requirements of any applicable blue sky laws.
(f) INFORMATION PROVIDED. The information provided by or on behalf of the
Company to the Buyer, including, without limitation, the information referred to
in Section 2(e) of this Agreement, does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading.
(g) ABSENCE OF CERTAIN CHANGES. Since December 31, 1996, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company or any of its subsidiaries, except as disclosed in the
SEC Reports.
(h) ABSENCE OF CERTAIN PROCEEDINGS. Except as disclosed in the SEC Reports,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company or any
of its subsidiaries, threatened against or affecting the Company or any of its
subsidiaries, wherein an unfavorable decision, ruling or finding would have a
material adverse effect on the properties, business, condition (financial or
other), results of operations or prospects of the Company and its subsidiaries
taken as a whole or the transactions contemplated by this Agreement or any of
the documents contemplated hereby or which would adversely affect the validity
or enforceability of, or the authority or ability of the Company to perform its
obligations under, this Agreement or any of such other documents.
(i) PROPERTIES. The Company and its subsidiaries have good title to all
property real and personal (tangible and intangible) and other assets owned by
them, free and clear of all security interests, charges, mortgages, liens or
other encumbrances, except such as are described in the SEC Reports or such as
do not materially interfere with the use of such property made, or proposed to
be made, by the Company or its subsidiaries. The leases, licenses or other
contracts or instruments under which the Company and its subsidiaries lease,
hold or are entitled to use any property, real or personal, are valid,
subsisting and enforceable with only such exceptions as do not materially
interfere with the use of such property made, or proposed to be made, by the
Company or its subsidiaries. Neither the Company nor any of its subsidiaries has
received notice of any material violation of any applicable law, ordinance,
regulation, order or requirement relating to its owned or leased properties.
(j) LABOR RELATIONS. No material labor problem exists or, to the knowledge
of the Company, is imminent with respect to any of the employees of the Company
or any of its subsidiaries.
(k) SEC FILINGS. The Company has timely filed all required forms, reports
and other documents with the SEC since December 1, 1996. All of such forms,
reports and other documents complied, when filed, in all material respects, with
all applicable requirements of the 1933 Act and the Securities Exchange Act of
1934, as amended (the "1934 Act").
(l) NO COMMISSIONS. The Company has not and will not pay any commission or
other remuneration to any person in connection with the exchange by the Buyer of
the Common Shares for the Series G Preferred Shares.
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(m) RULE 144. The Common Shares may be sold by the Buyer or its nominee
pursuant to Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the holders of Common Shares
to sell securities of the Company without registration ("Rule 144") (1) prior to
September 26, 1998 if the holder thereof is in compliance with paragraphs (e),
(f), (g), (h) and (i) of Rule 144 at the time of such sale, and (2) on and after
September 26, 1998 pursuant to paragraph (k) of Rule 144 if the holder of the
Common Shares is not and has not been an affiliate (as such term is defined in
Rule 144) during the preceding three months. As of the date hereof, adequate
current public information with respect to the Company is available in
accordance with paragraph (c)(1) of Rule 144.
(n) SUBORDINATED NOTE. The outstanding principal amount under that certain
4.5% Convertible Subordinated Promissory Note dated October 17, 1996 of the
Company in the original principal amount of $2,500,000 is currently $100,000.
The Company is not currently in default under such Note.
3. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
(a) TRANSFER RESTRICTIONS. The Buyer acknowledges that, except as otherwise
provided in Section 3(b), (1) the Common Shares have not been and are not being
registered under the 1933 Act, and may not be transferred unless (A)
subsequently registered thereunder for resale or (B) the Buyer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Common Shares to be
sold or transferred may be sold or transferred without such registration; (2)
any sale of the Common Shares made in reliance on Rule 144 may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Common Shares under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Common Shares under the 1933 Act or to comply with
the terms and conditions of any exemption thereunder.
(b) RULE 144. With a view to making available to the Buyer and each other
holder of Series G Preferred Stock and Common Shares (the Buyer and each such
other holder, an "Investor") the benefits of Rule 144, the Company agrees to:
(1) make and keep public information available, as that term is
understood and defined in Rule 144;
(2) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act;
(3) furnish to each Investor so long as such Investor owns shares of
Series G Preferred Stock and Common Shares, promptly upon request, (i) a written
statement by the Company that it has filed all reports required to be filed by
Section 13 or 15(d) of the 1934 Act during the preceding 12 months and has been
subject to such filing requirements for the past 90 days, (ii) a copy of the
most recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company and (iii) such other information as may be
reasonably requested to permit the Investors to sell such securities pursuant to
Rule 144 without registration;
(4) if at any time the Company is not required to file such reports
with the SEC under Sections 13 or 15(d) of the 1934 Act, to use its best efforts
to make publicly available other information, upon the request of an Investor,
so long as is necessary to permit publication
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<PAGE>
by brokers and dealers of quotations for the Common Stock and sales of the
Common Shares in accordance with Rule 15c2-11 under the 1934 Act; and
(5) within two business days after the provision to the Company of
evidence reasonably satisfactory to the Company (x) of compliance with the
applicable provisions of paragraphs (e), (f), (g) and (h) of Rule 144 in
connection with the sale of Common Shares by an Investor (which evidence may
include an opinion of counsel for the Investor, in form, scope and substance
customary for opinions in comparable transactions, if an opinion of counsel is
reasonably requested by the Company), the Company will take all necessary
actions to permit and cooperate with such Investor in completing the transfer of
such Common Shares including instructing the Transfer Agent (as defined herein)
to effect such transfer, and will not place any restrictive legend on
certificates for the Common Shares or impose any stop-transfer restriction
thereon, and (y) of compliance with the requirements of paragraph (k) of Rule
144, the Company will promptly remove any restrictive legend and cancel any
stop-transfer restriction on Common Shares held by an Investor.
(c) NO RESTRICTIVE LEGEND. The Company shall not place any restrictive
legend on certificates for Common Shares issued on exchange of the Series G
Preferred Shares pursuant to this Agreement or impose any stop-transfer
restriction thereon.
(d) NASDAQ LISTING; REPORTING STATUS. Within ten days after the Closing
Date, the Company shall file with Nasdaq an amended listing application or other
document required by Nasdaq in order that the listing of shares of Common Stock
originally made by the Company in connection with the issuance of the Series G
Preferred Stock will be applicable to the Common Shares and, if required by
Nasdaq because the listing application relating to the Series G Preferred Stock
may not be made applicable to the Common Shares, shall file with Nasdaq a
listing application for the number of Common Shares which may be issuable upon
exchange of the Series G Preferred Shares pursuant to this Agreement, on Nasdaq
and shall provide evidence of such filing to the Buyer promptly after such
filing. The Company shall use its best efforts to obtain such modification or
listing. So long as the Buyer beneficially owns any of the Common Shares, the
Company shall file all reports required to be filed with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act, and the Company shall not, prior to the
date which is two years after the Closing Date, terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
(e) MARGIN REQUIREMENTS. Neither the Company nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
transactions contemplated hereby to violate Regulation G, Regulation T or any
other regulation of the Board of Governors of the Federal Reserve System or to
violate the 1934 Act, in each case as in effect now or as the same may hereafter
be in effect.
(f) BLUE SKY LAWS. On or before the Closing Date, the Company shall take
such action as shall be necessary to qualify, or to obtain an exemption for, the
Common Shares for issuance to the Buyer pursuant to this Agreement under such of
the securities or oblue skyo laws of jurisdictions in the United States as shall
be applicable to the issuance of the Common Shares to the Buyer pursuant to this
Agreement. The Company shall furnish copies of all filings, applications, orders
and grants or confirmations of exemptions relating to such securities or oblue
skyo laws on or before the Closing Date.
(g) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall
pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer) incurred by the
Buyer in connection with this Agreement and the transactions contemplated
hereby.
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(h) CERTAIN ISSUANCES OF SECURITIES. If the transactions contemplated by
this Agreement are subject to the Nasdaq Stockholder Approval Rule, unless the
Company obtains Stockholder Approval or a waiver thereof from Nasdaq, the
Company will not issue any shares of Common Stock or shares of any other series
of preferred stock or other securities convertible into, exchangeable for or
otherwise entitling the holder to acquire shares of Common Stock which would be
subject to the requirements of the Nasdaq Stockholder Approval Rule (or any
successor or replacement provision thereof) and which would be integrated with
the sale of the Series G Preferred Shares to the Buyer or the issuance of Common
Shares upon conversion or exchange thereof for purposes of the Nasdaq
Stockholder Approval Rule (or any successor, replacement or other similar
provision applicable to the Company). As used herein, "Stockholder Approval"
means the approval by a majority of the votes cast by the holders of shares of
Common Stock (in person or by proxy) at a meeting of the stockholders of the
Company (duly convened at which a quorum was present), or a written consent of
holders of shares of Common Stock entitled to such number of votes given without
a meeting, of the issuance by the Company of 20% or more of the Common Stock of
the Company for less than the greater of the book or market value of such Common
Stock on conversion or exchange of the Series G Preferred Stock, as and to the
extent required under the Nasdaq Stockholder Approval Rule as in effect from
time to time or any successor, replacement or other similar provision applicable
to the Company.
(i) BEST EFFORTS. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to complete the
closing of the transactions contemplated by this Agreement set forth in Section
6 or 7, as the case may be, of this Agreement on or before the Closing Date.
4. EXCHANGE RIGHTS; TRANSFER AGENT INSTRUCTIONS.
(a) EXCHANGE RIGHTS. (i) The Company hereby agrees that, at any time after
the closing under this Agreement, the Buyer and each other holder of Series G
Preferred Stock (the Buyer and each such other holder, a "Holder") may exchange
shares of Series G Preferred Stock for shares of Common Stock in lieu of
converting such shares in accordance with the Certificate of Designations of the
Series G Convertible Preferred Stock (the "Certificate of Designations"). The
terms and conditions pursuant to which shares of Series G Preferred Stock may be
exchanged for shares of Common Stock shall in all respects be identical to the
terms pursuant to which such shares may be converted under the Certificate of
Designations and the provisions of Section 9 of the Certificate of Designations
are hereby incorporated herein by this reference as if set forth in full herein,
except as set forth below:
(a) the Minimum Conversion Price shall be $.01;
(b) The number of trading days used in calculating the arithmetic
average of the Closing Price of the Common Stock described in clause
(a)(i)(z)(II)(B) of Section 9 of the Certificate of Designations shall be
five (such arithmetic average is referred to herein as the "Exchange
Price");
(c) each reference in the provisions of Section 9 of the Certificate
of Incorporation to oconversion o or oconverto or other forms of such words
shall be deemed to be a reference to oexchangeo or the appropriate form of
such word;
(d) each reference in the provisions of Sections 9(a), 9(b) and 9(c)
to the oConversion Amounto shall be deemed to be a reference to the
oExchange Amount,o which initially shall mean $1,000.00, subject to
adjustment in accordance with Sections 9(a), 9(b) and 9(c) of the
Certificate of Designations as if it were the Conversion Amount;
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<PAGE>
(e) each reference in the provisions of Sections 9(a), 9(b) and 9(c)
of the Certificate of Designations to the oConversion Dateo shall be deemed
to be a reference to Exchange Date and, for purposes of this Section 4
oExchange Dateo shall mean the date on which the Notice of Exchange is
actually received by the Company, any transfer agent for the Series G
Preferred Stock or the transfer agent for the Common Stock, in case of an
exchange at the option of a Holder pursuant to Section 4(a).
(b) LIMITATION ON EXCHANGES. So long as the Company shall be in compliance
in all material respects with its obligations to the Holders (including, without
limitation, its obligations under the Subscription Agreement, the Registration
Rights Agreement, this Certificate of Designations and this Agreement, then,
notwithstanding any other provisions of Section 4(a), (x) no Holder shall be
entitled to exercise exchange rights prior to March 1, 1998 and (y) no Holder
shall be entitled on any Exchange Date to exchange any shares of Series G
Preferred Stock to the extent that the sum of (1) the number of shares of Series
G Preferred Stock for which valid notices of exchange were given by such Holder
within 30 days preceding such Exchange Date plus (2) the number of shares of
Series G Preferred Stock held by such Holder with respect to which the
determination in this Section 4(b) is being made would exceed the applicable
Exchangeability Amount.
As used herein, oExchangeability Amounto for any Exchange Date means the
number of shares of Series G Preferred Stock set forth below opposite the
Exchange Rate which is in effect for exchanges on such Exchange Date
EXCHANGE RATE EXCHANGEABILITY AMOUNT
$.01 to $2.00 per share 268
$2.01 to $3.00 per share 536
$3.01 to $4.00 per share 804
$4.01 per share or greater 1,072
; PROVIDED, HOWEVER, that the Exchange Rates shown above shall be subject to
equitable adjustments for stock splits, stock dividends, combinations,
recapitalizations, and similar events which occur on or after the Closing Date.
If at any time by reason of a proposed transfer or otherwise the number of
Holders is to be increased, then the Exchange Amount applicable to each such
Holder shall be allocated between or among the transferring Holder and the new
Holders pro rata, the Company shall be entitled to make a notation thereof on
the particular certificates and any such new Holder, by such Holder's acceptance
of shares of Series G Preferred Stock, agrees to such allocation and notation.
(c) EXCHANGE AT OPTION OF COMPANY. So long as the Company shall be in
compliance in all material respects with its obligations to the holders of the
Series G Preferred Stock (including, without limitation, its obligations under
this Agreement, the Registration Rights Agreement and the Certificate of
Designations), the Company shall have the right, exercisable at any time or from
time to time after February 28, 1998 by at least 15 business days but not more
than 20 business days prior notice (a "Company Exchange Notice") to the holders
of the Series G Preferred Stock, to require such holders to exchange, in
accordance with the provisions, and subject to the limitations, of this Section
4, all or any part of the outstanding shares of Series G Preferred Stock for
shares of Common Stock to the extent the same are at such time exchangeable for
shares of Common Stock. Unless paragraph (k) of Rule 144 is available to the
holder and the Company has complied with all of its obligations in this
Agreement with respect thereto, the number of outstanding shares of Series G
Preferred Stock which the Company may require a holder to exchange on any
exchange date may not exceed such number of shares of Series G Preferred Stock
which are exchangeable for a number of shares of Common
8
<PAGE>
Stock which, together with the number of shares of Common Stock sold for the
account of such holder within the preceding three months, equals one percent of
the outstanding shares of Common Stock as shown by the most recent report or
statement published by the Company. The Company Exchange Notice shall state (1)
the number of shares of Series G Preferred Stock which the Company seeks to
require to be exchanged for shares of Common Stock and (2) the exchange date
(which shall not be less than 15 business days or more than 20 business days
after the date the Company Exchange Notice is given). If the Company shall give
a Company Exchange Notice, then, unless theretofore exchanged by a Holder, and,
so long as the Company shall be in compliance in all material respects with its
obligations to the holders of the Series G Preferred Stock (including, without
limitation, its obligations under this Agreement, the Registration Rights
Agreement and the Certificate of Designations) on such exchange date, on the
exchange date properly set forth therein, the lesser of (A) the number of shares
of Series G Preferred Stock which the Company seeks to require to be exchanged,
as set forth in such Company Exchange Notice or (B) the maximum number of shares
of Series G Preferred Stock which on such exchange date is exchangeable in
accordance with Section 4(a) hereof, shall be exchanged for such number of
shares of Common Stock as shall be determined pursuant to this Section 4 as if
the exchange of such number of shares of Series G Preferred Stock were made by
the Holders thereof in accordance herewith without any further action on the
part of the holders of such shares of Series G Preferred Stock. Upon receipt by
the Company of certificates for shares of Series G Preferred Stock exchanged for
shares of Common Stock in accordance with this Section 4(c) after a Company
Exchange Notice is given, the Company shall issue and, within three trading days
after such surrender, deliver to or upon the order of such Holder (1) that
number of shares of Common Stock for the number of shares of Series G Preferred
Stock exchanged as shall be determined in accordance herewith and (2) a new
certificate for the balance of shares of Series G Preferred Stock, if any.
(d) CONVERSIONS DEEMED EXCHANGES. On and after March 1, 1998, the Company
shall to treat any request for conversion of Series G Preferred Stock submitted
by a Holder in accordance with the terms and conditions of the Certificate of
Designations as a request for exchange in accordance with the terms and
conditions hereof, subject to Section 4(f). On and after the closing under this
Agreement, any Corporation Conversion Notice submitted by the Company in
accordance with the terms and conditions of the Certificate of Designations
shall be deemed to be a Company Exchange Notice in accordance with the terms and
conditions of Section 4(c).
(e) TRANSFER AGENT INSTRUCTIONS. Prior to the Closing Date, the Company
will (1) execute and deliver the Transfer Agent Instructions substantially in
the form attached hereto as ANNEX I to and thereby irrevocably instruct,
American Stock Transfer & Trust Company, as Transfer Agent and Registrar (the
"Transfer Agent"), to issue certificates for the Common Shares from time to time
upon exchange of the Series G Preferred Shares in such amounts as specified from
time to time to the Transfer Agent in the Exchange Notices surrendered in
connection with such exchanges and (2) appoint the Transfer Agent the exchange
agent for the Series G Preferred Stock. The certificates for the Common Shares
shall be registered in the name of the Buyer or its nominee and in such
denominations to be specified by the Buyer in connection with each exchange of
Series G Preferred Shares. The Company warrants that no instruction other than
such instructions referred to in this Section 4(e) will be given by the Company
to the Transfer Agent and that the Common Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement. Nothing in this Section 4(e) shall limit in any way
the Buyer's obligations and agreement to comply with the registration
requirements of all applicable securities laws upon any resale of Common Shares
by the Buyer. If the Buyer provides the Company with an opinion of counsel
reasonably satisfactory in form, scope and substance to the Company that
registration of a resale by the Buyer of any of the Common Shares in accordance
with clause (1)(B) of Section 3(a) of this Agreement is not required under the
1933 Act, the Company shall permit the transfer
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<PAGE>
of such Common Shares and promptly instruct the Company's transfer agent to
issue upon transfer no later than three days after receipt of such opinion one
or more share certificates in such name and in such denominations as specified
by the Buyer. Nothing in this Section 4(e) shall limit the obligations of the
Company under Section 3(n) of the Registration Rights Agreement.
(f) LIMITATION ON EXERCISE OF CONVERSION RIGHTS. Prior to March 1, 1998,
the Holders shall be entitled to exercise conversion rights in accordance with
the Certificate of Designations. On and after March 1, 1998, so long as the
Company is in compliance in all material respects with its obligations to the
holders of the Series G Preferred Stock (including, without limitation, its
obligations under this Agreement, the Registration Rights Agreement and the
Certificate of Designations), the Buyer and any other holder of shares of Series
G Preferred Stock who is bound by this Section 4(f) shall not exercise the
conversion rights provided in Section 9(a) of the Certificate of Designations.
(g) EXCHANGE NOTICE. Any notice of exchange of shares of Series G Preferred
Stock by a Holder pursuant to Section 4(a) shall be in the form attached hereto
as ANNEX II.
(h) TRANSFERS. The Buyer agrees not to sell, assign or otherwise transfer
any Series G Preferred Shares unless the transferee becomes a party to this
Agreement. The Company agrees to be bound by the terms of this Agreement for the
benefit of each such transferee.
(i) RETIREMENT OF SERIES G PREFERRED STOCK. Upon each exchange of shares of
Series G Preferred Stock pursuant to this Agreement, the Company shall retire
such shares.
5. CLOSING DATE.
The date and time of the closing under this Agreement (the "Closing Date")
shall be 12:00 noon, New York City time, on January 23, 1998. Such closing shall
occur on the Closing Date at the Law Offices of Brian W Pusch.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Buyer understands that the Company's obligations under this Agreement
are conditioned upon the satisfaction of the following conditions precedent on
or before the Closing Date (any or all of which may be waived by the Company in
its sole discretion):
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) The accuracy on the Closing Date of the representations and warranties
of the Buyer contained in this Agreement as if made on the Closing Date and the
performance by the Buyer on or before the Closing Date of all covenants and
agreements of the Buyer required to be performed on or before the Closing Date;
and
(c) The Buyer shall have executed and delivered to the Company a General
Release in the form attached hereto as ANNEX III.
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<PAGE>
7. CONDITIONS TO THE BUYER'S OBLIGATIONS.
The Company understands that the Buyer's obligation under this Agreement is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Buyer in its
sole discretion):
(a) The accuracy on the Closing Date of the representations and warranties
of the Company contained in this Agreement as if made on the Closing Date and
the performance by the Company on or before the Closing Date of all covenants
and agreements of the Company required to be performed on or before the Closing
Date and receipt by the Buyer of a certificate, dated the Closing Date, of the
Chief Executive Officer or the Chief Financial Officer of the Company confirming
such matters and such other matters as the Buyer may reasonably request;
(b) The closing under the Stock Purchase Agreement shall have occurred;
(c) The receipt by the Buyer of a certificate, dated the Closing Date, of
the Secretary of the Company certifying (1) the certificate of incorporation and
by-laws of the Company as in effect on the Closing Date, (2) all resolutions of
the Board of Directors (and committees thereof) of the Company relating to this
Agreement and the transactions contemplated hereby and (3) such other matters as
reasonably requested by the Buyer;
(d) The Company shall have executed and delivered to the Buyer a General
Release in the form attached hereto as ANNEX III; and
(e) Receipt by the Buyer on the Closing Date of an opinion of counsel for
the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX IV attached hereto.
8. MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts.
(b) This Agreement may be executed in counterparts and by the parties
hereto on separate counterparts, all of which together shall constitute one and
the same instrument. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such party.
Although this Agreement is dated as of the date first set forth above, the
actual date of execution and delivery of this Agreement by each party is the
date set forth below such party's signature on the signature page hereof. Any
reference in this Agreement or in any of the documents executed and delivered by
the parties hereto in connection herewith to the date of execution and delivery
of this Agreement shall be deemed a reference to the later of such dates set
forth below each party's respective signature on the signature page hereof.
(c) The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
(e) This Agreement may be amended only by an instrument in writing signed
by the party to be charged with enforcement.
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<PAGE>
(f) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings between the parties, shall not operate as a waiver
thereof or an amendment hereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) Any notices required or permitted to be given under the
terms of this Agreement shall be sent by mail or delivered personally (which
shall include telephone line facsimile transmission with answer back
confirmation) or by courier and shall be effective five days after being placed
in the mail, if mailed, or upon receipt, if delivered personally or by courier,
in the case of the Company addressed to the Company at its address shown in the
introductory paragraph of this Agreement, Attention: Director of Finance
(telephone line facsimile transmission number (781) 676-7330) or, in the case of
the Buyer, at its address shown on the signature page of this Agreement, with a
copy to Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920,
Bellevue, Washington 98004-4332 (telephone line facsimile transmission number
(425) 462-4645) or such other address as a party shall have provided by notice
to the other party in accordance with this provision. The Buyer hereby
designates as its address and telephone line facsimile transmission number for
any notice required or permitted to be given to the Buyer pursuant to the
Certificate of Designations or the provisions of Section 4 the address and
telephone line facsimile transmission number shown on the signature page of this
Agreement, with a copy to: Advantage Fund Limited, c/o Genesee International,
Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332
(facsimile number (425) 462-4645), until the Buyer shall designate another
address for such purpose.
(h) The Buyer shall have the right to assign its rights and obligations
under this Agreement to any transferee of all or any portion of the Series G
Preferred Shares, provided any such assignee, by written instrument duly
executed by such assignee, assumes all obligations of the Buyer hereunder with
respect to the Series G Preferred Shares so transferred, whereupon the Buyer
shall be relieved of any further obligations, responsibilities and liabilities
under this Agreement with respect to the Series G Preferred Shares so
transferred.
(i) The respective representations, warranties, covenants and agreements of
the Buyer and the Company contained in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall survive the closing on the
Closing Date and shall remain in full force and effect regardless of any
investigation made by or on behalf of them or any person controlling or advising
any of them.
(j) This Agreement and its Annexes set forth the entire agreement between
the parties hereto with respect to the subject matter hereof and supersede all
prior agreements and understandings, whether written or oral, with respect
thereto.
(k) The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto by their respective officers thereunto duly authorized as of the date
first set forth above.
ADVANTAGE FUND LIMITED
By: /s/ A.P. de Groot
--------------------
A.P. de Groot
President
Address: c/o CITCO
Kaya Flamboyan 9
Curatao, Netherlands Antilles
Facsimile No.: 011-599-9322008
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Joseph P. Caruso
-------------------------------
Title: Treasurer and Chief Financial
Officer
EMPLOYMENT AGREEMENT
Dated as of September 1, 1997
To: Steven Georgiev
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 an adviser to the Chief Executive Officer of the
Company, performing such duties as may be assigned to you by or on authority of
the Company's Chief Executive Officer.
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. 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,
including but not limited to the Company's Standard of Business Conduct.
2. TERM AND TERMINATION.
2.1 The term of this Agreement shall be for the period commencing with the
date hereof up through December 31, 1997. Thereafter, this Agreement may be
renewed or re-negotiated at the discretion of the Company's Chief Executive
Officer, with the review and approval of the Compensation and Nominating
Committee of the Board of Directors.
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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 thirty (30) days prior written notice to you upon your disability
(disability shall be defined as your inability to perform for a period of
at least forty-five (45) days 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, the Company shall pay to
your estate Five Hundred Thousand Dollars ($500,000) less applicable taxes
and withholding, in a lump sum, and 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 vote of a majority of
the Board of Directors of 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 the
Company shall be obligated to pay to you upon notice of termination, as
severance pay, (i) your Compensation due over the remaining term of the
Agreement in a lump sum payment, less applicable taxes and other required
withholdings and any amounts you may owe to the Company and (ii)
continuation of all health, life, dental and disability coverage to the
extent permitted by the Company's plans or policies up through the earlier
of December 31, 1998 or until you obtain coverage elsewhere.
2.3 During the term of this Agreement, you shall have the right to
terminate your employment hereunder for any reason, upon not less than five (5)
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
2
<PAGE>
hereby, or to comply with reasonable explicit directives of the Chief Executive
Officer 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
committing assets or funds of the Company without the prior approval of the
Chief Executive Officer; (v) your conviction of a criminal felony offense; (vi)
any material breach of the terms hereof; (vii) habitual use of drugs; (viii)
conduct by you that is materially harmful to the business interest or reputation
of the Company or any of its affiliates; or (ix) acting outside the scope of
your services hereunder; or (x) your failure to deliver to the Company within
thirty (30) days from the date hereof the Pledged Securities as defined in four
separate Stock Pledge Agreements by and between you and the Company dated as of
April 16, 1997 (two agreements) and April 28, 1997 (two agreements), and
attached hereto as Exhibit C.
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.
3.1 You shall receive as compensation ("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 B between you and the Company (the
"Proprietary Information and Inventions Agreement") the following: (a)
Twenty-Nine Thousand Dollars ($29,000) per month, less applicable taxes and
withholding, and (b) within thirty (30) days of payment in full of all
outstanding loans from the Company to you and to third parties against which
loans you have pledged stock as collateral, and contingent upon such repayment,
Five Hundred Thousand Dollars ($500,000) less applicable taxes and withholding,
to be paid in a lump sum to either you or your spouse, at the Company's
discretion. If you exercise any options or warrants to purchase the common stock
of the Company, and if at such time (i) any amounts are due with respect to the
notes signed by you in favor of the Company dated April 28, 1997 (the "Notes"),
and/or (ii) demand has been made and full repayment has not been made of the
loans by the Company to Trani, Inc. and JCV Capital Corp., against which loans
you have pledged stock as collateral, then the Company shall have the right to
offset any proceeds realized from any such option or warrant exercises against
your obligations to the Company pursuant to the Notes and/or the Stock Pledge
Agreements.
3.2 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
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by law. You 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.
3.3 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 in advance in writing by the Chief Executive Officer, including,
without limitation, reasonable and necessary travel expenses incurred by you
during the term of this Agreement. 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.
4. OTHER ACTIVITIES DURING EMPLOYMENT.
4.1 Except for any outside employment and directorships currently held by
you as listed on Exhibit A 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 A 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 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 A attached hereto, you hereby represent that you are not engaged in any
of the foregoing capacities (i) through (ix) in any Prohibited Enterprise.
5. 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 B.
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6. POST-EMPLOYMENT ACTIVITIES.
6.1 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 6, 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 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.
6.2 During the Non-Competition Period, the provisions of Section 4.2 shall
be applicable to you and you shall comply therewith.
6.3 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.
6.4 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.
6.5 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 6.1 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
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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.
6.6 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.
6.7 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 6 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.
7. SURVIVAL OF TERMS AND REMEDIES.
Your obligations under the Proprietary Information and Inventions
Agreement and the provisions of Sections 6, 7, 8, and 10 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 6 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.
8. 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 B), or (ii) the breach or alleged breach by you of any obligations set
forth in Section 6, shall be settled by either a Federal or state court sitting
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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.
9. 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.
10. 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 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.
11. 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 Chief
Executive Officer 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 the Company at its principal office.
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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. COMPLETE AGREEMENT; AMENDMENTS.
The foregoing, including Exhibits A and B 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.
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 governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts without regard to its principles of
conflict of laws.
17. EFFECTIVE DATE.
The effective Date of this Agreement is September 1, 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
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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: /s/ Louis P. Valente
---------------------------------
Name: Louis P. Valente
Title: Chief Executive Officer
and President
Accepted and Agreed:
/s/ Steven Georgiev
- ------------------------
Steven Georgiev
<PAGE>
EXHIBIT A
OUTSIDE EMPLOYMENT AND DIRECTORSHIPS
OF
STEVEN GEORGIEV
<PAGE>
EXHIBIT B
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
As of September 1, 1997
To: Steven Georgiev
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.
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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.
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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
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rights that it may have, either under this Proprietary Information and
Confidentiality 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.
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
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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.
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 Chief
Executive Officer 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 the Company at its principal office.
EMPLOYEE
/s/ Steven Georgiev
---------------------------
Steven Georgiev
Accepted and Agreed: PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
------------------------------
Louis P. Valente
Chief Executive Officer
Duly Authorized
<PAGE>
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
STEVEN GEORGIEV
KEY EMPLOYEE AGREEMENT
To: Joseph P. Caruso
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 Financial Officer 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.
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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.
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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 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
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<PAGE>
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 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.
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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.
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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 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
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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.
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.
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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 January 1, 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:
Joseph P. Caruso
<PAGE>
EXHIBIT A
EMPLOYMENT TERM, COMPENSATION AND BENEFITS
OF
Joseph P. Caruso
Chief Financial Officer
1. TERM.
The term of the Agreement to which this Exhibit A is annexed and
incorporated shall be for three (3) 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 be TWO HUNDRED THOUSAND DOLLARS
($200,000) 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 as determined by the Board of Directors.
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 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.
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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 an automobile on your behalf for the initial term
of this Agreement.
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EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
JOSEPH P. CARUSO
NONE
<PAGE>
EXHIBIT C
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
As of January 1, 1997
To: Joseph P. Caruso
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.
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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.
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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 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.
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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.
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<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
Joseph P. Caruso
Accepted and Agreed:
PALOMAR MEDICAL TECHNOLOGIES, INC.
By:
Name:
Title:
<PAGE>
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
JOSEPH P. CARUSO
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.
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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.
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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 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
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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 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.
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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.
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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 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
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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.
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.
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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: /s/ Sarah Reed
-------------------------------
Name: Sarah Reed
Title: General Counsel and
Assistant Secretary
Accepted and Agreed:
/s/ Louis P. Valente
- ----------------------
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 as determined by the Board of Directors.
(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 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
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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 will reimburse you for automobile expenses for the initial
term of this Agreement.
<PAGE>
EXHIBIT B
OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS
OF
LOUIS P. VALENTE
Director, Micrion Corp.
Director, Medical Information Technology, Inc.
Director, MKS Instruments, Inc.
Director, Patient Care Technologies, Inc.
<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.
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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.
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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 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.
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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
----------------------------------
Louis P. Valente
Accepted and Agreed:
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Sarah Reed
-------------------------------
Name: Sarah Reed
Title: General Counsel and
Assistant Secretary
<PAGE>
SCHEDULE A
LIST OF PRIOR INVENTIONS
OF
LOUIS P. VALENTE
CONFIDENTIAL
$2,000,000 Bridge Loan w/ Payment of Interest in Common Stock
Binding Term Sheet
Closing Date: March 27, 1998
Issuer: Palomar Medical Technologies, Inc. ("Palomar")
Securities: Note, Warrants underlying shares of Palomar Common Stock
(the "Warrants") and shares of Palomar Common Stock (the
"Common Stock"), issued pursuant to Regulation D of the
Securities Act of 1933.
Note Amount: $2,000,000
Interest: 125,000 5 year Warrants exercisable at $.01 per share to be
delivered no later than April 6, 1998.
Maturity Date: The earlier of (i) May 26, 1998 or (ii) one day
following the sale of Dynaco or (iii) the sale of any other
Palomar assets in a transaction outside the normal course of
business or (iv) the raise of additional capital where the
use of proceeds to pay back debt is not prohibited.
Default: If the loan is not repaid in full by the Maturity Date, the
Note shall become convertible in whole or in part at the
option of the Note Holder (the "Holder") at Market Price (as
defined below) as follows:
<TABLE>
<S> <C> <C> <C> <C>
Conversion Conversion Conversion Penalty
DATE AMOUNT # OF SHS OF C/S # OF SHS OF C/S
After 5/26/98 $250,000 $250,000/Market Price $100,000/Market Price
After 6/2/98 $250,000 $250,000/Market Price 0
After 6/9/98 $250,000 $250,000/Market Price 0
After 6/16/98 $250,000 $250,000/Market Price 0
After 6/23/98 $250,000 $250,000/Market Price $125,000/Market Price
After 6/30/98 $250,000 $250,000/Market Price 0
After 7/7/98 $250,000 $250,000/Market Price 0
After 7/14/98 $250,000 $250,000/Market Price 0
</TABLE>
The Penalty as stated above shall be payable effective on
each date as stated above as long as any amount due is
outstanding (i.e., if any amount due is outstanding after
5/26/98 then the penalty is $100,000/Market Price, and if
any amount is outstanding after 6/23/98 then the additional
penalty is $125,000/Market Price) regardless of whether the
Holder elects to convert the Note into Common Stock or not.
The Issuer may repay the loan in full or in part without
additional penalty at any time prior to receiving the
Holder's Notice of Conversion (as defined below). If paid in
part, the payment shall be applied to reduce the outstanding
balance, however the conversion schedule will remain in
place until the entire balance is paid in full.
Market Price: The net sell price as supplied to Palomar from
Fechtor, Detwiler & Co. evidencing the Holder's sale of the
Common Stock through Fechtor, Detwiler & Co. within 24 hours
of the sale of the Common Stock.
Conversion Date: The business day(s) on which the Holder gives written
notice (the "Notice of Conversion") of its election to
convert all or a portion of the Note.
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Registration Rights: The Holder shall have the right to request the
Company to file with the SEC a registration statement on
Form S-3 providing for the resale of the Warrants and the
Common Stock no earlier than May 18, 1998.
Use of Proceeds: General working capital purposes.
<TABLE>
<S> <C> <C>
Wire Instructions: Name of Bank: Fleet Bank
ABA#: 011000206
For Further Credit to: Palomar Medical Technologies, Inc.
Account #: 0501395874
</TABLE>
Binding Agreement: Upon execution of this term sheet by the parties,
this term sheet will constitute a legally binding and
enforceable agreement of each of the parties to their mutual
undertakings with respect to the matters set forth herein.
SUBSCRIPTION AMOUNT: $2,000,000
ACKNOWLEDGED AND ACCEPTED: ACKNOWLEDGED AND ACCEPTED:
SUBSCRIBER PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Hector Wiltshire By: /s/ Joseph P. Caruso
----------------------- -------------------------------
Name: Hector Wiltshire Name: Joseph P. Caruso,
Chief Financial Officer
Date: March 27, 1998 Date:
Phone: (954) 345-8022 Phone: (781) 676-7300
Fax: (954) 341-0664 Fax: (781) 676-7330
SECURITIES PURCHASE AGREEMENT
THIS AGREEMENT is by and between Palomar Medical Technologies, Inc.
(the "Company"), a Delaware corporation with an office at 45 Hartwell Avenue,
Lexington, Massachusetts 02173 U.S.A., and the purchasers (each a "Purchaser"
and, collectively, the "Purchasers") named on the purchaser signature pages
hereto (the "Purchaser Signature Pages").
IN CONSIDERATION of the mutual covenants contained in this Agreement
and good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
SECTION 1. AUTHORIZATION OF SHARES. The Company has authorized (a) the
sale of up to 10,000,000 shares (the "Shares") of the Company's Common Stock,
par value $.01 per share (the "Common Stock"), and (b) the sale of warrants (the
"Warrants" and, together with the Shares, the "Securities") to purchase up to an
aggregate of 10,000,000 shares (the "Warrant Shares") of Common Stock.
SECTION 2. AGREEMENT TO SELL AND PURCHASE THE SECURITIES. At each
Closing (as defined below), the Company will sell to each Purchaser
participating in such Closing, and each such Purchaser will buy from the
Company, upon the terms and conditions hereinafter set forth, the Securities
being purchased by such Purchaser. The number of shares of Common Stock to be
purchased by each Purchaser, and the number of Warrant Shares to be purchasable
under each Purchaser's Warrant, shall be determined on the basis of the total
amount payable by such Purchaser (the "Purchase Price") as set forth on such
Purchaser's Purchaser Signature Page, based on an aggregate purchase price of
$1.00 for each share of Common Stock and Warrant to purchase one share of Common
Stock.
SECTION 3. PAYMENT OF PURCHASE PRICE. On or prior to each Closing Date,
as defined below, each Purchaser that is purchasing Securities on such Closing
Date will deliver to the Company the full amount of the Purchase Price payable
by such Purchaser by check or wire transfer. Wire transfers should be directed
as follows:
Chase Manhattan Bank
ABA No.: 021000021
Account No.: 066296390
Account Name: Prudential Securities Incorporated
For further credit to: account no.: ABX-960805-28
account name: Palomar Medical Technologies, Inc.
SECTION 4. THE CLOSING. The consummation of the transactions
contemplated by this Agreement (the "Closings") shall occur as to each Purchaser
on the date that all conditions to Closing with respect to the Company and such
Purchaser have been satisfied or at such other time as shall be agreed by the
Company and the Purchasers (the "Closing
1
<PAGE>
Date"). Within thirty (30) days after each Closing Date, the Company shall
deliver to each Purchaser that purchased Securities on such Closing Date one or
more certificates for the Securities registered in the name of such Purchaser or
its nominee.
SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
The Company hereby represents and warrants to, and covenants with, the
Purchasers as follows:
SECTION 5.1. ORGANIZATION. The Company is duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Company has full power and authority to own and operate its properties and to
conduct its business as currently conducted and is registered or qualified to do
business and is in good standing in each jurisdiction in which it owns or leases
property or transacts business and where the failure to be so qualified would
have a material adverse effect upon the business, financial condition,
properties or operations of the Company.
SECTION 5.2. DUE AUTHORIZATION. The Company has all requisite
power and authority to execute, deliver and perform its obligations under this
Agreement and the Warrants, and this Agreement and the Warrants have been duly
authorized and validly executed and delivered by the Company and constitute
valid and binding agreements of the Company enforceable against the Company in
accordance with their terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
SECTION 5.3. NON-CONTRAVENTION. The execution and delivery of
this Agreement and the Warrants, the issuance and sale of the Securities to be
sold by the Company hereunder, and the consummation of the transactions
contemplated hereby will not conflict with or constitute a violation of, or
default (with the passage of time or otherwise) under, any material agreement or
instrument to which the Company is a party or by which it is bound or the
Certificate of Incorporation (the "Charter") or the By-Laws of the Company nor
result in the creation or imposition of any lien, encumbrance, claim, security
interest or restriction whatsoever upon any of the material properties or assets
of the Company or an acceleration of indebtedness pursuant to any obligation,
agreement or condition contained in any material bond, debenture, note or any
other evidence of indebtedness or any material indenture, mortgage, deed of
trust or any other agreement or instrument to which the Company is a party or by
which the Company is bound or to which any of the property or assets of the
Company is subject, nor conflict with, or result in a violation of, any law,
administrative regulation, ordinance or order of any court or governmental
agency, arbitration panel or authority applicable to the Company. No consent,
approval, authorization or other order of, or registration, qualification or
filing with, any regulatory body, administrative agency, or other governmental
body in the United States, other than with respect to "blue sky" laws and is
required by the rules and regulations of the Nasdaq SmallCap Market, is required
for the valid issuance and sale of the Securities to be sold pursuant to this
Agreement (other than such as have been made or obtained).
2
<PAGE>
SECTION 5.4. THE SHARES; THE WARRANT SHARES. The Shares have been
duly authorized, and when issued and paid for in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable. The
Warrant Shares have been duly authorized, and when issued and paid for in
accordance with the terms of the Warrants will be validly issued, fully paid and
nonassessable. On and after the later to occur of (i) six months after each
Purchaser's Closing Date and (ii) the first date following such Closing Date on
which the Closing Price (as defined in the Warrants) of a share of Common Stock
has equaled or exceeded $2.50 for a period of ten (10) consecutive trading days,
the Company shall reserve and keep available, solely for issuance or delivery
upon exercise of such Purchaser's Warrants, the number of shares of Common Stock
as from time to time shall be receivable upon the exercise of such Warrants.
SECTION 5.5. LEGAL PROCEEDINGS. Except as disclosed in the SEC
Filings (as defined below), there is no material legal or governmental
proceeding pending or, to the knowledge of the Company, threatened or
contemplated to which the Company is or may be a party or of which the business
or property of the Company is or may be subject.
SECTION 5.6. NO VIOLATIONS. Except as disclosed in the SEC
Filings, the Company is not in violation of its Charter or By-Laws, in violation
of any law, administrative regulation, ordinance or order of any court or
governmental agency, arbitration panel or authority applicable to the Company,
which violation, individually or in the aggregate, would have a material adverse
effect on the business or financial condition of the Company, or in default in
any material respect in the performance of any obligation, agreement or
condition contained in any bond, debenture, note or any other evidence of
indebtedness in any indenture, mortgage, deed of trust or any other agreement or
instrument to which the Company is a party or by which the Company is bound or
by which the properties of the Company are bound or affected, and there exists
no condition which, with the passage of time or the giving of notice or both,
would constitute a material default under any such document or instrument or
result in the imposition of any material penalty or the acceleration of any
indebtedness.
SECTION 5.7. GOVERNMENTAL PERMITS, ETC. Except as disclosed in
the SEC Filings, the Company has all necessary franchises, licenses,
certificates and other authorizations from any foreign, federal, state or local
government or governmental agency, department, or body that are currently
necessary for the operation of the business of the Company as currently
conducted, the absence of which would have a material adverse effect on the
business or operations of the Company.
SECTION 5.8. FINANCIAL STATEMENTS. Except as disclosed in the SEC
Filings, the financial statements of the Company and the related notes contained
in the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1996 and its Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997, present fairly the financial position of the Company as of the dates
indicated therein and its results of operations and cash flows for the periods
therein specified. Such financial statements
3
<PAGE>
(including the related notes) have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods therein specified and are true, correct and complete in all respects.
SECTION 5.9. NO MATERIAL ADVERSE CHANGE. Except as disclosed in
the SEC Filings, since September 30, 1997, the Company has not incurred any
material liabilities or obligations, direct or contingent, other than in the
ordinary course of business, and there has not been any material adverse change
in its business, financial condition or results of operations.
SECTION 5.10. ADDITIONAL INFORMATION. The Company has filed in a
timely manner all documents that the Company was required to file under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") during the 12
months preceding the date of this Agreement. The following documents
(collectively, the "SEC Filings") complied in all material respects with the
requirements of the Exchange Act or the Securities Act of 1933, as amended (the
"Securities Act"), as the case may be, as of their respective filing or
effective dates, and the information contained therein was true and correct in
all material respects as of the date or effective date of such documents, and
each of the following documents as of the date thereof did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading:
(a) The Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996 and its Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1997;
(b) All other documents, if any, filed by the Company with the
Securities and Exchange Commission (the "SEC") since September 30, 1997 pursuant
to the reporting requirements of the Exchange Act; and
(c) Amendment No. 2 to the Company's Registration Statement on
Form S-3 (No. 333-42129), filed with the SEC on January 9, 1998.
SECTION 5.11. INTELLECTUAL PROPERTY. The Company has the right to
use all intellectual property (the "Intellectual Property") now used by it in
its business. The Company owns all right, title and interest in and to, all of
the intellectual property it owns, free and clear of any liens or encumbrances.
In any case in which the Company does not own the Intellectual Property, it has
good and valid licenses for the same, which are in full force and effect. No
claims have been asserted with respect to the use of any such Intellectual
Property or challenging or questioning the validity or effectiveness of any such
license or agreement.
SECTION 5.12. LISTING. The Company shall use its best efforts to
comply with all requirements of the National Association of Securities Dealers,
Inc. (the "NASD")
4
<PAGE>
with respect to the issuance of the Shares and the listing of the Shares and the
Warrant Shares on the Nasdaq SmallCap Market.
SECTION 5.13. USE OF PROCEEDS. The Company will use the proceeds
of the sale of the Securities for the purpose of redeeming, repurchasing and/or
repaying certain convertible preferred stock and/or convertible debentures
previously issued by it.
SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS.
(a) Each Purchaser, severally and not jointly, represents and warrants
to, and covenants with, the Company, as of the date hereof and as of the Closing
Date on which such Purchaser acquires the Securities, that: (i) such Purchaser
is an "accredited investor" as defined in Rule 501 of Regulation D promulgated
under the Securities Act; (ii) such Purchaser is acquiring the Securities for
its own account for investment and with no present intention of distributing any
of such Shares other than to any affiliate of such Purchaser; (iii) such
Purchaser will not, directly or indirectly, voluntarily offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of) any of the Securities, except in
compliance with the Securities Act and the rules and regulations promulgated
thereunder; (iv) such Purchaser has received and reviewed copies of the SEC
Filings, (v) such Purchaser has had an opportunity to ask questions and receive
answers from the management of the Company regarding the Company, its business
and the offering of the Securities; and (vi) such Purchaser has, in connection
with its decision to purchase Shares, relied solely upon the documents described
in Section 5.10 and the representations and warranties of the Company contained
herein.
(b) Each Purchaser agrees not to make any sale of the Securities except
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements thereof.
(c) Each Purchaser, severally and not jointly, further represents and
warrants to, and covenants with, the Company that (i) such Purchaser has full
right, power, authority and capacity to enter into this Agreement and to
consummate the transactions contemplated hereby and has taken all necessary
action to authorize the execution, delivery and performance of this Agreement,
and (ii) upon the execution and delivery of this Agreement, this Agreement shall
constitute a valid and binding obligation of such Purchaser enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(d) Each Purchaser, severally and not jointly, represents that it
understands and agrees that, until registered under the Securities Act or
transferred pursuant to the provisions of Rule 144 promulgated thereunder, all
certificates evidencing the Securities and the Warrant Shares,
5
<PAGE>
whether upon initial issuance or upon any transfer thereof, shall bear a legend,
prominently stamped or printed therein, reading substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or the securities laws of
any state. These securities have been acquired for investment and not
with a view toward distribution or resale. Such securities may not be
offered for sale, sold, delivered after sale, transferred, pledged or
hypothecated in the absence of an effective registration statement
covering such securities under the Act and any applicable state
securities laws, unless the holder shall have obtained an opinion of
counsel satisfactory to the corporation that such registration is not
required."
SECTION 7. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Notwithstanding any investigation made by any party to this Agreement all
covenants, agreements, representations and warranties made by the Company and
the Purchasers herein shall survive the execution of this Agreement, the
delivery to the Purchasers of the Securities being purchased and payment
therefor.
SECTION 8. REGISTRATION STATEMENT. Within 120 days after the date
hereof and, in any event, subject to the receipt of necessary information from
the Purchasers, the Company shall file with the SEC a registration statement on
Form S-3 (the "Registration Statement"), which may include other selling
stockholders, providing for the resale of the Warrant Shares and the Shares
(collectively, the "Registrable Shares") by the Purchasers from time to time in
accordance with Rule 415 promulgated under the Securities Act. The Company shall
use its best efforts to cause the Registration Statement to become effective
within 180 days after the date hereof and the Company shall use its best efforts
to keep the Registration Statement effective until the earlier of (a) the time
all the Registrable Shares have been sold pursuant to the Registration Statement
or (b) the expiration of the Warrants. The Company shall furnish to each
Purchaser such number of copies of the prospectus contained in the Registration
Statement as such Purchaser shall reasonably require to facilitate the public
sale of the Registrable Shares.
SECTION 9. LOCKUP AGREEMENTS WITH UNDERWRITERS. In the event of an
underwritten public offering of the Company's securities, each Purchaser agrees
to enter into an agreement with the Underwriter or Underwriters' Representative
for such offering restricting the sale, transfer or other disposition of the
Securities and the Warrant Shares to the extent that such agreement is required
to be executed by members of senior management of the Company.
SECTION 10. PAYMENTS IN RESPECT OF UNSOLD SHARES. Within thirty (30)
days following May 31, 1998 and the end of each three month period following
such date, the Company shall pay to each Purchaser an amount equal to $0.0125
multiplied by the number of Shares that continue to be held by such Purchaser or
its nominee named on the signature page to this Agreement as of such date. Such
number of Shares shall be determined by the Company solely by reference to the
monthly list of stockholders furnished to the Company
6
<PAGE>
by its transfer agent, American Stock Transfer & Trust Company. Each Purchaser
understands and agrees that, in order to be eligible for the payments
contemplated by this Section, it must either continue to hold the certificate or
certificates issued to it by the Company in connection with such Purchaser's
Closing or provide evidence satisfactory to the Company that any other
certificate held by it represents the Shares or a portion thereof. The Company
shall send all payments by the Company pursuant to this Section 10 to each
Purchaser at such Purchaser's address determined in accordance with Section
13(b) of this Agreement.
SECTION 11. CONDITIONS TO CLOSING.
(a) The obligations of each Purchaser to consummate the transactions
contemplated hereby shall be subject to the satisfaction by the Company of each
of the following conditions on or before the Closing Date on which such
Purchaser is to acquire Securities, any one or more of which may be waived by
such Purchaser:
(i) The representations and warranties of the Company set forth
in this Agreement delivered to the Purchasers by or on behalf of the Company
shall be true and correct as if made on such Closing Date.
(ii) Each of the covenants, agreements and conditions to be
performed and satisfied by the Company pursuant to this Agreement at or prior to
such Purchaser's Closing shall have been duly performed and satisfied.
(iii) The Company shall have delivered an executed counterpart of
this Agreement to such Purchaser.
(b) The obligations of the Company to consummate the transactions
contemplated hereby on each Closing Date shall be subject to the satisfaction by
each Purchaser acquiring Securities on such Closing Date of each of the
following conditions on or before such Closing Date, any one or more of which
may be waived by the Company:
(i) The representations and warranties of such Purchaser set
forth in this Agreement shall be true and correct as if made on such Closing
Date.
(ii) Each of the covenants, agreements and conditions to be
performed and satisfied by such Purchaser pursuant to this Agreement at or prior
to such Purchaser's Closing shall have been duly performed and satisfied.
(iii) Such Purchaser shall have paid the Purchase Price to be
paid by it in accordance with Section 3.
(iv) Such Purchaser shall have delivered a completed and executed
Purchaser Signature Page to the Company.
7
<PAGE>
(c) The Company and each Purchaser shall use their best efforts to
cause their respective conditions to closing set forth in this Section 11 to be
satisfied.
SECTION 12. NO BROKERS. The parties hereto hereby represent that there
are no brokers or finders entitled to compensation in connection with the
transactions contemplated hereby, other than Fechtor, Detwiler & Co., Inc., who
will be paid a commission by the Company.
SECTION 13. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified mail, postage prepaid, or sent by facsimile and shall be
deemed given when actually received:
(a) if to the Company to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Facsimile: (781) 676-7330
Attention: Paul S. Weiner, Director of Finance
(b) if to any Purchaser, to its address as set forth on such
Purchaser's Purchaser Signature Page, or to such other address or addresses as
may have been furnished to the Company in writing.
SECTION 14. CHANGES. Any term of the Agreements may be amended or
compliance therewith waived with the written consent of the Company and the
holders of a majority of the Shares purchased pursuant to this Agreement.
SECTION 15. HEADINGS. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
SECTION 16. SEVERABILITY. If any provision contained in this Agreement
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
SECTION 17. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of The Commonwealth of
Massachusetts and United States federal law.
SECTION 18. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall constitute an original, but both of which,
when taken together, shall constitute but one instrument, and shall become
effective when one or more counterparts have been signed by each party hereto
and delivered to the other parties.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be executed by their duly authorized representatives as of
the following date.
Dated: , 1998 PALOMAR MEDICAL TECHNOLOGIES, INC.
----
By:
------------------------------
Title:
---------------------------
[Purchaser Signature Page Continues on the Following Page]
<PAGE>
PURCHASER SIGNATURE PAGE
The undersigned Purchaser hereby executes the Securities Purchase
Agreement with Palomar Medical Technologies, Inc. (the "Company") and hereby
authorizes this signature page to be attached to a counterpart of such document
executed by a duly authorized officer of the Company.
Purchaser Name:
--------------------------
By:
------------------------------------
Title:
------------------------------------
Amount of Investment: $
------------------
Name in which Securities are to be registered:
---------------------------------
Address and facsimile number of registered holder:
- --------------------------------------------------
- --------------------------------------------------
facsimile number:
--------------------------------
Social Security or Tax ID Number:
----------------
Contact name and telephone number
regarding settlement and registration:
-----------------------------------------
-----------------------------------------
SECURITY AGREEMENT - STOCK PLEDGE
This SECURITY AGREEMENT - STOCK PLEDGE (this "Agreement"), dated as of
December 31, 1997, is entered into by and between PALOMAR MEDICAL TECHNOLOGIES,
INC., a Delaware corporation ("Pledgor" or "Borrower"), and COAST BUSINESS
CREDIT, a division of Southern Pacific Bank, a California corporation
("Pledgee"), with reference to the following facts:
RECITALS
A. Pledgor is contemporaneously herewith entering into that certain Secured
Promissory Note, dated as of even date (as the same may be amended, restated,
modified or supplemented from time to time in accordance with its terms, the
"Secured Note").
B. In order to induce Pledgee to enter into the Secured Note, Pledgor has
agreed to execute and deliver this Agreement to Pledgee, securing Pledgor's
obligations owing to Pledgee under the Secured Note with a pledge of Pledgor's
right, title and interest in and to sufficient unrestricted capital stock of
Pledgor, which shall be wholly owned by Pledgor at the time of the delivery of
the stock, such that seventy percent (70%) of the value of said stock shall at
all times be equal to or greater than the principal amount due and payable under
the Secured Note.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
(A) DEFINITIONS. All initially capitalized terms used but not defined
in this Agreement shall have the meanings assigned to such terms
in the Secured Note. In addition, the following terms, as used in
this Agreement, have the following meanings:
"BORROWER" has the meaning set forth in the introduction hereto.
"CODE" means the California Uniform Commercial Code as amended
and supplemented from time to time, and any successor statute;
PROVIDED, HOWEVER, with respect to any Collateral consisting of
"uncertified securities" (as defined in Division 8 of the Code),
"Code" shall mean the Uniform Commercial Code as adopted in the
States of incorporation of each Borrower, as amended and
supplemented from time to time, and any successor statue.
"COLLATERAL" means all of the following:
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(i) Upon execution and return of this Agreement, Coast shall
accept as the Collateral sufficient unrestricted marketable
securities in Pledgor such that seventy percent (70%) of the
market price of said securities shall be equal to or greater
than the principal amount due and owing under the Secured
Note. Pledgor shall use it best efforts to obtain the
authority to issue, and to issue sufficient unrestricted
marketable securities in Pledgor such that seventy percent
(70%) of the market price of the Pledgor marketable
securities shall be equal to or greater than the principal
amount due and owing under the Secured Note ("Pledgor
Shares"). If at any time that Coast is holding the Pledgor
Shares, and the market price decreases such that the
coverage ratio (Market Price of the Pledgor Shares, to the
outstanding principal balance under the Secured Note) is
eighty-five percent (85%) or greater, Pledgor shall provide
Coast, upon demand, with additional Pledgor Shares to reach
a 70% coverage ratio. Coast will release Pledgor Shares to
Pledgor upon collection of principal payments under the
Secured Note provided that the seventy percent (70%)
coverage ratio is maintained.
(ii) The proceeds of each of the foregoing, including any and all
dividends, cash, stock, instruments, and other property from
time to time received, receivable, or otherwise distributed
in respect of or in exchange for any of the Shares or
Options (the "Proceeds").
"SECURED NOTE" has the meaning set forth in Recital A hereto
"EVENT OF DEFAULT" has the meaning given to such term in Section
10.
"LOAN DOCUMENTS" means this Agreement, the Secured Promissory
Note and the other agreements, instruments and documents executed
in connection herewith and therewith.
"PLEDGEE" has the meaning set forth in the introduction hereto.
"PLEDGOR" has the meaning set forth in the introduction hereto.
"SECURED OBLIGATIONS" means Pledgor's obligations under the Loan
Documents and the obligations of Pledgor under this Agreement.
"SHARES" means all of the Pledgor Shares.
"33 ACT" means the Securities Act of 1933, as amended and
supplemented from time to time, and any successor statute, and
any and all rules promulgated in connection therewith.
(B) CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the
singular, references to the singular include the plural, and the
term "including" is not limiting. The words "hereof," "herein,"
"hereby," "hereunder" and other similar terms refer to this
Agreement as a whole and not to any particular provision of this
Agreement. Any reference herein to any document includes any and
all alterations, amendments, extensions, modifications, renewals,
or supplements thereto or thereof, as applicable. Neither this
agreement nor any uncertainty or ambiguity herein shall be
construed
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or resolved against Pledgee or Pledgor, whether under any rule of
construction or otherwise. On the contrary, this Agreement has
been reviewed by Pledgor, Pledgee, and their respective counsel,
and shall be construed and interpreted according to all ordinary
meanings of the words used so as to fairly accomplish the purpose
and intentions of Pledgee and Pledgor.
2. PLEDGE. As security for the prompt and complete payment and performance
of the Secured Obligations, Pledgor hereby, except as otherwise provided for
herein, delivers, pledges, and grants to Pledgee a continuing security interest
in Pledgor's right, title, and interest in and to the Collateral. Sufficient
certificates or instruments representing or evidencing the Collateral shall be
delivered promptly to and held by Pledgee pursuant hereto and shall be in
suitable form for transfer or assignment in blank, all in form and substance
satisfactory to Pledgee. In the event that the securities that comprise the
Collateral are uncertified or in book entry form, then Pledgor shall take such
actions as may be required to register or enter, as the case may be, such
Collateral in the name of Pledgee, and otherwise take such actions as Pledgee
may require for Pledgee's security interest therein to be perfected in
accordance with Section 8313 and 8321 of the Code. In addition, Pledgor shall
provide Pledgee with an opinion of counsel satisfactory to Pledgee, to the
effect that Pledgee has a perfected security interest in the Collateral, that
the Collateral accurately states ownership and capital structure of Pledgor and
such other opinions as Pledgee may require, in form and substance satisfactory
to Pledgee.
3. FURTHER ASSURANCES. Pledgor agrees that it shall cooperate with Pledgee
and shall execute and deliver, or cause to be executed and delivered, to Pledgee
all stock powers, proxies, assignments, financing statements, instruments and
other documents, and shall take all further action, at the expense of Pledgor,
from time to time requested by Pledgee, in order to maintain a continuing,
first-priority, perfected security interest in the Collateral in favor of
Pledgee, and to enable Pledgee to exercise and enforce its rights and remedies
hereunder with respect to the Collateral, and Pledgor agrees that it shall
execute and deliver to Pledgee at Pledgee's request any further applications,
agreements, documents and instruments, and shall perform any and all acts deemed
necessary by Pledgee to carry into effect the terms, conditions, and provisions
of this Agreement and the transactions connected herewith. Should Pledgor fail
to execute or deliver any such applications, agreements, documents, financing
statements and instruments, or to perform any such acts, Pledgor acknowledges
that Pledgee may execute and deliver the same and perform such acts in the name
of Pledgor and on its behalf as its attorney-in-fact in accordance with Section
12 hereof.
4. PLEDGEE'S DUTIES. Pledgee shall not have any duties with respect to the
Collateral other than the duty to use reasonable care if the Collateral is in
its possession. In accordance with Section 9207 of the Code, Pledgee shall be
deemed to have used reasonable care if it observes substantially the same
standard of care with respect to the custody or protection of the Collateral as
it observes with respect to similar assets owned by Pledgee. Without limiting
the generality of the foregoing, Pledgee shall be under no obligation to take
any steps necessary to preserve rights in the Collateral against any other
parties, to sell the same if it threatens to decline in value, or to exercise
any rights represented thereby (including rights with respect to calls,
conversions, exchanges, maturities, or tenders); provided, however, that Pledgee
may, at its option, do so, and any and all expenses incurred in connection
therewith shall be for the account of Pledgor.
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<PAGE>
5. VOTING RIGHTS; DIVIDENDS; ETC..
5.1 During the term of this Agreement, and as long as no Event of
Default is continuing:
(a) Pledgor shall be entitled to exercise any and all voting and
other consensual rights pertaining to the Shares or any part
thereof; provided, however, no vote shall be cast or any
consent, waiver or ratification given or any action taken
which would violate or be inconsistent with the terms of
this Agreement, the Loan Documents or any other instrument
or agreement referred to therein or herein, or which could
have effect of impairing the value of the Collateral or any
part thereof or the position or interest of Pledgee therein.
(b) Pledgor shall be entitled to receive and retain any and all
dividends and distributions paid in respect of the Shares
not otherwise prohibited by the Loan Documents; provided,
HOWEVER, that any and all:
(i) dividends and distributions paid or payable other than
in cash in respect of, and any and all additional
Shares or instruments or other property received,
receivable, or otherwise distributed in respect of, or
in exchange for, any Shares;
(ii) dividends and distributions paid or payable in cash in
respect of any Shares in connection with a partial or
total liquidation or dissolution, merger, consolidation
of any of the Borrowers, or any exchange of stock,
conveyance of assets, or similar corporate
reorganization; and
(iii)cash paid with respect to, payable, or otherwise
distributed on redemption of, or in exchange for, any
Shares, shall be forthwith delivered to Pledgee to hold
as Collateral and shall, if received by Pledgor, be
received in trust for the benefit of Pledgee, be
segregated from the other property or funds of Pledgor,
and be forthwith delivered to Pledgee as Collateral in
the same form as so received (with any necessary
endorsement), and, if deemed appropriate by Pledgee,
Pledgor shall take such actions, including the actions
described in Section 2, as Pledgee may require.
5.2 If an Event of Default shall be continuing or any amounts shall
be due and payable (whether by acceleration, maturity, or
otherwise) under any of the Secured Obligations, all rights of
Pledgor to exercise the voting and other consensual rights that
it would otherwise be entitled to exercise pursuant to Section
5.1(a) and to receive the dividends and distributions that it
would be otherwise be authorized to receive and retain pursuant
to Section 5.1(b) shall, at Pledgee's option, cease, and all such
rights shall at Pledgee's option, thereupon become vested in
Pledgee, and Pledgee shall, at its option, thereupon have the
sole right to exercise such voting and other consensual rights
and to receive and hold as Collateral such dividends and interest
payments. Any payments received by Pledgor contrary to the
provisions of this section 5.2 shall be held in trust by Pledgor
for the benefit of Pledgee, shall be segregated from other funds
of Pledgor, and shall be promptly paid over to Pledgee, with any
necessary endorsement.
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<PAGE>
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Pledgor warrants,
represents, and covenants that:
6.1 Pledgor is and will continue to be a corporation duly organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Pledgor is and will continue
to be qualified and licensed to do business in all jurisdictions
in which any failure to do so wou1d have a Material Adverse
Effect. The execution, delivery and performance by Pledgor of
this Agreement, Secured Promissory Note and the other Loan
Documents (a) have been duly and validly authorized, (b) are
enforceable against Pledgor in accordance with their terms
(except as enforcement may be limited by equitable principles and
by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not
violate Pledgor's articles or certificate of incorporation, or
Pledgor's by-laws, or any law or any material agreement or
instrument which is binding upon Pledgor or its property, and (d)
do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or
instrument which is binding upon Pledgor or its property.
6.2 EXCEPT WITH RESPECT TO APPLICABLE SECURITIES LAWS AND
REGULATIONS, ESTABLISHED BY THE SEC, THERE are no restrictions
upon the transfer of any of the Collateral to or by Pledgee and
Pledgor is the sole beneficial owner of the Collateral and has
the right to pledge and grant a security interest in or otherwise
transfer, SUBJECT TO APPLICABLE SECURITIES LAWS, such Collateral
free of any encumbrances or rights of third parties.
6.3 All of the Collateral is and shall remain free from all liens,
claims, encumbrances, and purchase-money or other security
interests except as created hereby. Pledgor shall not, without
Pledgee's prior written consent sell or otherwise dispose of any
of the Collateral.
6.4 The execution and delivery of this Agreement, and the delivery to
Pledgee of the Shares creates a valid, perfected, and
first-priority security interest in the Collateral in favor of
Pledgee, and all actions necessary or desirable to such
perfection have been duly taken.
6.5 No authorization or other action by, and no notice to or filing
with, any governmental authority or regulatory body is required
either: (a) for the grant by Pledgor of the security interest
granted hereby or for the execution, delivery, or performance of
this Agreement by Pledgor, (b) for the perfection of or exercise
by Pledgee of its rights and remedies hereunder (except as may
have been taken by or at the direction of Pledgor or as maybe
required in connection with a disposition of the Collateral by
laws affecting the offering and sale of securities generally); or
(c) for the exercise by Pledgee of the voting or other rights
provided for in this Agreement or the remedies in respect of the
Collateral pursuant to this Agreement (except as maybe required
in connection with a disposition of the Collateral by laws
affecting the offering and sale of securities generally).
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<PAGE>
6.6 All of the issued and outstanding shares of Common Stock pledged
pursuant to this Agreement are owned by Pledgor and shall at all
times during the term of the Loan Documents bear a restricted
legend confirming their pledged status hereunder.
6.7 Pledgor shall, upon execution hereof, commence its best efforts
to obtain the authority to issue and to issue the necessary
number of unrestricted shares in Pledgor as required under this
Agreement.
6.8 At the time of delivery to Pledgee, all of the outstanding Shares
shall have been duly and validly issued and will be fully paid
and non-assessable.
6.9 Pledgor has made its own arrangements for keeping informed of
changes or potential changes affecting the Collateral (including,
but not limited to, rights to convert, rights to subscribe,
payment of dividends, reorganization or other exchanges, tender
offers, and voting rights), and Pledgor agrees that Pledgee shall
not have any responsibility or liability for informing Pledgor or
any such changes or for taking any action or omitting to take any
such action with respect thereto.
7. SHARE ADJUSTMENTS. In the event that during the term of this Agreement
any reclassification, readjustment, or other change is declared or
made in the capital structure of Pledgor, all new substituted and
additional shares, options, or other securities issued or issuable to
Pledgor by reason of any such change or exercise shall be delivered to
or held by Pledgee under the terms of this Agreement in the same
manner as the Collateral originally Pledged hereunder.
8. OPTIONS. In the event that during the term of this Agreement Options
shall be issued or exercised in connection with the Collateral, such
Options acquired by Pledgor shall be immediately assigned by Pledgor
to Pledgee and all new shares or other securities acquired by Pledgor
shall also be immediately assigned to Pledgee to be held under to the
same terms of this Agreement in the same manner as the Collateral
originally pledged hereunder.
9. CONSENT. Pledgor hereby consents that, from time to time, before or
after the occurrence or existence of any Event of Default with or
without notice to or assent from Pledgor, any other security at any
time held by or available to Pledgee for any of the Secured
Obligations or any other security at any time held by or available to
Pledgee of any other person, firm, or corporation secondarily or
otherwise liable for any of the Secured Obligations, may be exchanged
surrendered, or released and any of the Secured Obligations may be
changed, altered, renewed, extended, continued, surrendered,
compromised, waived, or released, in whole or in part, as Pledgee may
see fit. Pledgor shall remain bound under this Agreement not
withstanding any such change, surrender, release, alteration, renewal,
extension, continuance, compromise, waiver, or inaction, or extension
of further credit.
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10. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default") under this
Agreement;
10.1 The Occurrence of an Event of default under the Secured Note.
10.2 Pledgor shall breach, or be in default of, any of its agreements,
covenants and obligations under this Agreement or the Guaranty;
or;
10.3 Any representation or warranty made by Pledgor under this
Agreement or the Secured Note shall prove to have been untrue
when made.
11. REMEDIES UPON DEFAULT.
11.1 Upon the occurrence of an Event of Default, Pledgee shall have, in
addition to any other rights given by law or in this Agreement, in the
Loan Documents, or in any other agreement between Pledgee and Pledgor,
all of the rights and remedies with respect to the Collateral of a
secured Party under the code, and also shall have, without limitation
the following rights, which Pledgor hereby agrees to be commercially
reasonable.
(a) to receive an amounts payable in respect of the Collateral to
Pledgor under Section 5.1(b) hereof;
(b) to register all or any part of the Collateral on the books of
each of the Borrowers in Pledgee's name or the name of its
nominee or nominees;
(c) to vote all or part of the Shares (whether or not transferred
into the name of the Pledgee) in accordance with Section 5.2
hereof, and give all consents, waivers and ratifications in
respect of the Collateral and otherwise act with respect thereto
as though it were the outright owner thereof; PLEDGOR HEREBY
IRREVOCABLY CONSTITUTES AND APPOINTS PLEDGEE THE PROXY AND
ATTORNEY-IN-FACT OF PLEDGOR, COUPLED WITH AN INTEREST, WITH FULL
POWER OF SUBSTITUTION FOR ANY AND ALL OF SUCH PURPOSES; WHICH
PROXY AND POWER OF ATTORNEY SHALL CONTINUE IN FULL FORCE AND
EFFECT AND TERMINATE UPON THE EARLIER TO OCCUR OF (A) THE
INDEFEASIBLE PAYMENT IN FULL OF THE SECURED OBLIGATIONS, AND (B)
TEN (10) YEARS FROM THE DATE HEREOF.
(d) at any time or from time to time, to sell, assign and deliver, or
grant options to purchase, all or any part of the Collateral, or
any interest therein, at any public or private sale, without
demand of performance, advertisement or notice of intention to
sell or of the time or place of sale or adjournment thereof or to
redeem or otherwise (all of which are hereby waived by Pledgor),
for cash, on credit or for other property, for immediate or
future delivery without any assumption of credit risk, and for
such price or prices and on such terms as the Pledgee in its
absolute discretion may determine; PROVIDED that at least five
(5) days notice of the time and place of any such sale shall be
given to Pledgor. Pledgee shall not be
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obligated to make any such sale of Collateral regardless of
whether any such notice of sale has therefore been given. Pledgor
hereby waives any other requirement of notice, demand, or
advertisement for sale, to the extent permitted by law. Pledgor
hereby waives and releases to the fullest extent permitted by law
any right or equity of redemption with respect to the Collateral,
before or after sale hereunder, and all rights, if any, of
marshaling the Collateral and any other security for the Secured
Obligations or otherwise. At any such sale, unless prohibited by
applicable law, Pledgee may bid for and purchase all or any part
of the Collateral so sold free from any such right of equity or
redemption. Pledgee shall not be liable for failure to collect or
realize upon any or all of the Collateral or for any delay in so
doing nor shall Pledgee be under any obligation to take any
action whatsoever with regard thereto;
(e) to buy the Collateral in its own name, or in the name of a
designee or nominee. Pledgee shall have the right to execute any
document or form, in its name or in the name of the Pledgor, that
may be necessary or desirable in connection with such sale of the
Collateral.
(f) to sell all of or any part of the Collateral by a private
placement, restricting bidders and prospective purchasers to
those who will represent and agree that they are purchasing for
investment only and not for distribution. In so doing, Pledgee
may solicit offers to buy the Collateral, or any part of it for
cash, for a limited number of investors deemed by Pledgee, in its
reasonable judgment, to be responsible parties who might be
interested in purchasing the Collateral. If Pledgee shall solicit
such offers from not less than four (4) such investors, then the
acceptance by Pledgee of the highest offer obtained therefore
shall be deemed to be a commercially reasonable method of
disposition of such Collateral, even though the sales price
established and/or obtained may be substantially less than the
price that would be obtained pursuant to a public offering.
Notwithstanding the foregoing, should Pledgee determine that,
prior to any public offering of any securities contained in the
Collateral, such securities should be registered under the '33
Act and/or registered or qualified under any other federal or
state law, and that such registration and/or qualification is not
practical, Pledgor agrees that it will be commercially reasonable
if a private sale is arranged so as to avoid a public offering
even if offers are solicited from fewer than four (4) investors,
and even though at sales price established and/or obtained may be
substantially less than the price that would be obtained pursuant
to a public offering.
NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY IN THIS
PARAGRAPH 11, should the Event of Default be Pledgor's failure to
make a payment within ten (10) days of its due date, Coast will
be permitted to exercise it rights as described herein against
only that amount of the Collateral sufficient to satisfy the
amount of the past due payment plus all costs, fees and expenses
in connection with the exercise of said rights against the
Collateral. However, in the event Pledgor falls three (3) months
in arrears under the Secured Note, upon ten (10) days written
notice prior to the sale, Coast will be permitted to exercise it
rights as described herein against only that portion of the
Collateral sufficient to obtain any and all amounts due under the
Secured Note plus all costs, fees and expenses in connection with
the exercise of said rights against the Collateral.
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12. PLEDGEE AS PLEDGOR'S ATTORNEY-IN FACT. Pledgor hereby irrevocably
appoints Pledgee as its attorney-in-fact, coupled with an interest,
(i) to arrange for the register, at any time after the occurrence and
during the continuance of an Event of Default, of the Collateral on
the books of each of the Borrowers to the name of Pledgee or to the
name of Pledgee's nominee and (ii) to receive, endorse and collect all
instruments made payable to Pledgor of any dividend, distribution or
other payment on account of the Collateral, or any part thereof, and
to give full discharge for the same and to execute and file
governmental notifications and reporting forms. Pledgor further
authorizes Pledgee to perform any and all acts which Pledgee deems
necessary for the protection and preservation of the Collateral or of
the value of Pledgee's security interest therein, but not limited to
receiving income thereon as additional security hereunder, all at
Pledgor's expense, and Pledgor agrees to repay Pledgee promptly upon
demand any amounts expended hereunder by Pledgee, together with
interest thereon. Pledgor further grants to Pledgee a power of
attorney coupled with an interest to execute all agreements, forms,
applications, documents and instruments and to take all actions and to
do all things as could be executed, taken or done by Pledgor in
connection with the protection and preservation of the Collateral or
this Agreement. This power of attorney is irrevocable and authorizes
Pledgee to act for Pledgor in connection with the matters described
herein without notice to or demand upon Pledgor.
13. GENERAL PROVISIONS
13.1 CUMULATIVE REMEDIES: NO PRIOR RECOURSE TO COLLATERAL. The
enumeration herein of Pledgee's rights and remedies is not
intended to be exclusive, and such rights and remedies are in
addition to and not by way of limitation of any other rights or
remedies that the Pledgee may have under the Secured Note, the
Loan Documents, the Code, or other applicable law. Pledgee shall
have the right, in its sole discretion, to determine which rights
and remedies are to be exercised and in which order. The exercise
of one right or remedy shall not preclude the exercise of any
others, all of which shall be cumulative.
13.2 NO IMPLIED WAIVERS. No act, failure, or delay by Pledgee shall
constitute a waiver of any of its rights and remedies. No single
or partial waiver by Pledgee of any provision of this Agreement,
or of a breach or default hereunder, or of any right or remedy
which the Pledgee may have, shall operate as a waiver of any
other provision, breach, default, right or remedy or of the same
provision, breach, default, right or remedy on a future occasion.
No waiver by Pledgee shall effect its rights to require strict
performance of this Agreement.
13.3 NOTICES. All notices or demands by any party hereto to the other
party and relating to this Agreement shall be sent in accordance
with the terms of Section 9.5 of the Secured Note as follows:
If to Pledgor: Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Attn: Director of Finance
Facsimile No. (781) 676-7330
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With a copy to: Palomar Medical Technologies, Inc.
General Counsel
45 Hartwell Avenue
Lexington, MA 02173
Facsimile No. (781) 676-7330
If to Pledgee: Coast Business Credit
12121 Wilshire Blvd., Ste. 1111
Los Angeles, CA 90025
Attn: Bay Fetner
Facsimile No: (310) 826-2884
13.4 SEVERABILITY. Should any provision, clause or condition of this
Agreement be held by any court of competent jurisdiction to be
void or unenforceable, such defect shall not affect the remainder
of this Agreement.
13.5 INTEGRATION. This Agreement and such other agreements, documents
and instruments as may be executed in connection herewith shall
be construed as the entire and complete agreement between Pledgor
and Pledgee and shall supersede all prior negotiations, all of
which are merged and integrated herein.
13.6 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended except in a writing executed by Pledgor and a
duly authorized officer of Pledgee.
13.7 TIME OF ESSENCE. Time is of the essence in the performance by
Pledgor of each and every obligation under this Agreement.
13.8 MUTUAL WAIVER OF JURY TRIAL. Pledgor and Pledgee each hereby
waive the right to trial by jury in any action or proceeding
based upon, arising out of, or in any way relating to, this
Agreement, or any conduct, acts omission of Pledgor or Pledgee
any of their directors, officers, employees, agents, attorneys or
any other persons affiliated with Pledgor or Pledgee.
13.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective
successors, assigns, heirs, beneficiaries and representatives of
the parties hereto; provided, however, that Pledgor may not
assign or transfer any of its rights under this Agreement without
the prior written consent of Pledgee, and any prohibited
assignment shall be void. No consent by Pledgee to any assignment
shall relieve Pledgor or any guarantor from its liability
hereunder.
13.10PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are used
herein for convenience only. Pledgor acknowledges that the same
may not describe completely the subject matter of the applicable
paragraph, and the same shall not be used in any manner to
construe, limit, define or interpret any term or provision
hereof. This Agreement has
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<PAGE>
been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Pledgor or Pledgee
under any rule of construction or otherwise.
13.11 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of
Pledgor and Pledgee SHALL be governed by and in accordance with
the laws of the State of California; PROVIDED, HOWEVER, the
respective rights of the parties hereto in the Collateral,
including voting, transfer and proxy rights, shall be governed by
the laws of the state of organization of each of the Companies,
respectively, to the extent such laws are applicable to such
rights. Any undefined term used in this Agreement that is defined
in the California Uniform Commercial Code shall have the meaning
therein assigned to that term. As a part of the consideration to
Pledgee to enter into the Secured Note, Pledgor (i) agrees that
all actions and proceedings relating directly or indirectly
hereto shall, at Pledgee's option, be litigated in courts located
within California, and that the exclusive venue therefor shall be
Los Angeles County; (ii) consent to the jurisdiction and venue of
any such court and consents to service of process in any such
action or proceeding by personal delivery or any other method
permitted by law; and (iii) waives any and all rights Pledgor may
have to object to the jurisdiction of any such court, or to
transfer or change the venue of any such action or proceeding.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written above.
"PLEDGOR'
PALOMAR MEDICAL TECHNOLOGIES, INC.
/s/ Louis P. Valente
---------------------------------------
By: Louis P. Valente
Title: CEO and President
"PLEDGEE"
COAST BUSINESS CREDIT, a division of
SOUTHERN PACIFIC BANK, a California
corporation
/s/ Philip Goessler
-------------------------------------
By: Philip Goessler
Title: Vice President
3
SECURED PROMISSORY NOTE
(Term Loan)
Los Angeles, California
$3,233,000 December 31, 1997
FOR VALUE RECEIVED, the undersigned (Borrower"), promises to pay to the
order of COAST BUSINESS CREDIT, a division of Southern Pacific Bank, a
California corporation (Coast"), at 12121 Wilshire Boulevard, Suite 1111, Los
Angeles, California, or at such other address as the holder of this note shall
direct, the principal sum of Three Million Two Hundred Thirty-Three Thousand
Dollars ($3,233,000.00), or the then outstanding principal amount of this Term
Loan made by Coast to Borrower (the "Term Loan" or "Note"), plus interest as
hereinafter provided. The Term Loan plus interest shall be due and payable in
equally monthly installments of 1/24th of the original principal amount of such
Term Loan: such installments to commence on February 28, 1998, and continuing on
the last day of each month thereafter. The entire remaining unpaid principal
balance of this Note, plus any and all accrued and unpaid interest, shall be due
and payable on the earlier of: (i) January 31, 2000, or (ii) the date this Term
Loan terminates by its terms or is terminated by either party in accordance with
its terms.
This Note shall bear interest on the unpaid principal balance hereof
from time to time compounding at a rate equal to the "Prime Rate" (as
hereinafter defined) plus 2.25% per annum, but in no event shall the interest
rate in any month be less than 9% per annum, interest shall be calculated on the
basis of a 360-day year for the actual number of days elapsed. As used herein,
the term "Prime Rate" shall mean the actual "Reference Rate" or the substitute
therefor of the Bank of America NT &SA whether or not that rate is the lowest
interest rate charged by said bank. The interest rate applicable to this Note
shall be adjusted monthly, as of the first day of each month, and the interest
rate charged during each month shall be based on the highest Prime Rate in
effect during said month. If the Prime Rate is unavailable, "Prime Rate" shall
mean the highest of the prime rates published in the Wall Street Journal on the
first business day of the month, as the base rate of corporate loans at large
U.S. money center banks. Accrued interest shall be payable monthly, in arrears,
in addition to the principal payments provided above, commencing on March 1,
1998, and continuing on the first day of each succeeding month.
Principal of, and interest on, this Note shall be payable in lawful
money of the United States of America. If a payment hereunder becomes due and
payable on a Saturday, Sunday or legal holiday, the due date thereof shall be
extended to the next most succeeding business day, and interest shall be payable
thereon during such extension.
In the event any payment of principal or interest on this Note is not
paid within ninety (90) days from its due date, or if any other default or event
of default occurs under
1
<PAGE>
this Note, the Security Agreement-Stock Pledge entered into between the parties
hereto of even date herewith or any other present or future instrument,
document, or agreement between Borrower and Coast, Coast may, at its option, at
any time thereafter, declare the entire unpaid principal balance of this Note
plus all accrued interest to be immediately due and payable, without notice or
demand. Without limiting the foregoing, and without limiting Coast's other
rights and remedies, in the event any installment of principal or interest is
not paid in full on or before ten (10) days from the date due, Borrower agrees
that it would be impossible or extremely difficult to fix the actual damages
resulting therefrom to Coast, and therefore the Borrower agrees immediately to
pay to Coast an amount equal to 5% of the installment (or portion thereof) not
paid, as liquidated damages, to compensate Coast for the internal administrative
expenses in administering the default ("Liquidated Damages"). The acceptance of
any installment of principal or interest by Coast after the time when it becomes
due, as herein specified, shall not be held to establish a custom, or to waive
any rights of Coast to enforce payment when due of any further installments or
any other rights, nor shall any failure or delay to exercise any rights be held
to waive the same.
All payments hereunder are to be applied first to Liquidated Damages,
if any, costs and fees referred to hereunder not otherwise compensated for by
the Liquidated Damages, second to the payment of accrued interest and the
remaining balance to the payment of principal. Any principal prepayment
hereunder shall be applied against principal payments in the inverse order of
maturity. Coast shall have the continuing and exclusive right to apply or
reverse and reapply any and all payments hereunder in its sole discretion.
Borrower agrees to pay all costs and expenses (including without
limitation attorneys' fees) incurred by Coast in connection with or related to
this Note, or its enforcement, whether or not suit be brought. Borrower hereby
further waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note, and Borrower hereby waives the benefits of any statute
of limitations with respect to any action to enforce, or otherwise related to,
this Note.
This Note is secured by the Security Agreement-Stock Pledge and all
other present and future security agreements between Borrower and Coast. Nothing
herein shall be deemed to limit any of the terms or provisions of the Security
Agreement-Stock Pledge or any other present or future document, instrument or
agreement, between Borrower and Coast, and all of Coast's rights and remedies
hereunder and thereunder are cumulative.
In the event any one or more of the provisions of this Note shall for
any reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
2
<PAGE>
No waiver or modification of any of the terms or provisions of this
Note shall be valid or binding unless set forth in a writing signed by a duly
authorized officer of Coast, and then only to the extent therein specifically
set forth. If more than one person executes this Note, their obligations
hereunder shall be joint and several.
COAST AND BORROWER HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I)
THIS NOTE; OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
COAST AND SUCH BORROWER; OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR
SUCH BORROWER OR ANY OF THEIR DIRECTORS, MANAGERS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR SUCH BORROWER.
This Note is payable in, and shall be governed by, the internal laws of
the State of California.
BORROWER:
Palomar Medical Technologies, Inc.
By: /s/ Louis P. Valente
---------------------------------
Name: Louis P. Valente
Title: CEO and President
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements, File Numbers 33-47479, 33-879650, 33-96436, 33-97760,
33-99792, 33-99794, 333-000140, 333-001070, 333-3424, 333-5781, 333-7097,
333-10681, 333-18003, 333-87908, 33-97710, 333-18347, 333-21095, 333-22725,
333-25209, 333-28251 and 333-42129.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 7, 1998
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