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, 1998
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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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 2, 1999, 72,145,509 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 $$43,549,606. 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. 4 to a Schedule 13G filed on January 22,
1999 and Amendment No. 3 to a Schedule 13D filed on February 16, 1999, 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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INDEX
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Item Page No.
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PART I.........................................................................................................1
Item 1. Business.........................................................................................1
(a) Introduction.....................................................................................1
(b) Financial Information About Industry Segments....................................................1
(c) Description of Business..........................................................................1
(d) Financial Information About Exports by Domestic Operations......................................10
Item 2. Properties......................................................................................10
Item 3. Legal Proceedings...............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.............................................11
PART II.......................................................................................................12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................12
Item 6. Selected Financial Data.........................................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........15
(a) Overview........................................................................................15
(b) Results.........................................................................................15
(c) Liquidity and Capital Resources......................................................................19
(d) Year 2000 Issues.....................................................................................21
(e) Nasdaq Stock Market Listing..........................................................................21
(f) Recently Issued Accounting Standard..................................................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................22
Statement Under the Private Securities Litigation Reform Act.............................................22
Risk Factors.............................................................................................23
Item 8. Financial Statements............................................................................27
Reports of Independent Public Accountants............................................................28
Consolidated Balance Sheets as of December 31, 1997 and 1998.........................................30
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998...........31
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998................................................................32
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998...........35
Notes to Consolidated Financial Statements...........................................................37
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosures..............63
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PART III .....................................................................................................64
Item 10. Directors and Executive Officers of the Registrant.............................................64
Item 11. Executive Compensation.........................................................................64
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................64
Item 13. Certain Relationships and Related Transactions.................................................64
PART IV.......................................................................................................65
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................65
(a) Index to Consolidated Financial Statements and Schedules........................................65
(b) Reports on Form 8-K.............................................................................65
(c) Exhibits........................................................................................66
SIGNATURES....................................................................................................73
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PART I
Item 1. Business.
(a) Introduction
Palomar Medical Technologies, Inc. (the "Company," "Palomar," or "we")
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 believed was at that time
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, completed in May of 1998, 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. The Company's exclusive focus
is now the use of lasers in dermatology and cosmetic procedures, with an
emphasis on laser hair removal and research and development relating to that and
other cosmetic laser products. Currently, the Company has three operating
subsidiaries, Palomar Medical Products, Inc. ("PMP"), Esthetica Partners, Inc.
("Esthetica") (formerly Cosmetic Technology International, Inc.) and Star
Medical Technologies, Inc. ("Star"). PMP, located at the Company's headquarters
in Lexington, Massachusetts, oversees the manufacture and sale of the Company's
two ruby hair removal laser system currently on the market. Esthetica, also
based in Lexington, Massachusetts, places the Company's lasers in clinical and
cosmetic settings and shares in a portion of the revenue generated thereby.
Star, based in Pleasanton, California, manufactures the LightSheer(TM) diode
hair removal laser. Palomar has entered into an agreement with Coherent, Inc.
("Coherent') to sell Star to Coherent. The agreement is subject to stockholder
approval and standard closing conditions. (On March 12, 1999, Palomar filed a
proxy statement with the Securities and Exchange Commission that details the
Star Sale.) A Special Meeting of Palomar's stockholders has been scheduled for
April 21, 1999. If the Star sale is approved at that meeting by the holders of a
majority of the shares of Palomar's outstanding common stock, then the sale will
be completed shortly after the meeting date. (See Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview.")
(b) Financial Information About Industry Segments
The Company conducts business in one industry segment, medical products
and services. In 1998 the Company completed the program, begun in 1997, of
divesting all of its non-core electronics subsidiaries. (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 Technology
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 licensed exclusively to Palomar targets the
pigment in a hair follicle and was developed at Massachusetts General Hospital
("MGH"), Palomar's research partner. 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
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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 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
without harming the surrounding skin or surface of the skin. The laser light is
pulsed at a rapid rate covering approximately one square inch at each pulse.
This treatment method allows for a large area of treatment over a relatively
short period of time.
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 the underlying patents 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 Products
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 cooling handpiece, allows for safe and
effective hair removal. In March 1997, Palomar was the first company to receive
FDA clearance to sell and market a ruby laser (the EpiLaser(R) system) 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 LightSheer(TM) diode laser system manufactured by
Star. The LightSheer(TM) diode laser also incorporates the patented
contact-cooling system licensed exclusively to Palomar. Star's high-powered
diode system is a compact, solid-state laser that is significantly smaller than
most current systems, and relatively easy to install and service. The
LightSheer(TM) is the only high-power pulsed diode laser hair removal system
available on the market today.
Palomar recently introduced its second generation ruby laser, the
Palomar E2000(TM), a product which the Company anticipates will be superior to
hair removal lasers currently available in a number of respects, including speed
and efficacy. The Palomar E2000(TM) has already received FDA clearance for hair
removal.
Studies using Palomar's laser hair removal process demonstrated
significant permanent reduction of hair following treatment with the EpiLaser(R)
ruby laser. 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. The EpiLaser(R) and the Palomar E2000(TM)
are the only hair removal lasers on the market that have been cleared by the FDA
for "permanent hair reduction" labeling.
The Hair Removal Market
The market for laser-based hair removal is in its early stages. Palomar
believes that this market remains a growing one. Benefits of Palomar's laser
hair removal process, as compared to other hair removal methods currently
available, 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.
Market surveys report that the great majority 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 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
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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 dissolve hair, 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.
Before the advent of laser hair removal, electrolysis was the only
method available for the long-term removal of body hair. 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 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. 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.
Marketing, Distribution and Service
Pursuant to an agreement executed in November 1997, Coherent acts as
the exclusive distributor for Palomar's hair removal lasers. Under its agreement
with Palomar, Coherent is responsible for sales, marketing, service, training
and education. However, Coherent and Palomar agreed that, beginning January 1,
1999, Palomar would take over all service for Palomar's ruby hair removal
lasers. Coherent has over 200 sales persons worldwide, and 50 service
representatives in the US and over 100 worldwide. If Star is sold to Coherent,
Coherent will continue to act as a distributor of Palomar's products, but on a
non-exclusive basis. If the Star sale is not completed, Coherent will remain as
the Company's exclusive distributor through November 2001, pursuant to the terms
of the Sales Agency Agreement between the parties. In December, 1998, Palomar
signed a letter of intent with Continuum Biomedical, Inc., a medical division of
the scientific laser-based company Continuum Electro-Optics (which is in turn a
wholly-owned subsidiary of Hoya Corp. of Japan), to distribute Palomar's
products (other than Star's LightSheer(TM) laser) on a non-exclusive basis. The
Company intends to tailor distribution methods to different geographic regions
and may include a combination of exclusive and non-exclusive distributors,
independent representatives or direct salespeople. In exchange for a payment of
$2,740 per day from January 20, 1999 until the closing of the Star sale,
Coherent has agreed to waive its exclusive distribution rights under the
Company's Sales Agency Agreement with Coherent, so that Palomar may begin to
sell the Palomar E2000(TM) immediately through other channels, including
Continuum Biomedical, without the necessity of paying commissions to Coherent or
waiting for the Sales Agency Agreement to terminate upon the closing of the Star
sale.
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). The RD-1200(TM) has been on the
market for ten years. In 1998, RD-1200(TM) sales constituted less than 5% of the
Company's sales, and were primarily overseas, in Japan, Korea and other parts of
the world. Intense competition in the medical device industry and market
saturation for this type of laser have reduced RD-1200(TM) sales over the last
five years. In addition, there are less expensive products now available for
this purpose. Palomar expects sales of this product to continue in 1999 at a low
volume to foreign countries where the advantages of ruby laser for treatment of
pigmented lesions is especially important. Palomar sells and services the
RD-1200(TM) through distributors internationally. In the United States, Palomar
provides service through its own service organization.
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Cosmetic Laser Services
An additional avenue that the Company has explored for its laser
technology is the service business conducted through its Esthetica subsidiary,
which was incorporated in 1996 (under the name Cosmetic Technology
International, Inc.) for that purpose. During 1997 and 1998, Esthetica
established a number of test sites to explore business models. Esthetica
provides each of its sites with a turnkey package of laser and medical device
technology, equipment, training and service, strategic advertising and marketing
programs, and management assistance. To date, ten Esthetica revenue-sharing
sites are open and under development.
(ii) Products Under Development
Other Cosmetic Applications
Palomar aims to address dermatology and cosmetic procedure markets
other than hair removal, and its research and development is not limited to hair
removal. (See "Research and Development.")
Palomar will consider a number of alternatives with respect to its
future products, including manufacturing them itself and selling them directly
and/or through distributors or (as in the case of Star) selling the product line
and/or technology to others. Palomar will choose in each case the alternative
which it believes best maximizes long-term stockholder value.
Non-Cosmetic Applications Developed at Star
The only non-cosmetic products under development are all being
developed out of Palomar's Star subsidiary, and these projects would transfer to
Coherent upon the sale of Star. One of the products under development at Star is
a diode laser for burn diagnosis. 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. 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 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. 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.
Non-Cosmetic Applications Developed at Palomar
Another area of non-cosmetic laser product development being conducted
by Palomar is laser tonsillectomy. In June 1994, Palomar 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. Palomar 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 Star's diode lasers
in connection with performing tonsillectomies. The animal studies were completed
successfully in 1997.
Palomar expects that it may take several years before commercial
products are available as a result of any of the above-described non-cosmetic
product development efforts.
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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.
Laser Thrombolysis
In 1993, the Company entered into an agreement with the Edwards LIS
Division of Baxter regarding an integrated system utilizing lasers and catheters
for the removal of blood clots. Under this 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. Palomar owns approximately 10% of
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. The results of
LaTIS' operations and financial position have been immaterial to Palomar to
date.
(iii) Production and Sources and Availability of Materials
Palomar's manufacturing operations are currently located in both
Lexington, Massachusetts and Pleasanton, California. The ruby laser systems are
manufactured in Massachusetts and the diode laser system is manufactured in
California. If Star is sold to Coherent, Palomar will no longer have facilities
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.
(iv) Patents and Licenses
Certain products of the Company and methods for the use of such
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 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 thirteen 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, four of
these patents have been issued. Additionally, the Company extends many of its
domestic filings into foreign applications. To date, ten 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.
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The Company believes it owns, or has the right to use, the basic
patents covering its products. However, each year there are many 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 manufacturing 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.
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. Palomar successfully argued that
the Selvac patent was invalid, and now Selvac has appealed that ruling. See Item
3. "Legal Proceedings.")
Other than the matter 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.")
In August 1995, the Company entered into an agreement with MGH whereby
MGH agreed to conduct clinical trials on a laser treatment for hair
removal/reduction developed at MGH's Wellman Laboratories of Photomedicine. As
part of the agreement, MGH provided the Company with prior data already
generated at MGH with respect to the ruby laser device. 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. 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
approximately $204,000 to perform research and evaluation in the field of hair
removal. During 1998, the Company incurred approximately $517,000 under its
clinical research agreement with MGH and other clinical studies. The Company
expects to incur approximately $350,000 of clinical research with MGH during
1999. The Company is also in the process of negotiating another amendment to
both extend the term and expand the scope of the clinical trial agreement with
MGH.
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. MGH licenses
these patents exclusively to Palomar. Palomar, in turn, has the right to
sublicense these patents to others. Palomar also has the right to exclusively
license any other patents arising out of MGH's Palomar-funded clinical trials.
As consideration for this license, the Company is obligated to pay MGH royalties
of 5% of net revenues on laser hair removal 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.
Star owns four patents, two relating to the use of a high-powered diode
laser for the treatment of psoriasis and subsurface blood vessels, one related
to the design and use of high-powered diode lasers, and one related to laser
diode array packaging. Under a patent license agreement which will take effect
only if and when Star is sold to Coherent (the "Patent License Agreement"),
Palomar will sublicense to Coherent the two MGH hair removal patents discussed
above for a royalty of 7.5% of the net sales price of all licensed products.
Licensed products means products manufactured by Coherent or Star which infringe
one or more claims of either of the two MGH hair removal patents. Assuming it
purchases Star, then, Coherent will have to pay Palomar a 7.5% royalty on all
LightSheer(TM) diode lasers that are sold by Coherent. Palomar, in turn, will
pay a portion of this royalty income back to MGH.
The Patent License Agreement further provides that, if it is sold to
Coherent, Star will grant to Palomar a royalty-free license on its two patents
relating to treatment of subsurface blood vessels, in the following limited
respect: Palomar may sublicense these patents only to other companies in
connection with their manufacture and sale of so-called "dual use devices," that
is, lasers that perform both hair removal and the treatment of subsurface blood
vessels (for example, leg veins). If Palomar does enter into such sublicensing
agreements, it will not have to pay any royalty amounts back to Coherent.
However, for a period of two years from the closing of the Star sale, Palomar
may not offer to sublicense the two subsurface blood vessel patents for
semiconductor lasers that operate in a continuous wave mode or in a
quasi-continuous wave mode
6
<PAGE>
that deliver more than 5 joules in any 50 millisecond period ("Competitive
Products"). After the two year period, Palomar may sublicense dual use devices
that constitute Competitive Products, but then it must pay a royalty back to
Coherent.
The Patent License Agreement also provides that Star will grant to
Palomar a royalty-free license to Star's high-fluence diode laser patent for
uses other than Competitive Products. Once again, Palomar may license this
patent in connection with Competitive Products at the end of the two year
period, but only if it pays a royalty back to Coherent.
All licenses granted under the Patent License Agreement are granted for
the life of the respective patents. The Patent License Agreement also includes a
so-called "most favored licensee" provision, which means that, should either
party grant to a third party a license to any of these patents on more favorable
royalty terms than those established in the Patent License Agreement, then the
other party can immediately obtain that same lower royalty going forward
(assuming that all of the other material terms of the license agreement with the
third party are essentially like those in the Patent License Agreement).
(v) Seasonal Influences
There is no significant seasonal influence on the Company's sales.
(vi) Financing of Operations and Increase in Outstanding Shares
If Star is sold to Coherent, Palomar will receive net proceeds of
approximately $49 million in cash. In addition, as part of the sale of Star,
Coherent has agreed to pay the Company an ongoing 7.5% sublicensing royalty on
future sales of its hair removal lasers. (See "Patents and Licenses.") There can
be no assurance that the sale of Star to Coherent will be completed and that
events in the future will not require the Company to seek additional financing.
The sale must be approved by a majority of the Company's shares outstanding, and
is also subject to standard closing conditions. Financing of the Company's
future operating plan is now to a great extent dependant on completing the sale.
If the sale of Star is not completed the Company will require additional
financing during 1999 and there can be no assurance that any such financing will
be available on terms satisfactory to the Company. Based on its historical
ability to raise funds as necessary and ongoing discussions with potential
financing sources, the Company believes that it will be successful in obtaining
additional financing, if required, in order to fund future operations.
To enhance stockholder value and increase revenues, Palomar will also
consider licensing its intellectual property (in particular, the patents
licensed exclusively to Palomar by MGH under which the Company practices its
proprietary method of skin cooling and hair removal), selling intellectual
property rights that the Company does not intend to exploit, and mergers,
acquisitions or other transactions.
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. Net cash provided by
financing activities totaled approximately $7,050,000 and $31,198,000 for the
years ended December 31, 1998, and December 31, 1997, respectively. If Star is
not sold, 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 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 would be successful
in raising additional capital on favorable terms. (See Notes 1, 6, and 7 to
Financial Statements, Item 5. "Market for Common Equity and Related Stockholder
Matters," and Item 7. "Risk Factors")
The Company has a $10,000,000 revolving line of credit from a bank.
This revolving line of credit matures on March 31, 2000 and bears interest at
the bank's prime rate (7.75% at December 31, 1998). Borrowings are limited to
80% of domestic accounts receivable under 90 days from invoice. A director of
the Company has personally guaranteed borrowings under the line of credit. As of
March 20, 1999, $725,000 was available under that line of credit. Substantially
all of Star's account receivables provide the borrowing base under this line of
credit.
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
7
<PAGE>
shares of common stock have increased to 70,179,027 at December 31, 1998. The
Company also had additional reserved but unissued shares of common stock of
33,807,020 shares at December 31, 1998. As of March 18, 1999, the Company's
issued and outstanding shares of common stock increased to 72,145,509 shares,
and reserved but unissued shares of common stock stood at 31,268,118 shares. A
substantial number of the Company's reserved shares are registered and could be
resold into the public market. (See Item 7. "Risk Factors.")
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 89% of the Company's total
revenues in fiscal 1998. (See - "Marketing, Distribution and Service," Item 7.
"Risk Factors" and Notes 3(i) and 12(d) to Financial Statements.) If Star is not
sold to Coherent, then this Sales Agency Agreement will remain in effect until
November 17, 2001. Otherwise, the Sales Agency Agreement will terminate upon the
closing of the sale of Star.
(viii) Backlog
The Company's backlog of firm orders for its continuing operations at
December 31, 1998, and December 31, 1997, was approximately $3.4 million and
$2.5 million, respectively. This backlog consists almost entirely of orders for
Star's LightSheer(TM) diode laser. The Company has filled $2.1 million of this
year-end backlog in 1999. As of March 20, 1999, the Company's backlog of firm
orders related to Star's LightSheer(TM) was approximately $4.4 million, and, to
the Palomar E2000(TM), approximately $750,000.
(ix) Government Contracts
Not applicable.
(x) Competition
The markets in which the Company is engaged are subject to keen
competition and rapid technological change. Nine other companies, ThermoLase
Corporation; Candela, Inc.; Medical Laser Technologies Ltd. (Aesculap-Medtec);
Light Age, Inc.; Dornier Surgical Products, Inc.; Continuum Biomedical, Inc.;
Polytec PI, Inc. (Lambda Photometics); Leisegang Medical, Inc. 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 1999, making laser hair removal a competitive application within
the cosmetic laser marketplace. The Company also expects that there may be
further consolidation of companies within the laser hair removal industry via
acquisitions, partnering arrangements or joint ventures. 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.
In the cosmetic laser services industry, the Company's Esthetica
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. Esthetica's services will also compete for business with
other aesthetic service providers such as electrologists, beauty 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.")
(xi) Research and Development
Among Palomar's research and development goals in the field of laser
hair removal are to design systems that (1) permit more rapid treatment of large
areas, (2) have high gross margins, and (3) are lower cost, thus addressing
broader markets. Further, Palomar aims to address dermatology and cosmetic
procedure markets other than hair.
8
<PAGE>
During fiscal 1998, fiscal 1997, and fiscal 1996, the Company incurred
approximately $7,029,000 $11,990,000 and $6,297,000, 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, 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 23 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 its
research and development tasks to them on a project basis. In 1998, the Company
spent approximately $178,000 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 43 employees of the Company and its subsidiaries were
engaged full time in research and development activities at December 31, 1998.
Twenty-three of these employees work at Star and will no longer work for Palomar
if Star is sold.
Under the Sales Agency, Development and License Agreement that the
Company entered into with Coherent in November 1997, the Company 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.
Although the Company expects to continue to devote substantial resources to
research and development regardless of whether the sale of Star to Coherent is
consummated, this specific commitment will terminate upon the sale.
(See Item 7. "Risk Factors" and Note 8 to Financial Statements.)
9
<PAGE>
(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.")
(xiv) Number of Employees
As of December 31, 1998, the Company and its PMP, Esthetica and Star
subsidiaries employed 164 people, 3 independent contractors and 14 temporary
employees. Of these employees, 71 are with Star and would not remain with the
Company following the sale of Star.
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.")
(d) Financial Information About Exports by Domestic Operations
Aggregate export sales for the Company's continuing operations were
approximately $3,870,000 for 1996, $5,030,000 for 1997 and $17,360,000 for 1998.
The 1996 export sales consisted primarily of the RD-1200(TM) tattoo removal
laser and the EpiLaser(R) laser system, the 1997 export sales consisted
primarily of the EpiLaser(R) laser system, and the 1998 export sales consisted
primarily of the LightSheer(TM). (See Notes 3(i) and 13 to Financial
Statements.)
Item 2. Properties.
The Company occupies 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
25,000 square feet of office, manufacturing and research space in Pleasanton,
California under two leases expiring in April 1999 and March 2001. Upon the sale
of Star to Coherent, Coherent will assume these leases for Star's operations.
The Company believes that these facilities are in good condition and are
suitable and adequate for its current operations, assuming it does not sell
Star. However, if the Star sale is completed, the Company expects that it will
require additional office, manufacturing and research space for its existing
operations.
Item 3. Legal Proceedings.
On March 7, 1997, Selvac Acquisition Corp. ("Selvac"), a subsidiary of
Mehl Biophile International, Inc. ("Mehl"), 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 subsidiaries and a New Jersey dermatologist. Selvac's complaint
alleged that the Company's EpiLaser(R) ruby laser hair removal system infringed
a patent licensed to Selvac (the "Selvac Patent") and that the Company unfairly
competed by promoting the EpiLaser(R) ruby laser hair removal system for hair
removal before it had received FDA approval for that specific application. On
May 18, 1998 the court granted the Company's motion for partial summary judgment
on the ground that the Selvac patent is invalid because prior art anticipated
it. The court has since denied Selvac's motion for reconsideration of the
summary judgment ruling.
10
<PAGE>
On September 25, 1998, the court denied Selvac's motion for reconsideration of
its prior order dismissing so much of Selvac's unfair competition claim as
relied on interpreting the Food, Drug and Cosmetics Act or FDA regulations, and
dismissed without prejudice the state law remainder of Selvac's unfair
competition claim. On October 26, 1998, Selvac filed its notice of appeal to the
Court of Appeals for the Federal Circuit. Selvac subsequently filed its opening
brief on appeal; the Company filed its opposition. Selvac will likely file a
reply brief in April 1999. The Company is unable to express an opinion as to the
likely outcome of Selvac's appeal.
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"). 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 know 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 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$5,600,000 at December 31, 1998 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. Palomar filed a motion for summary
judgment, asserting that its conversion of the debentures into Palomar common
stock deprives the plaintiffs of standing to bring a claim. That motion has been
denied without prejudice, and the court also denied the plaintiffs' motion for
summary judgment. By mutual agreement, the Asserting Holders and the Company
requested that the case be removed from the Court's October 1998 trial calendar.
The parties have discussed ways to resolve their dispute, including the
restructuring of the debentures (so that Palomar would withdraw its forced
conversion and repay on a modified schedule the original debt, with a
substantial prepayment of principal). But there can be no absolute assurance
that all of the debentureholders, including the Asserting Holders, and the
Company will complete the proposed settlement. If the case is returned to the
trial calendar, the Company expects to vigorously contest the claims of the
Asserting Holders, as the Company believes its position in the lawsuit is
correct, and that the debt cannot properly be accelerated. The court has given
the parties until April 30, 1999 to complete their agreement.
On March 11, 1999, the United States District Court for the Southern
District of New York granted plaintiffs leave to amend their complaint in the
action styled VARLJEN V. H.J. MEYERS, INC., ET. AL. to join the Company, Steven
Georgiev and Joseph Caruso as defendants. On March 17, 1999, the Second Amended
Class Action Complaint ("Complaint") in Varljen was served upon the Company and
Caruso. The Complaint alleges that the Company, Georgiev and Caruso violated the
federal securities laws in various public disclosures that the Company made
directly and indirectly during the period from February 1, 1996 to March 26,
1997. In particular, the Complaint alleges that Palomar, Georgiev and Caruso
misrepresented the Company's financial results and future prospects through
their direct disclosure and through disclosures made by securities analysts and
other third parties. The case is in its earliest stages, and the Company cannot
predict its outcome.
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.
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, at
present 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.
(See "Risk Factor.")
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
11
<PAGE>
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, 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
Fiscal Year Ended
December 31, 1998
-----------------
High Low
---- ---
Quarter Ended March 31, 1998 2 11/32 5/8
Quarter Ended June 30, 1998 1 9/16 31/32
Quarter Ended September 30, 1998 1 7/32 3/4
Quarter Ended December 31, 1998 1 1/8 19/32
As of March 2, 1999, the Company had 939 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 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 third party unaffiliated
individual investors, respectively, for an aggregate of $7,200,000. In addition,
for every share purchased the investor received a warrant to purchase one share
of 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.
Pursuant to Section 4(2) of the Act, on July 24, 1998 the Company sold
1,800,000 shares and 1,200,000 shares of the Company's common stock to the
Rockside Foundation and Mark T. Smith, respectively, for an aggregate of
$3,000,000. In addition, for every share purchased the investors received a
warrant to purchase one share of 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.
Each of these sales was made without general solicitation or
advertising. Each purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment in the Company, and
each purchaser represented to the Company that the securities were being
acquired for investment.
12
<PAGE>
Convertible Debentures
Pursuant to Section 4(2) of the Act, the Company sold a $2,000,000
convertible debenture on March 27, 1998 to Hechtor Wiltshire, an individual
unaffiliated third party investor. The debenture was 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 was not prohibited. If the debenture was not repaid by the
maturity date, the debenture would become convertible at market value at the
option of the debentureholder, as defined. Interest on this debenture was in the
form of a warrant to purchase 125,000 shares of common stock for $.01 per share
exercisable over five years. The Company repaid $1,250,000 and $750,000 of this
$2,000,000 convertible debenture on April 8, 1998 and May 27, 1998,
respectively. The warrant to purchase 125,000 shares of common stock for $.01
per share was exercised by the individual on May 18, 1998.
This sales was made without general solicitation or advertising. The
purchaser was a sophisticated investor with access to all relevant information
necessary to evaluate the investment in the Company, and represented to the
Company that the securities were being acquired for investment.
Conversions of Preferred Stock and Debentures
During the year ended December 31, 1998, the following securities were
converted by the accredited investor unaffiliated third-party holders for the
number of shares of common stock indicated:
<TABLE>
<S> <C> <C> <C>
Number of Shares
Type of Security Number of Shares Common Stock Issued
---------------- ---------------- -------------------
Preferred Stock Series G 1,941 2,703,032
Preferred Stock Series H 3,947 4,188,650
Debenture 5% Due December 31, 2001 N/A 1,160,999
Debenture 5% Due January 13, 2002 N/A 924,029
Debenture 5% Due March 10, 2002 N/A 1,561,064
Debenture 4.5% Due October 21, 1999, 2000, 2001 N/A 60,809
Debenture 6%,7%,8% Due September 30, 2002 N/A 3,328,761
</TABLE>
The Company received no proceeds in connection with any of these
conversions.
13
<PAGE>
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, 1998. 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.
Selected Financial Data
(in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
Nine months
ended Year ended
December 31, December 31,
-----------------------------------------------------------------------------
Statement of Operations Data 1994 1995 1996 1997 1998
-------------- ------------ ------------ ------------ ------------
Revenues $ 40 $ 5,610 $ 17,607 $ 20,995 $ 44,514
Gross Profit (Loss) 22 2,146 3,437 939 21,463
Operating Expenses 5,740 10,985 26,548 42,867 30,897
Loss from Operations (5,718) (8,839) (23,110) (41,929) (9,434)
Net Loss from Continuing Operations (5,689) (8,390) (20,798) (58,369) (9,967)
Net Loss from Discontinued Operations (3) (4,231) (17,066) (27,435) (2,624)
Net Loss (5,692) (12,621) (37,864) (85,804) (12,591)
Basic and Diluted Net Loss Per Common Share:
Continuing Operations $ (0.84) $ (0.60) $ (0.84) $ (1.79) $ (0.18)
Discontinued Operations - (0.30) (0.65) (0.78) (0.04)
-------------- ------------ ------------ ------------ ------------
Total Loss Per Common Share $ (0.84) $ (0.90) $ (1.49) $ (2.57) $ (0.22)
Weighted Average Number of
Common Shares Outstanding
6,759 14,165 26,167 35,105 62,869
============== ============ ============ ============ ============
Balance Sheet Data:
Working Capital $ 2,491 $ 12,998 $ 15,203 $ (7,269) $ (6,004)
Total Assets 6,551 33,656 67,533 28,968 23,526
Long-term debt 2,322 1,765 14,665 12,446 3,150
Stockholders' Equity (Deficit) 2,794 25,289 38,077 (6,184) (6,463)
</TABLE>
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(a) Overview
On December 7, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Coherent, Inc. ("Coherent") to sell all of
the issued and outstanding common stock of Star Medical Technologies, Inc.
("Star"), its 99.96% majority-owned subsidiary, to Coherent for $65 million in
cash. The Company currently owns substantially all of the issued and outstanding
common shares of Star. However, options that have been granted to Palomar and
employees of Star to purchase shares of Star's common stock remain outstanding.
When all of the outstanding options under Star's Stock Option Plan have been
exercised, the Company will own 82.46% of Star's common stock and the employees
will collectively own 17.54% at the time of the sale of Star. Therefore, the
Company anticipates that it will receive net proceeds from this sale of
approximately $46 million after taxes (see Note 7 to the Consolidated Financial
Statements). Under the terms of the Agreement, the Company will also receive an
ongoing royalty of 7.5% from Coherent on the sale of any products by Coherent
that employ certain patented technology related to laser hair removal currently
licensed by the Company on an exclusive basis from Massachusetts General
Hospital ("MGH") (see Note 12(b) to the Consolidated Financial Statements). The
sale is subject to stockholder approval, as well as customary closing
conditions.
If this transaction is consummated, revenues would decline
significantly in the near term and the successful introduction and marketing of
new products will become more critical to the Company's long-term success. A
significant portion of the Company's current revenue base will need to be
replaced with future revenues from the Company's other laser products, including
the Palomar E2000TM hair removal laser introduced in February of 1999 and other
products currently in development. For the year ended December 31, 1998, gross
revenues associated with Star's LightSheer(TM) diode laser comprised 80% of the
Company's total revenues. There can be no assurance that the Palomar E2000TM or
the Company's future products will achieve market acceptance or generate
sufficient margins. Broad market acceptance of laser hair removal is critical to
the Company's success. The Company recognizes the need and intends to broaden
its product line by developing cosmetic laser products other than hair removal
lasers.
In the third and fourth quarters of 1997, the Board of Directors
authorized management to focus the Company on its core laser products and
services business, principally related to laser hair removal, and to proceed
with a restructuring plan to reorganize the Company and divest its electronic
subsidiaries, Dynaco Corp. ("Dynaco"), Dynamem, Inc. ("Dynamem"), Comtel
Electronics, Inc. ("Comtel") and Nexar Technologies, Inc. ("Nexar")
(collectively, the "Electronic Subsidiaries"), and other non-core 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
Consolidated Financial Statements).
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.
(b) Results
(i) REVENUES AND GROSS MARGIN: Year Ended December 31, 1998,
Compared to Year Ended December 31, 1997
For the year ended December 31, 1998, the Company's revenues increased
to $44.5 million as compared to $21.0 million for the year ended December 31,
1997. The increase in the Company's revenue of $23.5 million or 112% from the
year ended December 31, 1997 was mainly due to additional sales volume of $35.6
million associated with the introduction of the LightSheer(TM) diode laser,
partially offset by a decrease in revenue of approximately $12.1 million in
other cosmetic laser product revenue. The Company obtained FDA clearance to
market and sell its LightSheer(TM) laser for hair removal and leg vein treatment
in the United States at the end of 1997. The decrease in sales volume associated
with other cosmetic laser
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product revenue was principally due to declining sales of the Company's
EpiLaser(R) ruby laser. The Company focused on bringing the LightSheer(TM) laser
to market while further developing a new generation of ruby hair removal lasers
during 1998. Using its core ruby laser technology, originally developed for
tattoo and pigmented lesion removal, Palomar developed its long pulse
EpiLaser(R) ruby laser 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 Company's patented cooling handpiece, allows safe and effective hair
removal. Palomar expects its new generation long pulse ruby laser, the Palomar
E2000TM, to permit more rapid treatment of large areas of the body. In July
1998, the Company obtained FDA clearance to market and sell its EpiLaser(R)
laser system in the United States for "permanent hair reduction." In March of
1999, the Company also obtained FDA clearance to market and sell its Palomar
E2000TM laser system in the United States for "permanent hair reduction."
Gross margin for the year ended December 31, 1998 was approximately
$21.5 million (48% of revenues) compared to $939,000 (4% of revenues) for the
year ended December 31, 1997. The increase in gross margin and gross margin
percentage was due to sales of the LightSheer(TM) diode laser system. This new
laser system has a significantly higher gross margin than the Company's
EpiLaser(R) laser and other cosmetic products. The Company anticipates that if
the sale of Star is consummated, its gross margin percentage from the sale of
Palomar E2000TM will decrease compared to the current gross margin from the sale
of its LightSheer(TM) product unless and until the Palomar E2000TM achieves
volume production and manufacturing efficiencies.
(ii) OPERATING AND OTHER EXPENSES: Year Ended December 31, 1998,
Compared to Year Ended December 31, 1997
Research and development costs decreased to $7.0 million for the year
ended December 31, 1998 from $12.0 million for the year ended December 31, 1997.
Research and development expenses as a percentage of revenue totaled 16% for the
year ended December 31, 1998 and 57% for the year ended December 31, 1997. The
decline in spending is primarily the result of the Company's receipt of FDA
approval for the LightSheer(TM) laser at the end of 1997. The continued spending
on research and development reflects the Company's commitment to research and
development for medical devices and delivery systems for cosmetic laser
applications and other medical applications using a variety of lasers, while
continuing dermatology research utilizing the Company's ruby and diode lasers.
Among the Company's research and development goals in hair removal is to design
systems permitting more rapid treatment of large areas, and to produce systems
with high gross margins. Management believes that research and development
expenditures will remain constant over the next year as the Company continues
product development and clinical trials for additional applications for its
lasers and delivery systems in the cosmetic and dermatological markets.
Selling and marketing expenses increased to $15.1 million (34% of
revenues) for the year ended December 31, 1998, from approximately $7.0 million
(33% of revenues) for the year ended December 31, 1997. The increase in selling
and marketing expenses is attributable to the costs associated with the
Company's distribution agreement with Coherent, which increase in direct
proportion to sales volume (see Note 12(d) to the Consolidated Financial
Statements) because Coherent receives a commission for each of the Company's
products that it sells to compensate it for its selling and marketing efforts.
The amounts received by Coherent (as a percentage of the Company's net revenues)
are greater than the Company's selling and marketing expenses when it performed
these functions internally during 1997. The Company anticipates that its selling
and marketing expenses will decrease as a percentage of revenue after the
completion of the sale of Star to Coherent as the Company begins to sell the
Palomar E2000TM through other sales channels, including distribution through
Continuum Biomedical, a distributor of medical products. The Company also will
consider establishing its own direct sales force to compliment these sales
channels. The Company anticipates that its selling and marketing costs incurred
through other sales channels and its own direct sales force will be less than
the commissions currently earned by Coherent as a percentage of the Company's
net revenues.
General and administrative expenses decreased to $8.9 million (20% of
revenues) for the year ended December 31, 1998, as compared to $15.3 million
(73% of revenues) for the year end ended December 31, 1997. This decrease is
attributable to the Company's restructuring and consolidation of administrative
functions in the third and fourth quarters of 1997, including a reduction in
costs attributable to Palomar Technologies, Ltd., Esthetica, Inc. (formerly
Cosmetic Technology International, Inc.), Palomar Medical Products, Inc. and
corporate costs totaling $1.0 million, $2.4 million, $1.9 million and $2.0
million, respectively. This reduction was offset by an increase of $900,000 for
general and administrative expenses incurred at the Company's Star subsidiary to
support its successful introduction of its LightSheer(TM) laser. In previous
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years, the Company used management's time and allocated resources to developing
businesses outside of the medical and cosmetic laser industry and financing the
non-core businesses. Beginning in the fourth quarter of 1997, the Company
focused its efforts on its core business. The Company anticipates general and
administrative expense will continue to stabilize in the future and after the
sale of Star as the Company focuses on its core operations in the cosmetic laser
business.
The Company incurred no business development and financing costs during
the year ended December 31, 1998 as compared to $2.1 million (10% of revenues)
for the year ended December 31, 1997. This decrease is attributable to the
Company's restructuring efforts to focus on its core medical business.
Restructuring and asset write-off costs were approximately $13.0
million for the year ended December 31, 1997. These charges reflect
restructuring and asset write-off costs for certain operating and non-operating
assets that the Company believes were not fully realizable for both the
Company's medical business and other non-medical investments. Included in this
charge is a $2.7 million reserve for severance costs associated with
consolidating selling, general and administrative functions, including the
closing of certain facilities. Through December 31, 1998, the Company paid out
$2.3 million of severance costs and has a remaining liability of $279,000
related to two individuals that will be paid out in 1999, resulting in actual
restructuring costs incurred of $2.6 million. Accordingly, the Company reversed
the balance of this restructuring accrual of approximately $131,000 in its
consolidated statement of operations during the fourth quarter of fiscal 1998
(see Note 4 to Consolidated Financial Statements).
For the year ended December 31, 1998, the Company did not incur
settlement expenses. Settlement costs of $3.2 million were incurred in the year
ended December 31, 1997. These charges consisted mainly of a legal accrual
related to a legal settlement with an investment bank.
Interest expense decreased to $1.3 million for the year ended December
31, 1998, from $7.0 million for the year ended December 31, 1997. The amount for
1997 includes $5.5 million of non-cash interest expense related to the value
ascribed to the discount features of the convertible debentures issued by the
Company during 1996 and 1997. This 82% decrease is primarily the result of a
decrease in convertible debenture financings and the Company's increased use of
conventional financing. Also, operations did not require as much financing in
1998 as compared to 1997.
Interest income decreased to $33,000 for the year ended December 31,
1998, from approximately $457,000 for the year ended December 31, 1997. 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 1998.
Net gain on trading securities represents a realized gain of
approximately $703,000 for the year ended December 31, 1998 related to the
Company's investment in a publicly traded company that was sold during 1998. The
Company does not have any marketable trading securities as of December 31, 1998.
The loss from discontinued operations for the year ended December 31,
1998 was $2.6 million compared to a loss of $27.4 million for the year ended
December 31, 1997. The loss from discontinued operations in 1998 was due to a
delay in the disposition of Dynaco resulting in operating expenses of
approximately $1.1 million above the estimated operating expenses accrued at
December 31, 1997. A loss on disposition of discontinued entities for the year
ended December 31, 1998 of $1.5 million was incurred. The majority of this
charge relates the write-off of the Company's carrying value of its investment
in Nexar during the second quarter of 1998.
(iii) REVENUES AND GROSS MARGIN Year Ended December 31, 1997,
Compared to Year Ended December 31, 1996
Revenues from continuing operations for the year ended December 31,
1997 were $21.0 million as compared to $17.6 million 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) hair removal laser
system and service revenue and with the RD-1200(TM) tattoo removal and pigmented
lesion treatment 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.
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Gross margin for the year ended December 31, 1997 was $939,000 (4% of
revenues) compared to $3.4 million (20% 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 under-absorbed 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 which
led to the successful introduction and sales of its LightSheer(TM) laser in
1998.
(iv) OPERATING AND OTHER EXPENSES: Year Ended December 31, 1997,
Compared to Year Ended December 31, 1996
Research and development costs increased to $12.0 million (57% of
revenues) for the year ended December 31, 1997, from $6.3 million (36% of
revenues) for the year ended December 31, 1996. This 90% 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.
Selling and marketing expenses increased to $7.0 million (33% of
revenues) for the year ended December 31, 1997, from $5.1 million (29% of
revenues) for the year ended December 31, 1996. This 37% increase reflected the
Company's effort to expand its marketing and distribution for the Company's
EpiLaser(R) laser system.
General and administrative expenses increased to $15.3 million (73% of
revenues) for the year ended December 31, 1997, from $9.8 million (55% of
revenues) for the year ended December 31, 1996. This 57% increase was the result
of additional administrative resources required at the Company's now closed
separate 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, totaling approximately $500,000. Additional general and administrative
costs were also incurred at Palomar Medical Products, Inc., Esthetica and
Palomar Technologies, Ltd. totaling approximately $1.7 million, $2.3 million and
$1.0 million, respectively. The majority of these general and administrative
expenditures incurred by the subsidiaries were for employee and infrastructure
expenses to manage the transition from a development stage company to the
commercialization stage.
Business development and financing costs decreased to $2.1 million (10%
of revenues) for the year ended December 31, 1997, from $2.9 million (16% of
revenues) for the year ended December 31, 1996. This 28% decrease is
attributable to the Company's restructuring efforts to focus on its core medical
product and service businesses.
Restructuring and asset write-off costs totaling $13.0 million were
incurred for the year ended December 31, 1997 as compared to $1.7 million for
the year ended December 31, 1996. These charges reflect restructuring and asset
write-off costs for certain operating and non-operating assets that the Company
believes were not fully realizable for both the Company's medical business and
other non-medical investments. Included in this charge for 1997 is a $2.7
million charge for severance costs associated with consolidating the selling,
general and administrative functions, including the closing of certain
facilities. Through December 31, 1998, the Company paid out $2.3 million of
severance costs and has a remaining liability of $279,000 to two individuals
that will be paid out in 1999 resulting in total restructuring costs incurred of
$2.6 million. Accordingly, the Company reversed the balance of this
restructuring accrual of approximately $131,000 in its consolidated statement of
operations during the fourth quarter of fiscal 1998 (see Note 4 to Consolidated
Financial Statements).
Settlement and litigation costs increased to $3.2 million for the year
ended December 31, 1997 from $880,000 for the year ended December 31, 1996.
These costs are primarily attributable to a lawsuit brought by an investment
bank. In
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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 $1.9 million.
Interest expense from continuing operations increased to $7.0 million
for the year ended December 31, 1997, from $272,000 for the year ended December
31, 1996. This amount for 1997 includes $5.5 million of non-cash interest
expense related to the value ascribed to the discount features of the
convertible debentures issued by the Company.
Interest income decreased to $457,000 for the year ended December 31,
1997, from $1.4 million 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.
Loss from discontinued operations was $27.4 million for the year ended
December 31, 1997 as compared with a loss of $17.1 million for the year ended
December 31, 1996. The Company also reported a gain of $2.1 million on the
disposition of its discontinued operations. This amount includes a gain of $6.2
million related to the disposition of 1,960,736 shares of Nexar common stock
which was offset by losses incurred and accrued of $4.1 million on the
disposition of Dynaco and its wholly owned subsidiaries. The Company completed
the disposition of Comtel and Dynamem on December 9, 1997. The disposition of
Dynaco was completed in May of 1998 (see Note 2 to the Consolidated Financial
Statements).
(c) Liquidity and Capital Resources
The Company is a holding company with no significant operations or
assets other than its investments in operating subsidiaries and strategic
investments. The Company depends upon dividends, cash advances and/or other cash
payments from its subsidiaries to meet its cash flow requirements. To date, the
Company's operating subsidiaries have required cash advances from the Company to
fund their operations.
On December 7, 1998, the Company entered into a Agreement and Plan of
Reorganization (the "Agreement") with Coherent to sell all of the issued and
outstanding common stock of Star, its 99.96% majority-owned subsidiary, to
Coherent. The Company currently owns substantially all of the issued and
outstanding common shares of Star. However, options outstanding granted to
Palomar and employees of Star to purchase shares of Star's common stock remain
outstanding. When all of the outstanding options under Star's Stock Option Plan
have been exercised, the Company will own 82.46% of Star's common stock and the
employees will collectively own 17.54%. See Note 7 to the Financial Statements.
Under the terms of the Agreement, the selling price of Star is $65 million. In
addition, the Company will receive an ongoing royalty of 7.5% from Coherent on
the sale of any products by Coherent that use certain patents currently licensed
by the Company on an exclusive basis from Massachusetts General Hospital. See
Note 12(b) to the Financial Statements. This sale is subject to the approval of
the stockholders of Palomar. The Company anticipates that it will receive net
proceeds of approximately $49 million for the sale. The Company intends to use
these funds to support its ongoing operations and research and development
activities.
As of December 31, 1998, the Company had $1.9 million in cash and cash
equivalents. In order to meet its cash flow requirements and fund operating
losses at its subsidiaries, the Company generated $9.8 million and $3.0 million
in net proceeds from the issuance of common stock and short-term notes payable,
respectively, during the year ended December 31, 1998. The Company's net cash
used in operating activities for the year end ended December 31, 1998 was
approximately $11.1 million which includes approximately $2.1 million of net
cash generated from Star's operating activities. The Company's net loss for the
year ended December 31, 1998 included approximately $2.7 million of non-cash
depreciation and amortization expense.
As of December 31, 1998, the Company's accounts receivable totaled $9.9
million as compared to $2.2 million as of December 31, 1997. The amount at
December 31, 1998 is principally related to accounts receivable from the sale of
Star's LightSheer(TM) diode laser. The Company began shipping this product in
the first quarter of 1998. The increase in this balance from 1997 is related to
the sale of Star's LightSheer(TM) diode laser product. The Company's allowance
for doubtful accounts totaled approximately $364,000 as of December 31, 1998,
compared to $746,000 as of December 31, 1997. This reduction was principally due
to a decrease in the allowance for doubtful accounts for write-offs during 1998
of certain accounts receivable related to the sales of the Company's EpiLaser(R)
laser systems sold in 1997 totaling approximately $565,000, and an increase in
the allowance for doubtful accounts for the Company sale of its LightSheer(TM)
diode laser products during 1998.
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As of December 31, 1998 accounts payable totaled approximately $6.6
million as compared to $4.2 million as of December 31, 1997. This increase of
$2.4 million is principally due to the additional purchases of inventory and
additional plant cost for the manufacturing of the Company's LightSheer(TM)
product during the fourth quarter of 1998 and the buildup of inventory for the
anticipated sales of Palomar E2000(TM) laser system.
The Company anticipates that capital expenditures for 1999 will total
approximately $1.0 million, consisting primarily of machinery, equipment and
computers and peripherals. The Company expects to finance these expenditures
with cash on hand, its line of credit and equipment leasing lines. However,
there can be no assurance that the Company will be able to obtain the necessary
financing.
The Company has a $10,000,000 revolving line of credit from a bank.
This revolving line of credit matures on March 31, 2000 and bears interest at
the bank's prime rate (7.75% at December 31, 1998). Borrowings are limited to
80% of domestic accounts receivable under 90 days from invoice. A director of
the Company has personally guaranteed borrowings under the line of credit. As of
March 20, 1999, approximately $725,000 was available under this line of credit.
The Company entered into a Loan Agreement with Coherent, pursuant to
which Coherent agreed to loan the Company money to help finance the Company's
working capital requirements. These loans are collateralized by Star's
inventory. As of December 31, 1998, the total amount outstanding under this loan
agreement was $4.0 million (see Note 6 to the Consolidated Financial
Statements).
In connection with the disposition of Comtel, a former wholly-owned
subsidiary in the electronics segment, the Company guaranteed $2.5 million of a
$3.3 million line of credit extended by a 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 $1.5 million in the event the Company
is obligated to honor this guaranty. The amount BTC has outstanding under the
line of credit at December 31, 1998 was approximately $2.1 million.
Regardless of whether the sale of Star to Coherent is consummated, the
Company's strategic plan is to continue to fund research and development for its
medical and cosmetic laser products. The Company expects to expand the scope and
extend the term of its current Clinical Trial Agreement with MGH following the
sale of Star. This research and development effort entails extensive clinical
trials. These activities are an important part of the Company's business plan.
Due to the nature of clinical trials and research and development activities, it
is not possible to predict with any certainty the timetable for completion of
these research activities or the total amount of funding required to
commercialize products developed as a result of such research and development.
The rate of research and the number of research projects underway are dependent
to some extent upon external funding. While the Company is regularly reviewing
potential funding sources in relation to these ongoing and proposed research
projects, there can be no assurance that the current levels of funding or
additional funding will be available, or, if available, on terms satisfactory to
the Company.
The Company will consider a number of alternatives with respect to its
future products, including manufacturing them itself and selling them directly
and/or through distributors or selling the product line and/or technology to
others. The Company will in each case choose the alternative which it believes
best maximizes profitability and long-term shareholder value.
The Company has historically incurred significant losses. While the
Company achieved profitable operations for the three and six months ended
December 31, 1998, primarily related to the operations of Star, there can be no
assurance that this will continue. Therefore, the Company may need to continue
to secure additional financing to complete its research and development
activities, commercialize its current and proposed medical products and
services, and fund ongoing operations.
There can be no assurance that the sale of Star to Coherent will be
completed (resulting in cash proceeds to the Company of $49 million) and that
events in the future will not require the Company to seek additional financing.
The sale must be approved by the Company's stockholders, and is also subject to
regulatory approval and other standard closing conditions. Financing of the
Company's future operating plan is now to a great extent dependant on completing
the sale. If the sale of Star is not completed the Company will require
additional financing during 1999 and there can be no assurance that any such
financing will be available on terms satisfactory to the Company. Based on its
historical ability to raise funds as
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necessary and ongoing discussions with potential financing sources, the Company
believes that it will be successful in obtaining additional financing, if
required, in order to fund future operations.
The report of the Company's independent public accountants in
connection with the Company's Consolidated Balance Sheets at December 31, 1998
and 1997, and the related Consolidated Statements of Operations, Stockholders'
Equity (Deficit) and Cash Flows for the three years ended December 31, 1998
includes an explanatory paragraph stating that the Company's recurring losses,
working capital deficiency and stockholders' deficit raises substantial doubt
about the Company's ability to continue as a going concern.
(d) Year 2000 Issues
During 1998, the Company has been actively engaged in addressing Year 2000
(Y2K) issues, which result from the use of two-digit, rather than four-digit,
year dates in software, a practice which could cause date-sensitive systems to
malfunction or fail because they may not recognize or process date information
correctly.
State of Readiness:
To manage its Y2K program, the Company has divided its efforts into
four program areas:
o Information Technology (computer hardware and software)
o Physical Plant (manufacturing equipment and facilities)
o Products (including product development)
o Extended Enterprise (suppliers and customers)
For each of these program areas, the Company is using a four-step
approach:
o Ownership (creating awareness, assigning tasks)
o Inventory (listing items to be assessed for Y2K readiness)
o Assessment (prioritizing the inventoried items, assessing
their Y2K readiness, planning corrective actions, developing
initial contingency plans)
o Corrective Action Deployment (implementing corrective actions,
verifying implementation, finalizing and executing contingency
plans)
At December 31, 1998, the Ownership, Inventory and Assessment steps
were essentially complete for all program areas. The Company expects to complete
Corrective Action Deployment by June 1999.
Costs to Address Y2K Issues:
The Company's estimated aggregate costs for its Y2K activities from
1998 through 2000 are expected to be less than $100,000. Through December 31,
1998 the Company has spent approximately $20,000.
Risks of Y2K Issues and Contingency Plans:
The Company continues to assess the Year 2000 issues relating to its
physical plant, products and suppliers. The Company intends to develop a
contingency planning process to mitigate worst-case business disruptions such as
delays in product delivery, which could potentially result from events such as
supply chain disruptions. The Company expects its contingency plans to be
complete by June 1999.
(e) Nasdaq Stock Market Listing
The Company has been notified by the Nasdaq Stock Market ("Nasdaq") that
for continued listing on the Nasdaq SmallCap Market the Company must meet
Nasdaq's minimum bid price requirement of $1.00 per share. Because the
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Company's stock price fell below $1.00 for a 30 day trading period between
August 28 and October 9, 1998, it is now subject to delisting. The Company met
with representatives of Nasdaq on March 18, 1999 and presented arguments
supporting continued listing. At the hearing, the Company volunteered to delist
from the Nasdaq SmallCap Market on May 18, 1999 if it is not in compliance with
the minimum bid price requirement by that date. The Company expects that it will
be in compliance by that date, as a result of the reverse split and the Star
sale. Nasdaq's decision is still pending. To regain compliance with the minimum
bid price requirement, the Company has asked its stockholders to approve a
reverse split of the Company's common stock. However, the reverse split may not
enable the Company to regain compliance with the minimum bid price requirement
in time to prevent delisting. The Company's management anticipates that the
absence of the Nasdaq listing for the Company's common stock would have an
adverse effect on the market for, and potentially the market price of, the
Company's common stock. The delisting of the common stock would likely reduce
stockholders' ability to buy and sell Company common stock, and the Company's
ability to raise capital. If the Company's common stock is delisted from Nasdaq,
the Company expects that brokers would continue to make a market in the
Company's common stock on the OTC Bulletin Board.
(f) Recently Issued Accounting Standard
In February 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.133 Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The Company believes that the adoption of
this new accounting standard will not have a material impact on the Company's
financial statements.
Item 7A Quantitative And Qualitative Disclosures About Market Risk
(i) Derivative Financial Instruments, Other Financial Instruments,
and Derivative Commodity Instruments.
As of December 31, 1998, the Company did not participate in any
derivative financial instruments or other financial and commodity instruments
for which fair value disclosure would be required under SFAS No. 107. All of the
Company's investments are considered cash equivalents money market accounts that
are carried on the Company's books at amortized cost, which approximates fair
market value. Accordingly, the Company has no quantitative information
concerning the market risk of participating in such investments.
(ii) Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. The Company's
investment portfolio of cash equivalents is subject to interest rate
fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.
The Company's exposure to currency exchange rate fluctuations has been
and is expected to continue to be modest due to the fact it currently sells its
products in United States dollars. The Company does not engage in foreign
currency hedging activities.
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 the
sale of Star, financing of future operations, and the Company's research
partnership with MGH) 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 risk factors identified 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
22
<PAGE>
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
IF WE DO NOT CLOSE THE SALE OF OUR STAR SUBSIDIARY, WE MAY NOT HAVE ENOUGH MONEY
TO FINANCE FUTURE OPERATIONS.
We have recently signed an agreement with Coherent in which Coherent
has agreed to buy our Star subsidiary for $65 million in cash. The sale must be
approved by stockholders holding a majority of the shares of our outstanding
common stock. The sale is also subject to other standard closing conditions. We
may not receive a sufficient number of stockholder votes to approve the
transaction, or the transaction may fail to close for other reasons. Our future
operating plan is now to a great extent dependant on completing the sale, in
that it will provide us with the money necessary to finance our future
operations, including research and product development.
WE MAY BE DELISTED FROM NASDAQ. DELISTING MAY REDUCE YOUR ABILITY TO BUY AND
SELL OUR COMMON STOCK AND OUR ABILITY TO RAISE MONEY.
We have been notified by the Nasdaq Stock Market that for continued
listing on the Nasdaq SmallCap Market we must meet Nasdaq's minimum bid price of
$1.00 per share. Because our stock price fell below $1.00 for a 30 day trading
period between August 28 and October 9, 1998, it is now subject to delisting.
Nasdaq held a hearing on our delisting on March 18, 1999. Nasdaq's decision is
pending. To regain compliance with the minimum bid price requirement, we have
asked our stockholders to approve a one-for-seven reverse split of our common
stock. At the March 18, 1999 hearing, the Company volunteered to delist from the
Nasdaq SmallCap Market on May 18, 1999 if it is not in compliance with the
minimum bid price requirement by that date. We expect that we will be in
compliance by that date as a result of the reverse split and the Star sale.
Nevertheless, the reverse split may not enable us to regain compliance with the
minimum bid price requirement in time to prevent delisting. The delisting of our
common stock would likely reduce stockholders' ability to buy and sell our
common stock and our ability to raise capital. If our common stock is delisted
from the Nasdaq SmallCap Market, it will likely be quoted on the "pink sheets"
maintained by the National Quotation Bureau, Inc. or Nasdaq's OTC Bulletin
Board. These listings can make trading more difficult for stockholders. In
addition, a reverse split itself could hurt the market price of our common
stock.
WE MAY NEED TO SECURE ADDITIONAL FINANCING, AND OUR AUDITORS HAVE EXPRESSED
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have a history of losses. As a result, the report of our independent
public accountants in connection with our Consolidated Balance Sheets as of
December 31, 1998 and 1997, and the related Consolidated Statements of
Operations, Stockholders' Equity (Deficit) and Cash Flows for the three years
ended December 31, 1998 includes an explanatory paragraph stating that our
recurring losses, working capital deficiency and stockholders' deficit raises
substantial doubts about our ability to continue as a going concern. If we do
not sell our Star subsidiary, we may have to secure additional financing to
complete our research and development activities, commercialize our current and
proposed cosmetic laser products, and fund ongoing operations. We may also
determine, depending upon the opportunities available, to seek additional debt
or equity financing to fund the costs of acquisitions or expansion. If we
finance an acquisition with our stock, our issuance of such stock could result
in dilution to the interests of our stockholders. Additionally, if we incur
indebtedness to fund increased levels of accounts receivable, finance the
acquisition of capital equipment, or if we issue debt securities in connection
with any acquisition we will be subject to risks associated with incurring
substantial additional indebtedness. One of those risks is that interest rates
may fluctuate and our cash flow may be insufficient to pay principal and
interest on any such indebtedness.
WE WILL CONTINUE TO BE DEPENDENT ON COHERENT IF WE DO NOT SELL STAR.
Under our sales agency agreement with Coherent, which will remain in
effect until November, 2001 if we do not sell Star to Coherent, Coherent
receives a marketing and sales commission, based on the end-user price, for each
of our lasers that it sells. If Coherent remains as our exclusive distributor
because we do not close the Star sale, Coherent may not be successful in
distributing our lasers or may not give sufficient priority to marketing our
products. In addition, Coherent may develop, market and manufacture its own
lasers that incorporate our proprietary technology and compete with our lasers,
in which case it must
23
<PAGE>
pay us a royalty on such sales. Under our agreement, if we are unable or
unwilling to manufacture the cosmetic laser products to be distributed by
Coherent, then we must license to Coherent the technology necessary to make such
products.
OUR FUTURE REVENUE DEPENDS ON OUR DEVELOPING NEW PRODUCTS.
We face rapidly changing technology and continuing improvements in
cosmetic laser technology. In order to be successful, we must continue to make
significant investments in research and development in order to develop in a
timely and cost-effective manner new products that meet changing market demands,
enhance existing products, and achieve market acceptance for such products. We
have in the past experienced delays in developing new products and enhancing
existing products. If we sell our Star subsidiary, our future revenue will be
entirely dependent on sales of newly introduced products. Although we have
recently introduced a new hair removal laser, it may not achieve market
acceptance or generate sufficient margins. In addition, the market for this type
of hair removal laser may already be saturated. At present, broad market
acceptance of laser hair removal is critical to our success. We need to
diversify our product line by developing cosmetic laser products other than hair
removal lasers.
WE FACE INTENSE COMPETITION FROM COMPANIES WITH SUPERIOR FINANCIAL, MARKETING
AND OTHER RESOURCES.
The laser hair removal industry is highly competitive, and companies
frequently introduce new products. We compete in the development, manufacture,
marketing and servicing of hair removal lasers with numerous other companies,
many of which have substantially greater financial, marketing and other
resources than we do. As a result, some of our competitors are able to sell hair
removal lasers at prices significantly below the prices at which we sell our
hair removal lasers. In addition, if and when we sell Star, our current
distributor, Coherent, one of the largest and best financed laser companies,
will become our competitor, and we will have to find new ways to distribute our
products. Our laser products also face competition from alternative medical
products and procedures, such as electrolysis and waxing, among others. We may
not be able to differentiate our products from the products of our competitors,
and customers may not consider our products to be superior to competing products
or medical procedures, especially if competitive products and procedures are
offered at lower prices. Our competitors may develop products or new
technologies that make our products obsolete or less competitive.
OUR QUARTERLY OPERATING RESULTS MAY DECREASE IF WE SELL STAR, AND THAT MAY HURT
THE PRICE OF OUR COMMON STOCK.
Almost all of our revenues in our most recent two quarters were
attributable to sales of the LightSheer(TM) diode laser manufactured by Star. If
we sell Star, our revenues will decline significantly. If our operating results
fall below the expectations of investors or public market analysts, the price of
our common stock could fall dramatically.
OUR LASERS ARE SUBJECT TO NUMEROUS FDA REGULATIONS. COMPLIANCE IS EXPENSIVE AND
TIME-CONSUMING. OUR PRODUCTS MAY NOT BE ABLE TO OBTAIN THE NECESSARY FDA
CLEARANCES BEFORE WE CAN SELL THEM.
All of our products are laser medical devices. Laser medical devices
are subject to FDA regulations regulating clinical testing, manufacture,
labeling, sale, distribution and promotion of medical devices. Before a new
device can be introduced into the market, we must obtain clearance from the FDA.
Compliance with the FDA clearance process is expensive and time-consuming, and
we may not be able to obtain such clearances timely or at all.
WE ARE DEPENDENT ON THIRD PARTY RESEARCHERS.
We are substantially dependent upon third party researchers, over whom
we do not have absolute control, to satisfactorily conduct and complete research
on our behalf and to grant us favorable licensing terms for products which they
may develop. At present, our principal research partner is the Wellman Labs at
Massachusetts General Hospital. We provide research funding, laser technology
and optics know-how in return for licensing agreements with respect to specific
medical applications and patents. Our success will be highly dependent upon the
results of the research. We cannot be sure that such research agreements will
provide us with marketable products in the future or that any of the products
developed under these agreements will be profitable for us.
24
<PAGE>
OUR COMMON STOCK COULD BE FURTHER DILUTED AS THE RESULT OF OUR ISSUING
CONVERTIBLE SECURITIES, WARRANTS AND OPTIONS.
In the past, we have issued convertible securities, such as debentures
and preferred stock, and warrants in order to raise money. We have also issued
options and warrants as compensation for services and incentive compensation for
our employees and directors. We have a substantial number of shares of common
stock reserved for issuance upon the conversion and exercise of these
securities. Our issuing additional convertible securities, options and warrants
could affect the rights of our stockholders, and could reduce the market price
of our common stock.
OUR PROPRIETARY TECHNOLOGY HAS ONLY LIMITED PROTECTIONS.
Our business could be materially and adversely affected if we are not
able to protect adequately our proprietary intellectual property rights. We rely
on a combination of patent, trademark and trade secret laws, license and
confidentiality agreements to protect our proprietary rights. We generally enter
into non-disclosure agreements with our employees and customers and restrict
access to, and distribution of, our proprietary information. Nevertheless, we
may be unable to deter misappropriation of our proprietary information, to
detect unauthorized use and to take appropriate steps to enforce our
intellectual property rights. Our competitors also may independently develop
technologies that are substantially equivalent or superior to our technology.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, we cannot prevent someone else from
asserting a claim against us in the future for violating their intellectual
property rights. In addition, costly and time consuming lawsuits may be
necessary to enforce patents issued or licensed exclusively to us, to protect
our trade secrets and/or know-how or to determine the enforceability, scope and
validity of others' intellectual property rights.
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, we can
conduct only limited searches to determine whether our 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 us 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 us on satisfactory
terms, or that we could redesign our 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 us from manufacturing and selling some of our products. This could have
a material adverse effect on our business, results of operations and financial
condition.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DISCOURAGE POTENTIAL TAKEOVER
ATTEMPTS.
Certain provisions of our Second Restated Certificate of Incorporation,
our By-laws, and Delaware law could be used by our incumbent management to make
it more difficult for a third party to acquire control of us, even if the change
in control might be beneficial to our stockholders. This could discourage
potential takeover attempts and could adversely affect the market price of our
common stock. In particular, we may issue preferred stock in the future without
stockholder approval, upon terms determined by our board of directors. The
rights of our common stockholders may be adversely affected by the rights of
holders of any preferred stock issued in the future. Our 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, or of discouraging a third party
from acquiring, a majority of our outstanding stock.
25
<PAGE>
AS WITH ANY NEW PRODUCTS, THERE IS SUBSTANTIAL RISK THAT THE MARKETPLACE MAY NOT
ACCEPT OR BE RECEPTIVE TO THE POTENTIAL BENEFITS OF OUR PRODUCTS.
Market acceptance of our current and proposed products will depend, in
large part, upon our or any marketing partners to demonstrate to the marketplace
the advantages of our products over other types of products. There can be no
assurance that the marketplace will accept applications or uses for our current
and proposed products or that any of our current or proposed products will be
able to compete effectively.
WE FACE RISKS ASSOCIATED WITH PENDING LITIGATION.
We are involved in disputes with third parties. Such disputes have
resulted in litigation with such parties. We have 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 us. An
adverse result in the MEHL patent litigation, the action relating to the Swiss
Franc Debentures, or the Varljen litigation (all described in detail in Item 3)
could have a material adverse effect on our business, financial condition and
results of operations. We are 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.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT
PERSONNEL.
As a small company with less than 100 employees (assuming the sale of
Star) our success depends on the services of key employees in executive and
research and development positions. The loss of the services of one or more of
these employees could have a material adverse effect on us.
WE FACE A RISK OF FINANCIAL EXPOSURE TO PRODUCT LIABILITY CLAIMS IN THE EVENT
THAT THE USE OF OUR PRODUCTS RESULTS IN PERSONAL INJURY.
Our products are 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 our products. Further, in the event that any of our products prove to be
defective, we may be required to recall and redesign such products. Although we
have not experienced any material losses due to product liability claims to
date, there can be no assurance that we will not experience such losses in the
future. We maintain general liability insurance in the amount of $1,000,000 per
occurrence and $2,000,000 in the aggregate and maintain 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 us or that such
coverage will be adequate for liabilities actually incurred. In the event we are
found liable for damages in excess of the limits of our insurance coverage, or
if any claim or product recall results in significant adverse publicity against
us, our business, financial condition and results of operations could be
materially and adversely affected. In addition, although our products have been
and will continue to be designed to operate in a safe manner, and although we
attempt to educate medical personnel with respect to the proper use of our
products, misuse of our products by medical personnel over whom we cannot exert
control may result in the filing of product liability claims or significant
adverse publicity against us.
COMPUTER SYSTEMS ON WHICH WE RELY MAY NOT 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. We are at this time utilizing internal
resources to identify, correct or reprogram, and test our systems for year 2000
compliance. However, there can be no assurance that the systems of other
companies on which our 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 our 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 our earnings.
26
<PAGE>
Item 8. Financial Statements
<TABLE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Reports of Independent Public Accountants 28
Consolidated Balance Sheets as of December 31, 1997 and 1998 30
Consolidated Statements of Operations for the years ended December 31, 1996,
1997 and 1998 31
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996,
1997 and 1998 32
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 35
Notes to Consolidated Financial Statements 37
</TABLE>
27
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Palomar Medical Technologies, Inc:
We have audited the accompanying consolidated balance sheets of Palomar
Medical Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, 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, 1998. 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. as of and for the year ended
December 31, 1997 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 audits 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, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 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 11, 1999 (except for the
matter discussed in Note 12(c)
as to which the date is March 17, 1999).
28
<PAGE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Nexar Technologies, Inc.
Southborough, Massachusetts
We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements (which are not shown
separately herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Nexar Technologies, Inc. and
subsidiary as of December 31, 1996 and for the periods ended December 31, 1995
and 1996 (not shown separately herein), were audited by other auditors whose
report dated January 24, 1997 (except with respect to the purchased technology
matter discussed in Note 2 as to which the date is February 28, 1997), expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Nexar Technologies, Inc. and
subsidiary as of December 31, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
February 13, 1998 (except for
Note 10 which is as of
March 20, 1998)
29
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, December 31,
1997 1998
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,003,300 $1,874,718
Marketable securities 1,449,326 -
Accounts receivable, net of allowance for doubtful accounts of
approximately $746,000 and $364,000 in 1997 and 1998, respectively 2,248,680 9,938,121
Inventories 4,711,474 5,416,342
Other current assets 2,153,941 1,056,388
---------------- ----------------
Total current assets 13,566,721 18,285,569
---------------- ----------------
NET ASSETS OF DISCONTINUED OPERATIONS (NOTE 2) 5,825,602 -
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 6,455,586 3,314,087
---------------- ----------------
OTHER ASSETS:
Cost in excess of net assets acquired, net of accumulated amortization of
approximately $1,280,000 and $1,882,000 in 1997 and 1998, respectively 2,302,348 1,699,983
Deferred financing costs 591,609 58,923
Other non-current assets 225,706 167,352
---------------- ----------------
Total other assets 3,119,663 1,926,258
---------------- ----------------
$28,967,572 $23,525,914
================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $1,640,465 $6,290,041
Accounts payable 4,150,982 6,553,745
Accrued liabilities 13,759,854 10,301,624
Current portion of deferred revenue 1,284,395 1,143,796
---------------- ----------------
Total current liabilities 20,835,696 24,289,206
---------------- ----------------
NET LIABILITIES OF DISCONTINUED OPERATIONS - 1,680,171
---------------- ----------------
LONG-TERM DEBT, NET OF CURRENT PORTION 12,445,563 3,150,000
---------------- ----------------
DEFERRED REVENUE, NET OF CURRENT PORTION 1,870,000 870,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value-
Authorized - 5,000,000 shares
Issued and outstanding -
16,397 shares and 6,993 shares
at December 31, 1997 and 1998, respectively
(Liquidation preference of $8,228,082 as of December 31, 1998) 164 69
Common stock, $.01 par value-
Authorized - 120,000,000 shares
Issued - 45,792,585 shares and 70,524,027 shares
at December 31, 1997 and 1998, respectively 457,926 705,240
Additional paid-in capital 147,356,579 160,733,433
Accumulated deficit (152,359,497) (166,263,346)
Less: Treasury stock - (345,000 shares at cost) (1,638,859) (1,638,859)
---------------- ----------------
Total stockholders' deficit (6,183,687) (6,463,463)
---------------- ----------------
$28,967,572 $23,525,914
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
30
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Years Ended December 31,
1996 1997 1998
------------------ ----------------- ----------------
<S> <C> <C> <C>
REVENUES $17,606,871 $20,994,546 $44,514,057
COST OF REVENUES 14,169,471 20,055,963 23,050,834
------------------ ----------------- ----------------
Gross profit 3,437,400 938,583 21,463,223
------------------ ----------------- ----------------
OPERATING EXPENSES:
Research and development 6,297,477 11,990,332 7,029,348
Sales and marketing 5,076,941 6,959,750 15,132,595
General and administrative 9,752,922 15,332,241 8,866,530
Business development
and other financing costs 2,879,603 2,060,852 -
Restructuring and asset write-off (Note 4) 1,660,808 3,325,000 (131,310)
Settlement and litigation costs 880,000 3,199,000 -
------------------ ----------------- ----------------
Total operating expenses 26,547,751 42,867,175 30,897,163
------------------ ----------------- ----------------
Loss from operations (23,110,351) (41,928,592) (9,433,940)
INTEREST EXPENSE (271,619) (6,993,898) (1,290,905)
INTEREST INCOME 1,355,488 456,945 33,080
NET GAIN (LOSS) ON TRADING SECURITIES 2,033,371 (52,272) 703,211
ASSET WRITE-OFF (NOTE 4) (1,397,000) (9,658,000) -
OTHER INCOME (EXPENSE) 591,853 (193,262) 21,311
------------------ ----------------- ----------------
NET LOSS FROM CONTINUING OPERATIONS (20,798,258) (58,369,079) (9,967,243)
------------------ ----------------- ----------------
LOSS FROM DISCONTINUED OPERATIONS (NOTE 2):
Loss from operations (20,895,534) (29,508,755) (1,090,885)
Gain (Loss) on dispositions, net 3,830,000 2,073,943 (1,533,295)
------------------ ----------------- ----------------
NET LOSS FROM DISCONTINUED OPERATIONS (17,065,534) (27,434,812) (2,624,180)
------------------ ----------------- ----------------
NET LOSS $ (37,863,792) $ (85,803,891) $(12,591,423)
================== ================= ================
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations $(0.84) $(1.79) $(0.18)
Discontinued operations (0.65) (0.78) (0.04)
------------------ ----------------- ----------------
TOTAL LOSS PER COMMON SHARE $(1.49) $(2.57) $(0.22)
================== ================= ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 26,166,538 35,105,272 62,868,696
================== ================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
31
<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, 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>
Additional Unrealized
Paid-in Accumulated (Loss) Gain on Subscriptions
Capital Deficit Marketable Receivable
Securities
------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $54,152,385 $(25,864,657) $-- $(1,988,709)
Sale of common stock pursuant to warrants and
options 7,569,226 -- -- --
Sale of common stock 6,049,618 -- -- --
Payments received on subscriptions receivable -- -- -- 2,441,556
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 30,821,677 -- -- --
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,139 -- -- --
Conversion of preferred stock, including accrued
dividends and interest of $782,602 744,124 -- -- --
Conversion of convertible debentures 145,260 -- -- --
Redemption of convertible debentures (41,530) -- -- --
Value ascribed to convertible debentures 2,757,860 -- -- --
Redemption of preferred stock (3,123,127) -- -- --
Exercise of underwriter's warrants 1,057,500 -- -- (1,057,500)
Exercise of stock options in majority controlled
subsidiary 50,000 -- -- --
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,019,022 -- -- --
Issuance of common stock for minority interest in
Star Medical subsidiary 1,747,482 -- -- --
Issuance of common stock in exchange for license
rights 369,574 -- -- --
Issuance of common stock for acquisition of
Dermascan, Inc. 489,650 -- -- --
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,156 -- -- --
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758 -- -- --
Return of escrowed shares 460 -- -- --
Amortization of deferred financing costs (77,683) -- -- --
Unrealized loss on marketable securities -- -- (342,500) --
Preferred stock dividends -- (1,242,751) -- --
Net loss -- (37,863,792) -- --
------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653)
============================================================
</TABLE>
<TABLE>
<S> <C>
Total
Stockholders
Equity (Deficit)
-------------------
BALANCE, DECEMBER 31, 1995 25,288,754
Sale of common stock pursuant to warrants and
options 7,598,907
Sale of common stock 6,061,380
Payments received on subscriptions receivable 2,441,556
Issuance of preferred stock, including common stock issued
as a placement fee, net of issuance costs 30,823,147
Issuance of common stock for 1995 employer 401(k)
matching contribution 160,598
Conversion of preferred stock, including accrued
dividends and interest of $782,602 788,687
Conversion of convertible debentures 145,606
Redemption of convertible debentures (41,530)
Value ascribed to convertible debentures 2,757,860
Redemption of preferred stock (3,123,152)
Exercise of underwriter's warrants 5,000
Exercise of stock options in majority controlled
subsidiary 50,000
Issuance of common stock for conversion of debentures at
Tissue Technologies, Inc. 1,027,156
Issuance of common stock for minority interest in
Star Medical subsidiary 1,749,723
Issuance of common stock in exchange for license
rights 370,143
Issuance of common stock for acquisition of
Dermascan, Inc. 490,000
Issuance of common stock for investment banking and merger
and acquisition consulting services 476,724
Compensation expense related to warrants issued to
non-employees under SFAS No. 123 532,758
Return of escrowed shares --
Amortization of deferred financing costs (77,683)
Unrealized loss on marketable securities (342,500)
Preferred stock dividends (1,242,751)
Net loss (37,863,792)
------------
BALANCE, DECEMBER 31, 1996 $ 38,076,591
=== ==== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
32
<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 costs 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>
Additional Unrealized (Loss)
Paid-in Accumulated Gain on Marketable Subscriptions
Capital Deficit Securities Receivable
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $104,900,551 $(64,971,200) $(342,500) $(604,653)
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,606,083 -- -- --
Reduction in subscriptions receivable -- -- -- 604,653
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 14,999,840 -- -- --
Issuance of common stock for 1996 employer 401(k)
matching contribution 317,280 -- -- --
Conversion and redemption of preferred stock (3,926,317) -- -- --
Conversion of convertible debentures and issuance
of common stock to an investor 16,935,713 -- -- --
Issuance of common stock for investment banking, merger
and acquisition and consulting services 52,925 -- -- --
Value ascribed to the discount feature of
convertible debentures issued 3,750,812 -- -- --
Unrealized gain on marketable securities -- -- 342,500 --
Preferred stock dividends -- (1,584,406) -- --
Guaranteed value of common stock associated with
Dermascan acquisition (216,562) -- -- --
Issuance of common stock for technology 1,146,388 -- -- --
Purchase of stock for treasury -- -- -- --
Gain related to the issuance of common stock by
Nexar Technologies, Inc. 7,409,866 -- -- --
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000 -- -- --
Net loss -- (85,803,891) -- --
----------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $147,356,579 $(152,359,497) $ -- $ --
==========================================================
</TABLE>
Total
Stockholder
Equity (Deficit)
----------------
BALANCE, DECEMBER 31, 1996 $38,076,591
Sale of common stock pursuant to warrants,
options and Employee Stock Purchase Plan 1,614,234
Reduction in subscriptions receivable 604,653
Sale of preferred stock, net of issuance costs of
approximately $1,000,000 15,000,000
Issuance of common stock for 1996 employer 401(k)
matching contribution 318,154
Conversion and redemption of preferred stock (3,865,096)
Conversion of convertible debentures and issuance
of common stock to an investor 17,010,363
Issuance of common stock for investment banking, merger
and acquisition and consulting services 53,125
Value ascribed to the discount feature of
convertible debentures issued 3,754,943
Unrealized gain on marketable securities 342,500
Preferred stock dividends (1,584,406)
Guaranteed value of common stock associated with
Dermascan acquisition (216,562)
Issuance of common stock for technology 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
Value ascribed to warrant to purchase common
stock issued to Coherent, Inc. 380,000
Net loss (85,803,891)
------------
BALANCE, DECEMBER 31, 1997 $(6,183,687)
=== ==== ============
The accompanying notes are an integral part of these
consolidated financial statements.
33
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<S> <C> <C> <C>
Preferred Stock Common Stock
-----------------------------------------------
Number $0.01 Number
of Shares Par Value of Shares
----------------------------------------------
BALANCE, DECEMBER 31, 1997 16,397 $ 164 45,792,585
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan -- -- 192,211
Issuance of common stock for 1997 employer 401(k) matching contribution -- -- 311,887
Conversion of preferred stock (5,888) (59) 6,891,682
Conversion of convertible debentures -- -- 7,035,662
Issuance of common stock net of investment banking fees -- -- 10,200,000
Redemption of preferred stock (3,516) (36) --
Value ascribed to warrants issued to investment banker -- -- --
Common stock issued for advisory services -- -- 100,000
Costs incurred related to the issuance of common stock -- -- --
Preferred stock dividends and penalties -- -- --
Net loss -- -- --
------------- ------------- -----------
BALANCE, DECEMBER 31, 1998 6,993 $ 69 70,524,027
============= ============= ===========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Common Stock Treasury Stock
----------------------------------------------------
$0.01 Number
Par Value of Shares Cost
----------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 457,926 (345,000) ($ 1,638,859)
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan 1,923 -- --
Issuance of common stock for 1997 employer 401(k) matching contribution 3,118 --
Conversion of preferred stock 68,917 --
Conversion of convertible debentures 70,356 -- --
Issuance of common stock net of investment banking fees 102,000 -- --
Redemption of preferred stock -- -- --
Value ascribed to warrants issued to investment banker -- -- --
Common stock issued for advisory services 1,000 -- --
Costs incurred related to the issuance of common stock -- -- --
Preferred stock dividends and penalties -- -- --
Net loss -- -- --
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ 705,240 (345,000) ($ 1,638,859)
============= ============= =============
</TABLE>
<TABLE>
<S> <C> <C> <C>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity (Deficit)
---------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 147,356,579 ($152,359,497) ($ 6,183,687)
Sale of common stock pursuant to warrants, options and Employee
Stock Purchase Plan 64,208 -- 66,131
Issuance of common stock for 1997 employer 401(k) matching contribution 251,163 -- 254,281
Conversion of preferred stock 583,310 -- 652,168
Conversion of convertible debentures 6,368,820 -- 6,439,176
Issuance of common stock net of investment banking fees 9,738,000 -- 9,840,000
Redemption of preferred stock (3,615,522) -- (3,615,558)
Value ascribed to warrants issued to investment banker 171,000 -- 171,000
Common stock issued for advisory services 99,000 -- 100,000
Costs incurred related to the issuance of common stock (283,125) -- (283,125)
Preferred stock dividends and penalties -- (1,312,426) (1,312,426)
Net loss -- (12,591,423) (12,591,423)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 $ 160,733,433 ($166,263,346) ($ 6,463,463)
============= ============= =============
</TABLE>
34
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
--------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(37,863,792) $(85,803,891) $(12,591,423)
Less: Net Loss from Discontinued Operations (17,065,534) (27,434,812) (2,624,180)
------------ ------------ ------------
Net Loss from Continuing Operations (20,798,258) (58,369,079) (9,967,243)
------------ ------------ ------------
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities-
Depreciation and amortization 2,343,013 2,246,412 2,676,651
Restructuring and asset write-off costs 3,057,808 12,983,000 (131,310)
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) --
Non-cash interest expense related to debt 163,680 5,473,077 63,652
Non-cash compensation related to common stock and warrants 836,982 205,238 171,000
Realized gain on marketable securities (835,197) (577,969) --
Unrealized (gain) loss on marketable securities (1,198,174) 669,293 (703,211)
Changes in assets and liabilities,
Purchases of marketable securities (10,355,055) (152,938) --
Net sale of marketable securities 10,244,044 2,234,436 2,152,537
Accounts receivable (82,025) (1,809,371) (7,689,441)
Inventories (4,661,443) (3,390,396) (704,868)
Other current assets (1,514,858) (1,005,781) 1,097,553
Accounts payable 1,243,161 1,378,637 2,402,763
Accrued liabilities 4,727,008 3,546,543 639,934
Deferred revenue 35,773 2,948,247 (1,140,599)
------------ ------------ ------------
Net cash used in operating activities (16,918,640) (33,043,310) (11,132,582)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,180,112) (5,777,446) (403,189)
Increase in other assets (1,176,527) (95,830) (19,628)
Loans to related parties (7,338,625) (1,250,000) --
Loans to unrelated parties (2,236,531) -- --
Payments received on loans to related parties 9,322,284 941,288 --
Guaranteed value associated with Dermascan acquisition -- (216,562) --
Net proceeds from notes receivable -- -- --
Investment in nonmarketable securities (2,077,054) (1,057,631) --
------------ ------------ ------------
Net cash used in investing activities (6,686,565) (7,456,181) (422,817)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
35
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 14,169,441 16,715,169 --
Proceeds from notes payable -- 3,500,000 --
Deferred financing costs incurred related to convertible debentures (1,365,217) -- --
Redemption of convertible debentures (930,000) (196,000) (2,196,667)
Proceeds from (payments of) notes payable and capital lease obligations (260,224) (4,856,479) 3,010,817
Proceeds from issuance of common stock 13,715,287 1,462,121 9,840,000
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan -- -- 66,131
Issuance of preferred stock 30,823,147 15,000,000 --
Purchase of treasury stock -- (427,102) --
Payment of contingent note payable (500,000) -- --
Cost incurred in connection with the issuance of common stock -- -- (283,125)
Redemption of preferred stock, including accrued dividends of $71,223
and $771,876 in 1996 and 1998, respectively (3,194,375) -- (4,387,434)
Proceeds from line of credit -- -- 1,000,000
Payments received on subscription receivable 2,009,592 -- --
Deferred costs (932,661) -- --
============ ============= ============
Net cash provided by financing activities 53,534,990 31,197,709 7,049,722
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,929,785 (9,301,782) (4,505,677)
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (30,073,633) 12,676 3,377,095
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 12,436,254 12,292,406 3,003,300
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 12,292,406 $ 3,003,300 $ 1,874,718
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 280,659 $ 534,037 $ 1,094,759
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Conversion of convertible debentures and related accrued
interest, net of financing fees $ 1,172,762 $ 17,010,363 $ 6,439,176
============ ============ ============
Subscription received in connection with warrant
exercises $ 1,057,500 $ -- $ --
============ ============ ============
Conversion of preferred stock $ 788,687 $ 414,904 $ 652,168
============ ============ ============
Issuance of common stock for purchase of technology
related to discontinued operations $ -- $ 1,148,941 $ --
============ ============ ============
Exchange of preferred stock for investment in a
discontinued operation $ -- $ (4,280,000) $ --
============ ============ ============
Investment banking and consulting fees for services related
to the issuance of common stock and convertible debentures $ 709,224 $ 53,125 $ --
============ ============ ============
Issuance of common stock for employer 401(k)
matching contribution $ 160,598 $ 318,154 $ 254,281
============ ============ ============
Issuance of common stock for minority interest
in Star Medical Technologies subsidiary $ 1,749,723 $ -- $ --
============ ============ ============
Issuance of common stock for advisory services performed
in 1997 $ -- $ -- $ 100,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
36
<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). The Company substantially completed the divestiture
program in May of 1998.
Some of the Company's medical laser products are in various stages of
development; and, accordingly, the success of future operations is subject to a
number of risks similar to those of other companies with products in similar
stages of development. Principal among these risks are the successful
development and marketing of the Company's products, obtaining 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 including the pending sale of its Star Medical
Technologies, Inc. ("Star") to Coherent, Inc. ("Coherent), as discussed below,
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. Net cash provided by financing activities
totaled approximately $53,535,000, $31,198,000 and $7,050,000 for the years
ended December 31, 1996, 1997 and 1998, respectively. If the Company does not
complete the sale of Star to Coherent the Company believes that it will require
additional financing during the next twelve-month period to continue to fund
operations and growth. This additional financing could be in the form of sales
of securities to private investors which are generally sold at a discount to the
publicly quoted market price 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.
On December 7, 1998, the Company entered into a Agreement and Plan of
Reorganization (the "Agreement") with Coherent to sell all of the issued and
outstanding common stock of Star, its 99.96% majority-owned subsidiary, to
Coherent. The Company currently owns substantially all of the issued and
outstanding common shares of Star. However, options outstanding granted to
Palomar and employees of Star to purchase shares of Star's common stock remain
outstanding. When all of the outstanding options under Star's Stock Option Plan
have been exercised, the Company will own 82.46% of Star's common stock and the
employees will collectively own 17.54%. See Note 7. Under the terms of the
Agreement, the selling price of Star is $65 million. In addition, the Company
will receive an ongoing royalty of 7.5% from Coherent on the sale of any
products by Coherent that use certain patents currently licensed by the Company
on an exclusive basis from Massachusetts General Hospital. See Note 12(b). This
sale is subject to the approval of the stockholders of Palomar.
The Agreement may only be terminated by (i) mutual consent of the
Company, Star and Coherent, or (ii) Coherent, if Palomar's Board of the Company
approves a superior proposal to sell Star to a different party, or (iii) either
party after May 1, 1999. The Company anticipates that this sale will close by
May 1, 1999, so long as the Company obtains stockholder approval.
(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 consist of the manufacture and sale of personal computers, high-density
flexible electronics circuitry and memory modules. The Company substantially
completed this plan in May of 1998.
37
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Nexar Technologies, Inc. ("Nexar") was included in the electronics
business segment. Nexar is an early-stage company that manufactures, markets and
sells personal computers. 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.
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. As of December 31, 1998 the Company
beneficially owned 2,406,080 shares of Nexar's common stock, representing
approximately a 19% ownership interest and had no other significant obligations
related to Nexar, other than the guaranty to GFL Advantage Fund Limited ("GFL")
discussed below. The Company has been actively trying to sell its remaining
shares of Nexar common stock; however, the Company may not be successful since
Nexar filed in the United States Bankruptcy Court a petition for reorganization
under Chapter 11 of Title 11 of the United States Code on December 17, 1998.
Furthermore, Nexar has been delisted from The Nasdaq Stock Market due to Nexar's
failure to satisfy Nasdaq minimum listing requirements.
The Company has accounted for its investment in Nexar as a discontinued
operation using the equity method. During 1998, the Company recorded a charge to
discontinued operations of $1,524,966 as a result of management's decision to
write-down the carrying value of its investment in Nexar. During the years ended
December 31, 1996 and 1997, the Company recognized gains on the disposition of
shares of Nexar common stock of $3,830,000 and $6,221,689, respectively. These
amounts are included in "Gain (Loss) on Dispositions, net" in the Consolidated
Statements of Operations.
The following is the summarized financial information for Nexar:
<TABLE>
<CAPTION>
December 31,
1996 1997
------------------------- ------------------------
<S> <C> <C>
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
Year Ended December 31,
1996 1997
------------------------- ------------------------
Net Revenues $18,695,364 $33,608,063
Gross Profit 2,302,881 740,151
Net Loss (7,510,139) (13,346,380)
</TABLE>
On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 shares of Nexar's common stock to GFL for $2,000,000. Under the
terms of the Exchange Agreement, Palomar guaranteed GFL a minimum selling price
of $5.00 per share with respect to 400,000 shares of Nexar's common stock over a
two-year time period. The Company is obligated to pay GFL on January 1, 2000 the
difference between $5.00 and the price at which GFL sells the shares of Nexar's
common stock. As of December 31, 1998, the deferred liability related to this
transaction totaled $1,680,171 and represents the total amount due to GFL after
GFL sold their 400,000 common shares of Nexar stock.
38
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The other entities that were 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 was a $850,000 unsecured promissory note
that was due on February 15, 1998. The second installment was a $2.8 million
unsecured promissory note due in forty-eight monthly installments, beginning
February 1, 1999. This promissory note was fully reserved by the Company during
1997, as its ultimate collectibility was believed to be uncertain. BTC did not
make the first installment on February 1, 1998 and on October 7, 1998 the
Company and BTC agreed to reduce the principal balances of the $850,000 note and
the $2.8 million note to a total of $1,000,000. BTC paid $500,000 during 1998
and the balance is due April 5, 1999. The amended note is guaranteed by the
principal shareholders of BTC.
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 are being made over twenty-four
months, beginning December 31, 1997 and interest will accrue at the bank's prime
rate (7.75% at December 31, 1998) plus 2.25%. This promissory note has been
collateralized by 3,250,000 shares of the Company's common stock that are held
in escrow, are not entitled to vote and are not considered outstanding. The
Company also guaranteed up to $2,500,000 of Comtel's borrowings from this
creditor until November 30, 1999. 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.
In connection with the disposition of Comtel, 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 collectibility is uncertain. To date,
no amounts have been received under this restructured note receivable from the
customer, nor does the Company anticipate receiving any amounts from this note
receivable in the foreseeable future.
In phase II, BTC agreed to purchase all of the issued and outstanding
stock of Dynaco. The phase II purchase price was $5,346,000, of which $2,673,000
was to be paid in cash and $2,673,000 was to be paid in BTC common stock of
equal value. Alternatively, the Company could have elected to have the entire
phase II purchase paid in cash at a value of $3,500,000. During phase II BTC had
the option of selling Dynaco to a third party if agreed to by the Company and
BTC. Phase II was required to be completed by June 30, 1998. Consistent with the
terms of the agreement with BTC, the Company entered into a Stock Purchase
Agreement with Quick Turn Circuits, Inc. ("QTC") on May 26, 1998 pursuant to
which QTC purchased 100% of the issued and outstanding shares of common stock of
Dynaco for $3,200,000.
As of December 31, 1997, the Company recognized a loss of approximately
$4,148,000 related to the phase I and phase II dispositions. These charges have
been netted in "Gain (Loss) on Dispositions, net" in the accompanying
Consolidated Statements of Operations. As of December 31, 1997, the Company
accrued for the estimate of Dynaco's 1998 operating loss through June 30, 1998
of approximately $850,000. Through the date of disposition of Dynaco, the
Company recognized additional operating losses totaling $1,090,885. During 1998,
the Company recorded a loss on disposition of $8,329 related to the ultimate
sale of Dynaco to QTC.
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, ("APB No. 30") the consolidated financial statements of the
Company have been reclassified to reflect the dispositions of the aforementioned
subsidiaries that comprise the electronics segment.
39
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 (liabilities) of these
entities have been reported as "Net Assets (Liabilities) 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>
<CAPTION>
December 31,
1997 1998
-------------- --------------
<S> <C> <C>
Current Assets $5,683,694 $ -
Total Assets 11,506,145 -
Current Liabilities 5,375,353 -
Total Liabilities 5,680,543 (1,680,171)
-------------- --------------
Net Assets (Liabilities) of Discontinued
Operations $5,825,602 $(1,680,171)
============== ==============
</TABLE>
The assets and liabilities of the discontinued operations as of
December 31, 1997 represent the financial position of Dynaco and the Company's
liability associated with the sale of Nexar common stock to GFL. The net
liability as of December 31, 1998 represents the Company's liability associated
with the sale of Nexar common stock to GFL.
<TABLE>
<CAPTION>
Year Ended December 31, Period Ended May 26,
1996 1997 1998
---------------- ---------------- ------------------------
<S> <C> <C> <C>
Revenues $52,491,572 $57,663,080 $6,471,701
Net Loss from Discontinued Operations $(17,065,534) $(27,434,812) $(2,624,180)
</TABLE>
The loss from operations for all of the discontinued operations from
the measurement date, October 1, 1997, through the date of disposition for
Comtel and Dynamem or December 31, 1997 for Dynaco, total approximately
$3,405,000. Dynaco's loss from operations for the period beginning January 1,
1998 and ending May 26, 1998, the date of disposition, totaled $1,940,885.
(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 including Star, a
99.96% majority owned subsidiary as of December 31, 1998. 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.
40
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
(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, 1997 and 1998.
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. There were no available-for-sale securities
as of December 31, 1997 and 1998. 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. As of December 31, 1997, marketable securities
consisted of American Material & Technologies Corporation, held for trading
purposes. As of December 31, 1998, the Company did not have any investments in
marketable securities.
(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, 1997 and 1998, inventories
consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
--------------- ----------------
<S> <C> <C>
Raw materials $2,928,350 $2,478,289
Work-in-process 727,284 1,330,822
Finished goods 1,055,840 1,607,231
--------------- ----------------
$4,711,474 $5,416,342
=============== ================
</TABLE>
Included in finished goods inventory at December 31, 1998 is
approximately $938,000 of service inventory and finished good test units
currently being evaluated by medical professionals.
41
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
------------------------------------ ----------------------
<S> <C>
Machinery and equipment 3-8 Years
Furniture and fixtures 5 Years
Leasehold improvements Term of Lease
</TABLE>
At December 31, 1997 and 1998, property and equipment consist of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1998
---------------- ----------------
<S> <C> <C>
Machinery and equipment $6,328,442 $6,022,320
Furniture and fixtures 1,018,931 1,120,450
Leasehold improvements 480,453 567,216
---------------- ----------------
7,827,826 7,709,986
Less: Accumulated depreciation
and amortization 1,372,240 4,395,899
---------------- ----------------
$6,455,586 $3,314,087
================ ================
</TABLE>
Included in machinery and equipment as of December 31, 1997 and 1998 is
approximately $3,470,000 and $2,726,000, 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, 1996, 1997, and 1998 amounted to approximately
$536,000, $554,000 and $602,000 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. The Company has assessed the realizability of its long-lived assets as
of December 31, 1998 and believes them to be realizable.
(G) DEFERRED FINANCING COSTS
During the year ended December 31, 1996, 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).
42
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(H) REVENUE RECOGNITION
The Company recognizes product revenue upon shipment. The Company's
sales of its product do not include any rights of return. 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.
(I) SIGNIFICANT CUSTOMERS
For the years ended December 31, 1997 and 1998, Coherent acted as the
sales agent for products sold to the Company's customers that represented 11%
and 89% of revenues and 51% and 89% of accounts receivable, respectively.
Coherent is the Company's worldwide distributor of laser systems (see Note
12(d)). International sales (including sales for which Coherent was the sales
agent) for the years ended December 31, 1996, 1997 and 1998 were approximately
22%, 24% and 39% respectively, of total revenue.
(J) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(K) NET LOSS PER COMMON SHARE
Basic net loss per share was determined by dividing net loss by the
weighted average shares of common stock outstanding during the year. Diluted net
loss per share is the same as basic loss 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, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
Net loss from continuing operations $(20,798,258) $(58,369,079) $(9,967,243)
Preferred stock dividends (1,242,751) (1,584,406) (1,312,426)
Amortization of value ascribed to preferred
stock conversion discount --- (2,823,529) ---
---------------- --------------- ----------------
Adjusted net loss from continuing operations $(22,041,009) $(62,777,014) $(11,279,669)
================ =============== ================
Basic and diluted net loss per common share
from continuing operations $(0.84) $(1.79) $(0.18)
================ =============== ================
Weighted average number of common shares
outstanding 26,166,538 35,105,272 62,868,696
================ =============== ================
</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 1996, 1997 and 1998, 16,140,688, 32,358,446 and 28,451,024 weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding, as they were antidilutive.
43
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 established 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. The Company has not experienced significant losses related to receivables
from any individual customers or groups of customers in any specific industry or
by geographic area. Due to these factors, no additional credit risk beyond
amounts provided for collection losses is believed by management to be inherent
in the Company's accounts receivable.
(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, 1997 and 1998, financial instruments consisted
principally of convertible debentures and preferred stock financings. The fair
value of financial instruments pursuant to SFAS No. 107 approximated their
carrying values at December 31, 1997 and 1998. Fair values have been determined
through information obtained from market sources and management estimates.
(N) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
effective January 1, 1998. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income/loss and its components in the financial
statements. The components of the Company's comprehensive loss are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
Net loss from continuing operations $(20,798,258) $(58,369,079) $(9,967,243)
Unrealized (loss) gain on marketable securities (342,500) 342,500 ---
---------------- --------------- ----------------
Comprehensive loss from continuing operations $(21,140,758) $(58,026,579) $(9,967,243)
================ =============== ================
</TABLE>
(O) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997
consolidated financial statements to conform with the current year's
presentation.
44
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) ASSET WRITE-OFF AND RESTRUCTURING
The Company, in accordance with applicable accounting principles,
determined during the third quarter of 1997 that certain investments' and notes
receivables' carrying values would not be realizable due to the Company's change
in strategy to divest of its investments in non-core businesses. These
investments did not qualify for discontinued operations in accordance with APB
No. 30. During 1997, the Company fully reserved for all such investments
resulting in a charge of approximately $10,283,000 to continuing operations, as
follows:
<TABLE>
<CAPTION>
Description Carrying Amount
----------- ---------------
<S> <C>
Notes Receivable $ 2,250,000
Investments in Non-Core Businesses 8,033,000
-----------
$10,283,000
-----------
-----------
</TABLE>
The write-offs of the notes receivable and investment related to a
number of strategic investments and loans in non-medical businesses that the
Company made during 1996 and 1997. The notes receivable were principally
mezzanine investments whereby the Company loaned money and, in some cases,
received equity in early stage companies as a condition to making these loans.
During 1996 and 1997, the Company also made other equity investments in
companies that at the time were believed to be strategic to the Company's
business or had the potential to yield a higher than average financial return.
During 1997, based on a number of factors, including the Company's change in
strategy, the book value of these companies and their poor financial performance
to date, it became apparent to management that there was significant uncertainty
as to the ultimate realizability of these investments and notes receivable.
Accordingly, the Company wrote off these investments and notes receivable in
1997.
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 for significant reductions in staffing for
all areas of the Company, including the elimination of essentially all of the
sales and marketing function as a result of the Coherent transaction (Note
12(d)). Management's plan specifically identified 33 employees who were targeted
for termination almost exclusively in selling, general and administrative
functions. Actual employees terminated as a result of this restructuring totaled
45.
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. Through December 31, 1998, the Company paid out $2,289,690 of severance
costs and has a remaining liability of $279,000 to two individuals that will be
paid out in 1999 resulting in total restructuring costs incurred of $2,568,690.
Accordingly, the Company reversed the balance of this restructuring accrual of
$131,310 in its consolidated statement of operations during the fourth quarter
of fiscal 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. In exchange, the Company received a $500,000
note receivable due in monthly installments over the
45
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
The Company placed zero value on the equity position in the newly formed
company.
(B) 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, 1998, the Company had available, subject to review and possible
adjustment by the Internal Revenue Service, a federal net operating loss
carryforward of approximately $101,000,000 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 completed an analysis of its availability to utilize
its operating loss in connection with the anticipated sale of Star to Coherent
(See Note 1). The Company estimates that its has net operating losses of
approximately $75,000,000 that are not subject to limitation under the Internal
Revenue Code. The Company has a net deferred tax asset of approximately
$40,400,000, comprised mainly of the net operating tax carryforwards discussed
above, and the tax effect of certain expenses and reserves not currently
deductible. However, the Company has placed a full valuation allowance against
the deferred tax asset, due to uncertainty relating to the Company's ability to
realize the asset.
(6) LONG-TERM DEBT
At December 31, 1997 and 1998, long-term debt consisted of the
following:
<TABLE><CAPTION>
December 31,
1997 1998
--------------- ---------------
<S> <C> <C>
Convertible debentures $10,683,440 $2,150,000
Revolving line of credit with a bank -- 1,000,000
Note payable in connection with guarantee on behalf of discontinued
subsidiary (See Note 2) 3,233,000 2,290,041
Short-term notes payable to Coherent -- 4,000,000
Other notes payable 169,588 --
--------------- ---------------
$14,086,028 $9,440,041
Less - current maturities (1,640,465) (6,290,041)
--------------- ---------------
$12,445,563 $3,150,000
=============== ===============
</TABLE>
46
<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, 1997 and 1998.
<TABLE>
<CAPTION>
Common Shares
Initial Amount Outstanding Issued Upon
Face December 31, Conversion
----------------------------- --------------------------
Series Value 1997 1998 1997 1998
---------------------------------------------------- -------------- -------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
4.5% Series due October 21, 1999, 2000, 2001 $5,000,000 $100,000 $-- 1,381,264 60,809
5% Series due December 31, 2001 5,000,000 923,439 -- 2,074,992 1,160,999
5% Series due January 13, 2002 1,000,000 1,000,000 -- -- 924,029
5% Series due March 10, 2002 5,500,000 1,160,001 -- 2,794,677 1,561,064
6% Series due March 13, 2002 500,000 500,000 500,000 -- --
6%, 7% and 8% Series due September 30, 2002 7,000,000 7,000,000 1,650,000 -- 3,328,761
4.5% Series denominated in Swiss francs
due July 3, 2003 7,669,442 -- -- 914,028 --
-------------- -------------- ------------- --------------- ----------
$31,669,442 $10,683,440 $2,150,000 7,164,961 7,035,662
============== ============== ============= =============== ==========
</TABLE>
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 credits the ascribed value
for the discount features described above to additional paid-in capital. This
ascribed amount is amortized over a period to the earliest conversion date,
which is six months for the convertible debentures outstanding in 1997 and 1998.
During 1996 and 1997, the Company recorded approximately $77,000 and
$5,444,000, respectively, of interest expense related to the amortization of the
discount of convertible debentures. There was no amortization of the discount of
convertible debentures in 1998.
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. 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 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% of their debentures 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. During the year ended December 31, 1998 the Company redeemed
$2,196,667 of these convertible debentures. This amount includes accrued
interest of $196,667.
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 and consist of a convertible
debenture, due July 3, 2002, denominated in 1,000 Swiss francs and a warrant to
purchase 24 shares of the Company's common stock at $16.50 per share. 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 accrued at a rate of 4.5% per annum and was payable quarterly in
Swiss francs. The convertible debentures were convertible by the holder, or the
Company, commencing October 1, 1996 at a conversion price equal to from 100%
47
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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(c)).
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 are
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, 1996, 1997 and 1998,
the Company amortized approximately $78,000, $276,000 and $64,000 to interest
expense, respectively. Any remaining unamortized deferred financing costs are
charged to additional paid-in capital upon conversion. During the years ended
December 31, 1996, 1997 and 1998, the Company charged approximately $41,000,
$1,820,000 and $374,000, respectively, of unamortized deferred financing costs
to additional paid-in-capital.
(B) REVOLVING LINE OF CREDIT WITH A BANK
The Company has a $10,000,000 revolving line of credit with a bank.
This line of credit will mature on March 31, 2000 and bears interest at the
bank's prime rate (7.75% at December 31, 1998). Borrowings under this line of
credit are secured by substantially all assets of the Company and are limited to
80% of qualified accounts receivables. A director of Palomar has guaranteed all
borrowings under this line of credit. In connection with this guarantee the
Company issued this director 200,000 warrants with a three-year term to purchase
the Company's common stock at $1.50 per share. These warrants were valued at
approximately $69,000. This amount is being amortized to interest expense over
the term of the revolving line of credit.
(C) BRIDGE LOAN
On March 27, 1998, the Company borrowed $2,000,000 from an individual.
The Company subsequently repaid this note during 1998. Interest on this note was
in the form of a warrant to purchase 125,000 shares of common stock for $.01 per
share exercisable over five years. This warrant was valued at $171,000 using the
Black-Scholes option pricing model. The Company accounted for this warrant as a
discount to the note through additional paid-in capital and amortized the
discount to interest expense over the period that the note was outstanding.
(D) NOTES PAYABLE TO COHERENT
On May 22 and June 22, 1998, the Company borrowed $3,000,000 and
$1,000,000, respectively, from the Company's worldwide distributor, Coherent.
These notes accrue interest at 8.5% per annum. The notes are secured by all of
the inventory owned by the Company's Star subsidiary.
48
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under the terms of the Loan Agreement between Coherent and the Company,
in the event that sale of Star to Coherent is not completed, the $4,000,000 of
funds borrowed by the Company from Coherent are due 90 days from the date of
termination of the Agreement to sell Star to Coherent as discussed in Note (1).
(E) FUTURE MATURITIES OF LONG-TERM DEBT
Future maturities of notes payable and convertible debentures reflected
at face value as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $6,290,041
2000 1,000,000
2001 --
2002 2,150,000
-------------
$9,440,041
=============
</TABLE>
(7) STOCKHOLDERS' EQUITY
(A) COMMON STOCK
During 1998, the Company sold 10,200,000 shares of common stock to a
group of investors for $10,200,000. In addition, the Company issued callable
warrants with a three-year term to these investors to purchase 10,200,000 shares
of common stock at an exercise price of $3.00 per share. The callable warrants
are not exercisable for the first six months after issuance and thereafter are
callable by the Company if the closing price of the Company's common stock
equals or exceeds $5.00 for ten consecutive trading days. Under the terms of
this private placement, the Company is obligated to pay the investors a fee of
5% per annum (payable quarterly) of the dollar value invested in the Company as
long as the investors continue to hold their common stock in their name at the
Company's transfer agent. During 1998, the Company paid $283,125 related to this
fee. This amount has been charged to additional paid-in capital. The Company
also paid $360,000 for investment banking fees related to the issuance of these
common shares. The Company netted this amount against the proceeds through a
reduction in additional paid-in capital.
On February 28, 1997, the Company and Nexar entered into an Asset
Purchase and Settlement agreement with a former executive of Nexar and
Technovation Computer Labs, Inc. ("Licensor"). The Licensor was affiliated with
a former officer of Nexar. Under the terms of this agreement, the Company agreed
to pay this former executive and certain of his affiliates $1,250,000 in cash
and deliver $1,500,000 worth of Palomar's common stock. In exchange, the Company
and Nexar received the rights to certain technology previously licensed to Nexar
and a complete release and settlement of all claims between this former
executive and Nexar.
The Company assigned to Nexar all of its rights to the technology and
charged Nexar for the cost associated with this claim and the purchase of the
technology. Nexar recorded $1,375,000 of the consideration to settle this claim
as a litigation expense in its statement of operations for the year ended
December 31, 1996. The remaining consideration totaling $1,375,000 was recorded
as purchased technology and was being amortized by Nexar over the technology's
estimated useful life. The allocation of the purchased technology was based on
the value of anticipated royalty payments to the Licensor over the three years
ended December 31, 1999.
49
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(B) PREFERRED STOCK
The Company is authorized to issue up to 5 million shares of preferred
stock, $.01 par value. As of December 31, 1997 and 1998, preferred stock
authorized, issued and outstanding consist of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Redeemable convertible preferred stock, Series F, $.01 par value per
share Authorized, issued and outstanding - 6,000 shares
(liquidation preference of $7,072,917 at December 31, 1998) $60 $60
Redeemable convertible preferred stock, Series G, $.01 par value per
share Authorized - 10,000 shares Issued and outstanding - 2,684 shares
and 743 shares in 1997 and 1998, respectively,
(liquidation preference of $874,603 at December 31, 1998) 27 7
Redeemable convertible preferred stock, Series H, $.01 par value per
share Authorized - 16,000 shares Issued and outstanding - 7,690 shares
and 250 shares in 1997 and 1998, respectively,
(liquidation preference of $280,562 at December 31, 1998) 77 2
Total preferred stock $164 $ 69
==== =====
</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 the original
price to $7.00. The Series F Preferred may be redeemed at the Company's option,
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
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 the original floor to $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
50
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 less associated 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 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. 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 has been 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>
<CAPTION>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Series Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Converted Converted and Other Related Costs Amount Converted Into
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
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>
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. The reduction to stockholder's equity (deficit) as a
result of this transaction was as follows:
<TABLE>
<CAPTION>
<S> <C>
Value of Nexar Common Stock $4,671,597
Accrued Interest and Dividend (391,597)
-----------
$4,280,000
===========
</TABLE>
During the year ended December 31, 1998, the following shares of preferred
stock, accrued premium, dividends, interest and other related costs were
converted into shares of common stock as follows:
<TABLE>
<CAPTION>
Number of Additional Dollar Amount
Preferred Preferred Dollar Amount of Converted, Including Accrued Number of Common
Stock Series Shares Preferred Stock Premium, Dividends, Interest Total Dollar Shares Converted
Converted Converted and Other Related Costs Amount Converted Into
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
G 1,941 $1,941,000 $268,245 $2,209,245 2,703,032
H 3,947 3,946,700 383,923 4,330,623 4,188,650
- -------------- -------------- --------------------- --------------------------------- --------------------- -------------------
5,888 $5,887,700 $652,168 $6,539,868 6,891,682
</TABLE>
51
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to the 4,188,650 shares of common stock issued related to
the Series H Preferred conversion, the Company redeemed 3,516 shares of Series H
Preferred for $4,387,434. This amount includes accrued dividends and interest
totaling $771,876.
(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 7,350,000 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 its discretion, may convert the optionee's ISOs into
nonqualified options at any time prior to the expiration of such ISOs.
The following table summarizes all stock option activity of the Company
for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Number of Exercise Weighted Average
Shares Price Exercise Price
------------- ---------------- ----------------------
<S> <C> <C> <C>
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
Granted 2,294,900 1.50 1.50
Canceled (2,924,400) 1.50-8.125 3.38
------------- ---------------- ----------------------
Outstanding, December 31, 1998 2,352,900 $1.50-$2.50 $1.51
============= ================ ======================
Exercisable, December 31, 1998 1,851,371 $1.50-$2.50 $1.51
============= ================ ======================
Available for future issuances under the Plans
as of December 31, 1998 4,354,755
=============
</TABLE>
52
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The exercise prices for options outstanding and options exercisable at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
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
- --------------------- ---------------- ---------------------- ----------------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
$1.50 2,327,900 2.88 years $1.50 1,834,705 $1.50
$2.50 25,000 2.96 years 2.50 16,666 2.50
================ ====================== ======================= =============== ======================
2,352,900 2.88 years $1.51 1,851,371 $1.51
================ ====================== ======================= =============== ======================
</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 accounts for equity instruments issued to non-employees in accordance
with EITF 96-18 by valuing the instrument using the Black-Scholes pricing model,
as prescribed by SFAS No. 123, and recording a charge to operations for their
fair value. The Company has issued options and warrants to purchase common stock
to certain financial intermediaries in connection with various financings at
below the fair market value of the underlying stock. The costs associated with
these issuances are accounted for as a cost of raising capital and netted
against the proceeds from these issuances.
During the year ended December 31, 1997 and 1998, a total of 1,005,000
and 2,184,900 options to purchase common stock were repriced to above the fair
market value of the underlying common stock to $2.50 and $1.50 per share,
respectively. The majority of the remainder of the options canceled during the
years ended December 31, 1996, 1997 and 1998 were the result of employee
terminations.
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, 1997 and 1998 using the Black-Scholes option pricing
model prescribed by SFAS No. 123.
The assumptions used to calculate the SFAS No. 123 pro forma disclosure
for the years ended December 31, 1996, 1997 and 1998 for the Company are as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 6.37% 6.09% 5.60%
Expected dividend yield - - -
Expected lives 4.4 years 3.69 years 2.94 years
Expected volatility 79% 79% 93%
Grant date fair value of options granted during
the period $4.57 $2.06 $0.64
</TABLE>
53
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average fair-value and weighted average exercise price of
options granted by the Company for the years ended December 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price for options:
Whose exercise price exceeded fair market value at
the date of grant $10.00 $2.53 $1.50
Whose exercise price was equal to fair value at the
date of grant $6.875 $- $-
Weighted average fair market value for options:
Whose exercise price exceeded fair market value at
the date of grant $8.875 $2.06 $0.64
Whose exercise price was equal to fair market value
at the date of grant $6.875 $- $-
</TABLE>
The Company's majority owned Star subsidiary, a manufacturer of the
Company's diode laser, also has established a stock option plan that provides
for the issuance of a maximum of 650,000 shares of common stock, which may be
issued as nonqualified options and ISOs. The following table summarizes the
employee stock option activity for Star:
<TABLE>
<CAPTION>
Weighted
Average
Number of Shares Exercise Price Exercise Price
---------------- -------------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 95,000 $2.50 - $5.00 $3.68
Granted 150,000 6.00 - 19.00 6.27
Exercised (20,000) 2.50 2.50
Canceled (10,000) 6.00 6.00
----------------- --------------- -----------------
Outstanding, December 31, 1996 215,000 2.50 - 19.00 5.44
Granted 40,500 19.00 19.00
Canceled (1,917) 19.00 19.00
----------------- --------------- -----------------
Outstanding, December 31, 1997 253,583 $2.50-$19.00 $8.04
Exercised (6,300) 2.50-5.00 4.21
----------------- --------------- -----------------
Outstanding, December 31, 1998 247,283 $2.50-$19.00 $8.13
================= =============== =================
================= =============== =================
Exercisable, December 31, 1998 218,870 $2.50-$19.00 $7.22
================= =============== =================
================= =============== =================
Available for future issuances under the
Plan as of December 31, 1998 24,493
=================
</TABLE>
54
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The exercise prices for options outstanding and options exercisable at
December 31, 1998 for Star are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$2.50 28,000 5.45 years $ 2.50 28,000 $ 2.50
$5.00 40,700 5.43 years 5.00 40,700 5.00
$6.00 120,000 7.13 years 6.00 113,332 6.00
$9.50 10,000 7.63 years 9.50 7,777 9.50
$19.00 48,583 8.20 years 19.00 29,061 19.00
--------------- ---------- -------------- --------------- --------------
247,283 6.89 years $ 8.13 218,870 $ 7.22
=============== ========== ============== =============== ==============
</TABLE>
During 1998, Star also issued options to purchase 378,224 shares of
common stock of Star to Palomar at $19.00 per share.
(II) WARRANTS
The following table summarizes all warrant activity of the Company for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Weighted
Number of Exercise Average
Shares Price Exercise Price
--------------- ----------------- -------------------
<S> <C> <C> <C>
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
Granted 12,585,000 0.01-3.00 2.75
Exercised (125,000) 0.01 0.01
Canceled (2,878,452) 2.25-6.75 4.13
--------------- ----------------- -------------------
Outstanding, December 31, 1998 19,579,578 $1.50-$15.00 $4.38
=============== ================= ===================
Exercisable, December 31, 1998 19,359,578 $1.50-$15.00 $4.37
=============== ================= ===================
</TABLE>
During the years ended December 31, 1997 and 1998, a total of 1,240,000
and 1,300,000 warrants to purchase common stock were repriced to above the then
current fair market values of the underlying common stock. These repriced
exercise prices ranged from $2.50 to $4.00 per share in 1997 and ranged from
$1.50 to $2.00 per share in 1998. The majority of the remainder of the canceled
warrants during the years ended December 31, 1997 and 1998 were the result of
employee terminations. During 1998, the Company also issued warrants for an
aggregate of 250,000 shares of common stock to various parties in connection
with certain financing arrangements.
55
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company valued these warrants using the Black-Scholes pricing model, as
prescribed by SFAS No.123, and recorded a charge to operations for their fair
value for approximately $47,000.
The range of exercise prices for warrants outstanding and exercisable
at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
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
- --------------------- ---------------- ---------------------- ----------------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C>
$1.50 - $2.125 2,739,500 2.44 years $1.71 2,619,500 $1.72
$3.00 - $3.00 10,560,000 4.26 years 3.00 10,560,000 3.00
$3.25 - $9.50 5,102,020 2.07 years 6.45 5,002,020 6.39
$10.38 - $15.00 1,178,058 2.07 years 13.98 1,178,058 13.98
---------------- ---------------------- ----------------------- --------------- ----------------------
19,579,578 3.30 years $4.38 19,359,578 $4.37
================ ====================== ======================= =============== ======================
</TABLE>
The Company has computed the pro forma disclosures required under SFAS No.
123 for all warrants granted in the years ended December 31, 1997 and 1998 using
the Black-Scholes option pricing model prescribed by SFAS No. 123.
The weighted-average assumptions used to calculate the SFAS No. 123 pro
forma disclosure for the years ended December 31, 1996, 1997 and 1998 for the
Company are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
---------------- ------------------ ------------------
<S> <C> <C> <C>
Risk-free interest rate 5.93% 6.13% 5.44%
Expected dividend yield - - -
Expected lives 5.9 years 4.44 years 2.58 years
Expected volatility 79% 79% 93%
Grant date fair value of warrants granted during
the period $5.39 $2.17 $0.76
</TABLE>
56
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average fair value and weighted average exercise price of
warrants granted by the Company for the years ended December 31, 1996, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
----------------- -------------- -----------------
<S> <C> <C> <C>
Weighted average exercise price for warrants:
Whose exercise price exceeded fair market value at date
of grant $11.76 $4.30 $2.78
Whose exercise price was less than fair market value at
date of grant $7.07 $7.50 $0.01
Whose exercise price was equal to fair market value at
date of grant $6.67 $3.25 $-
Weighted average fair value for warrants:
Whose exercise price exceeded fair market value at date
of grant $9.34 $1.10 $0.76
Whose exercise price was less than fair market value at
date of grant $8.82 $0.62 $1.24
Whose exercise price was equal to fair market value at
date of grant $6.67 $2.18 $-
</TABLE>
(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 of the Company and Star would be
as follows:
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
------------------- ---------------------- -----------------
<S> <C> <C> <C>
Pro forma net loss from continuing operations $(48,292,780) $(62,020,782) $(23,169,514)
Pro forma basic and dilutive net loss per share from
continuing operations $(1.89) $(1.89) $(0.39)
</TABLE>
(D) RESERVED SHARES
At December 31, 1998, the Company has reserved shares of its common
stock for the following:
<TABLE>
<CAPTION>
<S> <C>
Warrants 19,579,578
Stock option plans 6,707,655
Convertible debentures 3,216,694
Preferred stock 3,328,894
Employee stock purchase plan 419,412
Employee 401(k) plan 554,787
---------------
Total 33,807,020
===============
</TABLE>
(E) 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, 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
57
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
lookback provision of three months. The Purchase Plan provides for issuance of
up to 500,000 shares under the Purchase Plan. During the year ended December 31,
1997 and 1998, employees purchased 15,377 and 65,211 shares of the Company's
common stock for approximately $40,000 and $50,000, respectively, pursuant to
the Purchase Plan.
(8) RESEARCH AND PRODUCT DEVELOPMENT AGREEMENTS
During 1995, the Company entered into a multi-year agreement with
Massachusetts General Hospital ("MGH"), whereby MGH agreed to conduct clinical
trials on a laser treatment for hair removal. 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.
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 covering the laser-based hair removal technology developed by at
MGH, for which Palomar is the exclusive worldwide licensee.
(9) ACCRUED LIABILITIES
At December 31, 1997 and 1998, accrued liabilities consist of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Payroll and consulting costs $1,535,013 $1,148,898
Royalties 853,808 1,106,352
Settlement costs 1,457,020 --
Warranty 2,583,677 2,798,836
Restructuring 1,981,907 279,000
Interest and preferred stock dividends 1,659,709 1,550,662
Other 3,688,720 3,417,876
---------------- ---------------
Total $13,759,854 $10,301,624
================ ===============
</TABLE>
(10) RELATED PARTY TRANSACTION
At December 31, 1997, approximately $478,000 of loans receivable with
interest at the rate of 7% per annum were outstanding from the Company's former
President. 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. The
Company has reserved 554,787 shares of its common stock for issuance in
connection with the Profit Sharing Plan.
58
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During 1997 and 1998, the Company issued 87,441 and 311,887 shares of
its common stock to the Profit Sharing Plan in satisfaction of its $318,154 and
$254,281 employer match for the 1996 and 1997 employee contributions,
respectively. For the year ended December 31, 1998, the Company has accrued
$206,000 for the 1998 match. The Company contributed 227,930 shares of its
common stock for this match in February of 1999.
(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 July 2003. The Company guarantees Star's facility operating lease
Future minimum payments under the Company's operating leases at
December 31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C>
1999 $548,000
2000 264,000
2001 96,000
2002 101,000
2003 60,000
-------------
$1,069,000
=============
</TABLE>
(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, 1996, 1997 and 1998, approximately $175,000, $854,000
and $1,332,000 of royalty expense, respectively, was incurred under this
agreement. These amounts are included in cost of sales in the accompanying
consolidated statements 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.
(C) 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.
On March 7, 1997, Selvac Acquisition Corp. ("Selvac"), a subsidiary of
Mehl Biophile International, Inc. ("Mehl"), filed a complaint for injunctive
relief and damages for patent infringement and for unfair competition in
59
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the United States District Court for the District of New Jersey against the
Company, two of its subsidiaries and a New Jersey dermatologist. Selvac's
complaint alleged that the Company's EpiLaser(R)- ruby laser hair removal system
infringed a patent licensed to Selvac (the "Selvac Patent") and that the Company
unfairly competed by promoting the EpiLaser(R)- ruby laser hair removal system
for hair removal before it had received FDA approval for that specific
application. On May 18, 1998 the court granted the Company's motion for partial
summary judgment on the ground that the Selvac patent is invalid because prior
art anticipated it. The court has since denied Selvac's motion for
reconsideration of the summary judgment ruling. On September 25, 1998, the court
denied Selvac's motion for reconsideration of its prior order dismissing so much
of Selvac's unfair competition claim as relied on interpreting the Food, Drug
and Cosmetics Act or FDA regulations, and dismissed without prejudice the state
law remainder of Selvac's unfair competition claim. On October 26, 1998, Selvac
filed its notice of appeal to the Court of Appeals for the Federal Circuit.
Selvac subsequently filed its opening brief on appeal; the Company's opposition
was filed in March, 1999. The Company is unable to express an opinion as to the
likely outcome of Selvac's appeal, or as to the range of loss if Selvac
ultimately prevailed at trial.
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$5,600,000 at December 31, 1998 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 the debt
cannot properly be accelerated, and intends to contest the claims of the
Asserting Holders vigorously. Nonetheless, an adverse result could have a
material adverse effect on the Company in the range of $5,600,000 to $7,000,000.
By mutual agreement, the Asserting Holders and the Company requested that the
case be removed from the Court's trial calendar. The parties have discussed ways
to resolve their dispute, including the restructuring of the debentures, but
there can be no absolute assurance that all of the debentureholders, including
the Asserting Holders, and the Company will complete a proposed settlement.
On March 17, 1999, the company and a former and current officer were
added as defendants in the class action of VARLJEN V. H.J. MEYERS, INC. ET AL.
pending in the United States District Court of the Southern District of New
York. The Company is unable to estimate any possible outcome or range of loss in
this matter at this time. An adverse result in the VARLJEN action, however,
could have a materially adverse effect upon the financial statements and
operations of 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.
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.
60
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(D) DISTRIBUTION AGREEMENT
On November 17, 1997, the Company entered into an exclusive
distribution, sales and service agreement with Coherent, an established,
worldwide laser company. Under this agreement, Coherent has the exclusive right
to sell the EpiLaser(R) and LightSheer(TM) laser systems and future generation
products worldwide. The Company pays Coherent a per unit commission, adjusted
for certain events as defined. During 1997 and 1998, the Company incurred
approximately $800,000 and $14,108,000, respectively, of commission expense
related to this agreement which is included in sales and marketing expense in
the accompanying consolidated statement of operations. Upon execution of this
agreement, Coherent 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, is being amortized to revenue over the three year
life of the agreement. If the Company completes its anticipated sale of Star to
Coherent as discussed in Note 1, the current distribution agreement with
Coherent will be terminated and replaced with a one year non-exclusive
distribution agreement that will enable Coherent to sell the Company's
ruby-based laser products. The Company will amortize the deferred revenue
related to Coherent over this one year non-exclusive period.
In exchange for the payment at closing of $2,740 per day from January
20, 1999 until Palomar shareholder approval of the Agreement, Coherent has
agreed to waive its exclusive rights under the distribution agreement to market
and sell our ruby laser products, so that we may begin to sell the Palomar
E2000(TM) immediately through other channels without the obligation of paying a
commission to Coherent or waiting for the distribution agreement to terminate
upon the closing of the sale of Star to Coherent.
(E) 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.
(13) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED Information in the fiscal year ended December 31, 1998.
SFAS 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The Company's chief decision-maker, as defined under SFAS 131, is a
combination of the Chief Executive Officer and the Chief Financial Officer. To
date, the Company has viewed its operations and manages its business as
principally one segment, cosmetic laser sales. Associated services are not
significant. As a result, the financial information disclosed herein represents
all of the material financial information related to the Company's principal
operating segment.
Product revenues from international sources were approximately $3.87
million, $5.03 million and $17.36 million in 1996, 1997 and 1998, respectively.
The Company's revenues from international sources were primarily generated from
customers located in Europe, Canada, Latin America and Asia/Pacific. All of the
Company's product sales for the years ended December 31, 1996, 1997 and 1998
were shipped from its facilities located in the United States.
61
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table represents percentage of product revenue by
geographic region from customers for 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
United States 78% 76% 61%
Europe 3 6 17
Asia/Pacific 10 6 13
Canada 9 4 3
Latin America -- 8 6
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
62
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
Not applicable.
63
<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.
64
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
<TABLE>
<S> <C> <C> <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:
Reports of Independent Public Accountants 29
Consolidated Balance Sheets -
December 31, 1998 and December 31, 1997 31
Consolidated Statements of Operations -
Years ended December 31, 1998, December 31, 1997 and December 31, 1996 32
Consolidated Statements of Stockholders' Equity (Deficit) -
Years ended December 31, 1998, December 31, 1997 and December 31, 1996 33
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, December 31, 1997 and December 31, 1996 36
Notes to Consolidated Financial Statements 38
2. Consolidated Financial Statement Schedules
Report of Independent Public Accountants on Schedule II 71
Schedule II - Valuation and Qualifying Accounts 72
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.
</TABLE>
(b) Reports on Form 8-K.
Form 8-K filed June 3, 1998.
Form 8-K filed November 3, 1998.
65
<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.
Exhibit
No. Title
<TABLE>
<S> <C>
^^^^2.1 Stock Purchase Agreement Between and Among Biometric Technologies Corp., Palomar Medical
Technologies, Inc. and Dynaco Corp., dated November 17, 1997.
***3.1 Second Restated Certificate of Incorporation, as filed with the
Delaware Secretary of State on January 8, 1999.
##3.2 Bylaws, as amended.
^4.1 Common Stock Certificate.
###4.2 Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due July 3, 2003.
*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.
####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 Stock Purchase Agreement, dated December 29, 1997.
####10.14 Stock Purchase Agreement, dated December 31, 1997.
####10.15 Exchange Agreement, dated December 31, 1997.
^^10.16 Form of 6%, 7% and 8% Convertible Debentures Due September 30, 2002
66
<PAGE>
^^10.17 Form of Registration Rights Agreement, dated September 30, 1997.
####10.18 Form of Securities Purchase Agreement dated September 30, 1997.
^^^10.19 Securities Purchase Agreement dated December 29, 1997.
##10.20 Subscription Agreement between the Company and Soginvest Bank, dated as of March 13, 1997.
##10.21 6% Convertible Debenture due March 13, 2002.
####10.22 Employment Agreement, dated as of January 1, 1997, between the Company and Joseph P. Caruso.
####10.23 Employment Agreement, dated as of May 15, 1997, between the Company and Louis P. Valente.
####10.24 Securities Purchase Agreement between the Company and RGC
International Investors, LDC, dated March 27, 1997.
##10.25 Registration Rights Agreement between the Company and RGC
International Investors, LDC, dated March 27, 1997.
####10.26 Binding Term Sheet between the Company and Hechtor Wiltshire, dated March 27, 1998.
####10.27 Securities Purchase Agreement between the Company and various entities, dated February 20, 1998.
####10.28 Security Agreement - Stock Pledge between the Company and Coast Business Credit, dated December
31, 1997.
####10.29 Secured Promissory Note between the Company and Coast Business Credit, dated December 31, 1997.
####10.30 Continuing Guaranty between the Company and Coast Business Credit, dated December 5, 1996.
####10.31 License Agreement between the Company and Massachusetts General Hospital, dated August 18, 1995.
####10.32 First Amendment to License Agreement between the Company and Massachusetts General Hospital,
dated August 18, 1995.
####10.32 Second Amendment to License Agreement between the Company and Massachusetts General Hospital,
dated August 18, 1995.
- ----10.34 Letter Agreement between Palomar Medical Technologies, Inc. and Coherent, Inc. dated September 10,
1998.
***10.35 Form of Securities Purchase Agreement between the Company, The Rockside Foundation, and Mark T.
Smith dated , 1998
***10.36 Form of Warrant to Purchase Common Stock
@10.37 Second Amended 1996 Employee Stock Purchase Plan.
@10.38 Second Loan Agreement Between Palomar Medical Technologies, Inc. and Coherent, Inc., dated May 7,
1998
@10.39 Loan Agreement between Palomar Medical Technologies, Inc. and Coherent, Inc., dated May 22, 1998
67
<PAGE>
@10.40 Fifth Amendment to the Schedule to the Loan and Security Agreement between Palomar Medical
Technologies, Inc. and Coast Business Credit, dated April 29, 1998.
****10.41 Agreement and Plan of Reorganization by and Among Coherent, Inc., Medical Technologies,
Acquisition, Inc., Palomar Medical Technologies, Inc., Star Medical Technologies, Inc., Robert E.
Grove, James Z. Holtz and David C. Mundinger, dated as of December 7,1998.
@@10.42 Form of Warrant to Purchase Common Stock
10.43 Letter Agreement between Palomar Medical Technologies, Inc. and Fleet National Bank, dated
November 16, 1998
10.44 Guaranty Agreement between A. Neil Pappalardo. and Fleet National Bank dated November 16, 1998.
10.45 Security Agreement (Trademarks) between Palomar Medical Technologies, Inc. and Fleet National Bank
dated November 16, 1998.
10.46 Security Agreement (Patents) between Palomar Medical Technologies, Inc. and Fleet National Bank
dated November 16, 1998.
10.47 Promissory Note between Palomar Medical Technologies, Inc. and Fleet National Bank dated November
16, 1998.
10.48 Guaranty Agreement between Star Medical Technologies, Inc. and Fleet National Bank dated November 16,
1998.
10.49 Security Agreement (Patents) between Star Medical Technologies, Inc. and Fleet National Bank dated
November 16, 1998.
10.50 Security Agreement (Trademarks) between Star Medical Technologies, Inc. and Fleet National Bank
dated November 16, 1998.
10.51 Bonus Agreement between Palomar Medical Technologies, Inc. Robert E. Grove, James Z. Holtz and
David C. Mundinger, dated as of December 7, 1998.
10.52 Letter Agreement between Palomar Medical Technologies, Inc. and Coherent, Inc., dated
February 1,1999
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for the Period Ended December 31, 1998.
^ Previously filed as an exhibit to Form 10-KSB/A-4 for the year ended December 31, 1996 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.
68
<PAGE>
^^^^ 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 an 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 Registration Statement No. 333-70391 filed on January 11, 1999,
and incorporated herein by reference.
**** Previously filed as an exhibit to the Company's Definitive Proxy
Statement for the period ended December 31, 1998 filed on March
12, 1999, 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 Form S-3 Registration Statement No. 333-22725 filed on March 4,
1997 and incorporated herein by reference.
#### Previously filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, 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-Q for the quarter
ended September 30, 1997, and incorporated herein by reference.
- ---- Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, 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.
&&&& Previously filed as an exhibit to Form S-3 Registration Statement No. 333-28251 filed on May 30,
1997 and incorporated herein by reference.
@ Previously filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, and incorporated herein by reference
69
<PAGE>
@@ Previously filed as an exhibit to Form S-8 Registration Statement No. 333-574031 filed on June 22,
1998 and incorporated herein by reference.
</TABLE>
70
<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 11, 1999. 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 11, 1999 (except for the
matter discussed in Note 12(c) as
to which the date is March 17, 1999).
71
<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, 1996 $7,000 $1,122,000 $-- $1,129,000
================= ================= ================ =================
December 31, 1997 $1,129,000 $933,000 $(1,316,000) $746,000
================= ================= ================ =================
================= ================= ================ =================
December 31, 1998 $746,000 $183,000 ($565,000) $364,000
================= ================= ================ =================
Balance,
Beginning of Balance, End of
Period Increases Deductions Period
Restructuring Accrual:
December 31, 1996 $-- $-- $-- $--
================= ================= ================ =================
December 31, 1997 $-- $2,700,000 $(718,000) $1,982,000
================= ================= ================ =================
December 31, 1998 $1,982,000 $-- $(1,703,000) $279,000
================= ================= ================ =================
</TABLE>
72
<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 March 30, 1999.
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>
Name Capacity Date
---- -------- ----
/s/ Louis P. Valente President, Chief Executive March 30, 1999
- -------------------------------------- Officer and Director
Louis P. Valente
/s/ Joseph P. Caruso Chief Financial Officer and Treasurer March 30, 1999
- -------------------------------------- (Principal Financial Officer and
Joseph P. Caruso Principal Accounting Officer)
/s/ Nicholas P. Economou Director March 30, 1999
- --------------------------------------
Nicholas P. Economou
/s/ A. Neil Pappalardo Director March 30, 1999
- --------------------------------------
A. Neil Pappalardo
/s/ James G. Martin Director March 30, 1999
- --------------------------------------
James G. Martin
</TABLE>
73
PALOMAR MEDICAL TECHNOLOGIES, INC.
45 Hartwell Avenue
Lexington, MA 02421
November 16, 1998
Fleet National Bank
One Federal Street
Boston, MA 02110
Gentlemen:
This letter agreement will set forth certain understandings between
Palomar Medical Technologies, Inc., a Delaware corporation (the "Borrower") and
Fleet National Bank (the "Bank") with respect to Revolving Loans (hereinafter
defined) to be made by the Bank to the Borrower and with respect to letters of
credit which may hereafter be issued by the Bank for the account of the
Borrower. In consideration of the mutual promises contained herein and in the
other documents referred to below, and for other good and valuable
consideration, receipt and sufficiency of which are hereby acknowledged, the
Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
1.1. Reference to Documents; Star Sale. Reference is made to (i) that
certain $10,000,000 face principal amount promissory note (the "Revolving Note")
of even date herewith made by the Borrower and payable to the order of the Bank,
(ii) that certain Inventory, Accounts Receivable and Intangibles Security
Agreement and that certain Supplementary Security Agreement Security Interest in
Goods and Chattels, each of even date herewith, from the Borrower to the Bank
(collectively, the "Borrower's Security Agreement"), (iii) collateral
assignments and notices of collateral assignment (collectively, the "Borrower's
Intellectual Property Security Agreements") from the Borrower to the Bank
relating to the Borrower's registered trademarks, patents and copyrights, if
any, (iv) that certain Guaranty Agreement of even date herewith (the "Personal
Guaranty") from A. Neil Pappalardo (the "Personal Guarantor") to the Bank, (v)
that certain Inventory, Accounts Receivable and Intangibles Security Agreement
and that certain Supplementary Security Agreement - Security Interest in Goods
and Chattels, each of even date herewith, from Star Medical Technologies, Inc.
("Star") to the Bank (collectively, "Star's Security Agreement"), (vi)
collateral assignments and notices of collateral assignment (collectively,
"Star's Intellectual Property Security Agreements") from Star to the Bank
relating to Star's registered trademarks, patents and copyrights, if any, and
(vii) that certain Guaranty Agreement of even date herewith (the "Star
Guaranty") from Star to the Bank. The Bank acknowledges that nothing in this
letter agreement or in any Security Agreement or in any Intellectual Property
Security Agreement will in any event be deemed to prevent the sale of Star on or
prior to March 31, 1999 for cash consideration which shall result, after all
payments owed to Coherent, Inc., in at least $40,000,000 in net proceeds to the
Borrower on a pre-tax
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basis, provided that proceeds of such sale are applied to reduce the Aggregate
Bank Liabilities to the extent necessary so that, after giving effect to such
sale and the release of the Star Security Agreement, the Aggregate Bank
Liabilities will not exceed the then remaining Borrowing Base. As provided in
ss.3.11 below, the security interest of the Bank in the assets of Star will be
released in order to permit the aforesaid sale on the terms described above.
1.2. The Borrowing; Revolving Note. Subject to the terms and conditions
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within-described revolving financing arrangements pursuant to
ss.5.2 or ss.6.7; provided, however, that (1) the aggregate principal amount of
Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount
(hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter
defined) shall at no time exceed the Borrowing Base (hereinafter defined).
Within such limits, and subject to the terms and conditions hereof, the Borrower
may obtain Revolving Loans, repay Revolving Loans and obtain Revolving Loans
again on one or more occasions. The Revolving Loans shall be evidenced by the
Revolving Note and interest thereon shall be payable at the times and at the
rate provided for in the Revolving Note. Overdue principal of the Revolving
Loans and, to the extent permitted by law, overdue interest shall bear interest
at a fluctuating rate per annum which at all times shall be equal to the sum of
(i) four (4%) percent per annum plus (ii) the per annum rate otherwise payable
under the Revolving Note (but in no event in excess of the maximum rate from
time to time permitted by then applicable law), compounded monthly and payable
on demand. The Borrower hereby irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to the Revolving Note or on the books of the
Bank, at or following the time of making each Revolving Loan and of receiving
any payment of principal, an appropriate notation reflecting such transaction
and the then aggregate unpaid principal balance of the Revolving Loans. The
amount so noted shall constitute presumptive evidence as to the amount owed by
the Borrower with respect to principal of the Revolving Loans. Failure of the
Bank to make any such notation shall not, however, affect any obligation of the
Borrower or any right of the Bank hereunder or under the Revolving Note. All
payments of interest, principal and any other sum payable hereunder and/or under
the Revolving Note shall be made to the Bank, in lawful money of the United
States in immediately available funds, at its office at One Federal Street,
Boston, MA 02110 or to such other address as the Bank may from time to time
direct. All payments received by the Bank after 2:00 p.m. on any day shall be
deemed received as of the next succeeding Business Day. All monies received by
the Bank shall be applied first to fees, charges, costs and expenses payable to
the Bank under this letter agreement, the Revolving Note and/or any of the other
Loan Documents, next to interest then accrued on account of any Revolving Loans
or letter of credit reimbursement obligations and only thereafter to principal
of the Revolving Loans and letter of credit reimbursement obligations. All
interest and fees payable hereunder and/or under the Revolving Note shall be
calculated on the basis of a 360-day year for the actual number of days elapsed.
1.3. Repayment; Renewal. The Borrower shall repay in full all Revolving
Loans and all interest thereon upon the first to occur of: (i) the Expiration
Date or (ii) an acceleration under
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section 5.2(a) following an Event of Default. The Borrower may repay, at any
time, without penalty or premium, the whole or any portion of any Revolving
Loan. In addition, if at any time the Borrowing Base is in an amount which is
less than the then outstanding Aggregate Bank Liabilities, the Borrower will
forthwith prepay so much of the Revolving Loans as may be required (or arrange
for the termination of such letters of credit as may be required) so that the
Aggregate Bank Liabilities will not exceed the Borrowing Base. The Bank may, at
its sole discretion, renew the financing arrangements described in this letter
agreement by extending the Expiration Date in a writing signed by the Bank and
accepted by the Borrower. Neither the inclusion in this letter agreement or
elsewhere of covenants relating to periods of time after the Expiration Date,
nor any other provision hereof, nor any action (except a written extension
pursuant to the immediately preceding sentence), non-action or course of dealing
on the part of the Bank will be deemed an extension of, or agreement on the part
of the Bank to extend, the Expiration Date.
1.4. Advances and Payments. The proceeds of all Revolving Loans shall be
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank. The proceeds of each Revolving Loan will be used by the Borrower
solely (i) for working capital purposes, (ii) to pay principal of and interest
on the Coherent Notes when same becomes due, (iii) to pay interest on the
Restructured Subordinated Notes as same becomes due and (iv) to pay when due the
5% per annum fee described in clause (i) of ss.4.4 below to the extent (but only
to the extent) that such fee is classified as indebtedness in accordance with
generally accepted accounting principles and is not deemed to be a dividend.
The Bank may charge any general deposit account of the Borrower at the
Bank with the amount of all payments of interest, principal and other sums due,
from time to time, under this letter agreement and/or the Revolving Note and/or
with respect to any letter of credit; and will thereafter notify the Borrower of
the amount so charged. The failure of the Bank so to charge any account or to
give any such notice shall not affect the obligation of the Borrower to pay
interest, principal or other sums as provided herein or in the Revolving Note or
with respect to any letter of credit.
Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall include
the amount thereof which shall accrue during the period of such extension of
time. All payments by the Borrower hereunder and/or in respect of the Revolving
Note and/or with respect to any letter of credit shall be made net of any
impositions or taxes and without deduction, set-off or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank.
1.5. Letters of Credit. At the Borrower's request, the Bank may, from
time to time, in its sole discretion issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto the Aggregate Bank Liabilities will in no event exceed the
lesser of (i) $10,000,000 or (ii) the then effective Borrowing Base.
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Any such letter of credit will be issued for such fee and upon such terms and
conditions as may be agreed to by the Bank and the Borrower at the time of
issuance. The Borrower hereby authorizes the Bank, without further request from
the Borrower, to cause the Borrower's liability to the Bank for reimbursement of
funds drawn under any such letter of credit to be repaid from the proceeds of a
Revolving Loan to be made hereunder. The Borrower hereby irrevocably requests
that such Revolving Loans be made.
1.6. Conditions to Advance. Prior to the making of the initial Revolving
Loan or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this letter agreement, the Security
Agreements, the Guaranties, the Intellectual Property Security Agreements, the
Revolving Note and the documents and other items listed on the Closing Agenda
delivered herewith by the Bank to the Borrower, all of which, as well as all
legal matters incident to the transactions contemplated hereby, shall be
satisfactory in form and substance to the Bank and its counsel.
Without limiting the foregoing, any Revolving Loan or letter of credit
issuance (including the initial Revolving Loan or letter of credit issuance) is
subject to the further conditions precedent that on the date on which such
Revolving Loan is made or such letter of credit is issued (and after giving
effect thereto):
(a) All statements, representations and warranties of the Borrower
and/or Star made in this letter agreement and/or in any Security Agreement shall
continue to be correct in all material respects as of the date of such Revolving
Loan or the date of issuance of such letter of credit, as the case may be.
(b) All covenants and agreements of the Borrower and/or Star contained
herein and/or in any of the other Loan Documents shall have been complied with
in all material respects on and as of the date of such Revolving Loan or the
date of issuance of such letter of credit, as the case may be.
(c) No event which constitutes, or which with notice or lapse of time
or both could constitute, an Event of Default shall have occurred and be
continuing.
(d) No material adverse change shall have occurred in the financial
condition of the Borrower and/or Star from that disclosed in the financial
statements then most recently furnished to the Bank.
Each request by the Borrower for any Revolving Loan or for the issuance
of any letter of credit, and each acceptance by the Borrower of the proceeds of
any Revolving Loan or delivery of a letter of credit, will be deemed a
representation and warranty by each of the Borrower and Star that at the date of
such Revolving Loan or the date of issuance of such letter of credit, as the
case may be, and after giving effect thereto all of the conditions set forth in
the foregoing clauses (a)-(d) of this ss.1.6 will be satisfied. Each request for
a Revolving Loan or letter of credit issuance will be accompanied by a borrowing
base certificate on a form satisfactory to the Bank,
<PAGE>
executed by the chief financial officer of the Borrower, unless such a
certificate shall have been previously furnished setting forth the Borrowing
Base as at a date not more than 20 days prior to the date of the requested
borrowing or the requested letter of credit issuance, as the case may be.
II. REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties. In order to induce the Bank to
enter into this letter agreement and to make Revolving Loans hereunder and/or
issue letters of credit hereunder, the Borrower warrants and represents to the
Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of Delaware. The Borrower has full corporate
power to own its property and conduct its business as now conducted, to grant
the security interests contemplated by the Borrower's Security Agreement and the
Borrower's Intellectual Property Security Agreements and to enter into and
perform this letter agreement and the other Loan Documents. The Borrower is duly
qualified to do business and is in good standing in Massachusetts and is also
duly qualified to do business in and is in good standing in each other
jurisdiction in which the Borrower maintains any facility, sales office,
warehouse or other location, and in each other jurisdiction where the failure so
to qualify could (singly or in the aggregate with all other such failures) have
a material adverse effect on the financial condition, business or prospects of
the Borrower, all such jurisdictions being listed on item 2.1(a) of the attached
Disclosure Schedule. At the date hereof, the Borrower has no Subsidiaries,
except as shown on said item 2.1(a) of the attached Disclosure Schedule. The
Borrower is not a member of any partnership or joint venture, except as shown on
said item 2.1(a) of the attached Disclosure Schedule.
(b) At the date of this letter agreement, no Person is known by the
Borrower to own, of record and/or beneficially, 5% or more of the outstanding
shares of any class of capital stock of the Borrower, except as set forth on
item 2.1(b) of the attached Disclosure Schedule.
(c) The execution, delivery and performance by the Borrower of this
letter agreement and each of the other Loan Documents have been duly authorized
by all necessary corporate and other action and do not and will not:
(i) violate any provision of, or require any filings (other than
filings under the Uniform Commercial Code), registration, consent or
approval under, any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower;
(ii) violate any provision of the charter or by-laws of the
Borrower, or result in a breach of or constitute a default or require
any waiver or consent under any indenture or loan or credit agreement
or any other material agreement, lease or instrument to which the
Borrower is a party or by which the Borrower or any of its properties
may be bound or affected or require any other consent of any Person; or
<PAGE>
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the
Bank), upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms, except as enforceability may be limited by
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and by rules of law governing specific performance, injunctive relief
and other equitable remedies.
(e) Except as described on item 2.1(e) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which could hinder or
prevent the consummation of the transactions contemplated hereby or call into
question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or
by-laws as now in effect. Except as described on item 2.1(f) of the attached
Disclosure Schedule, neither the Borrower nor any Subsidiary of the Borrower is
in material violation of any term of any mortgage, indenture or judgment, decree
or order, or any other instrument, contract or agreement to which it is a party
or by which any of its property is bound.
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary. All such filed
returns, reports and estimates have been completed in accordance with applicable
law and the Borrower or the relevant Subsidiary has paid all taxes, assessments,
impositions, fees and other governmental charges required to be paid in respect
of the periods covered by such returns, reports or estimates. No deficiencies
for any tax, assessment or governmental charge have been asserted or assessed,
and the Borrower knows of no material tax liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower
is in compliance) with all requirements of law, federal, state and local, and
all requirements of all governmental bodies or agencies having jurisdiction over
it, the conduct of its business, the use of its properties and assets, and all
premises occupied by it, failure to comply with any of which could (singly or in
the aggregate with all other such failures) have a material adverse effect upon
the assets, business, financial condition or prospects of the Borrower or any
such Subsidiary. Without limiting the foregoing, the Borrower has all the
franchises, licenses, leases, permits,
<PAGE>
certificates and authorizations needed for the conduct of its business and the
use of its properties and all premises occupied by it, as now conducted, owned
and used.
(i) The audited financial statements of the Borrower as at December 31,
1997 and the management-generated statements of the Borrower as at June 30,
1998, each heretofore delivered to the Bank, are complete and accurate and
fairly present in all material respects the financial condition of the Borrower
as at the respective dates thereof and for the periods covered thereby. Neither
the Borrower nor any of the Borrower's Subsidiaries has any liability,
contingent or otherwise, not disclosed in the aforesaid financial statements or
in any notes thereto that could materially affect the financial condition of the
Borrower. Since June 30, 1998, there has been no material adverse development in
the business, condition or prospects of the Borrower, and the Borrower has not
entered into any transaction other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at 45 Hartwell Avenue, Lexington, MA 02421. All of the
books and records of the Borrower are located at said address. Except as
described on item 2.1(j) of the attached Disclosure Schedule, no assets of the
Borrower are located at any other address. Said item 2.1(j) of the attached
Disclosure Schedule sets forth the names and addresses of the record owners of
all premises where any material amount of Collateral is located.
(k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises ("Intellectual
Property") now being used to conduct its business, described on item 2.1(k) of
the attached Disclosure Schedule. None of the Intellectual Property owned by the
Borrower is represented by a registered copyright, trademark, patent or other
federal or state registration, except as shown on said item 2.1(k). To the best
knowledge of the Borrower, the conduct of the Borrower's business as now
operated does not conflict with valid patents, licenses, copyrights, trademarks,
trade names or franchises of others in any manner that could materially
adversely affect the business, prospects, assets or condition, financial or
otherwise, of the Borrower.
(l) None of the executive officers or key employees of the Borrower is
subject to any agreement in favor of anyone other than the Borrower which limits
or restricts that person's right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now
has or, as far as can reasonably be foreseen by the Borrower at the date hereof,
may have a material adverse effect on the financial condition, business,
prospects or properties of the Borrower.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any covenants and agreements contained in the
Borrower's Security Agreement or elsewhere, the Borrower agrees that so long as
the financing arrangements
<PAGE>
contemplated hereby are in effect or any Revolving Loan or any of the other
Obligations shall be outstanding or any letter of credit issued hereunder shall
be outstanding:
3.1. Legal Existence; Qualification; Compliance. The Borrower will
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts. The Borrower will qualify to do business and will remain
qualified and in good standing (and the Borrower will cause each Subsidiary of
the Borrower to qualify and remain qualified and in good standing) in each
jurisdiction in which the failure so to qualify could (singly or in the
aggregate with all other such failures) have a material adverse effect on the
financial condition, business or prospects of the Borrower or any such
Subsidiary. The Borrower will comply (and will cause each Subsidiary of the
Borrower to comply) with its charter documents and by-laws. The Borrower will
comply with (and will cause each Subsidiary of the Borrower to comply with) all
applicable laws, rules and regulations (including, without limitation, ERISA and
those relating to environmental protection) other than (i) laws, rules or
regulations the validity or applicability of which the Borrower or such
Subsidiary shall be contesting in good faith by proceedings which serve as a
matter of law to stay the enforcement thereof and (ii) those laws, rules and
regulations the failure to comply with any of which could not (singly or in the
aggregate) have a material adverse effect on the financial condition, business
or prospects of the Borrower or any such Subsidiary.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements thereof. The Borrower will
maintain all such insurance as may be required under the Borrower's Security
Agreement and will also maintain, with financially sound and reputable insurers,
insurance with respect to its property and business against such liabilities,
casualties and contingencies and of such types and in such amounts as shall be
reasonably satisfactory to the Bank from time to time and in any event all such
insurance as may from time to time be customary for companies conducting a
business similar to that of the Borrower in similar locales, with the Bank to be
named as first loss payee on all policies relating to any Collateral; provided,
however, that so long as no Event of Default has occurred and is continuing, (i)
returned and unearned premiums may be paid directly to and may be retained by
the Borrower and (ii) insurance proceeds from any casualty damages totalling
$50,000 or less may be paid directly to and may be retained by the Borrower.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge
(and will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments, charges
or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower or any such Subsidiary, except any of the foregoing
which is being contested in good
<PAGE>
faith and by appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and for which the Borrower has established and is
maintaining adequate reserves. The Borrower will pay, and will cause each of its
Subsidiaries to pay, in a timely manner, all lease obligations, all trade debt,
purchase money obligations, equipment lease obligations and all of its other
material Indebtedness. The Borrower will perform and fulfill all material
covenants and agreements under any leases of real estate, agreements relating to
purchase money debt, equipment leases and other material contracts. The Borrower
will maintain in full force and effect, and comply with the terms and conditions
of, all permits, permissions and licenses necessary or desirable for its
business.
3.4. Accounts. The Borrower will maintain its principal depository and
operating accounts with the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary
course, the business in which it is presently engaged. The Borrower will not,
without the prior written consent of the Bank, directly or indirectly (itself or
through any Subsidiary) enter into any other lines of business, businesses or
ventures.
3.6. Reporting Requirements. The Borrower will furnish to the Bank:
(i) Within 90 days after the end of each fiscal year of the
Borrower, a copy of the annual audit report for such fiscal year for
the Borrower, including therein consolidated and consolidating balance
sheets of the Borrower and Subsidiaries as at the end of such fiscal
year and related consolidated and consolidating statements of income,
stockholders' equity and cash flow for the fiscal year then ended. The
annual consolidated financial statements shall be certified by
independent public accountants selected by the Borrower and reasonably
acceptable to the Bank, such certification to be in such form as is
generally recognized as "unqualified" (except that the annual audit may
be subject to a "going concern" qualification substantially similar to
that issued by the Borrower's accountants in connection with the
Borrower's fiscal 1997 financial statements).
(ii) Within 30 days after the end of each month,
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries and related consolidated and consolidating income
statements, unaudited but complete and fairly stated and prepared in
accordance with generally accepted accounting principles consistently
applied fairly presenting the financial condition of the Borrower as at
the dates thereof and for the periods covered thereby (except that such
monthly statements need not contain footnotes) and certified as being
fairly stated (subject to normal year-end audit adjustments, which
shall not be material) by the chief financial officer of the Borrower,
such balance sheets to be as at the end of such month and such income
statements to be for such month and for the fiscal year to date, in
each case together with a comparison to budget.
<PAGE>
(iii) At the time of delivery of each annual or monthly
statement of the Borrower, a certificate executed by the chief
financial officer of the Borrower stating that he or she has reviewed
this letter agreement and the other Loan Documents and has no knowledge
of any default by the Borrower in the performance or observance of any
of the provisions of this letter agreement or of any of the other Loan
Documents or, if he or she has such knowledge, specifying each such
default and the nature thereof. Each financial statement given as at
the end of any fiscal quarter of the Borrower will also set forth the
calculations necessary to evidence compliance with ss.3.7.
(iv) Monthly, within 20 days after the end of each month,
(A) an aging report in form satisfactory to the Bank covering all
Receivables of the Borrower and (prior to the consummation of the Star
Transaction) all Receivables of Star outstanding as at the end of such
month, and (B) a certificate of the chief financial officer of the
Borrower setting forth the Borrowing Base as at the end of such month,
all in form reasonably satisfactory to the Bank.
(v) Promptly after receipt, a copy of all audits or reports
submitted to the Borrower by independent public accountants in
connection with any annual, special or interim audits of the books of
the Borrower and any "management letter" prepared by such accountants.
(vi) As soon as possible and in any event within five days
of the occurrence of any Event of Default or any event which, with the
giving of notice or passage of time or both, would constitute an Event
of Default, the statement of the Borrower setting forth details of each
such Event of Default or event and the action which the Borrower
proposes to take with respect thereto.
(vii) Promptly (and in any event within 30 days) after
service of legal process upon the Borrower or the Borrower otherwise
having knowledge thereof, notice of all actions, suits and proceedings
before any court or governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, to which the Borrower
or any Subsidiary of the Borrower is a party; provided, however, that
the Borrower will not be deemed required by this clause (vii) to give
notice of any such action, suit or proceeding filed against the
Borrower or any such Subsidiary which seeks monetary damages only in an
amount of $100,000 or less.
(viii) Promptly upon filing any registration statement or
listing application (or any supplement or amendment to any registration
statement or listing application) with the Securities and Exchange
Commission ("SEC") or any successor agency or with any stock exchange
or with the National Association of Securities Dealers quotations
system, a copy of same.
(ix) A copy of each periodic or current report filed with
the SEC or any successor agency and each annual report, proxy statement
and other communication sent
<PAGE>
to shareholders or other securityholders generally, such copy to be
provided to the Bank promptly upon such filing with the SEC or such
communication with shareholders or securityholders, as the case may be.
(x) Promptly upon applying for, or being granted, a federal
or state registration for any copyright, trademark or patent or
purchasing any registered copyright, trademark or patent, written
notice to the Bank describing same, together with all such documents as
may be required to give the Bank a fully perfected first priority
security interest in each such copyright, trademark or patent.
(xi) Promptly after the Borrower has knowledge thereof,
written notice of any development or circumstance which may reasonably
be expected to have a material adverse effect on the Borrower or its
business, properties, assets, Subsidiaries or condition, financial or
otherwise.
(xii) Promptly upon request, such other information
respecting the financial condition, operations, Receivables, inventory,
machinery or equipment of the Borrower or any Subsidiary as the Bank
may from time to time reasonably request.
3.7. Profitability. The Borrower's results for its fiscal quarter ended
September 30, 1998 will show a consolidated quarterly Net Loss not to equal or
exceed $3,500,000. The Borrower will incur a consolidated quarterly Net Loss not
to equal or exceed $2,000,000 for its fiscal quarter ending December 31, 1998.
The Borrower will achieve consolidated quarterly Net Income of greater than
$1.00 for each of its fiscal quarters ending March 31, 1999 and June 30, 1999.
The Borrower will achieve consolidated quarterly Net Income of greater than
$500,000 for its fiscal quarter ending September 30, 1999. The Borrower will
achieve consolidated quarterly Net Income of greater than $750,000 for its
fiscal quarter ending December 31, 1999 and for each fiscal quarter thereafter.
3.8. Books and Records. The Borrower will maintain (and will cause each
of its Subsidiaries to maintain) complete and fairly stated books, records and
accounts which will at all times fairly reflect all of its transactions in
accordance with generally accepted accounting principles consistently applied.
The Borrower will, at any reasonable time and from time to time upon reasonable
notice and during normal business hours (and at any time and without any
necessity for notice following the occurrence of an Event of Default), permit
the Bank, and any agents or representatives thereof, to examine and make copies
of and take abstracts from the records and books of account of, and visit the
properties of the Borrower and any of its Subsidiaries, and to discuss its
affairs, finances and accounts with its officers, directors and/or independent
accountants, all of whom are hereby authorized and directed to cooperate with
the Bank in carrying out the intent of this ss.3.8. Each financial statement of
the Borrower hereafter delivered pursuant to this letter agreement will be
complete and will fairly present the financial condition of the Borrower as at
the date thereof and for the periods covered thereby.
<PAGE>
3.9. Landlord's Waiver. Prior to the Bank making the first Revolving
Loan, the Borrower will obtain, and will thereafter maintain in effect at all
times, waivers from the owners of all premises in which any material amount of
Collateral is located, such waivers to be in form and substance satisfactory to
the Bank.
3.10. Y2K Compliance. The Borrower will review the software which it
uses in its business (and which its Subsidiaries use in their respective
businesses) for "Year 2000" compliance. The Borrower will, on or before June 30,
1999, have completed all steps necessary to assure that such software will
continue to function in the manner intended without interruption of service or
other difficulty resulting from the "Year 2000 problem". The Borrower will, at
the request of the Bank, provide such reports and such other information as the
Bank may reasonably request in respect of the Borrower's program to assure such
Year 2000 compliance.
3.11. Agreements as to Star. As used herein, the term "Star
Transaction" means the sale by the Borrower of all or substantially all of the
stock or assets of Star to a Person unrelated to the Borrower for cash
consideration which results (after payment of all amounts owed to Coherent,
Inc.) in at least $40,000,000 in net proceeds to the Borrower on a pre-tax
basis. The Borrower presently intends to complete the Star Transaction and to
receive such proceeds on or before March 31, 1999. The Bank agrees that if the
Star Transaction is consummated and such net proceeds are received on or before
March 31, 1999, the Bank will, upon the payment of so much of the Revolving
Loans as may be required so that the Aggregate Bank Liabilities will not exceed
the Borrowing Base calculated without reference to any Receivables of Star,
release the Star Security Agreement and the Star Intellectual Property Security
Agreement and terminate the Star Guaranty.
3.12. Agreements as to CTI. At all times on and after the CTI
Compliance Date, all of the affirmative and negative covenants in Articles III
and IV will be deemed to apply to CTI as a "Subsidiary" of the Borrower. The
Borrower will promptly notify the Bank of the occurrence of the CTI Compliance
Date. Immediately following the CTI Compliance Date, the Borrower will obtain
from CTI and deliver to the Bank (i) a guaranty by CTI of the obligations of the
Borrower under this letter agreement, the Revolving Note and the other Loan
Documents, (ii) security agreements granting to the Bank a security interest in
all assets of CTI, together with all filings needed to perfect such security
interest and appropriate landlord's waivers, (iii) certificates of appropriate
governmental authorities as to the legal existence, qualification and good
standing of CTI, (iv) a Secretary's Certificate as to CTI's charter documents
and by-laws, the incumbency and signatures of CTI's officers, and the
resolutions of CTI's Board of Directors (and, if necessary, stockholders)
approving the aforesaid guaranty and security agreements, and (v) an opinion of
CTI's counsel in form and substance satisfactory to the Bank, all of the
documents described in clauses (i) - (v) of this sentence to be satisfactory in
form and substance to the Bank.
3.13. Agreements as to PEC. At all times on and after the PEC
Compliance Date, all of the affirmative and negative covenants in Articles III
and IV will be deemed to apply to PEC as a "Subsidiary" of the Borrower. The
Borrower will promptly notify the Bank of the occurrence of the PEC Compliance
Date. Immediately following the PEC Compliance Date, the Borrower will
<PAGE>
obtain from PEC and deliver to the Bank (i) a guaranty by PEC of the obligations
of the Borrower under this letter agreement, the Revolving Note and the other
Loan Documents, (ii) security agreements granting to the Bank a security
interest in all assets of PEC, together with all filings needed to perfect such
security interest and appropriate landlord's waivers, (iii) certificates of
appropriate governmental authorities as to the legal existence, qualification
and good standing of PEC, (iv) a Secretary's Certificate as to PEC's charter
documents and by-laws, the incumbency and signatures of PEC's officers, and the
resolutions of PEC's Board of Directors (and, if necessary, stockholders)
approving the aforesaid guaranty and security agreements, and (v) an opinion of
PEC's counsel in form and substance satisfactory to the Bank, all of the
documents described in clauses (i) - (v) of this sentence to be satisfactory in
form and substance to the Bank.
IV. NEGATIVE COVENANTS
Without limitation of any covenants and agreements contained in the
Borrower's Security Agreement or elsewhere, the Borrower agrees that so long as
the financing arrangements contemplated hereby are in effect or any Revolving
Loan or any of the other Obligations shall be outstanding or any letter of
credit issued hereunder shall be outstanding:
4.1. Indebtedness. The Borrower will not create, incur, assume or
suffer to exist any Indebtedness (nor allow any of its Subsidiaries to create,
incur, assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Revolving Note and any Indebtedness in
respect of letters of credit issued by the Bank;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes,
assessments and governmental charges or levies not yet due and payable;
(iii) unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or for purchase money Indebtedness with
respect to fixed assets) incurred upon customary terms in the ordinary
course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) incurred in
the future to equipment vendors and/or lessors for equipment hereafter
purchased or leased by the Borrower for use in the Borrower's business,
provided that the total of Indebtedness permitted under this clause
(iv) (exclusive of presently-existing financing permitted under clause
(v) of this ss.4.1) will not exceed $250,000 in the aggregate
outstanding at any one time;
(v) other Indebtedness existing at the date hereof (including, without
limitation, the Coherent Notes and certain amounts owed to Coherent,
Inc. in respect of prepaid
<PAGE>
invoices), but only to the extent set forth on item 4.1 of the attached
Disclosure Schedule and without any increase thereof; and
(vi) any guaranties or other contingent liabilities expressly permitted
pursuant to section 4.3.
4.2. Liens. The Borrower will not create, incur, assume or suffer to
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same shall
not at the time be delinquent or thereafter can be paid without
interest or penalty;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar Liens arising in the ordinary course
of business for sums not yet due or which are being contested in good
faith and by appropriate proceedings which serve as a matter of law to
stay the enforcement thereof and as to which adequate reserves have
been made;
(iii) pledges or deposits under workmen's compensation laws,
unemployment insurance, social security, retirement benefits or similar
legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing
purchase money Indebtedness to the extent permitted by clause (iv) of
ss.4.1; provided that no such Lien will extend to any property of the
Borrower other than the specific items of equipment financed;
(vi) a Lien on inventory of Star securing the Coherent Notes;
(vii) a Lien on certain specified accounts receivable of the Borrower
(more particularly described on item 4.2 of the attached Disclosure
Schedule) securing the amounts owed to Coherent, Inc. for prepaid
invoices as described in clause (v) of ss.4.1; or
(viii) other Liens existing at the date hereof, but only to the extent
and with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
4.3. Guaranties. The Borrower will not, without the prior written
consent of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including,
<PAGE>
without limitation, liable by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise invest
in any debtor or otherwise to assure any creditor against loss) (and will not
permit any of its Subsidiaries so to assume, guaranty or become directly or
contingently liable) in connection with any indebtedness of any other Person,
except (i) guaranties by endorsement for deposit or collection in the ordinary
course of business and (ii) guaranties existing at the date hereof and described
on item 4.3 of the attached Disclosure Schedule.
4.4. Dividends. The Borrower will not, without the prior written consent
of the Bank, make any distributions to its shareholders, pay any dividends
(other than dividends payable solely in capital stock of the Borrower) or
redeem, purchase or otherwise acquire, directly or indirectly any of its capital
stock, except that (i) the Borrower may, without being deemed to be in violation
of this ss.4.4, pay to certain of its stockholders a fee at the rate of 5% per
annum (payable quarterly) on the amount invested by such stockholders
($10,200,000 in the aggregate) in the equity of the Borrower in February 1998
and July 1998, and (ii) the Borrower may, without being deemed to be in
violation of this ss.4.4, complete the presently-contemplated redemption of
Series H Preferred Stock of the Borrower for an aggregate principal amount not
in excess of $450,000; provided that in no event will any payment to be made
under clause (i) or clause (ii) of this sentence be funded, in whole or in part,
with the proceeds of any Revolving Loan.
4.5. Loans and Advances. The Borrower will not make (and will not permit
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except (i) travel
advances and other expense advances made to officers and employees in the
ordinary course and repaid in the ordinary course and (ii) other loans and
advances to officers and employees in an aggregate amount not to exceed $25,000
outstanding at any one time.
4.6. Investments. The Borrower will not, without the Bank's prior
written consent, invest in, hold or purchase any stock or securities of any
Person (nor will the Borrower permit any of its Subsidiaries to invest in,
purchase or hold any such stock or securities) except (i) readily marketable
direct obligations of, or obligations guarantied by, the United States of
America or any agency thereof, (ii) other investment grade debt securities,
(iii) mutual funds, the assets of which are primarily invested in items of the
kind described in the foregoing clauses (i) and (ii) of this ss.4.6, (iv)
deposits with or certificates of deposit issued by the Bank and any other
obligations of the Bank or the Bank's parent, (v) deposits in any other bank
organized in the United States having capital in excess of $100,000,000, and
(vi) investments in any Subsidiaries now existing or hereafter created by the
Borrower pursuant to ss.4.7 below; provided that in any event the Tangible Net
Worth of the Borrower alone (exclusive of its investment in Subsidiaries and any
debt owed by any Subsidiary to the Borrower) will not be less than 90% of the
consolidated Tangible Net Worth of the Borrower and Subsidiaries.
4.7. Subsidiaries; Acquisitions. The Borrower will not, without the
prior written consent of the Bank, form or acquire any Subsidiary or make any
other acquisition of the stock of
<PAGE>
any other Person or of all or substantially all of the assets of any other
Person. The Borrower will not become a partner in any partnership.
4.8. Merger; Disposition of Assets. The Borrower will not, without the
prior written consent of the Bank, merge or consolidate with any Person, or
sell, lease, transfer or otherwise dispose of any material portion of its assets
(whether in one or more transactions), other than (i) sale of inventory in the
ordinary course, (ii) the sale of Star to Coherent, Inc. pursuant to the Star
Transaction on or before March 31, 1999 and (iii) a sale or transfer of any
Intellectual Property of the Borrower so long as (A) such sale or transfer could
not have a materially adverse effect on the business, condition or prospects of
the Borrower and (B) the Borrower gives the Bank not less than 20 days' prior
written notice of each such sale or transfer, in such detail as shall be
reasonably acceptable to the Bank. The Bank specifically acknowledges that this
letter agreement contemplates and permits the sale of Star to Coherent, Inc.
pursuant to the Star Transaction on or before March 31, 1999, with the Bank's
security interests in Star's assets to be released under the circumstances
described in ss.3.11 above. The Bank also consents to the granting by the
Borrower, on commercially reasonable terms, of one or more sublicenses of the
Borrower's rights under a certain patent license from Massachusetts General
Hospital to the Borrower with respect to laser hair removal.
4.9. Affiliate Transactions. The Borrower will not, without prior
written consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any affiliate of the Borrower, except in the ordinary course
of and pursuant to the reasonable requirements of the Borrower's business and
upon fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arms'-length transaction with any Person not an
affiliate; provided that nothing in this ss.4.9 shall be deemed to prohibit the
payment of salary or other similar payments to any officer or director of the
Borrower at a level consistent with the salary and other payments being paid at
the date of this letter agreement and heretofore disclosed in writing to the
Bank, nor to prevent the hiring of additional officers at a salary level
consistent with industry practice, nor to prevent reasonable periodic increases
in salary. For the purposes of this letter agreement, "affiliate" means any
Person which, directly or indirectly, controls or is controlled by or is under
common control with the Borrower; any officer or director or former officer or
director of the Borrower; any Person owning of record or beneficially, directly
or indirectly, 5% or more of any class of capital stock of the Borrower or 5% or
more of any class of capital stock or other equity interest having voting power
(under ordinary circumstances) of any of the other Persons described above; and
any member of the immediate family of any of the foregoing. "Control" means
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of any Person, whether through ownership
of voting equity, by contract or otherwise.
4.10. Change of Address, etc. The Borrower will not change its name or
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence of
ss.2.1(j) above, nor will the Borrower remove any books or records from such
address, nor will the Borrower keep any Collateral belonging to
<PAGE>
the Borrower at any location other than the premises described in ss.2.1(j)
without, in each instance, giving the Bank at least 30 days' prior written
notice and providing all such financing statements, certificates and other
documentation as the Bank may request in order to maintain the perfection and
priority of the security interests granted or intended to be granted pursuant to
the Borrower's Security Agreement. The Borrower will not change its fiscal year
or methods of financial reporting unless, in each instance, prior written notice
of such change is given to the Bank and prior to such change the Borrower enters
into amendments to this letter agreement in form and substance satisfactory to
the Bank in order to preserve unimpaired the rights of the Bank and the
obligations of the Borrower hereunder.
4.11. Hazardous Waste. Except as provided below, the Borrower will not
dispose of or suffer or permit to exist any hazardous material or oil on any
site or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to store)
on any site or vessel owned, occupied or operated by the Borrower or any such
Subsidiary, or transport or arrange the transport of, any hazardous material or
oil (the terms "hazardous material", "oil", "site" and "vessel", respectively,
being used herein with the meanings given those terms in Mass. Gen. Laws, Ch.
21E or any comparable terms in any comparable statute in effect in any other
relevant jurisdiction). The Borrower shall provide the Bank with written notice
of (i) the intended storage or transport of any hazardous material or oil by the
Borrower or any Subsidiary of the Borrower, (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Borrower or any Subsidiary of the Borrower,
and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Borrower or any
Subsidiary of the Borrower may be liable. Notwithstanding the foregoing, the
Borrower and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Borrower and
its Subsidiaries, in reasonable quantities, as long as in any case the Borrower
or the Subsidiary concerned (as the case may be) has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower or such Subsidiary (as the case may be) would follow, and
disposes of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
4.12. No Margin Stock. No proceeds of any Revolving Loan shall be used
directly or indirectly to purchase or carry any margin security.
4.13. Subordinated Debt. The Borrower will not directly or indirectly
make any optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment of Subordinated
Debt. In any event, the Borrower will not
<PAGE>
make any payment of any principal of or interest on any Subordinated Debt at any
time when there exists, or if there would result therefrom, any Event of Default
hereunder. Without limitation of the foregoing, the Restructured Subordinated
Notes shall contain subordination provisions satisfactory to the Bank and shall
in any event provide that no payment (of principal, interest, fees and/or any
put or repurchase price) shall be made with respect to any of the Restructured
Subordinated Notes at any time when there exists any Default or Event of Default
or any Default or Event of Default would result therefrom.
V. DEFAULT AND REMEDIES
5.1. Events of Default. The occurrence of any one of the following
events shall constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or
interest on the Revolving Note on or before the date when due; or the Borrower
shall fail to pay when due any amount owed to the Bank in respect of any letter
of credit now or hereafter issued by the Bank; or
(b) Any representation or warranty of the Borrower contained herein
shall at any time prove to have been incorrect in any material respect when made
or any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit shall at any time prove to have been
incorrect in any material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of ss.ss.3.6 or 3.7 or Article IV; or
(d) The Borrower shall default in the performance or observance of any
agreement or obligation under any of ss.ss.3.1, 3.3, 3.11, 3.12 or 3.13 and such
default shall continue uncured for 30 days after the Borrower first knows of (or
reasonably should know of) such default or of the events or circumstances giving
rise to such default; or
(e) The Borrower shall default in the performance or observance of any
other term, covenant or agreement contained in this letter agreement and such
default has not been cured within 30 days after notice thereof shall have been
given to the Borrower; or
(f) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or
(g) Any default shall exist and remain unwaived or uncured with respect
to any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $250,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $250,000
<PAGE>
in aggregate principal amount shall not have been paid when due, whether by
acceleration or otherwise, or shall have been declared to be due and payable
prior to its stated maturity, or any event or circumstance shall occur which
then currently permits the acceleration of the maturity of any such Indebtedness
by the holder of holders thereof; or
(h) The Borrower or Star shall be dissolved, or the Personal Guarantor
shall die, or any Guarantor shall become insolvent, or the Borrower or any
Subsidiary of the Borrower or any Guarantor shall cease paying its or his debts
as they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or for any
Subsidiary of the Borrower or for any Guarantor or for a substantial part of the
property of the Borrower or of any such Subsidiary or of any Guarantor, or
bankruptcy, reorganization, arrangement, insolvency or similar proceedings shall
be instituted by or against the Borrower or any such Subsidiary or any Guarantor
under the laws of any jurisdiction (except for an involuntary proceeding filed
against the Borrower or any Subsidiary of the Borrower or any Guarantor which is
dismissed within 60 days following the institution thereof); or
(i) Any attachment, execution or similar process relating to an amount
in excess of $250,000 shall be issued or levied against any of the property of
the Borrower or any Subsidiary and such attachment, execution or similar process
shall not be paid, stayed, released, vacated or fully bonded within 20 days
after its issue or levy; or
(j) Any final uninsured judgment in excess of $250,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction and shall not be paid, vacated, bonded or stayed within 30 days
after its entry; or
(k) The Borrower or any Subsidiary of the Borrower shall fail to meet
its minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to insure) or
any such plan shall be the subject of termination proceedings (whether voluntary
or involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or
(l) Any Security Agreement or any other Loan Document shall for any
reason (other than due to payment in full of all amounts secured or evidenced
thereby or due to discharge in writing by the Bank) not remain in full force and
effect; or
(m) The security interests and liens of the Bank in and on any of the
Collateral shall for any reason (other than due to payment in full of all
amounts secured thereby or due to written release by the Bank) not be fully
perfected liens and security interests; or
(n) At any time, 50% or more of the outstanding shares of voting stock
of the Borrower shall be owned by any Person or by any "group" (as defined in
the Securities Exchange
<PAGE>
Act of 1934, as amended, and the regulations thereunder), other than by one or
more of the Persons listed on item 5.1(n) of the attached Disclosure Schedule;
or
(o) Any default shall exist under any Guaranty or any Guaranty shall
for any reason not be in full force and effect (except, as to the Star Guaranty,
if same is terminated pursuant to ss.3.11 above); or
(p) There shall occur any other material adverse change in the
condition (financial or otherwise), operations, properties, assets, liabilities
or earnings of the Borrower or any Guarantor.
5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
Default (continuing beyond the expiration of any applicable notice and/or grace
period, if any), in addition to any other rights and remedies available to the
Bank hereunder or otherwise, the Bank may exercise any one or more of the
following rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Revolving Note
then outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Terminate the revolving financing arrangements provided for by this
letter agreement.
(c) Exercise all rights and remedies hereunder, under the Revolving
Note, under the Security Agreements, under the Intellectual Property Security
Agreements, under the Guaranties or any of same and under each and any other
agreement with the Bank; and exercise all other rights and remedies which the
Bank may have under applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default (continuing beyond the expiration of any
applicable notice and/or grace period, if any), the Bank is hereby authorized at
any time or from time to time, without presentment, demand, protest or other
notice of any kind to the Borrower or to any other Person, all of which are
hereby expressly waived, to set off and to appropriate and apply any and all
deposits and any other Indebtedness at any time held or owing by the Bank or any
affiliate thereof to or for the credit or the account of the Borrower against
and on account of the obligations and liabilities of the Borrower to the Bank
under this letter agreement or otherwise, irrespective of whether or not the
Bank shall have made any demand hereunder and although said obligations,
liabilities or claims, or any of them, may then be contingent or unmatured and
without regard for the availability or adequacy of other collateral. As further
security for the Obligations, the Borrower also grants to the Bank a security
interest with respect to all its deposits and all securities or other property
in the
<PAGE>
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code. ANY AND ALL
RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE
BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.
5.4. Letters of Credit. Without limitation of any other right or remedy
of the Bank, (i) if an Event of Default shall have occurred and the Bank shall
have accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.
VI. MISCELLANEOUS
6.1. Costs and Expenses. The Borrower agrees to pay on demand all costs
and expenses (including, without limitation, reasonable legal fees) of the Bank
in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreements, the Revolving Note and all other instruments
and documents to be delivered in connection with any Revolving Loan or any
letter of credit issued hereunder and any amendments or modifications of any of
the foregoing, as well as the costs and expenses (including, without limitation,
the reasonable fees and expenses of legal counsel) incurred by the Bank in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this letter agreement, the Security Agreements, the Revolving
Note and all other instruments and documents delivered or to be delivered
hereunder or in connection herewith, all whether or not legal action is
instituted. In addition, the Borrower shall be obligated to pay any and all
stamp and other taxes payable or determined to be payable in connection with the
execution and delivery of this letter agreement, the Security Agreements, the
Revolving Note and all other instruments and documents to be delivered in
connection with any Obligation. Any fees, expenses or other charges which the
Bank is entitled to receive from the Borrower under this Section shall bear
interest from the date of any demand therefor until the date when paid at a rate
per annum equal to the sum of (i) four (4%) percent plus (ii) the per annum rate
otherwise payable under the Revolving Note (but in no event in excess of the
maximum rate permitted by then applicable law).
6.2. Capital Adequacy. If the Bank shall have determined that the
adoption or phase-in after the date hereof of any applicable law, rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy
<PAGE>
(whether or not having the force of law) has or would have the effect of
reducing the return on the Bank's capital with respect to the Revolving Loans,
the within-described revolving loan facility and/or letters of credit issued for
the account of the Borrower to a level below that which the Bank could have
achieved (taking into consideration the Bank's policies with respect to capital
adequacy immediately before such adoption, phase-in, change or compliance and
assuming that the Bank's capital was then fully utilized) but for such adoption,
phase-in, change or compliance by any amount deemed by the Bank to be material:
(i) the Bank shall promptly after its determination of such occurrence give
notice thereof to the Borrower; and (ii) the Borrower shall pay forthwith to the
Bank as an additional fee such amount as the Bank certifies to be the amount
that will compensate it for such reduction with respect to the Revolving Loans,
the within-described revolving loan facility and/or such letters of credit.
A certificate of the Bank claiming compensation under this Section
shall be conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to it hereunder and the method by which
such amounts were determined. In determining such amounts, the Bank may use any
reasonable averaging and attribution methods. No failure on the part of the Bank
to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any certificate in a timely manner shall in any way
reduce any obligation of the Borrower to the Bank under this Section.
6.3. Facility Fees. With respect to the within arrangements for
Revolving Loans, the Borrower will pay to the Bank, at the time of execution and
delivery of this letter agreement, a non-refundable fee of $10,000. The Borrower
will also pay to the Bank with respect to the within arrangements for Revolving
Loans, on the last day of each calendar quarter (commencing on December 31,
1998) as long as the within-described Revolving Loan arrangements are in effect
and on the Expiration Date or earlier date of termination of such Revolving Loan
arrangements, a non-refundable commitment fee computed quarterly in arrears on
the daily average unused portion of the Bank's total revolving commitment during
the calendar quarter (or partial calendar quarter) then ended. Such commitment
fee will be payable at a rate of 0.5% per annum based on such unused portion of
the Bank's total revolving commitment and will be appropriately prorated for any
partial calendar quarter. As used herein, the Bank's "total revolving
commitment" will be deemed to be equal to the Maximum Revolving Credit as in
effect from time to time and the "unused portion" on any day means that amount
by which (x) the then effective Maximum Revolving Credit exceeds (y) the total
of (1) the aggregate principal amounts of the Revolving Loans outstanding at
that day and (2) the then total undrawn amounts of all letters of credit issued
hereunder and then outstanding, whether such excess results from the Bank not
making Revolving Loans or issuing letters of credit up to the Maximum Revolving
Credit, from the repayment of Revolving Loans or the termination of letters of
credit or from any other circumstance. In addition, if the within-described
revolving financing arrangements are cancelled or terminated prior to November
16, 1999 by the Borrower for any reason (not including termination by the Bank
due to the Borrower's default), the Borrower shall forthwith upon such
cancellation or termination pay to the Bank a sum equal to all of the commitment
fees
<PAGE>
which would have become due, absent such cancellation or termination, pursuant
to the immediately preceding three sentences with respect to the period
beginning on the date of such cancellation or termination and continuing through
November 16, 1999, assuming, for the purposes of this calculation, that no
Revolving Loans or letters of credit would be outstanding during such period.
The fees described in this Section are in addition to any balances and fees
required by the Bank or any of its affiliates in connection with any other
services now or hereafter made available to the Borrower.
6.4. Other Agreements. The provisions of this letter agreement are not
in derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or in any such other agreement.
6.5. Governing Law. This letter agreement and the Revolving Note shall
be governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6. Addresses for Notices, etc. All notices, requests, demands and
other communications provided for hereunder shall be in writing and shall be
mailed or delivered to the applicable party at the address indicated below:
If to the Borrower:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02421
Attention: Paul S. Weiner, Director of Finance
with a copy so mailed or delivered to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02421
Attention: General Counsel
<PAGE>
If to the Bank:
Fleet National Bank
High Technology Division
One Federal Street
Mail Code: MA OF DO7A
Boston, MA 02110
Attention: Lucie Burke, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.
6.7. Binding Effect; Assignment; Termination. This letter agreement
shall be binding upon the Borrower, its successors and assigns and shall inure
to the benefit of the Borrower and the Bank and their respective permitted
successors and assigns. The Borrower may not assign this letter agreement or any
rights hereunder without the express written consent of the Bank. The Bank may,
in accordance with applicable law, from time to time assign or grant
participation in this letter agreement, the Revolving Loans, the Revolving Note
and/or the letters of credit issued hereunder. Without limitation of the
foregoing generality:
(i) The Bank may at any time pledge all or any portion of
its rights under the Loan Documents (including any
portion of the Revolving Note) to any of the 12
Federal Reserve Banks organized under Section 4 of
the Federal Reserve Act, 12 U.S.C. Section 341. No
such pledge or the enforcement thereof shall release
the Bank from its obligations under any of the Loan
Documents.
(ii) The Bank shall have the unrestricted right at any
time and from time to time, and without the consent
of or notice to the Borrower, to grant to one or more
banks or other financial institutions (each, a
"Participant") participating interests in the Bank's
obligation to lend hereunder and/or any or all of the
Revolving Loans held by the Bank hereunder. In the
event of any such grant by the Bank of a
participating interest to a Participant, whether or
not upon notice to the Borrower, the Bank shall
remain responsible for the performance of its
obligations hereunder and the Borrower shall continue
to deal solely and directly with the Bank in
connection with the Bank's rights and obligations
hereunder. The Bank may furnish any information
concerning the Borrower in its possession from time
to time to prospective assignees and Participants;
provided that the Bank shall require any such
prospective assignee or Participant to
<PAGE>
agree in writing to maintain the confidentiality of
such information to the same extent as the Bank would
be required to maintain such confidentiality.
The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to the
Bank together with payment of the sum (if any) due under the penultimate
sentence of ss.6.3; provided that no such termination will release or waive any
of the Bank's rights or remedies or any of the Borrower's obligations under this
letter agreement or any of the other Loan Documents unless and until the
Borrower has paid in full the Revolving Loans and all interest thereon and all
fees and charges payable in connection therewith and all letters of credit
issued hereunder have been terminated.
6.8. Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note. The Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any such suit, action or proceeding brought in such a court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Borrower agrees that final judgment in any such suit, action or
proceeding brought in such a court shall be enforced in any court of proper
jurisdiction by a suit upon such judgment, provided that service of process in
such action, suit or proceeding shall have been effected upon the Borrower in
one of the manners specified in the following paragraph of this ss.6.8 or as
otherwise permitted by law.
The Borrower hereby consents to process being served in any suit,
action or proceeding of the nature referred to in the preceding paragraph of
this ss.6.8 either (i) by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set forth
in ss.6.6 (as such address may be changed from time to time pursuant to said
ss.6.6) or (ii) by serving a copy thereof upon it at its address set forth in
ss.6.6 (as such address may be changed from time to time pursuant to said
ss.6.6).
6.9. Severability. In the event that any provision of this letter
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each provision of
this letter agreement shall be valid and enforced to the fullest extent
permitted by law.
6.10. Replacement Note. Upon receipt of an affidavit of an officer of
the Bank as to the loss, theft, destruction or mutilation of the Revolving Note
or of any other Loan Document which is not of public record and, in the case of
any such mutilation, upon surrender and cancellation of such Revolving Note or
other Loan Document, the Borrower will issue, in lieu thereof, a replacement
Revolving Note or other Loan Document in the same principal amount (as to the
Revolving Note) and in any event of like tenor.
<PAGE>
6.11. Usury. All agreements between the Borrower and the Bank are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason of acceleration of maturity of the Revolving Note or otherwise, shall
the amount paid or agreed to be paid to the Bank for the use or the forbearance
of the Indebtedness represented by the Revolving Note exceed the maximum
permissible under applicable law. In this regard, it is expressly agreed that it
is the intent of the Borrower and the Bank, in the execution, delivery and
acceptance of the Revolving Note, to contract in strict compliance with the laws
of The Commonwealth of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Revolving Note or any of the
other Loan Documents at the time such provision is to be performed or fulfilled
shall involve exceeding the limit of validity prescribed by applicable law, then
the obligation so to be performed or fulfilled shall be reduced automatically to
the limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Revolving Note and not to
the payment of interest. The provisions of this ss.6.11 shall control every
other provision of this letter agreement and of the Revolving Note.
6.12. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS LETTER AGREEMENT, THE REVOLVING NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ENTER INTO THIS LETTER AGREEMENT AND TO MAKE REVOLVING LOANS AS
CONTEMPLATED HEREIN.
VII. DEFINED TERMS
7.1. Definitions. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"ACH Transactions" - Any automated clearinghouse transactions which may
be initiated by the Bank for the Borrower.
"Aggregate Bank Liabilities" - At any time, the sum of (i) the
principal amount of all Revolving Loans then outstanding, plus (ii) all then
undrawn amounts of letters of credit issued by the Bank for the account of the
Borrower, plus (iii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.
"Borrowing Base" - As determined at any time, the sum of (i) 80% of the
aggregate principal amount of the Qualified Receivables of the Borrower and/or
Star then outstanding, plus (ii) 90% of the aggregate principal amount of the
L/C-Backed Foreign Receivables of the
<PAGE>
Borrower and/or Star then outstanding, plus (iii) 85% of the aggregate principal
amount of the Insured Receivables of the Borrower and/or Star then outstanding,
plus (iv) 100% of the principal amount of (A) any certificate of deposit
hereafter issued by the Bank and purchased from the Bank by the Borrower which
is pledged to the Bank by instruments satisfactory in form and substance to the
Bank and in which the Bank has a fully perfected first priority security
interest or (B) any deposit account now or hereafter established by the Borrower
with the Bank, which account is blocked as to withdrawals by the Borrower, is
pledged to the Bank by instruments satisfactory in form and substance to the
Bank and in which the Bank has a fully perfected first priority security
interest.
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a
public holiday under the laws of the United States of America or The
Commonwealth of Massachusetts applicable to a national bank.
"Coherent Notes" - Promissory notes of the Borrower dated May 22, 1998
and June 19, 1998 in the aggregate original principal amount of $4,000,000,
payable to the order of Coherent, Inc.
"Collateral" - All property now or hereafter owned by the Borrower
and/or Star (until the release of Star's Collateral pursuant to ss.3.11) or in
which the Borrower and/or Star (until the release of Star's Collateral pursuant
to ss.3.11) now or hereafter has any interest which is described as "Collateral"
in any of the Security Agreements or in ss.7.2(b) below or in Star's Guaranty.
From and after the date when CTI and/or PEC has executed and delivered a
security agreement pursuant to ss.3.12 and/or ss.3.13, the term "Collateral"
shall also refer to all property and interests now or hereafter owned by CTI
and/or PEC, as the case may be.
"CTI" - Cosmetic Technology International, Inc., a Delaware
corporation.
"CTI Compliance Date" - The first to occur of: (i) that date when the
total assets of CTI (valued in accordance with generally accepted accounting
principles consistently applied) are equal to or greater than 5% of the total
consolidated assets (valued in accordance with generally accepted accounting
principles consistently applied) of the Borrower and Subsidiaries or (ii) the
end of any fiscal quarter of the Borrower in which the net revenues (exclusive
of any extraordinary items) of CTI for such fiscal quarter are equal to or
greater than 5% of the total consolidated net revenues (exclusive of any
extraordinary items) of the Borrower and Subsidiaries for such fiscal quarter.
"ERISA" - The Employee Retirement Income Security Act of 1974, as
amended.
"Expiration Date" - March 31, 2000, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.
"Guaranties" - Collectively, (i) the Personal Guaranty and (ii) the
Star Guaranty (but only until the Star Guaranty is released pursuant to
ss.3.11).
<PAGE>
"Guarantors" - Collectively, (i) the Personal Guarantor and (ii) Star
(but only until the release of the Star Guaranty pursuant to ss.3.11).
"Indebtedness" - All obligations of a Person, whether current or
long-term, senior or subordinated, which in accordance with generally accepted
accounting principles would be included as liabilities upon such Person's
balance sheet at the date as of which Indebtedness, is to be determined, and
shall also include guaranties, endorsements (other than for collection in the
ordinary course of business) or other arrangements whereby responsibility is
assumed for the obligations of others, whether by agreement to purchase or
otherwise acquire the obligations of others, including any agreement, contingent
or otherwise, to furnish funds through the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"Insured Receivable" - Any Receivable now or hereafter owed to the
Borrower or Star which satisfies all of the criteria set forth below to be a
"Qualified Receivable" except that the relevant customer may be located inside
or outside the United States; provided that such Receivable is insured by credit
insurance in form and substance satisfactory to the Bank and issued by Eximbank
or another insurer satisfactory to the Bank. In any event, "Insured Receivables"
shall not be deemed to include any of the Qualified Receivables nor any of the
L/C-Backed Foreign Receivables.
"Intellectual Property" - As defined in ss.2.1(k).
"Intellectual Property Security Agreements" - Collectively, the
Borrower's Intellectual Property Security Agreements and Star's Intellectual
Property Security Agreements.
"L/C-Backed Foreign Receivable" - Any Receivable now or hereafter owed
to the Borrower or Star which satisfies all of the criteria set forth below to
be a "Qualified Receivable" except that the relevant customer is located outside
the United States; provided that such Receivable is secured by a letter of
credit in form and substance satisfactory to the Bank and issued by a commercial
bank satisfactory to the Bank. In any event, "L/C-Backed Foreign Receivables"
shall not be deemed to include any of the Qualified Receivables nor any of the
Insured Receivables.
"Loan Documents" - Each of this letter agreement, the Revolving Note,
the Security Agreements, the Intellectual Property Security Agreements, the
Guaranties and each other instrument, document or agreement evidencing,
securing, guaranteeing or relating in any way to any of the Revolving Loans or
any of the letters of credit issued hereunder, all whether now existing or
hereafter arising or entered into.
"Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) the Maximum Revolving Credit exceeds (y) the
sum of (i) all then undrawn amounts of letters of credit issued by the Bank for
the account of the Borrower plus (ii) all
<PAGE>
amounts then drawn on any such letter of credit which at said date shall not
have been reimbursed to the Bank by the Borrower.
"Maximum Revolving Credit" - $10,000,000.
"Net Income" (or "Net Loss") - The book net income (or book net loss,
as the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Obligations" - All Indebtedness, covenants, agreements, liabilities
and obligations, now existing or hereafter arising, made by the Borrower with or
for the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
"Obligations" includes, without limitation, any liabilities of the Borrower now
existing or hereafter arising with respect to any ACH Transactions.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor
thereto.
"PEC" - Palomar Electronics Corp., a Delaware corporation.
"PEC Compliance Date" - The first to occur of: (i) that date when the
total assets of PEC (valued in accordance with generally accepted accounting
principles consistently applied) are equal to or greater than 5% of the total
consolidated assets (valued in accordance with generally accepted accounting
principles consistently applied) of the Borrower and Subsidiaries or (ii) the
end of any fiscal quarter of the Borrower in which the net revenues (exclusive
of any extraordinary items) of PEC for such fiscal quarter are equal to or
greater than 5% of the total consolidated net revenues (exclusive of any
extraordinary items) of the Borrower and Subsidiaries for such fiscal quarter.
"Person" - An individual, corporation, company, partnership, joint
venture, trust or unincorporated organization, or a government or any agency or
political subdivision thereof.
"Qualified Receivables" - Only those Receivables of the Borrower (or
Star, while the Star Guaranty, the Star Security Agreement and the Star
Intellectual Property Security Agreements remain in effect) which arise out of
bona fide sales made to customers of the Borrower (or Star, while the Star
Guaranty, the Star Security Agreement and the Star Intellectual Property
Security Agreements remain in effect) (which customers are located in the United
States and are unrelated to the Borrower or Star) in the ordinary course of the
Borrower's (or Star's) business and which remain unpaid no more than 90 days
past the respective invoice dates of such Receivables, the payment of which is
not in dispute. Unless the Bank in its sole discretion otherwise determines with
respect to any Receivable, a Receivable which would otherwise be a Qualified
Receivable shall be deemed not to be a Qualified Receivable (i) if the Bank does
not have a fully perfected first priority security interest in such Receivable
(except that Coherent, Inc. may have a prior security interest in certain
Receivables of Star); (ii) if such Receivable is not free and clear of all
<PAGE>
adverse interests in favor of any Person other than the Bank (except that
Coherent, Inc. may have a prior security interest in certain Receivables of
Star); (iii) if such Receivable is subject to any deduction, off-set, contra
account, counterclaim or condition; (iv) if a field examination made by the Bank
fails to confirm that such Receivable exists and satisfies all of the criteria
set forth herein to be a Qualified Receivable; (v) if such Receivable is not
properly invoiced at the date of sale; (vi) if the customer or account debtor
has disputed liability or made any claim with respect to the Receivable or the
merchandise covered thereby or with respect to any other Receivable due from
said customer to the Borrower or Star; (vii) if the customer or account debtor
has filed a petition for bankruptcy or any other application for relief under
the Bankruptcy Code or has effected an assignment for the benefit of creditors,
or if any petition or any other application for relief under the Bankruptcy Code
has been filed against said customer or account debtor, or if the customer or
account debtor has suspended business, become insolvent, ceased to pay its debts
as they become due, or had or suffered a receiver or trustee to be appointed for
any of its assets or affairs; (viii) if the customer or account debtor has
failed to pay other Receivables so that an aggregate of 25% of the total
Receivables owing to the Borrower and/or Star by such customer or account debtor
has been outstanding for more than 90 days past their respective due dates; (ix)
if such Receivable is owed by the United States government or any agency or
department thereof (unless assigned to the Bank under the Federal Assignment of
Claims Act); or (x) if the Bank reasonably believes that collection of such
Receivable is insecure or that it may not be paid by reason of financial
inability to pay or otherwise, or that such Receivable is not for any reason
suitable for use as a basis for borrowing hereunder. In no event will "Qualified
Receivables" be deemed to include any L/C-Backed Foreign Receivables nor any
Insured Receivables.
"Receivables" - All of the Borrower's (or Star's, while the Star
Guaranty, the Star Security Agreement and the Star Intellectual Property
Security Agreements remain in effect) present and future accounts, accounts
receivable and notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.
"Restructured Subordinated Notes" - The Company's 4.5% Subordinated
Convertible Debentures due 2003, denominated in Swiss Francs, as same are
modified by the settlement of the litigation entitled Banca Commerciale Lugano,
et al. v. Palomar Medical Technologies, Inc. described in item 2.1(e) of the
attached Disclosure Schedule.
"Security Agreements" - Collectively, the Borrower's Security Agreement
and Star's Security Agreement.
"Star" - Star Medical Technologies, Inc., a California corporation,
being a Subsidiary of the Borrower.
"Star Transaction" - As defined in ss.3.11.
<PAGE>
"Subordinated Debt" - Any Indebtedness of the Borrower which is
expressly subordinated, pursuant to a subordination agreement in form and
substance satisfactory to the Bank, to all Indebtedness now or hereafter owed by
the Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower
and/or any of its Subsidiaries, directly or indirectly, owns, or has the right
to control or direct the voting of, fifty (50%) percent or more of the
outstanding capital stock or other ownership interest having general voting
power (under ordinary circumstances); provided, however, that CTI will not be
deemed to be a Subsidiary of the Borrower for the purposes of this letter
agreement (other than compliance with ss.3.6 and ss.3.7) until the occurrence of
the CTI Compliance Date, if same ever occurs, and PEC will not be deemed to be a
Subsidiary of the Borrower for the purposes of this letter agreement (other than
compliance with ss.3.6 and ss.3.7) until the occurrence of the PEC Compliance
Date, if same ever occurs.
"Tangible Net Worth" - An amount equal to the total assets of any
Person (excluding (i) the total intangible assets of such Person and (ii) any
assets representing amounts due from any officer or employee of such Person or
from any Subsidiary of such Person) minus the total liabilities of such Person.
Total intangible assets shall be deemed to include, but shall not be limited to,
the excess of cost over book value of acquired businesses accounted for by the
purchase method, formulae, trademarks, trade names, patents, patent rights and
deferred expenses (including, but not limited to, unamortized debt discount and
expense, organizational expense, capitalized software costs and experimental and
development expenses).
Any defined term used in the plural preceded by the definite article
shall be taken to encompass all members of the relevant class. Any defined term
used in the singular preceded by "any" shall be taken to indicate any number of
the members of the relevant class.
7.2. Borrower's Security Agreement. (a) The Borrower acknowledges and
agrees that the "Obligations" described in and secured by the Borrower's
Security Agreement include, without limitation, all of the obligations of the
Borrower under the Revolving Note and/or this letter agreement and/or with
respect to any letter of credit which may be issued by the Bank for the account
of the Borrower and/or with respect to any ACH Transaction.
(b) The Borrower's Security Agreement is hereby modified to provide as
follows:
(i) That the "Collateral" subject thereto includes, without
limitation and in addition to the Collateral described therein, all of
the Borrower's files, books and records (including, without limitation,
all electronically recorded data) all whether now owned or existing or
hereafter acquired, created or arising. The Borrower hereby grants to
the Bank a security interest in all such Collateral in order to secure
the full and prompt payment and performance of all of the Obligations.
(ii) That, upon the occurrence of any Event of Default (as
defined in ss.5.1 of this letter agreement), the Bank may, at any time,
notify account debtors of the Borrower
<PAGE>
that the Collateral has been assigned to the Bank and that payments by
such account debtors shall be made directly to the Bank. At any time
after the occurrence of an Event of Default, the Bank may collect the
Borrower's Receivables, or any of same, directly from account debtors
and may charge the collection costs and expenses to the Borrower.
This letter agreement is executed, as an instrument under seal, as of
the day and year first above written.
Very truly yours,
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/
-----------------------------
Name: Joseph P. Caruso
Title: Chief Financial Officer
Accepted and agreed:
FLEET NATIONAL BANK
By
Its
<PAGE>
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries;
partnerships and joint ventures
Item 2.1(b) 5% Stockholders
Item 2.1(e) Litigation
Item 2.1(f) Violation of mortgages, indentures, etc.
Item 2.1(j) Locations of Collateral owned by Borrower; record owners of
premises where Collateral owned by Borrower is located
Item 2.1(k) Intellectual Property
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 5.1(n) Permitted 50% Stockholders
GUARANTY AGREEMENT dated as of November 16, 1998 from A. Neil
Pappalardo, of ________, MA (the "Guarantor") to Fleet National Bank (the
"Bank").
WITNESSETH:
WHEREAS, pursuant to a letter agreement of even date herewith (the
"Loan Agreement") between the Bank and Palomar Medical Technologies, Inc., a
Delaware corporation (the "Borrower"), the Bank is establishing a revolving
credit facility for the Borrower on the terms and conditions set forth therein;
and
WHEREAS, it is a condition precedent to the making of loans and the
issuance of letters of credit by the Bank pursuant to the Loan Agreement that
the Guarantor shall have executed and delivered this Agreement to the Bank; and
WHEREAS, the establishment of a revolving credit facility for, the
making of loans to, and the issuance of letters of credit for the account of,
the Borrower pursuant to the Loan Agreement are and will be beneficial to the
Guarantor inasmuch as the Guarantor is an investor in the Borrower and has
received and expects to receive certain fees from the Borrower and, therefore,
has a direct ownership and economic interest in the Borrower;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Guarantor hereby agrees as
follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01. Defined Terms. As used in this Agreement, the following
terms shall have the meanings set out respectively after each:
"Agreement" - This Guaranty Agreement, as same may be from time to time
amended.
"Event of Default" - As defined in Section 5.01 below.
"Guaranteed Obligations" - Any and all indebtedness, liabilities or
obligations of the Borrower, whether joint or several, direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
to or for the benefit of the Bank, including, without limitation, those now or
hereafter arising under any Loan Document.
"Guaranty" - The guaranty of the Guarantor set forth in Article II.
"Loan Documents" - The Loan Agreement, the Revolving Note and any other
instrument, document or other agreement relating to extension of financial
accommodations or other banking services between the Borrower and the Bank or
made by the Borrower in favor of the Bank, all whether now existing or hereafter
entered into or delivered.
<PAGE>
"Person" - As defined in the Loan Agreement.
"Prime Rate" - As defined in the Loan Agreement.
"Revolving Loans" - As defined in the Loan Agreement.
"Revolving Note" - As defined in the Loan Agreement.
Section 1.02. Use of Defined Terms. Any defined term used in the plural
preceded by the definite article shall be taken to encompass all members of the
relevant class. Any defined term used in the singular preceded by "any" shall be
taken to indicate any number of the members of the relevant class.
ARTICLE II
GUARANTY
Section 2.01. Guaranty. In consideration of the Bank making loans to
the Borrower pursuant to the Loan Agreement, the Guarantor hereby guaranties to
the Bank the due and punctual payment and performance of all of the Guaranteed
Obligations, as and when the same shall become due and payable, whether on
demand or at maturity, by declaration or otherwise, according to the terms
thereof, and all losses, costs, expenses and reasonable attorneys' fees and
disbursements incurred by reason of a default under any of said Guaranteed
Obligations. In case of failure by the Borrower punctually to pay any of the
Guaranteed Obligations, the Guarantor unconditionally agrees to cause such
payment to be made punctually as and when the same shall become due and payable,
whether at maturity or by declaration or otherwise, and as if such payment were
made by the Borrower. This Guaranty is an absolute, unconditional, unlimited and
continuing guaranty of the full and punctual payment and performance by the
Borrower of the Guaranteed Obligations and not merely of their collectibility
and is in no way conditioned upon any requirement that the Bank first collect or
attempt to collect the Guaranteed Obligations or any portion thereof from the
Borrower or from any other guarantor of any of same or resort to any security or
other means of obtaining payment of any of the Guaranteed Obligations which the
Bank now has or may acquire after the date hereof, or upon any other contingency
whatsoever. Upon and during th continuance of any Event of Default (as defined
herein), all liabilities and obligations of the Guarantor to the Bank, hereunder
or otherwise, shall, at the option of the Bank, become forthwith due and payable
to the Bank without further demand or notice of any nature, all of which are
expressly waived by the Guarantor. Payments by the Guarantor hereunder may be
required by the Bank on any number of occasions.
Section 2.02. Guarantor's Further Agreements to Pay. The Guarantor
further agrees, as principal obligor and not as guarantor, to pay to the Bank
forthwith upon demand, in lawful currency of the United States in funds
immediately available to the Bank, all costs and expenses (including court costs
and reasonable attorneys' fees and disbursements) incurred or expended by
<PAGE>
the Bank in connection with this Guaranty and the enforcement hereof, together
with interest on any sum now or hereafter payable by the Guarantor under this
Agreement, such interest to accrue from the date of any demand for payment of
such sum to the date of payment. Such interest will be payable at the rate set
forth in Section 6.04 below.
Section 2.03. Bank's Freedom to Deal with Borrower and Other Parties.
The Bank shall be at liberty, without giving notice to or obtaining the assent
of the Guarantor and without relieving the Guarantor of any liability hereunder,
to deal with the Borrower and with each other party who now is or after the date
hereof becomes liable in any manner for any of the Guaranteed Obligations in
such manner as the Bank in its sole discretion deems fit. The Bank has full
authority in its sole discretio to do any or all of the following things, none
of which shall discharge or affect the Guarantor's liability hereunder: (i)
extend credit, make loans and afford other financial accommodations to the
Borrower at such times, in such amounts and on such terms as the Bank may
approve; (ii) modify, amend, vary the terms and grant extensions or renewals of
any present or future indebtedness or of all or any of the Guaranteed
Obligations or any instrument relating to or securing same, and, without
limitation, this Guaranty shall survive payment of the Revolving Note; (iii)
grant time, waivers and other indulgences in respect thereto; (iv) vary,
exchange, release or discharge, wholly or partially, or delay or abstain from
perfecting and enforcing any security or guaranty or other means of obtaining
payment of any of the Guaranteed Obligations which the Bank now has or acquires
after the date hereof; (v) take or omit to take any of the actions referred to
in any Loan Document or other instrument evidencing, securing or relating to any
of the Guaranteed Obligations or any actions under this Guaranty; (vi) fail,
omit or delay to enforce, assert or exercise any right, power or remedy
conferred on the Bank in this Guaranty or in any other Loan Document or other
instrument evidencing, securing or relating to any of the Guaranteed Obligations
or take or refrain from taking any other action; (vii) accept partial payments
from the Borrower or any other party; (viii) release or discharge, wholly or
partially, the Borrower, any endorser or any guarantor, or accept additional
collateral for the payment of any Guaranteed Obligations; (ix) compromise or
make any settlement or other arrangement with the Borrower or any such other
party; and (x) consent to and participate in the proceeds of any assignment,
trust or mortgage for the benefit of creditors.
Section 2.04. Unenforceability of Guaranteed Obligations; Invalidity of
Security or Other Guaranties. If for any reason now or hereafter the Borrower
has no legal existence or is under no legal obligation to discharge any of the
Guaranteed Obligations undertaken or purported to be undertaken by it or on its
behalf, or if any of the moneys included in the Guaranteed Obligations have
become irrecoverable from the Borrower by operation of law or for any other
reason, this Guaranty shall nevertheless be binding on the Guarantor to the same
extent as if the Guarantor at all times had been the principal debtor on all
such Guaranteed Obligations. This Guaranty shall be in addition to any other
guaranty or other security for the Guaranteed Obligations, and it shall not be
prejudiced or rendered unenforceable by the invalidity of any such other
guaranty or security. The liability of the Guarantor under this Guaranty shall
remain in full force and effect until payment and performance in full of all of
the Guaranteed Obligations. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the
Guaranteed Obligations is rescinded or must otherwise be
<PAGE>
restored or returned by the Bank, upon the insolvency, bankruptcy or
reorganization of the Borrower or otherwise, all as though such payment had not
been made.
Section 2.05. Waivers by Guarantor. The Guarantor waives: notice of
acceptance hereof and reliance hereon, notice of any action taken or omitted by
the Bank in reliance hereon, any requirement that the Bank be diligent or prompt
in making demands hereunder, any requirement as to any presentment, demand,
protest, giving notice of any default by the Borrower or asserting any other
right of the Bank hereunder and all demands, notices (other than any demands and
notices which are specifically provided for in the Loan Agreement) and all
suretyship defenses generally. The Guarantor also irrevocably waives, to the
fullest extent permitted by law, all defenses which at any time may be available
in respect of the Guarantor's obligations hereunder by virtue of any statute of
limitations, valuation, stay, homestead or moratorium law or other similar law
now or hereafter in effect.
Without limiting the generality of the foregoing provisions of this
Guaranty, the liability of the Guarantor shall not be released, discharged or
otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or
release in respect of any obligation of the Borrower or any
other guarantor of any of the Guaranteed Obligations;
(ii) any change in the time, manner, amount or place of payment of
any Guaranteed Obligation or any modification or amendment of
or supplement to any Loan Document or this Agreement;
(iii) any release, non-perfection or invalidity of any direct or
indirect security for any obligation of the Borrower, the
Guarantor or any other guarantor of any of the Guaranteed
Obligations;
(iv) any change in the legal existence, structure, record or
beneficial ownership or control of the Borrower or any other
guarantor of any of the Guaranteed Obligations, or any
insolvency, bankruptcy, reorganization or other similar
proceeding affecting any such Person or its assets;
(v) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against the Borrower, the Bank
or any other guarantor of any of the Guaranteed Obligations or
any other Person, whether or not arising in connection with
this Agreement;
(vi) any invalidity or unenforceability relating to or against the
Borrower or the Guarantor for any reason under any Loan
Document or under this Agreement; or any provision of
applicable law or regulation purporting to prohibit the
payment by any Person of the principal of or interest on the
Revolving Note or any other amount payable under any Loan
Document or this Agreement; or
<PAGE>
(vii) any other act or omission to act or delay of any kind by the
Borrower, the Bank or any other Person or any other
circumstances whatsoever which might, but for the provisions
of this paragraph, constitute a legal or equitable discharge
of the Guarantor's obligations hereunder.
Section 2.06. Subrogation. Unless and until all of the Guaranteed
Obligations shall have been indefeasibly paid in full and all commitments for
further extensions of credit to the Borrower by the Bank shall have been
terminated, the Guarantor hereby irrevocably and unconditionally waives
enforcement of any and all rights of subrogation, contribution or similar rights
which, but for this Section 2.06, he might otherwise have in relation to the
Borrower or any other guarantor as a result of this Agreement. No right of
subrogation, contribution or any similar right will in any event be deemed to
give the Guarantor any claim against the Bank on account of the Bank's release,
failure to perfect or other dealing or failing to deal with any collateral or
with any Person, even if the value of such subrogation, contribution or similar
rights is thereby diminished or jeopardized.
Section 2.07. No Contest with Bank. No set-off, counterclaim, reduction
or diminution of any obligation, or any claim or defense of any kind or nature
which the Guarantor has or may have against the Borrower, any other guarantor or
the Bank shall be available hereunder to the Guarantor. The Guarantor will not,
in any proceedings under the Bankruptcy Code or insolvency proceedings of any
nature, prove in competition with the Bank in respect of any payment hereunder
or be entitled to have the benefit of any counterclaim or proof of claim or
dividend or payment by or on behalf of the Borrower or the benefit of any other
security for any Guaranteed Obligation which, now or hereafter, the Guarantor
may hold in competition with the Bank.
Section 2.08. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrower under any Loan Document is stayed
upon the insolvency, bankruptcy or reorganization of the Borrower, all such
amounts otherwise subject to acceleration under the terms of this Guaranty shall
nonetheless be payable by the Guarantor hereunder forthwith on demand by the
Bank.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. General Representations and Warranties. The Guarantor
hereby represents and warrants that:
(a) The execution, delivery and performance by the Guarantor
of this Agreement do not and will not:
(i) violate any provision of, or require any filing,
registration, consent or approval under, any law,
rule, regulation (including, without limitation,
Regulation U), order, writ, judgment, injunction,
decree, determination or award presently in effect
having applicability to the Guarantor;
<PAGE>
(ii) result in a breach of or constitute a default or
require any consent under any indenture or loan or
credit agreement or any other agreement, lease or
instrument to which the Guarantor is a party or by
which the Guarantor or any of his properties may be
bound or affected; or
(iii) result in, or require, the creation or imposition of
any lien, security interest or other encumbrance upon
or with respect to any of the properties now owned or
hereafter acquired by the Guarantor.
(b) This Agreement has been duly executed and delivered on
behalf of the Guarantor and is a legal, valid and binding obligation of
the Guarantor, enforceable against the Guarantor in accordance with its
terms.
(c) The Guarantor is an investor in the Borrower and has
received and expects to receive certain fees from the Borrower.
(d) After giving effect to this Agreement and the transactions
contemplated hereby, the Guarantor (A) is and will be able to pay his
debts as they become due, (B) has and will have funds and capital
sufficient to carry on his business as now conducted or as contemplated
to be conducted, (C) owns property having a value both at fair
valuation and at present fair saleable value greater than the amount
required to pay his debts as they become due, and (D) is not insolvent
and will not be rendered insolvent as determined by applicable law,
after taking into account the reasonable likelihood of payments being
required hereunder.
ARTICLE IV
COVENANTS
Section 4.01. Covenants. So long as any of the Guaranteed Obligations
remain outstanding, the Guarantor will provide to the Bank, promptly upon
request, such financial and other information as the Bank may from time to time
reasonably request.
ARTICLE V
DEFAULT AND REMEDIES
Section 5.01. Events of Default. An Event of Default will be deemed to
have occurred under this Agreement upon the occurrence of any one or more of the
following:
(i) The Guarantor shall fail to make any monetary payment
hereunder when due; or
<PAGE>
(ii) Any representation or warranty of the Guarantor
contained herein shall at any time prove to have been
incorrect in any material respect when made; or
(iii) The Guarantor shall fail to perform or observe any
other obligation or agreement contained herein and
such failure shall continue uncured for thirty (30)
days after written notice of such failure is given by
the Bank to the Guarantor; or
(iv) Any default on the part of the Guarantor or any
Person controlled by the Guarantor shall exist, and
shall remain unwaived or uncured beyond the
expiration of any applicable notice and/or grace
period, under any other contract, agreement or
undertaking now existing or hereafter entered into
with or for the benefit of the Bank (or any affiliate
of the Bank); or
(v) Any "Event of Default" (as defined in the Loan
Agreement) shall occur and shall continue uncured
beyond the expiration of any applicable notice and/or
grace period.
Section 5.02. Rights and Remedies Upon Default. Upon the occurrence of
any Event of Default and at any time thereafter during the continuance thereof,
in addition to any other rights and remedies available to the Bank hereunder or
otherwise, the Bank may exercise any one or more of the following rights and
remedies (all of which shall be cumulative):
(a) Enforce the provisions of this Agreement by legal
proceedings for the specific performance of any covenant or agreement
contained herein or for the enforcement of any other appropriate legal
or equitable remedy, and the Bank may recover damages caused by any
breach by the Guarantor of the provisions of this Agreement, including
court costs, reasonable attorneys' fees and other costs and expenses
incurred in the enforcement of the obligations of the Guarantor
hereunder.
(b) Exercise all rights and remedies hereunder, under the Loan
Documents, and under any other agreement with the Bank, and exercise
all other rights and remedies which the Bank may have under applicable
law.
Section 5.03. Set-off. In addition to any rights now or hereafter
granted under applicable law and not by way of limitation of any such rights,
upon the occurrence of any Event of Default and during the continuance thereof,
the Bank is hereby authorized at any time or from time to time, without
presentment, demand, protest or other notice of any kind to the Guarantor or to
any other Person, all of which are hereby expressly waived, to set off and to
appropriate and apply any and all deposits and any other Indebtedness at any
time held or owing by the Bank or any affiliate of the Bank to or for the credit
or the account of the Guarantor against and on account of the obligations and
liabilities of the Guarantor to the Bank, under this Agreement or otherwise,
irrespective of whether or not the Bank shall have made any demand for payment
and although said obligations, liabilities or claims, or any of them, may then
be contingent or unmatured and without regard for the availability or adequacy
of other collateral. The Guarantor also grants to the Bank a security interest
with respect to all his deposits and all securities or
<PAGE>
other property in the possession of the Bank or any affiliate of the Bank from
time to time, and, upon the occurrence of any Event of Default, the Bank may
exercise all rights and remedies of a secured party under the Uniform Commercial
Code. ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF TH GUARANTEED
OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS
SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
ARTICLE VI
MISCELLANEOUS
Section 6.01. No Waiver; Cumulative Remedies. No failure or delay on
the part of any party in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law or
otherwise available to the Bank. Such remedies may be exercised without resort
or regard to the other source of satisfaction of any liabilities of the
Guarantor to the Bank. The provisions of this Agreement are not limited by nor
in the limitation of any additional or inconsistent provisions contained in the
Loan Agreement or elsewhere.
Section 6.02. Amendments, Waivers and Consents. Neither this Agreement
nor any provision hereof may be amended, waived discharged or terminated orally.
Any such amendment, waiver, discharge or termination must be in writing signed
by the party against whom enforcement of the amendment, waiver, discharge or
termination is sought. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
Section 6.03. Addresses for Notices, etc. Except as otherwise expressly
provided in this Agreement, all notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Guarantor
Mr. A. Neil Pappalardo
10 Rowes Wharf
Boston, MA 02110
<PAGE>
If to the Bank:
Fleet National Bank
High Technology Division
One Federal Street
Mail Stop: MA OF DO7A
Boston, MA 02110
Attention: Lucie Burke, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. Except as otherwise provided herein, all such
notices, requests, demands and other communications shall be deemed delivered on
the earlier of (i) the date received or (ii) the date of delivery, refusal or
non-delivery indicated on the return receipt if deposited in the United States
mails, sent postage prepaid, registered or certified mail, return receipt
requested, postage and registration or certification charges prepaid, addressed
as aforesaid.
Section 6.04. Costs, Expenses and Taxes. The Guarantor agrees to pay on
demand all costs and expenses (including, without limitation, reasonable legal
fees) of the Bank in connection with the preparation, execution and delivery of
this Agreement and all other instruments and documents to be delivered hereunder
and any amendments or modifications of any of the foregoing, or in connection
with the examination, review or administration of any of the foregoing, as well
as the costs and expenses (including, without limitation the reasonable fees and
out-of-pocket expenses of legal counsel) incurred by the Bank in connection with
preserving, enforcing or exercising any rights or remedies under this Agreement
and all other instruments and documents to be delivered hereunder, all whether
or not legal action is instituted. In addition, the Guarantor shall be obligated
to pay any and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this Agreement and all other
instruments and documents to be delivered hereunder, and the Guarantor agrees to
save the Bank harmless from and against any and all liabilities with respect to
or resulting from any delay in paying or omission to pay such taxes. Any fees,
expenses or other charges which the Bank is entitled to receive from the
Guarantor hereunder shall bear interest from the date of demand for payment
until paid at the lesser of (i) a fluctuating rate per annum which shall at all
times be equal t the sum of four (4%) percent per annum plus the Prime Rate as
in effect from time to time or (ii) the maximum rate permitted by then
applicable law.
Section 6.05. Representations and Warranties. All covenants,
agreements, representations and warranties made herein or in any other document
delivered by or on behalf of the Guarantor pursuant to or in connection with
this Agreement are material and shall be deemed to have been relied upon by the
Bank, notwithstanding any investigation heretofore or hereafter made by the Bank
and shall survive the making of the Revolving Loans as contemplated in the Loan
Agreement, and shall continue in full force and effect so long as any of the
Guaranteed Obligations remain outstanding and unpaid or any facility for the
making of loans to the Borrower remains in effect. All statements contained in
any certificate or other paper delivered
<PAGE>
to the Bank at any time by or on behalf of the Guarantor pursuant hereto shall
constitute representations and warranties by the Guarantor hereunder.
Section 6.06. Binding Effect; Assignment. This Agreement shall be
binding upon the Guarantor and his heirs, executors, administrators, successors
and assigns and shall inure to the benefit of the Bank and its successors and
assigns. The Guarantor may not assign this Agreement or any rights hereunder
without the express written consent of the Bank.
Section 6.07. Reproduction of Agreement. This Agreement and all other
instruments, documents and papers which relate thereto which have been or may be
hereafter furnished to the Bank may be reproduced by the Bank by any
photographic, photostatic, micro-card, miniature photographic, xerographic or
similar process, and the Bank may destroy the original from which any document
was so reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether or not such reproduction was made in the
regular course of business).
Section 6.08. Consent to Jurisdiction. The Guarantor irrevocably
submits to the non-exclusive jurisdiction of any Massachusetts court or any
federal court sitting within The Commonwealth of Massachusetts over any suit,
action or proceeding arising out of or relating to this Agreement. The Guarantor
irrevocably waives, to the fullest extent permitted by law, any objection which
he may now or hereafter have to the laying of venue of any such suit, action or
proceeding brought in such a court and any claim that any such suit, action or
proceeding has been brought in an inconvenient forum. The Guarantor agrees that
final judgment in any such suit, action or proceeding brought in such a court
shall be enforced in any court of proper jurisdiction by a suit upon such
judgment, provided that service of process in such action, suit or proceeding
shall have been effected upon the Guarantor in one of the manners specified in
the following paragraph of this Section 6.08 or as otherwise permitted by law.
The Guarantor hereby consents to process being served in any suit,
action or proceeding of the nature referred to in the preceding paragraph of
this Section 6.08 either (i) by mailing a copy thereof by registered or
certified mail, postage prepaid, return receipt requested, to him at his address
set forth in Section 6.03 or (ii) by serving a copy thereof upon him at his
address set forth in Section 6.03. The Guarantor irrevocably waives, to the
fullest extent permitted by law, all claims of erro by reason of any service as
contemplated herein and agrees that such service shall (x) be deemed in every
respect effective service upon such Guarantor in any such suit, action or
proceeding and (y) to the fullest extent permitted by law, be taken and held to
be valid personal service upon and personal delivery to the Guarantor.
Section 6.09. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of The Commonwealth of Massachusetts.
Section 6.10. Severability. In the event that any provision of this
Agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this Agreement and the application of such provision
<PAGE>
to Persons, properties or circumstances other than those as to which it has been
held invalid or unenforceable shall not be affected thereby, and each provision
of this Agreement shall be valid and enforceable to the fullest extent permitted
by law.
Section 6.11. Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 6.12. WAIVER OF JURY TRIAL. THE GUARANTOR AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY
JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT, THE LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS
OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT
FOR THE BANK TO ENTER INTO THE LOAN AGREEMENT AND TO MAKE LOANS AS CONTEMPLATED
THEREIN.
IN WITNESS WHEREOF, the Guarantor has executed this Agreement, as an
instrument under seal, as of the day and year first above written.
BY HIS SIGNATURE, THE BORROWER ACKNOWLEDGES: (A) THAT HE HAS RECEIVED A
COPY OF THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS AND HAS HAD AN
OPPORTUNITY TO REVIEW SAME, (B) THAT HE HAS HAD AN OPPORTUNITY TO REQUEST
FINANCIAL INFORMATION FROM THE BORROWER AND HAS RECEIVED ALL INFORMATION
REQUESTED, AND (C) THAT HE HAS HAD AN OPPORTUNITY TO CONSULT WITH HIS COUNSEL
AND FINANCIAL ADVISORS WITH RESPECT TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS AND HAS SO CONSULTED TO THE EXTENT HE HAS DEEMED APPROPRIATE.
WITNESS: ____________________________
A. Neil Pappalardo
- -----------------------------
SECURITY AGREEMENT (TRADEMARKS)
WHEREAS, PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware corporation,
with a principal place of business at 45 Hartwell Avenue, Lexington, MA 02421
(the "Company") and FLEET NATIONAL BANK, with a place of business at One Federal
Street, Boston, Massachusetts 02110 (the "Bank") have entered into an Inventory,
Accounts Receivable and Intangibles Security Agreement dated November 16, 1998
(the "Security Agreement") and are also parties to a related letter agreement
(the "Letter Agreement") between the Bank and the Company; and
WHEREAS, the Company is the owner and user of the trademarks listed on
Schedule A hereto and identified in said Security Agreement (the "Trademarks");
and
WHEREAS, among the security interests granted by the Company to the
Bank pursuant to the Security Agreement is a security interest in the Trademarks
listed on Schedule A hereto, together with the goodwill of the business
associated with and symbolized by such Trademarks; and
WHEREAS, the parties to the Security Agreement contemplate and intend
that, if an Event of Default (as defined in the Letter Agreement) shall occur
and be continuing, the Bank shall have all rights of the Company in and to the
Trademarks and the goodwill of the business of the Company associated with and
symbolized by the Trademarks as may be necessary or proper in order to enable
the Bank, as foreclosing secured party, to continue such business of the Company
or, following such foreclosure, to transfer to a purchaser all such rights as
may be necessary or proper to enable such purchaser to continue such business of
the Company;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties reconfirm the terms of
the Security Agreement, as if set forth fully herein, and acknowledge that the
Bank has a security interest in the Trademarks listed on Schedule A hereto,
together with the goodwill of the business associated with and symbolized by
such Trademarks; as security for the Obligations (as defined in the Security
Agreement), the Company hereby collaterally assigns to the Bank, and grants a
security interest to the Bank in and to, all of the Company's right, title and
interest in and to said Trademarks and the goodwill of the business associated
therewith; the Company agrees that it will not sell or assign any of the
Trademarks without the prior written consent of the Bank; and the Company and
the Bank request that the Commissioner of Patents and Trademarks record this
document with respect to the Trademarks.
The Company hereby appoints the Bank as the Company's attorney-in-fact
(with full power of substitution and resubstitution) with the power and
authority, after the occurrence and during the continuance of any Event of
Default (as defined in the Letter Agreement), to execute and deliver, in the
name and on behalf of the Company, and to cause the recording of all such
further assignments and other instruments as the Bank may deem necessary or
desirable in order to carry out the intent of the Security Agreement and this
Security Agreement (Trademarks). The Company agrees that all third parties may
conclusively rely on any such further assignment or
<PAGE>
other instrument, so executed, delivered and recorded by the Bank (or the Bank's
designee in accordance with the terms hereof) and on the statements made
therein.
PALOMAR MEDICAL TECHNOLOGIES, INC. FLEET NATIONAL BANK
By: /s/ Joseph P. Caruso By: /s/ Lucie Burke
------------------------------ ------------------------
Name: Its Vice President
Title:
COMMONWEALTH OF MASSACHUSETTS)
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me the above-named JOSEPH P. CARUSO,
the CHIEF FINANCIAL OFFICER of Palomar Medical Technologies, Inc., and stated
that he/she executed the foregoing instrument under the authority of said
corporation's Board of Directors and acknowledged the foregoing instrument to be
the free act and deed of said corporation.
WITNESS my hand and seal this 16th day of November, 1998.
/s/ Marianne Barrett
----------------------------
Notary Public
My commission expires:
November 19, 2004
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT (TRADEMARKS)
Marks with Federal Registration
<TABLE>
<S> <C> <C>
Marks Registration No./Reg. Date Use
- ----- -------------------------- ---
None.
Marks with Pending Applications
Marks Serial No./Filing Date Use
- ----- ---------------------- ---
CTI and design 75-182,709/Oct. 16, 1996 Cosmetic, plastic and
laser surgery; dermatological
medical services
LASERTROLOGY 75-150,492/Aug. 15, 1996 Medical services, namely performing
laser dermatology treatments
LASERTROLOGIST 75-150,460/Aug. 15, 1996 Dermatology services, namely,
laser hair removal
</TABLE>
SECURITY AGREEMENT (PATENTS)
WHEREAS, PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware corporation,
with a principal place of business at 45 Hartwell Avenue, Lexington, MA 02421
(the "Company") and FLEET NATIONAL BANK, with a place of business at One Federal
Street, Boston, Massachusetts 02110 (the "Bank") have entered into an Inventory,
Accounts Receivable and Intangibles Security Agreement dated November 16, 1998
(the "Security Agreement") and are also parties to a related letter agreement
(the "Letter Agreement") between the Bank and the Company; and
WHEREAS, the Company is the owner and user of the United States Patent
Applications listed on Schedule A hereto and identified in said Letter Agreement
and said Security Agreement (collectively, the "U.S. Patent Applications"); and
WHEREAS, among the security interests granted by the Company to the
Bank pursuant to the Security Agreement is a security interest in the U.S.
Patent Applications listed on Schedule A hereto and in any registered patents
arising therefrom; and
WHEREAS, the parties to the Security Agreement contemplate and intend
that, if an Event of Default (as defined in the Letter Agreement) shall occur
and be continuing, the Bank shall have all rights of a foreclosing secured party
in and to the U.S. Patent Applications and in any registered patents arising
therefrom and any proceeds thereof, including, without limitation, the right,
following such foreclosure, to transfer to a purchaser all of the Company's
right, title and interest in and to the U.S. Patent Applications and in any
registered patents arising therefrom;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties reconfirm the terms of
the Security Agreement, as if set forth fully herein, and acknowledge that the
Bank has a security interest in the U.S. Patent Applications listed on Schedule
A hereto and in any registered patents arising therefrom; as security for the
Obligations (as defined in the Security Agreement) the Company hereby
collaterally assigns to the Bank, and grants a security interest to the Bank in
and to, all of the Company's right, title and interest in and to said U.S.
Patent Applications and in any registered patents arising therefrom; the Company
agrees that it will not sell or assign any of the U.S. Patent Applications nor
any of the registered patents arising therefrom without the prior written
consent of the Bank; and the Company and the Bank request that the Commissioner
of Patents and Trademarks record this document with respect to the U.S. Patent
Applications.
The Company hereby appoints the Bank as the Company's attorney-in-fact
(with full power of substitution and resubstitution) with the power and
authority, after the occurrence of any Event of Default (as defined in the
Letter Agreement), to execute and deliver, in the name and on behalf of the
Company, and to cause the recording of all such further assignments and other
instruments as the Bank may reasonably deem necessary or desirable in order to
carry out the intent of the Security Agreement and this Security Agreement
(Patents). The Company agrees that all third parties may conclusively rely on
any such further assignment or other instrument, so
<PAGE>
executed, delivered and recorded by the Bank (or the Bank's designee in
accordance with the terms hereof) and on the statements made therein.
PALOMAR MEDICAL TECHNOLOGIES, INC. FLEET NATIONAL BANK
By: /s/ Joseph P. Caruso By: /s/ Lucie Burke
------------------------------ ------------------------------
Name: Joseph P. Caruso Its: Vice President
Title: Chief Financial Officer
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me the above-named JOSEPH P. CARUSO,
the CHIEF FINANCIAL OFFICER of Palomar Medical Technologies, Inc., and stated
that he/she executed the foregoing instrument under the authority of said
corporation's Board of Directors and acknowledged the foregoing instrument to be
the free act and deed of said corporation.
WITNESS my hand and seal this 16th day of November, 1998.
/s/ Marianne Barrett
----------------------------
Notary Public
My commission expires:
- 2 -
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT (PATENTS)
Patents with United States Registration
<TABLE>
<S> <C> <C>>
Patent Description Reg. No. Issue Date
- ------------------ -------- ----------
None.
Patent Applications
- -------------------
Description Serial No. Filing Date
- ----------- ---------- -----------
Laser applicator having thermoelectric cooling 08/759,136 April 24, 1997
Laser dermatology with feedback control 08/759,036 December 2, 1996
Method and apparatus for hair removal 09/028,416 February 24, 1998
Method and apparatus for dermatology treatment 09/178,055 May 13, 1998
System for electromagnetic
dermatology and head for use therewith 60,077,794 March 12, 1998
</TABLE>
PROMISSORY NOTE
$10,000,000.00 Boston, Massachusetts
November 16, 1998
FOR VALUE RECEIVED, the undersigned Palomar Medical Technologies, Inc.,
a Delaware corporation (the "Borrower") hereby promises to pay to the order of
FLEET NATIONAL BANK (the "Bank") the principal amount of Ten Million and 00/100
($10,000,000.00) Dollars or such portion thereof as may be advanced by the Bank
pursuant to ss.1.2 of that certain letter agreement of even date herewith
between the Bank and the Borrower (the "Letter Agreement") and remains
outstanding from time to time hereunder ("Principal"), with interest, at the
rate hereinafter set forth, on the daily balance of all unpaid Principal, from
the date hereof until payment in full of all Principal and interest hereunder.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the advance of any Principal and continuing on the first day of each month
thereafter and on the date of payment of this note in full, at a fluctuating
rate per annum (computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed) which shall at all times (except as
described in the next sentence) be equal to the Prime Rate, as in effect from
time to time (but in no event in excess of the maximum rate permitted by then
applicable law), with a change in the aforesaid rate of interest to become
effective on the same day on which any change in the Prime Rate is effective.
Overdue Principal and, to the extent permitted by law, overdue interest shall
bear interest at a fluctuating rate per annum which at all times shall be equal
to the sum of (i) four (4%) percent per annum plus (ii) the per annum rate
otherwise payable under this note (but in no event in excess of the maximum rate
permitted by then applicable law), compounded monthly and payable on demand. As
used herein, "Prime Rate" means the variable rate of interest per annum
designated by the Bank from time to time as its prime rate, it being understood
that such rate is merely a reference rate and does not necessarily represent the
lowest or best rate being charged to any customer. If the entire amount of any
required Principal and/or interest is not paid within ten (10) days after the
same is due, the Borrower shall pay to the Bank a late fee equal to five percent
(5%) of the required payment, provided that such late fee shall be reduced to
three percent (3%) of any required Principal and interest that is not paid
within fifteen (15) days of the date it is due if this note is secured by a
mortgage on an owner-occupied residence of 1-4 units.
All outstanding Principal and all interest accrued thereon shall be due
and payable in full on the first to occur of: (i) an acceleration under ss.5.2
of the Letter Agreement or (ii) March 31, 2000. The Borrower may at any time and
from time to time prepay all or any portion of said Principal, without premium
or penalty. Under certain circumstances set forth in the Letter Agreement,
prepayments of Principal may be required.
<PAGE>
Payments of both Principal and interest shall be made, in lawful money
of the United States in immediately available funds, at the office of the Bank
located at One Federal Street, Boston, Massachusetts 02110, or at such other
address as the Bank may from time to time designate.
The undersigned Borrower irrevocably authorizes the Bank to make or
cause to be made, on a schedule attached to this note or on the books of the
Bank, at or following the time of making any Revolving Loan (as defined in the
Letter Agreement) and of receiving any payment of Principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid balance of
Principal. Failure of the Bank to make any such notation shall not, however,
affect any obligation of the Borrower hereunder or under the Letter Agreement.
The unpaid Principal amount of this note, as recorded by the Bank from time to
time on such schedule or on such books, shall constitute presumptive evidence of
the aggregate unpaid principal amount of the Revolving Loans.
The Borrower hereby (a) waives notice of and consents to any and all
advances, settlements, compromises, favors and indulgences (including, without
limitation, any extension or postponement of the time for payment), any and all
receipts, substitutions, additions, exchanges and releases of collateral, and
any and all additions, substitutions and releases of any person primarily or
secondarily liable, (b) waives presentment, demand, notice, protest and all
other demands and notices generally (other than any such notices and rights to
cure as are expressly provided for in the Letter Agreement) in connection with
the delivery, acceptance, performance, default or enforcement of or under this
note, and (c) agrees to pay all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by the Bank in
enforcing this note and any collateral or security therefor, all whether or not
litigation is commenced.
This note is the Revolving Note referred to in the Letter Agreement.
This note is secured by, and is entitled to the benefits of, the Security
Agreement (as defined in the Letter Agreement). This note is subject to
prepayment as set forth in the Letter Agreement. The maturity of this note may
be accelerated upon the occurrence of an Event of Default, as provided in the
Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE LOANS AS CONTEMPLATED IN THE LETTER
AGREEMENT.
<PAGE>
Executed, as an instrument under seal, as of the day and year first
above written.
CORPORATE SEAL PALOMAR MEDICAL TECHNOLOGIES, INC.
ATTEST:
/s/ Sarah Reed By: /s/ Joseph P. Caruso
- -------------- --------------------
Assistant Secretary Name: Joseph P. Caruso
Title: Chief Financial Officer
GUARANTY AGREEMENT
GUARANTY AGREEMENT dated as of November 16, 1998 from Star Medical
Technologies, Inc., a California corporation (the "Guarantor") to Fleet National
Bank (the "Bank").
WITNESSETH:
WHEREAS, Palomar Medical Technologies, Inc., a Delaware corporation
(the "Borrower") wishes to enter into a letter agreement of even date herewith
(as same may be from time to time amended, the "Loan Agreement") with the Bank;
and
WHEREAS, pursuant to the Loan Agreement, the Bank will establish a
revolving credit facility for the Borrower and may make Revolving Loans (defined
below) to the Borrower on the terms and conditions set forth therein and may
also extend other credit facilities for the Borrower on the terms and conditions
set forth therein; and
WHEREAS, in order to induce the Bank to enter into the Loan Agreement
and to make Revolving Loans under the Loan Agreement, the Borrower has agreed to
obtain and deliver this Agreement; and
WHEREAS, the Guarantor is a Subsidiary of the Borrower and benefits
from the management, accounting and financial services provided the Borrower;
and
WHEREAS, the Bank's agreement to make Revolving Loans in accordance
with the Loan Agreement is and will be beneficial to the Guarantor inasmuch as
the Guarantor may receive certain proceeds thereof from the Borrower and will
benefit from the financial strength of the Borrower;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Guarantor hereby agrees as
follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.01. Defined Terms. As used in this Agreement, the following
terms shall have the meanings set out respectively after each:
"Agreement" - This Guaranty Agreement, as same may be from time to time
amended.
"Collateral" - As defined in the Loan Agreement.
"Event of Default" - As defined in Section 5.01 below
<PAGE>
"Guaranteed Obligations" - Any and all indebtedness, liabilities or
obligations of the Borrower, whether joint or several, direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
to or for the benefit of the Bank, including, without limitation, those now or
hereafter arising under any Loan Document.
"Guarantor's Documents" - Collectively, this Agreement, the Guarantor's
Security Agreement and the Guarantor's Intellectual Property Security
Agreements.
"Guarantor's Intellectual Property Security Agreements" - Collectively,
the collateral assignments and notices of collateral assignment from the
Guarantor to the Bank relating to the Guarantor's registered trademarks, patents
and copyrights, if any.
"Guarantor's Security Agreement" - Collectively, that certain
Inventory, Accounts Receivable and Intangibles Security Agreement and that
certain Supplementary Security Agreement - Security Interest in Good and
Chattels, each of even date herewith, from the Guarantor to the Bank.
"Guaranty" - The guaranty of the Guarantor set forth in Article II.
"Indebtedness" - As defined in the Loan Agreement.
"Intellectual Property" - As defined in Subsection 3.01(j).
"Loan Documents" - The Loan Agreement, the Revolving Note, the Security
Agreements and any other instrument, document or other agreement relating to
extension of financial accommodations or other banking services between the
Borrower and the Bank or made by the Borrower in favor of the Bank, all whether
now existing or hereafter entered into or delivered.
"Person" - As defined in the Loan Agreement.
"Prime Rate" - That variable rate of interest per annum designated by
Fleet National Bank, from time to time, as being its prime rate of interest,
with a change in the Prime Rate to take effect simultaneously with each change
in such designated rate. It is understood that such designated prime rate is
merely a reference rate and does not necessarily represent the lowest or best
rate being charged to any customer.
"Revolving Loans" - As defined in the Loan Agreement.
"Revolving Note" - As defined in the Loan Agreement.
"Security Agreements" - As defined in the Loan Agreement.
<PAGE>
"Subsidiary" - As defined in the Loan Agreement, except that references
in such definition to the "Borrower" will be deemed, for the purposes of this
Agreement, to refer to the Guarantor.
Section 1.02. Use of Defined Terms. Any defined term used in the plural
preceded by the definite article shall be taken to encompass all members of the
relevant class. Any defined term used in the singular preceded by "any" shall be
taken to indicate any number of the members of the relevant class.
ARTICLE II
GUARANTY
Section 2.01. Guaranty. In consideration of the Bank entering into the
Loan Agreement and making Revolving Loans to the Borrower pursuant to the Loan
Agreement, the Guarantor hereby guaranties to the Bank the due and punctual
payment and performance of all of the Guaranteed Obligations, as and when the
same shall become due and payable, whether on demand or at maturity, by
declaration or otherwise, according to the terms thereof, and all losses, costs,
expenses and reasonable attorneys' fees and disbursements incurred by reason of
a default under any of said Guaranteed Obligations. In case of failure by the
Borrower punctually to pay any of the Guaranteed Obligations, the Guarantor
unconditionally agrees to cause such payment to be made punctually as and when
the same shall become due and payable, whether at maturity or by declaration or
otherwise, and as if such payment were made by the Borrower. This Guaranty is an
absolute, unconditional, unlimited and continuing guaranty of the full and
punctual payment and performance by the Borrower of the Guaranteed Obligations
and not merely of their collectibility and is in no way conditioned upon any
requirement that the Bank first collect or attempt to collect the Guaranteed
Obligations or any portion thereof from the Borrower or from any other guarantor
of any of same or resort to any security or other means of obtaining payment of
any of the Guaranteed Obligations which the Bank now has or may acquire after
the date hereof, or upon any other contingency whatsoever. Upon and during the
continuance of any Event of Default (as defined herein), all liabilities and
obligations of the Guarantor to the Bank, hereunder or otherwise, shall at the
option of the Bank, become forthwith due and payable to the Bank without further
demand or notice of any nature, all of which are expressly waived by the
Guarantor. Payments by the Guarantor hereunder may be required by the Bank on
any number of occasions.
Section 2.02. Guarantor's Further Agreements to Pay. The Guarantor
further agrees, as principal obligor and not as guarantor, to pay to the Bank
forthwith upon demand, in funds immediately available to the Bank, all costs and
expenses (including court costs and reasonable attorneys' fees and
disbursements) incurred or expended by the Bank in connection with this Guaranty
and the enforcement hereof, together with interest on any sum now or hereafter
payable by the Guarantor under this Agreement, such interest to accrue from the
date of any demand for payment of such sum to the date of payment. Such interest
will be payable at the rate set forth in Section 6.04 below.
<PAGE>
Section 2.03. Bank's Freedom to Deal with Borrower and Other Parties.
The Bank shall be at liberty, without giving notice to or obtaining the assent
of the Guarantor and without relieving the Guarantor of any liability hereunder,
to deal with the Borrower and with each other party who now is or after the date
hereof becomes liable in any manner for any of the Guaranteed Obligations in
such manner as the Bank in its sole discretion deems fit. The Bank has full
authority in its sole discretio to do any or all of the following things, none
of which shall discharge or affect the Guarantor's liability hereunder: (i)
extend credit, make loans and afford other financial accommodations to the
Borrower at such times, in such amounts and on such terms as the Bank may
approve; (ii) modify, amend, vary the terms and grant extensions or renewals of
any present or future indebtedness or of all or any of the Guaranteed
Obligations or any instrument relating to or securing same, and, without
limitation, this Guaranty shall survive payment of the Revolving Note; (iii)
grant time, waivers and other indulgences in respect thereto; (iv) vary,
exchange, release or discharge, wholly or partially, or delay or abstain from
perfecting and enforcing any security or guaranty or other means of obtaining
payment of any of the Guaranteed Obligations which the Bank now has or acquires
after the date hereof; (v) take or omit to take any of the actions referred to
in any Loan Document or other instrument evidencing, securing or relating to any
of the Guaranteed Obligations or any actions under this Guaranty; (vi) fail,
omit or delay to enforce, assert or exercise any right, power or remedy
conferred on the Bank in this Guaranty or in any other Loan Document or other
instrument evidencing, securing or relating to any of the Guaranteed Obligations
or take or refrain from taking any other action; (vii) accept partial payments
from the Borrower or any other party; (viii) release or discharge, wholly or
partially, the Borrower, any endorser or any guarantor, or accept additional
collateral for the payment of any Guaranteed Obligations; (ix) compromise or
make any settlement or other arrangement with the Borrower or any such other
party; and (x) consent to and participate in the proceeds of any assignment,
trust or mortgage for the benefit of creditors.
Section 2.04. Unenforceability of Guaranteed Obligations; Invalidity of
Security or Other Guaranties. If for any reason now or hereafter the Borrower
has no legal existence or is under no legal obligation to discharge any of the
Guaranteed Obligations undertaken or purported to be undertaken by it or on its
behalf, or if any of the moneys included in the Guaranteed Obligations have
become irrecoverable from the Borrower by operation of law or for any other
reason, this Guaranty shall nevertheless be binding on the Guarantor to the same
extent as if the Guarantor at all times had been the principal debtor on all
such Guaranteed Obligations. This Guaranty shall be in addition to any other
guaranty or other security for the Guaranteed Obligations, and it shall not be
prejudiced or rendered unenforceable by the invalidity of any such other
guaranty or security. The liability of the Guarantor under this Guaranty shall
remain in full force and effect until payment and performance in full of all of
the Guaranteed Obligations. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the
Guaranteed Obligations is rescinded or must otherwise be restored or returned by
the Bank, upon the insolvency, bankruptcy or reorganization of the Borrower or
otherwise, all as though such payment had not been made.
<PAGE>
Section 2.05. Waivers by Guarantor. The Guarantor waives: notice of
acceptance hereof and reliance hereon, notice of any action taken or omitted by
the Bank in reliance hereon, any requirement that the Bank be diligent or prompt
in making demands hereunder, any requirement as to any presentment, demand,
protest, giving notice of any default by the Borrower or asserting any other
right of the Bank hereunder and all demands, notices (other than any demands and
notices which are specifically provided for in the Loan Agreement) and all
suretyship defenses generally. The Guarantor also irrevocably waives, to the
fullest extent permitted by law, all defenses which at any time may be available
in respect of the Guarantor's obligations hereunder by virtue of any statute of
limitations, valuation, stay, homestead or moratorium law or other similar law
now or hereafter in effect.
Without limiting the generality of the foregoing provisions of this
Guaranty, the liability of the Guarantor shall not be released, discharged or
otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or release
in respect of any obligation of the Borrower or any other guarantor of any of
the Guaranteed Obligations;
(ii) any change in the time, manner, amount or place of payment of any
Guaranteed Obligation or any modification or amendment of or supplement to any
Loan Document or this Agreement;
(iii) any release, non-perfection or invalidity of any direct or
indirect security for any obligation of the Borrower, the Guarantor or any other
guarantor of any of the Guaranteed Obligations;
(iv) any change in the legal existence, structure, record or beneficial
ownership or control of the Borrower or the Guarantor or any other guarantor of
any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization
or other similar proceeding affecting any such Person or its assets;
(v) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against the Borrower, the Bank or any other
guarantor of any of the Guaranteed Obligations or any other Person, whether or
not arising in connection with this Agreement;
(vi) any invalidity or unenforceability relating to or against the
Borrower or the Guarantor for any reason under any Loan Document or under this
Agreement; or any provision of applicable law or regulation purporting to
prohibit the payment by any Person of the principal of or interest on the
Revolving Note or any other amount payable under any Loan Document or this
Agreement; or
(vii) any other act or omission to act or delay of any kind by the
Borrower, the Bank or any other Person or any other circumstances whatsoever
which might, but for the provisions of this paragraph, constitute a legal or
equitable discharge of the Guarantor's obligations hereunder.
<PAGE>
Section 2.06. Subrogation. Unless and until all of the Guaranteed
Obligations shall have been indefeasibly paid in full and all commitments for
further extensions of credit to the Borrower by the Bank shall have been
terminated, the Guarantor hereby irrevocably and unconditionally waives
enforcement of any and all rights of subrogation, contribution or similar rights
which, but for this Section 2.06, the Guarantor might otherwise have in relation
to the Borrower or any other guarantor as a result of this Agreement. No right
of subrogation, contribution or any similar right will in any event be deemed to
give the Guarantor any claim against the Bank on account of the Bank's release,
failure to perfect or other dealing or failing to deal with any collateral or
with any Person, even if the value of such subrogation, contribution or similar
rights is thereby diminished or jeopardized.
Section 2.07. No Contest with Bank. No set-off, counterclaim, reduction
or diminution of any obligation, or any claim or defense of any kind or nature
which the Guarantor has or may have against the Borrower, any other guarantor or
the Bank shall be available hereunder to the Guarantor. The Guarantor will not,
in any proceedings under the Bankruptcy Code or insolvency proceedings of any
nature, prove in competition with the Bank in respect of any payment hereunder
or be entitled to have the benefit of any counterclaim or proof of claim or
dividend or payment by or on behalf of the Borrower or the benefit of any other
security for any Guaranteed Obligation which, now or hereafter, the Guarantor
may hold in competition with the Bank.
Section 2.08. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by the Borrower under any Loan Document is stayed
upon the insolvency, bankruptcy or reorganization of the Borrower, all such
amounts otherwise subject to acceleration under the terms of this Guaranty shall
nonetheless be payable by the Guarantor hereunder forthwith on demand by the
Bank.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. General Representations and Warranties. The Guarantor
hereby represents and warrants that:
(a) The Guarantor (i) is a corporation duly incorporated, validly
existing and in good standing under the laws of California, (ii) has full
corporate power and authority to own its assets and to transact the business in
which it is now engaged, to grant the security interests contemplated by the
Guarantor's Security Agreement and the Guarantor's Intellectual Property
Security Agreements, and to enter into and perform this Agreement and the other
Guarantor's Documents, and (iii) is duly qualified to do business and in good
standing under the laws of each jurisdiction in which failure to be so qualified
could have a material adverse effect on the business, prospects or condition of
the Guarantor, all such jurisdictions being listed on item 3.01(a) of the
attached Disclosure Schedule. At the date hereof, the Guarantor has no
Subsidiaries. The Guarantor is not a member of any partnership or a joint
venture, except as shown on said item 3.01(a) of the attached Disclosure
Schedule. The Guarantor is a Subsidiary
<PAGE>
of the Borrower and, at the date of this Agreement, is wholly-owned by the
Borrower (save for certain stock options held by officers and employees of the
Guarantor and shares issued upon the exercise of stock options).
(b) The execution, delivery and performance by the Guarantor of this
Agreement do not and will not:
(i) require any consent or approval of the Guarantor's
stockholders;
(ii) contravene its charter documents or by-laws;
(iii) violate any provision of, or require any filing,
registration, consent or approval under, any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to the Guarantor;
(iv) result in a breach of or constitute a default or require
any consent under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which the Guarantor is a party
or by which the Guarantor or any of the Guarantor's properties may be
bound or affected; or
(v) result in, or require, the creation or imposition of any
lien, security interest or other encumbrance (other than in favor of
the Bank) upon or with respect to any of the properties now owned or
hereafter acquired by the Guarantor.
(c) This Agreement and the other Guarantor's Documents have been duly
authorized by the Guarantor by all appropriate corporate proceedings, have been
duly executed and delivered on behalf of the Guarantor and each is a legal,
valid and binding obligation of the Guarantor, enforceable against the Guarantor
in accordance with its respective terms, except as enforceability may be limited
by laws of general application relating to bankruptcy, insolvency and the relief
of debtors and by rules of law governing specific performance, injunctive relief
and other equitable remedies.
(d) Except as described on item 3.01(d) of the attached Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Guarantor, threatened by or against the Guarantor or any
Subsidiary of the Guarantor before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, which
could hinder or prevent the consummation of the transactions contemplated hereby
or call into question the validity of this Agreement or any of the other
Guarantor's Documents or any other instrument provided for or contemplated by
this Agreement or any of the other Guarantor's Documents or any action taken or
to be taken in connection with the transactions contemplated hereby or thereby
or which in any single case or in the aggregate
<PAGE>
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Guarantor or any such Subsidiary.
(e) The Guarantor is not in violation of any term of its charter or
by-laws as now in effect. Neither the Guarantor nor any Subsidiary of the
Guarantor is in material violation of any term of any mortgage, indenture or
judgment, decree or order, or any other instrument, contract or agreement to
which it is a party or by which any of its property is bound.
(f) The Guarantor has filed (and has caused each Subsidiary of the
Guarantor to file) all federal, state and local tax returns, reports and
estimates required to be filed by the Guarantor or by any such Subsidiary. All
such filed returns, reports and estimates and have been completed in accordance
with applicable law and the Guarantor (or the Subsidiary concerned, as the case
may be) has paid all taxes, assessments, impositions, fees and other
governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Guarantor knows of
no material tax liability or basis therefor.
(g) The Guarantor is in compliance with (and each Subsidiary of the
Guarantor is in compliance with) all requirements of law, federal, state and
local, and all requirements of all governmental bodies or agencies having
jurisdiction over it, the conduct of its business, the use of its properties and
assets, and all premises occupied by it, failure to comply with which could
(singly or in the aggregate with all other such failures) have a material
adverse effect upon the assets, business, financial condition or prospects of
the Guarantor or any such Subsidiary. Without limiting the foregoing, the
Guarantor has all the franchises, licenses, leases, permits, certificates and
authorizations needed for the conduct of its business and the use of its
properties and all premises occupied by it, as now conducted, owned and used and
as proposed to be conducted, owned and used.
(h) The Guarantor is a Subsidiary of the Borrower and receives
management, accounting and financial services from the Borrower and may receive
funding from the Borrower. The continued financial strength of the Borrower and,
in particular, its financing arrangements with the Bank are thus of direct and
substantial benefit to the Guarantor and the execution and delivery of this
Agreement is a substantial inducement for the Bank to continue and amend such
financing arrangements. The Guarantor has determined the execution, delivery and
performance of this Agreement to be necessary and convenient to the conduct,
promotion and attainment of the business of the Guarantor and the Borrower.
(i) The principal place of business and chief executive offices of the
Guarantor are located at 1249 Quarry Lane, Pleasanton, CA 94566. All of the
books and records of the Guarantor are located at said address. Except as
described on item 3.01(i) of the attached Disclosure Schedule, no assets of the
Guarantor are located at any other address. Said item 3.01(i) of the attached
Disclosure Schedule sets forth the names and addresses of the record owners of
all premises where any material amount of Collateral owned by the Guarantor is
located.
<PAGE>
(j) The Guarantor owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises ("Intellectual
Property") now being used to conduct its business, as described on item 3.01(j)
of the attached Disclosure Schedule. None of the Intellectual Property owned by
the Guarantor is represented by a registered copyright, trademark, patent or
other federal or state registration, except as shown on said item 3.01(j). To
the best knowledge of the Guarantor, the conduct of the Guarantor's business as
now operated does not conflict with valid patents, licenses, copyrights,
trademarks, trade names or franchises of others in any matter that could
materially adversely affect the business, prospects, assets or donation,
financial or otherwise, of the Guarantor.
(k) None of the executive officers or key employees of the Guarantor is
subject to any agreement in favor of anyone other than the Guarantor which
limits or restricts that person's right to engage in the type of business
activity conducted or proposed to be conducted by the Guarantor or which grants
to anyone other than the Guarantor any rights in any inventions or other ideas
susceptible to legal protection developed or conceived by any such officer or
key employee.
(l) The Guarantor is not a party to any contract or agreement which now
has or, as far as can reasonably be foreseen by the Guarantor at the date
hereof, may have a material adverse effect on the financial condition, business,
prospects or properties of the Guarantor.
(m) After giving effect to this Agreement and the transactions
contemplated hereby, the Guarantor (A) is and will be able to pay its debts as
they become due, (B) has and will have funds and capital sufficient to carry on
its business as now conducted or as contemplated to be conducted, (C) owns
property having a value both at fair valuation and at present fair saleable
value greater than the amount required to pay its debts as they become due, and
(D) is not insolvent and will not be rendered insolvent as determined by
applicable law, after taking into account the reasonable likelihood of payments
being required hereunder.
ARTICLE IV
COVENANTS
Section 4.01. Affirmative Covenants and Reporting Requirements. So long
as the Loan Agreement is in effect and/or any of the Guaranteed Obligations
remain outstanding, the Guarantor will duly and promptly perform and observe
each provision contained in Article III of the Loan Agreement which may relate
to the Guarantor as a Subsidiary of the Borrower (said Article III, together
with any related definitions, being deemed incorporated herein by this
reference). Further, and without limitation of the foregoing, so long as the
Loan Agreement is an effect and/or any of the Guaranteed Obligations remain
outstanding:
(a) The Guarantor will maintain and preserve (and will cause each
Subsidiary of the Guarantor to maintain and preserve) all of its properties in
good working order and condition,
<PAGE>
making all necessary repairs thereto and replacements thereof. The Guarantor
will maintain, with financially sound and reputable insurers, insurance with
respect to its property and business against such liabilities, casualties and
contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Guarantor in similar locales, with the Bank to be named
as first loss payee on all policies relating to any Collateral; provided,
however, that so long as no Event of Default under the Loan Agreement has
occurred and is continuing, (i) returned and unearned premiums may be paid
directly to and may be retained by the Guarantor and (ii) insurance proceeds
from any casualty damages totalling $50,000 or less may be paid directly to and
may be retained by the Guarantor.
(b) The Guarantor will perform and fulfill all material covenants and
agreements under any lease or real estate, agreements relating to purchase money
debt, equipment leases and other material contracts. The Guarantor will maintain
in full force and effect, and comply with the terms and conditions of, all
permits, permissions and licenses necessary or desirable for its business.
(c) The Guarantor will conduct, in the ordinary course, the business in
which it is presently engaged. The Guarantor will not, without the prior written
consent of the Bank, directly or indirectly (itself or through any Subsidiary),
enter into any other lines of business or business ventures.
(d) The Guarantor will furnish to the Bank:
(i) Promptly after receipt, a copy of all audits or reports
submitted to the Guarantor by independent public accountants in
connection with any annual, special or interim audit of the books of
the Guarantor and any "management letter" prepared by such accountants.
(ii) As soon as possible and in any event within five days of
the occurrence of any Event of Default or any event which, with the
giving of notice or passage of time or both, would constitute an Event
of Default, the statement of the Guarantor setting forth details of
such Event of Default or event and the action which the Guarantor
proposes to take with respect thereto.
(iii) Promptly (and in any event within 30 days) after service
of legal process upon the Guarantor or the Guarantor otherwise having
notice thereof, notice of all actions, suits and proceedings before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, to which the Guarantor or any
Subsidiary of the Guarantor is a party; provided, however, that the
Guarantor will not be deemed required by this clause (iii) to give
notice of any such action, suit or proceeding filed against the
Guarantor or any such Subsidiary which seeks monetary damages only in
an amount of $100,000 or less.
<PAGE>
(iv) Promptly upon applying for, or being granted, a federal
or state registration for any copyright, trademark or patent or
purchasing any registered copyright, trademark or patent, written
notice to the Bank describing same, together with all such documents as
may be required to give the Bank a fully perfected first priority
security interest in each such copyright, trademark or patent.
(v) Promptly after the Guarantor has knowledge thereof,
written notice of any development or circumstance which may reasonably
be expected to have a material adverse effect on the Guarantor or its
business, properties, assets, Subsidiaries or condition, financial or
otherwise.
(vi) Promptly upon request, such other information respecting
the financial condition, operations, receivables, inventory, machinery
or equipment of the Guarantor or any Subsidiary of the Guarantor as the
Bank may from time to time reasonably request.
(e) The Guarantor will maintain (and cause each of its Subsidiaries to
maintain) complete and fairly stated books, records and accounts which will at
all times fairly reflect all of its transactions in accordance with generally
accepted accounting principles consistently applied. The Guarantor will, at any
reasonable time and from time to time upon reasonable notice and during normal
business hours (and at any time and without any necessity for notice following
the occurrence of an Event of Default), permit the Bank, and any agents or
representatives thereof, to examine and make copies of and take abstracts from
the records and books of account of, and visit the properties of the Guarantor
and any of its Subsidiaries, and to discuss its affairs, finances and accounts
with its officers, directors and/or independent accountants, all of whom are
hereby authorized and directed to cooperate with the Bank in carrying out the
intent of this Subsection 3.01(e). Each financial statement of the Guarantor
hereafter delivered pursuant to this Agreement will be complete and will fairly
present the financial condition of the Guarantor as at the date thereof and for
the periods covered thereby.
(f) Prior to the Bank making the first Revolving Loan, the Guarantor
will obtain, and will thereafter maintain in effect at all times, waivers from
the owners of all premises in which any material amount of Collateral is
located, such waivers to be in form and substance satisfactory to the Bank.
(g) The Guarantor will review the software which it uses in its
business (and which its Subsidiaries use in their respective businesses) for
"Year 2000" compliance. The Guarantor will, on or before June 30, 1999, have
completed all steps necessary to assure that such software will continue to
function in the manner intended without interruption or other difficulty
resulting from the "Year 2000 problem". The Guarantor will, at the request of
the Bank, provide such reports and such other information as the Bank may
reasonably request in respect of the Guarantor's program to assure such Year
2000 compliance.
(h) As used herein, the term "Star Transaction" has the meaning
ascribed to that term in the Loan Agreement. The Guarantor presently intends to
complete the Star Transaction and to
<PAGE>
receive the proceeds thereof (in the amount described in Section 3.11 of the
Loan Agreement) on or before March 31, 1999. The Bank agrees that if the Star
Transaction is consummated and such proceeds are received on or prior to March
31, 1999, the Bank will, upon the payment of so much of the Revolving Loans as
may be required so that the Aggregate Bank Liabilities (as defined in the Loan
Agreement) will not exceed the Borrowing Base (as defined in the Loan Agreement)
calculated without reference to any receivables of Star, release the Guarantor's
Security Agreement and the Guarantor's Intellectual Property Security Agreements
and terminate the within Guaranty and release any other obligations of Star to
the Bank arising under or in connection with the Loan Agreement.
Section 4.02. Negative Covenants. So long as the Loan Agreement is in
effect and/or any of the Guaranteed Obligations remain outstanding, the
Guarantor will not take or omit to take any action or suffer to exist any event
or circumstance which would be a breach of any of the provisions of Article IV
of the Loan Agreement which may relate to the Guarantor as a Subsidiary of the
Borrower (said Article IV, together with any related definitions, being deemed
incorporated herein by this reference). Further, and without limitation of the
foregoing, so long as the Loan Agreement is in effect and/or any of the
Guaranteed Obligations remain outstanding:
(a) The Guarantor will not, without the prior written consent of the
Bank, form or acquire any Subsidiary or make any other acquisition of the stock
of any Person or of all or substantially all of the assets of any other Person.
The Guarantor will not become a partner in any partnership.
(b) The Guarantor will not, without the prior written consent of the
Bank, merge or consolidate with any Person or sell, lease, transfer or otherwise
dispose of any material portion of its assets (whether in one or more
transactions), other than (i) sale of inventory in the ordinary course, (ii) the
sale of the Guarantor to Coherent, Inc. pursuant to the Star Transaction on or
before March 31, 1999 and (iii) a sale or transfer of any Intellectual Property
of the Guarantor so long as (A) such sale or transfer could not have a
materially adverse effect on the business, condition or prospects of the
Guarantor and (B) the Guarantor gives the Bank not less than 20 days' prior
written notice of each such sale or transfer, in such detail as shall be
reasonably acceptable to the Bank. The Bank specifically acknowledges that this
Agreement contemplates and permits the sale of the Guarantor to Coherent, Inc.
pursuant to the Star Transaction on or before March 31, 1999, with the Bank's
security interests in the Guarantor's assets to be released under the
circumstances described in Subsection 4.01(h).
(c) The Guarantor will not, without the prior written consent of the
Bank, enter into any transaction, including, without limitation, the purchase,
sale or exchange of any property or the rendering of any service, with any
affiliate of the Guarantor, except in the ordinary course of and pursuant to the
reasonable requirements of the Guarantor's business and upon fair and reasonable
terms no less favorable to the Guarantor than would be obtained in a comparable
arms'-length transaction with any Person not an affiliate; provided that nothing
in this Subsection shall be deemed to prohibit the payment of salary or other
similar payments to any officer or director of the Guarantor at a level
consistent with the salary and other payments being paid at
<PAGE>
the date of this Agreement, nor to prevent the hiring of additional officers at
a salary level consistent with industry practice, nor to prevent reasonable
periodic increases in salary. For the purposes of this Agreement, "affiliate"
means any Person which, directly or indirectly, controls or is controlled by or
is under common control with the Guarantor; any officer or director or former
officer or director of the Guarantor; any Person owning of record or
beneficially, directly or indirectly, 5% or more of any class of capital stock
of the Guarantor or 5% or more of any class of capital stock or other equity
interest having voting power (under ordinary circumstances) of any of the other
Persons described above; and any member of the immediate family of any of the
foregoing. "Control" means possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of any Person,
whether through ownership of voting equity, by contract or otherwise.
(d) The Guarantor will not change its name or legal structure, nor will
the Guarantor move its chief executive offices or principal place of business
from the address described in the first sentence of Subsection 3.01(i) above,
nor will the Guarantor remove any books or records from such address, nor will
the Guarantor keep any Collateral belonging to the Guarantor at any location
other than the premises described in Subsection 3.01(i) above without, in each
instance, giving the Bank at least 30 days' prior written notice and providing
all such financing statements, certificates and other documentation as the Bank
may request in order to maintain the perfection and priority of the security
interests granted or intended to be granted pursuant to the Guarantor's Security
Agreement.
(e) Except as provided below, the Guarantor will not dispose of or
suffer or permit to exist any hazardous material or oil on any site or vessel
owned, occupied or operated by the Guarantor or any Subsidiary of the Guarantor,
nor shall the Guarantor store (or permit any Subsidiary to store) on any site or
vessel owned, occupied or operated by the Guarantor or any such Subsidiary, or
transport or arrange the transport of, any hazardous material or oil (the terms
"hazardous material", "oil", site" and "vessel", respectively, being used herein
with the meanings given those terms in Mass. Gen. Laws, Ch. 21E or any
comparable terms in any comparable statute in effect in any other relevant
jurisdiction). The Guarantor shall provide the Bank with written notice of (i)
the intended storage or transport of any hazardous material or oil by the
Guarantor or any Subsidiary of the Guarantor, (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Guarantor or any Subsidiary of the Guarantor,
and (iii) any incurrence of any expense or loss by any government or
governmental authority in connection with the assessment, containment or removal
of any hazardous material or oil for which expense or loss the Guarantor or any
Subsidiary of the Guarantor may be liable. Notwithstanding the foregoing, the
Guarantor and its Subsidiaries may use, store and transport, and need not notify
the Bank of the use, storage or transportation of, (x) oil in reasonable
quantities, as fuel for heating of their respective facilities or for vehicles
or machinery used in the ordinary course of their respective businesses and (y)
hazardous materials that are solvents, cleaning agents or other materials used
in the ordinary course of the respective business operations of the Guarantor
and its Subsidiaries, in reasonable quantities, as long as in any case the
Guarantor or the Subsidiary concerned (as the case may be) has obtained and
maintains in effect any necessary governmental permits, licenses
<PAGE>
and approvals, complies with all requirements of applicable federal, state and
local law relating to such use, storage or transportation, follows the
protective and safety procedures that a prudent businessperson conducting a
business the same as or similar to that of the Guarantor or such Subsidiary (as
the case may be) would follow, and disposes of such materials (not consumed in
the ordinary course) only through licensed providers of hazardous waste removal
services.
ARTICLE V
DEFAULT AND REMEDIES
Section 5.01. Events of Default. An Event of Default will be deemed to
have occurred under this Agreement upon the occurrence of any one or more of the
following:
(i) The Guarantor shall fail to make any monetary payment hereunder
when due; or
(ii) Any representation or warranty of the Guarantor contained herein
shall at any time prove to have been incorrect in any material respect when
made; or
(iii) The Guarantor shall fail to perform or observe any obligation or
agreement under Subsection 4.01(d) or any provision of Section 4.02; or
(iv) The Guarantor shall default in the performance or observance of
any obligation or agreement under the first sentence of Section 4.01 (to the
extent that same incorporates by reference Section 3.1 and Section 3.3 of the
Loan Agreement) and such failure continues uncured for 30 days after the
Guarantor first knows of (or reasonably should know of) such default or of the
events or circumstances giving rise to such default; or
(v) The Guarantor shall fail to perform or observe any other obligation
or agreement contained herein and such failure shall continue uncured for 30
days after notice thereof shall have been given to the Guarantor; or
(vi) For any reason, the Guarantor shall cease to be 100% owned by the
Borrower, except due to the consummation of the Star Transaction under the
conditions contemplated by Subsection 4.01(h) above and except for the
above-described stock options held by officers and employees and any shares
issued upon exercise of same; or
(vii) Any "Event of Default" (as defined in the Loan Agreement) shall
occur and shall continue uncured beyond the expiration of any applicable notice
and/or grace period.
Section 5.02. Rights and Remedies Upon Default. Upon the occurrence of
any Event of Default and at any time thereafter during the continuance thereof,
in addition to any other rights and remedies available to the Bank hereunder or
otherwise, the Bank may exercise any one or more of the following rights and
remedies (all of which shall be cumulative):
<PAGE>
(a) Enforce the provisions of this Agreement by legal proceedings for
the specific performance of any covenant or agreement contained herein or for
the enforcement of any other appropriate legal or equitable remedy, and the Bank
may recover damages caused by any breach by the Guarantor of the provisions of
this Agreement, including court costs, reasonable attorneys' fees and other
reasonable costs and expenses incurred in the enforcement of the obligations of
the Guarantor hereunder.
(b) Exercise all rights and remedies hereunder, under the Loan
Documents, and under any other agreement with the Bank, and exercise all other
rights and remedies which the Bank may have under applicable law.
Section 5.03. Set-off. In addition to any rights now or hereafter
granted under applicable law and not by way of limitation of any such rights,
upon the occurrence of any Event of Default and during the continuance thereof,
the Bank is hereby authorized at any time or from time to time, without
presentment, demand, protest or other notice of any kind to the Guarantor or to
any other Person, all of which are hereby expressly waived, to set off and to
appropriate and apply any and all deposits and any other Indebtedness at any
time held or owing by the Bank or any affiliate of the Bank to or for the credit
or the account of the Guarantor against and on account of the obligations and
liabilities of the Guarantor to the Bank, under this Agreement or otherwise,
irrespective of whether or not the Bank shall have made any demand for payment
and although said obligations, liabilities or claims, or any of them, may then
be contingent or unmatured and without regard for the availability or adequacy
of other collateral. ANY AND ALL RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS
RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF THE
GUARANTEED OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF
UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
ARTICLE VI
MISCELLANEOUS
Section 6.01. No Waiver; Cumulative Remedies. No failure or delay on
the part of any party in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law or
otherwise available to the Bank. Such remedies may be exercised without resort
or regard to the other source of satisfaction of any liabilities of the
Guarantor to the Bank. The provisions of this Agreement are not limited by nor
in the limitation of any additional or inconsistent provisions contained in the
Loan Agreement or elsewhere. No right of subrogation, contribution or any
similar rights will in any event be deemed to give the Guarantor any cause of
action against the Bank or any of its officers, employees or agents for any act
or omission on the part of the Bank; the Bank may, without liability, release or
fail to perfect any security interest and may take or
<PAGE>
omit to take any action under any of the Loan Documents, even if same would
reduce the value of the Guarantor's subrogation or similar rights.
Section 6.02. Amendments, Waivers and Consents. Neither this Agreement
nor any provision hereof may be amended, waived, discharged or terminated
orally. Any such amendment, waiver, discharge or termination must be in writing
signed by the party against whom enforcement of the amendment, waiver, discharge
or termination is sought. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
Section 6.03. Addresses for Notices, etc. Except as otherwise expressly
provided in this Agreement, all notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
If to the Guarantor:
Star Medical Technologies, Inc.
c/o Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02421
Attention: Paul S. Weiner, Director of Finance
with a copy so mailed or delivered to:
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02421
Attention: General Counsel
If to the Bank:
Fleet National Bank
High Technology Division
One Federal Street
Mail Stop: MA OF DO7A
Boston, MA 02110
Attention: Lucie Burke, Vice President
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. Except as otherwise provided herein, all such
notices, requests, demands and other communications shall be deemed delivered on
the earlier of (i) the date received or (ii) the date of delivery, refusal or
<PAGE>
non-delivery indicated on the return receipt if deposited in the United States
mails, sent postage prepaid, registered or certified mail, return receipt
requested, postage and registration or certification charges prepaid, addressed
as aforesaid.
Section 6.04. Costs, Expenses and Taxes. The Guarantor agrees to pay on
demand all costs and expenses (including, without limitation, reasonable legal
fees) of the Bank in connection with the preparation, execution and delivery of
this Agreement and all other instruments and documents to be delivered hereunder
and any amendments or modifications of any of the foregoing, or in connection
with the examination, review or administration of any of the foregoing, as well
as the costs and expenses (including, without limitation, the reasonable fees
and expenses of legal counsel) incurred by the Bank in connection with
preserving, enforcing or exercising any rights or remedies under this Agreement
and all other instruments and documents to be delivered hereunder, all whether
or not legal action is instituted. In addition, the Guarantor shall be obligated
to pay any and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this Agreement and all other
instruments and documents to be delivered hereunder, and the Guarantor agrees to
save the Bank harmless from and against any and all liabilities with respect to
or resulting from any delay in paying or omission to pay such taxes. Any fees,
expenses or other charges which the Bank is entitled to receive from the
Guarantor hereunder shall bear interest from the date of demand for payment
until paid at the lesser of (i) a fluctuating rate per annum which shall at all
times be equal to the sum of four (4%) percent per annum plus the Prime Rate or
(ii) the maximum rate permitted by then applicable law.
Section 6.05. Representations and Warranties. All covenants,
agreements, representations and warranties made herein or in any other document
delivered by or on behalf of the Guarantor pursuant to or in connection with
this Agreement are material and shall be deemed to have been relied upon by the
Bank, notwithstanding any investigation heretofore or hereafter made by the Bank
and shall survive the making of the Revolving Loans as contemplated in the Loan
Agreement, and shall continue in full force and effect so long as any of the
Guaranteed Obligations remain outstanding and unpaid or any facility for the
making of loans to the Borrower remains in effect.
Section 6.06. Binding Effect; Assignment. This Agreement shall be
binding upon the Guarantor and its successors and assigns and shall inure to the
benefit of the Bank and its successors and assigns. The Guarantor may not assign
this Agreement or any rights hereunder without the express written consent of
the Bank.
Section 6.07. Reproduction of Agreement. This Agreement and all other
instruments, documents and papers which relate thereto which have been or may be
hereafter furnished to the Bank may be reproduced by the Bank by any
photographic, photostatic, micro-card, miniature photographic, xerographic or
similar process. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in existence and whether o not such reproduction was made in the
regular course of business).
<PAGE>
Section 6.08. Consent to Jurisdiction. The Guarantor irrevocably
submits to the non-exclusive jurisdiction of any Massachusetts court or any
federal court sitting within The Commonwealth of Massachusetts over any suit,
action or proceeding arising out of or relating to this Agreement. The Guarantor
agrees that final judgment in any such suit, action or proceeding brought in
such a court shall be enforced in any court of proper jurisdiction by a suit
upon such judgment, provided that service of process in such action, suit or
proceeding shall have been effected upon the Guarantor in one of the manners
specified in the following paragraph of this Section 6.08 or as otherwise
permitted by law.
The Guarantor hereby consents to process being served in any suit,
action or proceeding of the nature referred to in the preceding paragraph of
this Section 6.08 either (i) by mailing a copy thereof by registered or
certified mail, postage prepaid, return receipt requested, to its at its address
set forth in Section 6.03 or (ii) by serving a copy thereof upon it at its
address set forth in Section 6.03. The Guarantor agrees that such service shall
(x) be deemed in every respect effective service upon such Guarantor in any such
suit, action or proceeding and (y) to the fullest extent permitted by law, be
taken and held to be valid personal service upon and personal delivery to the
Guarantor.
Section 6.09. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of The Commonwealth of Massachusetts.
Section 6.10. Severability. In the event that any provision of this
Agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be invalid or unenforceable, the remainder of
this Agreement and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid or
unenforceable shall not be affected thereby, and each provision of this
Agreement shall be valid and enforceable to the fullest extent permitted by law.
Section 6.11. Headings. Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 6.12. WAIVER OF JURY TRIAL. THE GUARANTOR AND THE BANK HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY
JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT, THE LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS
OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT
FOR THE BANK TO ENTER INTO THE LOAN AGREEMENT AND TO MAKE LOANS TO THE BORROWER
AS CONTEMPLATED THEREIN.
<PAGE>
Section 6.13. Guarantor's Security Agreement. (a) The Guarantor
acknowledges and agrees that the "Obligations" described in and secured by the
Guarantor's Security Agreement include, without limitation, all of the
obligations of the Guarantor under this Agreement.
(b) The Guarantor's Security Agreement is hereby modified to provide as
follows:
(i) That the "Collateral" subject thereto includes, without
limitation and in addition to the Collateral described therein, all of
the Guarantor's files, books and records (including, without
limitation, all electronically recorded data) all whether now owned or
existing or hereafter acquired, created or arising. The Guarantor
hereby grants to the Bank a security interest in all such Collateral in
order to secure the full and prompt payment and performance of all of
the aforesaid Obligations.
(ii) That, upon the occurrence of any Event of Default, the
Bank may, at any time, notify account debtors of the Guarantor that the
Collateral has been assigned to the Bank and that payments by such
account debtors shall be made directly to the Bank. At any time after
the occurrence of an Event of Default, the Bank may collect the
Guarantor's receivables, or any of same, directly from account debtors
and may charge the collection costs and expenses to the Guarantor.
IN WITNESS WHEREOF, the Guarantor has executed this Agreement, as an
instrument under seal, as of the day and year first above written.
STAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Joseph P. Caruso
--------------------------
Name: Joseph P.Caruso
Title: Vice President of
Finance
<PAGE>
DISCLOSURE SCHEDULE
Item 3.01(a) - Jurisdictions where Guarantor is qualified;
Subsidiaries; Partnerships
Star is qualified only in California.
Item 3.01(d) - Litigation
None.
Item 3.01(i) - Locations of Collateral; record owners
See Section 2.1(j) of Disclosure Schedule attached to Letter
Agreement between Palomar Medical Technologies, Inc. and Fleet
National Bank.
Item 3.01(j) - Intellectual Property
See Section 2.1(k) of Disclosure Schedule attached to Letter
Agreement between Palomar Medical Technologies, Inc. and Fleet
National Bank.
SECURITY AGREEMENT (PATENTS)
WHEREAS, STAR MEDICAL TECHNOLOGIES, INC., a California corporation,
with a principal place of business at 1249 Quarry Lane, Pleasanton, CA 94566
(the "Company") and FLEET NATIONAL BANK, with a place of business at One Federal
Street, Boston, Massachusetts 02110 (the "Bank") have entered into an Inventory,
Accounts Receivable and Intangibles Security Agreement dated November 16, 1998
(the "Security Agreement") and are also parties to a related Guaranty Agreement
(the "Guaranty Agreement") between the Bank and the Company; and
WHEREAS, the Company is the owner and user of the United States Patents
and Patent Applications listed on Schedule A hereto and identified in said
Guaranty Agreement and said Security Agreement (collectively, the "U.S. Patents
and Patent Applications"); and
WHEREAS, among the security interests granted by the Company to the
Bank pursuant to the Security Agreement is a security interest in the U.S.
Patents and Patent Applications listed on Schedule A hereto and in any
registered patents arising from such Patent Applications; and
WHEREAS, the parties to the Security Agreement contemplate and intend
that, if an Event of Default (as defined in the Guaranty Agreement) shall occur
and be continuing, the Bank shall have all rights of a foreclosing secured party
in and to the U.S. Patents and Patent Applications and in any registered patents
arising therefrom and any proceeds thereof, including, without limitation, the
right, following such foreclosure, to transfer to a purchaser all of the
Company's right, title and interest in and to the U.S. Patents and Patent
Applications and in any registered patents arising therefrom;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties reconfirm the terms of
the Security Agreement, as if set forth fully herein, and acknowledge that the
Bank has a security interest in the U.S. Patents and Patent Applications listed
on Schedule A hereto and in any registered patents arising therefrom; as
security for the Obligations (as defined in the Security Agreement), the Company
hereby collaterally assigns to the Bank, and grants a security interest to the
Bank in and to, all of the Company's right, title and interest in and to said
U.S. Patents and Patent Applications and in any registered patents arising
therefrom; the Company agrees that it will not sell or assign any of the U.S.
Patents or Patent Applications nor any registered patents arising therefrom
without the prior written consent of the Bank; and the Company and the Bank
request that the Commissioner of Patents and Trademarks record this document
with respect to the U.S. Patents and Patent Applications.
The Company hereby appoints the Bank as the Company's attorney-in-fact
(with full power of substitution and resubstitution) with the power and
authority, after the occurrence of any Event of Default (as defined in the
Guaranty Agreement), to execute and deliver, in the name and on behalf of the
Company, and to cause the recording of all such further assignments and other
instruments as the Bank may reasonably deem necessary or desirable in order to
carry out the intent of the Security Agreement and this Security Agreement
(Patents). The Company agrees
<PAGE>
that all third parties may conclusively rely on any such further assignment or
other instrument, so executed, delivered and recorded by the Bank (or the Bank's
designee in accordance with the terms hereof) and on the statements made
therein.
STAR MEDICAL TECHNOLOGIES, INC. FLEET NATIONAL BANK
By: /s/ Joseph P. Caruso By: /s/ Lucie Burke
------------------------- -----------------------
Name: Joseph P. Caruso Its: Vice President
Title: Vice President of Finance
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me the above-named JOSEPH P. CARUSO,
the _VICE PRESIDENT OF FINANCE of Star Medical Technologies, Inc., and stated
that he/she executed the foregoing instrument under the authority of said
corporation's Board of Directors and acknowledged the foregoing instrument to be
the free act and deed of said corporation.
WITNESS my hand and seal this 16th day of November, 1998.
/s/ Marianne Barrett
----------------------------
Notary Public
My commission expires:
November 19, 2004
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT (PATENTS)
Patents with United States Registration
- ---------------------------------------
<TABLE>
<S> <C> <C>
Patent Description Registration No. Registration Date
- ------------------ ---------------- -----------------
High fluence diode laser device
and method for the
fabrication and use thereof 5,743,901 April 28, 1998
Method for the laser treatment of
subsurface blood vessels 5,707,403 January 13, 1998
Pulsed infrared laser treatment of psoriasis 5,527,350 June 18, 1996
</TABLE>
Patent Applications
- -------------------
Patent Description Serial No./Filing Date
- ------------------ ----------------------
Integrated cooling mechanism 08/845,630/January 17, 1997
for diode-pumped solid state laser
Laser diode array packaging 08/789,968/January 31, 1997
SECURITY AGREEMENT (TRADEMARKS)
WHEREAS, STAR MEDICAL TECHNOLOGIES, INC., a California corporation,
with a principal place of business at 1249 Quarry Lane, Pleasanton, CA 94566
(the "Company") and FLEET NATIONAL BANK, with a place of business at One Federal
Street, Boston, Massachusetts 02110 (the "Bank") have entered into an Inventory,
Accounts Receivable and Intangibles Security Agreement dated November 16, 1998
(the "Security Agreement") and are also parties to a related Guaranty Agreement
(the "Guaranty Agreement") between the Bank and the Company; and
WHEREAS, the Company is the owner and user of the trademarks listed on
Schedule A hereto and identified in said Security Agreement (the "Trademarks");
and
WHEREAS, among the security interests granted by the Company to the
Bank pursuant to the Security Agreement is a security interest in the Trademarks
listed on Schedule A hereto, together with the goodwill of the business
associated with and symbolized by such Trademarks; and
WHEREAS, the parties to the Security Agreement contemplate and intend
that, if an Event of Default (as defined in the Guaranty Agreement) shall occur
and be continuing, the Bank shall have all rights of the Company in and to the
Trademarks and the goodwill of the business of the Company associated with and
symbolized by the Trademarks as may be necessary or proper in order to enable
the Bank, as foreclosing secured party, to continue such business of the Company
or, following such foreclosure, to transfer to a purchaser all such rights as
may be necessary or proper to enable such purchaser to continue such business of
the Company;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties reconfirm the terms of
the Security Agreement, as if set forth fully herein, and acknowledge that the
Bank has a security interest in the Trademarks listed on Schedule A hereto,
together with the goodwill of the business associated with and symbolized by
such Trademarks; as security for the Obligations (as defined in the Security
Agreement), the Company hereby collaterally assigns to the Bank, and grants a
security interest to the Bank in and to, all of the Company's right, title and
interest in and to said Trademarks and the goodwill of the business associated
therewith; the Company agrees that it will not sell or assign any of the
Trademarks without the prior written consent of the Bank; and the Company and
the Bank request that the Commissioner of Patents and Trademarks record this
document with respect to the Trademarks.
The Company hereby appoints the Bank as the Company's attorney-in-fact
(with full power of substitution and resubstitution) with the power and
authority, after the occurrence and during the continuance of any Event of
Default (as defined in the Letter Agreement), to execute and deliver, in the
name and on behalf of the Company, and to cause the recording of all such
further assignments and other instruments as the Bank may deem necessary or
desirable in order to carry out the intent of the Security Agreement and this
Security Agreement (Trademarks).
<PAGE>
The Company agrees that all third parties may conclusively rely on any such
further assignment orother instrument, so executed, delivered and recorded by
the Bank (or the Bank's designee in accordance with the terms hereof) and on the
statements made therein.
STAR MEDICAL TECHNOLOGIES, INC. FLEET NATIONAL BANK
By: /s/ Joseph P. Caruso By: /s/ Lucie Burke
------------------------- -----------------------------
Name: Joseph P. Caruso Its: Vice President
Title: Vice President of Finance
COMMONWEALTH OF MASSACHUSETTS )
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me the above-named JOSEPH P. CARUSO,
the VICE PRESIDENT OF FINANCE of Star Medical Technologies, Inc., and stated
that he/she executed the foregoing instrument under the authority of said
corporation's Board of Directors and acknowledged the foregoing instrument to be
the free act and deed of said corporation.
WITNESS my hand and seal this 16th day of November, 1998.
/s/ Marianne Barrett
----------------------------
Notary Public
My commission expires:
November 19, 2004
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT (TRADEMARKS)
Marks with Federal Registration
- -------------------------------
<TABLE>
<S> <C> <C>
Marks Registration No./Reg. Date Use
- ----- -------------------------- ---
OPTIPULSE 2,078,051/July 8, 1997 Medical lasers
Marks with Pending Applications
- -------------------------------
Marks Serial No./Filing Date Use
- ----- ---------------------- ---
STARLIGHT 75-181,035/Oct. 15, 1996 Lasers and accessories
thereof for dermatological use
</TABLE>
BONUS AGREEMENT
Dated: December ___, 1998
Star Medical Technologies, Inc. (the "Company"), Medical Technologies
Acquisition, Inc. ("Merger Sub"), Coherent, Inc. ("Coherent"), Palomar Medical
Technologies, Inc. ("Palomar"), Dr. Robert E. Grove, Dr. James Z. Holtz and Dr.
David C. Mundinger are parties to that certain Agreement and Plan of
Reorganization (the "Agreement") dated as of December ___, 1998.
By executing this Bonus Agreement, Palomar hereby agrees to pay to the
individual employees of the Company listed on Schedule A hereto (and subject to
the withholding specified on such schedule), at the Closing (as defined in the
Agreement) an aggregate amount of $950,000, provided that Drs. Grove and Holtz
certify to Palomar as of the Closing that the Company has been able to produce
the cumulative number of units through the month ending prior to Closing set
forth opposite such month on the shipment forecast below (the "Requisite
Units"). If both (a) the certification provided for in the previous sentence has
not been provided, and (b) the Company has not produced and shipped (or is not
ready to ship, as the case may be) the Requisite Units, then Palomar shall pay
pro rata to the persons listed on Schedule A an amount equal to $950,000 times a
fraction, the numerator of which is equal to the cumulative number of units
shipped through the month ending prior to Closing plus the total number of units
in finished goods at the end of the month ending prior to Closing, and the
denominator of which is equal to the cumulative number of units in the shipment
forecast through the month ending prior to Closing. If the amount due hereunder
is less than $475,000, then no payments will be due hereunder, and in no case
shall the amount paid be in excess of $950,000.
Month Shipment Forecast (Units)
January 20
February 20
March 45
The parties hereto further agree and acknowledge that it is a condition
to the enforceability of that certain Power of Attorney and Proxy of even date
with the Agreement that the payments due under this Bonus Agreement are made at
the Closing as required herein.
[REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, Palomar, Company, Dr. Grove and Dr. Holtz have duly
executed this Bonus Agreement, as of the date and year first above written.
"PALOMAR" "COMPANY"
PALOMAR MEDICAL TECHNOLOGIES, INC. STAR MEDICAL TECHNOLOGIES, INC.
By: By:
----------------------------- ---------------------------
Title: Title:
- --------------------------------- -------------------------------
Robert E. Grove James Z. Holtz
[COHERENT LETTERHEAD]
February 1, 1999
Mr. Louis P. Valente
Chief Executive Officer
Palomar Medical Technologies, Inc.
45 Hartwell Avenue
Lexington, MA 02173
Dear Dan:
This letter is to confirm the agreement between Coherent, Inc.
("Coherent") and Palomar Medical Technologies, Inc. ("Palomar") relating, to the
Sales Agency, Development and License Agreement dated November 17, 1998 ("Sales
Agency Agreement") pending the Closing of the Agreement and Plan of
Reorganization dated as of December 7, 1998 ("Agreement and Plan of
Reorganization") as follows:
1. Effective from January 20, 1999 until the first to occur of (i) the
satisfaction of all of Coherent's closing conditions set forth in Section 6.2
(except for Section 6.2(i)) (the "Closing Conditions") of the Agreement and Plan
or Reorganization or (ii) termination of the Agreement and Plan of
Reorganization, Coherent hereby consents to the appointment of other sales
agents and/or distributors for Palomar's ruby laser based hair removal products.
As consideration for Coherent waiving- its exclusive rights to market and sell
these products in accordance with the terms of the Sales Agency Agreement,
Palomar agrees to pay Coherent S2,739.73 per day between January 20, 1999 and
the first to occur of satisfaction of all Closing- Conditions or termination of
the Agreement and Plan of Reorganization. This amount shall be paid at Closing
by a deduction in the Merger Consideration, or if the Closing, does not occur,
within 15 days of termination of the Agreement and Plan of Reorganization. If
the Closing does not occur, all such marketing and sales rights shall
exclusively revert back to Coherent unless Coherent agrees with Palomar in
writing to extend this arrangement. In addition, Palomar may also at any time
immediately terminate its obligation to pay Coherent $2,739.73 by notifying
Coherent in writing that exclusive rights to distribute Palomar's ruby laser
based hair removal products are reverting back to Coherent. During the remaining
term of the Sales Agency Agreement, Coherent shall be entitled to its full
commission for any sales of Palomar's ruby laser based hair removal products
occurring after the date of reversion of such exclusive rights to Coherent.
2. Coherent agrees to purchase at least $125,000 of spare parts
relating to the LightSheer at Star's cost. As consideration for such pricing,
Coherent agrees to provide Star with a line of credit up to $750,000. Coherent
shall have the right to purchase up to $250,000 of LightSheer spare parts at
Star's cost. In the event Coherent purchases more
<PAGE>
than $125,000 of such spare parts, the line of credit shall be increased by
$2,000 for every $ 1,000 of purchases in excess of S 125,000. In no event shall
the line of credit exceed $1 million. Any loans under this paragraph shall be
'interest free. Amounts drawn on this line of credit shall be used for Star's
working- capital purposes only. The principal amount shall be due and payable
upon the earlier of the Closing- (in which case Star can decide whether to repay
such amount or have it included as a liability on the Closing Balance Sheet) or
15 days following termination of the Agreement and Plan of Reorganization. Loans
shall be evidenced by a promissory note in substantially the form attached
hereto as Exhibit A.
3. Palomar agrees that the LightSheer EP and LightSheer SP shall be
considered Distributed Products under the Sales Agency Agreement and that
Coherent shall have the exclusive right to market and sell such products
according to the Sales Agency Agreement. In regards to the LightSheer EP and SP
products, we agree as follows:
<TABLE>
<S> <C> <C> <C> <C>
a.The Light Sheer EP will have the following pricing and
commission structure:
Price Coherent Palomar
End-User $125,000 $47,000 $78,000
Distributor $100,000 S22,000 $78,000
b. The LightSheer SP pricing, and commission will be:
Price Coherent Palomar
End-User $105,000 S35,000 $70,000
Distributor $90,000 S20,000 $70,000
</TABLE>
c. Coherent shall not sell these products at prices less than
those quoted above without Palomar's prior approval. In the event that Coherent
sells these products for prices in excess of those quoted above, Coherent's
commission shall be increased by 60% of such excess amount. Notwithstanding the
immediately preceding sentence, Coherent's commission on sales to distributors
of the LightSheer SP shall be $20,000 until the purchase price exceeds $97,000,
at which point it shall be increased by 60% of any excess over $97,000.
d. Coherent agrees not to announce these products prior to
February 1, 1999.
e. in addition to the 95 units already committed for shipment
in January, February and March, 1999, Coherent will buy five demos at $72,000
each.
Terms that are not otherwise defined herein shall have the meaning
assigned to them in the Sales Agency Agreement or the Agreement and Plan of
Reorganization, as applicable.
<PAGE>
If this letter accurately sets forth your understanding of our
agreement, please countersign this letter and return a copy to me at your
earliest convenience.
Sincerely,
/s/ Robert J. Quillinan
------------------------------
Robert J. Quillinan
Executive Vice President & CFO
AGREED AND ACCEPTED
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
----------------------
Louis P. Valente
Chief Executive Officer
Date: January 1999
<PAGE>
EXHIBIT A
PROMISSORY NOTE
Santa Clara, California
January ___, 1999
FOR VALUE RECEIVED, the undersigned, Star Medical Technologies, Inc., a
California corporation ("Star"), promises to pay to Coherent, Inc., a Delaware
corporation ("Coherent"), or order, the principal sum of S . No interest shall
accrue on the outstanding principal balance. The principal amount shall be due
and payable on or before the earlier of (1) the closing, of the Agreement and
Plan of Reorganization between Coherent, PMTI and others dated December 7, 1998
(either by payment directly to Coherent or having- the principal amount included
as a liability on the Closing Balance Sheet) or (ii) 15 days following
termination of such Agreement and Plan of Reorganization.
Should the principal not be paid in a timely manner, interest shall
accrue on the outstanding principal and interest balance at the lesser of 1 V2%
per month or the highest rate permitted by law.
Star 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 Star 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.
Star 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 Star 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 fall force and effect.
STAR MEDICAL TEC@LNOLOGIES, INC.
By
-----------------------------
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Palomar Medical Technologies, Inc. Delaware corporation
Palomar Electronics Corporation Delaware corporation
Palomar Medical Products, Inc. Delaware corporation
Star Medical Technologies, Inc. California corporation
Esthetica Partners, Inc. Delaware corporation
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, 33-97710,
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, 333-42129, 333-55821, 333-57261, 333-57403, and
333-70391.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000881695
<NAME> Palomar Medical Technologies, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,874,718
<SECURITIES> 0
<RECEIVABLES> 10,302,121
<ALLOWANCES> 364,000
<INVENTORY> 5,516,342
<CURRENT-ASSETS> 18,285,569
<PP&E> 7,709,986
<DEPRECIATION> 4,395,899
<TOTAL-ASSETS> 23,525,914
<CURRENT-LIABILITIES> 24,289,206
<BONDS> 3,150,000
0
69
<COMMON> 705,240
<OTHER-SE> (7,168,772)
<TOTAL-LIABILITY-AND-EQUITY> 23,525,914
<SALES> 44,514,057
<TOTAL-REVENUES> 44,514,057
<CGS> 23,050,834
<TOTAL-COSTS> 23,050,834
<OTHER-EXPENSES> 21,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,290,905
<INCOME-PRETAX> (9,967,243)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,967,243)
<DISCONTINUED> (2,624,180)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,591,423)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
