FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-22340
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Exact name of issuer as specified in its charter)
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Delaware 04-3128178
- ------------------------------------------------------------------ --------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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45 Hartwell Avenue, Lexington, Massachusetts 02421
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(Address of principal executive offices)
(781) 676-7300
-----------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
As of April 30, 1999, 10,308,351 shares of common stock, $.01 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
-- --
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Condensed Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statement of Stockholders' Deficit 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
RISK FACTORS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
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<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
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December 31, March 31,
1998 1999
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $1,874,718 $1,975,049
Accounts receivable, net 9,938,121 10,650,593
Inventories 5,416,342 6,180,973
Other current assets 1,056,388 669,639
--------------- ---------------
Total current assets 18,285,569 19,476,254
--------------- ---------------
Property and Equipment, at Cost, Net 3,314,087 2,553,800
--------------- ---------------
Other Assets:
Cost in excess of net assets acquired, net 1,699,983 1,549,392
Deferred financing costs 58,923 31,148
Other noncurrent assets 167,352 143,122
--------------- ---------------
Total other assets 1,926,258 1,723,662
--------------- ---------------
$23,525,914 $23,753,716
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of long-term debt $6,290,041 $6,770,625
Accounts payable 6,553,745 6,070,593
Accrued liabilities 10,301,624 10,914,851
Current portion of deferred revenue 1,143,796 1,203,162
--------------- ---------------
Total current liabilities 24,289,206 24,959,231
--------------- ---------------
Net Liabilities of Discontinued Operations 1,680,171 1,680,171
--------------- ---------------
Long-Term Debt, Net of Current Portion 3,150,000 2,200,000
--------------- ---------------
Deferred Revenue, Net of Current Portion 870,000 368,339
--------------- ---------------
Stockholders' Deficit:
Preferred stock, $.01 par value-
Authorized - 1,500,000 shares
Issued and outstanding -
6,993 shares and 6,653 shares
at December 31, 1998 and March 31, 1999, respectively 69 66
Common stock, $.01 par value-
Authorized - 45,000,000 shares
Issued - 10,074,864 shares and 10,355,790 shares
at December 31, 1998 and March 31, 1999, respectively 100,747 103,556
Additional paid-in capital 161,337,926 161,972,714
Accumulated deficit (166,263,346) (165,891,502)
Less: Treasury stock - (49,285 shares at cost) (1,638,859) (1,638,859)
--------------- ---------------
Total stockholders' deficit (6,463,463) (5,454,025)
--------------- ---------------
$23,525,914 $23,753,716
=============== ===============
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-1-
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
March 31,
1998 1999
------------------- ---------------------
Revenues $7,067,405 $13,478,609
Cost of Revenues 6,336,245 4,969,976
------------------- ---------------------
Gross profit 731,160 8,508,633
------------------- ---------------------
Operating Expenses
Research and development 2,165,000 2,125,983
Sales and marketing 2,503,115 4,098,422
General and administrative 2,843,859 1,672,254
------------------- ---------------------
Total operating expenses 7,511,974 7,896,659
------------------- ---------------------
(Loss) income from operations (6,780,814) 611,974
Interest Expense, net (392,833) (165,250)
Other Income 334,965 22,346
------------------- ---------------------
Net (Loss) Income from Continuing Operations $(6,838,682) $469,070
=================== =====================
Basic and Diluted Net (Loss) Income Per Common Share $(1.02) $0.04
=================== =====================
Weighted Average Number of
Common Shares Outstanding 7,413,316 10,194,145
=================== =====================
</TABLE>
-2-
The accompanying notes are in integral part
of these consolidated financial statements
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Unaudited)
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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, 1998 6,993 $69 10,074,864 100,747 (49,285) ($1,638,859)
Issuance of common stock for 1998 employer 401(k)
matching contribution - - 32,561 326 - -
Conversion of preferred stock (340) (3) 74,905 749 - -
Conversion of convertible debentures - - 170,723 1,707 - -
Redemption of preferred stock - - - - - -
Issuance of common stock for Employee
Stock Purchase Plan - - 2,737 27 - -
Costs incurred related to the issuance of common
stock - - - - - -
Preferred stock dividends - - - - - -
Net income - - - - - -
=======================================================================
Balance, March 31, 1999 6,653 $66 10,355,790 $103,556 (49,285) ($1,638,859)
=======================================================================
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Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
-----------------------------------------------
Balance, December 31, 1998 161,337,926 ($166,263,346) (6,463,463)
Issuance of common stock for 1998 employer 401(k)
matching contribution 206,333 - 206,659
Conversion of preferred stock 62,665 - 63,411
Conversion of convertible debentures 1,017,021 - 1,018,728
Redemption of preferred stock (557,417) - (557,417)
Issuance of common stock for Employee
Stock Purchase Plan 12,186 - 12,213
Costs incurred related to the issuance of common
stock (106,000) - (106,000)
Preferred stock dividends - (97,226) (97,226)
Net income - 469,070 469,070
===============================================
Balance, March 31, 1999 $161,972,714 ($165,891,502) ($5,454,025)
===============================================
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-3-
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31,
1998 1999
--------------- -------------
Cash Flows from Operating Activities
Net loss $(6,838,682) $469,070
Less: net loss from discontinued operations - -
--------------- -------------
Net loss from continuing operations (6,838,682) 469,070
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities-
Depreciation and amortization 672,352 444,772
Unrealized gain on marketable securities (332,965) -
Changes in assets and liabilities,
Net sale of marketable trading securities 485,479 -
Accounts receivable (1,630,322) (712,472)
Inventories 2,478,141 (764,631)
Other current assets (119,145) 386,749
Accounts payable (367,120) (483,152)
Accrued expenses 1,460,185 982,914
Deferred revenue (250,000) (442,295)
--------------- -------------
Net cash used in operating activities (4,442,077) (119,045)
--------------- -------------
Cash Flows from Investing Activities
Purchases of property and equipment (180,656) (191,651)
Increase in other assets (492,227) 24,230
Increase in notes receivable (86,818) -
--------------- -------------
Net cash used in investing activities (759,701) (167,421)
--------------- -------------
Cash Flows from Financing Activities
Redemption of convertible debentures (2,196,667) -
Net proceeds from the issuance of notes payable and advances from 2,753,341 480,584
distributor
Proceeds from issuance of common stock 6,840,000 -
Proceeds from exercise of warrants, stock options
and Employee Stock Purchase Plan 18,609 12,213
Costs incurred related to issuance of common stock (106,000)
Redemption of preferred stock, including accrued dividends of $437,850 in (2,673,850) -
--------------- -------------
Net cash provided by financing activities 4,741,433 386,797
--------------- -------------
Net (decrease) in cash and cash equivalents (460,345) 100,331
Net cash (used in) provided by discontinued operations 1,315,073 -
Cash and cash equivalents, beginning of the period 3,003,300 1,874,718
--------------- -------------
Cash and cash equivalents, end of the period $3,858,028 $1,975,049
=============== =============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $687,984 $148,149
=============== =============
Supplemental Disclosure of Noncash Financing and Investing Activities:
Conversion of convertible debentures and related accrued
interest, net of financing fees $3,257,151 $1,018,728
=============== =============
Conversion of preferred stock $390,062 $63,411
=============== =============
Issuance of common stock for 1997 and 1998 employer 401(k)
matching contribution $166,674 $206,659
=============== =============
Redemption of preferred stock $ - $557,417
=============== =============
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-4-
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
and its subsidiaries (the "Company" or "Palomar") believes that the quarterly
information presented includes all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation in accordance with generally
accepted accounting principles. The accompanying financial statements and notes
should be read in conjunction with the Company's Form 10-K as amended, as of and
for the year ended December 31, 1998.
On December 7, 1998, the Company entered into a Agreement and Plan of
Reorganization (the "Agreement") with Coherent, Inc. ("Coherent") to sell all of
the issued and outstanding common stock of Palomar's Star Medical Technologies,
Inc. subsidiary ("Star"). This sale was approved by a majority of the
stockholders of Palomar on April 21, 1999 and on April 27, 1999, the Company
completed the sale of Star to Coherent. The total purchase price for all of the
issued and outstanding capital stock of Star was $65 million, paid in cash. The
purchase price was paid to the shareholders of Star in proportion to their
holdings of Star capital stock. On the date of sale, Palomar owned 82.46% of
Star. Palomar received net proceeds of $49,686,070, of which $3,254,908 will be
held in escrow for one year as security for any claims which Coherent may have
under the Agreement. In addition, under the terms of the Agreement, the Company
will receive an ongoing royalty of 7.5% from Coherent on the sale of any
products by Coherent that incorporate certain patented technology or use certain
patented methods currently licensed by the Company on an exclusive basis from
Massachusetts General Hospital.
On April 21, 1999, a majority of the Company's stockholders' approved
an amendment to the Company's Certificate of Incorporation to effect a plan of
recapitalization that resulted in a one-for-seven reverse split of the Company's
common stock and that reduced the Company's authorized capital stock to
45,000,000 shares of common stock and 1,500,000 shares of preferred stock. All
share and per share amounts of common stock for all periods presented have been
retroactively adjusted to reflect the reverse stock split.
2. INVENTORIES
Inventories are stated at lower of cost (first-in, first-out)
or market. Work in process and finished goods inventories consist of material,
labor and manufacturing overhead and consist of the following:
December 31, March 31,
1998 1999
---------------- ----------------
Raw materials $2,478,289 $2,097,311
Work-in-process 1,330,822 1,960,169
Finished goods 1,607,231 2,123,493
---------------- ----------------
$5,416,342 $6,180,973
================ =================
-5-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
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December 31, March 31,
1998 1999
--------------- ----------------
Machinery and equipment $6,022,320 $6,066,509
Furniture and fixtures 1,120,450 1,252,722
Leasehold improvements 567,216 582,406
--------------- ----------------
7,709,986 7,901,637
Less: Accumulated depreciation
and amortization 4,395,899 5,347,837
--------------- ----------------
$3,314,087 $2,553,800
=============== ================
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4. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per share was determined by dividing net income
(loss) by the weighted average shares of common stock outstanding during the
year. Diluted net income (loss) per share is the same as basic net income (loss)
per share because the Company's potentially dilutive securities, primarily stock
options, warrants, redeemable preferred stock and convertible debentures are
antidilutive.
The Company's net income (loss) per common share from continuing
operations for the three months ended March 31, 1998 and 1999 is as follows:
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Three Months Ended
March 31,
1998 1999
--------------- -------------
Net (loss) income $(6,838,682) $469,070
Preferred stock dividends (744,821) (97,226)
--------------- -------------
Adjusted net (loss) income $(7,583,503) $371,844
=============== =============
Basic and diluted net (loss) income
per common share $(1.02) $0.04
=============== =============
Weighted average number of
common shares outstanding 7,413,316 10,194,145
=============== =============
</TABLE>
As of March 31, 1998 and 1999, 3,275,514 and 3,868,613 weighted average
common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding as they were antidilutive.
-6-
<PAGE>
PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE
Notes payable consist of the following:
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December 31, March 31,
1998 1999
--------------- ----------------
Convertible debentures $2,150,000 $1,200,000
Note payable issued in connection with guaranty on behalf of discontinued subsidiary 2,290,041 2,020,625
Revolving line of credit with a bank 1,000,000 1,000,000
Short-term notes payable to Coherent 4,000,000 4,750,000
--------------- ----------------
9,440,041 8,970,625
Less - current maturities 6,290,041 6,770,625
--------------- ----------------
$3,150,000 $2,200,000
=============== ================
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(a) Convertible Debentures
During the first quarter of 1999, the Company converted $1,018,728 of
its 6%, 7% and 8% convertible debentures due March 31, 2002 , including $89,139
of accrued interest, into 170,723 shares of the Company's common stock.
(b) Short-Term Notes Payable
Through March 31, 1999, the Company's Star subsidiary borrowed a total
of $4,750,000 from Coherent in the form of notes payable. These notes accrued
interest at 8.5% per annum andwere collaterlized by Star's inventory. Coherent
assumed this debt in connection with its purchase of all of the issued and
outstanding common stock of Star on April 27, 1999. See Note 1.
(c) Revolving Line of Credit
The Company has a $10,000,000 revolving line of credit with a bank.
This line of credit matures on March 31, 2000 and bears interest at the bank's
prime rate (7.75% at March 31, 1999). Borrowings under this line of credit are
secured by substantially all assets of the Company and are limited to 80% of
qualified accounts receivable. A director of Palomar has personally guaranteed
all borrowings under this line of credit. The Company borrowed an additional
$500,000 in April 1999 and repaid all amounts outstanding under this line of
credit on April 27, 1999.
(d) Note Payable Issued In Connection With Guaranty On Behalf Of
Discontinued Subsidiary
In connection with the divestiture of one of its discontinued
operations, the Company entered into a Loan and Subscription Agreement with a
bank for $3,233,000. This promissory note represents the settlement of amounts
owed to the bank by Palomar's former Comtel, Inc. subsidiary and by Palomar in
connection with a guarantee from Palomar in favor of the bank. Principal and
interest payments were being made over twenty-four months, beginning December
31, 1997, with interest accruing at the bank's prime rate (7.75% at March 31,
1999) plus 2.25%. This promissory note was collateralized by 464,286 shares of
the Company's common stock, which was held in escrow, not entitled to vote and
not considered outstanding. On May 3, 1999, the Company paid off the balance of
this note (totaling $1,364,379), and the shares of the Company's common stock
are being released from escrow and returned to the Company.
-7-
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PALOMAR MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STOCKHOLDERS' DEFICIT
(a) Convertible Preferred Stock
During the first quarter of 1999, the Company converted 340 shares of
Series G Preferred Stock and accrued dividends and interest of $63,411 into
74,905 shares of the Company's common stock. The Company also agreed to redeem
403 shares of Series G Preferred Stock for $557,417, including $154,838 of
accrued dividends and interest, five days after the completion of the sale of
Star to Coherent. The Company paid this obligation on May 3, 1999. The Company
has accrued this amount on the accompanying consolidated balance sheet as of
March 31, 1999.
(b) Options to Purchase Common Stock
During the three months ended March 31, 1999, the Company granted
options to purchase 2,143 shares of the Company's common stock at an exercise
price of $10.50 per share. No options were exercised during the three months
ended March 31, 1999. During the three months ended March 31, 1999 options to
purchase 21,057 shares of the Company's common stock at $10.50 per share
expired.
(c) Warrants to Purchase Common Stock
During the three months ended March 31, 1999, warrants to purchase
88,917 shares of the Company's common stock at exercise prices ranging from
$10.00 to $72.625 per share expired. No warrants were granted or exercised
during the three months ended March 31, 1999.
(d) Reserved Shares
As of March 31, 1999, the Company had reserved shares of its common
stock for the following:
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March 31, 1999
-------------------
Convertible debentures 288,805
Stock option plans 958,236
Warrants 2,715,308
Employee 401(k) plan 46,694
Employee stock purchase plan 57,179
Convertible preferred stock 400,651
===================
Total 4,466,873
===================
</TABLE>
Substantially all of the reserved shares reflected above are
exercisable at prices in excess of the current market price of the Company's
common stock.
7. NET LIABILITIES OF DISCONTINUED OPERATIONS
On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 shares of the common stock of Nexar Technologies, Inc. ("Nexar") to
GFL Advantage Fund Limited ("GFL") for $2,000,000. Under the terms of the
Exchange Agreement, Palomar guaranteed GFL a minimum selling price of $5.00 a
share with respect to 400,000 shares of the Nexar common stock over a two year
time period. The Company therefore would have been obligated to pay GFL on
January 1, 2000 the difference between $5.00 and the price at which GFL sold the
shares of Nexar common stock. As of March 31, 1999, the deferred liability
related to this transaction totaled $1,680,171 and represented the total amount
due to GFL after GFL sold all of its 400,000 shares of Nexar common stock. The
Company paid this obligation on May 3, 1999.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(a) Overview
On December 7, 1998, the Company entered into the Agreement with
Coherent to sell all of the issued and outstanding common stock of Star. The
total purchase price for all of the issued and outstanding capital stock of Star
was $65 million, paid in cash. The purchase price was paid to the shareholders
of Star in proportion to their holdings of Star capital stock. This sale was
approved by a majority of the stockholders of Palomar on April 21, 1999, and on
April 27, 1999, Palomar completed the sale of Star to Coherent. On the date of
the sale, Palomar owned 82.46% of Star. Palomar received net proceeds of
$49,686,070, of which $3,254,908 will be held in escrow for one year as security
for any claims which Coherent may have under the Agreement. In addition, under
the terms of the Agreement, the Company will receive an ongoing royalty of 7.5%
from Coherent on the sale of any products by Coherent that incorporate certain
patented technology or use certain patented methods currently licensed by the
Company on an exclusive basis from Massachusetts General Hospital.
As a result of the consummation of the transaction discussed above, the
Company anticipates that revenues will decline significantly in the near term
because Palomar will no longer be selling the LightSheer(TM) diode laser
manufactured by Star. For the three months ended March 31, 1999 and 1998 gross
revenues associated with Star's LightSheer(TM) diode laser comprised 85.5% and
12.4% of the Company's total revenues, respectively. Accordingly, the Company
expects to incur net losses from operations over the next few quarters. The
successful introduction and marketing of new products will be critical to the
Company's long-term success, since a significant portion of the Company's
revenue base previously generated from Star's LightSheer(TM) laser will need to
be replaced with revenues from other laser products, including the Palomar
E2000TM hair removal laser introduced in March of 1999 and other products
currently in development. 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 also
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.
The accompanying pro forma consolidated condensed balance sheet as of
March 31, 1999 assumes that Palomar sold Star to Coherent on the last reported
balance sheet date, March 31, 1999. The accompanying pro forma consolidated
condensed statement of operations for the three months ended March 31, 1999
assumes the sale of Star took place on January 1, 1999, the beginning of
Palomar's fiscal year ended December 31, 1999. The pro forma consolidated
condensed statement of operations does not include the effect of the gain from
Palomar's sale of Star to Coherent.
The accompanying pro forma condensed information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations which would actually have been reported had
the sale of Star occurred during the periods presented, or which may be reported
in the future.
-9-
<PAGE>
The accompanying pro forma consolidated condensed financial statements
should be read in conjunction with the historical financial statements and
related notes thereto for Palomar.
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Three Months Ended
March 31, 1999
Pro Forma
Pro Forma Condensed Statement of Operations: Unaudited
------------------------
Revenues $ 2,357,048
Cost of revenues 1,662,817
------------------------
Gross profit 694,231
Operating expenses 2,752,278
------------------------
Loss from operations (2,058,047)
Interest expense, net (82,625)
Other income 22,346
------------------------
Net loss $(2,118,326)
Basic and diluted net loss per common share: $(0.22)
========================
Weighted average number of
common shares outstanding 10,194,145
========================
March 31,1999
Pro Forma
Pro Forma Condensed Balance Sheet Unaudited
------------------------
Assets:
Cash and cash equivalents $48,046,595
Other current assets 9,100,596
Property and equipment, net 1,652,382
Other assets 962,190
-----------------------
Total assets $59,761,763
=======================
Liabilities and Stockholders' Equity:
Current liabilities $16,182,028
Other liabilities 4,248,510
Total stockholders' equity 39,331,225
-----------------------
Total liabilities and stockholders' equity $59,761,763
=======================
</TABLE>
-10-
<PAGE>
(b) Results of Operations.
(i) REVENUES AND GROSS PROFIT: Three Months Ended March 31, 1999,
Compared to the Three Months Ended March 31, 1998
For the three months ended March 31, 1999, the Company's revenues
increased to $13.5 million, as compared to $7.1 million for the three months
ended March 31, 1998. The increase in the Company's revenues of $6.4 million, or
91% from the three months ended March 31, 1998, was mainly due to additional
sales volume of $10.2 million associated with the introduction of the
LightSheer(TM) diode laser, partially offset by a decrease in revenue of
approximately $3.8 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 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. Palomar
introduced its second generation long pulse ruby laser for hair removal, the
Palomar E2000TM, during the first quarter of 1999 to permit more rapid treatment
of large areas of the body. In March of 1999, the Company obtained FDA clearance
to market and sell its Palomar E2000TM laser system in the United States for
"permanent hair reduction." The Company generated revenues of approximately $1.3
million from the initial shipments of the Palomar E2000TM in the first quarter
of 1999.
Gross profit for the three months ended March 31, 1999 was
approximately $8.5 million (63% of revenues) compared to $731,000 (10% of
revenues) for the three months ended March 31, 1998. The increase in gross
profit and gross profit percentage was due to sales of the LightSheer(TM) diode
laser system. This laser system provided a significantly higher gross profit
than the Company's EpiLaser(R) laser and other cosmetic products. The Company
anticipates that its gross profit percentage from sales of the Palomar E2000TM
will be less than the gross profit from its former LightSheer(TM) product,
unless and until the Palomar E2000TM achieves volume production and
manufacturing efficiencies.
(ii) OPERATING AND OTHER EXPENSES: Three Months Ended March 31,
1999, Compared to Three Months Ended March 31, 1998
Research and development costs decreased to $2.1 million for the three
months ended March 31, 1999, from $2.2 million for the three months ended March
31, 1998. Research and development expenses as a percentage of revenue totaled
16% for the three months ended March 31, 1999 and 31% for the three months ended
March 31, 1998. The continued spending on research and development reflects the
Company's commitment to research and development for devices and delivery
systems for cosmetic and 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. However,
research and development as a percentage of revenues will increase until the
Company achieves higher sales volume from its recently introduced Palomar
E2000TM laser system.
Selling and marketing expenses increased to $4.1 million (30% of
revenues) for the three months ended March 31, 1999, from approximately $2.5
million (35% of revenues) for the three months ended March 31, 1998. The
increase in selling and marketing expenses is attributable to higher revenue
volumes attained and corresponding higher selling expenses paid to Coherent in
the first quarter of 1999 as compared to the first quarter of 1998. The decrease
in selling and marketing expenses as a percentage of revenues is a result of the
Company's introduction of its Palomar E2000TM laser system during the first
quarter of 1999, which is being sold through new distribution channels. These
new distribution channels include direct sales by the Company and distribution
through Continuum Biomedical, a distributor of medical products, and the
associated selling and marketing expenses have to date been less than the
commissions earned by Coherent, the Company's previous distributor. The Company
also will consider establishing its own direct sales force to compliment these
sales channels. The Company anticipates that, in comparison to the commissions
previously paid to Coherent as a percentage of net revenues, its future selling
and
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marketing costs as a percentage of net revenues will decrease. The Company will
also consider selling entire product lines and/or technology to others, as in
the case of the sale of Star to Coherent.
General and administrative expenses decreased to $1.7 million (12% of
revenues) for the three months ended March 31, 1999, as compared to $2.8 million
(40% of revenues) for the three months end ended March 31, 1998. This decrease
for the three months ended March 31, 1999 is attributable to the Company's
restructuring and consolidation of administrative functions related to the
Company's Esthetica Partners, Inc. (formerly Cosmetic Technology International,
Inc.) and Palomar Medical Products, Inc. subsidiaries and general corporate
costs that resulted in respective reductions of approximately $500,000, $300,000
and $450,000 compared to the three months ended March 31, 1998. These reductions
were offset by an increase of $150,000 for general and administrative expenses
incurred at the Company's Star subsidiary to support its successful introduction
of the LightSheer(TM) laser. The Company anticipates general and administrative
expense will decrease slightly in the future as a result of the Star sale,
although it expects such expenses to increase as a percentage of revenues as
revenues decline in the near term as the result of the Star sale.
Interest expense decreased to $165,000 for the three months ended March
31, 1999, from $393,000 for the three months ended March 31, 1998. This 58%
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 1999 as compared to 1998. As a
result of the sale of Star, which generated $49.6 million in cash, the Company
anticipates that interest expense will decline significantly because it utilized
a portion of the proceeds to pay down debt during the second quarter of 1999.
The balance of the funds will be invested in high-grade corporate and government
notes and bonds to fund future operations and research and development efforts.
Accordingly, the Company will generate additional interest income for the
foreseeable future.
Other income decreased to $22,000 for the three months ended March 31,
1999. This amount compares to $335,000 for the three months ended March 31,
1998. Other income for the three months ended March 31, 1998 consisted primarily
of trading gains associated with selling the Company's investment in The
American Materials & Technologies Corporation.
(c) Liquidity and Capital Resources
On December 7, 1998, the Company entered into the Agreement with
Coherent to sell all of the issued and outstanding common stock of Star. The
total purchase price for all of the issued and outstanding capital stock of Star
was $65 million, paid in cash. The purchase price was paid to the shareholders
of Star in proportion to their holdings of capital stock of Star. This sale was
approved by a majority of the stockholders of Palomar on April 21, 1999, and on
April 27, 1999, Palomar completed the sale of Star to Coherent. On the date of
the sale, Palomar owned 82.46% of Star. Palomar received net proceeds of
$49,686,070, of which $3,254,908 will be held in escrow for one year as security
for any claims which Coherent may have under the Agreement. In addition, under
the terms of the Agreement, the Company will receive an ongoing royalty of 7.5%
from Coherent on the sale of any products by Coherent that incorporate certain
patented technology or use certain patented methods currently licensed by the
Company on an exclusive basis from Massachusetts General Hospital.
The Company utilized a portion of the proceeds of the Star sale to pay
down debt during the second quarter of 1999. The balance of the funds will be
invested in high-grade corporate and governmental notes and bonds to fund future
operations and research and development efforts. Accordingly, the Company will
generate additional interest income for the foreseeable future.
The Company is a holding company with no significant operations.
Operations are carried out at the subsidiary level. To date, the Company's
operating subsidiaries have required cash advances from the Company to fund
their operations. As of March 31, 1999, the Company had $2.0 million in cash and
cash equivalents. With the proceeds from the Star sale, the Company has a strong
financial position to meet its ongoing cash flow requirements and fund expected
operating losses at its subsidiaries in the near term.
As of March 31, 1999, the Company's accounts receivable totaled $10.7
million, as compared to $9.9 million as of December 31, 1998. The amount at
March 31, 1999 includes approximately $2.0 million of accounts receivable
generated from cosmetic laser product revenues other than sales of Star's
LightSheer(TM) diode laser. The
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Company's allowance for doubtful accounts totaled approximately $385,000 as of
March 31, 1999, compared to $364,000 as of December 31, 1998.
As of March 31, 1999, accounts payable totaled approximately $6.1
million as compared to $6.6 million as of December 31, 1998. This decrease of
$500,000 is principally due to the timing of additional purchases of inventory
for the manufacture of the LightSheer and Palomar E2000(TM) laser systems.
The Company anticipates that capital expenditures for the remainder of
1999 will total approximately $750,000, consisting primarily of machinery,
equipment and computers and peripherals. The Company expects to finance these
expenditures with cash on hand and equipment leasing lines.
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 March 31, 1999). 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. The
Company borrowed an additional $500,000 during April of 1999. The Company repaid
all amounts outstanding under this line of credit ($1,500,000) on April 27,
1999.
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 were collateralized by Star's
inventory. As of March 31, 1999, the total amount outstanding under this loan
agreement was $4.8 million. Coherent assumed this debt in connection with its
purchase of all of the issued and outstanding common stock of Star on April 27,
1999. See Note 5(b).
(d) Material Uncertainties.
(i) Year 2000 Issues
During 1998 and 1999 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)
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At March 31, 1999, 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 March 31, 1999
the Company has spent approximately $40,000.
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 result from events such as supply
chain disruptions. The Company expects its contingency plans to be complete by
June 1999.
(ii) Nasdaq Stock Market Listing
The Company was notified by the Nasdaq Stock Market ("Nasdaq") that for
continued listing on The Nasdaq SmallCap Market the Company had to meet Nasdaq's
minimum bid price requirement of $1.00 per share. Because the Company's stock
price fell below $1.00 for a 30 day trading period between August 28 and October
9, 1998, it became 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 were not in compliance with the minimum bid price
requirement by that date. As a result of the one-for-seven reverse split of its
common stock implemented on May 10, 1999, the Company is now in compliance with
the minimum bid price requirement.
In addition, prior to the completion of the Star sale, the Company
received another letter from Nasdaq on April 9, 1999 asking the Company to
address Nasdaq's concern about the Company's receipt of a report from its
auditors in connection with the Company's Report on Form 10-K for the year ended
December 31, 1998 that contained a "going concern" qualification. The Company
informed Nasdaq that the Company's auditors would reissue their report without
this qualification following the sale of Star, and subsequently provided Nasdaq
with a copy of the Company's amended Report on Form 10-K/A-1 for the year ended
December 31, 1998 containing the reissued unqualified auditor's report. The
Company believes that it has obviated Nasdaq's concerns, and that it is in
compliance with all of Nasdaq's requirements for continued listing on The Nasdaq
SmallCap Market.
RISK FACTORS
In addition to the other information in this Quarterly Report on Form
10-Q, the following cautionary statements should be considered carefully in
evaluating the Company and its business. Statements contained in this Form 10-Q
that are not historical facts (including, without limitation, statements
concerning financial projections, the financing of future operations, use of
proceeds of the Star sale, maintenance of Nasdaq listing for the Company's
common stock, product gross margins, product developments and improvements,
research and development plans and expenditures, and ^2K issues) 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 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.
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
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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. As a result of the sale of Star to Coherent, 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, as a result of the Star sale, Coherent, our
former exclusive distributor and one of the largest and best financed laser
companies, is now our competitor and we 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 will decrease as a result of the Star sale, 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.
Therefore, as a result of the Star sale, 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.
We could be delisted from Nasdaq.
- --------------------------------------------------------------------------------
On March 18, 1999, Nasdaq held a hearing regarding our continued
listing on The Nasdaq SmallCap Market in light of the fact that our common stock
had traded below Nasdaq's $1.00 minimum bid price requirement for longer than 30
trading days. At the hearing, we volunteered to delist from Nasdaq if we were
not in compliance with the minimum bid price requirement by May 18, 1999. As a
result of our reverse stock split, we regained compliance with the minimum bid
price requirement before that date. In addition, on April 9, 1999, Nasdaq asked
us to address its concern about our receipt of a report from our auditors
containing a "going concern" qualification. Following the Star sale, that
auditor's report was reissued without the qualification. Hence, we believe that
we have obviated Nasdaq's concerns, and are now in compliance with all of
Nasdaq's requirements for continued listing on The Nasdaq SmallCap Market.
However, there can be no assurance that we will remain listed on Nasdaq. The
delisting of our common stock would likely reduce the liquidity of 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.
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 in a timely fashion or at all.
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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 this 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.
Our common stock could be further diluted as the result of outstanding
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. These outstanding 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 medical 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
non-infringing 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.
- --------------------------------------------------------------------------------
Our Second Restated Certificate of Incorporation and our By-laws
contain provisions that could discourage takeover attempts or make more
difficult the acquisition of a substantial block of our common stock. Our
By-laws require a stockholder to provide to the Secretary of the Company advance
notice of business to be brought by such stockholder before any annual or
special meeting of stockholders as well as certain information regarding such
stockholder and others known to support such proposal and any material interest
they may have in the proposed business. These provisions could delay any
stockholder actions that are favored by the holders of a majority of the
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<PAGE>
outstanding stock of the Company until the next stockholders' meeting. In
addition, the Board of Directors is authorized to issue shares of common stock
and preferred stock which, if issued, could dilute and adversely affect various
rights of the holders of common stock and, in addition, could be used to
discourage an unsolicited attempt to acquire control of the Company.
The Company is also subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with in "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless the business combination is approved
in a prescribed manner. The application of Section 203 may limit the ability of
stockholders to approve a transaction that they may deem to be in their best
interests. These provisions of our Second Restated Certificate of Incorporation,
By-laws and the Delaware General Corporation Law could deter certain takeovers
or tender offers or could delay or prevent certain changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over the then current market
prices.
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 partner's ability 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 Part II,
Item 1) 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 after the sale of Star
to Coherent, 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
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<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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PART II
Item 1. 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 clearance 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 later 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 with the Court of Appeals for the Federal Circuit. Selvac subsequently
filed its opening brief on appeal; the Company filed its opposition. Selvac has
filed its reply brief, but the Federal Circuit has not yet set a date for oral
argument 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. (The total disputed
indebtedness is approximately $6.2 million at current exchange rates; the
Asserting Holders' portion of the total is approximately $5.6 million.) 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 resolving this dispute by restructuring the
debentures (whereby Palomar would prepay approximately two-thirds of the total
indebtedness, or about $4.2 million, withdraw its forced conversion, and repay
on a modified schedule the original debt). But there can be no absolute
assurance that all of the debentureholders, including the Asserting Holders, and
the Company will execute the proposed settlement. If the case is returned to the
trial calendar, the Company expects vigorously to contest the claims of the
Asserting Holders, as the Company believes its position in the lawsuit is
correct and that the disputed debt cannot properly be accelerated.
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, its
former chief executive officer and current chief financial officer as
defendants. On March 17, 1999, the Second Amended Class Action Complaint
("Complaint") in Varljen was served upon the Company and its current chief
financial officer. The Complaint alleges that the Company and the former and
current officer 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 and the former and current officer misrepresented the Company's future
prospects, including earnings projections and expected
-19-
<PAGE>
shares outstanding, through their direct disclosures and through disclosures
made by securities analysts and other third parties. The Company and the former
and current officer have filed a motion to dismiss the complaint, asserting all
claims are barred by the statute of limitations, that the complaint does not
meet federal pleading requirements, and that it fails to state a securities
claim. The Company and the former and current officer have also filed a motion
to transfer the case to the District of Massachusetts. Plaintiffs' opposition to
these motions is at present expected to be filed in June 1999. The case is in
its earliest stages, and the Company cannot predict its outcome.
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.
Item 2. Changes in Securities.
----------------------
During the quarter ended March 31, 1999, the following securities were
converted by their accredited investor unaffiliated third party holder for the
number of shares of common stock indicated:
<TABLE>
<S> <C> <C> <C>
Number of Shares
Type of Security Number of Shares of Common Stock Issued
---------------- ---------------- ----------------------
Preferred Stock Series G 340 74,905
</TABLE>
-20-
<PAGE>
Item 3. Defaults upon Senior Securities.
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Not applicable.
Item 5. Other Information.
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
4.1 Common Stock Certificate.
4.2 Certificate of Designation, as filed with the Delaware
Secretary of State on April 21, 1999.
*4.3 Rights Agreement Between Palomar Medical Technologies, Inc.
and American Stock Transfer & Trust Company, dated as of April
20, 1999.
**4.4 Bylaws, as amended.
**4.5 Second Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on January 8, 1999.
10.1 Repurchase Agreement between Palomar Medical Technologies,
Inc. and Advantage Fund Limited dated as of April 6, 1999.
10.2 Mutual Release, Consent and Settlement Agreement between
Palomar Medical Technologies, Inc. and Electronic Packaging
Interconnect Corporation dated as of April 16, 1999.
27.1 Financial Data Statement, Restated, for the period ended March
31, 1998.
* Previously filed as an exhibit to Form 8-K, filed on April 21, 1999 and
incorporated herein by reference.
** Previously filed as an exhibit to Form 10-K for the period ended
December 31, 1998, filed on March 30, 1999 and incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
-21-
<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 May ___, 1999.
PALOMAR MEDICAL TECHNOLOGIES, INC.
(Registrant)
DATE: May 17, 1999 By: /s/ Louis P. Valente
-----------------------------
Louis P. Valente
Chief Executive Officer
(Principal Executive
Officer)
DATE: May 17, 1999 By: /s/ Joseph P. Caruso
-----------------------------
Joseph P. Caruso
Chief Financial Officer
and Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
NUMBER SHARES
PALOMAR MEDICAL TECHNOLOGIES, INC.
Incorporated under the laws of the State of Delaware
CUSIP 697529 30 3
THIS IS TO CERTIFY THAT:
--------------------------------------------------
IS THE OWNER OF
--------------------------------------------------
Fully-paid and non-assessable shares of the common stock, par value $.01, of
PALOMAR MEDICAL TECHNOLOGIES, INC.
(hereinafter called the "Company"), transferable on the books of the Company by
the holder in person or by duly authorized attorney upon surrender of this
certificate properly endorsed or assigned for transfer. The shares represented
by this certificate are subject to the laws of the State of Delaware, the
provisions of the Certificate of Incorporation and the By-Laws of the Company as
now or hereafter amended, copies of which are or will be on file at the
principal office of the Company, to all of which the holder by acceptance hereof
assents.
This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Company and the facsimile signatures
of its duly authorized officers.
Dated:
-----------------------
S E A L
/s/ Sarah Reed /s/ Louis P. Valente
- ------------------- ------------------------------
Assistant Secretary President and
Chief Executive Officer
<PAGE>
THE CORPORATION WILL FURNISH TO THE HOLDER UPON REQUEST
WITHOUT CHARGE THE DESIGNATIONS, PREFERENCES AND RELATIVE
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS
OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS
OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - . . . . Custodian. . . . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act. . . . . . . . . . . . . . . . .
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED HEREBY SELL, ASSIGN AND TRANSFER UNTO
----------
Please insert Social Security or other
identifying number of assignee
- ---------------------------------------
| |
| |
| |
- ---------------------------------------
- --------------------------------------------------------------------------------
(please print or typewrite name and address, including zip code, of assignee)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT
ATTORNEY
- -----------------------------------------------------------------------
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED:
-----------------------------------------
-----------------------------------------------------------------------
NOTICE: The signature to the assignment must correspond with the name as
written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
-----------------------------------------------------
The signature(s) should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with
membership in an approved signature guarantee
medallion program), pursuant to S.E.C. Rule 17Ad-15.
CERTIFICATE OF DESIGNATION,
PREFERENCES AND RIGHTS OF THE
SERIES A PARTICIPATING CUMULATIVE
PREFERRED STOCK OF
PALOMAR MEDICAL TECHNOLOGIES, INC.
Pursuant to Section 151 of the General Corporation Law of the
State of Delaware, Palomar Medical Technologies, Inc. (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, in accordance with the provisions of Section 103 thereof,
DOES HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors of the Corporation by Article FOURTH of the Second Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), the board of directors of the Corporation on April 15, 1999,
adopted the following resolution creating a series of Preferred Stock designated
as Series A Participating Cumulative Preferred Stock:
RESOLVED, that, pursuant to the authority vested in the Board
of Directors of the Corporation in accordance with the provisions of
the Certificate of Incorporation of the Corporation, the Board of
Directors hereby designates and establishes 100,000 shares of its
authorized but unissued Preferred Stock as its Series A Participating
Cumulative Preferred Stock, $.01 par value (the "Series A Preferred
Stock"); that such Series A Preferred Stock shall have the terms set
forth below:
Section 1. Designation and Number of Shares. The shares of such series
shall be designated as "Series A Participating Cumulative Preferred Stock" (the
"Series A Preferred Stock"), $.01 par value. The number of shares initially
constituting the Series A Preferred Stock shall be 100,000; provided, however,
that, if more than a total of 100,000 shares of Series A Preferred Stock shall
be issuable upon the exercise of Rights (the "Rights") issued pursuant to the
Rights Agreement dated as of April 20, 1999, between the Corporation and
American Stock Transfer & Trust Company, as Rights Agent (the "Rights
Agreement"), the Board of Directors of the Corporation, pursuant to Section 151
of the General Corporation Laws of Delaware, shall direct by resolution or
resolutions that a certificate be properly executed, acknowledged, filed and
recorded, in accordance with the provisions of said Section 103 thereof,
providing for the total number of shares of Series A Preferred Stock authorized
to be issued to be increased (to the extent that the Certificate of
Incorporation then permits) to the largest number of whole shares (rounded up to
the nearest whole number) issuable upon exercise of such Rights.
Section 2. Dividends or Distributions.
(a) Subject to the prior and superior rights of the holders of
shares of any other series of Preferred Stock or other class of capital stock of
the Corporation ranking prior and superior to the shares of Series A Preferred
Stock with respect to dividends, the holders of shares of the Series A Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors, out of the assets of the Corporation legally available therefor, (1)
quarterly dividends
- 1 -
<PAGE>
payable in cash on the last day of each fiscal quarter in each year, or such
other dates as the Board of Directors of the Corporation shall approve (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or a fraction of a share of Series A Preferred Stock, in the amount
of $1.00 per whole share (rounded to the nearest cent) less the amount of all
cash dividends declared on the Series A Preferred Stock pursuant to the
following clause (2) since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock
(the total of which shall not, in any event, be less than zero) and (2)
dividends payable in cash on the payment date for each cash dividend declared on
the Common Stock in an amount per whole share (rounded to the nearest cent)
equal to the Formula Number (as hereinafter defined) then in effect times the
cash dividends then to be paid on each share of Common Stock. In addition, if
the Corporation shall pay any dividend or make any distribution on the Common
Stock payable in assets, securities or other forms of non-cash consideration
(other than dividends or distributions solely in shares of Common Stock), then,
in each such case, the Corporation shall simultaneously pay or make on each
outstanding whole share of Series A Preferred Stock a dividend or distribution
in like kind equal to the Formula Number then in effect times such dividend or
distribution on each share of the Common Stock. As used herein, the "Formula
Number" shall be 1000; provided, however, that if at any time after April 20,
1999, the Corporation shall (i) declare or pay any dividend on the Common Stock
payable in shares of Common Stock or make any distribution on the Common Stock
in shares of Common Stock, (ii) subdivide (by a stock split or otherwise) the
outstanding shares of Common Stock into a larger number of shares of Common
Stock or (iii) combine (by a reverse stock split or otherwise) the outstanding
shares of Common Stock into a smaller number of shares of Common Stock, then in
each such event the Formula Number shall be adjusted to a number determined by
multiplying the Formula Number in effect immediately prior to such event by a
fraction, the numerator of which is the number of shares of Common Stock that
are outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event (and rounding the result to the nearest whole number); and provided
further, that, if at any time after April 20, 1999, the Corporation shall issue
any shares of its capital stock in a merger, reclassification, or change of the
outstanding shares of Common Stock, then in each such event the Formula Number
shall be appropriately adjusted to reflect such merger, reclassification or
change so that each share of Series A Preferred Stock continues to be the
economic equivalent of a Formula Number of shares of Common Stock prior to such
merger, reclassification or change.
(b) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in Section 2(a) immediately prior to or
at the same time it declares a dividend or distribution on the Common Stock
(other than a dividend or distribution solely in shares of Common Stock);
provided, however, that, in the event no dividend or distribution (other than a
dividend or distribution in shares of Common Stock) shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment Date
and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per
whole share on the Series A Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date. The Board of Directors may fix
a record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive a dividend or distribution declared thereon,
- 2 -
<PAGE>
which record date shall be the same as the record date for any corresponding
dividend or distribution on the Common Stock.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from and after the Quarterly
Dividend Payment Date next pre ceding the date of original issue of such shares
of Series A Preferred Stock; provided, however, that dividends on such shares
which are originally issued after the record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive a quarterly
dividend and on or prior to the next succeeding Quarterly Dividend Payment Date
shall begin to accrue and be cumulative from and after such Quarterly Dividend
Payment Date. Notwithstanding the foregoing, dividends on shares of Series A
Preferred Stock which are originally issued prior to the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend on the first Quarterly Dividend Payment Date shall
be calculated as if cumulative from and after the last day of the fiscal quarter
next preceding the date of original issuance of such shares. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends or other distributions shall be declared, paid or
distributed, or set aside for payment or distribution, on the Common Stock
unless, in each case, the dividend required by this Section 2 to be declared on
the Series A Preferred Stock shall have been declared.
(e) The holders of the shares of Series A Preferred Stock shall
not be entitled to receive any dividends or other distributions except as
provided herein.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(a) Each holder of Series A Preferred Stock shall be entitled to
a number of votes equal to the Formula Number then in effect for each share of
Series A Preferred Stock held of record on each matter on which holders of the
Common Stock or stockholders generally are entitled to vote, multiplied by the
maximum number of votes per share which any holder of the Common Stock or
stockholders generally then have with respect to such matter (assuming any
holding period or other requirement to vote a greater number of shares is
satisfied).
(b) Except as otherwise provided herein or by applicable law,
the holders of shares of Series A Preferred Stock and the holders of shares of
Common Stock shall vote together as one class for the election of directors of
the Corporation and on all other matters submitted to a vote of stockholders of
the Corporation.
(c) If, at the time of any annual meeting of stockholders for
the election of directors, the equivalent of six quarterly dividends (whether or
not consecutive) payable on any share or shares of Series A Preferred Stock are
in default, the number of directors constituting the Board of Directors of the
Corporation shall be increased by two. In addition to voting together with the
holders of Common Stock for the election of other directors of the Corporation,
the
- 3 -
<PAGE>
holders of record of the Series A Preferred Stock, voting separately as a class
to the exclusion of the holders of Common Stock, shall be entitled at said
meeting of stockholders (and at each subsequent annual meeting of stockholders),
unless all dividends in arrears have been paid or declared and set apart for
payment prior thereto, to vote for the election of two directors of the
Corporation, the holders of any Series A Preferred Stock being entitled to cast
a number of votes per share of Series A Preferred Stock equal to the Formula
Number. Until the default in payments of all dividends which permitted the
election of said directors shall cease to exist, any director who shall have
been so elected pursuant to the next preceding sentence may be removed at any
time, either with or without cause, only by the affirmative vote of the holders
of the shares of Series A Preferred Stock at the time entitled to cast a
majority of the votes entitled to be cast for the election of any such director
at a special meeting of such holders called for that purpose, and any vacancy
thereby created may be filled by the vote of such holders. If and when such
default shall cease to exist, the holders of the Series A Preferred Stock shall
be divested of the foregoing special voting rights, subject to revesting in the
event of each and every subsequent like default in payments of dividends. Upon
the termination of the foregoing special voting rights, the terms of office of
all persons who may have been elected directors pursuant to said special voting
rights shall forthwith terminate, and the number of directors constituting the
Board of Directors shall be reduced by two. The voting rights granted by this
Section 3(c) shall be in addition to any other voting rights granted to the
holders of the Series A Preferred Stock in this Section 3.
(d) Except as provided herein, in Section 11 or by applicable
law, holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for authorizing or taking
any corporate action.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire
for consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or
- 4 -
<PAGE>
winding up) with the Series A Preferred Stock; provided that the
Corporation may at any time redeem, purchase or otherwise acquire
shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking
on a parity with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Liquidation Rights. Upon the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, no distribution
shall be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received an amount equal to the accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (x) $1.00 per whole share
or (y) an aggregate amount per share equal to the Formula Number then in effect
times the aggregate amount to be distributed per share to holders of Common
Stock or (2) to the holders of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series A Preferred
Stock, except distributions made ratably on the Series A Preferred Stock and all
other such parity stock in proportion to the total amounts to which the holders
of all such shares are entitled upon such liquidation, dissolution or winding
up.
Section 6. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the then
outstanding shares of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share equal to the Formula
Number then in effect times the aggregate amount of stock, securities, cash or
any other property (payable in kind), as the case may be, into which or for
which each share of Common Stock is exchanged or changed. In the event both this
Section 6 and Section 2 appear to apply to a transaction, this Section 6 will
control.
Section 7. No Redemption; No Sinking Fund.
(a) The shares of Series A Preferred Stock shall not be subject
to redemption by the Corporation or at the option of any holder of Series A
Preferred Stock; provided,
- 5 -
<PAGE>
however, that the Corporation may purchase or otherwise acquire outstanding
shares of Series A Preferred Stock in the open market or by offer to any holder
or holders of shares of Series A Preferred Stock.
(b) The shares of Series A Preferred Stock shall not be subject
to or entitled to the operation of a retirement or sinking fund.
Section 8. Ranking. The Series A Preferred Stock shall rank junior to
all other series of Preferred Stock of the Corporation, unless the Board of
Directors shall specifically determine otherwise in fixing the powers,
preferences and relative, participating, optional and other special rights of
the shares of such series and the qualifications, limitations and restrictions
thereof.
Section 9. Fractional Shares. The Series A Preferred Stock shall be
issuable upon exercise of the Rights issued pursuant to the Rights Agreement in
whole shares or in any fraction of a share that is one one-thousandth (1/1000th)
of a share or any integral multiple of such fraction which shall entitle the
holder, in proportion to such holder's fractional shares, to receive dividends,
exercise voting rights, participate in distributions and to have the benefit of
all other rights of holders of Series A Preferred Stock. In lieu of fractional
shares, the Corporation, prior to the first issuance of a share or a fraction of
a share of Series A Preferred Stock, may elect (1) to make a cash payment as
provided in the Rights Agreement for fractions of a share other than one
one-thousandth (1/1000th) of a share or any integral multiple thereof or (2) to
issue depository receipts evidencing such authorized fraction of a share of
Series A Preferred Stock pursuant to an appropriate agreement between the
Corporation and a depository selected by the Corporation; provided that such
agreement shall provide that the holders of such depository receipts shall have
all the rights, privileges and preferences to which they are entitled as holders
of the Series A Preferred Stock.
Section 10. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock, without designation as to series until such shares are once
more designated as part of a particular series by the Board of Directors
pursuant to the provisions of Article 4 of the Certificate of Incorporation.
Section 11. Amendment. None of the powers, preferences and relative,
participating, optional and other special rights of the Series A Preferred Stock
as provided herein or in the Certificate of Incorporation shall be amended in
any manner which would alter or change the powers, preferences, rights or
privileges of the holders of Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least 66-2/3% of the
outstanding shares of Series A Preferred Stock, voting as a separate class;
provided, however, that no such amendment approved by the holders of at least
66-2/3% of the outstanding shares of Series A Preferred Stock shall be deemed to
apply to the powers, preferences, rights or privileges of any holder of shares
of Series A Preferred Stock originally issued upon exercise of the Rights after
the time of such approval without the approval of such holder.
- 6 -
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate
of Designation to be duly executed in its corporate name by its president duly
authorized on this 20th day of April, 1999.
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-----------------------------
Louis P. Valente
REPURCHASE AGREEMENT
THIS REPURCHASE AGREEMENT, dated as of April 6, 1999, by and between
PALOMAR MEDICAL TECHNOLOGIES, INC., a Delaware corporation (the "Company"), with
offices located at 45 Hartwell Avenue, Lexington, Massachusetts 02421-3102, and
ADVANTAGE FUND LIMITED, a British Virgin Islands corporation ("Advantage").
W I T N E S S E T H:
WHEREAS, Advantage owns (i) 403 shares (the "Shares") of Series G
Convertible Preferred Stock, $.01 par value, of the Company (the "Series G
Preferred Stock") and (ii) the promissory note of the Company payable to
Advantage due January 8, 2000 in the aggregate principal amount of $1,619,808.31
(the "Note"); and
WHEREAS, Upon the terms and subject to the conditions set forth herein,
the Company has agreed to repurchase the Shares and the Note (the "Repurchase");
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. DEFINITIONS.
The following terms used in this Agreement shall have the following
meanings:
"Certificate of Designations" means the Certificate of Designations for
the Series G Preferred Stock.
"Exchange Agreement" means the Exchange Agreement, dated as of December
31, 1997, between the Company and Advantage.
"Note Repurchase Price" means the net present value as of the day
preceding the Repurchase Date of the $1,619,808.31 amount due under the Note
using a 5% discount rate from the January 8, 2000 maturity date.
"Principal Agreements" means the Note, the Certificate of Designations,
the Exchange Agreement, the Registration Rights Agreement, dated as of September
26, 1996, between the Company and Advantage, and the other agreements and
instruments contemplated thereby.
"Repurchase Date" means the date the Shares and the Note are
repurchased by the Company pursuant to this Agreement.
"Repurchase Period" means the period from the date of this Agreement
until the earlier of (i) May 20, 1999 or (ii) the date of the Star Sale
Cancellation.
"Repurchase Price" means the sum of the Share Repurchase Price and the
Note Repurchase Price.
"Share Repurchase Price" means the number of shares multiplied by the
per share Redemption Price as such term is defined in Section 8 of the
Certificate of Designations.
"Star Sale" means the closing of the sale by the Company to Coherent,
Inc. of all of the Company's ownership interest in Star Medical Technologies,
Inc., a subsidiary of the Company, as described in the Company's proxy statement
dated March 12, 1999 or pursuant to a substantially similar transaction.
<PAGE>
"Star Sale Cancellation" means the first time the Company's gives to or
receives written notice from any party involved in the proposed Star Sale that
the transactions contemplated by the proposed Star Sale have been cancelled,
terminated or suspended (including the failure to seek or obtain approval of the
Company's Stockholders.)
2. THE REPURCHASE.
(a) Repurchase Obligation. If the Star Sale occurs on or before May 15,
1999, the Company shall, within five days after the occurrence of the Star Sale,
repurchase from Advantage (i) all of the Shares for the Share Repurchase Price
and (ii) the Note for the Note Repurchase Price. Within one business day after
the occurrence of the Star Sale, the Company shall give Advantage written notice
of such occurrence, the Repurchase Date, the Share Repurchase Price and the Note
Repurchase Price.
(b) Method of Payment. Payment of the Repurchase Price shall be made by
wire transfer of immediately available funds to an account of Advantage
specified by Advantage by written notice to the Company at least one business
day prior to the Repurchase Date.
(c) Late Payment Fee. If for any reason (other than the fault of
Advantage) the Repurchase Price is not paid when due within five days after the
occurrence of the Star Sale, the Company shall pay Advantage a late payment fee
equal to one-half of one percent of the Repurchase Price per day for each day
after such fifth day until the Repurchase Date.
3. ADVANTAGE REPRESENTATIONS, WARRANTIES, ETC.
Advantage represents and warrants to, and covenants and agrees with,
the Company as follows:
(a) Repurchase Agreement. This Agreement has been duly and validly
authorized, executed and delivered on behalf of Advantage and is a valid and
binding agreement of Advantage enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditorsAE rights generally.
(b) Title to the Shares and the Note. Advantage is the beneficial owner
of the Shares and the Note and, if the Repurchase is consummated, the Shares and
the Note will be transferred to the Company free and clear of all claims, liens,
security interests, pledges, charges, and other encumbrances.
4. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with,
Advantage that:
(a) Repurchase Agreement. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Company and is a valid and
binding agreement of the Company enforceable in accordance with its terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditorsAE rights generally.
(b) Non-contravention. The execution and delivery by the Company of
this Agreement do not and the consummation by the Company of the transactions
contemplated hereby, including without limitation the Repurchase, will not, with
or without the giving of notice or the lapse of time, or both, (i) result in any
violation of any terms of the Certificate of Incorporation or By-laws of the
Company, (ii) conflict with or result in a breach by the Company of any of the
material terms or provisions of, or constitute a material default under, or
result in or give to others
<PAGE>
any rights of termination, amendment, modification, acceleration or cancellation
of, or result in the creation or imposition of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Company
pursuant to, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company is a party or by which the Company or its
properties or assets is bound or affected, (iii) violate or contravene any
applicable law (including without limitation Section 160(a) of the Delaware
General Corporation Law), rule or regulation or any applicable decree, judgment
or order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
(c) Approvals. No authorization, approval or consent of, or filing
with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained or made by the Company for the execution or delivery by
the Company of this Agreement or the consummation of the transactions
contemplated hereby, including, without limitation, the Repurchase.
(d) Solvency. Prior to and after giving effect to the Repurchase the
Company will be Solvent. "Solvent" at any time shall mean that, at such time,
the aggregate fair saleable value of the CompanyAEs assets is in excess of the
total amount of its probable liabilities on its then existing debts as they
become absolute and matured, the Company has not then incurred debts beyond its
foreseeable ability to pay such debts as they mature, and the Company then has
capital adequate to conduct the business it is then engaged in or is then about
to engage in.
5. CERTAIN COVENANTS.
(a) Restriction on Exchange. During the Repurchase Period if the
Company is then in compliance with its obligations under the Principal
Agreements in all material respects, Advantage agrees that it will not exercise
its right to exchange or convert any of the Shares into shares of Common Stock,
$.01 par value, of the Company. After the Repurchase Period, there shall be no
restrictions on the number of Shares which may be exchanged or converted into
Common Stock and the limitations on exchanges in Section 4(b) of the Exchange
Agreement shall terminate and have no further force or effect.
(b) Restriction on Transfer. During the Repurchase Period if the
Company is then in compliance with its obligations under the Principal
Agreements in all material respects, Advantage agrees that it will not sell,
encumber, or otherwise transfer any interest in the Shares or the Note to any
third party.
(c) Certain Expenses. Whether or not the Repurchase occurs, the Company
shall promptly pay or reimburse Advantage for all reasonable fees and expenses,
including attorneys' fees and expenses, incurred by Advantage in connection with
this Agreement and the transactions contemplated hereby.
(d) Notice of Star Sale Cancellation. The Company shall give Advantage
notice of the Star Sale Cancellation on the date thereof. The parties
acknowledge that, if the Repurchase does not occur during the Repurchase Period,
the restrictions on Advantage set forth in Sections 4(a) and 4(b) above shall
terminate and Advantage shall be entitled to all of its rights and remedies
under the Principal Agreements and any other agreements and instruments relating
to the Shares and the Notes.
6. INDEMNIFICATION.
(a) Indemnity Obligation. To the extent permitted by law, the Company
will indemnify and hold harmless Advantage and its directors, officers, agents,
representatives, and controlling persons (each, an "Indemnified Person") from
and against all losses, claims, damages, liabilities, and expenses (including
reasonable legal fees and expenses) (collectively, "Claims") incurred by any of
them arising out of or in connection with Claims pertaining to this Agreement,
<PAGE>
the Repurchase, or the circumstances giving rise to this Agreement which are
brought or asserted by third parties which are not affiliated with Advantage
(collectively, "Third Party Claims"). This Section 6 shall be Advantage's sole
remedy against the Company for Claims which constitute Third Party Claims.
(b) Indemnity Procedure. Promptly after receipt by an Indemnified
Person of notice of the commencement of any action (including any governmental
action), such Indemnified Person shall, if a Claim in respect thereof is to be
made against the Company under this Section 5, deliver to the Company a written
notice of the commencement thereof and the Company shall have the right to
participate in, and, to the extent the Company so desires, to assume control of
the defense thereof with counsel selected by the Company but reasonably
acceptable to the Indemnified Person; provided, however, that an Indemnified
Person shall have the right to retain its own counsel with the fees and expenses
to be paid by the Company if, in the reasonable opinion of counsel retained by
the Company, the representation by such counsel of the Indemnified Person and
the Company would be inappropriate due to actual or potential differing
interests between such Indemnified Person and any other party represented by
such counsel in such proceeding. In such event, the Company shall pay for only
one separate legal counsel in the aggregate for all Indemnified Persons and all
indemnified persons pursuant to similar indemnification obligations of the
Company relating to the repurchase of other shares of Preferred Stock; such
legal counsel shall be selected by the holders of a majority in interest of the
Preferred Stock on the date hereof. The failure to deliver written notice to the
Company within a reasonable time of the commencement of any such action shall
not relieve the Company of any liability to the Indemnified Person under this
Section 6, except to the extent that the Company is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable. No Indemnified Party shall, without the written consent
of the Company, settle, compromise or pay any Claim or consent to the entry of
judgment with respect thereto.
7. MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the Commonwealth of Massachusetts applicable to
agreements made and to be performed entirely within such Commonwealth.
(b) Counterparts. This Agreement may be executed in counterparts and by
the parties hereto on separate counterparts, all of which together shall
constitute one and the same instrument. A facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal and
binding on such party.
(c) Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
(d) Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement or
the validity or enforceability of this Agreement in any other jurisdiction.
(e) Amendments. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Advantage or the Company therefrom shall in any event be effective unless
the same shall be in writing and signed by the party to be charged with
enforcement, and then shall be effective only in the specific instance and for
the purpose for which given. No course of dealing between the parties hereto
shall operate as an amendment of this Agreement.
(f) Waivers. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor
<PAGE>
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or exercise of any other right or
power.
(g) Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective upon receipt, in the case of the Company
addressed to the Company at its address shown in the introductory paragraph of
this Agreement, Attention: Director of Finance (telephone line facsimile
transmission number (781) 676-7330 or, in the case of Advantage, at its address
or telephone line facsimile transmission number shown on the signature page of
this Agreement, with a copy to Genesee International, Inc., 10500 N.E. 8th
Street, Suite 1920, Bellevue, Washington 98004-4332 (telephone line facsimile
transmission number (425) 462-4645) or such other address or telephone line
facsimile transmission number as a party shall have provided by notice to the
other party in accordance with this provision.
(h) Assignment. Neither party may sell, assign, transfer, or otherwise
convey any of its rights or delegate any of its duties under this Agreement
without the prior written consent of the other party and this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors.
(i) Survival of Representations and Warranties. The respective
representations, warranties, covenants and agreements of Advantage and the
Company contained in this Agreement or made by them, respectively, pursuant to
this Agreement shall survive the delivery of payment for the Shares and the Note
and shall remain in full force and effect regardless of any investigation made
by or on behalf of them or any person controlling or advising any of them.
(j) Entire Agreement. This Agreement sets forth the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
with respect thereto. Notwithstanding the foregoing, the parties agree and
acknowledge that, except as expressly provided herein, nothing contained in this
Agreement shall constitute an amendment to any of the Principal Agreements, each
of which remains unamended and in full force and effect.
(k) Further Assurances. Each party to this Agreement will perform any
and all acts and execute any and all documents as may be necessary and proper
under the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
(l) Press Releases. The Company and Advantage shall have the right to
review before issuance any press releases with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of Advantage, to make any press release or other
public disclosure with respect to such transactions as is required by applicable
law and regulations (although Advantage shall be consulted by the Company in
connection with any such press release prior to its release and shall be
provided with a copy thereof).
(m) Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the
Advantage and the Company by their respective officers or other representatives
thereunto duly authorized as of the date first set forth above.
ADVANTAGE FUND LIMITED
By: /s/
-------------------------------------
Name: Inter Caribbean Services, Ltd.
Title: Secretary
Address: c/o CITCO
Kaya Flamboyan 9
Curatao, Netherlands Antilles
Facsimile No.: 011-599-9732-2008
PALOMAR MEDICAL TECHNOLOGIES, INC.
By: /s/ Louis P. Valente
-------------------------------
Name: Louis P. Valente
Title: Chief Executive Officer
MUTUAL RELEASE, CONSENT AND SETTLEMENT AGREEMMNT
This Mutual Consent and Settlement Agreement (the "Agreement") is
entered into this 16th day of April, 1999 by and between Palomar Medical
Technologies, Inc, ("Palomar"), Electronic Packaging Interconnect Corporation, a
Delaware corporation, formerly known as "Biometric Technologies, Inc." ("EPIC")
and Comtel Electronics, Inc., a California corporation, a subsidiary of EPIC
("Comtel') (EPIC and Comtel individually and collectively, the "Company"),
Maurice Needham, Jr. ("Needham") and Lyle E. Jensen ("Jensen").
Recitals:
A. EPIC, Palomar, Needham and Jensen are parties to that certain Stock
Purchase Agreement dated December 9, 1997, which was amended by that certain
First Amendment to Stock Purchase Agreement dated as of May 14,1998, and which
was amended by that certain Second Amendment to Stock Purchase Agreement dated
October 7, 1998 (the Stock Purchase Agreement, First Amendment and the Second
Amendment are collectively referred to as the "Stock Purchase Agreement."
B. In connection with the Second Amendment to Stock Purchase Agreement,
the Company executed a Promissory Note dated October 7, 1999, in the original
principal sum of $500,000.00 (the "Note") in favor of Palomar. As used herein,
the term "Loan Documents" shall refer to the Note and the Stock Purchase
Agreement and the First Amendment and Second Amendment to Stock Purchase
Agreement.
C. The Company, as the sole shareholder of Comtel has caused Comtel to
enter into an agreement to sell substantially all of the assets of Comtel to
Myford Acquisition Corp., a Delaware corporation ("MAC") controlled by MapleWood
Management LP ("Maplewood"), an unrelated third party (the "Comtel Asset Sale").
D. The Company has disclosed to Palomar the consideration it is
receiving from MAC and the consideration Needham and Jensen are receiving in
connection with the Comtel Asset Sale. A copy of-thee Company's disclosure
letter is attached hereto as Exhibit B. The Parties acknowledge that the
execution and delivery of this Agreement is a condition precedent to the Comtel
Asset Sale and that, if the Comtel Asset Sale does not close, the Company is
unlikely to be able to continue in business.
E. Palomar and the Company, in full and complete satisfaction of the,
Company's obligations under Loan Documents, desire to enter into this Agreement,
to settle and finally resolve all matters relating to the Loan Documents and to
set forth the amounts to be paid by the Company and Needham and Jensen to
Palomar in full satisfaction of the obligations of the Company under the Loan
Documents.
<PAGE>
Agreements:
NOW, THEREFORE, in consideration of the terms and conditions hereof,
the parties agree as follows:
1. CONSENT TO SALE OF ASSETS OF COMTEL. Subject to and upon
receipt of the Settlement Consideration, as hereinafter defined, Palomar hereby
(a) consents to the sale by Comtel of all of its assets pursuant to the Comtel
Asset Sale; and (b) releases any and all liens that Palomar, either individually
or Palomar may hold in any of the assets of Comtel or any proceeds of the Comtel
Asset Sale.
2. SETTLEMENT CONSIDERATION. In consideration of the
agreements and releases set forth herein, (a) the Company agrees to pay and
deliver to Palomar, at the Closing Date (as defined below), the following
consideration; (i) cash in the amount of $100,000, and (ii) a release of Palomar
from its guaranty obligations pertaining to a loan to Comtel by Coast Business
Credit, a division of Southern Pacific Bank (the "Coast Business Credit
Release'); and (b) Needham and Jensen agree to deliver to Palomar a Promissory
Note in the form attached hereto as Exhibit A in the principal amount of
$400,000.00 executed by Needham and Jensen and their spouses in favor of
Palomar. (The consideration described in clauses (a) and (b) above is
hereinafter called the "Settlement Consideration").
3. REPAYMENT AND SATISFACTION OF NOTE. Except with respect to
obligations created by or arising-out of this Agreement for the payment of the
Settlement Consideration to Palomar on or before the Closing Date, Palomar, for
itself and its successors and assigns, together with all affiliates, agents,
attorneys, representatives, partners, officers, directors, shareholders,
employees and other persons claiming. through Palomar, hereby remises,
releases,. acquits and forever discharges hereby releases and discharges the
Company, Needham, Jcnsen, MAC, MapleWood and their respective successors,
assigns, affiliates, agents, attorneys, representatives, partners, officers,
directors, shareholders and employees (the "Releasees") from (a) any and all
liens. claims, cause of actions, demands, liabilities, obligations, damages,
losses, costs, and expenses whatsoever, whether known or unknown, mature or
contingent arising out of or in connection with the Note and any of the Loan
Documents, but only as it pertains to the Company; (b) any and all liens,
claims, cause of actions, demands, liabilities, obligations, damages, losses,
costs and expenses whatsoever. known or unknown, contingent or mature, arising
out of or in connection with any of the assets of Comtel or the right of Comtel
to receive proceeds from the Comtel Asset Sale, whether such assets or rights
are held by Comtel or its assignees; (c) any and all liens, claims, cause of
actions, demands, liabilities, obligations, damages, losses, costs and expenses
whatsoever, known or unknown, contingent or mature, arising out of or in
connection with the distribution of proceeds or other assets or rights received
from MAC in connection with the Comtel Asset Sale to the Company or any other
third parties; and (d) all suits, claims or causes of action, whether known or
unknown, mature or contingent whether arising under any federal or state statute
(including, without limitation, state and federal securities laws) or in tort,
contract, equity, indemnity, contribution, accounting, or other legal theory,
relative to the Loan Documents but only as it pertains to the Company-
<PAGE>
4. COMPANY, NEEDHAM AND JENSEN RELEASE. Except with respect to
obligations created by or arising out of this Agreement, the Company, Needham
and Jensen, and each of them for their respective successors and assigns,
together with all affiliates, agents, attorneys, representatives, partners,
officers, directors, shareholders and employees claiming through them, hereby
promise, release, acquit and forever discharge Palomar and its successors,
assigns, affiliates, agents, attorneys, representatives, partners, officers,
directors, shareholders and employees claiming through them and for any others
who may claim through them, from any and all suits, claims or causes of action
demand, liabilities, obligations, damages, losses, costs and expenses
whatsoever, whether known or unknown, mature or contingent, arising,, under any
federal or state statute (including, without limitation, state and federal
securities laws) or in tort, contract, equity, indemnity, contribution,
accounting, or other legal theory, which the Company, Needham and Jensen have or
ever had arising prior to and including the Closing Date against Palomar, its
subsidiaries, affiliates, officers, directors and employees
5. VOLUNTARY SETTLEMENT. Each party granting a release
hereunder (a) represents, warrants and acknowledges it has been fully advised by
its attorney of its rights and has entered into this Agreement voluntarily,
without duress or coercion. Representations and Warranties.
-------------------------------
a. Palomar Representations and Warranties. Palomar hereby
represents and warrants to the Company, Needham and Jensen as follows:
(i) Palomar has the full power and authority to
execute and deliver this Agreement, and this Agreement is
valid, binding and enforceable against Palomar in accordance
with its terms;
(ii) Palomar owns the Note free and clear of any and
all security interests or other encumbrances and Palomar has
not transferred, assigned, sold, negotiated or pledged,
encumbered the Loan Documents or any of these or any of its
rights thereunder;
(iii) Palomar has all necessary corporate, power and
authority to execute and deliver this Agreement and has taken
all corporate action necessary to execute, deliver and perform
this Agreement;
(iv) Palomar has had the right to inquire and make
inquires of the Company regarding the Comtel Asset Sale and to
receive answers concerning the Comtel Asset Sale, the
distribution of proceeds, assets or the right to receive
assets from the Comtel Asset Sale; and
(v) No consent, authorization, approval or other
action by, and no notice to or filing with, any governmental
authority, regulatory body, lessor, franchisor or other person
or entity is required for Palomar to enter into this Agreement
or for the execution, delivery or performance of this
Agreement by Palomar.
<PAGE>
b. Company Representations and Warranties. Company hereby
represents and warrants to Palomar as follows:
(i) Company has the full power and authority to
execute and deliver this Agreement and this Agreement is
valid, binding and enforceable against Company accordance with
its terms;
(ii) Company has all necessary corporate power and
authority to execute and deliver this Agreement and has taken
all corporate action necessary to execute, deliver and perform
this Agreement; and
(iv) No consent, authorization, approval or other
action by, and no notice to or filing with, any governmental
authority, regulatory body, lessor, franchisor or other person
or entity is required for Company to enter into this Agreement
or for the execution, delivery or performance of this
Agreement by Company.
6. Payment of Settlement Amount. The Closing Date for the
transaction described in this Agreement shall be March 31, 1999, or such other
date as the Company and Palomar agree in writing (the "Closing Date"). The
closing of the transaction contemplated by this Agreement shall take place at
the offices of Chadbourne & Parke, LLP, 30 Rockefeller Plaza, 36th Floor, New
York, New York, on or before the Closing Date.
a. On or before the Closing Date, Palomar shall have executed
and delivered the following documents to the Company's legal counsel or
its nominee: (i) an executed original of this Agreement- (ii) a
certified Corporate Resolution authorizing the execution and delivery
of this Agreement, (iii) the original ,Note, and (iv) irrevocable
written instructions to cause the documents described in (i), (ii), and
(iii) to be released to the Company upon the payment of, or the
delivery of the documents constituting, the Settlement Consideration,
as defined in Section 2 hereof, to Palomar.
b. On the Closing Date, the Company shall have executed and
delivered to Chadbourne & Parke, LLP for delivery to Palomar (i) an
executed original of the Agreement, and (ii) to wired the sum of
$100,000 to Palomar.
c. On the Closing Date, Needham and Jensen shall have executed
and delivered the Promissory Note and delivered it to Chadbourne &
Parke, LLP for delivery, to Palomar.
7. Miscellaneous.
a. Each party acknowledges that this Agreement is entered into
after voluntary and without coercion arms length negotiations in which
all parties have been represented
<PAGE>
by counsel of their choice, and that all parties to this Agreement are
in equal bargaining positions and without any disadvantage.
b. If any part of this Agreement is breached in any manner and
legal, equitable or other proceedings are required to enforce the same,
the unsuccessful party in the litigation, as determined by the court,
agrees to pay the successful party, as determined by the court, all
costs, legal fees and expenses, including attorneys fees and expert
witness fees in the amount incurred by the successful party.
c. This Agreement will inure to the benefit of and will be
binding upon all heirs, assignees, personal representatives, or
successors in interest by merger or otherwise to any or all of the
parties to this Agreement.
d. This Agreement will be governed by and construed and
enforced in accordance with the laws of the State of Delaware without
regard to its principals of conflicts of law.
e. This Agreement may be executed in any number of
counterparts, and when so executed, such counterparts shall constitute
a single, binding Agreement between all signatories thereto.
f. This Agreement shall not constitute a negotiable instrument
or note.
g. The terms of this Agreement supersede all prior or
contemporaneous oral or written agreements and understanding of the
parties, all of which will be deemed to be merged into this Agreement.
IN WITNESS NVEEREOF, the parties have executed this Agreement on
the date and year set forth above.
Palomar Medical Technologies, Inc.
By: /s/ Louis P. Valente
---------------------------
Its: Chairman and CEO
Electronic Packaging Interconnect Corporation,
a Delaware corporation
By: /s/ Lyle E. Jensen
---------------------------
Lyle E. Jensen
President and Chief Executive Officer
Comtel Electronics, Inc.
A California corporation
By: /s/ Lyle E. Jensen
----------------------------
Lyle E. Jensen
Chief Executive Officer
/s/ Lyle E. Jensen
----------------------------------
Lyle E. Jensen
/s/ Maurice E. Needham
----------------------------------
Maurice E. Needham
<PAGE>
Exhibit A
PROMISSORY NOTE
Principal Amount Phoenix, Arizona
$400,000.00 April 16, 1999
FOR VALUE RECEIVED, Maurice Needham, Jr. and Majorie L. Needham,
husband and wife and Lyle E. Jensen and Kathryn A. Jensen, husband and wife
(collectively the "Maker"), promises to pay to Palomar Medical Technologies,
Inc. or order ("Holder"), the principal balance of Four Hundred Thousand and
No/100ths Dollars (S400,000.00) in lawful money of the United States of America,
together with interest on the unpaid principal amount hereof from time to time
outstanding, from the date hereof until payment in full, at ten percent (10%)
per annum. All amounts due hereunder, including any accrued and unpaid interest,
shall be due and payable on March 31, 2001 (the "Maturity Date").
The Maker promises to pay to the Holder quarterly interest payments of
Two Thousand Five Hundred and No/100ths Dollars ($2,500.00) commencing on the
first (1st) day of July, 1999 and continuing on the first (1st) day of October,
January, and April from the date hereof until the Maturity- Date. Payment of
interest that accrues hereunder that is in excess of the amount of the quarterly
interest payment shall be deferred until the Maturity Date.
The Maker shall be permitted to prepay all or any portion of the amount
due hereunder at any time without penalty.
Holder's acceptance of payments after the due date shall not waive or
postpone any right of the Holder hereof, and time is and shall remain of the
essence hereof.
If, as a result of any default under this Note, the Holder incurs any
attorneys' fees or other legal costs or expenses with respect to enforcement of
any rights provided for hereunder, whether or not any legal proceeding is
instituted, Maker promises to pay such attorneys' fees and expenses, including,
without limitation, any costs of court, witness fees or experts fees, and
reasonable travel costs, regardless of whether such amounts are reasonable under
applicable law.
Maker and all persons now or hereafter liable on this Note severally
waive notice, presentment for payment and protest.
<PAGE>
The loan evidenced by this Note is made for commercial purposes and
that no portion of the amounts describe herein are or will be used for any
purpose other than a commercial purpose. If all interest, fees, penalties or
other charges payable under this Note should exceed the maximum interest rate
permitted by law, then (i) interest or charges that exceed the maximum interest
rate permitted by law shall be reduced to the maximum rate permitted by law and
(ii) any amounts paid in excess of the maximum legal interest rate shall be
credited against the outstanding principal amount of the indebtedness evidenced
by this Note.
This Note shall be governed by the substantive laws of the Commonwealth
of Massachusetts, without regard to conflicts of law principles.
"MAKER"
/s/ Maurice Needham, Jr.
------------------------------------
Maurice Needham, Jr., a married man
/s/ Marjorie L. Needham
------------------------------------
Marjorie L. Needham, a married woman
/s/ Lyle E. Jensen
------------------------------------
Lyle E. Jensen, a married man
/s/ Kathryn A. Jensen
------------------------------------
Kathryn A. Jensen, a married woman
<PAGE>
EXHIBIT B
ELECTRONIC PACKAGING
INTERCONNECT CORPORATION
14101 Myford Road
Tustin, California 92780
March 16, 1999
Via Federal Express
Palomar Medical Technologies
45 Hartwell Avenue
Lexington, Massachusetts 02173
Attn: Paul Weiner, Director of Finance
Dear Mr. Weiner:
Please find enclosed three documents for your review and approval:
1. Mutual Release, Consent and Settlement Agreement
2. Non-Negotiable Promissory Note
3. Class A Stock Warrant
As we have discussed, Electronic Packaging Interconnect Corporation,
formerly known as Biometric Technologies Corp. ("EPIC") has not been able to
attract sufficient outside capital necessary to meet the strategic and
operational objectives of the company. Not all the parties who entered the EPIC
Participant Term Sheet dated October 16,1 998 were able to meet their investment
objective. This required EPIC and its sole operating subsidiary, Comtel
Electronics, Inc. ("Comtel"), to seek other sources of financing.
On December 30, 1998, EPIC and its sole operating subsidiary, Comtel,
entered a Letter of Intent with MapleWood Management LP ("MapleWood") to conduct
due diligence and determine MapleWood's potential interest in making an
investment in the company. In ate February, MapleWood's Investment Committee
approved the creation of two new Delaware corporation, Myford Holdings Corp.
("MHC") and Myford Acquisition Corp. ("MAC"), which were authorized to enter an
agreement to acquire substantially all of the assets of Comtel subject to
specific terms and conditions. A definitive agreement is nearing completion and
is expected to be ready for signature shortly. A Bulk Sale Notice (attached) was
recorded on March 8, 1999. The targeted closing dart is for the end of March.
<PAGE>
Palomar Medical Technologies
March 16, 1999
Page 2
The acquisition is being structured as an asset purchase, with MAC
acquiring the assets of Comtel and assuming certain liabilities. Except as
described below, EPIC will realize no value from the transaction, but Comtel's
business will be preserved.
In negotiating with MapleWood, EPIC has attempted to obtain as much
consideration as possible for its debt and equity bridge investors, given EPIC's
and Comtel's financial condition. While MHC is not obligated to do so, MHC is
offering the EPIC outside shareholders the opportunity to convert their EPIC
investment into Class A Warrants in MHC. The EPIC bridge lenders (including, to
the extent of a $200,000 bridge loan, Maurice Needham and the undersigned) will
be offered various combinations of cash, seven year notes, and Class A Warrants
in MHC. The EPIC bridge lenders will receive Class A Warrants convertible into
an aggregate of 300,782 common shares of MHC. Since Comtel is the only remaining
operating asset in EPIC, serious consideration should be given to this proposal.
It is unlikely that any EPIC shareholder or EPIC bridge lender would realize any
value for its investment if these offers are not accepted. MAC's offer and the
closing of its proposed purchase of Comtel's assets is conditioned upon
obtaining mutual releases regarding all previous business matters with EPIC,
Comtel Electronics, Mr. M. Needham and the undersigned, including the release of
any claims by EPIC, debt or equity investors.
Going forward, MapleWood is prepared to make a significant initial
investment into Comtel to be followed by subsequent planned investments in
acquisitions and strategic expansions. The amount of the initial investment is
subject o MapleWood's discretion, but is contemplated to be $7,000,000. In
exchange therefore, MapleWood will receive preferred stock of MHC which is
convertible into 7.2 million common shares of MHC. The investment objective is
to create a regional market leader in contract electronic manufacturing. The
initial focus of the business will be on Southern and Northern California.
MapleWood's investment in Comtel through MAC should give the company a viable
opportunity to be successful.
To facilitate the transaction, Maury Needham and the undersigned have
agreed tow rite-off their Convertible Note of $1.6m and forego their 6.7 million
share of EIPC stock as described in the October 16,1 998 EPIC Participant Term
Sheet. The undersigned will enter a multi-year employment contract as the CEO
and will receive 450,000 shares of common stock in MAC as an incentive for
entering into said Agreement. The employment package will include a base salary,
annual cash bonuses based on EBITDA performance, and restricted stock whose
vesting will be tied to EBITDA performance over the next five years. Mr. Needham
will enter a Directors Agreement and will be compensated for the time spent on
the strategic expansion of Comtel. Mr. Needham will receive 450,000 shares of
common stock in MAC as an incentive for entering into the Director's Agreement.
Mr. Needham will also be offered an additional 450,000 shares of restricted
stock whose vesting will be based on EBITDA performance over the next five
years. Both Mr. Needham and the undersigned will be eligible to participate in
MHC's stock option plan. The maximum amount of option's which may be granted to
all person under MHC's proposed stock option plan, including Mr. Needham and the
undersigned, will total 1 million shares.
<PAGE>
Palomar Medical Technologies
March 16,1999
Page 3
On behalf of EPIC and Comtel, we encourage you to accept the attached
offer and provide the necessary releases to ensure the MapleWood offer and
closing occurs in a timely manner. EPIC has no other viable financing options
and strongly believes MapleWood's offer provides the best opportunity to you and
likely the last opportunity to realize any value on your investment.
Please review and sign the attached documents. You will notice that all
aspects of the old agreements are canceled and replaced with a set of new
agreements. Time is of the essence and we look forward to your timely approval
of MAC's offer.
Sincerely,
/s/ Lyle E. Jensen
------------------
Lyle E. Jensen
CEO
Comtel Electronics
Enclosures
c(w/out encs.): Maurice Needham Jr.
MapleWood management LP
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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